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##### Index to Financial Statements

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K

(Mark One)



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

For the fiscal year ended December 31, 2005

OR



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

Commission File Number 001-15663



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American Realty Investors, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 75-2847135                          
|(State or other jurisdiction of Incorporation or organization) |  | (IRS Employer Identification Number)
|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

Securities registered pursuant to
Section 12(b) of the Act:



|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of each exchange on which registered
|Common Stock, $0.01 par value |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x

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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of accelerated filer and large accelerated filer in Rule 126-2 of the Exchange Act (check one).

Large accelerated filer ̈Accelerated filer ̈Non-accelerated
filer  x

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

The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of
the Registrant, computed by reference to the closing price at which the common equity was last sold which was the sales price of the Common Stock on the New York Stock Exchange as of June 30, 2005 (the last business day of the Registrants
most recently completed second fiscal quarter) was $16,375,845 based upon a total of 1,642,512 shares held as of June 30, 2005 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a
determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing, would yield a different value.

As of March 24, 2006, there were 10,895,972 shares of common stock outstanding, which includes 746,972 shares issued to and owned by Transcontinental
Realty Investors, Inc.

Documents Incorporated By Reference:

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc.; Commission File No. 001-14784



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INDEX TO

ANNUAL REPORT ON FORM 10-K



|               |  |                                                                                                               |  |     
|-------------- |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                                               |  | Page
|               |  | PART I                                                                                                        |  |     
|               |  |                                                                                                              
|Item 1.        |  | Business                                                                                                      |  | 3   
|               |  |                                                                                                              
|Item 1A.       |  | Risk Factors                                                                                                  |  | 8   
|               |  |                                                                                                              
|Item 1B.       |  | Unresolved Staff Comments                                                                                     |  | 13  
|               |  |                                                                                                              
|Item 2.        |  | Properties                                                                                                    |  | 13  
|               |  |                                                                                                              
|Item 3.        |  | Legal Proceedings                                                                                             |  | 29  
|               |  |                                                                                                              
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                           |  | 30  
|               |  |                                                                                                              
|               |  | PART II                                                                                                       |  |     
|               |  |                                                                                                              
|Item 5.        |  | Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |  | 31  
|               |  |                                                                                                              
|Item 6.        |  | Selected Financial Data                                                                                       |  | 33  
|               |  |                                                                                                              
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 34  
|               |  |                                                                                                              
|Item 7A.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 48  
|               |  |                                                                                                              
|Item 8.        |  | Consolidated Financial Statements and Supplementary Data                                                      |  | 49  
|               |  |                                                                                                              
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | 112 
|               |  |                                                                                                              
|Item 9A.       |  | Controls and Procedures                                                                                       |  | 112 
|               |  |                                                                                                              
|Item 9B.       |  | Other Information                                                                                             |  | 112 
|               |  |                                                                                                              
|               |  | PART III                                                                                                      |  |     
|               |  |                                                                                                              
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                            |  | 113 
|               |  |                                                                                                              
|Item 11.       |  | Executive Compensation                                                                                        |  | 121 
|               |  |                                                                                                              
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management                                                |  | 123 
|               |  |                                                                                                              
|Item 13.       |  | Certain Relationships and Related Transactions                                                                |  | 124 
|               |  |                                                                                                              
|Item 14.       |  | Principal Accountant Fees and Services                                                                        |  | 128 
|               |  |                                                                                                              
|               |  | PART IV                                                                                                       |  |     
|               |  |                                                                                                              
|Item 15.       |  | Exhibits and Financial Statement Schedules                                                                    |  | 130 
|               | 
|Signature Page |  | 132                                                                                                          



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FORWARD-LOOKING STATEMENTS

Certain Statements in this Form 10-K are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words estimate, plan, intend, expect,
anticipate, believe, and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by
reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described in Item 1A.
Risk Factors beginning on page 7.

PART I



|ITEM 1. | BUSINESS
|------- | --------

American Realty
Investors, Inc., a Nevada corporation (ARI or the Company or we or us), was organized in 1999, and in August 2000, through mergers into wholly-owned subsidiaries of ARI, acquired American Realty Trust,
Inc., a Georgia corporation (ART), and National Realty LP, a Delaware limited partnership (NRLP). ART was the successor to a District of Columbia business trust organized July 14, 1961, to provide investors with a
professionally-managed, diversified portfolio of equity real estate and mortgage loan investments selected to provide opportunities for capital appreciation, as well as current income. The business trust merged into ART on June 24, 1988. NRLP
was organized in 1987, and subsequently acquired all of the assets and assumed all of the liabilities of several public and private limited partnerships. NRLP also owned a portfolio of real estate and mortgage loan investments.

On December 31, 2005, ARI subsidiaries owned 82.2% 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. See Note 1 to the Consolidated Financial Statements. ARI has consolidated TCIs accounts and operations since March 31, 2003. At
December 31, 2005, TCI owned 24.9% of Income Opportunity Realty Investors, Inc. (IORI) shares of common stock, and TCI owned 746,972 shares of common stock of ARI.

Effective July 1, 2003, Prime Asset Management, Inc. (PAMI) became the advisor to ARI and TCI. PAMI is owned by Realty Advisors, Inc.
(80.0%) and Syntek West, Inc. (Syntek West) (20.0%), related parties. Syntek West is owned by Gene E. Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc. (PIAMI). On
October 1, 2003, Prime Income Asset Management, LLC (Prime), which is 100% owned by PIAMI, replaced PIAMI as the advisor to ARI and TCI.

Business Plan and Investment Policy

ARIs primary business is investing in equity interests in real estate (including
equity securities of real estate-related entities), leases, joint venture development projects, and partnerships and, to a lesser extent, financing real estate and real estate activities through investments in mortgage loans, including first,
wraparound and junior mortgage loans. Information regarding the real estate and mortgage notes receivable portfolios of ARI is set forth in ITEM 2. PROPERTIES, NOTE 3. NOTES AND INTEREST RECEIVABLE and in



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Schedules III and IV to the Consolidated Financial Statements included in ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA. ARI has six operating segments: apartments, commercial properties, hotels, land ownership, quick-service restaurants, and notes receivable. For additional information, see NOTE 18 to the Consolidated Financial Statements.

ARIs business objective is to maximize long-term value for its stockholders by investing in commercial real estate through the ownership,
management, development, and acquisition of apartments, commercial properties, hotels, and land. ARI intends to achieve this objective through acquiring and developing properties in multiple markets and operating as an industry-leading landlord. ARI
believes this objective will provide the benefits of enhanced investment opportunities, economies of scale, risk diversification, both in terms of geographic market and real estate product type, and continuing access to both debt and equity capital.
In pursuing its business objective, ARI seeks to achieve a combination of internal and external growth, maintain a strong balance sheet, and pursue a strategy of financial flexibility. ARI maximizes the value of its apartments and commercial
properties by maintaining high occupancy levels while charging competitive rental rates, controlling costs, and focusing on tenant retention.

ARI generates increased operating cash flow through annual contractual increases in rental rates under existing leases. ARI also seeks to identify best practices across operating platforms in order to enhance cost savings and other
efficiencies. ARI and its subsidiaries employ capital improvement and preventive maintenance programs designed to reduce operating costs and to increase the long-term value of its real estate investments.

ARI also pursues attractive development opportunities, focusing primarily on new construction or development, either directly or in concert with
unaffiliated parties or affiliates. A summary of the properties under construction is set forth under ITEM 2. PROPERTIES below.

ARI also seeks to acquire properties consistent with its business objectives and strategies. ARI executes its acquisition strategy by purchasing properties which management believes will create stockholder value over the long-term. ARI will
also sell properties when management believes value has been maximized or when a property is no longer considered an investment to be held long-term. During the year ended December 31, 2005, ARI, through its subsidiaries, acquired 37 properties
and sold 42 properties.

ARI is continuously in various stages of discussions and negotiations with respect to development, acquisition,
and disposition projects. The consummation of any current or future development, acquisition, or disposition, if any, and the pace at which any may be completed cannot be assured or predicted.

Substantially all properties are owned by subsidiaries of ARI, many of which are single-asset entities. This ownership structure permits greater access
to financing for individual properties and permits flexibility in the type of transaction available for future disposition of each property by permitting a sale of either the asset or the equity ownership in the entity owning the asset. From
time-to-time, subsidiaries have invested in joint ventures with others, creating the possibility of risks that do not exist with properties solely owned by an ARI subsidiary. In those instances where other investors are involved, those other
investors may have business, economic, or other objectives that are inconsistent with ARIs objectives, which may in turn require ARI to make investment decisions different than it might if ARI was the sole investor.

Real estate generally cannot be sold quickly. ARI and its subsidiaries may not be able to promptly dispose of properties in response to economic or other
conditions. To offset this challenge, selective dispositions have been a part of ARIs strategy to create an efficient portfolio and to provide additional sources of capital for future use. See the discussion under LIQUIDITY AND CAPITAL
RESOURCES in Managements Discussion and Analysis of Financial Condition and Results of Operations for information concerning sales of properties during the past year. ARI and its subsidiaries finance acquisitions through non-recourse
mortgages, internally generated funds, and, to a lesser extent, property sales. Those sources provide the bulk of funds for future acquisitions. ARI, from time-to-time, acquires properties subject to existing indebtedness by a subsidiary assuming
such



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indebtedness. When properties are acquired in such a manner, ARI and its subsidiaries customarily seek to refinance the asset in order to properly leverage
the asset for future operation.

ARI, through its interest in Milano Restaurants International Corporation (Milano), operates
and franchises several quick-service restaurant concepts including pizzerias featuring pizza delivery, carryout, and dine-in under the trademarks Me-N-Eds Pizzerias, Me-N-Eds Slices, and Angelo &
Vitos Pizzerias (collectively the Pizzerias). The first Me-N-Eds Pizzeria opened in 1958. At December 31, 2005, there were 59 restaurants in operation, consisting of 41 owned and 18 franchised. Two of the
restaurants were located in Texas and the remainder were in California. In addition to the Pizzerias, Milano has developed two new concepts: Pizzeria del Pane, a bakery/café concept and Me-N-Eds Pizza Pastaria, a quick-service Italian
restaurant. The initial locations for each of the concepts opened in 2004.

In July 2003, ARI sold its interest in Milano to Gruppa
Florentina, LLC (Gruppa), for $18.5 million, receiving $7.4 million in cash after debt assumption and providing purchase money financing of $2.3 million (see NOTE 3. NOTES RECEIVABLE). ARI owns 20.0% of Gruppa, thereby
retaining a 20.0% interest in Milano. ARI remains as the guarantor of $8.7 million of assumed debt and is one of the guarantors of $7.5 million in new debt obtained by Gruppa. Due to the debt guarantees and ARIs continuing ownership interest
in Milano, management determined that the sale should be accounted for as a financing transaction. In September 2003, ARI sold the note to Syntek West for $2.3 million, plus accrued and unpaid interest, to reduce affiliate debt.

ARIs businesses are not generally seasonal with regard to real estate investments. ARIs investment strategy seeks both current income and
capital appreciation. ARIs plan of operation is to continue, to the extent its liquidity permits, to make equity investments in income-producing real estate such as hotels, apartments, and commercial properties, including equity securities of
real estate-related entities. ARI also intends to continue to pursue higher risk, higher reward investments, such as improved and unimproved land where it can obtain financing of substantially all of a propertys purchase price. ARI intends to
seek selected dispositions of certain of its assets, including in particular selected income producing properties in stabilized markets and certain of its land holdings where the prices obtainable for such assets justify their disposition. ARI has
determined that it will no longer actively seek to fund or purchase mortgage loans. However, it may, in selected instances, originate mortgage loans or it may provide purchase money financing in conjunction with a property sale. See ITEM 2.
PROPERTIES, NOTE 3. NOTES AND INTEREST RECEIVABLE and Schedules III and IV to the Consolidated Financial Statements included in ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

ARIs Board of Directors has broad authority under ARIs governing documents to make all types of investments, and may devote
available assets to particular investments or types of investments, without restriction on the amount or percentage of assets that may be allocated to a single investment or to any particular type of investment, and without limit on the percentage
of securities of any one issuer that may be acquired. Investment objectives and policies may be changed at any time by the Board without stockholder approval.

The specific composition from time-to-time of ARIs real estate portfolio owned through subsidiaries depends largely on the judgment of management to changing investment opportunities and the level of risk
associated with specific investments or types of investments. Management intends to attempt to maintain a real estate portfolio diversified by location and type of property.

In addition to its equity investments in real estate, ARI and/or its subsidiaries have also invested in private and open market purchases of the equity
securities of IORI and TCI, both affiliates of ARI. See ITEM 2. PROPERTIESInvestments in Real Estate Companies and Real Estate Partnerships.

Management of the Company

Although the Board of Directors is directly responsible for managing the affairs of ARI and for
setting the policies which guide it, its day-to-day operations are performed by Prime, a contractual advisor under the



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##### Index to Financial Statements

supervision of the Board. The duties of Prime include, among other things, locating, investigating, evaluating, and recommending real estate and mortgage
note investments and sales opportunities, as well as financing and refinancing sources. Prime also serves as a consultant in connection with ARIs business plan and investment policy decisions made by the Board. Prime is a single-member limited
liability company, the sole member of which is PIAMI, which is owned 80% by Realty Advisors, Inc. and 20% by Syntek West, Inc. Realty Advisors, Inc. is owned 100% by a trust for the benefit of the children of Gene E. Phillips. Syntek West,
Inc. is owned 100% by Gene E. Phillips. Mr. Phillips is not an officer or director of Prime but serves as a representative of the Trust, is involved in daily consultation with the officers of Prime and has significant influence over the
conduct of Primes business, including the rendering of advisory services and the investment decisions for Prime and for ARI. As of March 24, 2006, PIAMI, Primes parent, owned 1,437,208 shares of ARIs common stock,
approximately 13.2% of the shares then outstanding. Prime is more fully described in ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe Advisor.

Prime has been providing advisory services to ARI since October 1, 2003. Prime also serves as advisor to TCI. The officers of ARI are also officers
of IORI, TCI, and Prime. The directors of ARI also serve as directors of TCI. The Chairman of the Board of Directors of ARI also serves as the Chairman of the Board of Directors of TCI and IORI. One other director of ARI also serves as a director of
TCI and IORI. Affiliates of Prime have provided property management services to ARI. Currently, Triad Realty Services, Ltd. (Triad), an affiliate, and Carmel Realty, Inc. (Carmel) provide such property management services.
Triad and Carmel subcontract with other entities for property-level management services. The general partner of Triad is PIAMI. The limited partner of Triad is Highland Realty Services, Inc. (Highland). Triad subcontracts the
property-level management and leasing of 29 of ARIs commercial properties (shopping centers, office buildings, and industrial warehouses) to Regis Realty I, LLC (Regis I) which is owned by Highland. Regis I receives property and
construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis Hotel I, LLC, manages ARIs 11 hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland.
Carmel is owned by Regis I.

Regis I is also entitled to receive real estate brokerage commissions in accordance with the terms of the
Advisory Agreement as discussed in ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe Advisor.

ARI has
no employees itself, but Milano has 895 employees. Under the terms of the Advisory Agreement, employees of Prime render services to ARI.

Competition

Real Estate.    The real estate business is highly competitive and ARI competes with numerous entities
engaged in real estate activities (including certain entities described in ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSRelated Party Transactions), some of which have greater financial resources than ARI. Management
believes that success against such competition is dependent upon the geographic location of the property, the performance of property-level managers in areas such as leasing and marketing, collections and control of operating expenses, the amount of
new construction in the area and the maintenance and appearance of the property. Additional competitive factors include ease of access to the property, the adequacy of related facilities, such as parking and other amenities, and sensitivity to
market conditions in determining rent levels. With respect to apartments, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the residents. With respect to hotels, competition is also
based upon the market served, i.e., transient, commercial, or group users. Management believes that beyond general economic circumstances and trends, the degree to which properties are renovated or new properties are developed in the competing
submarket are also competitive factors. See also ITEM 1A. RISK FACTORS.

To the extent that ARI seeks to sell any of its
properties, the sales prices for the properties may be affected by competition from other real estate entities and financial institutions, also attempting to sell properties in areas where ARIs properties are located, as well as aggressive
buyers attempting to dominate or penetrate a particular market.



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As described above and in ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSRelated
Party Transactions, the officers and directors of ARI also serve as officers and directors of TCI and the officers of ARI also serve as the officers of IORI and two directors of ARI are also directors of IORI. Both TCI and IORI have business
objectives similar to ARIs. ARIs officers and directors owe fiduciary duties to both IORI and TCI as well as to ARI under applicable law. In determining whether a particular investment opportunity will be allocated to ARI, IORI, or TCI,
management considers the respective investment objectives of each Company and the appropriateness of a particular investment in light of each Companys existing real estate and mortgage notes receivable portfolio. To the extent that any
particular investment opportunity is appropriate to more than one of the entities, the investment opportunity may be allocated to the entity which has had funds available for investment for the longest period of time, or, if appropriate, the
investment may be shared among all three or two of the entities.

In addition, also as described in ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, ARI competes with affiliates of Prime having similar investment objectives, in the purchasing, selling, leasing, and financing of real estate and real estate-related investments. In resolving any
potential conflicts of interest which may arise, Prime has informed ARI that it intends to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.

ARI is subject to all the risks incident to ownership and financing of real estate and interests therein, many of which relate to the general illiquidity
of real estate investments. These risks include, but are not limited to, changes in general or local economic conditions, changes in interest rates and availability of permanent mortgage financing which may render the purchase, sale, or refinancing
of a property difficult or unattractive, and which may make debt service overly burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes, hurricanes and other
acts of God and other factors beyond the control of management or the advisor. The illiquidity of real estate investments may also impair the ability of management to respond promptly to changing circumstances. Management believes that such risks
are partially mitigated by the diversification by geographic region and property type of ARIs real estate and mortgage notes receivable portfolios. However, to the extent that property sales, new property investments, in particular improved
and unimproved land, or mortgage lending are concentrated in any particular region, the advantages of geographic diversification are mitigated.

Virtually all of ARIs real estate, equity security holdings in TCI, and its portfolio of equity securities are held subject to secured indebtedness. Such borrowings increase the risk of loss because they represent a prior claim on
ARIs assets and require fixed payments regardless of profitability. In the event of default, the lender may foreclose on the assets securing such indebtedness, and ARI could lose its investment in the pledged assets.

Quick-Service Restaurants.    The pizza parlor business is highly competitive and is affected by changes in consumer tastes
and eating habits, as well as national, regional, and local economic conditions, and demographic trends. The performance of an individual pizza parlor can be affected by changes in traffic patterns, demographics, and the type, number and location of
competing restaurants.

The quick-service restaurant industry is extremely competitive with respect to price, service, location, and food
quality. Milano and its franchisees compete with a variety of other restaurants in the quick-service restaurant industry; including those that offer dine-in, carryout and delivery services. These competitors include national and regional chains,
franchisees of other restaurant chains and local owner-operated restaurants. Some of these competitors have been in existence longer and have an established market presence in certain geographic regions, and some have substantially greater
financial, marketing, and other resources than Milano and its franchisees. Milano competes for qualified franchisees with many other restaurant concepts, including national and regional restaurant chains.

Milanos success is largely dependent upon the efforts of its management and other key personnel. The loss of the service of one or more members of
management could have an adverse effect on Milanos operations.



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Significant transitions in management involve important risks, including potential loss of key personnel, difficulties in implementing changes to operational
strategies and maintaining relationships with franchisees.

At December 31, 2005, Milano owned and operated 41 and franchised 18 pizza
parlors. The results achieved by Milanos relatively small pizza parlor base may not be indicative of the results of a larger number of pizza parlors in a more geographically dispersed area. Because of Milanos relatively small pizza
parlor base, an unsuccessful pizza parlor has a more significant effect on Milanos results of operations than would be the case in a company owning more pizza parlors.

Milanos existing pizza parlors, both owned and franchised, are located predominately in California. At December 31, 2005, there were 55 pizza
parlors in California and two in Texas. Accordingly, Milanos results of operations may be affected by economic or other conditions in those regions. Given Milanos present geographic concentration, publicity relating to Milanos
pizza parlors could have a more pronounced effect on Milanos overall sales than might be the case if Milanos pizza parlors were more geographically dispersed.

All of Milanos owned pizza parlors are operated on premises leased from third parties. Most of the pizza parlor leases provide for a minimum annual rent. There can be no assurance that Milano will be able to
renew leases upon expiration or that the lease terms on renewal will be as favorable as the current lease terms. In 2005, Milano purchased one franchise store and sold one company-owned store as a franchise. Milano also closed one company-owned
store and converted two stores into a Me-N-Eds Pizza Pastaria. Milano opened one new franchise with two franchises leaving the system.

Available
Information

ARI maintains an Internet site at http://www.amrealtytrust.com. Available through the website, free of charge, are
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16, and amendments to those reports, as soon as reasonably practicable after they are electronically filed or furnished
to the Securities and Exchange Commission. In addition, ARI has posted the charters for the Audit Committee, Compensation Committee, and Governance and Nominating Committee, as well as the Code of Business Conduct and Ethics, Corporate Governance
Guidelines on Director Independence, and other information on the website. These charters and principles are not incorporated in this report by reference. ARI will also provide a copy of these documents free of charge to stockholders upon written
request. ARI issues Annual Reports containing audited financial statements to its common stockholders.

ITEM 1A.RISK FACTORS

An investment in our securities involves
various risks. All investors should carefully consider the following risk factors in conjunction with the other information in this report before trading our securities.

Risk Factors Related to ARIs Business

Adverse events concerning existing tenants, or
negative market conditions that may affect existing tenants could have an adverse impact on ARIs ability to attract new tenants, relet space, collect rent or renew leases, and thus could adversely affect cash flow from operations and inhibit
growth.    Cash flow from operations depends in part on the ability to lease space to tenants on economically favorable terms. ARI could be adversely affected by various facts and events over which the Company has limited or
no control, such as:



| |  |  | lack of demand for space in areas where the Companys properties are located;
| | - |  | -----------------------------------------------------------------------------



| |  |  | inability to retain existing tenants and attract new tenants;
| | - |  | -------------------------------------------------------------



| |  |  | oversupply of or reduced demand for space and changes in market rental rates;
| | - |  | -----------------------------------------------------------------------------



| |  |  | defaults by tenants or failure to pay rent on a timely basis;
| | - |  | -------------------------------------------------------------



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| |  |  | the need to periodically renovate and repair marketable space;
| | - |  | --------------------------------------------------------------



| |  |  | physical damage to properties;
| | - |  | ------------------------------



| |  |  | economic or physical decline of the areas where properties are located;
| | - |  | -----------------------------------------------------------------------



| |  |  | potential risk of functional obsolescence of properties over time.
| | - |  | ------------------------------------------------------------------

At any time, any tenant may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay a lease commencement, fail to make rental payments when due, decline to extend
a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenants lease and material losses to the
Company.

If tenants do not renew their leases as they expire, ARI may not be able to rent the space. Furthermore, leases that are renewed,
and some new leases for space that is relet, may have terms that are less economically favorable than expiring lease terms, or may require ARI to incur significant costs, such as renovations, tenant improvements, or lease transaction costs.

Any of these events could adversely affect cash flow from operations and ARIs ability to make distributions to shareholders and
service indebtedness.

A significant portion of the costs of owning property, such as real estate taxes, insurance costs, and debt service
payments are not necessarily reduced when circumstances cause a decrease in rental income from the properties.

ARI may not be able to
compete successfully with other entities that operate in our industry.    ARI experiences a great deal of competition in attracting tenants for its properties and in locating land to develop and properties to acquire.

In ARIs effort to lease its properties, ARI competes for tenants with a broad spectrum of other landlords. These competitors
include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial terms than ARI
is able to offer.

If the availability of land or high quality properties in ARIs markets diminishes, operating results could be
adversely affected.

ARI may experience increased operating costs, which could adversely affect our financial results and the value of
our properties.    ARIs properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with
security, landscaping, repairs, and maintenance of the properties. While some current tenants generally are obligated by their leases to reimburse ARI for a portion of these costs, there is no assurance that these tenants will make such payments or
agree to pay these costs upon renewal or new tenants will agree to pay these costs. If operating expenses increase in ARIs markets, ARI may not be able to increase rents or reimbursements in all of these markets to offset the increased
expenses, without at the same time decreasing occupancy rates. If this occurs, ARIs ability to make distributions to shareholders and service indebtedness could be adversely affected.

ARIs ability to achieve growth in operating income depends in part on its ability to develop properties.    ARI intends
to continue to develop properties where warranted by market conditions. ARI has a number of ongoing development and land projects being readied for commencement.



9



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##### Index to Financial Statements

Additionally, general construction and development activities include the following risks:



| |  |  | construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability
for that property;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | construction costs may exceed original estimates due to increases in interest rates and increased cost of materials, labor or other costs, possibly making the property less
profitable because of inability to increase rents to compensate for the increase in construction costs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | some developments may fail to achieve expectations, possibly making them less profitable;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | ARI may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in
increased costs and could require ARI to abandon its activities entirely with respect to a project;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ARI may abandon development opportunities after the initial exploration, which may result in failure to recover costs already incurred. If ARI determines to alter or discontinue its
development efforts, future costs of the investment may be expensed as incurred rather than capitalized and ARI may determine the investment is impaired resulting in a loss;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ARI may expend funds on and devote managements time to projects which will not be completed;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | occupancy rates and rents at newly-completed properties may fluctuate depending on various factors including market and economic conditions, and may result in lower than projected
rental rates and reduced income from operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ARI faces risks associated with property
acquisitions.    ARI acquires individual properties and various portfolios of properties and intends to continue to do so. Acquisition activities are subject to the following risks:



| |  |  | when ARI is able to locate a desired property, competition from other real estate investors may significantly increase the sellers offering price;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquired properties may fail to perform as expected;
| | - |  | ----------------------------------------------------



| |  |  | the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | acquired properties may be located in new markets where ARI faces risks associated with an incomplete knowledge or understanding of the local market, a limited number of established
business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ARI may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations
and financial condition could be adversely affected.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ARI may acquire properties subject to liabilities and without any
recourse, or with limited recourse, with respect to unknown liabilities. However, if an unknown liability was later asserted against the acquired properties, ARI might be required to pay substantial sums to settle it, which could adversely affect
cash flow.

Many of ARIs properties are concentrated in our primary markets, and the Company may suffer economic harm as a result
of adverse conditions in those markets.    ARIs properties are located principally in specific geographic areas in the Southwestern, Southeastern, and Midwestern United States. The Companys overall performance is
largely dependent on economic conditions in those regions.

ARI is leveraged and we may not be able to meet our debt service
obligations.    ARI had total indebtedness at December 31, 2005 of approximately $1.044 billion. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they
represent a prior claim on assets and most require fixed payments regardless of profitability. ARIs leveraged position makes it vulnerable to declines in the general economy and may limit the Companys ability to pursue other business
opportunities in the future.



10



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##### Index to Financial Statements

The Company may not be able to access financial markets to obtain capital on a timely basis, or on
acceptable terms.    ARI relies on proceeds from property dispositions and third party capital sources for a portion of its capital needs, including capital for acquisitions and development. The public debt and equity markets
are among the sources upon which the Company relies. There is no guarantee ARI will be able to access these markets or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:



| |  |  | general economic conditions affecting these markets;
| | - |  | ----------------------------------------------------



| |  |  | ARIs own financial structure and performance;
| | - |  | ----------------------------------------------



| |  |  | the markets opinion of real estate companies in general;
| | - |  | ---------------------------------------------------------



| |  |  | the markets opinion of real estate companies that own properties like ARI.
| | - |  | ---------------------------------------------------------------------------

ARI may suffer adverse effects as a result of terms and covenants relating to the Companys indebtedness.    Required payments on ARIs indebtedness generally are not reduced if
the economic performance of the portfolio declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders may be reduced. If payments on debt cannot be made, ARI could sustain
a loss or suffer judgments, or in the case of mortgages, suffer foreclosures by mortgagees. Further, some obligations contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default
on other obligations.

ARI anticipates only a small portion of the principal of its debt will be repaid prior to maturity. Therefore, ARI
is likely to refinance a portion of its outstanding debt as it matures. There is a risk that ARI may not be able to refinance existing debt or the terms of any refinancing will not be as favorable as the terms of the maturing debt. If principal
balances due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity capital, cash flow may not be sufficient to repay all maturing debt in years when significant
balloon payments come due.

ARIs credit facilities and unsecured debt contain customary restrictions, requirements and
other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios, and minimum ratios of unencumbered assets to unsecured debt, which ARI must maintain.
ARIs continued ability to borrow is subject to compliance with financial and other covenants. In addition, failure to comply with such covenants could cause a default under credit facilities, and ARI may then be required to repay such debt
with capital from other sources. Under those circumstances, other sources of capital may not be available, or be available only on unattractive terms.

ARIs leverage could affect the Companys ability to obtain additional financing for working capital, capital expenditures, acquisitions, development, or other general corporate purposes. The degree of
leverage could also make ARI more vulnerable to a downturn in business or the economy or could affect the market price of the Companys common stock.

An increase in interest rates would increase interest costs on variable rate debt and could adversely impact the Companys ability to refinance existing debt.    ARI currently has, and
may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will the interest costs, which would adversely affect cash flow and the ability to pay principal and interest on ARIs debt and the
ability to make distributions to shareholders. Further, rising interest rates could limit ARIs ability to refinance existing debt when it matures.

Unbudgeted capital expenditures or cost overruns could adversely affect business operations and cash flow.    If capital expenditures for ongoing or planned development projects or
renovations exceed expectations, the additional cost of these expenditures could have an adverse effect on business operations and cash flow. In addition, ARI might not have access to funds on a timely basis to pay the unexpected expenditures.



11



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##### Index to Financial Statements

Construction costs are funded in large part through construction financing, which the Company may
guarantee and the Companys obligation to pay interest on this financing continues until the rental project is completed, leased up, and permanent financing is obtained, or the for sale project is sold or the construction loan is otherwise
paid. Unexpected delays in completion of one or more ongoing projects could also have a significant adverse impact on business operations and cash flow.

ARI may need to sell properties from time-to-time for cash flow purposes.    Because of the lack of liquidity of real estate investments generally, ARIs ability to respond to changing
circumstances may be limited. Real estate investments generally cannot be sold quickly. In the event that ARI must sell assets to generate cash flow, ARI cannot predict whether there will be a market for those assets in the time period desired, or
whether ARI will be able to sell the assets at a price that will allow the Company to fully recoup its investment. ARI may not be able to realize the full potential value of the assets and may incur costs related to the early pay-off of the debt
secured by such assets.

The Company intends to devote resources to the development of new projects.    ARI
plans to continue developing new projects as opportunities arise in the future. Development and construction activities entail a number of risks, including but not limited to the following:



| |  |  | ARI may abandon a project after spending time and money determining its feasibility;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | construction costs may materially exceed original estimates;
| | - |  | ------------------------------------------------------------



| |  |  | the revenue from a new project may not be enough to make it profitable or generate a positive cash flow;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | ARI may not be able to obtain financing on favorable terms for development of a property, if at all;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the Company may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | ARI may not be able to obtain, or may be delayed in obtaining, necessary governmental permits.
| | - |  | ----------------------------------------------------------------------------------------------

The overall business is subject to all of the risks associated with the real estate industry.    ARI is subject to all risks
incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:



| |  |  | ARIs real estate assets are concentrated primarily in the Southwest and any deterioration in the general economic conditions of this region could have an adverse effect;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in interest rates may make the ability to satisfy debt service requirements more burdensome;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in real estate and zoning laws;
| | - |  | ---------------------------------------



| |  |  | increases in real estate taxes and insurance costs;
| | - |  | ---------------------------------------------------



| |  |  | federal or local economic or rent control;
| | - |  | ------------------------------------------



| |  |  | acts of terrorism, and
| | - |  | ----------------------



| |  |  | hurricanes, tornadoes, floods, earthquakes and other similar natural disasters.
| | - |  | -------------------------------------------------------------------------------

Risks Related to the Real Estate Industry

Real estate investments are illiquid, and the Company may not be able to sell
properties if and when it is appropriate to do so.    Real estate generally cannot be sold quickly. ARI may not be able to dispose of properties promptly in response to economic or other conditions. In addition, provisions of
the Internal Revenue Code may



12



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##### Table of Contents

##### Index to Financial Statements

limit ARIs ability to sell properties (without incurring significant tax costs) in some situations when it may be otherwise economically advantageous
to do so, thereby adversely affecting returns to stockholders and adversely impacting ARIs ability to meet its obligations.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.



|ITEM 2. | PROPERTIES
|------- | ----------

ARIs principal
offices are located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate for ARIs present operations.

Details of ARIs and its subsidiaries real estate and mortgage notes receivable portfolios at December 31, 2005, are set forth in
SCHEDULES III and IV, respectively, to the Consolidated Financial Statements included in ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The discussions set forth below under the headings Real Estate
and Mortgage Loans provide certain summary information concerning ARIs real estate and mortgage notes receivable portfolios.

At December 31, 2005, no single asset accounted for 10.0% or more of total assets. At December 31, 2005, 82.7% of ARIs assets consisted of real estate, and 6.1% consisted of notes and interest receivable. The remaining 11.2%
of ARIs assets were cash, cash equivalents, marketable equity securities, restaurant equipment, investments in equity investees, goodwill and other intangibles, and other assets. The percentage of assets invested in any one category is subject
to change and no assurance can be given that the composition of ARIs assets in the future will approximate the percentages listed above.

ARIs real estate is geographically diverse with concentrations in the Southwest, Southeast, and Midwest regions. At December 31, 2005, ARIs real estate was located in all geographic regions of the continental United States,
other than the Northeast region, as shown more specifically in the table under Real Estate below. ARI also holds mortgage notes receivable secured by real estate located in the Southwest, Pacific, and Midwest regions of the continental
United States. See SCHEDULE IV to the Consolidated Financial Statements included in ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for a detailed description of ARIs notes receivable portfolio.

Real Estate

At December 31, 2005, 83.7% of
ARIs assets were invested in real estate and the equity securities of IORI and other equity investees. ARI invests in real estate located throughout the continental United States, either on a leveraged or non-leveraged basis. ARIs real
estate portfolio consists of properties held for investment, properties held for sale, investments in partnerships, and investments in equity investees.

Types of Real Estate Investments.    ARIs real estate consists of apartments, commercial properties (office buildings, industrial warehouses, shopping centers, and a merchandise mart),
hotels, and improved and unimproved land. In selecting real estate for investment, the location, age, and type of property, gross rents, lease terms, financial and business standing of tenants, operating expenses, fixed charges, land values, and
physical condition are among the factors considered. Properties may be purchased subject to debt, or existing debt may be assumed and properties may be mortgaged, pledged or otherwise collateralized to obtain financing. The Board of Directors may
alter the types of and criteria for selecting new real estate investments and for obtaining financing without a vote of stockholders.

Although ARI has typically invested in developed real estate, it may also invest in new construction or development either directly or in partnership with unaffiliated parties or affiliates (subject to approval by the



13



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##### Table of Contents

##### Index to Financial Statements

Board of Directors). To the extent that it invests in construction and development projects, such as the apartments described below, ARI is subject to
business risks, which include cost overruns and construction delays, associated with higher risk projects.

At December 31, 2005, ARI
had the following properties under construction.



|                     |  |                    |  |           |  |                |        |                           |   |                         |  |   |       
|-------------------- |  | ------------------ |  | --------- |  | -------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------
|Property             |  | Location           |  | Units     |  | AmountExpended |        | AdditionalAmount toExpend |   | ConstructionLoanFunding
|Apartments           |  |                    |  |           |  |                |        |                           |   |                         |  |   |       
|Laguna Vista         |  | Farmers Branch, TX |  | 206 Units |  | $              | 8,308  |                           | $ | 12,797                  |  | $ | 17,741
|Legends of El Paso   |  | El Paso, TX        |  | 240 Units |  |                | 5,319  |                           |   | 12,765                  |  |   | 16,040
|Mission Oaks         |  | San Antonio, TX    |  | 228 Units |  |                | 12,072 |                           |   | 5,397                   |  |   | 15,636
|Parc at Maumelle     |  | Maumelle, AR       |  | 240 Units |  |                | 11,805 |                           |   | 6,894                   |  |   | 16,829
|Parc at Metro Center |  | Nashville, TN      |  | 144 Units |  |                | 3,328  |                           |   | 9,287                   |  |   | 11,141

In 2005, ARI completed the 70 unit Blue Lake Villas II in Waxahachie, Texas, the 272 unit Bluffs
at Vista Ridge in Lewisville, Texas, the 232 unit Bridges on Kinsey in Tyler, Texas, the 208 unit Dakota Arms in Lubbock, Texas, the 240 unit Lake Forest in Houston, Texas, the 220 unit Wildflower Villas in Temple, Texas, the 398 unit Kingsland
Ranch Apartments in Houston, Texas, the 240 unit Stonebridge at City Park Apartments in Houston, Texas, and the 240 unit Vistas of Vance Jackson in San Antonio, Texas.

In the opinion of management, the properties owned by ARI are adequately covered by insurance.

The
Companys three office buildings in downtown New Orleans suffered extensive damage from Hurricane Katrina. Management is presently working with the Companys insurance carriers to finalize all related claims. Most of the
necessary repairs to the Amoco and 1010 Common Buildings have either been made or scheduled. At year-end, the Company had received approximately $8.7 million from its insurance carriers principally as partial reimbursement for Katrina-related lost
rents. At the same time, the Company had spent $1.7 million to stabilize and initiate repairs to the buildings. At December 31, 2005, the Amoco Building and the 1010 Common Building were open for business on a limited-access
basis. The 225 Baronne Building, however, is closed until the assessment of damages can be fully completed. We believe our insurance coverage is adequate to fully cover the cost of repairs and lost rents, less our normal property and wind
deductibles.

Two of our apartment communities (Island Bay and Marina Landing) in Galveston, Texas and one property (Harpers Ferry)
in Lafayette, Louisiana suffered damage from Hurricane Rita. Most of the repairs have either been completed or scheduled. Our insurance policies will cover the costs of the required repairs, excluding normal property and wind deductibles.

The following table sets forth the percentages, by property type and geographic region, of owned real estate (excluding 92 parcels of
improved and unimproved land, a hotel in Wroclaw, Poland, and a single-family residence, described below) at December 31, 2005.



|          |  |            |   |  |                      |   |  |        |  
|--------- |  | ---------- | - |  | -------------------- | - |  | ------ | -
|Region    |  | Apartments |   |  | CommercialProperties |   |  | Hotels |  
|Midwest   |  | 6          | % |  | 16                   | % |  | 11     | %
|Mountain  |  |           |   |  | 12                   |   |  | 12     |  
|Pacific   |  |           |   |  | 1                    |   |  | 47     |  
|Southeast |  | 9          |   |  | 5                    |   |  | 30     |  
|Southwest |  | 85         |   |  | 66                   |   |  |       |  
|          |  |            |   |  |                      |   |  |        |  
|          |  | 100        | % |  | 100                  | % |  | 100    | %

The foregoing table is based solely on the number of apartment units, amount of commercial square
footage, and number of hotel rooms owned, and does not reflect the value of ARIs investment in each region. See



14



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##### Table of Contents

##### Index to Financial Statements

SCHEDULE III to the Consolidated Financial Statements included in ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for a
detailed description of owned real estate.

Excluded from the table above are a 165 room hotel in Wroclaw, Poland, a single family
residence in Dallas, Texas, and 92 parcels of improved and unimproved land. See Land Properties table below for a listing of properties, locations, and acres.

A summary of the activity in the owned real estate portfolio during 2005 is as follows:



|                                                                    |  |     |  
|------------------------------------------------------------------- |  | --- | -
|Owned properties at January 1, 2005                                 |  | 204 |  
|Properties purchased (excluding additions to existing land parcels) |  | 28  |  
|Properties added from consolidation of partnerships                 |  | 1   |  
|Properties sold (excluding partial sales)                           |  | (21 | )
|                                                                    |  |     |  
|Owned properties at December 31, 2005                               |  | 212 |  
|                                                                    |  |     |  

Operating Properties.    Set forth below are ARIs operating
properties and the monthly rental rate for apartments, the average annual rental rate for commercial properties, the average daily room rate and room revenue divided by total available rooms for hotels, and occupancy at December 31, 2005, 2004,
and 2003 for apartments and commercial properties and average occupancy during 2005, 2004, and 2003 for hotels.



|                       |  |                   |      |                           |      |                      |      |             |      |      |  |      |      |  |      |   |  |     |   |  |     |  
|---------------------- |  | ----------------- | ---- | ------------------------- | ---- | -------------------- | ---- | ----------- | ---- | ---- |  | ---- | ---- |  | ---- | - |  | --- | - |  | --- | -
|Property               |  | Location          |      | Units/Square Footage      |      | Rent Per Square Foot |      | Occupancy % |     
|                       |  |                   | 2005 |                           | 2004 |                      | 2003 |             | 2005 |      |  | 2004 |      |  | 2003 |  
|Apartments             |  |                   |      |                           |      |                      |      |             |      |      |  |      |      |  |      |   |  |     |   |  |     |  
|4400                   |  | Midland, TX       |      | 92 Units/94,472 Sq. Ft.   |      | $                    | .55  |             | $    | .51  |  | $    | .49  |  | 97   | % |  | 97  | % |  | 86  | %
|Apple Lane             |  | Lawrence, KS      |      | 75 Units/30,000 Sq. Ft.   |      |                      | 1.12 |             |      | 1.08 |  |      | 1.05 |  | 100  |   |  | 100 |   |  | 100 |  
|Arbor Point            |  | Odessa, TX        |      | 195 Units/178,920 Sq. Ft. |      |                      | .50  |             |      | .47  |  |      | .45  |  | 92   |   |  | 90  |   |  | 95  |  
|Arlington Place        |  | Pasadena, TX      |      | 230 Units/205,476 Sq. Ft. |      |                      | .76  |             |      | .76  |  |      | .76  |  | 96   |   |  | 97  |   |  | 97  |  
|Ashton Way             |  | Midland, TX       |      | 178 Units/138,964 Sq. Ft. |      |                      | .48  |             |      | .45  |  |      | .43  |  | 96   |   |  | 95  |   |  | 87  |  
|Autumn Chase           |  | Midland, TX       |      | 64 Units/58,652 Sq. Ft.   |      |                      | .61  |             |      | .57  |  |      | .55  |  | 95   |   |  | 98  |   |  | 98  |  
|Bay Walk               |  | Galveston, TX     |      | 192 Units/153,120 Sq. Ft. |      |                      | .75  |             |      | .75  |  |      | .75  |  | 94   |   |  | 90  |   |  | 95  |  
|Blue Lake Villas       |  | Waxahachie, TX    |      | 186 Units/169,746 Sq. Ft. |      |                      | .93  |             |      | .91  |  |      | .91  |  | 95   |   |  | 90  |   |  | 92  |  
|Blue Lake Villas II    |  | Waxahachie, TX    |      | 70 Units/69,768 Sq. Ft.   |      |                      | .79  |             |      | *    |  |      | *    |  | 99   |   |  | *   |   |  | *   |  
|Bluffs at Vista Ridge  |  | Lewisville, TX    |      | 272 Units/257,432 Sq. Ft. |      |                      | .98  |             |      | *    |  |      | *    |  | 89   |   |  | *   |   |  | *   |  
|Breakwater Bay         |  | Beaumont, TX      |      | 176 Units/145,688 Sq. Ft. |      |                      | .94  |             |      | .93  |  |      | *    |  | 99   |   |  | 87  |   |  | *   |  
|Bridges on Kinsey      |  | Tyler, TX         |      | 232 Units/209,888 Sq. Ft. |      |                      | .87  |             |      | *    |  |      | *    |  | 98   |   |  | *   |   |  | *   |  
|Bridgestone            |  | Friendswood, TX   |      | 76 Units/65,519 Sq. Ft.   |      |                      | .74  |             |      | .74  |  |      | .74  |  | 96   |   |  | 96  |   |  | 96  |  
|Capitol Hill           |  | Little Rock, AR   |      | 156 Units/151,116 Sq. Ft. |      |                      | .76  |             |      | .88  |  |      | *    |  | 98   |   |  | 70  |   |  | *   |  
|Château                |  | Bellevue, NE      |      | 115 Units/99,220 Sq. Ft.  |      |                      | .74  |             |      | .73  |  |      | .73  |  | 91   |   |  | 86  |   |  | 86  |  
|Château Bayou          |  | Ocean Springs, MS |      | 122 Units/105,536 Sq. Ft. |      |                      | .70  |             |      | .67  |  |      | .67  |  | 100  |   |  | 94  |   |  | 94  |  
|Courtyard              |  | Midland, TX       |      | 133 Units/111,576 Sq. Ft. |      |                      | .49  |             |      | .47  |  |      | .46  |  | 96   |   |  | 94  |   |  | 99  |  
|Coventry               |  | Midland, TX       |      | 120 Units/105,608 Sq. Ft. |      |                      | .51  |             |      | .45  |  |      | .44  |  | 98   |   |  | 96  |   |  | 84  |  
|Dakota Arms            |  | Lubbock, TX       |      | 208 Units/178,776 Sq. Ft. |      |                      | .88  |             |      | *    |  |      | *    |  | 93   |   |  | *   |   |  | *   |  
|DeSoto Ranch           |  | DeSoto, TX        |      | 248 Units/240,718 Sq. Ft. |      |                      | .97  |             |      | .95  |  |      | .94  |  | 96   |   |  | 98  |   |  | 98  |  
|El Chapparal           |  | San Antonio, TX   |      | 190 Units/174,220 Sq. Ft. |      |                      | .76  |             |      | .75  |  |      | .73  |  | 93   |   |  | 94  |   |  | 96  |  
|Fairway View Estates   |  | El Paso, TX       |      | 264 Units/204,000 Sq. Ft. |      |                      | .67  |             |      | .65  |  |      | .64  |  | 95   |   |  | 90  |   |  | 96  |  
|Fairways               |  | Longview, TX      |      | 152 Units/134,176 Sq. Ft. |      |                      | .61  |             |      | .59  |  |      | .58  |  | 91   |   |  | 96  |   |  | 93  |  
|Falcon Lakes           |  | Arlington, TX     |      | 284 Units/207,960 Sq. Ft. |      |                      | .97  |             |      | .96  |  |      | .96  |  | 96   |   |  | 94  |   |  | 94  |  
|Fountain Lake          |  | Texas City, TX    |      | 166 Units/161,220 Sq. Ft. |      |                      | .62  |             |      | .62  |  |      | .62  |  | 92   |   |  | 86  |   |  | 96  |  
|Fountains of Waterford |  | Midland, TX       |      | 172 Units/129,200 Sq. Ft. |      |                      | .61  |             |      | .55  |  |      | .53  |  | 96   |   |  | 96  |   |  | 99  |  
|Foxwood                |  | Memphis, TN       |      | 220 Units/212,000 Sq. Ft. |      |                      | .61  |             |      | .61  |  |      | .61  |  | 95   |   |  | 83  |   |  | 83  |  
|Governors Square      |  | Tallahassee, FL   |      | 169 Units/146,550 Sq. Ft. |      |                      | .69  |             |      | .73  |  |      | .73  |  | 98   |   |  | 95  |   |  | 95  |  
|Harpers Ferry         |  | Lafayette, LA     |      | 122 Units/112,500 Sq. Ft. |      |                      | .61  |             |      | .61  |  |      | .60  |  | 98   |   |  | 95  |   |  | 90  |  
|Heather Creek          |  | Mesquite, TX      |      | 200 Units/170,212 Sq. Ft. |      |                      | .95  |             |      | .94  |  |      | *    |  | 94   |   |  | 93  |   |  | *   |  
|Hunters Glen           |  | Midland, TX       |      | 260 Units/174,180 Sq. Ft. |      |                      | .45  |             |      | .42  |  |      | .39  |  | 100  |   |  | 93  |   |  | 94  |  
|Island Bay             |  | Galveston, TX     |      | 458 Units/374,784 Sq. Ft. |      |                      | .84  |             |      | .83  |  |      | .83  |  | 94   |   |  | 93  |   |  | 91  |  
|Kingsland Ranch        |  | Houston, TX       |      | 398 Units/350,574 Sq. Ft. |      |                      | .96  |             |      | *    |  |      | *    |  | 97   |   |  | *   |   |  | *   |  



15



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##### Table of Contents

##### Index to Financial Statements

|                         |  |                      |      |                           |      |                      |      |             |      |       |      |     |      |     |  |    
|------------------------ |  | -------------------- | ---- | ------------------------- | ---- | -------------------- | ---- | ----------- | ---- | ----- | ---- | --- | ---- | --- |  | ---
|Property                 |  | Location             |      | Units/Square Footage      |      | Rent Per Square Foot |      | Occupancy %
|                         |  |                      | 2005 |                           | 2004 |                      | 2003 |             | 2005 |       | 2004 |     | 2003
|Lake Forest              |  | Houston, TX          |      | 240 Units/193,872 Sq. Ft. |      | .97                  |      | *           |      | *     |      | 95  |      | *   |  | *  
|Limestone Canyon         |  | Austin, TX           |      | 260 Units/216,000 Sq. Ft. |      | 1.06                 |      | 1.06        |      | 1.06  |      | 94  |      | 96  |  | 91 
|Limestone Ranch          |  | Lewisville, TX       |      | 252 Units/219,600 Sq. Ft. |      | .97                  |      | .95         |      | .94   |      | 94  |      | 95  |  | 91 
|Marina Landing           |  | Galveston, TX        |      | 256 Units/205,504 Sq. Ft. |      | .83                  |      | .83         |      | .83   |      | 97  |      | 92  |  | 95 
|Mariposa Villas          |  | Dallas, TX           |      | 216 Units/199,656 Sq. Ft. |      | .89                  |      | .89         |      | .89   |      | 92  |      | 95  |  | 97 
|Mediterranean Villas     |  | San Antonio, TX      |      | 140 Units/158,960 Sq. Ft. |      | .58                  |      | .56         |      | .56   |      | 99  |      | 92  |  | 92 
|Mountain Plaza           |  | El Paso, TX          |      | 188 Units/220,710 Sq. Ft. |      | .54                  |      | .52         |      | .52   |      | 97  |      | 90  |  | 94 
|Oak Park IV              |  | Clute, TX            |      | 108 Units/78,708 Sq. Ft.  |      | .56                  |      | .56         |      | .56   |      | 93  |      | 93  |  | 91 
|Oak Tree                 |  | Grandview, MO        |      | 189 Units/160,591 Sq. Ft. |      | .67                  |      | .66         |      | .66   |      | 88  |      | 93  |  | 93 
|Paramount Terrace        |  | Amarillo, TX         |      | 181 Units/123,840 Sq. Ft. |      | .62                  |      | .61         |      | .60   |      | 96  |      | 91  |  | 93 
|Plantation               |  | Tulsa, OK            |      | 138 Units/103,500 Sq. Ft. |      | .61                  |      | .61         |      | .61   |      | 91  |      | 90  |  | 92 
|Quail Oaks               |  | Balch Springs, TX    |      | 131 Units/72,848 Sq. Ft.  |      | .83                  |      | .83         |      | .83   |      | 97  |      | 95  |  | 95 
|River Oaks               |  | Wylie, TX            |      | 180 Units/164,604 Sq. Ft. |      | .96                  |      | .86         |      | .86   |      | 95  |      | 95  |  | 98 
|Sendero Ridge            |  | San Antonio, TX      |      | 384 Units/340,880 Sq. Ft. |      | .95                  |      | 1.02        |      | 1.01  |      | 90  |      | 94  |  | 80 
|Somerset                 |  | Texas City, TX       |      | 200 Units/163,368 Sq. Ft. |      | .68                  |      | .68         |      | .68   |      | 92  |      | 85  |  | 88 
|Southgate                |  | Odessa, TX           |      | 180 Units/151,656 Sq. Ft. |      | .51                  |      | .46         |      | .43   |      | 95  |      | 98  |  | 93 
|Spy Glass                |  | Mansfield, TX        |      | 256 Units/239,264 Sq. Ft. |      | .97                  |      | .96         |      | .95   |      | 93  |      | 92  |  | 97 
|Stonebridge at City Park |  | Houston, TX          |      | 240 Units/207,424 Sq. Ft. |      | .97                  |      | *           |      | *     |      | 96  |      | *   |  | *  
|Sunchase                 |  | Odessa, TX           |      | 300 Units/223,048 Sq. Ft. |      | .54                  |      | .51         |      | .49   |      | 96  |      | 97  |  | 96 
|Sunset                   |  | Odessa, TX           |      | 240 Units/160,400 Sq. Ft. |      | .49                  |      | .49         |      | .50   |      | 98  |      | 97  |  | 100
|Timbers                  |  | Tyler, TX            |      | 180 Units/101,666 Sq. Ft. |      | .61                  |      | .60         |      | .60   |      | 97  |      | 96  |  | 92 
|Tivoli                   |  | Dallas, TX           |      | 190 Units/168,862 Sq. Ft. |      | .96                  |      | .95         |      | .95   |      | 93  |      | 92  |  | 92 
|Treehouse                |  | Irving, TX           |      | 160 Units/153,072 Sq. Ft. |      | .80                  |      | .80         |      | *     |      | 95  |      | 96  |  | *  
|Verandas at City View    |  | Fort Worth, TX       |      | 314 Units/295,170 Sq. Ft. |      | .92                  |      | .92         |      | .60   |      | 96  |      | 93  |  | 92 
|Villa Del Mar            |  | Wichita, KS          |      | 162 Units/128,004 Sq. Ft. |      | .62                  |      | .62         |      | .62   |      | 91  |      | 89  |  | 89 
|Villager                 |  | Ft. Walton, FL       |      | 33 Units/22,840 Sq. Ft.   |      | .88                  |      | .79         |      | .79   |      | 97  |      | 100 |  | 100
|Vistas at Pinnacle Park  |  | Dallas, TX           |      | 332 Units/276,928 Sq. Ft. |      | .93                  |      | .91         |      | *     |      | 93  |      | 96  |  | *  
|Vistas at Vance Jackson  |  | San Antonio, TX      |      | 240 Units/196,272 Sq. Ft. |      | .72                  |      | *           |      | *     |      | 94  |      | *   |  | *  
|Westwood                 |  | Mary Ester, FL       |      | 120 Units/93,000 Sq. Ft.  |      | .83                  |      | .74         |      | .74   |      | 99  |      | 100 |  | 100
|Westwood                 |  | Odessa, TX           |      | 79 Units/49,001 Sq. Ft.   |      | .54                  |      | .46         |      | .44   |      | 100 |      | 91  |  | 100
|Whispering Pines         |  | Topeka, KS           |      | 320 Units/299,264 Sq. Ft. |      | .55                  |      | .55         |      | .55   |      | 91  |      | 91  |  | 91 
|Wildflower Villas        |  | Temple, TX           |      | 220 Units/201,536 Sq. Ft. |      | .85                  |      | *           |      | *     |      | 92  |      | *   |  | *  
|Willow Creek             |  | El Paso, TX          |      | 112 Units/103,140 Sq. Ft. |      | .59                  |      | .58         |      | .57   |      | 97  |      | 97  |  | 96 
|Willo-Wick Gardens       |  | Pensacola, FL        |      | 152 Units/153,360 Sq. Ft. |      | .56                  |      | .55         |      | .55   |      | 95  |      | 95  |  | 91 
|Windsong                 |  | Ft. Worth, TX        |      | 188 Units/169,464 Sq. Ft. |      | .90                  |      | .89         |      | *     |      | 96  |      | 91  |  | *  
|Woodlake                 |  | Carrollton, TX       |      | 256 Units/210,208 Sq. Ft. |      | .87                  |      | .87         |      | .87   |      | 94  |      | 92  |  | 92 
|Woodview                 |  | Odessa, TX           |      | 232 Units/165,840 Sq. Ft. |      | .56                  |      | .53         |      | .52   |      | 96  |      | 93  |  | 94 
|                         |  |                      |      |                           |      |                      |      |            
|Office Buildings         |  |                      |      |                           |      |                      |      |             |      |       |      |     |      |     |  |    
|1010 Common              |  | New Orleans, LA      |      | 494,579 Sq. Ft.           |      | 14.09                |      | 14.08       |      | 13.63 |      | 85  |      | 84  |  | 82 
|225 Baronne              |  | New Orleans, LA      |      | 416,834 Sq. Ft.           |      | 10.62                |      | 10.70       |      | 10.63 |      | 68  |      | 69  |  | 65 
|600 Las Colinas          |  | Las Colinas, TX      |      | 509,829 Sq. Ft.           |      | 21.88                |      | *           |      | *     |      | 88  |      | *   |  | *  
|Amoco                    |  | New Orleans, LA      |      | 378,244 Sq. Ft.           |      | 13.78                |      | 13.66       |      | 13.37 |      | 72  |      | 69  |  | 78 
|Cooley Building          |  | Farmers Branch, TX   |      | 27,000 Sq. Ft.            |      | 13.63                |      | 12.63       |      | 12.63 |      | 100 |      | 100 |  | 100
|Durham Center            |  | Durham, NC           |      | 207,171 Sq. Ft.           |      | 16.60                |      | 17.73       |      | 17.73 |      | 55  |      | 83  |  | 83 
|Eton Square              |  | Tulsa, OK            |      | 222,654 Sq. Ft.           |      | 10.51                |      | 11.09       |      | 11.60 |      | 60  |      | 75  |  | 38 
|Executive Court          |  | Memphis, TN          |      | 41,840 Sq. Ft.            |      | 4.51                 |      | 8.00        |      | 8.00  |      | 10  |      | *   |  | *  
|Forum                    |  | Richmond, VA         |      | 79,791 Sq. Ft.            |      | 13.86                |      | 13.68       |      | 14.23 |      | 90  |      | 76  |  | 61 
|Four Hickory Centre      |  | Farmers Branch, TX   |      | 226,911 Sq. Ft.           |      | 18.41                |      | 18.70       |      | 18.70 |      | 11  |      | 4   |  | 4  
|Lexington Center         |  | Colorado Springs, CO |      | 74,603 Sq. Ft.            |      | 10.88                |      | 10.56       |      | 12.33 |      | 58  |      | 58  |  | 70 
|One Hickory Centre       |  | Farmers Branch, TX   |      | 102,615 Sq. Ft.           |      | 18.67                |      | 20.34       |      | 20.34 |      | 100 |      | 74  |  | 74 
|Park West                |  | Farmers Branch, TX   |      | 243,416 Sq. Ft.           |      | 10.00                |      | *           |      | *     |      | 0   |      | *   |  | *  
|Parkway North            |  | Dallas, TX           |      | 71,041 Sq. Ft.            |      | 15.26                |      | 16.58       |      | 18.08 |      | 31  |      | 60  |  | 64 
|Signature Building       |  | Dallas, TX           |      | 56,532 Sq. Ft.            |      | 10.00                |      | **          |      | **    |      | 100 |      | **  |  | ** 
|Two Hickory Centre       |  | Farmers Branch, TX   |      | 96,127 Sq. Ft.            |      | 18.29                |      | 21.47       |      | 21.47 |      | 89  |      | 100 |  | 100
|University Square        |  | Anchorage, AK        |      | 22,260 Sq. Ft.            |      | 19.73                |      | 14.64       |      | 14.64 |      | 77  |      | 100 |  | 100
|Westgrove Air Plaza      |  | Addison, TX          |      | 78,326 Sq. Ft.            |      | 11.29                |      | 12.68       |      | 13.26 |      | 79  |      | 74  |  | 94 
|                         |  |                      |      |                           |      |                      |      |            
|Industrial Warehouses    |  |                      |      |                           |      |                      |      |             |      |       |      |     |      |     |  |    
|5360 Tulane              |  | Atlanta, GA          |      | 30,000 Sq. Ft.            |      | 2.85                 |      | 2.85        |      | 2.80  |      | 100 |      | 100 |  | 65 



16



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##### Table of Contents

##### Index to Financial Statements

|                        |  |                   |      |                      |      |                      |      |             |      |       |      |     |      |     |  |    
|----------------------- |  | ----------------- | ---- | -------------------- | ---- | -------------------- | ---- | ----------- | ---- | ----- | ---- | --- | ---- | --- |  | ---
|Property                |  | Location          |      | Units/Square Footage |      | Rent Per Square Foot |      | Occupancy %
|                        |  |                   | 2005 |                      | 2004 |                      | 2003 |             | 2005 |       | 2004 |     | 2003
|Addison Hanger          |  | Addison, TX       |      | 23,650 Sq. Ft.       |      | 7.83                 |      | 7.54        |      | 7.94  |      | 100 |      | 67  |  | 100
|Addison Hanger II       |  | Addison, TX       |      | 29,000 Sq. Ft.       |      | 9.05                 |      | 9.24        |      | 9.64  |      | 100 |      | 92  |  | 92 
|Encon                   |  | Fort Worth, TX    |      | 256,410 Sq. Ft.      |      | 2.93                 |      | 3.12        |      | 3.17  |      | 100 |      | 100 |  | 100
|Space Center            |  | San Antonio, TX   |      | 101,500 Sq. Ft.      |      | 3.36                 |      | 3.41        |      | 3.43  |      | 61  |      | 61  |  | 84 
|                        |  |                   |      |                      |      |                      |      |            
|Shopping Centers        |  |                   |      |                      |      |                      |      |             |      |       |      |     |      |     |  |    
|Bridgeview Plaza        |  | LaCrosse, WI      |      | 116,008 Sq. Ft.      |      | 7.23                 |      | 6.97        |      | 7.25  |      | 89  |      | 89  |  | 90 
|Cross County Mall       |  | Mattoon, IL       |      | 304,575 Sq. Ft.      |      | 5.59                 |      | 5.44        |      | 5.44  |      | 88  |      | 88  |  | 88 
|Cullman                 |  | Cullman, AL       |      | 92,466 Sq. Ft.       |      | 5.15                 |      | 3.55        |      | 3.53  |      | 27  |      | 27  |  | 95 
|Dunes Plaza             |  | Michigan City, IN |      | 223,869 Sq. Ft.      |      | 5.92                 |      | 5.91        |      | 5.51  |      | 53  |      | 64  |  | 61 
|Willowbrook Village     |  | Coldwater, MI     |      | 179,741 Sq. Ft.      |      | 5.95                 |      | *           |      | *     |      | 93  |      | *   |  | *  
|                        |  |                   |      |                      |      |                      |      |            
|Merchandise Mart        |  |                   |      |                      |      |                      |      |             |      |       |      |     |      |     |  |    
|Denver Mart             |  | Denver, CO        |      | 320,466 Sq. Ft.      |      | 18.56                |      | 11.75       |      | 11.75 |      | 95  |      | 92  |  | 92 
|                        |  |                   |      |                      |      |                      |      |            
|Single Family Residence |  |                   |      |                      |      |                      |      |             |      |       |      |     |      |     |  |    
|Tavel Circle            |  | Dallas, TX        |      | 2,271 Sq. Ft.        |      |                      |      |             |      |       |      |     |      |     |  |    

---

|* | Property was purchased or constructed in 2003, 2004, or 2005.
|- | -------------------------------------------------------------

|** | Not applicable data. ARI sold the Signature Athletic Club in November 2004, but retained the Signature Building.
|-- | ----------------------------------------------------------------------------------------------------------------



|                               |  |                    |  |           |  |                   |        |             |   |        |                                                    |      |        |  |      |   |  |      |   |  |      |   |      |   |       |  |   |       |  |   |      
|------------------------------ |  | ------------------ |  | --------- |  | ----------------- | ------ | ----------- | - | ------ | -------------------------------------------------- | ---- | ------ |  | ---- | - |  | ---- | - |  | ---- | - | ---- | - | ----- |  | - | ----- |  | - | -----
|                               |  |                    |  |           |  | Average Room Rate |        | Occupancy % |   |        | Total Room RevenuesDivided By TotalAvailable Rooms
|Property                       |  | Location           |  | Rooms     |  | 2005              |        | 2004        |   | 2003   |                                                    | 2005 |        |  | 2004 |   |  | 2003 |   |  | 2005 |   | 2004 |   | 2003 
|Hotels                         |  |                    |  |           |  |                   |        |             |   |        |                                                    |      |        |  |      |   |  |      |   |  |      |   |      |   |       |  |   |       |  |   |      
|Akademia                       |  | Wroclaw, Poland    |  | 165 Rooms |  | $                 | 63.00  |             | $ | 55.33  |                                                    | $    | 47.78  |  | 73   | % |  | 65   | % |  | 51   | % |      | $ | 45.09 |  | $ | 35.98 |  | $ | 46.86
|Best Western                   |  | Virginia Beach, VA |  | 110 Rooms |  |                   | 120.26 |             |   | 108.92 |                                                    |      | 108.92 |  | 48   |   |  | 65   |   |  | 65   |   |      |   | 57.62 |  |   | 70.56 |  |   | 70.56
|Château Inn                    |  | Fresno, CA         |  | 78 Rooms  |  |                   | 71.88  |             |   | 63.42  |                                                    |      | 63.42  |  | 60   |   |  | 58   |   |  | 58   |   |      |   | 43.01 |  |   | 36.52 |  |   | 36.52
|City Suites                    |  | Chicago, IL        |  | 45 Rooms  |  |                   | 144.21 |             |   | 126.29 |                                                    |      | 120.16 |  | 63   |   |  | 58   |   |  | 58   |   |      |   | 96.18 |  |   | 71.60 |  |   | 76.78
|Comfort Inn                    |  | Denver, CO         |  | 161 Rooms |  |                   | 56.10  |             |   | 56.10  |                                                    |      | 56.10  |  | 55   |   |  | 55   |   |  | 55   |   |      |   | 35.49 |  |   | 30.80 |  |   | 30.80
|Picadilly Airport              |  | Fresno, CA         |  | 185 Rooms |  |                   | 81.15  |             |   | 79.25  |                                                    |      | 75.18  |  | 62   |   |  | 63   |   |  | 61   |   |      |   | 53.49 |  |   | 50.50 |  |   | 50.04
|Picadilly Shaw                 |  | Fresno, CA         |  | 194 Rooms |  |                   | 83.46  |             |   | 81.19  |                                                    |      | 81.19  |  | 66   |   |  | 69   |   |  | 69   |   |      |   | 59.01 |  |   | 58.10 |  |   | 55.70
|Picadilly University           |  | Fresno, CA         |  | 190 Rooms |  |                   | 77.68  |             |   | 68.21  |                                                    |      | 68.21  |  | 57   |   |  | 63   |   |  | 63   |   |      |   | 44.19 |  |   | 43.03 |  |   | 43.03
|The Majestic                   |  | Chicago, IL        |  | 55 Rooms  |  |                   | 151.17 |             |   | 129.64 |                                                    |      | 124.47 |  | 52   |   |  | 52   |   |  | 48   |   |      |   | 75.50 |  |   | 65.91 |  |   | 57.86
|Williamsburg Hospitality House |  | Williamsburg, VA   |  | 296 Rooms |  |                   | 100.91 |             |   | 93.97  |                                                    |      | 93.97  |  | 43   |   |  | 53   |   |  | 53   |   |      |   | 43.44 |  |   | 49.98 |  |   | 49.98
|Willows                        |  | Chicago, IL        |  | 52 Rooms  |  |                   | 141.10 |             |   | 119.84 |                                                    |      | 121.24 |  | 57   |   |  | 57   |   |  | 53   |   |      |   | 86.14 |  |   | 67.62 |  |   | 69.54

Occupancy presented above and throughout this ITEM 2. is without reference to whether leases
in effect are at, below, or above market rates.

In 2005, ARI purchased the following properties:



|                           |  |                    |  |                      |  |                |       |                           |   |               |  |              |       |  |               |     |  |      
|-------------------------- |  | ------------------ |  | -------------------- |  | -------------- | ----- | ------------------------- | - | ------------- |  | ------------ | ----- |  | ------------- | --- |  | -----
|Property                   |  | Location           |  | Units/ Sq. Ft./Acres |  | Purchase Price |       | Net Cash Paid/ (Received) |   | Debt Incurred |  | InterestRate |       |  | Maturity Date
|Apartments                 |  |                    |  |                      |  |                |       |                           |   |               |  |              |       |  |               |     |  |      
|Legends of El Paso(4)      |  | El Paso, TX        |  | 240 Units            |  | $              | 2,247 |                           | $ | 464           |  | $            | 1,774 |  | 5.50          | %   |  | 01/47
|Mission Oaks(4)            |  | San Antonio, TX    |  | 228 Units            |  |                | 573   |                           |   | 573           |  |              |      |  | 5.30          |     |  | 09/46
|Parc at Metro Center(4)    |  | Nashville, TN      |  | 144 Units            |  |                | 817   |                           |   |              |  |              | 817   |  | 5.65          |     |  | 09/46
|                           |  |                    |  |                      |  |                |      
|Land                       |  |                    |  |                      |  |                |       |                           |   |               |  |              |       |  |               |     |  |      
|Addison Park  Residential |  | Addison, TX        |  | 1.9 Acres            |  |                | 1,475 |                           |   | 381           |  |              | 1,180 |  | 8.00          | (3) |  | 11/06
|Addison Park  Retail      |  | Addison, TX        |  | 3.4 Acres            |  |                | 783   |                           |   | 201           |  |              | 626   |  | 8.00          | (3) |  | 11/06
|Alliance 8                 |  | Tarrant County, TX |  | 8 Acres              |  |                | 657   |                           |   | 332           |  |              | 408   |  | 7.75          | (3) |  | 05/06
|Alliance 52                |  | Tarrant County, TX |  | 51.9 Acres           |  |                | 2,538 |                           |   | 1,054         |  |              | 1,610 |  | 7.75          | (3) |  | 05/06



17



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##### Table of Contents

##### Index to Financial Statements

|                        |  |                    |  |                      |  |                |  |                           |  |               |     |  |              |     |  |               |    
|----------------------- |  | ------------------ |  | -------------------- |  | -------------- |  | ------------------------- |  | ------------- | --- |  | ------------ | --- |  | ------------- | ---
|Property                |  | Location           |  | Units/ Sq. Ft./Acres |  | Purchase Price |  | Net Cash Paid/ (Received) |  | Debt Incurred |     |  | InterestRate |     |  | Maturity Date |    
|Alliance Airport        |  | Tarrant County, TX |  | 12.7 Acres           |  | 850            |  | 892                       |  |              |     |  |             |     |  |              |    
|Denton                  |  | Denton, TX         |  | 25.9 Acres           |  | 2,100          |  | 862                       |  | 1,365         |     |  | 7.75         | (3) |  | 04/07         |    
|Denton  Andrew B       |  | Denton, TX         |  | 22.9 Acres           |  | 853            |  | 345                       |  | 554           |     |  | 8.00         | (3) |  | 06/07         |    
|Denton  Andrew C       |  | Denton, TX         |  | 5.2 Acres            |  | 303            |  | 126                       |  | 197           |     |  | 8.00         | (3) |  | 06/07         |    
|Katrina(1)              |  | Palm Desert, CA    |  | 23.0 Acres           |  | 4,184          |  |                          |  |              |     |  |             |     |  |              |    
|Kaufman Cogen           |  | Kaufman County, TX |  | 2,567 Acres          |  | 5,498          |  | 6,110                     |  |              |     |  |             |     |  |              |    
|Kaufman Taylor          |  | Kaufman County, TX |  | 31.0 Acres           |  | 465            |  | 486                       |  |              |     |  |             |     |  |              |    
|Keenan Bridge(2)        |  | Farmers Branch, TX |  | 7.5 Acres            |  | 510            |  | 14                        |  |              |     |  |             |     |  |              |    
|Luna                    |  | Farmers Branch, TX |  | 2.6 Acres            |  | 250            |  | 257                       |  |              |     |  |             |     |  |              |    
|Mandahl Bay             |  | US Virgin Islands  |  | 50.4 Acres           |  | 7,000          |  | 4,101                     |  | 3,500         |     |  | 7.00         |     |  | 07/05         | (7)
|Mandahl Bay (Chung)     |  | US Virgin Islands  |  | .7 Acres             |  | 95             |  | 101                       |  |              |     |  |             |     |  |              |    
|Mandahl Bay (Gilmore)   |  | US Virgin Islands  |  | 1.0 Acres            |  | 96             |  | 104                       |  |              |     |  |             |     |  |              |    
|Mandahl Bay (Inn)       |  | US Virgin Islands  |  | 15.0 Acres           |  | 2,500          |  | 2,731                     |  |              |     |  |             |     |  |              |    
|Mandahl Bay (Marina)    |  | US Virgin Islands  |  | 24.0 Acres           |  | 2,000          |  | 2,101                     |  |              |     |  |             |     |  |              |    
|Mansfield               |  | Mansfield, TX      |  | 21.9 Acres           |  | 1,450          |  | 577                       |  | 943           |     |  | 7.50         | (3) |  | 03/07         |    
|Mason Goodrich(1)       |  | Houston, TX        |  | 13.0 Acres           |  | 1,360          |  |                          |  |              |     |  |             |     |  |              |    
|McKinney Ranch          |  | McKinney, TX       |  | 464.9 Acres          |  | 45,975         |  | 19,992                    |  | 28,051        |     |  | 8.00         |     |  | 12/08         |    
|Palmer Lane(10)         |  | Austin, TX         |  | 367.4 Acres          |  | 24,832         |  |                          |  | 14,599        |     |  | 8.25         |     |  | 08/07         |    
|Pantaze                 |  | Dallas, TX         |  | 6.0 Acres            |  | 265            |  | 276                       |  |              |     |  |             |     |  |              |    
|Payne I & II(9)         |  | Las Colinas, TX    |  | 149.7 Acres          |  | 1,000          |  | 1,066                     |  |              |     |  |             |     |  |              |    
|Senlac                  |  | Farmers Branch, TX |  | 11.9 Acres           |  | 625            |  | 643                       |  |              |     |  |             |     |  |              |    
|Senlac VHP              |  | Farmers Branch, TX |  | 3.9 Acres            |  | 595            |  | 623                       |  |              |     |  |             |     |  |              |    
|Southwood Plantation(5) |  | Tallahassee, FL    |  | 12.9 Acres           |  | 525            |  | 555                       |  |              |     |  |             |     |  |              |    
|TuTu                    |  | US Virgin Islands  |  | 19.5 Acres           |  | 1,350          |  | 1,401                     |  |              |     |  |             |     |  |              |    
|West End(6)             |  | Dallas, TX         |  | .2 Acres             |  | 49             |  | 52                        |  |              |     |  |             |     |  |              |    
|Whorton                 |  | Benton County, AR  |  | 79.7 Acres           |  | 4,332          |  | 702                       |  | 3,828         |     |  | 6.08         | (3) |  | 01/07         |    
|Wilmer 88               |  | Dallas, TX         |  | 87.6 Acres           |  | 638            |  | 668                       |  |              |     |  |             |     |  |              |    
|                        |  |                    |  |                      |  |                | 
|Office Buildings        |  |                    |  |                      |  |                |  |                           |  |               |     |  |              |     |  |               |    
|600 Las Colinas         |  | Las Colinas, TX    |  | 509,829 Sq. Ft.      |  | 56,000         |  | 17,663                    |  | 40,487        | (8) |  | 6.16         |     |  | 01/13         |    
|Park West               |  | Farmers Branch, TX |  | 243,416 Sq. Ft.      |  | 10,000         |  | 4,715                     |  | 6,500         |     |  | 7.50         | (3) |  | 05/06         |    
|                        |  |                    |  |                      |  |                | 
|Shopping Center         |  |                    |  |                      |  |                |  |                           |  |               |     |  |              |     |  |               |    
|Willowbrook Village     |  | Coldwater, MI      |  | 179,741 Sq. Ft.      |  | 8,200          |  | 2,223                     |  | 6,495         |     |  | 7.28         |     |  | 02/13         |    

---

|(1) | Exchanged for note receivable. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|--- | ---------------------------------------------------------------------------

|(2) | Exchanged for the Bee Street and 2524 Valley View land parcels.
|--- | ---------------------------------------------------------------

|(3) | Variable rate.
|--- | --------------

|(4) | Initial construction loan funding to purchase land and begin apartment construction. Does not represent actual units purchased.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(5) | Purchased a 50% interest in this land tract.
|--- | --------------------------------------------

|(6) | Purchased a 37.5% interest in this land tract.
|--- | ----------------------------------------------

|(7) | Extended to April 2006, with an increase in the interest rate to 8.0%.
|--- | ----------------------------------------------------------------------

|(8) | First lien of $35.3 million. Second lien of $5.1 million. Interest rate and maturity date identical for both.
|--- | -------------------------------------------------------------------------------------------------------------

|(9) | TCI dissolved the 50% Tenant-In-Common interest in the Payne land, resulting in TCI owning the 109.8 acre Payne I tract and the 39.9 acre Payne II tract. TCI paid an additional $1.0
million for the 30.4 flood plain acreage difference between the two parties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | In addition to debt assumed, the property was acquired in exchange for cancellation of a $2.3 million note receivable, and a $7.6 million reduction in receivables from Prime, a
related party.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

##### Index to Financial Statements

In 2005, ARI sold the following properties:



|                              |  |                    |  |                      |  |            |        |                         |   |       |                |  |   |              |     |  |   |        |    
|----------------------------- |  | ------------------ |  | -------------------- |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | - | ------------ | --- |  | - | ------ | ---
|Property                      |  | Location           |  | Units/Acres/ Sq. Ft. |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  |   | Gain on Sale |    
|Apartments                    |  |                    |  |                      |  |            |        |                         |   |       |                |  |   |              |     |  |   |        |    
|By the Sea                    |  | Corpus Christi, TX |  | 153 Units            |  | $          | 7,450  |                         | $ | 2,050 |                |  | $ | 5,165        |     |  | $ | 1,770  |    
|Longwood                      |  | Long Beach, MS     |  | 200 Units            |  |            | 6,456  |                         |   | 9     |                |  |   | 6,253        |     |  |   | 56     |    
|Quail Pointe                  |  | Huntsville, AL     |  | 184 Units            |  |            | 6,200  |                         |   | 2,157 |                |  |   | 3,501        |     |  |   | 5,265  |    
|Sun Hollow                    |  | El Paso, TX        |  | 216 Units            |  |            | 7,700  |                         |   | 2,623 |                |  |   | 4,327        |     |  |   | 5,816  |    
|Terrace Hills                 |  | El Paso, TX        |  | 310 Units            |  |            | 12,300 |                         |   | 5,467 |                |  |   | 5,890        |     |  |   | 6,959  |    
|Waters Edge III & IV          |  | Gulfport, MS       |  | 318 Units            |  |            | 16,350 |                         |   | 6,201 |                |  |   | 7,207        |     |  |   | 7,724  |    
|Windsor Tower                 |  | Ocala, FL          |  | 64 Units             |  |            | 2,845  |                         |   | (85   | )(2)           |  |   | 1,937        | (1) |  |   | 785    |    
|Woodhollow                    |  | San Antonio, TX    |  | 546 Units            |  |            | 12,500 |                         |   | 3,429 |                |  |   | 7,900        |     |  |   | 8,290  |    
|                              |  |                    |  |                      |  |           
|Hotels                        |  |                    |  |                      |  |            |        |                         |   |       |                |  |   |              |     |  |   |        |    
|Majestic Inn                  |  | San Francisco, CA  |  | 57 Rooms             |  |            | 7,900  |                         |   | 3,487 |                |  |   | 3,950        |     |  |   | 3,272  |    
|                              |  |                    |  |                      |  |           
|Industrial Warehouses         |  |                    |  |                      |  |            |        |                         |   |       |                |  |   |              |     |  |   |        |    
|5700 Tulane                   |  | Atlanta, GA        |  | 67,850 Sq. Ft.       |  |            | 816    |                         |   | 738   |                |  |   |             |     |  |   | 329    |    
|                              |  |                    |  |                      |  |           
|Land                          |  |                    |  |                      |  |            |        |                         |   |       |                |  |   |              |     |  |   |        |    
|Alamo Springs/Lemmon Carlisle |  | Dallas, TX         |  | 2.8 Acres            |  |            | 7,674  |                         |   | 5,627 |                |  |   | 1,744        |     |  |   | 2,729  |    
|Granbury Station              |  | Ft. Worth, TX      |  | 15.7 Acres           |  |            | 1,003  |                         |   | 265   |                |  |   | 738          |     |  |   | 10     |    
|JHL Connell                   |  | Carrollton, TX     |  | 3.7 Acres            |  |            | 2,236  |                         |   | 1,625 |                |  |   |             |     |  |   | 1,397  |    
|Katrina                       |  | Palm Desert, CA    |  | 9.9 Acres            |  |            | 2,616  |                         |   | 574   |                |  |   |             |     |  |   | 1,323  |    
|Katrina                       |  | Palm Desert, CA    |  | 13.6 Acres           |  |            | 3,703  |                         |   | 591   |                |  |   |             |     |  |   | 1,706  |    
|Katrina                       |  | Palm Desert, CA    |  | 5.5 Acres            |  |            | 1,325  |                         |   | 1,281 |                |  |   |             |     |  |   | 619    |    
|Katrina                       |  | Palm Desert, CA    |  | 6.5 Acres            |  |            | 1,695  |                         |   | 340   |                |  |   |             |     |  |   | 818    |    
|Katrina                       |  | Palm Desert, CA    |  | 7.4 Acres            |  |            | 2,028  |                         |   | 455   |                |  |   |             |     |  |   | 1,072  |    
|Katrina                       |  | Palm Desert, CA    |  | 81.2 Acres           |  |            | 19,878 |                         |   | (814  | )              |  |   | 5,100        |     |  |   | 9,387  |    
|Katrina                       |  | Palm Desert, CA    |  | 24.8 Acres           |  |            | 6,402  |                         |   | 1,027 |                |  |   |             |     |  |   | 2,947  |    
|Katy                          |  | Katy, TX           |  | 130.6 Acres          |  |            | 12,400 |                         |   | 4,981 |                |  |   | 6,601        |     |  |   | 5,630  |    
|LCLLP                         |  | Las Colinas, TX    |  | 4.3 Acres            |  |            | 1,873  |                         |   | 511   |                |  |   | 1,290        |     |  |   | 1,327  |    
|Mason Goodrich                |  | Houston, TX        |  | 16.0 Acres           |  |            | 2,091  |                         |   | 935   |                |  |   |             |     |  |   | 802    |    
|McKinney Ranch                |  | McKinney, TX       |  | 1.3 Acres            |  |            | 347    |                         |   | 325   |                |  |   |             |     |  |   | 191    |    
|McKinney Ranch                |  | McKinney, TX       |  | 27.2 Acres           |  |            | 10,070 |                         |   | 2,214 |                |  |   |             |     |  |   |       | (3)
|McKinney Ranch                |  | McKinney, TX       |  | 3.7 Acres            |  |            | 1,381  |                         |   | 290   |                |  |   |             |     |  |   |       | (4)
|Nashville                     |  | Nashville, TN      |  | 3.0 Acres            |  |            | 441    |                         |   | (13   | )              |  |   | 408          |     |  |   | 282    |    
|Nashville                     |  | Nashville, TN      |  | 1.2 Acres            |  |            | 304    |                         |   | 236   |                |  |   |             |     |  |   | 226    |    
|Nashville                     |  | Nashville, TN      |  | 0.7 Acres            |  |            | 50     |                         |   | (2    | )              |  |   |             |     |  |   | 18     |    
|Nashville                     |  | Nashville, TN      |  | 5.0 Acres            |  |            | 1,035  |                         |   | (31   | )              |  |   | 941          |     |  |   | 737    |    
|Round Mountain                |  | Austin, TX         |  | 10.0 Acres           |  |            | 1,500  |                         |   | 251   |                |  |   |             |     |  |   | 1,094  |    
|Vineyards                     |  | Grapevine, TX      |  | 7.6 Acres            |  |            | 4,323  |                         |   | 874   |                |  |   |             |     |  |   | 1,764  |    
|Vineyards and Vineyards II    |  | Grapevine, TX      |  | 5.2 Acres            |  |            | 2,332  |                         |   | 160   |                |  |   | 300          |     |  |   | 494    |    
|Vista Ridge                   |  | Lewisville, TX     |  | 4.4 Acres            |  |            | 950    |                         |   | (92   | )              |  |   | 914          |     |  |   | 440    |    
|Vista Ridge                   |  | Lewisville, TX     |  | 17.9 Acres           |  |            | 4,291  |                         |   | (129  | )              |  |   | 4,096        |     |  |   | 2,185  |    
|West End                      |  | Dallas, TX         |  | 0.8 Acres            |  |            | 2,259  |                         |   | 2,099 |                |  |   |             |     |  |   | 1,259  |    
|West End                      |  | Dallas, TX         |  | 0.8 Acres            |  |            | 2,430  |                         |   | 213   |                |  |   | 2,000        |     |  |   | 1,448  |    
|                              |  |                    |  |                      |  |           
|Office Buildings              |  |                    |  |                      |  |            |        |                         |   |       |                |  |   |              |     |  |   |        |    
|9033 Wilshire                 |  | Los Angeles, CA    |  | 44,253 Sq. Ft.       |  |            | 12,000 |                         |   | 4,366 |                |  |   | 6,506        |     |  |   | 2,781  |    
|Bay Plaza I                   |  | Tampa, FL          |  | 75,780 Sq. Ft.       |  |            | 4,682  |                         |   | 3,253 |                |  |   | 961          |     |  |   | 1,212  |    
|Bay Plaza II                  |  | Tampa, FL          |  | 78,882 Sq. Ft.       |  |            | 4,719  |                         |   | 1,114 |                |  |   | 3,284        |     |  |   | 132    |    
|Institute Place               |  | Chicago, IL        |  | 144,915 Sq. Ft.      |  |            | 14,460 |                         |   | 4,843 |                |  |   | 7,792        |     |  |   | 10,603 |    
|                              |  |                    |  |                      |  |           
|Shopping Centers              |  |                    |  |                      |  |            |        |                         |   |       |                |  |   |              |     |  |   |        |    
|Promenade                     |  | Highland Ranch, CO |  | 133,558 Sq. Ft.      |  |            | 14,250 |                         |   | 6,192 |                |  |   | 6,651        |     |  |   | 7,129  |    

---

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

|(2) | Cash of $860,000 received by an affiliate, increasing ARIs affiliate receivable.
|--- | ---------------------------------------------------------------------------------

|(3) | Gain of $7.0 million deferred due to insufficient initial buyer investment.
|--- | ---------------------------------------------------------------------------

|(4) | Gain of $307,000 deferred due to insufficient initial buyer investment.
|--- | -----------------------------------------------------------------------



19



---

##### Table of Contents

##### Index to Financial Statements

In 2005, ARI financed/refinanced or obtained second mortgage financing on the following:



|                               |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|------------------------------ |  | ------------------ |  | -------------------------- |  | ------------ | ------ | -------------- | - | ---------------- |  | - | ------------ | - |  | ------------ | ---- |  | ----- | ---
|Property                       |  | Location           |  | Sq. Ft./Rooms/ Units/Acres |  | DebtIncurred |        | DebtDischarged |   | Net CashReceived |  |   | InterestRate |   |  | MaturityDate |     
|Apartments                     |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|Autumn Chase                   |  | Midland, TX        |  | 64 Units                   |  | $            | 1,166  |                | $ | 797              |  | $ | 317          |   |  | 5.88         | %(1) |  | 05/35 |    
|Courtyard                      |  | Midland, TX        |  | 133 Units                  |  |              | 1,342  |                |   | 966              |  |   | 266          |   |  | 5.88         | (1)  |  | 05/35 |    
|Southgate                      |  | Odessa, TX         |  | 180 Units                  |  |              | 1,879  |                |   | 1,712            |  |   | 61           |   |  | 5.88         | (1)  |  | 05/35 |    
|Sun Hollow                     |  | El Paso, TX        |  | 216 Units                  |  |              | 2,000  |                |   |                 |  |   | 2,000        |   |  | 12.50        |      |  | 01/06 | (4)
|Sunset                         |  | Odessa, TX         |  | 240 Units                  |  |              | 2,995  |                |   | 1,684            |  |   | 1,054        |   |  | 5.25         | (1)  |  | 10/35 |    
|Westwood                       |  | Odessa, TX         |  | 79 Units                   |  |              | 500    |                |   |                 |  |   | 464          |   |  | 5.25         | (1)  |  | 12/35 |    
|                               |  |                    |  |                            |  |              |       
|Hotels                         |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|The Majestic                   |  | Chicago, IL        |  | 55 Rooms                   |  |              | 3,225  |                |   |                 |  |   | 3,066        |   |  | 6.40         |      |  | 06/10 |    
|Williamsburg Hospitality House |  | Williamsburg, VA   |  | 296 Rooms                  |  |              | 11,000 |                |   | 10,540           |  |   | 137          |   |  | 6.19         | (1)  |  | 09/10 |    
|                               |  |                    |  |                            |  |              |       
|Land                           |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|2301 Valley Branch             |  | Farmers Branch, TX |  | 23.8 Acres                 |  |              | 2,420  |                |   | 2,841            |  |   | (385         | ) |  | 8.50         | (1)  |  | 12/06 |    
|Alliance Airport(2)            |  | Tarrant County, TX |  | 12.7 Acres                 |  |              | 553    |                |   |                 |  |   | 540          |   |  | 7.25         | (1)  |  | 01/07 |    
|Centura(3)                     |  | Farmers Branch, TX |  | 8.8 Acres                  |  |              | 6,727  |                |   |                 |  |   | 6,727        |   |  | 8.50         | (1)  |  | 08/07 |    
|DeSoto Ranch(2)                |  | DeSoto, TX         |  | 21.9 Acres                 |  |              | 1,635  |                |   | 1,271            |  |   | 336          |   |  | 7.25         | (1)  |  | 01/07 |    
|Elm Fork                       |  | Denton County, TX  |  | 105.4 Acres                |  |              | 7,740  |                |   |                 |  |   | 7,540        |   |  | 7.00         | (1)  |  | 07/06 |    
|McKinney 36                    |  | Collin County, TX  |  | 34.6 Acres                 |  |              | 4,000  |                |   | 1,747            |  |   | 2,123        |   |  | 6.50         | (1)  |  | 12/07 |    
|Mercer Crossing                |  | Farmers Branch, TX |  | 235 Acres                  |  |              | 3,000  |                |   |                 |  |   | 2,889        |   |  | 8.50         |      |  | 12/06 |    
|Nashville                      |  | Nashville, TN      |  | 109.6 Acres                |  |              | 7,000  |                |   |                 |  |   | 6,341        |   |  | 7.50         |      |  | 02/07 |    
|Payne I                        |  | Las Colinas, TX    |  | 109.9 Acres                |  |              | 6,732  |                |   |                 |  |   | 6,550        |   |  | 8.00         |      |  | 12/07 |    
|Sheffield Village(2)           |  | Grand Prairie, TX  |  | 13.9 Acres                 |  |              | 975    |                |   | 975              |  |   | 94           |   |  | 7.75         | (1)  |  | 03/07 |    
|West End(2)                    |  | Dallas, TX         |  | 6.3 Acres                  |  |              | 2,000  |                |   |                 |  |   | 1,951        |   |  | 7.25         | (1)  |  | 01/07 |    
|West End (2)                   |  | Dallas, TX         |  | 5.5 Acres                  |  |              | 2,000  |                |   |                 |  |   | 1,842        |   |  | 8.00         | (1)  |  | 06/07 |    
|                               |  |                    |  |                            |  |              |       
|Office Buildings               |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|Bridgeview Plaza               |  | LaCrosse, WI       |  | 116,008 Sq. Ft.            |  |              | 7,197  |                |   | 6,304            |  |   | 649          |   |  | 7.25         | (1)  |  | 03/10 |    
|                               |  |                    |  |                            |  |              |       
|Shopping Centers               |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|Dunes Plaza                    |  | Michigan City, IN  |  | 223,869 Sq. Ft.            |  |              | 3,750  |                |   | 2,685            |  |   | 658          |   |  | 7.50         | (1)  |  | 01/10 |    

---

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

|(2) | Drawn on the $10.0 million line of credit for land acquisitions and financing.
|--- | ------------------------------------------------------------------------------

|(3) | IORI purchased the Centura Land for $13.0 million. See NOTE 9. RELATED PARTY TRANSACTIONS.
|--- | --------------------------------------------------------------------------------------------

|(4) | Paid in full in January 2006.
|--- | -----------------------------

Land
Properties.    Set forth below are ARIs land properties, consisting of both improved and unimproved land:



|                           |  |                    |  |      
|-------------------------- |  | ------------------ |  | -----
|Property                   |  | Location           |  | Acres
|1013 Common                |  | New Orleans, LA    |  | 0.4  
|2301 Valley Branch         |  | Farmers Branch, TX |  | 23.8 
|Addison Park  Residential |  | Addison, TX        |  | 3.4  
|Addison Park  Retail      |  | Addison, TX        |  | 1.9  
|Alliance 8                 |  | Tarrant County, TX |  | 8.0  
|Alliance 52                |  | Tarrant County, TX |  | 51.9 
|Alliance Airport           |  | Tarrant County, TX |  | 12.7 
|Backlick                   |  | Springfield, VA    |  | 4.0  
|Bonneau                    |  | Dallas County, TX  |  | 8.4  
|Centura                    |  | Farmers Branch, TX |  | 8.8  
|Chase Oaks                 |  | Plano, TX          |  | 11.8 
|Cooks Lane                 |  | Ft. Worth, TX      |  | 23.2 



20



---

##### Table of Contents

##### Index to Financial Statements

|                  |  |                    |  |        
|----------------- |  | ------------------ |  | -------
|Property          |  | Location           |  | Acres  
|Croslin           |  | Dallas County, TX  |  | 0.8    
|Dalho             |  | Farmers Branch, TX |  | 3.4    
|Denton            |  | Denton, TX         |  | 25.9   
|Denton  Andrew B |  | Denton, TX         |  | 22.9   
|Denton  Andrew C |  | Denton, TX         |  | 5.2    
|Denton-Coonrod    |  | Denton , TX        |  | 82.2   
|DeSoto            |  | DeSoto, TX         |  | 21.9   
|Dominion          |  | Dallas, TX         |  | 14.4   
|Elm Fork          |  | Denton County, TX  |  | 105.4  
|Fiesta            |  | San Angelo, TX     |  | 0.7    
|Folsom            |  | Dallas, TX         |  | 36.8   
|Fort Wayne        |  | Fort Wayne, IN     |  | 18.9   
|Fruitland         |  | Fruitland Park, FL |  | 4.7    
|FRWM Cummings     |  | Farmers Branch, TX |  | 6.5    
|Hollywood Casino  |  | Farmers Branch, TX |  | 42.8   
|HSM               |  | Farmers Branch, TX |  | 6.2    
|JHL Connell       |  | Carrollton, TX     |  | 3.9    
|Katrina           |  | Palm Desert, CA    |  | 22.4   
|Kaufman Cogen     |  | Kaufman County, TX |  | 2,567.0
|Kaufman Taylor    |  | Kaufman County, TX |  | 31.0   
|Keenan Bridge     |  | Farmers Branch, TX |  | 7.5    
|Kelly Lots        |  | Collin County, TX  |  | 0.8    
|Lacy Longhorn     |  | Farmers Branch, TX |  | 17.1   
|LaDue             |  | Farmers Branch, TX |  | 8.0    
|Lakeshore Villas  |  | Humble, TX         |  | 1.4    
|Lamar/Parmer      |  | Austin, TX         |  | 17.1   
|Las Colinas       |  | Las Colinas, TX    |  | 1.6    
|Las Colinas       |  | Las Colinas, TX    |  | 4.7    
|LCLLP             |  | Las Colinas, TX    |  | 41.2   
|Leone             |  | Irving, TX         |  | 8.2    
|Limestone Canyon  |  | Austin, TX         |  | 10.0   
|Lubbock           |  | Lubbock, TX        |  | 2.9    
|Luna Road         |  | Farmers Branch, TX |  | 2.6    
|Mandahl Bay       |  | US Virgin Islands  |  | 110.7  
|Manhattan         |  | Farmers Branch, TX |  | 108.9  
|Mansfield         |  | Mansfield, TX      |  | 21.9   
|Marine Creek      |  | Ft. Worth, TX      |  | 43.3   
|Mason Park        |  | Houston, TX        |  | 18.0   
|Mason/Goodrich    |  | Houston, TX        |  | 17.2   
|McKinney 36       |  | Collin County, TX  |  | 34.6   
|McKinney Corners  |  | Collin County, TX  |  | 18.5   
|McKinney Ranch    |  | McKinney, TX       |  | 432.7  
|Meloy             |  | Kent, OH           |  | 54.2   
|Mendoza           |  | Dallas County, TX  |  | 0.4    
|Mira Lago         |  | Farmers Branch, TX |  | 4.2    
|Nashville         |  | Nashville, TN      |  | 107.2  
|Pac Trust         |  | Farmers Branch, TX |  | 7.1    
|Palmer Lane       |  | Austin, TX         |  | 367.4  
|Pantaze           |  | Dallas, TX         |  | 6.0    
|Payne I           |  | Las Colinas, TX    |  | 109.9  
|Payne II          |  | Las Colinas, TX    |  | 39.9   



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|                     |  |                     |  |        
|-------------------- |  | ------------------- |  | -------
|Property             |  | Location            |  | Acres  
|Pioneer Crossing     |  | Austin, TX          |  | 439.1  
|Pulaski              |  | Pulaski County, AR  |  | 21.9   
|Railroad             |  | Dallas, TX          |  | .3     
|Rochelle I           |  | Las Colinas, TX     |  | 10.1   
|Rochelle II          |  | Las Colinas, TX     |  | 21.3   
|Rogers               |  | Rogers, AR          |  | 20.1   
|Seminary West        |  | Ft. Worth, TX       |  | 5.4    
|Senlac               |  | Farmers Branch, TX  |  | 11.9   
|Senlac VHP           |  | Farmers Branch, TX  |  | 4.0    
|Sheffield Village    |  | Grand Prairie, TX   |  | 13.9   
|Siskiyou             |  | Siskiyou County, CA |  | 20.7   
|Sladek               |  | Travis County, TX   |  | 63.3   
|Southwood Plantation |  | Tallahassee, FL     |  | 13.0   
|Stagliano            |  | Farmers Branch, TX  |  | 3.2    
|Thompson             |  | Farmers Branch, TX  |  | 4.0    
|Thompson II          |  | Dallas County, TX   |  | 3.3    
|Tomlin               |  | Farmers Branch, TX  |  | 9.2    
|Travelers            |  | Farmers Branch, TX  |  | 202.0  
|Valley Ranch         |  | Irving, TX          |  | 29.9   
|Valley View 34       |  | Farmers Branch, TX  |  | 33.9   
|Valwood              |  | Dallas County, TX   |  | 235.0  
|Vineyards            |  | Tarrant County, TX  |  | 11.2   
|Vineyards II         |  | Tarrant County, TX  |  | 10.1   
|Vista Ridge          |  | Lewisville, TX      |  | 42.5   
|Walker               |  | Dallas County, TX   |  | 132.6  
|West End             |  | Dallas, TX          |  | 5.3    
|Whorton              |  | Benton County, AR   |  | 79.7   
|Wilmer 88            |  | Dallas, TX          |  | 87.6   
|                     |  |                     |  |        
|                     |  |                     |  | 6,341.0
|                     |  |                     |  |        

Partnership Properties.    ARI accounts for partnership properties
using the equity method. ARI had no property information for properties owned by partnerships.

In December 2004, ARI sold to an unrelated
investment group a 95% partnership interest in Garden Centura, L.P. that owns the 410,901 sq. ft. Centura Tower office building located in Farmers Branch, Texas. ARI retained a non-controlling 1% general partner and 4% limited partner interest in
Garden Centura, L.P. ARI accounts for its investment in this partnership on the equity method.

Mortgage Loans

In addition to real estate, a portion of ARIs assets are invested in mortgage notes receivable, secured by income-producing real estate, unimproved
land and partnership interests. Management expects the percentage of ARIs assets invested in mortgage loans will decline, as ARI will no longer seek to fund or acquire new mortgage loans. However, ARI may, in selected instances, originate
mortgage loans or it may provide purchase money financing in conjunction with a property sale. Management intends to service and hold for investment the mortgage notes currently in the portfolio. Mortgage notes receivable consist primarily of first
mortgage loans.

Types of Properties Subject to Mortgages.    The types of properties securing mortgage notes
receivable at December 31, 2005, consisted of four commercial buildings, unimproved land and partnership interests. The type of properties subject to mortgages in which ARI invests may be altered without a vote of stockholders.



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##### Index to Financial Statements

As of December 31, 2005, the obligors on $44.5 million or 54.0% of the mortgage notes receivable
portfolio were affiliates of ARI. Also at that date, $11.5 million or 14.0% of the mortgage notes receivable portfolio was non-performing.

The following table sets forth the percentages (based on the outstanding mortgage loan balance at December 31, 2005), by property type and geographic region, of the income producing properties that serve as collateral for ARIs
mortgage notes receivable. Excluded are $61.8 million of mortgage notes that are secured by unimproved land and other security, or are unsecured. See SCHEDULE IV to the Consolidated Financial Statements included in ITEM 8. CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for additional details of ARIs mortgage notes receivable portfolio.



|          |  |                      |  
|--------- |  | -------------------- | -
|Region    |  | CommercialProperties |  
|Midwest   |  | 5                    | %
|Southwest |  | 95                   |  
|          |  |                      |  
|          |  | 100                  | %
|          |  |                      |  

A summary of the activity in the mortgage notes receivable portfolio during 2005 is as follows:



|                                               |  |     |  
|---------------------------------------------- |  | --- | -
|Mortgage notes receivable at January 1, 2005   |  | 59  |  
|Loans funded                                   |  | 16  |  
|Loans collected in full                        |  | (12 | )
|Loans sold                                     |  | (8  | )
|                                               |  |     |  
|Mortgage notes receivable at December 31, 2005 |  | 55  |  
|                                               |  |     |  

First Mortgage Loans.    These loans generally provide for level
periodic payments of principal and interest sufficient to substantially repay the loan at or prior to maturity, but may involve interest-only payments, moderate or negative amortization of principal, or all interest and a balloon
principal payment at maturity. With respect to first mortgage loans, it is ARIs general policy to require that the borrower provide a title policy or an acceptable legal opinion of title as to the validity and the priority of ARIs
mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders. ARI may grant participations in first mortgage loans that it originates to other lenders.

The following discussion briefly describes first mortgage loans funded in 2005, as well as events during 2005 that affected previously
funded mortgage loans.

In February 2005, ARI sold a 9.9 acre tract of its Katrina land parcel for $2.6 million, receiving $574,000 after
payment of closing costs and providing purchase money financing of $2.0 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2008. In March 2005, ARI sold the loan for $2.0 million, receiving $2.0
million in cash after payment of closing costs.

In February 2005, ARI sold a 13.6 acre tract of its Katrina land parcel for $3.7 million,
receiving $591,000 after payment of closing costs and providing purchase money financing of $2.8 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2008. In March 2005, ARI sold the loan for
$2.8 million, receiving $2.8 million in cash after payment of closing costs.

In February 2005, ARI sold a 6.5 acre tract of its Katrina
land parcel for $1.7 million, receiving $340,000 after payment of closing costs and providing purchase money financing of $1.3 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2007. In March
2005, ARI sold the loan for $1.3 million, receiving $1.3 million in cash after payment of closing costs.



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##### Index to Financial Statements

In February 2005, ARI sold a 7.4 acre tract of its Katrina land parcel for $2.0 million, receiving
$455,000 after payment of closing costs and providing purchase money financing of $1.5 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2007. In March 2005, ARI sold the loan for $1.5 million,
receiving $1.5 million in cash after payment of closing costs.

In February 2005, ARI sold an 81.2 acre tract of its Katrina land parcel
for $19.9 million, paying $814,000 after payment of debt and closing costs and providing purchase money financing of $14.9 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2007. In March 2005,
ARI sold the loan for $14.9 million, receiving $14.9 million in cash after payment of closing costs.

In March 2005, ARI sold a 24.8 acre
tract of its Katrina land parcel for $6.4 million, receiving $1.0 million after payment of closing costs and providing purchase money financing of $4.8 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in
March 2007. In March 2005, ARI sold the loan for $4.8 million, receiving $4.8 million in cash after payment of closing costs.

In August
2005, ARI sold a 7.6 acres tract of its Vineyards land parcel for $4.3 million, receiving $874,000 after payment of closing costs and providing purchase money financing of $3.2 million. The secured note bore interest at 8.0% per annum and
matured in August 2006. In September 2005, ARI sold the note for $3.2 million plus accrued but unpaid interest, receiving $3.3 million in cash after payment of closing costs.

In September 2005, ARI sold a 5.2 acre tract of its Vineyards and Vineyards II land parcels for $2.3 million, receiving $160,000 after payment of closing
costs and debt paydown, and providing purchase money financing of $1.7 million. The secured note bore interest at 8.0% per annum and matured in September 2006. In September 2005, ARI sold the note for $1.7 million plus accrued but unpaid
interest, receiving $1.7 million in cash after payment of closing costs.

In August 2005, ARI sold a 16.0 acre tract of its Mason Goodrich
land parcel for $2.1 million, receiving $935,000 after payment of closing costs and providing purchase money financing of $1.0 million. The secured note bore interest at 8.0%, required monthly interest payments, and matured in November 2005. In
November 2005, the note was collected in full, including accrued but unpaid interest.

In March 2004, ARI sold an 8.0 acre tract of its
Mason Goodrich land parcel for $1.0 million, receiving $251,000 after payment of closing costs and providing purchase money financing of $523,000. The secured loan bears interest at 10.0% per annum, requires monthly payments of accrued interest
and matures in March 2006. All principal and accrued but unpaid interest is due at maturity. In 2005, $117,000 in principal was collected. In March 2006, the note was extended to March 2007 by paying a 1% extension fee and making a 10% principal
reduction.

In September 2003, ARI sold a 367.4 acre tract of its Pioneer Crossing land parcel for $22.5 million, receiving $4.9 million
after payment of closing costs and providing purchase money financing of $16.9 million. The note bears interest at 8.0% per annum, matures in September 2006 and requires quarterly payments of accrued interest beginning in January 2004. All
principal and accrued but unpaid interest are due at maturity. In November 2003, ARI sold an interest in $8.0 million of the note for $7.5 million, receiving $7.2 million in cash after payment of closing costs and debt pay down. In February 2004,
ARI sold an additional interest in $6.6 million of the note for $6.3 million, receiving $6.3 million in cash after payment of closing costs. In December 2005, ARI acquired a 100% interest in the debtor in exchange for cancellation of the note
and assumption of debt on the property. See NOTE 2. REAL ESTATE.

In October 2004, ARI sold the In The Pines apartments to a
third party and provided $1.0 million of the purchase price as seller financing in the form of two notes. The first note bore interest at 7.0% per annum, required monthly interest only payments, and matured in January 2005. The Purchaser
extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note



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##### Index to Financial Statements

an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. In the event of a default, the note is also
secured by membership rights in the purchasers entity. The second note was unsecured, bore interest at 8.5% per annum, required monthly interest only payments, and matured in January 2005. The Purchaser extended this note to March 2005 by
paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. Both loans were extended to October 2005
with the payment to ARI of a 2.0% extension fee. Both loans were paid in full, including unpaid interest, in October 2005.

In March 2005,
ARI entered into an agreement to advance a third party $3.2 million for development costs relating to single family residential lots in Austin, Texas. These advances are secured by membership interests in the borrower and a second lien on 1,092
acres of undeveloped land. The secured note bears interest at 10%, requires semi-annual interest payments, and matures in March 2008. In September 2005, the total amount authorized under this advance was increased to $5.0 million. As of
March 31, 2006, ARI had advanced $4.0 million to the borrower. ARI also guaranteed, with full recourse to ARI, an $18 million bank loan for the borrower which is secured by a first lien on the 1,092 acres of undeveloped land. In June 2005,
ARI purchased the subsidiary of a related party for $4.1 million that holds two notes receivable from this third party totaling $3.0 and $1.0 million, respectively. These notes are secured by approximately 142 acres of undeveloped land and
membership interests in the borrowers. The secured notes bear interest at 12.0%, have an interest reserve for payments that is added to the principal balance on a monthly basis, and matured in June 2005. Both loans were extended to September 2005
and upon maturity, both loan balances were paid under the advance referred to at the beginning of this paragraph.

In July 2003, ARI
advanced $2.3 million to the Class A Limited Partners of TCI Countryside, L.P. of which ARI is the general partner. This loan bears interest at 7.25% and matures in January 2007. ARI also agreed to advance $1.1 million to the Class A
Limited Partners by advancing $105,000 in July 2003 and every year thereafter for ten years. This loan bears interest at 7.25% and matures in July 2012. Interest due to ARI will be deducted from the quarterly return owed by ARI to the Class A
Limited Partners, eliminating the quarterly payments. In October 2005, ARI agreed to settle the remaining obligations under this loan by paying a lump sum of $425,000, making the total advanced $740,000. After January 2007, ARI may redeem the
Class A Limited Partners interests in exchange for cancellation of both notes.

In September 2005, ARI sold 10 acres of unimproved
land to a third party for $1.5 million and provided $1.1 million of the purchase price as seller financing. The secured note bore interest at 10%, required monthly interest only payments, and matured in September 2008. In December 2005, ARI sold
this note to a financial institution for full face value less closing costs, plus accrued interest. ARI and other related parties have also guaranteed the full payment of the note balances, including any outstanding interest and costs incurred by
the financial institution.

In December 2005, ARI sold 27.192 acres and 3.73 acres to a third party for $10.1 million and $1.4 million, and
provided $7.6 million and $1.0 million of seller financing, respectively. Both notes bear interest at 8.0% per annum, require monthly interest only payments, and mature in December 2008. In January 2006, ARI sold both notes to a financial
institution for full face value less closing costs, plus accrued interest. The financial institution has a Put Option that would require ARI to purchase both notes back under the following conditions: (1) failure to construct agreed upon roads
on the property by December 2006; (2) there occurs any event of default by the buyer; (3) certain escrow deposits for the road completion are not sufficient to cover the cost of the road construction; (4) any amendment, modification
or assignment of certain development and escrow agreements between ARI and the buyer; and (5) failure of ARI to deliver certain documents to the financial institution within a timely manner. ARI and other related parties have also guaranteed
the full payment of the note balances, including any outstanding interest and costs incurred by the financial institution.

In December
2004, ARI sold the Centura Tower office building to a partnership and retained a 1% non-controlling general partner interest and a 4% limited partner interest. ARI has certain obligations to fund the



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##### Index to Financial Statements

partnership for rent abatements, tenant improvements, leasing commissions and other cash shortfalls. $4.1 million of these obligations were escrowed by
ARI with the lender at loan closing. Through December 31, 2005, ARI has funded $4.7 million of these obligations, with $4.1 million recorded as an investment in the partnership and the remainder of $603,000 in the form of a note receivable from
the partnership. This note has no maturity date, requires no payments, and bears interest at a fixed rate of 7.0% per annum. The note will be paid out of excess cash flow or from sales proceeds, but only after certain partner preferred returns
are paid.

In August 2001, ARI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note
receivable bore interest at a variable rate (then 9.0% per annum), required monthly interest only payments and originally matured in January 2003. As of March 2004, ARI had funded a total of $4.3 million. On January 22, 2003, ARI agreed to
extend the maturity date until May 1, 2003. The collateral used to secure ARIs second lien was seized by the first lien holder. On March 11, 2004, ARI agreed to accept an assignment of claims in litigation as additional security for
the note. In December 2004, ARI agreed to a Modification Agreement with the borrower, which was effective November 1, 2003. As of the modified effective date, accrued interest of $582,000 was added to the principal balance of the note, the
interest rate fixed at 9.0% per annum and all principal and interest is due November 2005. ARI also received Pledge and Security Agreements in various partnership interests belonging to the borrower and received various Assignments of Proceeds
from sales in certain entities owned by the borrower. ARI reduced accrued interest and principal by $1.5 million from the receipt of notes receivable assigned to ARI by borrower and by $605,000 from cash received. ARI also received $1.4 million in
January 2005 that was applied to accrued interest and principal effective December 30, 2004. As a result of the modification, ARI recognized a reduction of $1.4 million for loan loss expense in 2004. In December 2005, ARI advanced $2.5 million
under this note to the borrower.

In March 2002, ARI sold the 174,513 Sq. Ft. Hartford Office Building in Dallas, Texas, for $4.0 million,
providing $4.0 million in seller financing as well as an additional $1.4 million line of credit for leasehold improvements all in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 8.0% per
annum, requires monthly interest only payments and matures in March 2007. As of March 2006, ARI has funded $896,000 of the $1.4 million line of credit. ARI determined during the third quarter of 2005 that it would classify this note as
non-performing due to the lack of debt payments received and the probability that no debt payments would be received in the future. Effective for the quarter ended September 30, 2005, ARI no longer accrues interest on this note. The loan is not
considered impaired due to managements opinion that the fair value of the collateral is sufficient to cover the current loan balance and accrued interest at March 2006.

In July 2002, ARI entered into an agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the
borrower. The line of credit bears interest at 12.0% per annum, requires monthly interest only payments, and matured in June 2005. This loan was extended to June 2006 in the second quarter of 2005 and was subsequently modified in the fourth
quarter of 2005. This second modification extends the loan maturity to October 2007 and limits any advances under the line of credit to $25,000 per month. As of March 2006, the borrower had $211,000 of available credit under the credit limit.

In September 1999, in conjunction with the sale of two apartments in Austin, Texas, $2.1 million in purchase money financing was provided,
secured by limited partnership interests in two limited partnerships owned by the buyer. In March 2000, the borrower made a $1.1 million payment. The borrower executed a replacement promissory note for the remaining note balance of $1.0 million,
which was unsecured, non-interest bearing and matured in April 2003. In 2004, ARI initiated legal action to collect the note. In August 2005, a settlement agreement was reached. The note will be replaced with a new promissory note, also non-interest
bearing, which is secured by a $1.5 million Agreed Judgment. The note calls for 36 monthly payments beginning in January 2006, with a balloon payment of $460,000 due in January 2009. ARI will continue to classify this note as non-performing even
though payments have been received in 2006.

In February 2003, ARI sold an 89.3 acre tract of its Katrina land parcel for $8.5 million,
paying $410,000 after payment of closing costs and debt pay down and providing purchase money financing of $5.6 million. The



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##### Index to Financial Statements

note bears interest at 8.0% per annum and matures three years after the recording of the Deed of Trust. Interest was to begin accruing after
improvements to the site were completed by ARI. The costs to ARI to complete the improvements, estimated to be $2.5 million, were accrued in 2002. By 2005, a portion of the improvements had been completed and the remaining accrual at
December 31, 2005 is $1.2 million. At March 2006, negotiations with the buyer to settle the obligations are underway. The remaining improvements are not expected to be completed before the settlement. The note is classified as non-performing at
December 31, 2005.

In November 2003, ARI purchased a note receivable from an unrelated party for $1.4 million, including accrued and
unpaid interest. The note was secured by a first lien Deed of Trust on 13.0 acres of undeveloped land in Harris County, bore interest at the default rate of 18.0%, and matured in May 2003. In May 2005, ARI obtained title to the property via a Deed
in Lieu of Foreclosure. See NOTE 2. REAL ESTATE.

In December 2002, ARI sold a 238.0 acre tract of its Desert Wells land parcel
for $23.8 million, receiving $321,000 after payment of closing costs and debt paydown and providing purchase money financing of $21.4 million. The first lien financing of $17.8 million bore interest at 8.0% per annum, matured in December
2004 and required payments beginning in March 2003. In March 2003, the note was sold to an unrelated party for $17.1 million plus accrued and unpaid interest. The buyer of the note has limited recourse against a 53 acre parcel of ARIs
Katrina land, in event of default by the borrower. ARI recognized a previously deferred gain of $15.0 million upon completion of the sale of the note. The second lien financing of $3.6 million bore interest at 8.0% per annum and matured on
March 31, 2003. All principal and interest were due at maturity. In February 2005, the note was exchanged for 23.0 acres of land in Palm Desert, California. See NOTE 2. REAL ESTATE.

Related Parties.    In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to One Realco. At that
time, a wholly-owned subsidiary of One Realco owned approximately 2.2% of the outstanding shares of ARIs common stock. The line of credit bore interest at 12.0% per annum. All principal and interest were due at maturity in February 2002.
The line of credit was guaranteed by BCM. In June 2001, $810,000 in principal and interest was collected. In December 2001, $825,000 in principal and interest was collected. In February 2002, the line of credit was increased to $18.0 million,
accrued but unpaid interest of $217,000 was added to the principal, and the maturity date was extended to February 2004. In March 2002, ARI funded an additional $1.8 million, increasing the outstanding principal balance to $15.5 million. In October
2002, $856,900 in interest was collected, by the return of 85,690 shares of ARI Series A Preferred Stock. In June 2003, ARI sold a participating interest in $5.8 million of the $15.5 million balance to BCM, receiving 314,141 TCI shares from BCM (see
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.) In February 2004, $2.3 million in interest was collected, accrued but unpaid interest of $161,000 was added to the principal, the maturity date was extended to February 2007, and the
interest rate was changed to 3.0% over the prime rate, currently at 10.5%. In December 2005, $500,000 in interest was collected. All principal and interest are due at maturity. On February 1, 2006 Prime acquired from One Realco all of the
issued and outstanding stock of the former subsidiary which owns 234,450 shares of ARI common stock.

In March 2004, ARI sold a K-Mart in
Cary, North Carolina to BCM for $3.2 million, including the assumption of debt. ARI also provided $1.5 million of the purchase price as seller financing. The unsecured note bears interest at 2.0% over the prime rate, currently 9.5%, and matured in
April 2005. In April 2005, the note extended to April 2008.

In March 2004, ARI sold the Texstar Warehouse in Arlington, Texas to BCM for
$2.4 million, including the assumption of debt. ARI also provided $1.3 million of the purchase price as seller financing. The unsecured note bears interest at 2.0% over the prime rate, currently 9.5%, and matured in April 2005. In April 2005, the
note extended to April 2008.

In October 1999, ARI funded a $4.7 million loan to Realty Advisors. The loan, to provide funds for
acquisitions or working capital needs, was secured by all of the outstanding shares of common stock of American Reserve Life Insurance Company. The loan bore interest at 10.25% per annum and matured in November 2001.



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##### Index to Financial Statements

In January 2000, $100,000 was collected. In November 2001, the maturity date was extended to November 2004. The collateral was changed to a pledge of 850,000
shares of ARI common stock owned by BCM. The interest rate was changed to 2.0% over the prime rate, currently 9.5% per annum, and the accrued but unpaid interest of $1.0 million was added to the principal. The new principal balance is $5.6
million. In September 2003, $673,000 in accrued interest was collected. In August 2004, $342,000 in accrued interest was collected. In November 2004, the maturity date was extended to November 2006. In September 2005, $342,000 in accrued interest
was collected. All principal and accrued interest are due at maturity.

Investments in Real Estate Companies `

Real estate entities.    ARIs investment in real estate entities includes, through its ownership of 82.2% of the common
stock of TCI, the equity securities of a publicly traded real estate company, IORI, and interests in real estate joint venture partnerships.

The Board of Directors authorized the expenditure of up to an aggregate of $50.0 million to acquire, in open market purchases, shares of IORI, excluding private purchase transactions which were separately authorized. Through
December 31, 2005, ARI had expended an aggregate of $10.0 million to acquire shares of IORI, in open market purchases, in accordance with these authorizations. As of December 31, 2005, ARI and its subsidiaries, other than TCI, owned no
shares of common stock of IORI, but TCI continued to own 345,728 IORI shares (approximately 24.9% of the outstanding IORI shares). ARI may make additional investments in the equity securities of IORI to the extent its liquidity permits.

The following summary description of IORI is based on information publicly reported by IORI in its Form 10-K Annual Report to the Commission for
the fiscal year ended December 31, 2005.

Pertinent information regarding ARIs investment in the equity securities of the IORI
at December 31, 2005, is summarized below (dollars in thousands):



|         |  |                                                   |   |  |                                                 |       |                                                  |   |                                               |  |   |      
|-------- |  | ------------------------------------------------- | - |  | ----------------------------------------------- | ----- | ------------------------------------------------ | - | --------------------------------------------- |  | - | -----
|Investee |  | Percentageof ARI/TCIOwnership atDecember 31, 2005 |   |  | Carrying Value ofInvestment atDecember 31, 2005 |       | EquivalentInvestee BookValue atDecember 31, 2005 |   | Market Value ofInvestment atDecember 31, 2005
|IORI     |  | 24.88                                             | % |  | $                                               | 6,155 |                                                  | $ | 11,159                                        |  | $ | 6,534

IORI owns real estate, some of which has been held for many years. Because of depreciation, IORI
may earn substantial amounts in periods in which it sells real estate and may incur losses in periods in which it does not. ARIs reported income or loss attributable to IORI may differ materially from ARIs share of IORIs cash flow.

ARI owns an approximate 20.4% interest (through TCIs ownership of IORI shares) in IORI, a publicly held real estate investment
company. At December 31, 2005, IORI had total assets of $99.1 million and owned six apartments, one office building, one shopping center, one industrial warehouse, and one parcel of unimproved land, all within the State of Texas. IORI did not
sell any properties during 2005. Since IORI recognized no gains on the sale of property during 2005, ARI had no equity share on property sales. In 2004, IORI sold two office buildings, two office buildings and a parcel of unimproved land for a total
of $24.5 million, receiving net cash of $4.8 million after paying off $15.8 million in mortgage debt and the payment of various closing costs. IORI recognized gains of $5.5 million on the sales of which ARIs equity share was $1.3 million.
Based on the ownership percentage of ARIs investment in IORI and IORIs market value, ARIs investment in IORI has a market value of approximately $6.5 million at December 31, 2005. The carrying value of this investment is
approximately $6.2 million at December 31, 2005.

ARI received no dividends from IORI in 2005.



28



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##### Table of Contents

##### Index to Financial Statements

|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

During the fourth
quarter of the fiscal year covered by this Report, no proceeding previously reported was terminated. During the fiscal year ended December 31, 2005, the Innovo Realty, Inc. proceeding filed August 10, 2004 was resolved in April 2005. See
NOTE 9 to the Consolidated Financial Statements.

Sunset Management LLC.    On May 16, 2005, the United
States District Court for the Northern District of Texas, Dallas Division, entered its Memorandum Opinion and Order and Judgment dismissing a purported stockholders derivative action filed October 5, 2004, by Sunset Management LLC against
a number of entities, including the Company, as Case No. 3:04-CV-02162-B styled Sunset Management LLC, derivatively on behalf of Transcontinental Realty Investors, Inc. v. American Realty Investors, Inc., et al. The Courts Judgment
granted a Motion to Dismiss filed by the Defendants, including the Company, and ordered that Plaintiff Sunset Management LLC take nothing by its suit. No appeal was timely filed, and the dismissal of the action is now final. The Sunset Complaint in
this case contained many of the same allegations raised by Sunset Management LLC in four other cases which, as rulings have occurred, have resulted in a denial of Sunset Management LLCs requested relief. The dismissed action was the fifth in a
continuing series of actions involving Sunset Management LLC, certain subsidiaries of the Company and TCI resulting from a loan in September 2001 to BCM and three subsidiaries of the Company in the original amount of $30 million ($19.5 million of
which bore interest at 24% per annum, while the remaining $10.5 million of which bore interest at 20%). In September 2002, $15 million in principal was repaid leaving a $15 million aggregate balance, which Sunset Management LLC orally agreed to
extend the maturity date and accept substitute collateral, an arrangement which Sunset Management LLC did not honor, resulting in the original litigation filed in Texas State Court during October 2002 as Cause No. 02-09433-I in the
162ndJudicial District Court of Dallas County, Texas, originally styled American Realty Trust, Inc., ART
Williamsburg, Inc., Basic Capital Management, Inc. and EQK Holdings, Inc. v. Sunset Management LLC (the Texas Litigation). The Texas Litigation alleged breach of contract, misrepresentation, breach of duty of good faith and fair
dealing and slander of title by Sunset Management LLC and sought certain declaratory relief against Sunset Management LLC, as well as temporary and permanent anti-suit injunctions against Sunset Management LLC. The Texas Litigation has been removed
to the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division, as Adversary Proceeding No. 03-04256 styled American Realty Trust, Inc., et al. v. Sunset Management LLC, et al. This Adversary Proceeding is
associated with the case styled In Re: ART Williamsburg, Inc., Debtor, pending in the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division, Case No. 4:03-43909-BTR-11, filed August 22, 2003.

The Company is also a defendant in related litigation with Sunset Management LLC in the case styled Sunset Management LLC, et al. v. American
Realty Investors, Inc., et al., now pending in the United States District Court for the Eastern District of Texas, Tyler Division, as Case No. 4:06-CV-18. In this case, Sunset Management LLC originally sought to require a conveyance by ARI
and/or its subsidiaries of certain pledged shares back to the pledgors, BCM and certain subsidiaries of ARI. Sunset Management LLC has filed a Motion for Summary Judgment claiming that transfer of the ownership of the shares among the Company and
its affiliates violates the pledge agreements. ARI has responded to the Motion, which it believes is without merit because the transfer of the shares harmed no one, did not affect the validity of the pledge agreements, and in fact, benefited not
only ARI but also probably Sunset Management LLC because it substantially reduced the taxes payable on a consolidated basis for ARI and TCI, thereby potentially increasing the value of the collateral pledged. The Company expects this case to
eventually be consolidated with the primary discussed in the preceding paragraph when that case is transferred to the district court.

Fansler.    On February 12, 2004, The Fansler Foundation (Fansler) instituted an action in the U.S. District Court, Eastern District of California, against the Company and Basic Capital
Management, Inc. styled The Fansler Foundation v. American Realty Investors, Inc. and Basic Capital Management, Inc. The Fansler complaint, as amended September 7, 2004, demands a jury trial and alleges that in 1997, Fansler sold its
interests in four hotels (commonly known as The Piccadilly Inn Hotels in Fresno, California) to American Realty Trust, Inc. (ART) for 1,600,000 shares of ART Series F 10% Cumulative Convertible Preferred Stock (the ART



29



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##### Table of Contents

##### Index to Financial Statements

Series F Preferred Stock) which was, in August 2000, converted into 1,600,000 shares of ARI Series A 10% Cumulative Convertible Preferred Stock (the
ARI Series A Preferred Stock). Fanslers amended complaint alleges that it received multiple assurances that the ART Series F Preferred Stock (and subsequently the ARI Series A Preferred Stock) would be separately
listed on the NYSE, which (although attempts were made to do so) did not and has not occurred because the stock does not meet the minimum distribution requirements of the NYSE. Fansler alleges that if the ARI Series A Preferred Stock
were listed on the NYSE, the fair value of the shares held by Fansler would exceed $20,000,000. Fanslers amended complaint alleges breach of fiduciary duty, breach of express and implied obligations arising under a written contract, promissory
estoppel, misrepresentation, negligent fraud and misrepresentation and concealment and seeks rescission, unspecified, compensatory damages, interest, attorneys fees, and unspecified exemplary damages. The Company and BCM have denied all
material allegations and intend to vigorously defend this action. Due to the existence of this litigation and, among other things, the inclusion in the Amended Complaint of a claim for rescission (that is, to restore the parties to their respective
positions prior to the exchange of ART and ARI shares, which would require an accounting for and potential return of dividends paid thereafter), and ARIs rights to set off asserted in this litigation, the Company has suspended the delivery of
funds to Fansler representing declared dividends on the 1,600,000 shares of ARI Series A Preferred Stock held by Fansler, but all other eligible holders of ARI Series A Preferred Stock have received all funds representing declared dividends on
the ARI Series A Preferred Stock.

The ownership of property and provision of services to the public as tenants entails an inherent risk of
liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of Management, the outcome of such litigation will not have a material adverse
impact upon the Companys financial condition, results of operations or liquidity.



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

The Annual Meeting of Stockholders was held on November 22, 2005, at which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended (the Exchange Act).
There was no solicitation in opposition to Managements nominees listed in the Proxy Statement, all of which were elected. At the Annual Meeting stockholders were asked to consider and vote upon the election of Directors and the ratification of
the selection of the independent public accountants for ARI for the fiscal year ending December 31, 2005. At the Meeting, stockholders elected the following individuals as Directors:



|                      |  |               |  |                  
|--------------------- |  | ------------- |  | -----------------
|                      |  | Shares Voting
|Director              |  | For           |  | WithheldAuthority
|Henry A. Butler       |  | 10,585,558    |  | 38,021           
|Sharon Hunt           |  | 10,586,492    |  | 37,087           
|Robert A. Jakuszewski |  | 10,585,206    |  | 38,373           
|Ted R. Munselle       |  | 10,586,522    |  | 37,057           
|Ted P. Stokely        |  | 10,586,386    |  | 37,193           

There were no abstentions or broker non-votes on the election of Directors. With respect to the
ratification of the appointment of Farmer, Fuqua & Huff, P.C. as independent auditors of the Company for the fiscal year ending December 31, 2005, and any interim period, at least 10,591,407 votes were received in favor of such
proposal, 22,005 votes were received against such proposal, and 10,167 votes abstained.



30



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##### Table of Contents

##### Index to Financial Statements

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

ARIs common stock is listed and traded on the New York Stock Exchange under the symbol ARL. The following table sets forth the high and
low sales prices as reported in the consolidated reporting system of the New York Stock Exchange.



|                                        |  |      |       |     |   |     
|--------------------------------------- |  | ---- | ----- | --- | - | ----
|Quarter Ended                           |  | High |       | Low
|March 31, 2006 (through March 24, 2006) |  | $    | 10.50 |     | $ | 7.51
|March 31, 2005                          |  |      | 9.99  |     |   | 8.90
|June 30, 2005                           |  |      | 11.10 |     |   | 8.06
|September 30, 2005                      |  |      | 10.24 |     |   | 9.21
|December 31, 2005                       |  |      | 10.25 |     |   | 7.75
|March 31, 2004                          |  |      | 11.25 |     |   | 7.58
|June 30, 2004                           |  |      | 9.80  |     |   | 6.99
|September 30, 2004                      |  |      | 9.17  |     |   | 8.20
|December 31, 2004                       |  |      | 11.60 |     |   | 7.54

On of March 24, 2006, the closing market price of ARIs common stock on the New York
Stock Exchange was $9.54 per share.

As of March 24, 2006, ARIs common stock was held by approximately 3,100 stockholders of
record.

During the second quarter of 1999, the Board of Directors established the policy that dividend declarations on ARIs common
stock would be determined on an annual basis following the end of each year. In accordance with that policy, the Board determined not to pay any dividends in 2005. Future distributions to common stockholders will be dependent upon ARIs
realized income, financial condition, capital requirements and other factors deemed relevant by the Board.

15,000,000 shares of Series A
10.0% Cumulative Convertible Preferred Stock are authorized under ARIs Amended Articles of Incorporation, with a par value of $2.00 per share and a liquidation preference of $10.00 per share plus accrued and unpaid dividends. Dividends are
payable at the annual rate of $1.00 per share, or $.25 per share quarterly, to stockholders of record on the last day of each March, June, September, and December, when and as declared by the Board of Directors. The Series A Preferred Stock may be
converted into common stock at 90.0% of the average daily closing price of ARIs common stock for the prior 20 trading days. At December 31, 2005, 3,390,913 shares of Series A Preferred Stock were outstanding and 869,808 shares were
reserved for issuance as future consideration in various business transactions. Of the outstanding shares, 300,000 shares are owned by ART Edina, Inc., and 600,000 shares are owned by ART Hotel Equities, Inc., wholly-owned subsidiaries of ARI.
Dividends are not paid on the shares owned by ARI subsidiaries.

231,750 shares of Series C Cumulative Convertible Preferred Stock are
authorized under ARIs Amended Articles of Incorporation, with a par value of $2.00 per share and liquidation preference of $100.00 per share plus accrued and unpaid dividends. The Series C Preferred Stock bears a quarterly dividend of $2.50
per share to stockholders of record on the last day of March, June, September and December when and as declared by the Board of Directors. The Series C Preferred Stock is reserved for conversion of the Class A limited partner units of ART Palm,
L.P. (Art Palm). At December 31, 2005, 6,813,750 Class A units were outstanding. The Class A units may be exchanged for Series C Preferred Stock at the rate of 100 Class A units for each share of Series C Preferred
Stock. After December 31, 2005, all outstanding shares of Series C Preferred Stock may be converted into ARI common stock. All conversions of Series C Preferred Stock into ARI common stock will be at 90.0% of the average daily closing price of
ARIs common stock for the prior 20 trading days. In January 2006, 1.6 million Class A limited partner units were redeemed for $1.6 million in cash. At December 31, 2005, no shares of Series C Preferred Stock was outstanding.



31



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##### Index to Financial Statements

91,000 shares of Series D 9.50% Cumulative Preferred Stock are authorized under ARIs Amended
Articles of Incorporation, with a par value of $2.00 per share, and a liquidation preference of $20.00 per share. Dividends are payable at the annual rate of $1.90 per year or $.475 per quarter to stockholders of record on the last day of each
March, June, September and December when and as declared by the Board of Directors. The Series D Preferred Stock is reserved for the conversion of the Class A limited partner units of Ocean Beach Partners, L.P. The Class A units may be
exchanged for Series D Preferred Stock at the rate of 20 Class A units for each share of Series D Preferred Stock. No more than one-third of the Class A units could be exchanged prior to May 31, 2001. Between June 1, 2001 and
May 31, 2006, all unexchanged Class A units are exchangeable. At December 31, 2005, no shares of Series D Preferred Stock was outstanding.

500,000 shares of Series E 6.0% Cumulative Preferred Stock are authorized under ARIs Amended Articles of Incorporation, with a par value $2.00 per share and a liquidation preference of $10.00 per share.
Dividends are payable at the annual rate of $.60 per share or $.15 per quarter to stockholders of record on the last day of each March, June, September and December when and as declared by the Board of Directors. At December 31, 2005, no Series
E Preferred Stock was outstanding.

100,000 shares of Series J 8% Cumulative Convertible Preferred Stock have been designated pursuant to a
Certificate of Designation filed March 16, 2006, as an instrument amendatory to ARIs Amended Articles of Incorporation, with a par value of $2.00 per share, and a liquidation preference of $1,000 per share. Dividends are payable at the
annual rate of $80 per share, or $20 per quarter, to stockholders of record on the last day of each of March, June, September and December, when and as declared by the Board of Directors. Although the Series J 8% Cumulative Convertible Preferred
Stock has been designated, no shares have been issued as of March 24, 2006.

The following table sets forth information regarding
purchases made by ARI of shares of ARI common stock on a monthly basis during the fourth quarter of 2005:



|              |  |                                 |  |                              |   |                                                                        |   |                                                                         |        
|------------- |  | ------------------------------- |  | ---------------------------- | - | ---------------------------------------------------------------------- | - | ----------------------------------------------------------------------- | -------
|Period        |  | Total Number ofShares Purchased |  | Average Price Paid per Share |   | Total Number of Shares Purchased as Part of
Publicly Announced Program |   | Maximum Number of Shares that May Yet be
Purchased Under the Program(1)
|October 2005  |  |                                |  | $                            |  |                                                                        |  |                                                                         | 129,493
|November 2005 |  |                                |  |                              |  |                                                                        |  |                                                                         | 129,493
|December 2005 |  |                                |  |                              |  |                                                                        |  |                                                                         | 129,493
|              |  |                                 |  |                              |   |                                                                        |   |                                                                         |        
|Total         |  |                                |  | $                            |  |                                                                        |  |                                                                         |        
|              |  |                                 |  |                              |   |                                                                        |   |                                                                         |        

---

|(1) | The repurchase program was announced in September 2000. 1,000,000 shares may be repurchased through the program. The program has no expiration date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------



32



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##### Index to Financial Statements

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                              |  | For the Years Ended December 31, |           
|                                                                                              |  | 2005                             |            |   | 2004 |   |            | 2003 |  |   | 2002       |   |  | 2001 |           
|                                                                                              |  | dollars in thousands             |           
|EARNINGS DATA                                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total operating revenues                                                                      |  | $                                | 202,639    |   |      | $ | 181,124    |      |  | $ | 153,073    |   |  | $    | 87,779     |   |  | $ | 95,447     |  
|Total operating expenses                                                                      |  |                                  | (190,166   | ) |      |   | (189,802   | )    |  |   | (164,802   | ) |  |      | (95,853    | ) |  |   | (107,346   | )
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Operating (loss) income                                                                       |  |                                  | 12,473     |   |      |   | (8,678     | )    |  |   | (11,729    | ) |  |      | (8,074     | ) |  |   | (11,899    | )
|Other income (expense)                                                                        |  |                                  | (59,598    | ) |      |   | (53,993    | )    |  |   | (43,150    | ) |  |      | (41,389    | ) |  |   | (56,409    | )
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Loss before gain on real estate sales, minority interest, and equity in earnings of investees |  |                                  | (47,125    | ) |      |   | (62,671    | )    |  |   | (54,879    | ) |  |      | (49,463    | ) |  |   | (68,308    | )
|Gain on land sales                                                                            |  |                                  | 39,926     |   |      |   | 11,781     |      |  |   | 43,831     |   |  |      | 16,727     |   |  |   | 7,883      |  
|Gain on sale of real estate                                                                   |  |                                  |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   | 77,816     |  
|Equity in gain on sale of real estate by investees                                            |  |                                  |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   | 22,542     |  
|Minority interest                                                                             |  |                                  | (3,056     | ) |      |   | (7,270     | )    |  |   | (771       | ) |  |      | (1,346     | ) |  |   | (972       | )
|Equity in income (loss) of investees                                                          |  |                                  | 397        |   |      |   | (41        | )    |  |   | (4,441     | ) |  |      | (20,914    | ) |  |   | (13,352    | )
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss) from continuing operations                                                  |  |                                  | (9,858     | ) |      |   | (58,201    | )    |  |   | (16,260    | ) |  |      | (54,996    | ) |  |   | 25,609     |  
|Net income (loss) from discontinued operations                                                |  |                                  | 57,275     |   |      |   | 91,395     |      |  |   | 28,123     |   |  |      | 46,532     |   |  |   | (8,255     | )
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss)                                                                             |  |                                  | 47,417     |   |      |   | 33,194     |      |  |   | 11,863     |   |  |      | (8,464     | ) |  |   | 17,354     |  
|Preferred dividend requirement                                                                |  |                                  | (2,572     | ) |      |   | (2,601     | )    |  |   | (2,351     | ) |  |      | (2,401     | ) |  |   | (2,485     | )
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Income (loss) applicable to Common shares                                                     |  | $                                | 44,845     |   |      | $ | 30,593     |      |  | $ | 9,512      |   |  | $    | (10,865    | ) |  | $ | 14,869     |  
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|                                                                                              |  |                                  |            |   |     
|PER SHARE DATA                                                                                |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss) from continuing operations                                                  |  | $                                | (1.22      | ) |      | $ | (5.76      | )    |  | $ | (1.73      | ) |  | $    | (5.05      | ) |  | $ | 1.97       |  
|Net income (loss) from discontinued operations                                                |  |                                  | 5.64       |   |      |   | 8.66       |      |  |   | 2.61       |   |  |      | 4.09       |   |  |   | (.70       | )
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss) applicable to Common shares                                                 |  | $                                | 4.42       |   |      | $ | 2.90       |      |  | $ | .88        |   |  | $    | (.96       | ) |  | $ | 1.27       |  
|                                                                                              |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Weighted average shares outstanding                                                           |  |                                  | 10,149,000 |   |      |   | 10,559,571 |      |  |   | 10,789,352 |   |  |      | 11,375,127 |   |  |   | 11,714,374 |  
|                                                                                              |  |                                  |            |   |     
|BALANCE SHEET DATA                                                                            |  |                                  |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Real estate, net                                                                              |  | $                                | 1,113,105  |   |      | $ | 983,422    |      |  | $ | 1,054,735  |   |  | $    | 466,042    |   |  | $ | 590,488    |  
|Notes and interest receivable, net                                                            |  |                                  | 81,440     |   |      |   | 72,661     |      |  |   | 70,595     |   |  |      | 82,133     |   |  |   | 30,382     |  
|Total assets                                                                                  |  |                                  | 1,345,795  |   |      |   | 1,190,843  |      |  |   | 1,240,880  |   |  |      | 711,330    |   |  |   | 761,048    |  
|Notes and interest payable                                                                    |  |                                  | 1,021,822  |   |      |   | 939,921    |      |  |   | 986,769    |   |  |      | 475,433    |   |  |   | 564,298    |  
|Stock-secured notes payable                                                                   |  |                                  | 22,549     |   |      |   | 18,663     |      |  |   | 21,194     |   |  |      | 8,558      |   |  |   | 28,040     |  
|Stockholders equity                                                                          |  |                                  | 148,397    |   |      |   | 103,009    |      |  |   | 76,871     |   |  |      | 79,527     |   |  |   | 88,169     |  
|Book value per share                                                                          |  | $                                | 12.80      |   |      | $ | 8.89       |      |  | $ | 6.75       |   |  | $    | 6.99       |   |  | $ | 7.75       |  



33



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##### Table of Contents

##### Index to Financial Statements

|ITEM 7. | 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-K contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the
captions Business, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations. We caution investors that any forward-looking statements in this report, or which
management may make orally or in writing from time to time, are based on managements beliefs and on assumptions made by, and information currently available to, management. When used, the words anticipate, believe,
expect, intend, may, might, plan, estimate, project, should, will, result and similar expressions which do not relate solely to
historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends,
uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or
projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We
expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are
based on results and trends at the time they are made, to anticipate future results or trends.

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



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



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



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



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



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



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



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



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



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

The risks included here are not exhaustive. Other sections of this report, including Part I, Item 1A. Risk Factors, include additional
factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all
such risk factors, nor can we assess the impact of



34



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##### Index to Financial Statements

all such risk factors 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 risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form
10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

Overview

ARI was organized in 1999. In August 2000,
ARI acquired American Realty Trust, Inc. (ART) and National Realty, L.P. (NRLP), the predecessor trust which became ART was organized in 1961 to provide investors with a professionally managed, diversified portfolio of real
estate and mortgage loan investments selected to provide opportunities for capital appreciation as well as current income. ART owns a portfolio of real estate and mortgage loan investments. NRLP was organized in 1987, and subsequently acquired all
of the assets and assumed all of the liabilities of 35 public and private limited partnerships. NRLP also owned a portfolio of real estate and mortgage loan investments.

Today, ARI is an externally advised real estate investment company that owns a diverse portfolio of residential apartment communities, office buildings, hotels and other commercial properties. ARI has a preeminent
track record as a developer, completing the construction of 19 apartment properties comprising 4,362 units over the last three years. In addition, ARI owns a high-quality portfolio of land held for future development and continues to invest in
well-located land tracts in high-growth markets primarily in Texas. The Company is an active buyer and seller and during 2005 acquired over $190 million and sold over $225 million of land and income-producing properties. As December 31, 2005,
the Company owned approximately 13,524 units in 69 residential apartment communities, 29 commercial properties comprising almost five million rentable square feet and 11 hotels containing a total of 1,531 rooms. In addition, at December 31,
2005, ARI owned 6,300 acres of land held for development and had almost 1,100 apartment units in five projects under construction. The Company currently owns income-producing properties and land in 21 states as well as in Poland and the U.S. Virgin
Islands. Prime Income Asset Management, LLC (Prime) is the Companys external advisor. Regis Property Management, LLC, an affiliate of Prime, manages the Companys commercial properties. Regis Hotel I, LLC, another Prime
affiliate, manages the Companys hotel investments. ARI engages various third-party companies to lease and manage its apartment properties.

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 Held for Investment

Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), requires that a
property



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##### Index to Financial Statements

be considered impaired if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the
property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value less cost to sell the property. If impairment of a property is
recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the propertys remaining useful life. Depreciation is provided by the
straight-line method over estimated useful lives, which range from five to 40 years.

Real Estate Held-for-Sale

Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. SFAS
No. 144 also requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held-for-sale propertys carrying amount to fair value less costs of sale is required, a
provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale propertys estimated fair value less costs of sale are recorded as an adjustment to the propertys carrying
amount, but not in excess of the propertys carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated.

Investments in Equity Investees

ARI may be
considered to have the ability to exercise significant influence over the operating and investment policies of certain of its investees. Those investees are accounted for using the equity method. Under the equity method, an initial investment,
recorded at cost, is increased by a proportionate share of the investees operating income and any additional investment and decreased by a proportionate share of the investees operating losses and distributions received.

Recognition of Rental Income

Rental income for
commercial and residential property leases is recognized on a straight-line basis. For hotel properties, revenues for room sales and guest services are recognized as rooms are occupied and services are rendered.

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.



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##### Index to Financial Statements

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 its 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

2005 Compared to 2004.    ARI reported net income of $47.4 million in 2005 compared to net income of $33.2
million in 2004. ARIs net income in 2005 included gains on the sales of real estate of $102.5 million compared to gains on the sales of real estate of $108.8 million in 2004. The primary factors contributing to ARIs net income are
discussed in the following paragraphs.



|                             |  |      |         |      |   |        
|---------------------------- |  | ---- | ------- | ---- | - | -------
|                             |  | 2005 |         | 2004
|Rents (dollars in thousands) |  |      |         |      |   |        
|Commercial                   |  | $    | 48,091  |      | $ | 45,669 
|Apartments                   |  |      | 79,024  |      |   | 63,258 
|Hotels                       |  |      | 37,649  |      |   | 36,719 
|Land                         |  |      | 729     |      |   | 610    
|Other                        |  |      | 328     |      |   | 343    
|                             |  |      |         |      |   |        
|                             |  | $    | 165,821 |      | $ | 146,599
|                             |  |      |         |      |   |        

Rents from commercial properties increased due principally to the third quarter 2005 acquisition
of the 600 Las Colinas office building in Irving, Texas. At December 31, 2005, the commercial property portfolio had an occupancy rate of 73 percent, compared to 71 percent at December 31, 2004.

The increase in apartment rents was primarily due to the lease-up of completed apartment projects. During 2005 we completed the construction of nine
apartment communities totaling 2,120 units, all located in Texas. At December 31, 2005, our portfolio of apartment communities was 93.7% occupied compared to 92.2% at December 31, 2004.

Hotel rents increased due principally to higher occupancy and average room rates at the Companys hotel in Poland and higher average room rates at
our domestic hotels. Our hotel property in Poland increased average occupancy from 65 percent in 2004 to 73 percent in 2005 while increasing average daily room rate from US$55 in 2004 to US$63 in 2005. For 2005, the average daily room rate for our
domestic hotels was $95 compared to $86 in 2004. Average occupancy in our domestic hotels decreased from 60 percent in 2004 to 55 percent in 2005, mainly due to average occupancy declines at our Virginia Beach and Williamsburg, Virginia properties.



37



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##### Index to Financial Statements

Restaurant sales increased to $36.8 million in 2005 from $34.5 million in 2004, primarily as a result of
a 6.4 percent increase in same-store sales.



|                                                    |  |      |         |      |   |        
|--------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                    |  | 2005 |         | 2004
|Property Operations Expenses (dollars in thousands) |  |      |         |      |   |        
|Commercial                                          |  | $    | 29,829  |      | $ | 33,109 
|Apartments                                          |  |      | 49,263  |      |   | 41,267 
|Hotels                                              |  |      | 27,074  |      |   | 27,741 
|Land                                                |  |      | 5,921   |      |   | 7,115  
|Other                                               |  |      | 210     |      |   | 764    
|                                                    |  |      |         |      |   |        
|                                                    |  | $    | 112,297 |      | $ | 109,996
|                                                    |  |      |         |      |   |        

The decrease in commercial operations expense was primarily attributable to declines in operating
expenses at the Denver Merchandise Mart along with declines at our New Orleans properties since those properties were effectively shut down after Hurricane Katrina; these declines were somewhat offset by increases due to our third quarter 2005
acquisition of the 600 Las Colinas office building in Irving, Texas. The increase in apartment operations expense was primarily attributable to property replacements and completed apartment construction. Land expenses decreased due to sales of land
throughout 2005. The decrease in land expenses was somewhat offset by the acquisition of two large tracts of land in the fourth quarter of 2005.

Restaurant cost of sales increased to $27.9 million in 2005 from $26.7 million in 2004, due primarily to an increase in restaurant sales. Overall, restaurant operating margin increased slightly from 23 percent in 2004 to 24 percent in 2005.



|                                                     |  |      |        |      |   |       
|---------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                     |  | 2005 |        | 2004
|Depreciation and Amortization (dollars in thousands) |  |      |        |      |   |       
|Commercial                                           |  | $    | 9,527  |      | $ | 11,251
|Apartments                                           |  |      | 9,251  |      |   | 7,514 
|Hotels                                               |  |      | 2,872  |      |   | 3,882 
|Milano Restaurants                                   |  |      | 1,242  |      |   | 950   
|Other                                                |  |      | 39     |      |   | 56    
|                                                     |  |      |        |      |   |       
|                                                     |  | $    | 22,931 |      | $ | 23,653
|                                                     |  |      |        |      |   |       

The increase in apartment depreciation and amortization was primarily attributable to completed
construction. The decrease in commercial and hotel depreciation was due to adjustments of several properties during 2005.

General and
administrative expense decreased from $18.7 million in 2004 to $17.7 million in 2005, primarily due to a decrease in legal fees.

Advisory
fees decreased from $10.7 million in 2004 to $9.3 million in 2005, due mainly to a $2.4 million refund of 2004 operating expense reimbursements received by ARI from Prime in 2005.

Operating income improved from a loss of $8.7 million in 2004 to a $12.5 million profit in 2005, due to increased rental income from our commercial,
apartment and hotel portfolios combined with lower operating expenses.

Gain on foreign currency transaction was $292,000 in 2005, compared
to $3.8 million in 2004. Gain or loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated



38



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##### Index to Financial Statements

in Euros, into the functional currency, the Polish Zloty. The Euro weakened against the Polish Zloty during 2004, which resulted in ARI recognizing a gain.

Gain on settlement of debt was $10.6 million in 2004. The 2004 gain resulted from negotiated settlements regarding mortgage loans on an
office building in Farmers Branch, Texas ($8.4 million) and land properties in Texas ($2.2 million).



|                                        |  |      |        |      |   |       
|--------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                        |  | 2005 |        | 2004
|Interest Expense (dollars in thousands) |  |      |        |      |   |       
|Commercial                              |  | $    | 12,688 |      | $ | 12,817
|Apartments                              |  |      | 29,347 |      |   | 22,183
|Hotels                                  |  |      | 5,037  |      |   | 6,106 
|Land                                    |  |      | 10,710 |      |   | 12,966
|Milano Restaurants                      |  |      | 1,365  |      |   | 1,488 
|Other                                   |  |      | 4,204  |      |   | 7,556 
|                                        |  |      |        |      |   |       
|                                        |  | $    | 63,351 |      | $ | 63,116
|                                        |  |      |        |      |   |       

The increase in apartment interest expense was primarily attributable to increased loan balances
due to completed apartment construction. The decrease in land interest expense was primarily attributable to reduced principal balances payable and reduced interest rates on land mortgages.

Net income fees paid to the Advisor in 2005 increased to $3.7 million from $1.9 million in 2004, due to higher net income (largely driven by increased
gains on land sales) in 2005. Incentive fees paid to the Advisor increased to $1.1 million in 2005 from $-0- in 2004, due to various 2005 sales of commercial properties upon which Prime is paid an incentive fee. Under the terms of the advisory
agreement, incentive fees are paid based in part on Prime first earning the net income fees.

Litigation settlement expense decreased from
$5.8 million in 2004 to $130,000 in 2005 due to the one-time payment in 2004 related to the negotiated settlements regarding the loans on an office building located in Farmers Branch, Texas.

Provision for loan losses of $(2.8) million in 2004 related to the reversal of excess loan reserves. There was no provision for loan losses in 2005. All
of ARIs notes receivable are performing or adequately secured by collateral with values equal to or greater than the outstanding principal balances.

Provision for asset impairment decreased from $8.0 million in 2004 to $-0- in 2005. In 2004, an office building in Farmers Branch, Texas, an office building in New Orleans, Louisiana, and 1.0 acre of land in Farmers
Branch, Texas (exchanged for additional land in the first quarter of 2005) were reduced to their net realizable value.

Loss before gain on
land sales, minority interest and equity in earnings of investees declined from $(62.7) million in 2004 to $(47.1) million in 2005, due mainly to increased operating profits, a reduction in litigation settlement expense and in the provision for
asset impairment, all of which were somewhat offset by a reduction in gain on settlement of debt, increased net income fees expense and incentive fees expense and a reduction in the collection of notes receivable previously written off or fully
reserved.

Gain on land sales increased to $39.9 million in 2005 from $11.8 million in 2004. In 2005, ARI sold approximately 411 acres of
land in 27 transactions at an average sales price of approximately $235,000 per acre. Included in the 2005 transactions are various sales of land totaling almost 149 acres all located in southern California which were sold at an average price of
$253,000 per acre. In 2004, ARI sold approximately 573 acres in 14 transactions (virtually all of which were in Texas) at an average sales price of $70,000 per acre.



39



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##### Index to Financial Statements

Minority interest decreased to $3.1 million in 2005 from $7.3 million in 2004. Minority interest is the
earnings attributable to owners, other than ARI, of certain consolidated entities. Minority interest in 2005 and 2004 was attributable, in part, to the preferred return for limited partner units of Ocean Beach Partners, L.P., Edina Park Plaza
Associates, L.P., Hawthorne Lakes Associates, L.P., and ART Palm, L.P. The decrease is primarily attributable to reduced minority participation in ARI partnerships and to the decrease in minority interest expense related to TCIs operations.

In 2005 and 2004 gains on sale of real estate totaling $102.5 million and $108.8 million were recognized. See NOTE 2. REAL
ESTATE.

Net income from discontinued operations was $57.3 million in 2005 compared to $91.4 million in 2004. The net income relates
to 27 properties that ARI sold in 2004, 18 properties that ARI sold in 2005, and seven properties that ARI sold or held-for-sale through February 22, 2006. The following table summarizes revenue and expense information for the properties sold
and held-for-sale.



|                                                          |  |      |        |   |      |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                          |  | 2005 |        |   | 2004 |  
|Revenue                                                   |  |      |        |   |      |   |        |  
|Rental                                                    |  | $    | 21,478 |   |      | $ | 49,187 |  
|Property operations                                       |  |      | 17,766 |   |      |   | 30,820 |  
|                                                          |  |      |        |   |      |   |        |  
|                                                          |  |      | 3,712  |   |      |   | 18,367 |  
|                                                          |  |     
|Expenses                                                  |  |      |        |   |      |   |        |  
|Interest                                                  |  |      | 8,005  |   |      |   | 16,892 |  
|Depreciation                                              |  |      | 1,049  |   |      |   | 6,788  |  
|                                                          |  |      |        |   |      |   |        |  
|                                                          |  |      | 9,054  |   |      |   | 23,680 |  
|                                                          |  |     
|Net operating loss from discontinued operations           |  |      | (5,342 | ) |      |   | (5,313 | )
|Gain on sale of real estate                               |  |      | 62,617 |   |      |   | 96,994 |  
|Write-down of assets held for sale                        |  |      |       |   |      |   | (2,498 | )
|Equity in gain on sale of real estate by equity investees |  |      |       |   |      |   | 2,212  |  
|                                                          |  |      |        |   |      |   |        |  
|Net income from discontinued operations                   |  | $    | 57,275 |   |      | $ | 91,395 |  
|                                                          |  |      |        |   |      |   |        |  

2004 Compared to 2003.    ARI reported net income of $33.2 million in
2004 compared to net income of $11.9 million in 2003. ARIs net income in 2004 included gains on the sales of real estate of $108.8 million compared to gains on the sales of real estate of $92.6 million in 2003. The primary factors contributing
to ARIs net income are discussed in the following paragraphs.

ARI began consolidating TCIs operations effective March 31,
2003. The consolidation is the principal factor for the increase during 2004 in the following areas: rents, property operations expense, interest expense, depreciation and amortization, general and administrative expense, advisory fees, and gain on
sale of real estate. For these items, 2004 results are also presented without the effect of the consolidation of TCIs operations for the first three months of 2004.



|                             |  |          |         |                |   |         |  |   |        
|---------------------------- |  | -------- | ------- | -------------- | - | ------- |  | - | -------
|                             |  | 2004     |         |               
|                             |  | With TCI |         | Without Q1 TCI |   | 2003   
|Rents (dollars in thousands) |  |          |         |                |   |         |  |   |        
|Commercial                   |  | $        | 45,669  |                | $ | 39,384  |  | $ | 40,417 
|Apartments                   |  |          | 63,258  |                |   | 51,202  |  |   | 42,434 
|Hotels                       |  |          | 36,719  |                |   | 35,557  |  |   | 34,671 
|Land                         |  |          | 610     |                |   | 468     |  |   | 652    
|Other                        |  |          | 343     |                |   | 343     |  |   | 1,842  
|                             |  |          |         |                |   |         |  |   |        
|                             |  | $        | 146,599 |                | $ | 126,954 |  | $ | 120,016
|                             |  |          |         |                |   |         |  |   |        



40



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##### Index to Financial Statements

The increase in apartment rents, without the effect of the consolidation of TCIs operations, was
primarily attributable to completed construction. The increase in hotel rents was primarily attributable to increased occupancy. The decrease in other rents was primarily attributable to the sale of ARIs interest in Realty Advisors Korea, Ltd.
as of June 30, 2003.



|                                                    |  |          |         |                |   |        |  |   |       
|--------------------------------------------------- |  | -------- | ------- | -------------- | - | ------ |  | - | ------
|                                                    |  | 2004     |         |               
|                                                    |  | With TCI |         | Without Q1 TCI |   | 2003  
|Property Operations Expenses (dollars in thousands) |  |          |         |                |   |        |  |   |       
|Commercial                                          |  | $        | 33,109  |                | $ | 29,198 |  | $ | 26,604
|Apartments                                          |  |          | 41,267  |                |   | 33,902 |  |   | 31,167
|Hotels                                              |  |          | 27,741  |                |   | 26,709 |  |   | 25,903
|Land                                                |  |          | 7,115   |                |   | 6,687  |  |   | 5,677 
|Other                                               |  |          | 764     |                |   | 764    |  |   | 389   
|                                                    |  |          |         |                |   |        |  |   |       
|                                                    |  | $        | 109,996 |                | $ | 97,260 |  | $ | 89,740
|                                                    |  |          |         |                |   |        |  |   |       

The increase in commercial operations expense was primarily attributable to increased management
fees. The increase in apartment operations expense was primarily attributable to property replacements and completed apartment construction. The increase in hotel operations expense was primarily attributable to increased personnel costs and an
increase in repairs and replacement expenses.

Restaurant sales and cost of sales increased to $34.5 million and $26.7 million in 2004 from
$33.1 million and $26.1 million in 2003. The increases were primarily attributable to same-store sales increases of 6.4% in 2004 from 2003 levels.

Interest income decreased to $5.3 million in 2004 from $9.2 million income in 2003. The decrease was primarily attributable to the collection of $41.2 million of notes receivable in 2003 and 2004.

Equity in loss of investees improved to $(41,000) in 2004, from $(4.4) million in 2003. Prior to March 31, 2003, ARIs equity in loss of
investees included equity in TCIs operations. See NOTE 5. INVESTMENTS IN EQUITY INVESTEES.

Gain on foreign currency
transaction was $3.8 million in 2004 compared to a $3.3 million loss in 2003. Gain or loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated in Euros, into the functional currency, the
Polish Zloty. The Euro weakened against the Zloty during 2004, which resulted in ARI recognizing a gain, but strengthened against the Zloty during 2003, which resulted in a loss.

Gain on settlement of debt was $10.6 million in 2004, compared to $7.2 million in 2003. The 2004 gain resulted from negotiated settlements regarding
mortgage loans on an office building in Farmers Branch, Texas ($8.4 million) and land properties in Texas ($2.2 million). The 2003 gain resulted from a favorable ruling in a lender dispute regarding the mortgage loans on three office buildings in
New Orleans, Louisiana ($4.4 million) and from the sale through foreclosure of a hotel in Kansas City, Missouri ($2.8 million).

Gain on
condemnation award was $4.8 million in 2003, resulting from the settlement of a dispute regarding a land parcel in Dallas, Texas.



41



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##### Index to Financial Statements

Other income was $2.7 million in 2004 compared to $3.4 million in 2003. In 2004, ARI recognized
$2.3 million from the sale of leasehold interests in California. Other income in 2003 included a $3.4 million litigation settlement.



|                                        |  |          |        |                |   |        |  |   |       
|--------------------------------------- |  | -------- | ------ | -------------- | - | ------ |  | - | ------
|                                        |  | 2004     |        |               
|                                        |  | With TCI |        | Without 1Q TCI |   | 2003  
|Interest Expense (dollars in thousands) |  |          |        |                |   |        |  |   |       
|Commercial                              |  | $        | 12,817 |                | $ | 11,482 |  | $ | 11,771
|Apartments                              |  |          | 22,183 |                |   | 17,638 |  |   | 12,517
|Hotels                                  |  |          | 6,106  |                |   | 5,552  |  |   | 4,953 
|Land                                    |  |          | 12,966 |                |   | 12,345 |  |   | 17,500
|Milano Restaurants                      |  |          | 1,488  |                |   | 1,488  |  |   | 1,127 
|Other                                   |  |          | 7,556  |                |   | 7,556  |  |   | 6,522 
|                                        |  |          |        |                |   |        |  |   |       
|                                        |  | $        | 63,116 |                | $ | 56,061 |  | $ | 54,390
|                                        |  |          |        |                |   |        |  |   |       

The increase in apartment interest expense was primarily attributable to increased loan balances
due to completed apartment construction. The decrease in land interest expense was primarily attributable to reduced principal balances payable and reduced interest rates on land mortgages.



|                                                     |  |          |        |                |   |             |  |   |       
|---------------------------------------------------- |  | -------- | ------ | -------------- | - | ----------- |  | - | ------
|                                                     |  | 2004     |        |               
|                                                     |  | With TCI |        | Without 1Q TCI |   | 2003       
|                                                     |  |          |        |                |   | As Restated
|Depreciation and Amortization (dollars in thousands) |  |          |        |                |   |             |  |   |       
|Commercial                                           |  | $        | 11,251 |                | $ | 9,362       |  | $ | 7,941 
|Apartments                                           |  |          | 7,514  |                |   | 6,060       |  |   | 3,224 
|Hotels                                               |  |          | 3,882  |                |   | 3,545       |  |   | 4,849 
|Milano Restaurants                                   |  |          | 950    |                |   | 949         |  |   | 1,484 
|Other                                                |  |          | 56     |                |   | 37          |  |   | 44    
|                                                     |  |          |        |                |   |             |  |   |       
|                                                     |  | $        | 23,653 |                | $ | 19,953      |  | $ | 17,542
|                                                     |  |          |        |                |   |             |  |   |       

The increase in apartment depreciation and amortization was primarily attributable to completed
construction. The decrease in hotel depreciation and amortization was primarily attributable to the recognition, in 2003, of depreciation from the date of purchase for improvements at one hotel that had been place in service in 1997.

Discount on sale of notes receivable was $389,000 in 2004, compared to $2.2 million in 2003. This represents the discount from the face amount given by
ARI to purchasers of notes receivable. See NOTE 3. NOTES AND INTEREST RECEIVABLE.

General and administrative expenses
decreased to $18.7 million in 2004 from $22.1 million in 2003. The expenses in 2003 include $3.1 million of one-time reimbursements to BCM for legal fees.

Advisory fees increased to $10.7 million in 2004 from $9.3 million in 2003. In 2003, ARI received an operating expense refund of $1.3 million.

Provision for asset impairment increased to $8.0 million in 2004, from $7.7 million in 2003. In 2004, an office building in Farmers Branch, Texas, an
office building in New Orleans, Louisiana, and 1.0 acre of land in Farmers Branch, Texas (exchanged for additional land in the first quarter of 2005) were reduced to their net realizable value.

Minority interest increased to $7.3 million in 2004 from $771,000 in 2003. Minority interest is the earnings attributable to owners, other than ARI, of
certain controlled entities. Minority interest in 2004 and 2003 was



42



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##### Index to Financial Statements

attributable, in part, to the preferred return for limited partner units of Ocean Beach Partners, L.P., Edina Park Plaza Associates, L.P., Hawthorne Lakes
Associates, L.P., and ART Palm, L.P. The increase is primarily attributable to reduced minority participation in ARI partnerships and to the increase in minority interest expense related to TCIs operations.

In 2004 and 2003 gains on sale of real estate totaling $108.8 million and $92.6 million were recognized. See NOTE 2. REAL ESTATE.

Net income from discontinued operations was $91.4 million in 2004 compared to $28.1 million in 2003. The net income relates to 32 properties that ARI
sold in 2003, and 27 properties that ARI sold in 2004, 18 properties that ARI sold in 2005, and seven properties that ARI sold or held-for-sale in 2006. The following table summarizes revenue and expense information for the properties sold and
held-for-sale.



|                                                          |  |      |        |   |      |   |         |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                                          |  | 2004 |        |   | 2003 |  
|Revenue                                                   |  |      |        |   |      |   |         |  
|Rental                                                    |  | $    | 49,187 |   |      | $ | 67,636  |  
|Property operations                                       |  |      | 30,820 |   |      |   | 42,087  |  
|                                                          |  |      |        |   |      |   |         |  
|                                                          |  |      | 18,367 |   |      |   | 25,549  |  
|                                                          |  |     
|Expenses                                                  |  |      |        |   |      |   |         |  
|Interest                                                  |  |      | 16,892 |   |      |   | 25,235  |  
|Depreciation                                              |  |      | 6,788  |   |      |   | 9,677   |  
|                                                          |  |      |        |   |      |   |         |  
|                                                          |  |      | 23,680 |   |      |   | 34,912  |  
|                                                          |  |     
|Net loss from discontinued operations                     |  |      | (5,313 | ) |      |   | (9,363  | )
|Gain on sale of real estate                               |  |      | 96,994 |   |      |   | 48,806  |  
|Write-down of assets held for sale                        |  |      | (2,498 | ) |      |   | (12,036 | )
|Equity in gain on sale of real estate by equity investees |  |      | 2,212  |   |      |   | 716     |  
|                                                          |  |      |        |   |      |   |         |  
|Net income from discontinued operations                   |  | $    | 91,395 |   |      | $ | 28,123  |  
|                                                          |  |      |        |   |      |   |         |  

Liquidity and Capital Resources

General.    Cash and cash equivalents at December 31, 2005 totaled $13.9 million, compared with $22.4 million at
December 31, 2004. ARIs principal sources of cash have been and will continue to be from property operations, proceeds from property sales, and the collection of mortgage notes receivable, borrowings and, to a lesser extent, distributions
from partnerships. Management anticipates that ARIs cash at December 31, 2005, along with cash that will be generated in 2006 from property operations, may not be sufficient to meet all of ARIs cash requirements. Management intends
to selectively sell income producing real estate, refinance or extend real estate debt and seek additional borrowings against real estate to meet its cash requirements. Historically, management has been successful at extending its current maturity
obligations. Management also anticipates funding ongoing real estate construction projects and the acquisition of new real estate from cash generated by property sales, debt refinancings or extensions, and additional borrowings.

ARI reported net income of $47.4 million for 2005, which included the following non-cash charges and credits: gain on sale of real estate of $102.5
million, depreciation and amortization of real estate held for investment and intangible assets of $24.0 million, amortization of deferred borrowing costs of $6.7 million, discount on sale of notes receivable of $15,000 and gain on foreign currency
transactions of $292,000. Net cash used in operating activities was $9.0 million compared to $40.7 million in 2004. Funds provided by increases in accounts payable, other liabilities and deferred gains totaling $24 million, were partially offset by
an $8.3 million increase in other assets.



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##### Index to Financial Statements

Net cash used in investing activities of $43.9 million was primarily due to real estate acquisitions of
$170.3 million, real estate improvements of $60.4 million, earnest money deposits of $2.7 million, funding of notes receivable of $12.1 million, and distributions to equity investees of $4.4 million. These outflows were offset by proceeds from
the sale of real estate of $166.3 million, proceeds from the sale of notes receivable of $33.3 million, and collection of notes receivable of $6.3 million.

Net cash provided by financing activities of $44.4 million was primarily due to proceeds from the funding or refinancing of notes payable of $227.9 million, and stock-secured note proceeds of $3.9 million; offset by
$147.7 million to paydown existing notes payable, $4.4 million for financing costs, $32.8 million for cash advances to affiliates, $1.0 million in dividends paid, and $1.4 million to repurchase preferred stock.

In 2005, ARI purchased approximately 4,100 acres of land primarily in North Texas, but including land in California, the U.S. Virgin Islands, Houston,
Austin, Florida, and Arkansas. The aggregate purchase price was $115.2 million and ARI paid $46.8 million in cash, including closing costs. ARI also purchased three apartments and three commercial buildings for a total of $77.8 million. ARI paid
$25.6 million in cash, including closing costs.

In 2005, ARI sold approximately 400 acres of land primarily in North Texas and Palm
Desert, California, but including land in Houston, Austin, and Nashville, Tennessee. The aggregate sales price was $96.6 million and ARI received net cash of $23.8 million, after paying off or paying down $24.1 million in mortgage debt. ARI also
sold eight apartments and seven commercial buildings for a total of $130.6 million and received net cash of $45.8 million after the payoff or assumption of mortgage debt by the purchasers. Purchase money financing totaling $42.2 million was provided
on 2005 sales.

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

Equity Investments.    During the
fourth quarter of 1988, ARI began purchasing shares of IORI and TCI, both of which had the same advisor as ARI until June 30, 2003. It is anticipated that additional equity securities of IORI and TCI may be acquired in the future through open
market and negotiated transactions to the extent ARIs liquidity permits.

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

In 2005, ARI declared and paid preferred dividends to its Preferred stockholders totaling $1.0 million.

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



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##### Index to Financial Statements

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.

Contractual Obligations

ARI has contractual obligations and commitments primarily with regards to the payment of mortgages.

The following table aggregates ARIs expected contractual obligations and commitments subsequent to December 31, 2005.



|                                                                                   |  |                        |           |                  |   |           |  |           |         |                   |   |        |  |   |        
|---------------------------------------------------------------------------------- |  | ---------------------- | --------- | ---------------- | - | --------- |  | --------- | ------- | ----------------- | - | ------ |  | - | -------
|                                                                                   |  | Payments Due by Period
|Contractual Obligations                                                            |  | Total                  |           | Less than 1 year |   | 1-3 years |  | 3-5 years |         | More than 5 years
|                                                                                   |  | dollars in thousands  
|Long-Term Debt Obligations(1)                                                      |  | $                      | 1,035,219 |                  | $ | 298,197   |  | $         | 208,697 |                   | $ | 60,605 |  | $ | 467,720
|Capital Lease Obligations                                                          |  |                        |          |                  |   |          |  |           |        |                   |   |       |  |   |       
|Operating Lease Obligations                                                        |  |                        | 15,747    |                  |   | 2,396     |  |           | 4,912   |                   |   | 3,480  |  |   | 4,959  
|Purchase Obligations                                                               |  |                        |          |                  |   |          |  |           |        |                   |   |       |  |   |       
|Other Long-Term Liabilities Reflected on the Registrants Balance Sheet under GAAP |  |                        | 2,163     |                  |   | 2,163     |  |           |        |                   |   |       |  |   |       
|                                                                                   |  |                        |           |                  |   |           |  |           |         |                   |   |        |  |   |        
|Total                                                                              |  | $                      | 1,053,129 |                  | $ | 302,756   |  | $         | 213,609 |                   | $ | 64,085 |  | $ | 472,679
|                                                                                   |  |                        |           |                  |   |           |  |           |         |                   |   |        |  |   |        

---

|(1) | ARIs long-term debt may contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the note to
become due immediately.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other long-term liabilities represent ARIs intentions to purchase the interests of general and
limited purchases of partnerships formed to construct residential properties.

Environmental Matters

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

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

Newly Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123-R, Share-Based Payment. This Statement
addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for (a) equity instruments of the company, such as stock options, or (b) liabilities, such as those related to
performance units, that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments.



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##### Index to Financial Statements

SFAS No. 123-R, which is effective for the Company beginning in the first quarter of fiscal year
2006, eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, and generally requires that such transactions be accounted for using prescribed fair-value-based methods. SFAS No. 123-R permits
public companies to adopt its requirements using one of two methods: (a) a modified prospective method in which compensation costs are recognized beginning with the effective date based on the requirements of SFAS No. 123-R for
all share-based payments granted after the effective date and based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123-R that remain unvested on the effective date or
(b) a modified retrospective method which includes the requirements of the modified prospective method described above, but also permits companies to restate based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures either for all periods presented or prior interim periods of the year of adoption.

The Company has
decided to adopt SFAS No. 123-R using the modified prospective method. SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date. All of ARIs options were
fully vested as of the effective date, and ARI has no outstanding options that were granted, modified or settled after the effective date, so additional compensation costs for previously granted awards will not be recognized. The Company does not
believe the adoption of SFAS No. 123(R) will have a material impact on its financial statements or results of operations.

In May
2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (Statement No. 154). Statement No. 154, which replaces APB Opinion No. 20, Accounting Changes and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of
changes in accounting principle to prior periods financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. Statement No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of Statement No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows of ARI.

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (Issue 04-5), which provides guidance in determining whether a general partner controls a limited partnership.
Issue 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited
partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made
in the ordinary course of the limited partnerships business and thereby preclude the general partner from exercising unilateral control over the partnership. The adoption of Issue 04-5 by us for new or modified limited partnership arrangements
is effective June 30, 2005 and for existing limited partnership arrangements effective January 1, 2006. We do not expect that we will be required to consolidate our current unconsolidated joint venture investments nor do we expect Issue
04-5 to have a material effect on our consolidated financial statements.

At its June 2005 meeting, the EITF reached a consensus
regarding Issue No. 05-6 (Issue 05-6),Determining the Amortization Period for Leasehold Improvements. Issue 05-6 is effective for periods beginning after June 29, 2005. The guidance requires that leasehold improvements
acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of acquisition or purchase.
The adoption of Issue 05-6 did not have a material impact to our financial condition or results of operations.



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##### Index to Financial Statements

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.



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##### Index to Financial Statements

|ITEM 7A.QUANTITATIVE | AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|-------------------- | ----------------------------------------------

ARIs future operations, cash flow and fair values of financial instruments are partially dependent upon the then existing market interest rates and market equity prices. Market risk is the changes in the market rates and prices and
the affect of the changes on the future operations. Market risk is managed by matching a propertys anticipated net operating income to an appropriate financing.

ARI is exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. ARI does not hold financial instruments for trading or other speculative purposes, but
rather issues these financial instruments to finance its portfolio of real estate assets. ARIs interest rate sensitivity position is managed by ARIs capital markets department. Interest rate sensitivity is the relationship between
changes in market interest rates and the fair value of market rate sensitive assets and liabilities. ARIs earnings are affected as changes in short-term interest rates impact its cost of variable rate debt and maturing fixed rate debt. A large
portion of ARIs market risk is exposure to short-term interest rates from variable rate borrowings. The impact on ARIs financial statements of refinancing fixed debt that matured during 2005 was not material. As permitted, management
intends to convert a significant portion of those borrowings from variable rates to fixed rates. If market interest rates for variable rate debt average 100 basis points more in 2006 than they did during 2005, ARIs interest expense would
increase and net income would decrease by $2.3 million. This amount is determined by considering the impact of hypothetical interest rates on ARIs borrowing cost. The analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific
actions that would be taken and their possible effects, the sensitivity analysis assumes no change in ARIs financial structure.

The
following table contains only those exposures that existed at December 31, 2005. Anticipation of exposures of risk on positions that could possibly arise was not considered. ARIs ultimate interest rate risk and its effect on operations
will depend on future capital market exposures, which cannot be anticipated with a probable assurance level. Dollars in thousands.



|                                      |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | - |  | - | ------- |  | - | -------
|                                      |  | 2006 |         |   | 2007 |   |        | 2008 |  |   | 2009   |   |  | 2010 |        |   | Thereafter |   | Total 
|Assets                                |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Marketable securities at market value |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 7,446  
|Notes receivable                      |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Variable interest ratefair value     |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 22,326 
|Instruments maturities               |  | $    | 5,633   |   |      | $ | 14,845 |      |  | $ | 2,775  |   |  | $    |       |   |            | $ |       |   |  | $ |        |  | $ | 23,253 
|Instruments amortization             |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |   |  |   |        |  |   |       
|Interest                              |  |      | 2,418   |   |      |   | 706    |      |  |   | 284    |   |  |      |       |   |            |   |       |   |  |   |        |  |   | 3,408  
|Average rate                          |  |      | 10.3    | % |      |   | 5.1    | %    |  |   | 8.7    | % |  |      |       |   |            |   |       |   |  |   |        |  |   |        
|Fixed interest ratefair value        |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 53,318 
|Instruments maturities               |  | $    | 35,884  |   |      | $ | 2,463  |      |  | $ | 7,190  |   |  | $    | 600    |   |            | $ |       |   |  | $ | 10,109  |  | $ | 56,246 
|Instruments amortization             |  |      | 111     |   |      |   | 50     |      |  |   |       |   |  |      |       |   |            |   |       |   |  |   |        |  |   | 161    
|Interest                              |  |      | 4,721   |   |      |   | 2,653  |      |  |   | 1,517  |   |  |      | 1,384  |   |            |   | 1,380  |   |  |   | 5,879   |  |   | 17,534 
|Average rate                          |  |      | 8.2     | % |      |   | 9.5    | %    |  |   | 9.6    | % |  |      | 9.3    | % |            |   | 9.5    | % |  |   |        |  |   |        
|Liabilities                           |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Notes payable                         |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Variable interest ratefair value     |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 222,726
|Instruments maturities               |  | $    | 132,387 |   |      | $ | 46,767 |      |  | $ | 15,323 |   |  | $    | 6,737  |   |            | $ | 22,360 |   |  | $ | 10,993  |  | $ | 234,567
|Instruments amortization             |  |      | 2,628   |   |      |   | 1,735  |      |  |   | 1,645  |   |  |      | 1,574  |   |            |   | 1,346  |   |  |   | 14,700  |  |   | 23,628 
|Interest                              |  |      | 14,116  |   |      |   | 6,878  |      |  |   | 4,476  |   |  |      | 3,664  |   |            |   | 2,456  |   |  |   | 11,710  |  |   | 43,300 
|Average rate                          |  |      | 7.7     | % |      |   | 7.0    | %    |  |   | 6.8    | % |  |      | 6.8    | % |            |   | 6.5    | % |  |   |        |  |   |        
|Fixed interest ratefair value        |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 723,570
|Instruments maturities               |  | $    | 152,468 |   |      | $ | 58,749 |      |  | $ | 65,226 |   |  | $    | 8,353  |   |            | $ | 2,186  |   |  | $ | 121,184 |  | $ | 408,166
|Instruments amortization             |  |      | 10,714  |   |      |   | 10,034 |      |  |   | 9,218  |   |  |      | 9,076  |   |            |   | 8,973  |   |  |   | 320,843 |  |   | 368,858
|Interest                              |  |      | 50,641  |   |      |   | 41,454 |      |  |   | 36,076 |   |  |      | 31,387 |   |            |   | 30,278 |   |  |   | 443,380 |  |   | 633,216
|Average rate                          |  |      | 7.1     | % |      |   | 7.0    | %    |  |   | 7.1    | % |  |      | 6.7    | % |            |   | 6.7    | % |  |   |        |  |   |        



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##### Index to Financial Statements

|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | --------------------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                             |  |     
|-------------------------------------------------------------------------------------------- |  | ----
|                                                                                             |  | Page
|Financial Statements                                                                         |  |     
|Reports of Independent Registered Public Accounting Firms                                    |  | 50  
|Consolidated Balance SheetsDecember 31, 2005 and 2004                                       |  | 52  
|Consolidated Statements of OperationsYears Ended December 31, 2005, 2004 and 2003           |  | 53  
|Consolidated Statements of Stockholders EquityYears Ended December 31, 2005, 2004 and 2003 |  | 54  
|Consolidated Statements of Cash FlowsYears Ended December 31, 2005, 2004 and 2003           |  | 55  
|Notes to Consolidated Financial Statements                                                   |  | 57  
|                                                                                             | 
|Financial Statement Schedules                                                                |  |     
|Schedule IIIReal Estate and Accumulated Depreciation                                        |  | 95  
|Schedule IVMortgage Loans on Real Estate                                                    |  | 106 

All other schedules are omitted because they are not required, are not applicable, or the
information required is included in the Consolidated Financial Statements or the notes thereto.



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors of

American Realty Investors, Inc.

Dallas, Texas

We have audited the accompanying consolidated balance sheets of American Realty Investors, Inc. and Subsidiaries as of December 31, 2005 and 2004, and
the related consolidated statements of operations, stockholders equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
described in Note 22, American Realty Investors, Inc.s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate to meet its liquidity needs.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American
Realty Investors, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the
United States of America.

Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken
as a whole. Schedules III and IV are presented for the purpose of complying with the Securities and Exchange Commissions rules and is not a required part of the basic consolidated financial statements. These schedules have been subjected to
the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.

Farmer, Fuqua & Huff, PC

Plano, Texas

March 27, 2006



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors of

American Realty Investors, Inc.

Dallas, Texas

We have audited the accompanying consolidated
statements of operations, stockholders equity and cash flow of American Realty Investors, Inc. for the year ended December 31, 2003. We have also audited the schedules listed in the accompanying index. These financial statements and the
schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As described in Note 22, American Realty Investors, Inc.s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate to meet its liquidity
needs.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
results of their operations and their cash flows of American Realty Investors, Inc. for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.

BDO SEIDMAN, LLP

Dallas,
Texas

April 15, 2004 (except for Notes 18 and 19 which are as of March 27, 2006)



51



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                                                                                        |  | December 31, 2005      |           |   | December 31, 2004 |  
|                                                                                                                                                                                                                                                        |  | (dollars in thousands) |          
|Assets                                                                                                                                                                                                                                                  |  |                        |           |   |                   |  
|Real estate held for investment                                                                                                                                                                                                                         |  | $                      | 1,025,661 |   |                   | $ | 877,677   |  
|Lessaccumulated depreciation                                                                                                                                                                                                                           |  |                        | (153,597  | ) |                   |   | (157,138  | )
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                        | 872,064   |   |                   |   | 720,539   |  
|Real estate held for sale, net of depreciation                                                                                                                                                                                                          |  |                        | 172,303   |   |                   |   | 192,533   |  
|Real estate subject to sales contract                                                                                                                                                                                                                   |  |                        | 68,738    |   |                   |   | 70,350    |  
|Notes and interest receivable                                                                                                                                                                                                                           |  |                        |           |   |                   |   |           |  
|Performing ($44,500 in 2005 and $43,605 in 2004 from affiliates)                                                                                                                                                                                        |  |                        | 70,894    |   |                   |   | 67,894    |  
|Non-performing                                                                                                                                                                                                                                          |  |                        | 11,546    |   |                   |   | 6,632     |  
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                        | 82,440    |   |                   |   | 74,526    |  
|Lessallowance for estimated losses                                                                                                                                                                                                                     |  |                        | (1,000    | ) |                   |   | (1,865    | )
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                        | 81,440    |   |                   |   | 72,661    |  
|Restaurant equipment                                                                                                                                                                                                                                    |  |                        | 13,911    |   |                   |   | 13,747    |  
|Lessaccumulated depreciation                                                                                                                                                                                                                           |  |                        | (7,528    | ) |                   |   | (6,608    | )
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                        | 6,383     |   |                   |   | 7,139     |  
|Marketable securities, at market value                                                                                                                                                                                                                  |  |                        | 7,446     |   |                   |   | 6,670     |  
|Cash and cash equivalents                                                                                                                                                                                                                               |  |                        | 13,904    |   |                   |   | 22,401    |  
|Investments in equity investees                                                                                                                                                                                                                         |  |                        | 13,521    |   |                   |   | 8,212     |  
|Goodwill, net of accumulated amortization ($1,763 in 2005 and 2004)                                                                                                                                                                                     |  |                        | 11,858    |   |                   |   | 11,858    |  
|Other intangibles, net of accumulated amortization ($926 in 2005 and $871 in 2004)                                                                                                                                                                      |  |                        | 1,449     |   |                   |   | 1,480     |  
|Other assets ($30,441 in 2005 and $27,704 in 2004 from affiliates)                                                                                                                                                                                      |  |                        | 96,689    |   |                   |   | 77,000    |  
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  | $                      | 1,345,795 |   |                   | $ | 1,190,843 |  
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                       
|Liabilities and Stockholders Equity                                                                                                                                                                                                                    |  |                        |           |   |                   |  
|Liabilities                                                                                                                                                                                                                                             |  |                        |           |   |                   |   |           |  
|Notes and interest payable ($45,530 in 2005 and $36,298 in 2004 to affiliate)                                                                                                                                                                           |  | $                      | 817,944   |   |                   | $ | 722,985   |  
|Liabilities related to assets held-for-sale                                                                                                                                                                                                             |  |                        | 144,555   |   |                   |   | 156,959   |  
|Liabilities subject to sales contract                                                                                                                                                                                                                   |  |                        | 59,323    |   |                   |   | 59,977    |  
|Stock-secured notes payable                                                                                                                                                                                                                             |  |                        | 22,549    |   |                   |   | 18,663    |  
|Accounts payable and other liabilities ($4,667 in 2005 and $2,557 in 2004 to affiliates)                                                                                                                                                                |  |                        | 93,842    |   |                   |   | 71,357    |  
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                        | 1,138,213 |   |                   |   | 1,029,941 |  
|Commitments and contingencies                                                                                                                                                                                                                           |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                       
|Minority interest                                                                                                                                                                                                                                       |  |                        | 59,185    |   |                   |   | 57,893    |  
|Stockholders equity                                                                                                                                                                                                                                    |  |                        |           |   |                   |   |           |  
|Preferred Stock, $2.00 par value, authorized 50,000,000 shares, issued and outstanding Series A, 3,390,913 shares in 2005 and 3,469,350 shares
in 2004 (liquidation preference $33,909), including 900,000 shares in 2005 and 2004 held by subsidiaries |  |                        | 4,982     |   |                   |   | 5,139     |  
|Series E, 50,000 shares in 2004                                                                                                                                                                                                                         |  |                        |          |   |                   |   | 100       |  
|Common Stock, $.01 par value, authorized 100,000,000 shares; issued 11,592,272 shares in 2005 and 2004                                                                                                                                                  |  |                        | 114       |   |                   |   | 114       |  
|Treasury stock, at cost, 1,443,272 shares in 2005 and 2004                                                                                                                                                                                              |  |                        | (15,146   | ) |                   |   | (15,146   | )
|Paid-in capital                                                                                                                                                                                                                                         |  |                        | 93,389    |   |                   |   | 94,416    |  
|Retained earnings                                                                                                                                                                                                                                       |  |                        | 64,805    |   |                   |   | 19,934    |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                           |  |                        | 253       |   |                   |   | (1,548    | )
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  |                        | 148,397   |   |                   |   | 103,009   |  
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                        |  | $                      | 1,345,795 |   |                   | $ | 1,190,843 |  
|                                                                                                                                                                                                                                                        |  |                        |           |   |                   |   |           |  

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



52



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                        |  | Years Ended December 31, |           
|                                                                                                        |  | 2005                     |            |   | 2004 |   |            | 2003 | 
|                                                                                                        |  | (dollars in thousands)   |           
|Revenues:                                                                                               |  |                          |            |   |      |   |            |      |  |   |            |  
|Rental and other property revenues ($1,091 in 2005, $1,223 in 2004, and $1,102 in 2003 from affiliates) |  | $                        | 165,821    |   |      | $ | 146,599    |      |  | $ | 120,016    |  
|Restaurant sales                                                                                        |  |                          | 36,818     |   |      |   | 34,525     |      |  |   | 33,057     |  
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Total operating revenues                                                                                |  |                          | 202,639    |   |      |   | 181,124    |      |  |   | 153,073    |  
|                                                                                                        |  |                          |           
|Expenses                                                                                                |  |                          |            |   |      |   |            |      |  |   |            |  
|Property operating expenses ($7,646 in 2005, $5,182 in 2004, and $4,273 in 2003 to affiliates)          |  |                          | 112,297    |   |      |   | 109,996    |      |  |   | 89,740     |  
|Restaurant cost of sales                                                                                |  |                          | 27,906     |   |      |   | 26,713     |      |  |   | 26,051     |  
|Depreciation and amortization                                                                           |  |                          | 22,931     |   |      |   | 23,653     |      |  |   | 17,542     |  
|General and administrative ($4,407 in 2005, $2,470 in 2004, and $8,282 in 2003 to affiliates)           |  |                          | 17,696     |   |      |   | 18,712     |      |  |   | 22,124     |  
|Advisory fee to affiliate                                                                               |  |                          | 9,336      |   |      |   | 10,728     |      |  |   | 9,345      |  
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                                                                                |  |                          | 190,166    |   |      |   | 189,802    |      |  |   | 164,802    |  
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Operating income (loss)                                                                                 |  |                          | 12,473     |   |      |   | (8,678     | )    |  |   | (11,729    | )
|                                                                                                        |  |                          |           
|Other income (expense)                                                                                  |  |                          |            |   |      |   |            |      |  |   |            |  
|Interest income ($2,379 in 2005, $3,258 in 2004, and $4,035 in 2003 from affiliates)                    |  |                          | 5,439      |   |      |   | 5,347      |      |  |   | 9,222      |  
|Gain (loss) on foreign currency transaction                                                             |  |                          | 292        |   |      |   | 3,766      |      |  |   | (3,309     | )
|Gain on settlement of debt                                                                              |  |                          |           |   |      |   | 10,649     |      |  |   | 7,210      |  
|Gain on condemnation award                                                                              |  |                          |           |   |      |   |           |      |  |   | 4,800      |  
|Other income                                                                                            |  |                          | 3,007      |   |      |   | 2,764      |      |  |   | 3,408      |  
|Mortgage and loan interest ($2,510 in 2005, $2,825 in 2004, and $833 in 2003 to affiliates)             |  |                          | (63,351    | ) |      |   | (63,116    | )    |  |   | (54,390    | )
|Discount on sale of notes receivable                                                                    |  |                          | (15        | ) |      |   | (389       | )    |  |   | (2,220     | )
|Net income fee to affiliate                                                                             |  |                          | (3,712     | ) |      |   | (1,933     | )    |  |   |           |  
|Incentive fee to affiliate                                                                              |  |                          | (1,128     | ) |      |   |           |      |  |   |           |  
|Litigation settlement                                                                                   |  |                          | (130       | ) |      |   | (5,848     | )    |  |   | (15        | )
|Provision for loan losses                                                                               |  |                          |           |   |      |   | 2,768      |      |  |   | (158       | )
|Provision for asset impairment                                                                          |  |                          |           |   |      |   | (8,001     | )    |  |   | (7,698     | )
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Total other income (expense)                                                                            |  |                          | (59,598    | ) |      |   | (53,993    | )    |  |   | (43,150    | )
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Loss before gain on land sales, minority interest, and equity in earnings of investees                  |  |                          | (47,125    | ) |      |   | (62,671    | )    |  |   | (54,879    | )
|Gain on land sales                                                                                      |  |                          | 39,926     |   |      |   | 11,781     |      |  |   | 43,831     |  
|Minority interest                                                                                       |  |                          | (3,056     | ) |      |   | (7,270     | )    |  |   | (771       | )
|Equity in income (loss) of investees                                                                    |  |                          | 397        |   |      |   | (41        | )    |  |   | (4,441     | )
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Loss from continuing operations                                                                         |  |                          | (9,858     | ) |      |   | (58,201    | )    |  |   | (16,260    | )
|Income from discontinued operations (NOTE 19)                                                           |  |                          | 57,275     |   |      |   | 91,395     |      |  |   | 28,123     |  
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                              |  |                          | 47,417     |   |      |   | 33,194     |      |  |   | 11,863     |  
|Preferred dividend requirement                                                                          |  |                          | (2,572     | ) |      |   | (2,601     | )    |  |   | (2,351     | )
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Net income applicable to Common shares                                                                  |  | $                        | 44,845     |   |      | $ | 30,593     |      |  | $ | 9,512      |  
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Earnings per share-basic and diluted                                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Loss from continuing operations                                                                         |  | $                        | (1.22      | ) |      | $ | (5.76      | )    |  | $ | (1.73      | )
|Discontinued operations                                                                                 |  |                          | 5.64       |   |      |   | 8.66       |      |  |   | 2.61       |  
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Net income applicable to Common shares                                                                  |  | $                        | 4.42       |   |      | $ | 2.90       |      |  | $ | .88        |  
|                                                                                                        |  |                          |            |   |      |   |            |      |  |   |            |  
|Weighted average Common shares used in computing earnings per share                                     |  |                          | 10,149,000 |   |      |   | 10,559,571 |      |  |   | 10,789,352 |  

Convertible Preferred Stock (2,490,913, 2,569,350, and 2,325,370 shares) and options to purchase
70,750, 76,750, and 98,250, shares of ARIs Common Stock were excluded from the computation of diluted earnings per share for 2005, 2004, and 2003, respectively, because the effect of their inclusion would be antidilutive.

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



53



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ---------------------- | ----- | - | ---------------------- | - | ---- | ----------- |  | -------------- | --- |  | -------------- | ------- | - | ----------------- | - | ------ | ------------------------------------------ |  | - | ------------------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                               |  | Series APreferredStock |       |   | Series EPreferredStock |   |      | CommonStock |  | Treasury Stock |     |  | Paid-inCapital |         |   | Retained Earnings |   |        | AccumulatedOtherComprehensiveIncome/(Loss) |  |   | StockholdersEquity |  
|                                                                               |  | (dollars in thousands) |      
|Balance, January 1, 2003                                                       |  | $                      | 4,654 |   |                        | $ | 100  |             |  | $              | 114 |  |                |        |   |                   | $ | 93,954 |                                            |  | $ | (22,499             | ) |  | $ | 3,204  |   |  | $ | 79,527  |  
|Comprehensive income                                                           |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|Unrealized gain on foreign currency translation                                |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   |                    |   |  |   | 14     |   |  |   | 14      |  
|Recognition of previously unrealized gain, upon the sale of foreign operations |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   |                    |   |  |   | (3,117 | ) |  |   | (3,117  | )
|Net income                                                                     |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | 11,863              |   |  |   |       |   |  |   | 11,863  |  
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   | 8,760   |  
|Issuance of Common Stock                                                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   | 195    |                                            |  |   |                    |   |  |   |       |   |  |   | 195     |  
|Repurchase of Series A Preferred Stock                                         |  |                        | (3    | ) |                        |   |     |             |  |                |    |  |                |        |   |                   |   | (12    | )                                          |  |   | 1                   |   |  |   |       |   |  |   | (14     | )
|Common shares held by acquired company                                         |  |                        |      |   |                        |   |     |             |  |                |    |  |                | (9,924  | ) |                   |   |       |                                            |  |   |                    |   |  |   |       |   |  |   | (9,924  | )
|Exchange of investments with affiliates                                        |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   | 678    |                                            |  |   |                    |   |  |   |       |   |  |   | 678     |  
|Series A Preferred Stock cash dividend ($1.00 per share)                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   | (2,321 | )                                          |  |   |                    |   |  |   |       |   |  |   | (2,321  | )
|Series E Preferred Stock cash dividend ($0.60 per share)                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   | (30    | )                                          |  |   |                    |   |  |   |       |   |  |   | (30     | )
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2003                                                     |  | $                      | 4,651 |   |                        | $ | 100  |             |  | $              | 114 |  | $              | (9,924  | ) |                   | $ | 92,464 |                                            |  | $ | (10,635             | ) |  | $ | 101    |   |  | $ | 76,871  |  
|Comprehensive income:                                                          |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|Unrealized loss on foreign currency translation                                |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   |                    |   |  |   | (3,229 | ) |  |   | (3,229  | )
|Unrealized gain on marketable securities                                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   |                    |   |  |   | 1,580  |   |  |   | 1,580   |  
|Net income                                                                     |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | 33,194              |   |  |   |       |   |  |   | 33,194  |  
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   | 31,545  |  
|Repurchase of Common Stock                                                     |  |                        |      |   |                        |   |     |             |  |                |    |  |                | (5,222  | ) |                   |   |       |                                            |  |   |                    |   |  |   |       |   |  |   | (5,222  | )
|Common Stock dividends (pre- merger)                                           |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | (26                 | ) |  |   |       |   |  |   | (26     | )
|Repurchase of Series A Preferred Stock                                         |  |                        | (12   | ) |                        |   |     |             |  |                |    |  |                |        |   |                   |   | (48    | )                                          |  |   | 2                   |   |  |   |       |   |  |   | (58     | )
|Issuance of Series A Preferred Stock                                           |  |                        | 500   |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   | 2,000  |                                            |  |   |                    |   |  |   |       |   |  |   | 2,500   |  
|Series A Preferred Stock cash dividend ($1.00 per share)                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | (2,571              | ) |  |   |       |   |  |   | (2,571  | )
|Series E Preferred Stock cash dividend ($0.60 per share)                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | (30                 | ) |  |   |       |   |  |   | (30     | )
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2004                                                     |  | $                      | 5,139 |   |                        | $ | 100  |             |  | $              | 114 |  | $              | (15,146 | ) |                   | $ | 94,416 |                                            |  | $ | 19,934              |   |  | $ | (1,548 | ) |  | $ | 103,009 |  
|Comprehensive income:                                                          |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|Unrealized gain on foreign currency translation                                |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   |                    |   |  |   | 935    |   |  |   | 935     |  
|Unrealized gain on marketable securities                                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   |                    |   |  |   | 866    |   |  |   | 866     |  
|Net income                                                                     |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | 47,417              |   |  |   |       |   |  |   | 47,417  |  
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   | 49,218  |  
|Common Stock Dividends (Pre-merger)                                            |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | (1                  | ) |  |   |       |   |  |   | (1      | )
|Repurchase of Series A Preferred Stock                                         |  |                        | (157  | ) |                        |   |     |             |  |                |    |  |                |        |   |                   |   | (1,027 | )                                          |  |   | 27                  |   |  |   |       |   |  |   | (1,157  | )
|Repurchase of Series E Preferred Stock                                         |  |                        |      |   |                        |   | (100 | )           |  |                |    |  |                |        |   |                   |   |       |                                            |  |   |                    |   |  |   |       |   |  |   | (100    | )
|Series A Preferred Stock cash dividend ($1.00 per share)                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | (2,550              | ) |  |   |       |   |  |   | (2,550  | )
|Series E Preferred Stock cash dividend ($0.45 per share)                       |  |                        |      |   |                        |   |     |             |  |                |    |  |                |        |   |                   |   |       |                                            |  |   | (22                 | ) |  |   |       |   |  |   | (22     | )
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2005                                                     |  | $                      | 4,982 |   |                        | $ |     |             |  | $              | 114 |  | $              | (15,146 | ) |                   | $ | 93,389 |                                            |  | $ | 64,805              |   |  | $ | 253    |   |  | $ | 148,397 |  
|                                                                               |  |                        |       |   |                        |   |      |             |  |                |     |  |                |         |   |                   |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |         |  

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



54



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                                                                                |  | For the Years Ended December 31, |         
|                                                                                                                                                |  | 2005                             |          |   | 2004 |   |          | 2003 | 
|                                                                                                                                                |  | (dollars in thousands)           |         
|Cash Flows From Operating Activities                                                                                                            |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net income                                                                                                                                      |  | $                                | 47,417   |   |      | $ | 33,194   |      |  | $ | 11,863  |  
|Adjustments to reconcile net income to net cash used in operating activities                                                                    |  |                                  |          |   |      |   |          |      |  |   |         |  
|Gain on sale of real estate                                                                                                                     |  |                                  | (102,543 | ) |      |   | (110,987 | )    |  |   | (93,353 | )
|Depreciation and amortization                                                                                                                   |  |                                  | 23,981   |   |      |   | 30,440   |      |  |   | 27,216  |  
|Amortization of deferred borrowing costs                                                                                                        |  |                                  | 6,671    |   |      |   | 10,488   |      |  |   | 10,540  |  
|Provision for asset impairment                                                                                                                  |  |                                  |         |   |      |   | 10,499   |      |  |   | 19,892  |  
|Discount on sale of notes receivable                                                                                                            |  |                                  | 15       |   |      |   | 389      |      |  |   | 2,324   |  
|Provision for loan losses                                                                                                                       |  |                                  |         |   |      |   | (2,768   | )    |  |   | 158     |  
|Gain on settlement of debt                                                                                                                      |  |                                  |         |   |      |   | (10,649  | )    |  |   | (7,210  | )
|Gain on condemnation award                                                                                                                      |  |                                  |         |   |      |   |         |      |  |   | (4,800  | )
|Equity in (income) loss of investees                                                                                                            |  |                                  | (397     | ) |      |   | 41       |      |  |   | 4,441   |  
|(Gain) loss on foreign currency transactions                                                                                                    |  |                                  | (292     | ) |      |   | (3,766   | )    |  |   | 3,306   |  
|(Increase) decrease in accrued interest receivable                                                                                              |  |                                  | 1,008    |   |      |   | 1,318    |      |  |   | (3,992  | )
|(Increase) decrease in other assets                                                                                                             |  |                                  | (8,322   | ) |      |   | (3,548   | )    |  |   | 7,177   |  
|Increase (decrease) in accrued interest payable                                                                                                 |  |                                  | (1,984   | ) |      |   | 2,582    |      |  |   | 1,723   |  
|Increase (decrease) in accounts payable and other liabilities (includes $2,110 in 2005, $14,864 in 2004, and $(36,160) in 2003 with
affiliates) |  |                                  | 24,006   |   |      |   | 199      |      |  |   | 7,581   |  
|Increase (decrease) in minority interest                                                                                                        |  |                                  | 1,469    |   |      |   | 1,819    |      |  |   | (2,621  | )
|                                                                                                                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net cash used in operating activities                                                                                                           |  | $                                | (8,971   | ) |      | $ | (40,749  | )    |  | $ | (15,755 | )
|                                                                                                                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|Cash Flows From Investing Activities                                                                                                            |  |                                  |          |   |      |   |          |      |  |   |         |  
|Collections on notes receivable ($2,490 in 2005, $718 in 2004, and $2,535 in 2003 from affiliates)                                              |  | $                                | 6,277    |   |      | $ | 11,626   |      |  | $ | 29,622  |  
|Proceeds from sale of notes receivable                                                                                                          |  |                                  | 33,265   |   |      |   | 8,264    |      |  |   | 33,866  |  
|Notes receivable funded                                                                                                                         |  |                                  | (12,139  | ) |      |   | (6,848   | )    |  |   | (3,593  | )
|Proceeds from sale of real estate                                                                                                               |  |                                  | 166,254  |   |      |   | 273,393  |      |  |   | 163,097 |  
|Purchase of marketable equity securities                                                                                                        |  |                                  |         |   |      |   |         |      |  |   | (1,640  | )
|Proceeds from sale of marketable equity securities                                                                                              |  |                                  | 84       |   |      |   |         |      |  |   | 179     |  
|Acquisitions of real estate                                                                                                                     |  |                                  | (170,333 | ) |      |   | (57,877  | )    |  |   | (15,313 | )
|Real estate improvements                                                                                                                        |  |                                  | (60,356  | ) |      |   | (165,154 | )    |  |   | (50,997 | )
|Restaurant equipment purchased                                                                                                                  |  |                                  | (810     | ) |      |   | (1,527   | )    |  |   | (1,615  | )
|Proceeds from sale of restaurant equipment                                                                                                      |  |                                  | 1,360    |   |      |   | 94       |      |  |   | 438     |  
|Earnest money deposits                                                                                                                          |  |                                  | (2,670   | ) |      |   | (4,825   | )    |  |   | (8,594  | )
|Distribution from (to) equity investees                                                                                                         |  |                                  | (4,374   | ) |      |   | 1,007    |      |  |   | (648    | )
|Settlement of interest rate swap contract                                                                                                       |  |                                  |         |   |      |   |         |      |  |   | (31     | )
|Investment in real estate entities, net of cash acquired                                                                                        |  |                                  | (475     | ) |      |   | (3,887   | )    |  |   | (25,677 | )
|                                                                                                                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net cash (used in) provided by investing activities                                                                                             |  | $                                | (43,917  | ) |      | $ | 54,266   |      |  | $ | 119,094 |  
|                                                                                                                                                |  |                                  |          |   |      |   |          |      |  |   |         |  

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



55



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)



|                                                                         |  |                              |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------ |  | ---------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                         |  | For Years Ended December 31, |         
|                                                                         |  | 2005                         |          |   | 2004 |   |          | 2003 | 
|                                                                         |  | (dollars in thousands)       |         
|Cash Flows From Financing Activities                                     |  |                              |          |   |      |   |          |      |  |   |          |  
|Proceeds from notes payable                                              |  | $                            | 227,877  |   |      | $ | 382,259  |      |  | $ | 178,523  |  
|Stock-secured borrowings (payments), net                                 |  |                              | 3,878    |   |      |   | (736     | )    |  |   | 11,886   |  
|Payments on notes payable                                                |  |                              | (147,733 | ) |      |   | (380,579 | )    |  |   | (285,307 | )
|Deferred borrowing costs                                                 |  |                              | (4,417   | ) |      |   | (8,994   | )    |  |   | (7,450   | )
|Net advances (to) from affiliates                                        |  |                              | (32,827  | ) |      |   | 14,189   |      |  |   | 2,485    |  
|Dividends paid                                                           |  |                              | (1,012   | ) |      |   | (1,566   | )    |  |   | (2,351   | )
|Repurchase of Preferred Stock                                            |  |                              | (1,375   | ) |      |   | (10      | )    |  |   | (14      | )
|Repurchase of Common Stock                                               |  |                              |         |   |      |   | (5,222   | )    |  |   |         |  
|                                                                         |  |                              |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                      |  |                              | 44,391   |   |      |   | (659     | )    |  |   | (102,228 | )
|                                                                         |  |                              |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                     |  |                              | (8,497   | ) |      |   | 12,858   |      |  |   | 1,111    |  
|Cash and cash equivalents, beginning of year                             |  |                              | 22,401   |   |      |   | 9,543    |      |  |   | 8,432    |  
|                                                                         |  |                              |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents, end of year                                   |  | $                            | 13,904   |   |      | $ | 22,401   |      |  | $ | 9,543    |  
|                                                                         |  |                              |          |   |      |   |          |      |  |   |          |  
|Supplemental Disclosures of Cash Flow Information                        |  |                              |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                   |  | $                            | 52,494   |   |      | $ | 66,411   |      |  | $ | 80,867   |  
|Cash paid for income taxes, net of refunds                               |  |                              |         |   |      |   |         |      |  |   |         |  
|                                                                         |  |                              |         
|Schedule of non cash investing and financing activities                  |  |                              |          |   |      |   |          |      |  |   |          |  
|Notes payable assumed from acquisition of real estate                    |  | $                            | 15,669   |   |      | $ | 5,027    |      |  | $ | 29,151   |  
|Notes payable assumed by buyer upon sale of real estate                  |  |                              | 14,533   |   |      |   | 34,357   |      |  |   | 45,321   |  
|Purchase accounting adjustment of net assets acquired                    |  |                              |         |   |      |   | 8,434    |      |  |   | 58,558   |  
|Notes receivable from sale of real estate                                |  |                              | 43,192   |   |      |   | 24,167   |      |  |   | 59,440   |  
|Subsidiary purchased from affiliate decreasing affiliate receivable      |  |                              | 4,101    |   |      |   |         |      |  |   |         |  
|Acquisition of real estate to satisfy note receivable                    |  |                              | 12,531   |   |      |   |         |      |  |   |         |  
|Decrease in affiliate receivable for acquisition of real estate          |  |                              | 7,612    |   |      |   |         |      |  |   |         |  
|Funds collected by affiliate for property damage insurance reimbursement |  |                              | 8,182    |   |      |   |         |      |  |   |         |  
|Disposal of property to satisfy debt                                     |  |                              |         |   |      |   |         |      |  |   | 4,760    |  
|Exchange of interest in note receivable for stock                        |  |                              |         |   |      |   |         |      |  |   | 7,688    |  
|Note receivable from exchange of stock with affiliate                    |  |                              |         |   |      |   |         |      |  |   | 526      |  
|Notes payable proceeds collected by affiliate for property financing     |  |                              |         |   |      |   | 21,297   |      |  |   | 1,500    |  
|Sale of note and interest receivable to satisfy debt                     |  |                              |         |   |      |   |         |      |  |   | 13,435   |  
|Funds collected by affiliate on sale of real estate                      |  |                              |         |   |      |   |         |      |  |   | 6,239    |  
|Write-off goodwill upon sale of subsidiary                               |  |                              |         |   |      |   |         |      |  |   | 2,116    |  
|Sale of investment to reduce affiliate debt                              |  |                              |         |   |      |   |         |      |  |   | 6,000    |  
|Unrealized foreign currency translation gain (loss)                      |  |                              | 935      |   |      |   | (3,229   | )    |  |   | 14       |  
|Unrealized gain on marketable securities                                 |  |                              | 866      |   |      |   | 1,580    |      |  |   |         |  
|Issuance of Common Stock                                                 |  |                              |         |   |      |   |         |      |  |   | 195      |  
|Issuance of Series A Preferred Stock                                     |  |                              |         |   |      |   | 2,500    |      |  |   |         |  
|Note payable paid by affiliate                                           |  |                              |         |   |      |   | 10,823   |      |  |   |         |  
|Subsidiary shares of parent Common Stock                                 |  |                              |         |   |      |   |         |      |  |   | 9,924    |  

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



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of American Realty Investors, Inc. and consolidated subsidiaries have been prepared in conformity with
accounting principles generally accepted in the United States of America, the most significant of which are described in NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These, along with the remainder of the Notes to Consolidated
Financial Statements, are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables and accompanying footnotes are in thousands, except per share amounts.

Certain balances for 2003 and
2004 have been reclassified to conform to the 2005 presentation.



|NOTE 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|------- | ------------------------------------------

Organization and Business.    In November 1999, American Realty Investors, Inc. (ARI), a Nevada corporation, was formed, and in August 2000, ARI acquired American Realty Trust, Inc. (ART),
a Georgia corporation and National Realty, L.P. (NRLP), a Delaware partnership. ARI primarily invests in real estate and real estate-related entities and purchases and originates mortgage loans.

The acquisition of ART and NRLP by ARI was completed on August 2, 2000. NRLP unit holders, except for ART, received one share of ARI common stock
for each unit of NRLP held. ART stockholders received .91 shares of ARI common stock for each share of ART common stock held. Each share of ART Preferred Stock was converted into one share of Preferred Stock of ARI, having substantially the
same rights as ARTs Preferred Stock. The ART shares of common stock ceased trading on the New York Stock Exchange on August 2, 2000. The NRLP units of limited partner interest ceased trading on the American Stock Exchange on
August 2, 2000. ARI common stock commenced trading on the New York Stock Exchange on August 3, 2000.

On October 23, 2001,
ARI, Transcontinental Realty Investors, Inc. (TCI), and Income Opportunity Realty Investors, Inc. (IORI) jointly announced a preliminary agreement with the plaintiffs legal counsel of the derivative action entitled
Olive et al. V. National Income Realty Trust, et al. for complete settlement of all disputes in the lawsuit (the Olive Litigation). In February 2002, the court granted final approval of the proposed settlement (the Olive
Settlement). Under the Olive Settlement, ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for
all of the outstanding shares of IORI and TCI not currently owned by ARI. On November 15, 2002, ARI commenced the tender offers for the IORI and TCI shares. The tender offers were completed on March 19, 2003. ARI paid $19.00 cash per IORI
share and $17.50 cash per TCI share for the stock held by non-affiliated stockholders. Pursuant to the tender offers, ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offers fulfills the obligations under the
Olive Settlement; the Olive Litigation was dismissed with prejudice in 2003.

After the tender offers, ARI owned 64.8% of the outstanding
shares of TCI and 62.5% of the outstanding shares of IORI (46.9% owned directly by ARI and 15.6% through TCIs ownership of IORI shares). ARI began consolidation of TCIs and IORIs accounts and operations effective March 31,
2003. The effect of consolidating TCIs and IORIs operations from the completion of the tender offers through March 31, 2003 was determined to be immaterial. Through June 30, 2003, ARI had the same advisor as TCI and IORI, and
TCI and IORI had the same board of directors. At December 31, 2005, ARI and TCI have the same advisor and Board of Directors, and two directors of ARI (Ted Stokely and Robert A. Jakuszewski) also serve as directors of IORI.

On June 2, 2003, ARI exchanged all of its 674,971 IORI shares with Basic Capital Management, Inc. (BCM), receiving 650,000 TCI shares
from BCM. After the exchange, ARI owned 72.9% of the outstanding



57



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



shares of TCI. On June 30, 2003, ARI sold a participating interest in $5.8 million of its $15.5 million line of credit receivable from One Realco
Corporation (One Realco) to BCM, receiving 314,141 TCI shares from BCM (see NOTE 3. NOTES RECEIVABLE). After the transaction, ARI owned 76.8% of the outstanding shares of TCI. In December 2003, ARI purchased 88,600 TCI shares
in market transactions and 204,633 TCI shares in transactions with related parties for a total of $1.4 million. At December 31, 2005, ARI owned 82.2% of the outstanding shares of TCI. ARI no longer directly owns any IORI shares. At
December 31, 2005, ARI owned 20.4% of IORI through TCIs ownership of IORI shares. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003.

The following pro forma information reflects the results of operations for ARI as though the consolidation of TCIs operations had begun on
January 1, 2003.



|                               |  |      |        
|------------------------------ |  | ---- | -------
|                               |  | 2003
|Operating revenue, as reported |  | $    | 153,073
|Operating revenue, pro forma   |  |      | 166,825
|Net income, as reported        |  |      | 11,863 
|Net income, pro forma          |  |      | 11,108 
|Earnings per share:            |  |      |        
|Basic and diluted, as reported |  | $    | .88    
|Basic and diluted, pro forma   |  | $    | .81    

Effective July 1, 2003, Prime Asset Management, Inc. (PAMI) became the advisor to
ARI and TCI. PAMI is owned by Realty Advisors (80.0%) and Syntek West, Inc. (Syntek West) (20.0%), related parties. Syntek West is owned by Gene E. Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income
Asset Management, Inc. (PIAMI). On October 1, 2003, Prime Income Asset Management, LLC (Prime), which is 100% owned by PIAMI, replaced PIAMI as the advisor to ARI and TCI.

Basis of consolidation.    The accompanying Consolidated Financial Statements include the accounts of the Company, its
subsidiaries, generally all of which are wholly-owned, and all entities in which the Company has a controlling interest, including where the Company has been determined to be a primary beneficiary of a variable interest entity in accordance with the
provisions and guidance of Interpretation No. 46(R), Consolidation of Variable Interest Entities (FIN 46(R)) or meets certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues
Task Force (EITF) Issue 04-5, Investors Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (EITF 04-5). Controlling interest
in an entity is normally determined by the ownership of a majority of the entitys voting interests; however, other determining factors include, but may not be limited to, whether the Company provides significant financial support and bears a
majority of the financial risks, authorizes certain capital transactions such as the purchase, sale or financing of material assets or makes operating decisions that materially affect the entitys financial results. All intercompany balances
and transactions have been eliminated in consolidation.

Certain balances for 2003 and 2004 have been reclassified to conform to the 2005
presentation.

Accounting estimates.    In the preparation of these Consolidated Financial Statements, in
conformity with accounting principles generally accepted in the United States of America, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year then ended. Actual results could differ materially from these estimates.



58



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

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

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

Recent accounting pronouncements.In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123-R, Share-Based Payment. This Statement addresses the accounting for share-based payment transactions in which a company receives employee services in exchange
for (a) equity instruments of the company, such as stock options, or (b) liabilities, such as those related to performance units, that are based on the fair value of the companys equity instruments or that may be settled by the
issuance of such equity instruments.

SFAS No. 123-R, which is effective for the Company beginning in the first quarter of fiscal year
2006, eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, and generally requires that such transactions be accounted for using prescribed fair-value-based methods. SFAS No. 123-R
permits public companies to adopt its requirements using one of two methods: (a) a modified prospective method in which compensation costs are recognized beginning with the effective date based on the requirements of SFAS
No. 123-R for all share-based payments granted after the effective date and based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123-R that remain unvested on the
effective date or (b) a modified retrospective method which includes the requirements of the modified prospective method described above, but also permits companies to restate based on the amounts previously recognized under SFAS
No. 123 for purposes of pro forma disclosures either for all periods presented or prior interim periods of the year of adoption.

The
Company has decided to adopt SFAS No. 123-R using the modified prospective method. SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date. All of ARIs
options were fully vested as of the effective date, and ARI has no outstanding options that were granted, modified or settled after the effective date, so additional compensation costs for previously granted awards will not be recognized. The
Company does not believe the adoption of SFAS No. 123(R) will have a material impact on its financial statements or results of operations.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (Statement No. 154). Statement No. 154, which replaces APB Opinion No. 20, Accounting Changes
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective
application of changes in accounting principle to prior periods financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. Statement No. 154



59



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of Statement
No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows of ARI.

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have
Certain Rights (Issue 04-5), which provides guidance in determining whether a general partner controls a limited partnership. Issue 04-5 states that the general partner in a limited partnership is presumed to control that limited
partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights,
which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnerships business and thereby preclude the general partner from
exercising unilateral control over the partnership. The adoption of Issue 04-5 by us for new or modified limited partnership arrangements is effective June 30, 2005 and for existing limited partnership arrangements effective January 1,
2006. We do not expect that we will be required to consolidate our current unconsolidated joint venture investments nor do we expect Issue 04-5 to have a material effect on our consolidated financial statements.

At its June 2005 meeting, the EITF reached a consensus regarding Issue No. 05-6 (Issue 05-6),Determining the Amortization
Period for Leasehold Improvements. Issue 05-6 is effective for periods beginning after June 29, 2005. The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease
be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of acquisition or purchase. The adoption of Issue 05-6 did not have a material impact to our financial condition
or results of operations.

Real estate held for investment and depreciation.    Real estate held for investment
is carried at cost. Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), requires that a property be considered impaired if the sum of
the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the
carrying amount of the property exceeds the fair value less cost to sell the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is
established. Such new cost is depreciated over the propertys remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from five to 40 years.

Real estate held-for-sale.    Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost
or fair value minus estimated costs of sale. SFAS No. 144 also requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale propertys carrying
amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale propertys estimated fair value less costs of sale are
recorded as an adjustment to the propertys carrying amount, but not in excess of the propertys carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties
held for sale are not depreciated.

Investments in equity investees.    ARI may be considered to have the
ability to exercise significant influence over the operating and investment policies of certain of its investees. Those investees are accounted for using the equity method. Under the equity method, an initial investment, recorded at cost, is
increased by a proportionate share of the investees operating income and any additional investment and decreased by a proportionate share of the investees operating losses and distributions received.



60



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Present value premiums/discounts.    Present value premiums and discounts
are provided on notes receivable or payable that have interest rates that differ substantially from prevailing market rates and such premiums and discounts are amortized by the interest method over the lives of the related notes. The factors
considered in determining a market rate for notes receivable include the borrowers credit standing, nature of the collateral and payment terms of the note.

Foreign currency translation.    Foreign currency denominated assets and liabilities of subsidiaries with local functional currencies are translated to United States dollars at year-end
exchange rates. The effects of translation are recorded in the cumulative translation component of shareholders equity. Subsidiaries with a United States dollar functional currency remeasure monetary assets and liabilities at year-end exchange
rates and non-monetary assets and liabilities at historical exchange rates. The effects of re-measurement are included in income. Exchange gains and losses arising from transactions denominated in foreign currencies are translated at average
exchange rates. The effects of these exchange adjustments are included in income and amounted to a gain of $292,000 in 2005 and a gain of $3.8 million in 2004.

Recognition of rental income.    Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. 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.

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 either the deposit, the installment, the cost recovery, or the 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.

Operating segments.    Management has determined reportable operating segments to be those that are used for internal
reporting purposes, which disaggregates operations by type of real estate.

Fair value of financial
instruments.    The following assumptions were used in estimating the fair value of its 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.

Cash equivalents.    For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with
an original maturity of three months or less are considered to be cash equivalents.

Earnings (loss) per
share.    Income (loss) per share is presented in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Income (loss) per share is computed based upon the weighted average
number of shares of common stock outstanding during each year.

Stock-based employee compensation.    Accounting
Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, and related interpretations are utilized by management in accounting for the option plans.



61



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



All share options issued have exercise prices equal to the market price of the shares at the dates of grant. Accordingly, no compensation cost has been
recognized for the option plans. Had compensation cost for the option plans been determined based on the fair value at the grant dates consistent with the method of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, net income and net income per share would have been the pro forma amounts indicated below. All of ARIs option plans were terminated effective December 15, 2005. Previously issued options will remain
outstanding for up to ten years from the grant of each option.



|                                                                                                                                             |  |                                                 |        |      |   |        |  |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------ | ---- | - | ------ |  | - | -----
|                                                                                                                                             |  | 2005                                            |        | 2004 |   | 2003  
|                                                                                                                                             |  | (dollars in thousands, except per shareamounts)
|Net income applicable to Common shares, as reported                                                                                          |  | $                                               | 44,845 |      | $ | 30,593 |  | $ | 9,512
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax
effects |  |                                                 | 22     |      |   | 22     |  |   | 21   
|                                                                                                                                             |  |                                                 |        |      |   |        |  |   |      
|Pro forma net income                                                                                                                         |  | $                                               | 44,823 |      | $ | 30,571 |  | $ | 9,491
|                                                                                                                                             |  |                                                 |        |      |   |        |  |   |      
|Net income per share                                                                                                                         |  |                                                 |        |      |   |        |  |   |      
|Basic and diluted, as reported                                                                                                               |  | $                                               | 4.42   |      | $ | 2.90   |  | $ | .88  
|Basic and diluted, pro forma                                                                                                                 |  | $                                               | 4.42   |      | $ | 2.90   |  | $ | .88  

The fair value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:



|                          |  |      |   |  |      |   |  |      |  
|------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                          |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Dividend yield            |  |     |   |  |     |   |  |     |  
|Expected volatility       |  | 58   | % |  | 64   | % |  | 65   | %
|Risk-free interest rate   |  | 4.77 | % |  | 4.55 | % |  | 4.04 | %
|Expected lives (in years) |  | 10   |   |  | 10   |   |  | 10   |  
|Forfeitures               |  | 10   | % |  | 10   | % |  | 10   | %

The weighted average fair value per share of options granted in 2005 was $6.44.



|NOTE 2. | REAL ESTATE
|------- | -----------

In
2005, ARI purchased the following properties:



|                           |  |                    |  |                      |  |                |       |                           |   |               |  |              |       |  |               |     |  |      
|-------------------------- |  | ------------------ |  | -------------------- |  | -------------- | ----- | ------------------------- | - | ------------- |  | ------------ | ----- |  | ------------- | --- |  | -----
|Property                   |  | Location           |  | Units/ Sq. Ft./Acres |  | Purchase Price |       | Net Cash Paid/ (Received) |   | Debt Incurred |  | InterestRate |       |  | Maturity Date
|Apartments                 |  |                    |  |                      |  |                |       |                           |   |               |  |              |       |  |              
|Legends of El Paso(4)      |  | El Paso, TX        |  | 240 Units            |  | $              | 2,247 |                           | $ | 464           |  | $            | 1,774 |  | 5.50          | %   |  | 01/47
|Mission Oaks(4)            |  | San Antonio, TX    |  | 228 Units            |  |                | 573   |                           |   | 573           |  |              |      |  | 5.30          |     |  | 09/46
|Parc at Metro Center(4)    |  | Nashville, TN      |  | 144 Units            |  |                | 817   |                           |   |              |  |              | 817   |  | 5.65          |     |  | 09/46
|Land                       |  |                    |  |                      |  |                |       |                           |   |               |  |              |       |  |              
|Addison Park  Residential |  | Addison, TX        |  | 1.9 Acres            |  |                | 1,475 |                           |   | 381           |  |              | 1,180 |  | 8.00          | (3) |  | 11/06
|Addison Park  Retail      |  | Addison, TX        |  | 3.4 Acres            |  |                | 783   |                           |   | 201           |  |              | 626   |  | 8.00          | (3) |  | 11/06
|Alliance 8                 |  | Tarrant County, TX |  | 8 Acres              |  |                | 657   |                           |   | 332           |  |              | 408   |  | 7.75          | (3) |  | 05/06
|Alliance 52                |  | Tarrant County, TX |  | 51.9 Acres           |  |                | 2,538 |                           |   | 1,054         |  |              | 1,610 |  | 7.75          | (3) |  | 05/06
|Alliance Airport           |  | Tarrant County, TX |  | 12.7 Acres           |  |                | 850   |                           |   | 892           |  |              |      |  |              |     |  |     
|Denton                     |  | Denton, TX         |  | 25.9 Acres           |  |                | 2,100 |                           |   | 862           |  |              | 1,365 |  | 7.75          | (3) |  | 04/07
|Denton  Andrew B          |  | Denton, TX         |  | 22.9 Acres           |  |                | 853   |                           |   | 345           |  |              | 554   |  | 8.00          | (3) |  | 06/07
|Denton  Andrew C          |  | Denton, TX         |  | 5.2 Acres            |  |                | 303   |                           |   | 126           |  |              | 197   |  | 8.00          | (3) |  | 06/07



62



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                        |  |                    |  |                      |  |                |  |                           |  |               |     |  |              |     |  |               |    
|----------------------- |  | ------------------ |  | -------------------- |  | -------------- |  | ------------------------- |  | ------------- | --- |  | ------------ | --- |  | ------------- | ---
|Property                |  | Location           |  | Units/ Sq. Ft./Acres |  | Purchase Price |  | Net Cash Paid/ (Received) |  | Debt Incurred |     |  | InterestRate |     |  | Maturity Date |    
|Land (Continued)        |  |                    |  |                      |  |                |  |                           |  |               |     |  |              |     |  |               |    
|Katrina(1)              |  | Palm Desert, CA    |  | 23.0 Acres           |  | 4,184          |  |                          |  |              |     |  |             |     |  |              |    
|Kaufman Cogen           |  | Kaufman County, TX |  | 2,567 Acres          |  | 5,498          |  | 6,110                     |  |              |     |  |             |     |  |              |    
|Kaufman Taylor          |  | Kaufman County, TX |  | 31.0 Acres           |  | 465            |  | 486                       |  |              |     |  |             |     |  |              |    
|Keenan Bridge(2)        |  | Farmers Branch, TX |  | 7.5 Acres            |  | 510            |  | 14                        |  |              |     |  |             |     |  |              |    
|Luna                    |  | Farmers Branch, TX |  | 2.6 Acres            |  | 250            |  | 257                       |  |              |     |  |             |     |  |              |    
|Mandahl Bay             |  | US Virgin Islands  |  | 50.4 Acres           |  | 7,000          |  | 4,101                     |  | 3,500         |     |  | 7.00         |     |  | 07/05         | (7)
|Mandahl Bay (Chung)     |  | US Virgin Islands  |  | .7 Acres             |  | 95             |  | 101                       |  |              |     |  |             |     |  |              |    
|Mandahl Bay (Gilmore)   |  | US Virgin Islands  |  | 1.0 Acres            |  | 96             |  | 104                       |  |              |     |  |             |     |  |              |    
|Mandahl Bay (Inn)       |  | US Virgin Islands  |  | 15.0 Acres           |  | 2,500          |  | 2,731                     |  |              |     |  |             |     |  |              |    
|Mandahl Bay (Marina)    |  | US Virgin Islands  |  | 24.0 Acres           |  | 2,000          |  | 2,101                     |  |              |     |  |             |     |  |              |    
|Mansfield               |  | Mansfield, TX      |  | 21.9 Acres           |  | 1,450          |  | 577                       |  | 943           |     |  | 7.50         | (3) |  | 03/07         |    
|Mason Goodrich(1)       |  | Houston, TX        |  | 13.0 Acres           |  | 1,360          |  |                          |  |              |     |  |             |     |  |              |    
|McKinney Ranch          |  | McKinney, TX       |  | 464.9 Acres          |  | 45,975         |  | 19,992                    |  | 28,051        |     |  | 8.00         |     |  | 12/08         |    
|Palmer Lane(10)         |  | Austin, TX         |  | 367.4 Acres          |  | 24,832         |  |                          |  | 14,599        |     |  | 8.25         |     |  | 08/07         |    
|Pantaze                 |  | Dallas, TX         |  | 6.0 Acres            |  | 265            |  | 276                       |  |              |     |  |             |     |  |              |    
|Payne I & II(9)         |  | Las Colinas, TX    |  | 149.7 Acres          |  | 1,000          |  | 1,066                     |  |              |     |  |             |     |  |              |    
|Senlac                  |  | Farmers Branch, TX |  | 11.9 Acres           |  | 625            |  | 643                       |  |              |     |  |             |     |  |              |    
|Senlac VHP              |  | Farmers Branch, TX |  | 3.9 Acres            |  | 595            |  | 623                       |  |              |     |  |             |     |  |              |    
|Southwood Plantation(5) |  | Tallahassee, FL    |  | 12.9 Acres           |  | 525            |  | 555                       |  |              |     |  |             |     |  |              |    
|TuTu                    |  | US Virgin Islands  |  | 19.5 Acres           |  | 1,350          |  | 1,401                     |  |              |     |  |             |     |  |              |    
|West End(6)             |  | Dallas, TX         |  | .2 Acres             |  | 49             |  | 52                        |  |              |     |  |             |     |  |              |    
|Whorton                 |  | Benton County, AR  |  | 79.7 Acres           |  | 4,332          |  | 702                       |  | 3,828         |     |  | 6.08         | (3) |  | 01/07         |    
|Wilmer 88               |  | Dallas, TX         |  | 87.6 Acres           |  | 638            |  | 668                       |  |              |     |  |             |     |  |              |    
|Office Buildings        |  |                    |  |                      |  |                |  |                           |  |               |     |  |              |     |  |               |    
|600 Las Colinas         |  | Las Colinas, TX    |  | 509,829 Sq. Ft.      |  | 56,000         |  | 17,663                    |  | 40,487        | (8) |  | 6.16         |     |  | 01/13         |    
|Park West               |  | Farmers Branch, TX |  | 243,416 Sq. Ft.      |  | 10,000         |  | 4,715                     |  | 6,500         |     |  | 7.50         | (3) |  | 05/06         |    
|Shopping Center         |  |                    |  |                      |  |                |  |                           |  |               |     |  |              |     |  |               |    
|Willowbrook Village     |  | Coldwater, MI      |  | 179,741 Sq. Ft.      |  | 8,200          |  | 2,223                     |  | 6,495         |     |  | 7.28         |     |  | 02/13         |    

---

|(1) | Exchanged for note receivable. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|--- | ---------------------------------------------------------------------------

|(2) | Exchanged for the Bee Street and 2524 Valley View land parcels.
|--- | ---------------------------------------------------------------

|(3) | Variable rate.
|--- | --------------

|(4) | Initial construction loan funding to purchase land and begin apartment construction. Does not represent actual units purchased.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(5) | Purchased a 50% interest in this land tract.
|--- | --------------------------------------------

|(6) | Purchased a 37.5% interest in this land tract.
|--- | ----------------------------------------------

|(7) | Extended to April 2006, with an increase in the interest rate to 8.0%.
|--- | ----------------------------------------------------------------------

|(8) | First lien of $35.3 million. Second lien of $5.1 million. Interest rate and maturity date identical for both.
|--- | -------------------------------------------------------------------------------------------------------------

|(9) | TCI dissolved the 50% Tenant-In-Common interest in the Payne land, resulting in TCI owning the 109.8 acre Payne I tract and the 39.9 acre Payne II tract. TCI paid an additional $1.0
million for the 30.4 flood plain acreage difference between the two parties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | In addition to debt assumed, the property was acquired in exchange for cancellation of a $2.3 million note receivable, and a $7.6 million reduction in receivables from Prime, a
related party.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2004, ARI purchased the following properties:



|                       |  |                |  |             |  |                |       |                           |   |      |               |  |              |       |  |               |   |  |      
|---------------------- |  | -------------- |  | ----------- |  | -------------- | ----- | ------------------------- | - | ---- | ------------- |  | ------------ | ----- |  | ------------- | - |  | -----
|Property               |  | Location       |  | Units/Acres |  | Purchase Price |       | Net Cash Paid/ (Received) |   |      | Debt Incurred |  | InterestRate |       |  | Maturity Date
|Apartments             |  |                |  |             |  |                |       |                           |   |      |               |  |              |       |  |              
|288 City Park(1)       |  | Houston, TX    |  | 240 Units   |  | $              | 3,056 |                           | $ | 612  |               |  | $            | 2,444 |  | 5.95          | % |  | 04/45
|Blue Lake Villas II(1) |  | Waxahachie, TX |  | 70 Units    |  |                | 729   |                           |   | (164 | )             |  |              | 729   |  | 5.80          |   |  | 04/45
|Bridges on Kinsey(1)   |  | Tyler, TX      |  | 232 Units   |  |                | 2,291 |                           |   | 596  |               |  |              | 1,687 |  | 5.74          |   |  | 08/45



63



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                           |  |                    |  |             |  |                |  |                           |   |  |               |     |  |              |     |  |              
|-------------------------- |  | ------------------ |  | ----------- |  | -------------- |  | ------------------------- | - |  | ------------- | --- |  | ------------ | --- |  | -------------
|Property                   |  | Location           |  | Units/Acres |  | Purchase Price |  | Net Cash Paid/ (Received) |   |  | Debt Incurred |     |  | InterestRate |     |  | Maturity Date
|Apartments (Continued)     |  |                    |  |             |  |                |  |                           |   |  |               |     |  |              |     |  |              
|Dakota Arms(1)             |  | Lubbock, TX        |  | 208 Units   |  | 2,472          |  | 681                       |   |  | 1,791         |     |  | 5.85         |     |  | 06/45        
|Laguna Vista(1)            |  | Farmers Branch, TX |  | 206 Units   |  | 2,424          |  | 902                       |   |  | 1,522         |     |  | 5.50         |     |  | 09/46        
|Lake Forest(1)             |  | Houston, TX        |  | 240 Units   |  | 2,316          |  | (470                      | ) |  | 2,316         |     |  | 5.60         |     |  | 03/45        
|Parc at Maumelle(1)        |  | Maumelle, AR       |  | 240 Units   |  | 3,120          |  | 916                       |   |  | 2,204         |     |  | 5.37         |     |  | 07/46        
|Treehouse(3)               |  | Irving, TX         |  | 160 Units   |  | 7,519          |  | (498                      | ) |  | 5,027         | (4) |  | 5.00         |     |  | 08/13        
|Vistas of Vance Jackson(1) |  | San Antonio, TX    |  | 240 Units   |  | 3,550          |  | 771                       |   |  | 2,779         |     |  | 5.78         |     |  | 06/45        
|Wildflower Villas(1)       |  | Temple, TX         |  | 220 Units   |  | 2,045          |  | 79                        |   |  | 1,996         |     |  | 5.99         |     |  | 10/45        
|Land                       |  |                    |  |             |  |                |  |                           |   |  |               |     |  |              |     |  |              
|Cooks Lane                 |  | Ft. Worth, TX      |  | 21.9 Acres  |  | 1,000          |  | 1,034                     |   |  |              |     |  |             |     |  |             
|Denton-Coonrod             |  | Denton, TX         |  | 13.9 Acres  |  | 1,644          |  | 1,046                     |   |  | 840           |     |  | 6.25         |     |  | 11/06        
|DeSoto                     |  | DeSoto, TX         |  | 202.0 Acres |  | 2,516          |  | 1,364                     |   |  | 1,265         |     |  | 6.25         |     |  | 11/06        
|Granbury Station           |  | Ft. Worth, TX      |  | 15.7 Acres  |  | 923            |  | 236                       |   |  | 738           |     |  | 7.00         |     |  | 09/07        
|Ladue                      |  | Farmers Branch, TX |  | 8.0 Acres   |  | 1,743          |  | 659                       |   |  | 1,206         |     |  | 6.65         | (2) |  | 06/06        
|Las Colinas                |  | Irving, TX         |  | 45.5 Acres  |  | 4,802          |  | 1,674                     |   |  | 3,121         |     |  | 7.00         |     |  | 12/06        
|Las Colinas(5)             |  | Irving, TX         |  | 268.0 Acres |  | 4,687          |  | 159                       |   |  |              |     |  |             |     |  |             
|Lubbock                    |  | Lubbock, TX        |  | 2.9 Acres   |  | 224            |  | 224                       |   |  |              |     |  |             |     |  |             
|Meloy Road                 |  | Kent, OH           |  | 54.2 Acres  |  | 4,900          |  | 343                       |   |  | 4,900         |     |  | 5.00         | (2) |  | 01/06        
|Railroad                   |  | Dallas, TX         |  | 0.3 Acres   |  | 708            |  | 704                       |   |  |              |     |  |             |     |  |             
|Rogers                     |  | Rogers, AR         |  | 20.1 Acres  |  | 1,390          |  | 619                       |   |  | 1,130         |     |  | 10.50        |     |  | 04/05        
|West End                   |  | Dallas, TX         |  | 0.2 Acres   |  | 71             |  | 71                        |   |  |              |     |  |             |     |  |             

---

|(1) | Initial construction loan funding to purchase land and begin apartment construction. Does not represent actual units purchased.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(2) | Variable interest rate.
|--- | -----------------------

|(3) | Purchased from IORI, a related party, for assumption of debt and a note receivable, less $498,000 in cash received.
|--- | -------------------------------------------------------------------------------------------------------------------

|(4) | Assumed debt of seller.
|--- | -----------------------

|(5) | Obtained in exchange for 13.0 acres of Las Colinas land.
|--- | --------------------------------------------------------

In 2005, ARI sold the following properties:



|                              |  |                    |  |                     |  |            |        |                         |   |       |                |  |   |             |     |  |   |      
|----------------------------- |  | ------------------ |  | ------------------- |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | - | ----------- | --- |  | - | -----
|Property                      |  | Location           |  | Units/Acres/Sq. Ft. |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  |   | Gain onSale
|Apartments                    |  |                    |  |                     |  |            |        |                         |   |       |                |  |   |            
|By the Sea                    |  | Corpus Christi, TX |  | 153 Units           |  | $          | 7,450  |                         | $ | 2,050 |                |  | $ | 5,165       |     |  | $ | 1,770
|Longwood                      |  | Long Beach, MS     |  | 200 Units           |  |            | 6,456  |                         |   | 9     |                |  |   | 6,253       |     |  |   | 56   
|Quail Pointe                  |  | Huntsville, AL     |  | 184 Units           |  |            | 6,200  |                         |   | 2,157 |                |  |   | 3,501       |     |  |   | 5,265
|Sun Hollow                    |  | El Paso, TX        |  | 216 Units           |  |            | 7,700  |                         |   | 2,623 |                |  |   | 4,327       |     |  |   | 5,816
|Terrace Hills                 |  | El Paso, TX        |  | 310 Units           |  |            | 12,300 |                         |   | 5,467 |                |  |   | 5,890       |     |  |   | 6,959
|Waters Edge III & IV          |  | Gulfport, MS       |  | 318 Units           |  |            | 16,350 |                         |   | 6,201 |                |  |   | 7,207       |     |  |   | 7,724
|Windsor Tower                 |  | Ocala, FL          |  | 64 Units            |  |            | 2,845  |                         |   | (85   | )(2)           |  |   | 1,937       | (1) |  |   | 785  
|Woodhollow                    |  | San Antonio, TX    |  | 546 Units           |  |            | 12,500 |                         |   | 3,429 |                |  |   | 7,900       |     |  |   | 8,290
|Hotels                        |  |                    |  |                     |  |            |        |                         |   |       |                |  |   |             |     |  |   |      
|Majestic Inn                  |  | San Francisco, CA  |  | 57 Rooms            |  |            | 7,900  |                         |   | 3,487 |                |  |   | 3,950       |     |  |   | 3,272
|Industrial Warehouses         |  |                    |  |                     |  |            |        |                         |   |       |                |  |   |             |     |  |   |      
|5700 Tulane                   |  | Atlanta, GA        |  | 67,850 Sq. Ft.      |  |            | 816    |                         |   | 738   |                |  |   |            |     |  |   | 329  
|Land                          |  |                    |  |                     |  |            |        |                         |   |       |                |  |   |             |     |  |   |      
|Alamo Springs/Lemmon Carlisle |  | Dallas, TX         |  | 2.8 Acres           |  |            | 7,674  |                         |   | 5,627 |                |  |   | 1,744       |     |  |   | 2,729
|Granbury Station              |  | Ft. Worth, TX      |  | 15.7 Acres          |  |            | 1,003  |                         |   | 265   |                |  |   | 738         |     |  |   | 10   
|JHL Connell                   |  | Carrollton, TX     |  | 3.7 Acres           |  |            | 2,236  |                         |   | 1,625 |                |  |   |            |     |  |   | 1,397
|Katrina                       |  | Palm Desert, CA    |  | 9.9 Acres           |  |            | 2,616  |                         |   | 574   |                |  |   |            |     |  |   | 1,323



64



---

##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                           |  |                    |  |                     |  |            |        |                         |   |       |                |  |              |       |  |   |        |    
|-------------------------- |  | ------------------ |  | ------------------- |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | ------------ | ----- |  | - | ------ | ---
|Property                   |  | Location           |  | Units/Acres/Sq. Ft. |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  | Gain on Sale |      
|Land (Continued)           |  |                    |  |                     |  |            |        |                         |   |       |                |  |              |      
|Katrina                    |  | Palm Desert, CA    |  | 13.6 Acres          |  | $          | 3,703  |                         | $ | 591   |                |  | $            |      |  | $ | 1,706  |    
|Katrina                    |  | Palm Desert, CA    |  | 5.5 Acres           |  |            | 1,325  |                         |   | 1,281 |                |  |              |      |  |   | 619    |    
|Katrina                    |  | Palm Desert, CA    |  | 6.5 Acres           |  |            | 1,695  |                         |   | 340   |                |  |              |      |  |   | 818    |    
|Katrina                    |  | Palm Desert, CA    |  | 7.4 Acres           |  |            | 2,028  |                         |   | 455   |                |  |              |      |  |   | 1,072  |    
|Katrina                    |  | Palm Desert, CA    |  | 81.2 Acres          |  |            | 19,878 |                         |   | (814  | )              |  |              | 5,100 |  |   | 9,387  |    
|Katrina                    |  | Palm Desert, CA    |  | 24.8 Acres          |  |            | 6,402  |                         |   | 1,027 |                |  |              |      |  |   | 2,947  |    
|Katy                       |  | Katy, TX           |  | 130.6 Acres         |  |            | 12,400 |                         |   | 4,981 |                |  |              | 6,601 |  |   | 5,630  |    
|LCLLP                      |  | Las Colinas, TX    |  | 4.3 Acres           |  |            | 1,873  |                         |   | 511   |                |  |              | 1,290 |  |   | 1,327  |    
|Mason Goodrich             |  | Houston, TX        |  | 16.0 Acres          |  |            | 2,091  |                         |   | 935   |                |  |              |      |  |   | 802    |    
|McKinney Ranch             |  | McKinney, TX       |  | 1.3 Acres           |  |            | 347    |                         |   | 325   |                |  |              |      |  |   | 191    |    
|McKinney Ranch             |  | McKinney, TX       |  | 27.2 Acres          |  |            | 10,070 |                         |   | 2,214 |                |  |              |      |  |   |       | (3)
|McKinney Ranch             |  | McKinney, TX       |  | 3.7 Acres           |  |            | 1,381  |                         |   | 290   |                |  |              |      |  |   |       | (4)
|Nashville                  |  | Nashville, TN      |  | 3.0 Acres           |  |            | 441    |                         |   | (13   | )              |  |              | 408   |  |   | 282    |    
|Nashville                  |  | Nashville, TN      |  | 1.2 Acres           |  |            | 304    |                         |   | 236   |                |  |              |      |  |   | 226    |    
|Nashville                  |  | Nashville, TN      |  | 0.7 Acres           |  |            | 50     |                         |   | (2    | )              |  |              |      |  |   | 18     |    
|Nashville                  |  | Nashville, TN      |  | 5.0 Acres           |  |            | 1,035  |                         |   | (31   | )              |  |              | 941   |  |   | 737    |    
|Round Mountain             |  | Austin, TX         |  | 10.0 Acres          |  |            | 1,500  |                         |   | 251   |                |  |              |      |  |   | 1,094  |    
|Vineyards                  |  | Grapevine, TX      |  | 7.6 Acres           |  |            | 4,323  |                         |   | 874   |                |  |              |      |  |   | 1,764  |    
|Vineyards and Vineyards II |  | Grapevine, TX      |  | 5.2 Acres           |  |            | 2,332  |                         |   | 160   |                |  |              | 300   |  |   | 494    |    
|Vista Ridge                |  | Lewisville, TX     |  | 4.4 Acres           |  |            | 950    |                         |   | (92   | )              |  |              | 914   |  |   | 440    |    
|Vista Ridge                |  | Lewisville, TX     |  | 17.9 Acres          |  |            | 4,291  |                         |   | (129  | )              |  |              | 4,096 |  |   | 2,185  |    
|West End                   |  | Dallas, TX         |  | 0.8 Acres           |  |            | 2,259  |                         |   | 2,099 |                |  |              |      |  |   | 1,259  |    
|West End                   |  | Dallas, TX         |  | 0.8 Acres           |  |            | 2,430  |                         |   | 213   |                |  |              | 2,000 |  |   | 1,448  |    
|Office Buildings           |  |                    |  |                     |  |            |        |                         |   |       |                |  |              |       |  |   |        |    
|9033 Wilshire              |  | Los Angeles, CA    |  | 44,253 Sq. Ft.      |  |            | 12,000 |                         |   | 4,366 |                |  |              | 6,506 |  |   | 2,781  |    
|Bay Plaza I                |  | Tampa, FL          |  | 75,780 Sq. Ft.      |  |            | 4,682  |                         |   | 3,253 |                |  |              | 961   |  |   | 1,212  |    
|Office Buildings           |  |                    |  |                     |  |            |        |                         |   |       |                |  |              |       |  |   |        |    
|Bay Plaza II               |  | Tampa, FL          |  | 78,882 Sq. Ft.      |  |            | 4,719  |                         |   | 1,114 |                |  |              | 3,284 |  |   | 132    |    
|Institute Place            |  | Chicago, IL        |  | 144,915 Sq. Ft.     |  |            | 14,460 |                         |   | 4,843 |                |  |              | 7,792 |  |   | 10,603 |    
|Shopping Centers           |  |                    |  |                     |  |            |        |                         |   |       |                |  |              |       |  |   |        |    
|Promenade                  |  | Highland Ranch, CO |  | 133,558 Sq. Ft.     |  |            | 14,250 |                         |   | 6,192 |                |  |              | 6,651 |  |   | 7,129  |    

---

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

|(2) | Cash of $860,000 received by an affiliate, increasing ARIs affiliate receivable.
|--- | ---------------------------------------------------------------------------------

|(3) | Gain of $7.0 million deferred due to insufficient initial buyer investment.
|--- | ---------------------------------------------------------------------------

|(4) | Gain of $307,000 deferred due to insufficient initial buyer investment.
|--- | -----------------------------------------------------------------------

In 2004, ARI sold the following properties:



|                       |  |                  |  |                      |  |            |        |                         |   |                |  |   |                   |     |  |   |      
|---------------------- |  | ---------------- |  | -------------------- |  | ---------- | ------ | ----------------------- | - | -------------- |  | - | ----------------- | --- |  | - | -----
|Property               |  | Location         |  | Units/ Acres/Sq. Ft. |  | SalesPrice |        | Net CashReceived/(Paid) |   | DebtDischarged |  |   | Gain/Loss on Sale
|Apartments             |  |                  |  |                      |  |            |        |                         |   |                |  |   |                  
|Cliffs of El Dorado(5) |  | McKinney, TX     |  | 208 Units            |  | $          | 13,442 |                         | $ | 10             |  | $ | 10,323            | (1) |  | $ |     
|Falcon House           |  | Ft. Walton, FL   |  | 82 Units             |  |            | 3,330  |                         |   | 1,178          |  |   | 1,950             | (1) |  |   | 1,209
|In the Pines           |  | Gainesville, FL  |  | 242 Units            |  |            | 11,300 |                         |   | 3,247          |  |   | 5,201             |     |  |   | 5,517
|La Mirada              |  | Jacksonville, FL |  | 320 Units            |  |            | 10,500 |                         |   | 2,576          |  |   | 7,098             |     |  |   | 7,576
|Park Avenue            |  | Tallahassee, FL  |  | 121 Units            |  |            | 6,225  |                         |   | 926            |  |   | 4,320             | (1) |  |   | 3,922
|Sandstone              |  | Mesa, AZ         |  | 238 Units            |  |            | 8,650  |                         |   | 2,920          |  |   | 5,531             |     |  |   | 1,688
|Tiberon Trails         |  | Merrillville, IN |  | 376 Units            |  |            | 10,325 |                         |   | 2,869          |  |   | 6,189             | (1) |  |   | 49   
|Industrial Warehouses  |  |                  |  |                      |  |            |        |                         |   |                |  |   |                   |     |  |   |      
|Kelly (Cash Road)      |  | Dallas, TX       |  | 97,150 Sq. Ft.       |  |            | 1,500  |                         |   | 1,077          |  |   | 422               |     |  |   | 454  
|Kelly (Pinewood)       |  | Dallas, TX       |  | 100,000 Sq. Ft.      |  |            | 1,650  |                         |   | 65             |  |   | 65                |     |  |   | 153  



65



---

##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                  |  |                    |  |                      |  |            |  |                         |   |  |                |     |  |                   |        |    
|--------------------------------- |  | ------------------ |  | -------------------- |  | ---------- |  | ----------------------- | - |  | -------------- | --- |  | ----------------- | ------ | ---
|Property                          |  | Location           |  | Units/ Acres/Sq. Ft. |  | SalesPrice |  | Net CashReceived/(Paid) |   |  | DebtDischarged |     |  | Gain/Loss on Sale |       
|Industrial Warehouses (Continued) |  |                    |  |                      |  |            |  |                         |   |  |                |     |  |                   |        |    
|Ogden Industrial                  |  | Ogden, UT          |  | 107,112 Sq. Ft.      |  | 2,600      |  | 668                     |   |  | 668            |     |  | $                 | 1,474  |    
|Texstar Warehouse                 |  | Arlington, TX      |  | 97,846 Sq. Ft.       |  | 2,400      |  |                        |   |  |               |     |  |                   |       | (3)
|Land                              |  |                    |  |                      |  |            |  |                         |   |  |                |     |  |                   |        |    
|Allen                             |  | Collin County, TX  |  | 492.5 Acres          |  | 19,962     |  | 7,956                   |   |  | 4,088          |     |  |                   | 7,915  | (2)
|Marine Creek                      |  | Ft. Worth, TX      |  | 10.7 Acres           |  | 1,488      |  | 1,198                   |   |  | 991            |     |  |                   |       | (7)
|Mason Goodrich                    |  | Houston, TX        |  | 5.7 Acres            |  | 686        |  | 45                      |   |  | 588            |     |  |                   | 379    |    
|Mason Goodrich                    |  | Houston, TX        |  | 8.0 Acres            |  | 1,045      |  | 251                     |   |  | 200            |     |  |                   | 617    |    
|Mason Goodrich                    |  | Houston, TX        |  | 4.0 Acres            |  | 523        |  | 33                      |   |  | 436            |     |  |                   | 306    |    
|Mason Goodrich                    |  | Houston, TX        |  | 2.4 Acres            |  | 250        |  | 15                      |   |  | 200            |     |  |                   | 115    |    
|Mason Goodrich                    |  | Houston, TX        |  | 5.0 Acres            |  | 515        |  | 466                     |   |  |               |     |  |                   | 254    |    
|Mason Goodrich                    |  | Houston, TX        |  | 12.0 Acres           |  | 1,492      |  | 1,338                   |   |  |               |     |  |                   | 854    |    
|Meloy Road                        |  | Kent, OH           |  | 1.3 Acres            |  | 135        |  |                        |   |  | 135            |     |  |                   | 11     |    
|Rasor                             |  | Plano, TX          |  | 24.5 Acres           |  | 2,600      |  | 2,600                   |   |  | 1,260          |     |  |                   | 220    |    
|Red Cross                         |  | Dallas, TX         |  | 2.9 Acres            |  | 8,500      |  | 2,842                   |   |  | 4,450          |     |  |                   |       |    
|Vineyards                         |  | Tarrant County, TX |  | 1.6 Acres            |  | 1,307      |  | (275                    | ) |  | 548            |     |  |                   | 677    |    
|Vineyards II                      |  | Tarrant County, TX |  | 1.5 Acres            |  | 1,239      |  | (261                    | ) |  | 200            |     |  |                   | 551    |    
|Vista Ridge                       |  | Lewisville, TX     |  | 1.3 Acres            |  | 310        |  | 259                     |   |  |               |     |  |                   | 131    |    
|Office Buildings                  |  |                    |  |                      |  |            |  |                         |   |  |                |     |  |                   |        |    
|4135 Beltline                     |  | Addison, TX        |  | 90,000 Sq. Ft.       |  | 4,900      |  | 2,472                   |   |  | 2,009          |     |  |                   | 337    |    
|Ambulatory Surgery Center         |  | Sterling, VA       |  | 33,832 Sq. Ft.       |  | 8,675      |  | 5,448                   |   |  | 2,899          |     |  |                   | 784    |    
|Atrium                            |  | Palm Beach, FL     |  | 74,603 Sq. Ft.       |  | 5,775      |  | 1,842                   |   |  | 3,772          |     |  |                   | 708    |    
|Brandeis(6)                       |  | Omaha, NE          |  | 319,234 Sq. Ft.      |  |           |  |                        |   |  |               |     |  |                   | (92    | )  
|Centura Tower(4)                  |  | Farmers Branch, TX |  | 410,901 Sq. Ft.      |  | 84,075     |  | 36,350                  |   |  | 49,878         |     |  |                   | 38,154 |    
|Corporate Pointe                  |  | Chantilly, VA      |  | 65,918 Sq. Ft.       |  | 9,000      |  | 5,025                   |   |  | 3,585          |     |  |                   | 5,533  |    
|Countryside Harmon                |  | Sterling, VA       |  | 72,062 Sq. Ft.       |  | 9,150      |  | 4,608                   |   |  | 3,865          |     |  |                   | 1,931  |    
|Countryside Mimado                |  | Sterling, VA       |  | 35,127 Sq. Ft.       |  | 4,000      |  | 102                     |   |  | 941            |     |  |                   | 72     |    
|Countryside Retail                |  | Sterling, VA       |  | 133,422 Sq. Ft.      |  | 27,100     |  | 3,408                   |   |  | 3,408          |     |  |                   | 6,807  |    
|One Steeplechase                  |  | Sterling, VA       |  | 103,376 Sq. Ft.      |  | 11,900     |  | 3,743                   |   |  | 7,654          |     |  |                   | 6,786  |    
|Venture Center                    |  | Atlanta, GA        |  | 38,272 Sq. Ft.       |  | 4,000      |  | 997                     |   |  | 2,550          |     |  |                   | 1,381  |    
|Shopping Centers                  |  |                    |  |                      |  |            |  |                         |   |  |                |     |  |                   |        |    
|Collection                        |  | Denver, CO         |  | 267,812 Sq. Ft.      |  | 21,200     |  | 6,703                   |   |  | 13,153         |     |  |                   | 3,314  |    
|K-Mart                            |  | Cary, NC           |  | 92,033 Sq. Ft.       |  | 3,200      |  |                        |   |  | 1,677          | (1) |  |                   |       | (3)
|Plaza on Bachman Creek            |  | Dallas, TX         |  | 80,278 Sq. Ft.       |  | 7,850      |  | 1,808                   |   |  | 5,358          |     |  |                   | 4,073  |    
|Sadler Square A                   |  | Amelia Island, FL  |  | 70,295 Sq. Ft.       |  | 4,500      |  | 1,876                   |   |  | 2,680          |     |  |                   | 1,897  |    
|Other                             |  |                    |  |                      |  |            |  |                         |   |  |                |     |  |                   |        |    
|Signature Athletic Club(2)        |  | Dallas, TX         |  | N/A                  |  | 120        |  | (154                    | ) |  | 88             |     |  |                   | (47    | )  

---

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

|(2) | Signature Athletic Club was sold for the assumption of capital leases by purchaser. Net cash paid is from prepaid dues and unearned revenues due purchaser.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Sold to BCM, a related party, for assumption of debt and a secured note receivable. See NOTE 3. NOTES AND INTEREST RECEIVABLE. Gain of $1.2 million (Texstar) and
$521,000 (K-Mart) deferred until sale to unrelated party.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | ARI sold a 95% limited partnership interest, retaining a 1% general partner and 4% limited partner interest
|--- | -----------------------------------------------------------------------------------------------------------

|(5) | Sold to Unified Housing Foundation, Inc. (UHF), a related party, in 2003. See NOTE 9. RELATED PARTY TRANSACTIONS. Gain of $2.5 million deferred until sale to
unrelated party.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Returned to lender. See NOTE 7. NOTES AND INTEREST PAYABLE.
|--- | -------------------------------------------------------------

|(7) | Sold to UHF. Gain of $581,000 deferred until sale to unrelated party.
|--- | ---------------------------------------------------------------------



66



---

##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2005, ARI had the following properties under construction:



|                     |  |                    |  |           |  |                |       |                           |   |                         |  |   |       
|-------------------- |  | ------------------ |  | --------- |  | -------------- | ----- | ------------------------- | - | ----------------------- |  | - | ------
|Property             |  | Location           |  | Units     |  | AmountExpended |       | AdditionalAmountto Expend |   | ConstructionLoanFunding
|Apartments           |  |                    |  |           |  |                |       |                           |   |                         |  |   |       
|Laguna Vista         |  | Farmers Branch, TX |  | 206 Units |  | $              | 5,688 |                           | $ | 15,417                  |  | $ | 17,741
|Legends of El Paso   |  | El Paso, TX        |  | 240 Units |  |                | 2,723 |                           |   | 15,361                  |  |   | 16,040
|Mission Oaks         |  | San Antonio, TX    |  | 228 Units |  |                | 811   |                           |   | 16,658                  |  |   | 15,636
|Parc at Maumelle     |  | Maumelle, AR       |  | 240 Units |  |                | 6,543 |                           |   | 12,156                  |  |   | 16,829
|Parc at Metro Center |  | Nashville, TN      |  | 144 Units |  |                | 2,522 |                           |   | 10,093                  |  |   | 11,141

In 2005, ARI completed the 70 unit Blue Lake Villas II in Waxahachie, Texas, the 272 unit Bluffs
at Vista Ridge in Lewisville, Texas, the 232 unit Bridges on Kinsey in Tyler, Texas, the 208 unit Dakota Arms in Lubbock, Texas, the 240 unit Lake Forest in Houston, Texas, the 220 unit Wildflower Villas in Temple, Texas, the 398 unit Kingsland
Ranch Apartments in Houston, Texas, the 240 unit Stonebridge at City Park Apartments in Houston, Texas, and the 240 unit Vistas of Vance Jackson in San Antonio, Texas.



|NOTE 3. | NOTES AND INTEREST RECEIVABLE
|------- | -----------------------------



|                    |  |                      |        |           |   |                      |  |            |        |  |   |       
|------------------- |  | -------------------- | ------ | --------- | - | -------------------- |  | ---------- | ------ |  | - | ------
|                    |  | 2005                 |        | 2004     
|                    |  | Estimated Fair Value |        | BookValue |   | Estimated Fair Value |  | Book Value
|Notes receivable    |  |                      |        |           |   |                      |  |            |        |  |   |       
|Performing          |  | $                    | 64,822 |           | $ | 68,130               |  | $          | 68,728 |  | $ | 66,727
|Non-performing      |  |                      | 10,822 |           |   | 11,546               |  |            | 6,755  |  |   | 6,632 
|                    |  |                      |        |           |   |                      |  |            |        |  |   |       
|                    |  | $                    | 75,644 |           |   | 79,676               |  | $          | 75,483 |  |   | 73,359
|                    |  |                      |        |           |   |                      |  |            |        |  |   |       
|Interest receivable |  |                      |        |           |   | 2,764                |  |            |        |  |   | 1,167 
|                    |  |                      |        |           |   |                      |  |            |        |  |   |       
|                    |  |                      |        |           | $ | 82,440               |  |            |        |  | $ | 74,526
|                    |  |                      |        |           |   |                      |  |            |        |  |   |       

Interest income is recognized on non-performing notes receivable on a cash basis. If the notes for
the years 2005, 2004, and 2003 had been performing an additional receivable totaled $172,000, $961,000, and $583,000, respectively, would have been recognized.

Notes receivable at December 31, 2005, mature from 2003 to 2017 with interest rates ranging from 4.0% to 12.0% per annum and a weighted average rate of 7.9% per annum. Notes receivable are generally
collateralized by real estate or interests in real estate and personal guarantees of the borrower and, unless noted otherwise, are so secured. A majority of the notes receivable provide for principal to be paid at maturity. Scheduled principal
maturities of $41.5 million are due in 2006.

In February 2005, ARI sold a 9.9 acre tract of its Katrina land parcel for $2.6 million,
receiving $574,000 after payment of closing costs and providing purchase money financing of $2.0 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2008. In March 2005, ARI sold the loan for
$2.0 million, receiving $2.0 million in cash after payment of closing costs.

In February 2005, ARI sold a 13.6 acre tract of its Katrina
land parcel for $3.7 million, receiving $591,000 after payment of closing costs and providing purchase money financing of $2.8 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2008. In March
2005, ARI sold the loan for $2.8 million, receiving $2.8 million in cash after payment of closing costs.



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In February 2005, ARI sold a 6.5 acre tract of its Katrina land parcel for $1.7 million, receiving
$340,000 after payment of closing costs and providing purchase money financing of $1.3 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2007. In March 2005, ARI sold the loan for $1.3 million,
receiving $1.3 million in cash after payment of closing costs.

In February 2005, ARI sold a 7.4 acre tract of its Katrina land parcel for
$2.0 million, receiving $455,000 after payment of closing costs and providing purchase money financing of $1.5 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in February 2007. In March 2005, ARI sold
the loan for $1.5 million, receiving $1.5 million in cash after payment of closing costs.

In February 2005, ARI sold an 81.2 acre tract of
its Katrina land parcel for $19.9 million, paying $814,000 after payment of debt and closing costs and providing purchase money financing of $14.9 million. The loan bore interest at 8.0%, required quarterly payments of interest, and matured in
February 2007. In March 2005, ARI sold the loan for $14.9 million, receiving $14.9 million in cash after payment of closing costs.

In
March 2005, ARI sold a 24.8 acre tract of its Katrina land parcel for $6.4 million, receiving $1.0 million after payment of closing costs and providing purchase money financing of $4.8 million. The loan bore interest at 8.0%, required quarterly
payments of interest, and matured in March 2007. In March 2005, ARI sold the loan for $4.8 million, receiving $4.8 million in cash after payment of closing costs.

In August 2005, ARI sold a 7.6 acres tract of its Vineyards land parcel for $4.3 million, receiving $874,000 after payment of closing costs and providing purchase money financing of $3.2 million. The secured note bore
interest at 8.0% per annum and matured in August 2006. In September 2005, ARI sold the note for $3.2 million plus accrued but unpaid interest, receiving $3.3 million in cash after payment of closing costs.

In September 2005, ARI sold a 5.2 acre tract of its Vineyards and Vineyards II land parcels for $2.3 million, receiving $160,000 after payment of closing
costs and debt paydown, and providing purchase money financing of $1.7 million. The secured note bore interest at 8.0% per annum and matured in September 2006. In September 2005, ARI sold the note for $1.7 million plus accrued but unpaid
interest, receiving $1.7 million in cash after payment of closing costs.

In August 2005, ARI sold a 16.0 acre tract of its Mason Goodrich
land parcel for $2.1 million, receiving $935,000 after payment of closing costs and providing purchase money financing of $1.0 million. The secured note bore interest at 8.0%, required monthly interest payments, and matured in November 2005. In
November 2005, the note was collected in full, including accrued but unpaid interest.

In March 2004, ARI sold an 8.0 acre tract of its
Mason Goodrich land parcel for $1.0 million, receiving $251,000 after payment of closing costs and providing purchase money financing of $523,000. The secured loan bears interest at 10.0% per annum, requires monthly payments of accrued interest
and matures in March 2006. All principal and accrued but unpaid interest is due at maturity. In 2005, $117,000 in principal was collected. In March 2006, the purchaser extended the note to March 2007 by paying a 1% extension fee and making a 10%
principal reduction.

In September 2003, ARI sold a 367.4 acre tract of its Pioneer Crossing land parcel for $22.5 million, receiving $4.9
million after payment of closing costs and providing purchase money financing of $16.9 million. The note bears interest at 8.0% per annum, matures in September 2006 and requires quarterly payments of accrued interest beginning in January 2004.
All principal and accrued but unpaid interest are due at maturity. In November 2003, ARI sold an interest in $8.0 million of the note for $7.5 million, receiving $7.2 million in cash



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



after payment of closing costs and debt pay down. In February 2004, ARI sold an additional interest in $6.6 million of the note for $6.3 million,
receiving $6.3 million in cash after payment of closing costs. In December 2005, ARI acquired a 100% interest in the debtor in exchange for cancellation of the note and assumption of debt on the property. See NOTE 2. REAL ESTATE.

In October 2004, ARI sold the In The Pines apartments to a third party and provided $1.0 million of the purchase price as seller financing
in the form of two notes. The first note bore interest at 7.0% per annum, required monthly interest only payments, and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance
as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. In the event of a default, the note is also secured by membership rights in the
purchasers entity. The second note was unsecured, bore interest at 8.5% per annum, required monthly interest only payments, and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding
principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. Both loans were extended to October 2005 with the payment to ARI of a 2.0%
extension fee. Both loans were paid in full, including unpaid interest, in October 2005.

In March 2005, ARI entered into an agreement to
advance a third party $3.2 million for development costs relating to single-family residential lots in Austin, Texas. These advances are secured by membership interests in the borrower and a second lien on 1,092 acres of undeveloped land. The
secured note bears interest at 10%, requires semi-annual interest payments, and matures in March 2008. In September 2005 the total amount authorized under this advance was increased to $5.0 million. As of March 31, 2006, ARI had advanced
$4.0 million to the borrower. ARI also guaranteed, with full recourse to ARI, an $18 million bank loan for the borrower which is secured by a first lien on the 1,092 acres of undeveloped land. In June 2005, ARI purchased the subsidiary of a
related party for $4.1 million that holds two notes receivable from this third party totaling $3.0 and $1.0 million, respectively. These notes are secured by approximately 142 acres of undeveloped land and membership interests in the borrowers.
The secured notes bear interest at 12.0%, have an interest reserve for payments that is added to the principal balance on a monthly basis, and matured in June 2005. Both loans were extended to September 2005 and upon maturity, both loan balances
were paid under the advance referred to at the beginning of this paragraph.

In July 2003, ARI advanced $2.3 million to the Class A
Limited Partners of TCI Countryside, L.P. of which ARI is the general partner. This loan bears interest at 7.25% and matures in January 2007. ARI also agreed to advance $1.1 million to the Class A Limited Partners by advancing $105,000 in July
2003 and every year thereafter for ten years. This loan bears interest at 7.25% and matures in July 2012. Interest due to ARI will be deducted from the quarterly return owed by ARI to the Class A Limited Partners, eliminating the quarterly
payments. In October 2005, ARI agreed to settle the remaining obligations under this loan by paying a lump sum of $425,000, making the total advanced $740,000. After January 2007, ARI may redeem the Class A Limited Partners interests in
exchange for cancellation of both notes.

In September 2005, ARI sold 10 acres of unimproved land to a third party for $1.5 million and
provided $1.1 million of the purchase price as seller financing. The secured note bore interest at 10%, required monthly interest only payments, and matured in September 2008. In December 2005, ARI sold this note to a financial institution for
full face value less closing costs, plus accrued interest. ARI and other related parties have also guaranteed the full payment of the note balances, including any outstanding interest and costs incurred by the financial institution.

In December 2005, ARI sold 27.192 acres and 3.73 acres to a third party for $10.1 million and $1.4 million, and provided $7.6 million and $1.0 million of
seller financing, respectively. Both notes bear interest at 8.0% per



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



annum, require monthly interest only payments, and mature in December 2008. In January 2006, ARI sold both notes to a financial institution for full face
value less closing costs, plus accrued interest. The financial institution has a Put Option that would require ARI to purchase both notes back under the following conditions: (1) failure to construct agreed upon roads on the property by
December 2006; (2) there occurs any event of default by the buyer; (3) certain escrow deposits for the road completion are not sufficient to cover the cost of the road construction; (4) any amendment, modification or assignment of
certain development and escrow agreements between ARI and the buyer; and (5) failure of ARI to deliver certain documents to the financial institution within a timely manner. ARI and other related parties have also guaranteed the full payment of
the note balances, including any outstanding interest and costs incurred by the financial institution.

In December 2004, ARI sold the
Centura Tower office building to a partnership and retained a 1% non-controlling general partner interest and a 4% limited partner interest. ARI has certain obligations to fund the partnership for rent abatements, tenant improvements, leasing
commissions and other cash shortfalls. $4.1 million of these obligations were escrowed by ARI with the lender at loan closing. Through December 31, 2005, ARI has funded $4.7 million of these obligations, with $4.1 million recorded as an
investment in the partnership and the remainder of $603,000 in the form of a note receivable from the partnership. This note has no maturity date, requires no payments, and bears interest at a fixed rate of 7.0% per annum. The note will be paid
out of excess cash flow or from sales proceeds, but only after certain partner preferred returns are paid.

In August 2001, ARI agreed to
fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bore interest at a variable rate (then 9.0% per annum), required monthly interest only payments, and originally matured in January
2003. As of March 2004, ARI had funded a total of $4.3 million. On January 22, 2003, ARI agreed to extend the maturity date until May 1, 2003. The collateral used to secure ARIs second lien was seized by the first lien holder. On
March 11, 2004, ARI agreed to accept an assignment of claims in litigation as additional security for the note. In December 2004, ARI agreed to a Modification Agreement with the borrower, which was effective November 1, 2003. As of the
modified effective date, accrued interest of $582,000 was added to the principal balance of the note, the interest rate fixed at 9.0% per annum and principal and interest is due November 2005. ARI also received Pledge and Security Agreements in
various partnership interests belonging to the borrower and received various Assignments of Proceeds from sales in certain entities owned by the borrower. ARI reduced accrued interest and principal by $1.5 million from the receipt of notes
receivable assigned to ARI by borrower and by $605,000 from cash received. ARI also received $1.4 million in January 2005 that was applied to accrued interest and principal effective December 30, 2004. As a result of the modification, ARI
recognized a reduction of $1.4 million for loan loss expense in 2004. In December 2005, ARI advanced $2.5 million under this note to the borrower.

In March 2002, ARI sold the 174,513 Sq. Ft. Hartford Office Building in Dallas, Texas, for $4.0 million, providing $4.0 million in seller financing as well as an additional $1.4 million line of credit for leasehold improvements all in the
form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 8.0% per annum, requires monthly interest only payments and matures in March 2007. As of March 2006, ARI has funded $896,000 of the $1.4 million
line of credit. ARI determined during the third quarter of 2005 that it would classify this note as non-performing due to the lack of debt payments received and the probability that no debt payments would be received in the future. Effective for the
quarter ended September 30, 2005, ARI no longer accrues interest on this note. The loan is not considered impaired due to managements opinion that the fair value of the collateral is sufficient to cover the current loan balance and
accrued interest at March 2006.

In July 2002, ARI entered into an agreement to fund up to $300,000 under a revolving line of credit
secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum, requires



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



monthly interest only payments, and matured in June 2005. This loan was extended to June 2006 in the second quarter of 2005 and was subsequently modified in
the fourth quarter of 2005. This second modification extends the loan maturity to October 2007 and limits any advances under the line of credit to $25,000 per month. As of March 2006, the borrower had $211,000 of available credit under the credit
limit.

In September 1999, in conjunction with the sale of two apartments in Austin, Texas, $2.1 million in purchase money financing was
provided, secured by limited partnership interests in two limited partnerships owned by the buyer. In March 2000, the borrower made a $1.1 million payment. The borrower executed a replacement promissory note for the remaining note balance of $1.0
million, which was unsecured, non-interest bearing and matured in April 2003. In 2004, ARI initiated legal action to collect the note. In August 2005, a settlement agreement was reached. The note will be replaced with a new promissory note, also
non-interest bearing, which is secured by a $1.5 million Agreed Judgment. The note calls for 36 monthly payments beginning in January 2006, with a balloon payment of $460,000 due in January 2009. ARI will continue to classify this note as
non-performing even though payments have been received in 2006.

In February 2003, ARI sold an 89.3 acre tract of its Katrina land parcel
for $8.5 million, paying $410,000 after payment of closing costs and debt pay down and providing purchase money financing of $5.6 million. The note bears interest at 8.0% per annum and matures three years after the recording of the Deed of
Trust. Interest was to begin accruing after improvements to the site were completed by ARI. The costs to ARI to complete the improvements, estimated to be $2.5 million, were accrued in 2002. By 2005 a portion of the improvements had been completed
and the remaining accrual at December 31, 2005 is $1.2 million. At March 2006, negotiations with the buyer to settle the obligations are underway. The remaining improvements are not expected to be completed before the settlement. The note is
classified as non-performing at December 31, 2005.

In November 2003, ARI purchased a note receivable from an unrelated party for $1.4
million, including accrued and unpaid interest. The note was secured by a first lien Deed of Trust on 13.0 acres of undeveloped land in Harris County, bore interest at the default rate of 18.0%, and matured in May 2003. In May 2005, ARI obtained
title to the property via a Deed in Lieu of Foreclosure. See NOTE 2. REAL ESTATE.

In December 2002, ARI sold a 238.0 acre
tract of its Desert Wells land parcel for $23.8 million, receiving $321,000 after payment of closing costs and debt paydown and providing purchase money financing of $21.4 million. The first lien financing of $17.8 million bore interest at
8.0% per annum, matured in December 2004, and required payments beginning in March 2003. In March 2003, the note was sold to an unrelated party for $17.1 million plus accrued and unpaid interest. The buyer of the note has limited recourse
against a 53 acre parcel of ARIs Katrina land, in event of default by the borrower. ARI recognized a previously deferred gain of $15.0 million upon completion of the sale of the note. The second lien financing of $3.6 million bore interest at
8.0% per annum and matured on March 31, 2003. All principal and interest were due at maturity. In February 2005, the note was exchanged for 23.0 acres of land in Palm Desert, California. See NOTE 2. REAL ESTATE.

Related Parties.In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to One Realco. At that
time, a wholly-owned subsidiary of One Realco owned approximately 2.2% of the outstanding shares of ARIs common stock. The line of credit bore interest at 12.0% per annum. All principal and interest were due at maturity in February 2002.
The line of credit was guaranteed by BCM. In June 2001, $810,000 in principal and interest was collected. In December 2001, $825,000 in principal and interest was collected. In February 2002, the line of credit was increased to $18.0 million,
accrued but unpaid interest of $217,000 was added to the principal, and the maturity date was extended to February 2004. In March 2002, ARI funded an additional $1.8 million, increasing the outstanding principal balance to $15.5 million. In October
2002, $856,900 in interest was collected, by the return of 85,690 shares of ARI Series A Preferred Stock. In June 2003,



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



ARI sold a participating interest in $5.8 million of the $15.5 million balance to BCM, receiving 314,141 TCI shares from BCM (see NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES.) In February 2004, $2.3 million in interest was collected, accrued but unpaid interest of $161,000 was added to the principal, the maturity date was extended to February 2007, and the interest rate was
changed to 3.0% over the prime rate, currently at 10.5%. In December 2005, $500,000 in interest was collected. All principal and interest are due at maturity. On February 1, 2006 Prime acquired from One Realco all of the issued and outstanding
stock of the former subsidiary which owns 234,450 shares of ARI common stock.

In March 2004, ARI sold a K-Mart in Cary, North Carolina to
BCM for $3.2 million, including the assumption of debt. ARI also provided $1.5 million of the purchase price as seller financing. The unsecured note bears interest at 2.0% over the prime rate, currently 9.5%, and matured in April 2005. In April
2005, the note extended to April 2008.

In March 2004, ARI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million,
including the assumption of debt. ARI also provided $1.3 million of the purchase price as seller financing. The unsecured note bears interest at 2.0% over the prime rate, currently 9.5%, and matured in April 2005. In April 2005, the note extended to
April 2008.

In October 1999, ARI funded a $4.7 million loan to Realty Advisors. The loan, to provide funds for acquisitions or working
capital needs, was secured by all of the outstanding shares of common stock of American Reserve Life Insurance Company. The loan bore interest at 10.25% per annum and matured in November 2001. In January 2000, $100,000 was collected. In
November 2001, the maturity date was extended to November 2004. The collateral was changed to a pledge of 850,000 shares of ARI common stock owned by BCM. The interest rate was changed to 2.0% over the prime rate, currently 9.5% per annum, and
the accrued but unpaid interest of $1.0 million was added to the principal. The new principal balance is $5.6 million. In September 2003, $673,000 in accrued interest was collected. In August 2004, $342,000 in accrued interest was collected. In
November 2004, the maturity date was extended to November 2006. In September 2005, $342,000 in accrued interest was collected. All principal and accrued interest are due at maturity.



|NOTE 4. | ALLOWANCE FOR ESTIMATED LOSSES
|------- | ------------------------------

Activity in the allowance for estimated losses was as follows:



|                                          |  |      |       |   |      |   |        |      |  |   |      
|----------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | -----
|                                          |  | 2005 |       |   | 2004 |   |        | 2003
|Balance January 1,                        |  | $    | 1,865 |   |      | $ | 4,633  |      |  | $ | 3,077
|TCI allowance added through consolidation |  |      |      |   |      |   |       |      |  |   | 1,456
|(Decrease) increase in provision          |  |      | (865  | ) |      |   | (2,768 | )    |  |   | 100  
|                                          |  |      |       |   |      |   |        |      |  |   |      
|Balance December 31,                      |  | $    | 1,000 |   |      | $ | 1,865  |      |  | $ | 4,633
|                                          |  |      |       |   |      |   |        |      |  |   |      

The allowance was reduced in 2005 when ARI received title to 13 acres of land in Harris County in
settlement of a $1.4 million note from an unrelated party. See NOTE 3. NOTES AND INTEREST RECEIVABLE. The allowance was reduced in 2004 for the reversal of amounts determined to be in excess of required reserves.



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

Before 2003, ARIs investment in real estate entities included equity securities of IORI and TCI, and interests in real estate joint venture partnerships. BCM, ARIs advisor until June 30, 2003, also served as advisor to IORI
and TCI until June 30, 2003.



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Through March 31, 2003, ARI accounted for its investment in IORI and TCI and the joint venture
partnerships using the equity method. ARI began consolidation of TCIs and IORIs accounts and operations effective March 31, 2003. See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The effect of consolidating
TCIs and IORIs operations from the completion of the tender offer through March 31, 2003 was determined to be immaterial. On June 2, 2003, ARI exchanged all of its 674,971 IORI shares with BCM, receiving 650,000 TCI shares from
BCM. After the exchange, ARI owned 72.9% of the outstanding shares of TCI. On June 30, 2003, ARI sold a participating interest in $5.8 million of its $15.5 million line of credit receivable from One Realco to BCM, receiving 314,141 TCI shares
from BCM (see NOTE 3. NOTES RECEIVABLE). After the transaction, ARI owned 76.8% of the outstanding shares of TCI. In December 2003, ARI purchased 88,600 TCI shares in market transactions and 204,633 TCI shares in transactions with
related parties for a total of $1.4 million. At December 31, 2004, ARI owned 82.2% of the outstanding shares of TCI. ARI no longer directly owns any IORI shares. ARI owned 20.4% of IORI through TCIs ownership of IORI shares at
December 31, 2005 compared to 19.7% at December 31, 2004. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003.

ARI is a non-controlling 30.0% general partner in Sacramento Nine (SAC 9), which owned an office building in Rancho Cordova, California. In December 2004, SAC 9 sold the office building for $3.7 million,
of which ARI received $1.1 million after closing costs and fees. ARI recognized a gain on the sale of investment in SAC 9 of $882,000 relating to this transaction.

In December 2004, ARI sold a 95% interest in Garden Centura, L.P. that owns the 410,901 sq. ft. Centura Tower office building located in Farmers Branch, Texas. ARI retained a non-controlling 1% general partner and 4%
limited partner interest in Garden Centura, L.P. ARI accounts for its investment in this partnership on the equity method in 2005 and on the cost basis in 2004.

The investments in IORI and the joint venture partnerships are accounted for using the equity method as more fully described in NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESInvestments in equity
investees.

A significant portion of ARIs investment in IORI and TCI is pledged as collateral for borrowings. See NOTE 7.
NOTES AND INTEREST PAYABLE and NOTE 8. STOCK-SECURED NOTES PAYABLE.

Investments in equity investees consisted of
the following:



|                     |  |                                             |   |  |                                                  |        |                                                   |   |                                                |  |   |      
|-------------------- |  | ------------------------------------------- | - |  | ------------------------------------------------ | ------ | ------------------------------------------------- | - | ---------------------------------------------- |  | - | -----
|Investee             |  | Percentage ofOwnership At December 31, 2005 |   |  | Carrying Value ofInvestment at
December 31, 2005 |        | EquivalentInvestee BookValue at
December 31, 2005 |   | Market Value ofInvestment at December 31, 2005
|IORI                 |  | 24.88                                       | % |  | $                                                | 6,155  |                                                   | $ | 11,159                                         |  | $ | 6,534
|Garden Centura, L.P. |  | 5.00                                        |   |  |                                                  | 6,048  |                                                   |   | 1,910                                          |  |   |      
|Other                |  |                                             |   |  |                                                  | 1,318  |                                                   |   |                                                |  |   |      
|                     |  |                                             |   |  |                                                  |        |                                                   |   |                                                |  |   |      
|                     |  |                                             |   |  | $                                                | 13,521 |                                                   |   |                                                |  |   |      
|                     |  |                                             |   |  |                                                  |        |                                                   |   |                                                |  |   |      
|Investee             |  | Percentage ofOwnership At December 31, 2004 |   |  | Carrying Value ofInvestment at December 31, 2004 |        | EquivalentInvestee BookValue at December 31, 2004 |   | Market Value ofInvestment at December 31, 2004
|IORI                 |  | 24.03                                       | % |  | $                                                | 5,765  |                                                   | $ | 10,545                                         |  | $ | 5,532
|Garden Centura, L.P. |  | 5.00                                        |   |  |                                                  | 1,925  |                                                   |   |                                                |  |   |      
|Other                |  |                                             |   |  |                                                  | 522    |                                                   |   |                                                |  |   |      
|                     |  |                                             |   |  |                                                  |        |                                                   |   |                                                |  |   |      
|                     |  |                                             |   |  | $                                                | 8,212  |                                                   |   |                                                |  |   |      
|                     |  |                                             |   |  |                                                  |        |                                                   |   |                                                |  |   |      



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Set forth below are summary financial data for equity investees:



|                                                      |  |      |          |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | 2005 |          |   | 2004 |   |         |      | 
|Real estate, net of depreciation                      |  | $    | 115,980  |   |      | $ | 86,279  |      |  |   |         |  
|Notes receivable                                      |  |      | 63,045   |   |      |   |        |      |  |   |         |  
|Other assets                                          |  |      | 12,492   |   |      |   | 4,662   |      |  |   |         |  
|Notes payable                                         |  |      | (102,272 | ) |      |   | (44,571 | )    |  |   |         |  
|Other liabilities                                     |  |      | (5,157   | ) |      |   | (2,579  | )    |  |   |         |  
|                                                      |  |      |          |   |      |   |         |      |  |   |         |  
|Equity                                                |  | $    | 84,088   |   |      | $ | 43,791  |      |  |   |         |  
|                                                      |  |      |          |   |      |   |         |      |  |   |         |  
|                                                      |  |      |         
|                                                      |  | 2005 |          |   | 2004 |   |         | 2003 | 
|Revenues                                              |  | $    | 20,149   |   |      | $ | 9,227   |      |  | $ | 35,306  |  
|Depreciation                                          |  |      | (3,722   | ) |      |   | (740    | )    |  |   | (5,817  | )
|Provision for losses                                  |  |      |         |   |      |   |        |      |  |   | (956    | )
|Interest                                              |  |      | (5,829   | ) |      |   | (3,491  | )    |  |   | (11,517 | )
|Operating expenses                                    |  |      | (8,740   | ) |      |   | (4,888  | )    |  |   | (26,287 | )
|                                                      |  |      |          |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations              |  |      | 1,858    |   |      |   | 108     |      |  |   | (9,271  | )
|Income (loss) from discontinued operations            |  |      |         |   |      |   | (89     | )    |  |   | (1,685  | )
|Gain from sale of discontinued operations             |  |      |         |   |      |   | 5,473   |      |  |   | 5,334   |  
|                                                      |  |      |          |   |      |   |         |      |  |   |         |  
|Net income (loss)                                     |  | $    | 1,858    |   |      | $ | 5,492   |      |  | $ | (5,622  | )
|                                                      |  |      |          |   |      |   |         |      |  |   |         |  
|                                                      |  |      |         
|ARIs equity share of:                                |  |      |          |   |      |   |         |      |  |   |         |  
|                                                      |  |      |         
|                                                      |  | 2005 |          |   | 2004 |   |         | 2003 | 
|Loss before gain from sale of discontinued operations |  | $    | 397      |   |      | $ | (41     | )    |  | $ | (4,441  | )
|Gain from sale of discontinued operations             |  |      |         |   |      |   | 2,212   |      |  |   | 716     |  
|                                                      |  |      |          |   |      |   |         |      |  |   |         |  
|Net income (loss)                                     |  | $    | 397      |   |      | $ | 2,171   |      |  | $ | (3,725  | )
|                                                      |  |      |          |   |      |   |         |      |  |   |         |  

The cash flow from IORI is dependent on the ability of IORI to make distributions. IORI ceased
making quarterly distributions in the fourth quarter of 2000.

ARI acquired its initial investment in IORI and TCI in 1989.



|NOTE 6. | MARKETABLE EQUITY SECURITIES
|------- | ----------------------------

In March 2003, TCI acquired equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 for $5.0 million, representing approximately a 9.2% ownership interest. This investment is considered an available-for-sale security. TCI has
recognized unrealized gains of $866,000 and $1.6 million during 2005 and 2004, respectively, due to increases in market price since December 31, 2003.



74



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|NOTE 7. | NOTES AND INTEREST PAYABLE
|------- | --------------------------

Notes and interest payable consisted of the following:



|                 |  |                     |         |            |   |                     |  |           |         |  |   |        
|---------------- |  | ------------------- | ------- | ---------- | - | ------------------- |  | --------- | ------- |  | - | -------
|                 |  | 2005                |         | 2004      
|                 |  | EstimatedFair Value |         | Book Value |   | EstimatedFair Value |  | BookValue
|Notes payable    |  | $                   | 924,660 |            | $ | 1,012,466           |  | $         | 825,371 |  | $ | 931,663
|                 |  |                     |         |            |   |                     |  |           |         |  |   |        
|Interest payable |  |                     |         |            |   | 9,356               |  |           |         |  |   | 8,258  
|                 |  |                     |         |            |   |                     |  |           |         |  |   |        
|                 |  |                     |         |            | $ | 1,021,822           |  |           |         |  | $ | 939,921
|                 |  |                     |         |            |   |                     |  |           |         |  |   |        

Scheduled principal payments on notes payable are due as follows:



|           |  |   |          
|---------- |  | - | ---------
|2006       |  | $ | 275,697  
|2007       |  |   | 117,286  
|2008       |  |   | 91,411   
|2009       |  |   | 25,741   
|2010       |  |   | 34,864   
|Thereafter |  |   | 467,467  
|           |  |   |          
|           |  | $ | 1,012,466
|           |  |   |          

Stated interest rates on notes payable ranged from 2.0% to 16.4% per annum at
December 31, 2005 and matured in varying installments between 2006 and 2045. At December 31, 2005, notes payable were collateralized by deeds of trust on real estate with a net carrying value of $1,048 million.

In July 2005, ARI secured a line of credit for $10.0 million for the acquisition and financing of land tracts. The line of credit bears interest at the
prime rate plus 1.0%, which is currently 8.5%, requires interest only payments, and matures in three years. Each land tract funding has a $2.0 million limit on the loan amount, requires interest only payments at the line of credits variable
rate, and has a maturity date of 18 months. ARI has used all $10 million of the line of credit for land purchases as of December 31, 2005.

In February 2005, ARI received a loan in the amount of $5.0 million. The note bears interest at 8.0% per annum, requires semi-annual interest payments, and matures in July 2006. The loan is collateralized by certain partnership
interests that hold apartments owned by ARI. Anytime before maturity, the lender has the option to convert the outstanding loan balance into general and limited partnership units in each of the partnerships, subject to HUD approval.

Prior to February 2004, the Brandeis Office Building in Omaha, Nebraska was occupied by two tenants, one of which occupied a significant portion of the
building. The larger tenant built its own building and moved out, resulting in the office building being at only approximately 20% occupancy. The loan matured in December 2003, and ARI proposed an extension of the maturity of the loan. The lender
desired a sufficient pay down of the loan. In February 2004, the title to the Brandeis Office Building was transferred to the lender by agreement. Outstanding indebtedness and accrued interest at that time was $8.8 million. ARI recorded a net
impairment of $4.4 million in the fourth quarter of 2003 for this transaction.



75



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A subsidiary of ARI developed and constructed a commercial property in Texas, consisting of a 220,000
square foot building, with construction financing guaranteed by ARI. Several challenges occurred with respect to the construction of the property, involving work stoppages, completion of construction by the prime contractor, and actions of the prime
contractor with respect to subcontractors. The construction loan matured and ARI proposed to the lender a month-to-month extension, but the lender desired an extension for a two-year period with excessive fees and points. During December 2003, ARI
sold the property to a related party, which instituted a reorganization proceeding, in an effort to restructure the indebtedness on the property. In November 2004, ARI settled with the contractor, who was also the junior lender, and modified and
extended its debt with the primary lender. ARI recognized an $8.4 million gain on settlement of debt for these transactions.

In May 2003,
the lenders on one of ARIs commercial properties located in Texas notified ARI that the loans on the property were in default, due to ARIs failure to make timely debt service payments. The balance owed on the loans was $18.7 million. In
December 2003, ARI sold the property to a related entity, which then filed for bankruptcy, in an effort to restructure the debt on the property. ARI expected to reacquire the property after the debt was restructured. This transaction was not
accounted for as a sale by ARI. The property and related debt remain on ARIs balance sheet. In November 2004, ARI settled with one of the lenders, paying $4.3 million in satisfaction of $6.9 million in principal and accrued but unpaid
interest, and modified its debt with the second lender, restructuring $14.5 million in principal and accrued but unpaid interest into a new loan balance of $13.0 million. ARI recognized a $4.1 million gain from forgiveness of debt from these
transactions.

In October 2003, ARI borrowed $1.6 million from IORI, which was then advanced to the Class A Limited Partners of Encino
Executive Plaza, Ltd. The loan bore interest at 2.0% per annum and matures in June 2006. All principal and interest are due at maturity. Effective January 1, 2004, the interest rate was changed to 5.49%.

In 2005, ARI financed/refinanced or obtained second mortgage financing on the following:



|                               |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|------------------------------ |  | ------------------ |  | -------------------------- |  | ------------ | ------ | -------------- | - | ---------------- |  | - | ------------ | - |  | ------------ | ---- |  | ----- | ---
|Property                       |  | Location           |  | Sq. Ft./Rooms/ Units/Acres |  | DebtIncurred |        | DebtDischarged |   | Net CashReceived |  |   | InterestRate |   |  | MaturityDate |     
|Apartments                     |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|Autumn Chase                   |  | Midland, TX        |  | 64 Units                   |  | $            | 1,166  |                | $ | 797              |  | $ | 317          |   |  | 5.88         | %(1) |  | 05/35 |    
|Courtyard                      |  | Midland, TX        |  | 133 Units                  |  |              | 1,342  |                |   | 966              |  |   | 266          |   |  | 5.88         | (1)  |  | 05/35 |    
|Southgate                      |  | Odessa, TX         |  | 180 Units                  |  |              | 1,879  |                |   | 1,712            |  |   | 61           |   |  | 5.88         | (1)  |  | 05/35 |    
|Sun Hollow                     |  | El Paso, TX        |  | 216 Units                  |  |              | 2,000  |                |   |                 |  |   | 2,000        |   |  | 12.50        |      |  | 01/06 | (4)
|Sunset                         |  | Odessa, TX         |  | 240 Units                  |  |              | 2,995  |                |   | 1,684            |  |   | 1,054        |   |  | 5.25         | (1)  |  | 10/35 |    
|Westwood                       |  | Odessa, TX         |  | 79 Units                   |  |              | 500    |                |   |                 |  |   | 464          |   |  | 5.25         | (1)  |  | 12/35 |    
|Hotels                         |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|The Majestic                   |  | Chicago, IL        |  | 55 Rooms                   |  |              | 3,225  |                |   |                 |  |   | 3,066        |   |  | 6.40         |      |  | 06/10 |    
|Williamsburg Hospitality House |  | Williamsburg, VA   |  | 296 Rooms                  |  |              | 11,000 |                |   | 10,540           |  |   | 137          |   |  | 6.19         | (1)  |  | 09/10 |    
|Land                           |  |                    |  |                            |  |              |        |                |   |                  |  |   |              |   |  |              |      |  |       |    
|2301 Valley Branch             |  | Farmers Branch, TX |  | 23.8 Acres                 |  |              | 2,420  |                |   | 2,841            |  |   | (385         | ) |  | 8.50         | (1)  |  | 12/06 |    
|Alliance Airport(2)            |  | Tarrant County, TX |  | 12.7 Acres                 |  |              | 553    |                |   |                 |  |   | 540          |   |  | 7.25         | (1)  |  | 01/07 |    
|Centura(3)                     |  | Farmers Branch, TX |  | 8.8 Acres                  |  |              | 6,727  |                |   |                 |  |   | 6,727        |   |  | 8.50         | (1)  |  | 08/07 |    
|DeSoto Ranch(2)                |  | DeSoto, TX         |  | 21.9 Acres                 |  |              | 1,635  |                |   | 1,271            |  |   | 336          |   |  | 7.25         | (1)  |  | 01/07 |    
|Elm Fork                       |  | Denton County, TX  |  | 105.4 Acres                |  |              | 7,740  |                |   |                 |  |   | 7,540        |   |  | 7.00         | (1)  |  | 07/06 |    
|McKinney 36                    |  | Collin County, TX  |  | 34.6 Acres                 |  |              | 4,000  |                |   | 1,747            |  |   | 2,123        |   |  | 6.50         | (1)  |  | 12/07 |    
|Mercer Crossing                |  | Farmers Branch, TX |  | 235 Acres                  |  |              | 3,000  |                |   |                 |  |   | 2,889        |   |  | 8.50         |      |  | 12/06 |    
|Nashville                      |  | Nashville, TN      |  | 109.6 Acres                |  |              | 7,000  |                |   |                 |  |   | 6,341        |   |  | 7.50         |      |  | 02/07 |    
|Payne I                        |  | Las Colinas, TX    |  | 109.9 Acres                |  |              | 6,732  |                |   |                 |  |   | 6,550        |   |  | 8.00         |      |  | 12/07 |    
|Sheffield Village(2)           |  | Grand Prairie, TX  |  | 13.9 Acres                 |  |              | 975    |                |   | 975              |  |   | 94           |   |  | 7.75         | (1)  |  | 03/07 |    
|West End(2)                    |  | Dallas, TX         |  | 6.3 Acres                  |  |              | 2,000  |                |   |                 |  |   | 1,951        |   |  | 7.25         | (1)  |  | 01/07 |    
|West End (2)                   |  | Dallas, TX         |  | 5.5 Acres                  |  |              | 2,000  |                |   |                 |  |   | 1,842        |   |  | 8.00         | (1)  |  | 06/07 |    



76



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##### Index to Financial Statements

|                 |  |                   |  |                            |  |              |  |                |  |                  |  |              |     |  |             
|---------------- |  | ----------------- |  | -------------------------- |  | ------------ |  | -------------- |  | ---------------- |  | ------------ | --- |  | ------------
|Property         |  | Location          |  | Sq. Ft./Rooms/ Units/Acres |  | DebtIncurred |  | DebtDischarged |  | Net CashReceived |  | InterestRate |     |  | MaturityDate
|Office Buildings |  |                   |  |                            |  |              |  |                |  |                  |  |              |     |  |             
|Bridgeview Plaza |  | LaCrosse, WI      |  | 116,008 Sq. Ft.            |  | 7,197        |  | 6,304          |  | 649              |  | 7.25         | (1) |  | 03/10       
|Shopping Centers |  |                   |  |                            |  |              |  |                |  |                  |  |              |     |  |             
|Dunes Plaza      |  | Michigan City, IN |  | 223,869 Sq. Ft.            |  | 3,750        |  | 2,685          |  | 658              |  | 7.50         | (1) |  | 01/10       

---

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

|(2) | Drawn on the $10.0 million line of credit for land acquisitions and financing.
|--- | ------------------------------------------------------------------------------

|(3) | IORI purchased the Centura Land for $13.0 million. See NOTE 9. RELATED PARTY TRANSACTIONS.
|--- | --------------------------------------------------------------------------------------------

|(4) | Paid in full in January 2006.
|--- | -----------------------------

In 2004, ARI
financed/refinanced or obtained second mortgage financing on the following:



|                               |  |                    |  |                            |  |              |        |     |                |   |        |                       |  |   |              |      |  |              |     |  |      
|------------------------------ |  | ------------------ |  | -------------------------- |  | ------------ | ------ | --- | -------------- | - | ------ | --------------------- |  | - | ------------ | ---- |  | ------------ | --- |  | -----
|Property                       |  | Location           |  | Sq. Ft./Rooms/ Units/Acres |  | DebtIncurred |        |     | DebtDischarged |   |        | Net CashReceived/Paid |  |   | InterestRate |      |  | MaturityDate
|Apartments                     |  |                    |  |                            |  |              |        |     |                |   |        |                       |  |   |              |      |  |              |     |  |      
|Mountain Plaza                 |  | El Paso, TX        |  | 188 Units                  |  | $            | 5,184  |     |                | $ | 4,257  |                       |  | $ | 370          |      |  | 5.16         | %   |  | 12/34
|Treehouse                      |  | Irving, TX         |  | 160 Units                  |  |              | 5,780  |     |                |   | 5,027  |                       |  |   | 138          |      |  | 5.06         |     |  | 07/34
|Villager                       |  | Fort Walton, FL    |  | 33 Units                   |  |              | 804    |     |                |   | 507    |                       |  |   | 129          |      |  | 5.15         |     |  | 06/34
|Waters Edge III                |  | Gulfport, MS       |  | 238 Units                  |  |              | 3,250  |     |                |   |       |                       |  |   |             | (5)  |  | 12.50        |     |  | 12/04
|Hotels                         |  |                    |  |                            |  |              |        |     |                |   |        |                       |  |   |              |      |  |              |     |  |      
|City Suites                    |  | Chicago, IL        |  | 45 Rooms                   |  |              | 3,640  |     |                |   |       |                       |  |   | 3,548        |      |  | 6.75         | (1) |  | 09/09
|Majestic Inn                   |  | San Francisco, CA  |  | 57 Rooms                   |  |              | 2,000  | (8) |                |   | 5,138  |                       |  |   | (1,238       | )    |  | 5.75         | (1) |  | 10/05
|Williamsburg Hospitality House |  | Williamsburg, VA   |  | 296 Rooms                  |  |              | 11,500 |     |                |   | 12,332 |                       |  |   | (13,689      | )(3) |  | 7.00         | (1) |  | 03/05
|Willows                        |  | Chicago, IL        |  | 52 Rooms                   |  |              | 3,500  |     |                |   |       |                       |  |   | 3,411        |      |  | 6.75         | (1) |  | 09/09
|Land                           |  |                    |  |                            |  |              |        |     |                |   |        |                       |  |   |              |      |  |              |     |  |      
|Bonneau                        |  | Dallas County, TX  |  | 8.4 Acres                  |  |              | 9,661  | (6) |                |   | 10,283 | (7)                   |  |   | 76           |      |  | 6.75         | (1) |  | 09/05
|Centura                        |  | Farmers Branch, TX |  | 8.8 Acres                  |  |              | 4,485  |     |                |   | 4,000  |                       |  |   | (183         | )    |  | 7.00         | (1) |  | 02/05
|Chase Oaks                     |  | Plano, TX          |  | 5.8 Acres                  |  |              |       | (6) |                |   |       |                       |  |   |             |      |  |             |     |  |     
|Cooks Lane                     |  | Ft. Worth, TX      |  | 23.2 Acres                 |  |              | 550    |     |                |   |       |                       |  |   |             |      |  | 6.75         |     |  | 11/06
|Dalho                          |  | Farmers Branch, TX |  | 2.9 Acres                  |  |              |       | (6) |                |   |       |                       |  |   |             |      |  |             |     |  |     
|Dominion/Hollywood             |  | Farmers Branch, TX |  | 66.1 Acres                 |  |              | 6,985  |     |                |   | 6,222  |                       |  |   | (67          | )    |  | 7.00         | (1) |  | 02/05
|HSM                            |  | Farmers Branch, TX |  | 6.2 Acres                  |  |              |       | (6) |                |   |       |                       |  |   |             |      |  |             |     |  |     
|JHL Connell                    |  | Carrollton, TX     |  | 7.6 Acres                  |  |              |       | (6) |                |   |       |                       |  |   |             |      |  |             |     |  |     
|Katy                           |  | Harris County, TX  |  | 130.6 Acres                |  |              | 7,500  |     |                |   |       |                       |  |   | (75          | )(4) |  | 6.00         | (1) |  | 02/07
|Lacy Longhorn                  |  | Farmers Branch, TX |  | 17.1 Acres                 |  |              | 1,965  |     |                |   | 1,800  |                       |  |   | 78           |      |  | 4.03         | (1) |  | 07/07
|Las Colinas                    |  | Las Colinas, TX    |  | 1.5 Acres                  |  |              |       | (6) |                |   |       |                       |  |   |             |      |  |             |     |  |     
|Marine Creek                   |  | Ft. Worth, TX      |  | 28.4 Acres                 |  |              | 1,785  |     |                |   |       |                       |  |   | 1,746        |      |  | 4.03         | (1) |  | 07/07
|Mason/Goodrich                 |  | Houston, TX        |  | 39.4 Acres                 |  |              | 2,133  |     |                |   | 714    |                       |  |   | 1,345        |      |  | 6.00         | (1) |  | 08/05
|Stagliano                      |  | Farmers Branch, TX |  | 3.2 Acres                  |  |              |       | (6) |                |   |       |                       |  |   |             |      |  |             |     |  |     
|Vista Ridge                    |  | Lewisville, TX     |  | 64.9 Acres                 |  |              |       | (6) |                |   |       |                       |  |   |             |      |  |             |     |  |     
|Walker                         |  | Dallas County, TX  |  | 132.6 Acres                |  |              | 8,750  |     |                |   | 7,950  |                       |  |   | 264          |      |  | 5.90         | (1) |  | 06/06
|Office Buildings               |  |                    |  |                            |  |              |        |     |                |   |        |                       |  |   |              |      |  |              |     |  |      
|225 Baronne                    |  | New Orleans, LA    |  | 416,834 Sq. Ft.            |  |              | 500    | (8) |                |   |       |                       |  |   |             |      |  | 5.75         | (1) |  | 10/05
|1010 Common                    |  | New Orleans, LA    |  | 494,579 Sq. Ft.            |  |              | 16,250 |     |                |   | 8,000  |                       |  |   | 7,829        |      |  | 4.03         | (1) |  | 07/07
|Amoco                          |  | New Orleans, LA    |  | 378,244 Sq. Ft.            |  |              | 1,500  | (8) |                |   |       |                       |  |   |             |      |  | 5.75         | (1) |  | 10/05
|Centura Tower                  |  | Farmers Branch, TX |  | 410,901 Sq. Ft.            |  |              | 34,000 |     |                |   | 36,889 |                       |  |   | (4,588       | )    |  | 5.50         | (1) |  | 04/06
|Centura Tower                  |  | Farmers Branch, TX |  | 410,901 Sq. Ft.            |  |              | 3,800  | (2) |                |   |       |                       |  |   | 3,737        |      |  | 5.75         | (1) |  | 04/06
|Centura Tower                  |  | Farmers Branch, TX |  | 410,901 Sq. Ft.            |  |              | 50,000 |     |                |   | 37,594 |                       |  |   | 2,989        |      |  | 4.94         |     |  | 10/09
|Cooley                         |  | Farmers Branch, TX |  | 27,000 Sq. Ft.             |  |              | 2,600  |     |                |   | 1,726  |                       |  |   | 811          |      |  | 5.50         | (1) |  | 09/06
|Two Hickory Centre             |  | Farmers Branch, TX |  | 96,127 Sq. Ft.             |  |              | 7,500  |     |                |   | 7,500  |                       |  |   | (164         | )    |  | 3.60         | (1) |  | 05/06
|Warehouses                     |  |                    |  |                            |  |              |        |     |                |   |        |                       |  |   |              |      |  |              |     |  |      
|Addison Hangers I & II(9)      |  | Addison, TX        |  | 52,650 Sq. Ft.             |  |              | 4,500  |     |                |   | 2,592  |                       |  |   | 1,635        |      |  | 10.00        |     |  | 09/14

---

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

|(2) | 2ndlien advance on Centura Tower.
|--- | ---------------------------------



77



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(3) | Cash of $11.0 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | ------------------------------------------------------------------------------------------

|(4) | Cash of $7.4 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | -----------------------------------------------------------------------------------------

|(5) | Cash of $3.3 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | -----------------------------------------------------------------------------------------

|(6) | Single note, with all properties as collateral.
|--- | -----------------------------------------------

|(7) | Debt forgiveness of $2.3 million recognized.
|--- | --------------------------------------------

|(8) | The Majestic Inn, 225 Baronne Office Building and Amoco Office Building are cross collateralized. The debt incurred on 225 Baronne and Amoco are 2nd lien loans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | The Addison Hangers were sold in September 2004 to a third party but were then leased back for 10 years on a triple net lease basis. This transaction has been recorded as a
financing transaction for accounting purposes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|NOTE 8. | STOCK-SECURED NOTES PAYABLE
|------- | ---------------------------

ARI has
margin arrangements with various financial institutions and brokerage firms, which provide for borrowings of up to 50.0% of the market value of marketable equity securities. ARI also has other notes payable secured by stock. The borrowings under
such margin arrangements and notes are secured by the equity securities of IORI and TCI and ARIs trading portfolio securities and bear interest rates ranging from 9.5% to 24.0% per annum. Margin borrowings were $22.5 million at
December 31, 2005 and $18.7 million at December 31, 2004, representing 21.1% and 20.8%, respectively, of the market values of the equity securities at those dates.

Sunset Management LLC.    On May 16, 2005, the United States District Court for the Northern District of Texas, Dallas
Division, entered its Memorandum Opinion and Order and Judgment dismissing a purported stockholders derivative action filed October 5, 2004, by Sunset Management LLC against a number of entities, including the Company, as Case
No. 3:04-CV-02162-B styled Sunset Management LLC, derivatively on behalf of Transcontinental Realty Investors, Inc. v. American Realty Investors, Inc., et al. The Courts Judgment granted a Motion to Dismiss filed by the Defendants,
including the Company, and ordered that Plaintiff Sunset Management LLC take nothing by its suit. No appeal was timely filed, and the dismissal of the action is now final. The Sunset Complaint in this case contained many of the same allegations
raised by Sunset Management LLC in four other cases which, as rulings have occurred, have resulted in a denial of Sunset Management LLCs requested relief. The dismissed action was the fifth in a continuing series of actions involving Sunset
Management LLC, certain subsidiaries of the Company and TCI resulting from a loan in September 2001 to BCM and three subsidiaries of the Company in the original amount of $30 million ($19.5 million of which bore interest at 24% per annum, while
the remaining $10.5 million of which bore interest at 20%). In September 2002, $15 million in principal was repaid leaving a $15 million aggregate balance, (ARIs portion of the balance is $5 million) which Sunset Management LLC orally
agreed to extend the maturity date and accept substitute collateral, an arrangement which Sunset Management LLC did not honor, resulting in the original litigation filed in Texas State Court during October 2002 as Cause No. 02-09433-I in the
162ndJudicial District Court of Dallas County, Texas, originally styled American Realty Trust, Inc., ART
Williamsburg, Inc., Basic Capital Management, Inc. and EQK Holdings, Inc. v. Sunset Management LLC (the Texas Litigation). The Texas Litigation alleged breach of contract, misrepresentation, breach of duty of good faith and fair
dealing and slander of title by Sunset Management LLC and sought certain declaratory relief against Sunset Management LLC, as well as temporary and permanent anti-suit injunctions against Sunset Management LLC. The Texas Litigation has been removed
to the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division, as Adversary Proceeding No. 03-04256 styled American Realty Trust, Inc., et al. v. Sunset Management LLC, et al. This Adversary Proceeding is
associated with the case styled In Re: ART Williamsburg, Inc., Debtor, pending in the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division, Case No. 4:03-43909-BTR-11, filed August 22, 2003.



78



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company is also a defendant in related litigation with Sunset Management LLC in the case styled
Sunset Management LLC, et al. v. American Realty Investors, Inc., et al., now pending in the United States District Court for the Eastern District of Texas, Tyler Division, as Case No. 4:06-CV-18. In this case, Sunset Management LLC
originally sought to require a conveyance by ARI and/or its subsidiaries of certain pledged shares back to the pledgors, BCM and certain subsidiaries of ARI. Sunset Management LLC has filed a Motion for Summary Judgment claiming that transfer of the
ownership of the shares among the Company and its affiliates violates the pledge agreements. ARI has responded to the Motion, which it believes is without merit because the transfer of the shares harmed no one, did not affect the validity of the
pledge agreements, and in fact, benefited not only ARI but also probably Sunset Management LLC because it substantially reduced the taxes payable on a consolidated basis for ARI and TCI, thereby potentially increasing the value of the collateral
pledged. The Company expects this case to eventually be consolidated with the primary discussed in the preceding paragraph when that case is transferred to the district court.

Other Stock-secured notes payable.In September 2003, ARI obtained a security loan in the amount of $13.5 million from a
financial institution. The loan bears interest at 12.0% over the 30-day LIBOR rate, currently 16.4%, requires monthly payments of interest only and matured in September 2004. The loan is secured by 1,656,537 shares of TCI common stock and 250,000
shares of IORI common stock held by TCI. In September 2004, the maturity date was extended to December 2004. In December 2004, the maturity date was extended to March 2005. In March 2005, the maturity date was extended to March 2006. In March 2006,
the maturity date was extended to March 2007.

In May 2005, ARI received a loan in the amount of $4.0 million. The note bears interest at
the prime rate plus 2.0%, which is currently 9.5%, requires monthly interest only payments and matures in one year. The loan is collateralized by ARIs equity holdings in Realty Korea CR-REIT Co., Ltd. No. 1 and by equity securities owned
by an affiliate.

In October 2001, ARI obtained a security loan in the amount of $1.0 million from a financial institution. The loan bore
interest at 1.0% over the prime rate, required monthly payments of interest only, and matured in October 2003. The loan was secured by 250,000 shares of ARI common stock held by BCM. In October 2003, the maturity date was extended to December 2003.
In February 2004, ARI paid $450,000 in principal, and the maturity date was extended to February 2005. In February 2005, the note was paid in full.



|NOTE 9. | RELATED PARTY TRANSACTIONS
|------- | --------------------------

In
January 2005, an affiliate made a $700,000 note payment on ARIs behalf, reducing ARIs affiliate receivable.

In April 2005, ARI
purchased from IORI an additional 9.14% interest in a jointly-owned entity for $475,000, to increase ARIs ownership interest to a level sufficient to allow consolidation by ARI for federal income tax purposes. The consideration paid was based
upon the total amount paid by ARI and IORI to acquire the entity initially, with no discount or premium.

In June 2005, ARI purchased a
subsidiary of a related party for $4.1 million, reducing ARIs affiliate receivable.

In August 2005, ARI paid $4.1 million on behalf
of a related party, increasing ARIs affiliate receivable.

In August 2005, ARI sold the Windsor Tower Apartments. Cash of $860,000
was received by an affiliate, increasing ARIs affiliate receivable.



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In August 2005, ARI sold 8.8 acres of land to an affiliate for $6.7 million. For a period of one year
following closing and 90 days thereafter, the buyer has the right to convey the land to ARI for the original sales price, plus a 12% preferred return per annum accruing from the closing date. This transaction has been treated as a financing by ARI,
with a note payable of $6.7 million recorded.

In February 2004, ARI recorded the sale of a tract of Marine Creek land originally sold to a
related party in December 2003. This transaction was not recorded as a sale for accounting purposes in December 2003 and was recorded as an ARI refinancing transaction in February 2004. ARI received $1.2 million in cash from the related party in
February 2004 as payment on the land. ARI retained a note receivable with a balance of $270,000 that bore interest at 12.0% and matured in April 2009. In August 2005, the note was paid in full, including accrued interest. ARI recorded the sale of
the Marine Creek land tract due to the payment received on the note receivable.

In December 2005, ARI acquired a 100% interest in a 367.4
acre tract of the Palmer Lane land parcel. The land was acquired through cancellation of a $2.3 million note receivable from an unrelated party, assumption of debt, and a $7.6 million reduction in ARIs affiliate receivable.

In October 2003, ARI obtained a security loan in the amount of $2.6 million from a financial institution. In 2003, $1.8 million was advanced. In April
2004, an additional $825,000 was advanced. The proceeds were paid to an affiliate, increasing ARIs affiliate receivable.

In January
2004, ARI issued 200,000 shares of Series A 10.0% Cumulative Convertible Preferred Stock to Prime, ARIs advisor. In February 2004, 50,000 additional shares were issued to Prime. ARIs affiliate receivable was increased by $2.5 million.

In February 2004, ARI obtained an unsecured loan of $5.0 million. The proceeds of $5.0 million were received by an affiliate, increasing
ARIs affiliate receivable.

In February 2004, ARI obtained financing of $7.5 million on the Katy land tract. The funds, along with
additional cash of $6.3 million, were sent to an affiliate. Subsequently, the affiliate paid off the existing loan balance on an ARI property.

In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to One Realco. At that time, a wholly-owned subsidiary of One Realco owned approximately 2.1% of the outstanding shares of ARIs common Stock. The line
of credit bore interest at 12.0% per annum. All principal and interest were due at maturity in February 2002. The line of credit is guaranteed by BCM. In June 2001, $810,000 in principal and interest was collected. In December 2001, $825,000 in
principal and interest was collected. In February 2002, the line of credit was increased to $18.0 million, accrued but unpaid interest of $217,000 was added to the principal, and the maturity date was extended to February 2004. In March 2002, ARI
funded an additional $1.8 million, increasing the outstanding principal balance to $15.5 million. In October 2002, $856,900 in interest was collected, by the return of 85,690 shares of ARI Series A Preferred Stock. In June 2003, ARI sold a
participating interest in $5.8 million of the $15.5 million balance to BCM, receiving 314,141 TCI shares from BCM (see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.) In February 2004, $2.3 million in interest was collected, accrued
but unpaid interest of $161,000 was added to the principal, the maturity date was extended to February 2007, and the interest rate was changed to 3.0% over the prime rate, currently at 10.5%. In December 2005, $500,000 in interest was collected. All
principal and interest are due at maturity.

In May 2004, ARI purchased the Treehouse Apartments from an affiliate, with a net purchase
price of $7.5 million after assumption of debt and a note receivable, less cash received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs



80



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of El Dorado was not recorded as a sale for accounting purposes. ARI recorded the sale of the Cliffs of El Dorado in May 2004, due to payment received for
the Cliffs of El Dorado note receivable.

In July 2004, ARI obtained a loan of $3.2 million secured by a contract for sale of the Waters
Edge III Apartments. The proceeds of $3.2 million were received by an affiliate, increasing ARIs affiliate receivable.

In August
2003, ARI sold three Chicago hotels to a related party for $13.5 million, including the assumption of debt. Due to the sale to a related party to ARI and ARI having continued involvement and control of this entity, this transaction was not recorded
as a sale. In September 2004, ARI purchased the three Chicago hotels from the related party for assumption of debt and cancellation of the seller notes.

In September 2004, ARI sold 10.0 acres of land to an affiliate for a purchase price of $720,000 for a note receivable. Due to no cash received and common control, ARI has elected to continue consolidating this tract
of land until the requirements for a sale have been met. No sale has been recognized and no note receivable has been recorded.

In October
1999, ARI funded a $4.7 million loan to Realty Advisors. The loan, to provide funds for acquisitions or working capital needs, was secured by all of the outstanding shares of common stock of American Reserve Life Insurance Company. The loan bore
interest at 10.25% per annum, and matured in November 2001. In January 2000, $100,000 was collected. In November 2001, the maturity date was extended to November 2004. The collateral was changed to a pledge of 850,000 shares of ARI common stock
owned by BCM. The interest rate was changed to 2.0% over the prime rate, currently 9.5% per annum, and the accrued but unpaid interest of $1.0 million was added to the principal. The new principal balance is $5.6 million. In September 2003,
$673,000 in accrued interest was collected. In August 2004, $342,000 in accrued interest was collected. In November 2004, the maturity date was extended to November 2006. In September 2005, $342,000 in accrued interest was collected. All principal
and accrued interest are due at maturity.

In December 2003, ARI sold seven properties to subsidiaries of UHF. ARI sold 39.3 acres of
Pioneer Crossing land for $3.9 million, 10.7 acres of Marine Creek land for $1.5 million, the Limestone at Vista Ridge Apartments for $19.0 million, the Cliffs of El Dorado Apartments for $13.4 million, the Limestone Canyon Apartments for $18.0
million, the Sendero Ridge Apartments for $29.4 million, and Tivoli Apartments for $16.1 million. All of the transactions included the assumption of debt and notes receivable to ARI for the remainder of the purchase price. Ted Stokely, Chairman
of the Board of ARI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis Realty I, LLC, an affiliate, is President of UHF. Due to UHF being considered a related party to ARI and ARI having continued involvement and control of
these entities, these transactions were not recorded as sales. Instead, these transactions were accounted for on the deposit method, and the properties and corresponding debt were consolidated by ARI. All of these transactions were approved by
ARIs Board of Directors. Mr. Stokely abstained from voting on all of these transactions. The loans on Limestone Canyon apartments, Limestone at Vista Ridge apartments and Tivoli apartments were approved by their prospective lenders for
transfer to the purchasing entities. ARI has guaranteed the loans on both of these transfers. Also, Marine Creek land and the Cliffs of El Dorado apartments were recognized as sales during 2004. See NOTE 2. REAL ESTATE. Management is
currently seeking lender approval on the transfer of the notes associated with the Sendero Ridge apartments

In June 2002, ARI purchased
the Tiberon Trails Apartments from BCM for $12.3 million. The purchase price was determined based on the market value of the property exchanged, using a market rate multiple of net operating income. ARI assumed debt of $6.4 million. ARIs
receivable from BCM was reduced by $5.9 million, and no cash was paid by ARI. The business purpose of the transaction was to reduce the affiliate payable owed by BCM to ARI. In March 2004, ARI sold Tiberon Trails Apartments to an unrelated buyer
(see NOTE 2. REAL ESTATE).



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During 2002, ARIs Board of Directors authorized ARIs Chief Financial Officer to advance
funds either to or from ARI, through the advisor, in an amount up to $10.0 million and, subsequent to that, authorized ARIs Chief Financial Officer to make additional advances, on the condition that such advances shall be repaid in cash or
transfers of assets within 90 days. These advances are unsecured, generally have not had specific repayment terms, and have been reflected in ARIs financial statements as other assets and other liabilities. Effective July 1, 2005, ARI and
the advisor agreed to charge interest on the outstanding balance of funds advanced to or from ARI. The interest rate, set at the beginning of each quarter, is the prime rate plus 1% on the average daily cash balances advanced. Interest earned on the
advances totaled $1.7 million in 2005.

The following table reconciles the beginning and ending balances of affiliate receivables
(payables) as of December 31, 2005.



|                                       |  |       |          |   |      |   |      |  
|-------------------------------------- |  | ----- | -------- | - | ---- | - | ---- | -
|                                       |  | PRIME |          |   | IORI |  
|Balance, December 31, 2004             |  | $     | 13,579   |   |      | $ | (260 | )
|Cash transfers to affiliates           |  |       | 165,778  |   |      |   | 260  |  
|Cash transfers from affiliates         |  |       | (134,028 | ) |      |   |     |  
|Payments by affiliates on ARIs behalf |  |       | (700     | ) |      |   |     |  
|Repayments through property transfers  |  |       | (10,268  | ) |      |   |     |  
|Construction fees payable to affiliate |  |       | (1,714   | ) |      |   |     |  
|Payables clearing through Prime        |  |       | (2,945   | ) |      |   |     |  
|                                       |  |       |          |   |      |   |      |  
|Balance, December 31, 2005             |  | $     | 29,702   |   |      | $ |     |  
|                                       |  |       |          |   |      |   |      |  

At December 31, 2005, other assets includes $1.1 million due from Regis Hotel Corporation, a
related party. In addition, ARI owes $3.0 million to Prime and Regis Property Management for management fees, commissions and refinancing fees.

Returns on Metra Properties.    In April 2002, ARI, TCI, and IORI sold 28 apartment properties to partnerships controlled by Metra Capital, LLC (Metra). Innovo Group, Inc. (Innovo) is a
limited partner in the partnerships that purchased the properties. Joseph Mizrachi, then a director of ARI, controlled approximately 11.67% of the outstanding common stock of Innovo. Management determined to treat the sales as financing
transactions, and ARI and TCI continued to report the assets and the new debt incurred by Metra on their financial statements. The partnership agreements for each of these partnerships stated that the Metra Partners, as defined, receive cash flow
distributions at least quarterly in an amount sufficient to provide them with a 15% cumulative compounded annual rate of return on their invested capital, as well as a cumulative compounded annual amount of 0.50% of the average outstanding balance
of the mortgage indebtedness secured by any of these properties. These distributions to the Metra Partners had priority over distributions to any other partners. In August 2004, ARI, TCI, and IORI instituted an action in Texas State District Court
regarding the transaction. During April 2005, resolution of the litigation occurred, settling all liabilities remaining from the original partnership arrangements which included a return of investor equity, a cessation of any preferential return,
prospective asset management fees and miscellaneous fees and transactions costs from the Plaintiffs as a prepayment of a preferred return, along with a delegation of management and corresponding payment of management fees to Prime, and a motion to
dismiss the action as a part of the resolution. Of the prepayment, ARI recognized expense of $525,000 and a reduction in liabilities of $3.2 million during the second quarter of 2005.

NOTE 10.DIVIDENDS

During the second quarter of 1999,
ARIs Board of Directors established a policy that dividend declarations on common stock would be determined on an annual basis following the end of each year. No dividends on its



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



common stock were declared for 2003, 2004, or 2005. Future distributions to common stockholders will be dependent upon ARIs income, financial
condition, capital requirements, and other factors deemed relevant by the Board.

NOTE 11.PREFERRED STOCK

There are 15,000,000 shares of Series A 10.0% Cumulative Convertible Preferred Stock authorized, with a par value of $2.00 per
share and liquidation preference of $10.00 per share plus accrued and unpaid dividends. Dividends are payable at the annual rate of $1.00 per share or $.25 per share quarterly to stockholders of record on the last day of each March, June, September
and December when and as declared by the Board of Directors. Since August 15, 2003, the Series A Preferred Stock may be converted into ARI common stock at 90.0% of the average daily closing price of ARIs common stock for the prior 20
trading days. At December 31, 2005, 3,390,913 shares of Series A Preferred Stock were outstanding and 869,808 shares were reserved for issuance as future consideration in various business transactions. Of the outstanding shares, 300,000 shares
are owned by ART Edina, Inc., and 600,000 are owned by ART Hotel Equities, Inc., wholly-owned subsidiaries of ARI. Dividends are not paid on the shares owned by ARI subsidiaries.

There are 231,750 shares of Series C Cumulative Convertible Preferred Stock authorized, with a par value of $2.00 per share and liquidation preference of
$100.00 per share plus accrued and unpaid dividends. The Series C Preferred Stock bears a quarterly dividend of $2.25 per share through June 30, 2001 and $2.50 per share thereafter, to stockholders of record on the last day of March, June,
September and December when and as declared by the Board of Directors. The Series C Preferred Stock is reserved for conversion of the Class A limited partner units of ART Palm, L.P. (ART Palm). At December 31, 2005, 6,813,750
Class A units were outstanding. The Class A units may be exchanged for Series C Preferred Stock at the rate of 100 Class A units for each share of Series C Preferred Stock. On or after December 31, 2006, all outstanding shares of
Series C Preferred Stock may be converted into ARI common stock. All conversions of Series C Preferred Stock into ARI common stock will be at 90.0% of the average daily closing price of ARIs common stock for the prior 20 trading days. In
January 2006, 1,625,000 Class A limited partner units were redeemed for $1.6 million in cash. At December 31, 2005, no share of Series C Preferred Stock was outstanding.

There are 91,000 shares of Series D 9.50% Cumulative Preferred Stock authorized, with a par value of $2.00 per share, and a liquidation preference
of $20.00 per share. Dividends are payable at the annual rate of $1.90 per year or $.475 per quarter to stockholders of record on the last day of each March, June, September and December when and as declared by the Board of Directors. The Series D
Preferred Stock is reserved for the conversion of the Class A limited partner units of Ocean Beach Partners, L.P. The Class A units may be exchanged for Series D Preferred Stock at the rate of 20 Class A units for each share of Series
D Preferred Stock. No more than one-third of the Class A units could be exchanged prior to May 31, 2001. Between June 1, 2001 and May 31, 2006, all unexchanged Class A units are exchangeable. At December 31, 2005, no
shares of Series D Preferred Stock was outstanding.

There are 500,000 shares of Series E 6.0% Cumulative Preferred Stock authorized, with
a par value $2.00 per share and a liquidation preference of $10.00 per share. Dividends are payable at the annual rate of $.60 per share or $.15 per quarter to stockholders of record on the last day of each March, June, September and
December when and as declared by the Board of Directors. At December 31, 2005, no shares of Series E Preferred Stock was outstanding.

100,000 shares of Series J 8% Cumulative Convertible Preferred Stock have been designated pursuant to a Certificate of Designation filed March 16, 2006, as an instrument amendatory to ARIs Amended Articles of Incorporation, with
a par value of $2.00 per share, and a liquidation preference of $1,000 per share. Dividends are payable at the annual rate of $80 per share, or $20 per quarter, to stockholders of record on the last day of



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



each of March, June, September and December, when and as declared by the Board of Directors. Although the Series J 8% Cumulative Convertible Preferred Stock
has been designated, no shares have been issued as of March 24, 2006.

NOTE 12.STOCK OPTIONS

In January 1998, stockholders approved the 1997 Stock Option Plan (the Option Plan). Under the Option Plan, options
were granted to certain ARI officers and key employees of BCM and its affiliates. The Option Plan provided for options to purchase up to 300,000 shares of common stock. In December 2005, the Option Plan was terminated. All grants were determined by
the Option Committee of the Board of Directors. Options granted pursuant to the Option Plan are exercisable, based upon vesting of 20.0% per year, beginning one year after the date of grant and expire the earlier of three months after
termination of employment or ten years from the date of grant. At December 31, 2005, 61,250 options were exercisable at an exercise price of $16.35 per common share, and 2,500 shares were exercisable at an exercise price of $18.53 per common
share.

In January 1999, stockholders approved the Directors Stock Option Plan (the Directors Plan) which provided
for options to purchase up to 40,000 shares of common stock. In December 2005, the Directors Plan was terminated. Options granted pursuant to the Directors Plan were immediately exercisable and expire on the earlier of the first
anniversary of the date on which a Director ceases to be a Director or ten years from the date of grant. Each Independent Director was granted an option to purchase 1,000 common shares at an exercise price of $17.71 per common share on
January 11, 1999, the date stockholders approved the plan. On January 1, 2000, 2001, 2002, 2003, 2004, and 2005, each Independent Director was granted an option to purchase 1,000 common shares at exercise prices of $18.53, $13.625, $9.87,
$8.09, $9.13, and $9.70 per common share, respectively. At December 31, 2005, 7,000 options were exercisable at prices ranging from $8.09 to $9.70 per common share.



|                            |  |                 |   |      |                |      |                 |   |  |                |  |                 |   |  |               
|--------------------------- |  | --------------- | - | ---- | -------------- | ---- | --------------- | - |  | -------------- |  | --------------- | - |  | --------------
|                            |  | 2005            |   | 2004 |                | 2003
|                            |  | Numberof Shares |   |      | Exercise Price |      | Numberof Shares |   |  | Exercise Price |  | Numberof Shares |   |  | Exercise Price
|Outstanding at January 1,   |  | 76,750          |   |      | $8.09-18.53    |      | 98,250          |   |  | $8.09-18.53    |  | 105,750         |   |  | $9.87-18.53   
|Granted                     |  | 4,000           |   |      | $9.70          |      | 3,000           |   |  | $9.13          |  | 3,000           |   |  | $8.09         
|Canceled                    |  | (10,000         | ) |      | $8.09-16.35    |      | (24,500         | ) |  | $8.09-18.53    |  | (10,500         | ) |  | $9.87-18.53   
|                            |  |                 |   |      |                |      |                 |   |  |                |  |                 |   |  |               
|Outstanding at December 31, |  | 70,750          |   |      | $8.09-18.53    |      | 76,750          |   |  | $8.09-18.53    |  | 98,250          |   |  | $8.09-18.53   
|                            |  |                 |   |      |                |      |                 |   |  |                |  |                 |   |  |               

NOTE 13.ADVISORY AGREEMENT

Although the Board of Directors is directly responsible for managing the affairs of ARI and for setting the policies, which guide it, the day-to-day
operations of ARI are performed by Prime, a contractual advisor under the supervision of the Board. The duties of the advisor include, among other things, locating, investigating, evaluating, and recommending real estate and mortgage loan investment
and sales opportunities as well as financing and refinancing sources. Prime, as advisor, also serves as a consultant in connection with the preparation of ARIs business plan and investment policy decisions made by the Board.

Prime, an affiliate, has been providing advisory services to ARI since October 1, 2003. Prime is a single-member limited liability company, the sole
member of which is PIAMI, which is owned 80% by Realty Advisors, Inc. and 20% by Syntek West, Inc. Realty Advisors, Inc. is owned 100% by a trust for the benefit of the children of Gene E. Phillips. Syntek West, Inc. is owned 100% by Gene
E. Phillips. Mr. Phillips is not an officer or director of Prime but serves as a representative of the Trust, is involved in daily consultation with the



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



officers of Prime and has significant influence over the conduct of Primes business, including the rendering of advisory services and the investment
decisions for Prime and for ARI. See also Directors and Executive Officers of the RegistrantThe Advisor.

The
Advisory Agreement provides that Prime shall receive base compensation at the rate of 0.0625% per month (0.75% on an annualized basis) of ARIs Average Invested Assets.

In addition to base compensation, the Advisory Agreement provides that Prime, or an affiliate of Prime, receive an acquisition fee for locating, leasing
or purchasing real estate for ARIs benefit; a disposition fee for the sale of each equity investment in real estate; a loan arrangement fee; an incentive fee equal to 10.0% of net income for the year in excess of a 10.0% return on
stockholders equity, and 10.0% of the excess of net capital gains over net capital losses, if any; and a mortgage placement fee, on mortgage loans originated or purchased.

The Advisory Agreement further provides that Prime shall bear the cost of certain expenses of its employees not directly identifiable to ARIs
assets, liabilities, operations, business or financial affairs, and miscellaneous administrative expenses relating to the performance of its duties under the Advisory Agreement.

If and to the extent that Prime or any director, officer, partner, or employee of Prime shall be requested to render services to ARI other than those
required to be rendered by Prime under the Advisory Agreement, such additional services, if performed, will be compensated separately on terms agreed upon between each party from time-to-time.

The Advisory Agreement automatically renews from year to year unless terminated in accordance with its terms. Management believes that the terms of the
Advisory Agreement are at least as fair as could be obtained from unaffiliated third parties.

NOTE 14.PROPERTY
MANAGEMENT

Affiliates of Prime provide property management services to ARI. Currently, Triad Realty Services, Ltd.
(Triad), an affiliate, and Carmel Realty, Inc. (Carmel) provide property management services to ARIs properties for a fee of 6.0% or less of the monthly gross rents collected on the residential properties under its
management and 3.0% or less of the monthly gross rents collected on the commercial properties under its management. Triad and Carmel subcontract with other entities for property-level management services at various rates. The general partner of
Triad is PIAMI. The limited partner of Triad is Highland Realty Services, Inc. (Highland), a related party. Triad subcontracts the property-level management and leasing of ARIs commercial properties (shopping centers, office
buildings and individual warehouses) to Regis I. Regis I receives property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis Hotel I, LLC, manages
ARIs hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. Carmel is owned by Regis I.



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 15.ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

Fees and cost reimbursements to Prime, BCM and their affiliates were as follows:



|                          |  |      |        |      |   |        |  |   |       
|------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                          |  | 2005 |        | 2004 |   | 2003  
|Fees                      |  |      |        |      |   |        |  |   |       
|Advisory fee              |  | $    | 9,336  |      | $ | 10,728 |  | $ | 9,345 
|Net income fee            |  |      | 3,712  |      |   | 1,933  |  |   |      
|Incentive fee             |  |      | 1,128  |      |   |       |  |   |      
|Loan arrangement          |  |      | 822    |      |   | 1,927  |  |   | 1,256 
|Property acquisition fees |  |      | 1,076  |      |   | 133    |  |   | 371   
|                          |  |      |        |      |   |        |  |   |       
|                          |  | $    | 16,074 |      | $ | 14,721 |  | $ | 10,972
|                          |  |      |        |      |   |        |  |   |       
|Cost reimbursements       |  | $    | 4,407  |      | $ | 4,568  |  | $ | 5,182 
|                          |  |      |        |      |   |        |  |   |       

Fees paid to Triad, an affiliate, and Regis I, a related party:



|                                                              |  |      |        |      |   |        |  |   |       
|------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                              |  | 2005 |        | 2004 |   | 2003  
|Fees                                                          |  |      |        |      |   |        |  |   |       
|Real estate brokerage                                         |  | $    | 5,498  |      | $ | 8,376  |  | $ | 6,247 
|Property acquisition fee                                      |  |      | 2,452  |      |   | 445    |  |   |      
|Construction supervision fee                                  |  |      | 1,714  |      |   | 5,625  |  |   | 4,050 
|Property and construction management and leasing commissions* |  |      | 3,691  |      |   | 6,725  |  |   | 4,273 
|                                                              |  |      |        |      |   |        |  |   |       
|                                                              |  | $    | 13,355 |      | $ | 21,171 |  | $ | 14,570
|                                                              |  |      |        |      |   |        |  |   |       

---

|* | Net of property management fees paid to subcontractors, other than affiliates of Prime and BCM.
|- | -----------------------------------------------------------------------------------------------

NOTE 16.INCOME TAXES

Effective
January 1, 2004, TCI became eligible to file a consolidated Federal income tax return with ARI.

There was no deferred tax expense
(benefit) recorded for 2005 or 2004 as a result of the uncertainty of the future use of the deferred tax asset.

The Federal income tax
expense differs from the amount computed by applying the corporate tax rate of 35% to the income before income taxes as follows:



|                                                                        |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                        |  | 2005 |         |   | 2004 |  
|Computed expected income tax (benefit) expense                        |  | $    | 16,596  |   |      | $ | 11,800  |  
|Book to tax differences in gains on sale of property.                   |  |      | (2,280  | ) |      |   | (17,400 | )
|Gain from debt extinguishment not recorded for tax purposes             |  |      |        |   |      |   | (2,400  | )
|Book to tax differences from entities not consolidated for tax purposes |  |      | (968    | ) |      |   | 3,600   |  
|Book to tax differences of depreciation and amortization                |  |      | 1,832   |   |      |   | 3,500   |  
|Impairment charges not recorded for tax purposes                        |  |      | 644     |   |      |   | 1,500   |  
|Use of net operating loss carryforward                                  |  |      | (14,925 | ) |      |   | (1,200  | )
|Other                                                                   |  |      | (899    | ) |      |   | 600     |  
|                                                                        |  |      |         |   |      |   |         |  
|                                                                        |  | $    |        |   |      | $ |        |  
|                                                                        |  |      |         |   |      |   |         |  



86



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The tax effect of temporary differences that give rise to the deferred tax asset are as follows:



|                                     |  |      |          |   |      |   |          |  
|------------------------------------ |  | ---- | -------- | - | ---- | - | -------- | -
|                                     |  | 2005 |          |   | 2004 |  
|Net operating losses and tax credits |  | $    | 50,915   |   |      | $ | 61,649   |  
|                                     |  |     
|Basis difference of                  |  |      |          |   |      |   |          |  
|Real estate holdings and equipment   |  |      | 5,015    |   |      |   | (6,218   | )
|Notes receivable                     |  |      | 5,713    |   |      |   | 4,052    |  
|Investments                          |  |      | (15,943  | ) |      |   | (9,360   | )
|Goodwill and intangibles             |  |      | (5,057   | ) |      |   | (5,068   | )
|Notes payable                        |  |      | 28,608   |   |      |   | 47,132   |  
|Deferred gains                       |  |      | 32,772   |   |      |   | 29,292   |  
|                                     |  |      |          |   |      |   |          |  
|Total                                |  |      | 102,023  |   |      |   | 121,479  |  
|Deferred tax valuation allowance     |  |      | (102,023 | ) |      |   | (121,479 | )
|                                     |  |      |          |   |      |   |          |  
|Net deferred tax asset               |  | $    |         |   |      | $ |         |  
|                                     |  |      |          |   |      |   |          |  

ARI has prior tax net operating losses and capital loss carryforwards of approximately $129
million expiring through the year 2023.

ARI had a loss for federal income tax purposes for 2003, therefore, it recorded no provision for
income taxes. ARIs tax basis in its net assets differed from the amount at which its net assets were reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, the difference in the
allowance for estimated losses, depreciation on owned properties, and investments in equity method real estate entities. At December 31, 2003, ARIs tax basis in its net assets was exceeded by their basis for financial statement purposes
by $61.6 million. This amount was more than offset by notes payable and deferred revenue, which had a financial statement basis that exceeded their tax basis by $134.8 million. As a result, aggregate future income for income tax purposes was
expected to be less than such amount for financial statement purposes by approximately $73.2 million. Certain of the net operating and capital loss carryforwards may be subject to limitation under the current tax laws.

At December 31, 2003, ARI had a net deferred tax asset of $76.9 million due to tax deductions available to it in future years. However, as
management could not determine that it was more likely than not that ARI would realize the benefit of the deferred tax asset, a 100% valuation allowance was established.

TCI had net income for federal income tax purposes before the application of operating loss carryforwards in 2003, therefore, TCI recorded no provision for income taxes. TCIs tax basis in its net assets differs
from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, depreciation on owned properties and investments in joint venture partnerships. At
December 31, 2003, TCIs tax basis in its net assets was exceeded by their net basis for financial statement purposes by approximately $87.4 million and TCIs tax basis in its net liabilities was exceeded by their net basis for
financial statement purposes by approximately $91.9 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes by approximately $4.5 million. ARI and TCIs state
income tax expense is included in general and administrative expense on the Consolidated Statements of Operations.



87



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 17.RENTS UNDER OPERATING LEASES

ARIs operations include the leasing of commercial properties (office buildings, industrial warehouses, shopping centers, and a merchandise mart).
The leases, thereon, expire at various dates through 2020. The following is a schedule of minimum future rents due to ARI under non-cancelable operating leases as of December 31, 2005:



|           |  |   |        
|---------- |  | - | -------
|2006       |  | $ | 26,405 
|2007       |  |   | 19,117 
|2008       |  |   | 15,556 
|2009       |  |   | 12,193 
|2010       |  |   | 8,180  
|Thereafter |  |   | 27,172 
|           |  |   |        
|           |  | $ | 108,623
|           |  |   |        

Milano conducts its operations from leased facilities, which include office space, a warehouse,
and 59 restaurant locations for which a lease was signed and the restaurant was either open at December 31, 2005 or scheduled to open thereafter. The leases expire over the next 17 years. Milano also leases vehicles under operating leases.

The following is a schedule of minimum future rent commitments under operating leases as of December 31, 2005:



|           |  |   |       
|---------- |  | - | ------
|2006       |  | $ | 2,396 
|2007       |  |   | 2,552 
|2008       |  |   | 2,360 
|2009       |  |   | 1,976 
|2010       |  |   | 1,504 
|Thereafter |  |   | 4,959 
|           |  |   |       
|           |  | $ | 15,747
|           |  |   |       

Total facilities and vehicle rent expense relating to these leases was $2.2 million in 2005, $2.3
million in 2004, and $2.5 million in 2003.

NOTE 18.OPERATING SEGMENTS

Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve
the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow. Excluded from operating segment
assets are assets of $131.5 million in 2005, $114.1 million in 2004, and $94.8 million in 2003 which are not identifiable with an operating segment. There are no intersegment revenues and expenses and ARI conducted all of its business within the
United States, with the exception of Hotel Sofia (Bulgaria), which began operations in 2001 and was sold in March 2003; Realty Advisors Korea (South Korea), which ARI acquired in 2002 and sold in June 2003; and Hotel Akademia (Poland), which began
operations in 2002.



88



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Presented below is the operating income of each operating segment and each segments assets for
2005, 2004 and 2003. (dollars in thousands)



|                                |  |                      |         |   |            |   |         |        |  |      |        |             |   |                   |  |       |        |  |   |        |  |   |          
|------------------------------- |  | -------------------- | ------- | - | ---------- | - | ------- | ------ |  | ---- | ------ | ----------- | - | ----------------- |  | ----- | ------ |  | - | ------ |  | - | ---------
|                                |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  | Land |        | Restaurants |   | Receivables/Other |  | Total
|                                |  |                     
|2005                            |  |                      |         |   |            |   |         |        |  |      |        |             |   |                   |  |       |        |  |   |        |  |   |          
|Operating revenue               |  | $                    | 48,091  |   |            | $ | 79,024  |        |  | $    | 37,649 |             | $ | 729               |  | $     | 36,818 |  | $ | 328    |  | $ | 202,639  
|Operating expenses              |  |                      | 29,829  |   |            |   | 49,263  |        |  |      | 27,074 |             |   | 5,921             |  |       | 27,906 |  |   | 210    |  |   | 140,203  
|Depreciation and amortization   |  |                      | 9,527   |   |            |   | 9,251   |        |  |      | 2,872  |             |   |                  |  |       | 1,242  |  |   | 39     |  |   | 22,931   
|Mortgage and loan interest      |  |                      | 12,688  |   |            |   | 29,347  |        |  |      | 5,037  |             |   | 10,710            |  |       | 1,365  |  |   | 4,204  |  |   | 63,351   
|Interest income                 |  |                      |        |   |            |   |        |        |  |      |       |             |   |                  |  |       |       |  |   | 5,439  |  |   | 5,439    
|Gain on land sales              |  |                      |        |   |            |   |        |        |  |      |       |             |   | 39,926            |  |       |       |  |   |       |  |   | 39,926   
|                                |  |                      |         |   |            |   |         |        |  |      |        |             |   |                   |  |       |        |  |   |        |  |   |          
|Segment operating income (loss) |  | $                    | (3,953  | ) |            | $ | (8,837  | )      |  | $    | 2,666  |             | $ | 24,024            |  | $     | 6,305  |  | $ | 1,314  |  | $ | 21,519   
|                                |  |                      |         |   |            |   |         |        |  |      |        |             |   |                   |  |       |        |  |   |        |  |   |          
|Capital expenditures            |  | $                    | 4,080   |   |            | $ | 53,304  |        |  | $    | 885    |             | $ | 2,071             |  | $     | 810    |  | $ | 16     |  | $ | 61,166   
|Assets                          |  |                      | 223,455 |   |            |   | 515,168 |        |  |      | 76,918 |             |   | 297,564           |  |       | 19,723 |  |   | 81,440 |  |   | 1,214,268
|                                |  |                      |         |   |            |   |        
|Property Sales:                 |  |                      |         |   |            |   |         |        |  |      |        |             |   |                   |  |       |        |  |   |        |  |   |          
|Sales price                     |  | $                    | 50,927  |   |            | $ | 71,552  |        |  | $    | 7,900  |             | $ | 96,639            |  | $     |       |  | $ |       |  | $ | 227,018  
|Cost of sale                    |  |                      | 28,741  |   |            |   | 34,886  |        |  |      | 4,628  |             |   | 49,370            |  |       |       |  |   |       |  |   | 117,625  
|Deferred current gain           |  |                      |        |   |            |   |        |        |  |      |       |             |   | 7,343             |  |       |       |  |   |       |  |   | 7,343    
|Recognized prior deferred gain  |  |                      |        |   |            |   | 493     |        |  |      |       |             |   |                  |  |       |       |  |   |       |  |   | 493      
|                                |  |                      |         |   |            |   |         |        |  |      |        |             |   |                   |  |       |        |  |   |        |  |   |          
|Gain on sale                    |  | $                    | 22,186  |   |            | $ | 37,159  |        |  | $    | 3,272  |             | $ | 39,926            |  | $     |       |  | $ |       |  | $ | 102,543  
|                                |  |                      |         |   |            |   |         |        |  |      |        |             |   |                   |  |       |        |  |   |        |  |   |          



|                                |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|------------------------------- |  | -------------------- | ------- | - | ---------- | - | ------- | ------ |  | - | ------ | - |  | ----------- | ------- | ----------------- |  | - | ------ |  | - | ------ | - |  | - | --------- | -
|                                |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  |   | Land   |   |  | Restaurants |         | Receivables/Other |  |   | Total  | 
|2004                            |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Operating revenue               |  | $                    | 45,669  |   |            | $ | 63,258  |        |  | $ | 36,719 |   |  | $           | 610     |                   |  | $ | 34,525 |  | $ | 343    |   |  | $ | 181,124   |  
|Operating expenses              |  |                      | 33,109  |   |            |   | 41,267  |        |  |   | 27,741 |   |  |             | 7,115   |                   |  |   | 26,713 |  |   | 764    |   |  |   | 136,709   |  
|Depreciation and amortization   |  |                      | 11,251  |   |            |   | 7,514   |        |  |   | 3,882  |   |  |             |        |                   |  |   | 950    |  |   | 56     |   |  |   | 23,653    |  
|Mortgage and loan interest      |  |                      | 12,817  |   |            |   | 22,183  |        |  |   | 6,106  |   |  |             | 12,966  |                   |  |   | 1,488  |  |   | 7,556  |   |  |   | 63,116    |  
|Interest income                 |  |                      |        |   |            |   |        |        |  |   |       |   |  |             |        |                   |  |   |       |  |   | 5,347  |   |  |   | 5,347     |  
|Gain on land sales              |  |                      |        |   |            |   |        |        |  |   |       |   |  |             | 11,781  |                   |  |   |       |  |   |       |   |  |   | 11,781    |  
|                                |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Segment operating income (loss) |  | $                    | (11,508 | ) |            | $ | (7,706  | )      |  | $ | (1,010 | ) |  | $           | (7,690  | )                 |  | $ | 5,374  |  | $ | (2,686 | ) |  | $ | (25,226   | )
|                                |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Capital expenditures            |  | $                    | 13,619  |   |            | $ | 173,602 |        |  | $ | 4,530  |   |  | $           | 31,280  |                   |  | $ | 1,527  |  | $ |       |   |  | $ | 224,558   |  
|Assets                          |  |                      | 179,368 |   |            |   | 500,121 |        |  |   | 85,457 |   |  |             | 218,476 |                   |  |   | 20,615 |  |   | 72,661 |   |  |   | 1,076,698 |  
|                                |  |                      |         |   |            |   |        
|Property Sales:                 |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Sales price                     |  | $                    | 215,444 |   |            | $ | 63,772  |        |  | $ |       |   |  | $           | 40,052  |                   |  | $ |       |  | $ |       |   |  | $ | 319,268   |  
|Cost of sale                    |  |                      | 142,031 |   |            |   | 40,637  |        |  |   |       |   |  |             | 27,690  |                   |  |   |       |  |   |       |   |  |   | 210,358   |  
|Deferred current gain           |  |                      | 2,661   |   |            |   | 2,542   |        |  |   |       |   |  |             | 581     |                   |  |   |       |  |   |       |   |  |   | 5,784     |  
|Recognized prior deferred gain  |  |                      | 5,649   |   |            |   |        |        |  |   |       |   |  |             |        |                   |  |   |       |  |   |       |   |  |   | 5,649     |  
|                                |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Gain on sale                    |  | $                    | 76,401  |   |            | $ | 20,593  |        |  | $ |       |   |  | $           | 11,781  |                   |  | $ |       |  | $ |       |   |  | $ | 108,.775  |  
|                                |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|                                |  |                      |         |   |            |   |        
|                                |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  |   | Land   |   |  | Restaurants |         | Receivables/Other |  |   | Total  | 
|2003                            |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Operating revenue               |  | $                    | 40,417  |   |            | $ | 42,434  |        |  | $ | 34,671 |   |  | $           | 652     |                   |  | $ | 33,057 |  | $ | 1,842  |   |  | $ | 153,073   |  
|Operating expenses              |  |                      | 26,604  |   |            |   | 31,167  |        |  |   | 25,903 |   |  |             | 5,677   |                   |  |   | 26,051 |  |   | 389    |   |  |   | 115,791   |  
|Depreciation and amortization   |  |                      | 7,941   |   |            |   | 3,224   |        |  |   | 4,849  |   |  |             |        |                   |  |   | 1,484  |  |   | 44     |   |  |   | 17,542    |  
|Mortgage and loan interest      |  |                      | 11,771  |   |            |   | 12,517  |        |  |   | 4,953  |   |  |             | 17,500  |                   |  |   | 1,127  |  |   | 6,522  |   |  |   | 54,390    |  
|Interest income                 |  |                      |        |   |            |   |        |        |  |   |       |   |  |             |        |                   |  |   |       |  |   | 9,222  |   |  |   | 9,222     |  
|Gain on land sales              |  |                      |        |   |            |   |        |        |  |   |       |   |  |             | 43,831  |                   |  |   |       |  |   |       |   |  |   | 43,831    |  
|                                |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Segment operating income (loss) |  | $                    | (5,899  | ) |            | $ | (4,474  | )      |  | $ | (1,034 | ) |  | $           | 21,306  |                   |  | $ | 4,395  |  | $ | 4,109  |   |  | $ | 18,403    |  
|                                |  |                      |         |   |            |   |         |        |  |   |        |   |  |             |         |                   |  |   |        |  |   |        |   |  |   |           |  
|Capital expenditures            |  | $                    | 5,763   |   |            | $ | 53,178  |        |  | $ | 3,391  |   |  | $           | 3,978   |                   |  | $ | 1,615  |  | $ |       |   |  | $ | 67,925    |  
|Assets                          |  |                      | 294,849 |   |            |   | 389,204 |        |  |   | 89,228 |   |  |             | 281,454 |                   |  |   | 20,766 |  |   | 70,595 |   |  |   | 1,146,096 |  



89



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##### Table of Contents

##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                               |  |                      |        |            |   |        |  |   |        |   |             |   |                   |  |       |   |  |   |   |  |   |        
|------------------------------ |  | -------------------- | ------ | ---------- | - | ------ |  | - | ------ | - | ----------- | - | ----------------- |  | ----- | - |  | - | - |  | - | -------
|                               |  |                      |        |            |   |        | 
|                               |  | CommercialProperties |        | Apartments |   | Hotels |  |   | Land   |   | Restaurants |   | Receivables/Other |  | Total
|                               |  |                      |        |            |   |        | 
|Property Sales:                |  |                      |        |            |   |        |  |   |        |   |             |   |                   |  |       |   |  |   |   |  |   |        
|Sales price                    |  | $                    | 99,386 |            | $ | 90,378 |  | $ | 26,820 |   |             | $ | 67,283            |  | $     |  |  | $ |  |  | $ | 283,867
|Cost of sale                   |  |                      | 67,521 |            |   | 56,231 |  |   | 26,851 |   |             |   | 39,883            |  |       |  |  |   |  |  |   | 190,486
|Deferred current gain          |  |                      | 12,288 |            |   | 4,887  |  |   |       |   |             |   | 3,493             |  |       |  |  |   |  |  |   | 20,668 
|Recognized prior deferred gain |  |                      |       |            |   |       |  |   |       |   |             |   | 19,924            |  |       |  |  |   |  |  |   | 19,924 
|                               |  |                      |        |            |   |        |  |   |        |   |             |   |                   |  |       |   |  |   |   |  |   |        
|Gain (loss) on sale            |  | $                    | 19,577 |            | $ | 29,260 |  | $ | (31    | ) |             | $ | 43,831            |  | $     |  |  | $ |  |  | $ | 92,637 
|                               |  |                      |        |            |   |        |  |   |        |   |             |   |                   |  |       |   |  |   |   |  |   |        

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



|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                             |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Segment operating income (loss)              |  | $    | 21,519  |   |      | $ | (25,226 | )    |  | $ | 18,403  |  
|Other non-segment items of income/(expense): |  |      |         |   |      |   |         |      |  |   |         |  
|General and administrative                   |  |      | (17,696 | ) |      |   | (18,712 | )    |  |   | (22,124 | )
|Advisory fee                                 |  |      | (9,336  | ) |      |   | (10,728 | )    |  |   | (9,345  | )
|Gain/(loss) on foreign currency transaction  |  |      | 292     |   |      |   | 3,766   |      |  |   | (3,309  | )
|Gain on condemnation award                   |  |      |        |   |      |   |        |      |  |   | 4,800   |  
|Other income/(expense)                       |  |      | 3,007   |   |      |   | 2,764   |      |  |   | 3,408   |  
|Gain on settlement of debt                   |  |      |        |   |      |   | 10,649  |      |  |   | 7,210   |  
|Discount on sale of notes receivable         |  |      | (15     | ) |      |   | (389    | )    |  |   | (2,220  | )
|Net income fee                               |  |      | (3,712  | ) |      |   | (1,933  | )    |  |   |        |  
|Incentive fee                                |  |      | (1,128  | ) |      |   |        |      |  |   |        |  
|Litigation settlement                        |  |      | (130    | ) |      |   | (5,848  | )    |  |   | (15     | )
|Provision for loan losses                    |  |      |        |   |      |   | 2,768   |      |  |   | (158    | )
|Provision for asset impairment               |  |      |        |   |      |   | (8,001  | )    |  |   | (7,698  | )
|Equity in income (loss) of investees         |  |      | 397     |   |      |   | (41     | )    |  |   | (4,441  | )
|Minority interest                            |  |      | (3,056  | ) |      |   | (7,270  | )    |  |   | (771    | )
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Loss from continuing operations              |  | $    | (9,858  | ) |      | $ | (58,201 | )    |  | $ | (16,260 | )
|                                             |  |      |         |   |      |   |         |      |  |   |         |  

NOTE 19.DISCONTINUED OPERATIONS

Effective January 1, 2002, ARI adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. This statement requires that the operations related to properties that have been sold or
properties that are intended to be sold be presented as discontinued operations in the statement of operations for all periods presented, and properties intended to be sold are to be designated as held-for-sale on the balance sheet.



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##### Index to Financial Statements

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For 2005, 2004, and 2003, income from discontinued operations relates to 32 properties that ARI sold
during 2003, 27 properties that ARI sold during 2004, 18 properties that ARI sold during 2005, and 7 properties that ARI sold or held-for-sale during 2006 that are classified as held-for-sale at December 31, 2005. The following table summarizes
revenue and expense information for these properties sold and held-for-sale.



|                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                          |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Revenue                                                   |  |      |        |   |      |   |        |      |  |   |         |  
|Rental                                                    |  | $    | 21,478 |   |      | $ | 49,187 |      |  | $ | 67,636  |  
|Property operations                                       |  |      | 17,766 |   |      |   | 30,820 |      |  |   | 42,087  |  
|                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|                                                          |  |      | 3,712  |   |      |   | 18,367 |      |  |   | 25,549  |  
|Expenses                                                  |  |      |        |   |      |   |        |      |  |   |         |  
|Interest                                                  |  |      | 8,005  |   |      |   | 16,892 |      |  |   | 25,235  |  
|Depreciation                                              |  |      | 1,049  |   |      |   | 6,788  |      |  |   | 9,677   |  
|                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|                                                          |  |      | 9,054  |   |      |   | 23,680 |      |  |   | 34,912  |  
|                                                          |  |      |       
|Loss from discontinued operations                         |  |      | (5,342 | ) |      |   | (5,313 | )    |  |   | (9,363  | )
|Gain on sale of real estate                               |  |      | 62,617 |   |      |   | 96,994 |      |  |   | 48,806  |  
|Write-down of assets held for sale                        |  |      |       |   |      |   | (2,498 | )    |  |   | (12,036 | )
|Equity in gain on sale of real estate by equity investees |  |      |       |   |      |   | 2,212  |      |  |   | 716     |  
|                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|Income from discontinued operations                       |  | $    | 57,275 |   |      | $ | 91,395 |      |  | $ | 28,123  |  
|                                                          |  |      |        |   |      |   |        |      |  |   |         |  

Discontinued operations have not been segregated in the consolidated statements of cash flows.
Therefore, amounts for certain captions will not agree with respective consolidated statements of operations.

NOTE
20.QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of quarterly
results of operations for the years 2005 and 2004 (unaudited):



|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                                                                              |  | For Three Months Ended |        
|                                                                                              |  | March 31,              |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|2005                                                                                          |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Total operating revenues                                                                      |  | $                      | 46,378  |   |          | $ | 49,204  |               |  | $ | 53,147       |   |  | $ | 53,910  |  
|Total operating expenses                                                                      |  |                        | 44,416  |   |          |   | 48,104  |               |  |   | 47,652       |   |  |   | 49,994  |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Operating income                                                                              |  |                        | 1,962   |   |          |   | 1,100   |               |  |   | 5,495        |   |  |   | 3,916   |  
|Other income (expense)                                                                        |  |                        | (14,971 | ) |          |   | (11,735 | )             |  |   | (16,851      | ) |  |   | (16,041 | )
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Loss before gain on real estate sales, minority interest, and equity in earnings of investees |  |                        | (13,009 | ) |          |   | (10,635 | )             |  |   | (11,356      | ) |  |   | (12,125 | )
|Gain on land sales                                                                            |  |                        | 24,178  |   |          |   | 4,913   |               |  |   | 5,434        |   |  |   | 5,401   |  
|Minority interest                                                                             |  |                        | (921    | ) |          |   | 174     |               |  |   | 338          |   |  |   | (2,647  | )
|Equity in income (loss) of investees                                                          |  |                        | 60      |   |          |   | 152     |               |  |   | 71           |   |  |   | 114     |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations                                                      |  |                        | 10,308  |   |          |   | (5,396  | )             |  |   | (5,513       | ) |  |   | (9,257  | )
|Income from discontinued operations                                                           |  |                        | 10,370  |   |          |   | 2,678   |               |  |   | 21,587       |   |  |   | 22,640  |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Net income (loss)                                                                             |  |                        | 20,678  |   |          |   | (2,718  | )             |  |   | 16,074       |   |  |   | 13,383  |  
|Preferred dividend requirement                                                                |  |                        | (650    | ) |          |   | (649    | )             |  |   | (650         | ) |  |   | (623    | )
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Income (loss) applicable to Common shares                                                     |  | $                      | 20,028  |   |          | $ | (3,367  | )             |  | $ | 15,424       |   |  | $ | 12,760  |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Earnings Per Share                                                                            |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations                                                      |  | $                      | .95     |   |          | $ | (.59    | )             |  | $ | (.61         | ) |  | $ | (.97    | )
|Income from discontinued operations                                                           |  |                        | 1.02    |   |          |   | .26     |               |  |   | 2.13         |   |  |   | 2.23    |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Net income (loss) applicable to Common shares                                                 |  | $                      | 1.97    |   |          | $ | (.33    | )             |  | $ | 1.52         |   |  | $ | 1.26    |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                                                                              |  | For Three Months Ended |        
|                                                                                              |  | March 31,              |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|2004                                                                                          |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Total operating revenues                                                                      |  | $                      | 42,795  |   |          | $ | 43,558  |               |  | $ | 46,476       |   |  | $ | 48,295  |  
|Total operating expenses                                                                      |  |                        | 43,218  |   |          |   | 47,064  |               |  |   | 43,798       |   |  |   | 55,722  |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Operating income (loss)                                                                       |  |                        | (423    | ) |          |   | (3,506  | )             |  |   | 2,678        |   |  |   | (7,427  | )
|Other income (expense)                                                                        |  |                        | (12,851 | ) |          |   | (12,922 | )             |  |   | (11,032      | ) |  |   | (17,188 | )
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Loss before gain on real estate sales, minority interest, and equity in earnings of investees |  |                        | (13,274 | ) |          |   | (16,428 | )             |  |   | (8,354       | ) |  |   | (24,615 | )
|Gain on land sales                                                                            |  |                        | 3,752   |   |          |   | 2,296   |               |  |   | (2,465       | ) |  |   | 8,198   |  
|Minority interest                                                                             |  |                        | (1,184  | ) |          |   | 56      |               |  |   | 1,969        |   |  |   | (8,111  | )
|Equity in income (loss) of investees                                                          |  |                        | (815    | ) |          |   | (1,263  | )             |  |   | (428         | ) |  |   | 2,465   |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Loss from continuing operations                                                               |  |                        | (11,521 | ) |          |   | (15,339 | )             |  |   | (9,278       | ) |  |   | (22,063 | )
|Income from discontinued operations                                                           |  |                        | 12,904  |   |          |   | 5,887   |               |  |   | 2,291        |   |  |   | 70,313  |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Net income (loss)                                                                             |  |                        | 1,383   |   |          |   | (9,452  | )             |  |   | (6,987       | ) |  |   | 48,250  |  
|Preferred dividend requirement                                                                |  |                        | (650    | ) |          |   | (650    | )             |  |   | (651         | ) |  |   | (650    | )
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Income (loss) applicable to Common shares                                                     |  | $                      | 733     |   |          | $ | (10,102 | )             |  | $ | (7,638       | ) |  | $ | 47,600  |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Earnings Per Share                                                                            |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Loss from continuing operations                                                               |  | $                      | (1.14   | ) |          | $ | (1.51   | )             |  | $ | (.95         | ) |  | $ | (2.17   | )
|Income from discontinued operations                                                           |  |                        | 1.21    |   |          |   | .56     |               |  |   | .22          |   |  |   | 6.73    |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|Net income (loss) applicable to Common shares                                                 |  | $                      | .07     |   |          | $ | (.95    | )             |  | $ | (.73         | ) |  | $ | 4.56    |  
|                                                                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |         |  

Quarterly results presented differ from those previously reported in ARIs Form 10-Q due to
the reclassification of the operations of properties sold or held for sale to discontinued operations in accordance with SFAS 144.

NOTE
21.DERIVATIVE FINANCIAL INSTRUMENTS

During the first quarter of 2002, ARI entered into an
interest rate swap agreement with a bank. This agreement contained a notional amount of $12.8 million and required ARI to pay the bank a fixed rate of 4.3%, and required the bank to pay to ARI based on the 30-day LIBOR rate. This agreement was
entered into in order to effectively fix the rate on ARIs debt associated with the Limestone Canyon property. In December 2003, ARI sold this property to UHF, a related party. The swap agreement expired on December 9, 2004.

ARI did not designate the interest rate swap agreement as a hedge, as defined within Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, and as such, changes in the fair value of the swap agreement were recognized in earnings during the period of change and reflected in the statement of operations as
interest expense.

Amounts paid or received under the swap agreement were settled monthly and were reflected as a reduction in the
liability when paid. Interest expense for 2003 was decreased by $191,000, representing both amounts paid to the bank under the agreement and changes in the fair value of the related liability.

NOTE 22.COMMITMENTS, CONTINGENCIES, AND LIQUIDITY

Liquidity.    Although management anticipated that ARI would generate excess cash from operations in 2005, such excess cash did
not materialize and, therefore, was not sufficient to discharge all of ARIs debt obligations as they became due. ARI relied on additional borrowings, and sales of land and income producing properties to meet its cash requirements. In 2006, ARI
will rely on aggressive land sales, selected income producing property sales and, to the extent necessary, additional borrowings to meet its cash requirements.



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Partnership Buyouts.    ARI is the limited partner in 10 partnerships
currently constructing residential properties. As permitted in the respective partnership agreements, ARI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these
projects. The amounts paid to buyout the nonaffiliated partners are limited to development fees earned by the nonaffiliated partners, and are set forth in the respective partnership agreements. The total amount of the expected buyouts as of
December 31, 2005 is approximately $2.2 million.

Commitments.During 2002, Milano, then a wholly-owned
subsidiary of ARI, sold two restaurants to a corporation owned in part by an officer of Milano. In conjunction with the sale of these restaurants, Milano guaranteed the bank debt incurred by the related party. The guaranty applies to all current
debt and to all future debt of the related party until such time as the guaranty is terminated by Milano. The amount of the debt outstanding that is subject to the guaranty is $788,000 at December 31, 2005. In July 2003, ARI sold its interest
in Milano to Gruppa for $18.5 million, receiving $7.4 million in cash after debt assumption and providing purchase money financing of $2.3 million. ARI owns 20.0% of Gruppa, thereby retaining a 20.0% interest in Milano. ARI remains as the guarantor
of $8.7 million of assumed debt and is one of the guarantors of $7.5 million in new debt obtained by Gruppa. Due to the debt guarantees and ARIs continuing ownership interest in Milano, management has determined that this should be accounted
for as a financing transaction.

Litigation.On August 10, 2004, three entities, including American
Realty Investors, Inc. (the Company), instituted an action in Texas State District Court as Cause No. 2004-60231-393 styled American Realty Investors, Inc., Transcontinental Realty Investors, Inc. and Income Opportunity Realty
Investors, Inc., Plaintiffs v. Innovo Realty, Inc. and Innovo Group, Inc., Involuntary Plaintiffs v. Innovo Realty, Inc., Metra Capital LLC, Innovo Group, Inc., Joseph Mizrachi, Simon Mizrachi, Herbert Guez, Third Millennium Partners LLC, Third
Millennium Partners, Inc., Third Millennium Group LLC and Sunridge Management, Inc., Defendants. The Plaintiffs complaint alleged that a former director of the Company, and others, offered a plan to the Plaintiffs to create one or
more joint venture arrangements with one or more of the Plaintiffs to pursue alternative forms of financing or refinancing portions of Plaintiffs real estate portfolios, which entailed the creation of 22 separate limited partnerships to
acquire 28 separate apartment complexes in three states (Texas, Florida and Louisiana), the general partners of which were affiliates of, or are controlled by, the former director of the Company. During April 2005, resolution of the litigation
occurred, settling all liabilities remaining from the original partnership arrangements which included a return of investor equity, prospective asset management fees and miscellaneous fees and transactions costs from the Plaintiffs as a prepayment
of a preferred return, along with a delegation of management to another entity, and a motion to dismiss the action as a part of the resolution. Of the prepayment, the Company recognized expense of $525,000 and a reduction in liabilities of $3.2
million during the second quarter of 2005.

In September 2001, ARI obtained a security loan in the amount of $20.0 million from Sunset
Management, LLC (Sunset). ARI received net cash of $16.1 million after the payment of various closing costs and $3.4 million repayment of principal and accrued interest on an existing loan with the same lender. Of the total loan amount,
$19.5 million bears interest at 24.0% per annum, while the remaining $500,000 bears interest at 20.0% per annum. The loan is secured by 3,672,305 shares of TCI common stock then held by BCM and wholly-owned subsidiaries of ARI. The loan
required monthly payments of interest only and matured in September 2002. In September 2002, $15.0 million in principal was repaid. Sunset orally agreed in September 2002 to extend the maturity date of the loan and accept substitute collateral for
the shares of TCI common stock after the $15.0 million pay down. Sunset did not honor the agreement, which resulted in litigation filed in Texas state court during October 2002, styled American Realty Trust, Inc., ART Williamsburg, Inc., Basic
Capital Management, Inc. and EQK Holdings, Inc. v. Sunset Management, LLC, et al., Cause No. 02-09433-I in the 162nd Judicial Court of Dallas County, Texas. See NOTE 8. STOCK-SECURED NOTES PAYABLE.



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other Litigation.    ARI is also involved in various other lawsuits
arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on ARIs financial condition, results of operations or liquidity.

NOTE 23.SUBSEQUENT EVENTS

Activities subsequent to December 31, 2005 not already reflected elsewhere in this Form 10-K are disclosed below.

In 2006, ARI purchased the following property:



|                             |  |                    |  |                        |  |               |       |              |   |              |  |              |       |  |              |      |  |      
|---------------------------- |  | ------------------ |  | ---------------------- |  | ------------- | ----- | ------------ | - | ------------ |  | ------------ | ----- |  | ------------ | ---- |  | -----
|Property                     |  | Location           |  | Units/ Sq. Feet/ Acres |  | PurchasePrice |       | Net CashPaid |   | DebtIncurred |  | InterestRate |       |  | MaturityDate
|Land                         |  |                    |  |                        |  |               |       |              |   |              |  |              |       |  |              |      |  |      
|Southwood 1394 Land          |  | Tallahassee, FL    |  | 14.5 Acres             |  | $             | 1,150 |              | $ | 477          |  | $            | 748   |  | 8.50         | %(1) |  | 02/08
|Valley Ranch 20 Land         |  | Farmers Branch, TX |  | 20 Acres               |  |               | 4,673 |              |   | 1,892        |  |              | 3,038 |  | 8.50         | (1)  |  | 02/08
|Woodmont-Fairway Office Land |  | Dallas, TX         |  | 5.9 Acres              |  |               | 3,833 |              |   | 1,014        |  |              | 3,000 |  | 8.25         | (1)  |  | 01/07
|Woodmont-Merit Drive         |  | Dallas, TX         |  | 9.3 Acres              |  |               | 4,560 |              |   | 1,868        |  |              | 2,964 |  | 10.00        |      |  | 03/07

---

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

In 2006, ARI sold the
following property:



|                  |  |               |  |                      |  |            |       |                  |   |                |  |             |     |  |   |    
|----------------- |  | ------------- |  | -------------------- |  | ---------- | ----- | ---------------- | - | -------------- |  | ----------- | --- |  | - | ---
|Property          |  | Location      |  | Units/Acres/ Sq. Ft. |  | SalesPrice |       | Net CashReceived |   | DebtDischarged |  | Gain onSale
|Land              |  |               |  |                      |  |            |       |                  |   |                |  |             |     |  |   |    
|Vineyards II land |  | Grapevine, TX |  | 1.5 Acres            |  | $          | 1,272 |                  | $ | 429            |  | $           | 745 |  | $ | 578

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



|                 |  |               |  |               |  |              |        |                |   |                        |  |   |              |   |  |              |      |  |      
|---------------- |  | ------------- |  | ------------- |  | ------------ | ------ | -------------- | - | ---------------------- |  | - | ------------ | - |  | ------------ | ---- |  | -----
|Property         |  | Location      |  | Acres/Sq. Ft. |  | DebtIncurred |        | DebtDischarged |   | Net CashReceived/ Paid |  |   | InterestRate |   |  | MaturityDate
|Apartments       |  |               |  |               |  |              |        |                |   |                        |  |   |              |   |  |              |      |  |      
|Hunters Glen     |  | Midland, TX   |  | 212 Units     |  | $            | 2,475  |                | $ | 1,804                  |  | $ | 421          |   |  | 7.23         | %(1) |  | 02/09
|Land             |  |               |  |               |  |              |        |                |   |                        |  |   |              |   |  |              |      |  |      
|Nashville land   |  | Nashville, TN |  | 100.9 Acres   |  |              | 2,500  |                |   |                       |  |   | 2,500        |   |  | 12.50        |      |  | 05/06
|Palmer Lane land |  | Austin, TX    |  | 367.4 Acres   |  |              | 14,000 |                |   | 14,300                 |  |   | (893         | ) |  | 8.50         | (1)  |  | 08/07
|West End land    |  | Dallas, TX    |  | 5.3 Acres     |  |              | 9,000  |                |   | 2,000                  |  |   | 6,079        |   |  | 8.00         | (1)  |  | 03/07

---

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



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##### Index to Financial Statements

SCHEDULE III

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                      |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      |  |       |  |            
|------------------------------------- |  | ---------------------- | ------ | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ----- | ---- | - | ----------------------- | ---- | --------- | - | ----------------------------------------------------------------- |  | -------------------- | ------ | ------------- | - | ------ |  | - | ----- |  | ---- |  | ----- |  | -----------
|                                      |  |                        |        | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried atEnd of Year |       |   |       |      |   |                         |      |           |   | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                     |  | Encumbrances           |        | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |       | Land |   | Building & Improvements |      | (1) Total |   | Accumulated Depreciation                                          |  | Date of Construction |        | Date Acquired |  
|                                      |  | (dollars in thousands)
|Properties Held for Investment        |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      |  |       |  |            
|Apartments                            |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      |  |       |  |            
|4400, Midland, TX                     |  | $                      | 972    |              | $ | 349                                      |  | $            | 1,396                                       |       | $ |      |      | $ | (130                    | )(4) |           | $ | 349                                                               |  | $                    | 1,266  |               | $ | 1,615  |  | $ | 259   |  | 1981 |  | 3/98  |  | 40 years   
|Apple Lane, Lawrence, KS              |  |                        | 1,292  |              |   | 168                                      |  |              | 1,259                                       |       |   |      |      |   | (106                    | )(4) |           |   | 168                                                               |  |                      | 1,153  |               |   | 1,321  |  |   | 188   |  | 1989 |  | 1/00  |  | 40 years   
|Arbor Point, Odessa, TX               |  |                        | 1,827  |              |   | 321                                      |  |              | 1,285                                       |       |   | 525   |      |   | (159                    | )(4) |           |   | 321                                                               |  |                      | 1,651  |               |   | 1,972  |  |   | 789   |  | 1975 |  | 8/96  |  | 5-40 years 
|Arlington Place, Pasadena, TX         |  |                        | 4,005  |              |   | 330                                      |  |              | 3,275                                       |       |   | 752   |      |   | (2                      | )(4) |           |   | 330                                                               |  |                      | 4,025  |               |   | 4,355  |  |   | 3,470 |  | 1973 |  | 11/76 |  | 10-40 years
|Ashton Way, Midland, TX               |  |                        | 972    |              |   | 384                                      |  |              | 1,536                                       |       |   | 52    |      |   | (147                    | )(4) |           |   | 384                                                               |  |                      | 1,441  |               |   | 1,825  |  |   | 366   |  | 1978 |  | 4/98  |  | 5-40 years 
|Autumn Chase, Midland, TX             |  |                        | 1,152  |              |   | 141                                      |  |              | 1,265                                       |       |   |      |      |   | (105                    | )(4) |           |   | 141                                                               |  |                      | 1,160  |               |   | 1,301  |  |   | 175   |  | 1985 |  | 3/00  |  | 40 years   
|Bay Walk, Galveston, TX               |  |                        | 5,243  |              |   | 679                                      |  |              | 6,106                                       |       |   |      |      |   | (892                    | )    |           |   | 679                                                               |  |                      | 5,214  |               |   | 5,893  |  |   | 488   |  | 1979 |  | 9/01  |  | 5-40 years 
|Blue Lake Villas, Waxahachie, TX      |  |                        | 10,611 |              |   | 762                                      |  |              | 10,521                                      |       |   |      |      |   | (795                    | )(4) |           |   | 762                                                               |  |                      | 9,726  |               |   | 10,488 |  |   | 688   |  | 2002 |  | 1/02  |  | 40 years   
|Blue Lake Villas II, Waxahachie, TX   |  |                        | 4,079  |              |   | 287                                      |  |              | 4,451                                       |       |   |      |      |   |                        |      |           |   | 287                                                               |  |                      | 4,451  |               |   | 4,738  |  |   | 107   |  | 2004 |  | 1/04  |  | 40 years   
|Bluffs At Vista Ridge, Lewisville, TX |  |                        | 15,518 |              |   | 2,585                                    |  |              | 18,832                                      |       |   |      |      |   | (8                      | )(4) |           |   | 2,585                                                             |  |                      | 18,824 |               |   | 21,409 |  |   |      |  | 2005 |  | 8/03  |  | 40 years   
|Breakwater Bay, Beaumont, TX          |  |                        | 9,784  |              |   | 740                                      |  |              | 10,435                                      |       |   |      |      |   |                        |      |           |   | 740                                                               |  |                      | 10,435 |               |   | 11,175 |  |   | 231   |  | 2003 |  | 5/03  |  | 40 years   
|Bridges on Kinsey, Tyler, TX          |  |                        | 14,380 |              |   | 862                                      |  |              | 15,849                                      |       |   |      |      |   |                        |      |           |   | 862                                                               |  |                      | 15,849 |               |   | 16,711 |  |   | 166   |  | 2005 |  | 2/04  |  | 40 years   
|Bridgestone, Friendswood, TX          |  |                        | 1,992  |              |   | 169                                      |  |              | 1,780                                       |       |   | 192   |      |   | (58                     | )(4) |           |   | 169                                                               |  |                      | 1,914  |               |   | 2,083  |  |   | 1,440 |  | 1979 |  | 6/82  |  | 18-40 years
|Capitol Hill, Little Rock, AR         |  |                        | 9,368  |              |   | 932                                      |  |              | 8,875                                       |       |   |      |      |   |                        |      |           |   | 932                                                               |  |                      | 8,875  |               |   | 9,807  |  |   | 305   |  | 2003 |  | 3/03  |  | 40 years   
|Chateau, Bellevue, NE                 |  |                        | 3,163  |              |   | 130                                      |  |              | 1,723                                       |       |   | 141   |      |   | 9                       | (4)  |           |   | 130                                                               |  |                      | 1,873  |               |   | 2,003  |  |   | 1,430 |  | 1968 |  | 2/81  |  | 7-40 years 
|Chateau Bayou, Ocean Springs, MS      |  |                        | 3,713  |              |   | 591                                      |  |              | 2,364                                       |       |   |      |      |   |                        |      |           |   | 591                                                               |  |                      | 2,364  |               |   | 2,955  |  |   | 460   |  | 1973 |  | 3/02  |  | 40 years   
|Courtyard, Midland, TX                |  |                        | 1,327  |              |   | 151                                      |  |              | 1,359                                       |       |   |      |      |   | (113                    | )(4) |           |   | 151                                                               |  |                      | 1,246  |               |   | 1,397  |  |   | 152   |  | 1976 |  | 5/01  |  | 40 years   
|Coventry, Midland, TX                 |  |                        | 1,162  |              |   | 236                                      |  |              | 369                                         |       |   | 173   |      |   | (58                     | )(4) |           |   | 236                                                               |  |                      | 484    |               |   | 720    |  |   | 255   |  | 1977 |  | 8/96  |  | 5-40 years 
|Dakota Arms, Lubbock, TX              |  |                        | 12,493 |              |   | 921                                      |  |              | 12,888                                      |       |   |      |      |   |                        |      |           |   | 921                                                               |  |                      | 12,888 |               |   | 13,809 |  |   | 187   |  | 2005 |  | 1/04  |  | 40 years   
|DeSoto Ranch, DeSoto, TX              |  |                        | 16,098 |              |   | 1,472                                    |  |              | 17,856                                      |       |   |      |      |   | (1,066                  | )(4) |           |   | 1,472                                                             |  |                      | 16,790 |               |   | 18,262 |  |   | 781   |  | 2002 |  | 5/02  |  | 40 years   
|El Chapparal, San Antonio, TX         |  |                        | 4,035  |              |   | 279                                      |  |              | 2,821                                       |       |   |      |      |   | (603                    | )(4) |           |   | 279                                                               |  |                      | 2,218  |               |   | 2,497  |  |   | 1,111 |  | 1963 |  | 1/88  |  | 5-40 years 
|Fairway View Estates, El Paso, TX     |  |                        | 4,556  |              |   | 548                                      |  |              | 4,530                                       |       |   | 261   |      |   | (398                    | )(4) |           |   | 548                                                               |  |                      | 4,393  |               |   | 4,941  |  |   | 966   |  | 1977 |  | 3/99  |  | 40 years   
|Fairways, Longview, TX                |  |                        | 3,139  |              |   | 657                                      |  |              | 1,532                                       |       |   | 119   |      |   | (418                    | )(4) |           |   | 657                                                               |  |                      | 1,233  |               |   | 1,890  |  |   | 537   |  | 1980 |  | 3/93  |  | 5-40 years 
|Falcon Lakes, Arlington, TX           |  |                        | 13,509 |              |   | 1,437                                    |  |              | 15,375                                      |       |   |      |      |   | (1,047                  | )(4) |           |   | 1,437                                                             |  |                      | 14,328 |               |   | 15,765 |  |   | 1,169 |  | 2001 |  | 10/01 |  | 40 years   
|Fountain Lake, Texas City, TX         |  |                        | 2,945  |              |   | 861                                      |  |              | 2,585                                       |       |   | 19    |      |   | (232                    | )(4) |           |   | 861                                                               |  |                      | 2,372  |               |   | 3,233  |  |   | 706   |  | 1975 |  | 12/94 |  | 5-40 years 
|Fountains of Waterford, Midland, TX   |  |                        | 1,550  |              |   | 311                                      |  |              | 852                                         |       |   | 1,538 |      |   | (202                    | )(4) |           |   | 311                                                               |  |                      | 2,188  |               |   | 2,499  |  |   | 1,570 |  | 1977 |  | 5/98  |  | 5-40 years 
|Foxwood, Memphis, TN                  |  |                        | 5,540  |              |   | 218                                      |  |              | 3,188                                       |       |   |      |      |   | 1,171                   | (4)  |           |   | 218                                                               |  |                      | 4,359  |               |   | 4,577  |  |   | 3,512 |  | 1974 |  | 8/79  |  | 5-40 years 
|Governor Square, Tallahassee, FL      |  |                        | 4,325  |              |   | 245                                      |  |              | 2,207                                       |       |   |      |      |   |                        |      |           |   | 245                                                               |  |                      | 2,207  |               |   | 2,452  |  |   | 206   |  | 1974 |  | 3/02  |  | 40 years   
|Harpers Ferry, Lafayette, LA         |  |                        | 3,023  |              |   | 349                                      |  |              | 1,398                                       |       |   | 223   |      |   | (147                    | )(4) |           |   | 349                                                               |  |                      | 1,474  |               |   | 1,823  |  |   | 633   |  | 1972 |  | 2/92  |  | 5-40 years 



95



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |     |      |   |                         |      |           |   |                          |                                                                   |                      |        |  |               |        |  |   |       |  |      |   |  |       |  |            
|------------------------------------------ |  | ---------------------- | ------ | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | --- | ---- | - | ----------------------- | ---- | --------- | - | ------------------------ | ----------------------------------------------------------------- | -------------------- | ------ |  | ------------- | ------ |  | - | ----- |  | ---- | - |  | ----- |  | -----------
|                                           |  |                        |        | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried atEnd of Year |       |   |     |      |   |                         |      |           |   |                          | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |        | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |     | Land |   | Building & Improvements |      | (1) Total |   | Accumulated Depreciation |                                                                   | Date of Construction |        |  | Date Acquired |       
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |        |              |   |                                          |  |              |                                             |       |   |     |      |   |                         |      |           |   |                          |                                                                   |                      |        |  |               |        |  |   |       |  |      |   | 
|Apartments(continued)                     |  |                        |        |              |   |                                          |  |              |                                             |       |   |     |      |   |                         |      |           |   |                          |                                                                   |                      |        |  |               |        |  |   |       |  |      |   |  |       |  |            
|Heather Creek, Mesquite, TX                |  | $                      | 11,930 |              | $ | 1,100                                    |  | $            | 12,241                                      |       | $ |    |      | $ |                        |      |           | $ | 1,100                    |                                                                   | $                    | 12,241 |  | $             | 13,341 |  | $ | 501   |  | 2003 |   |  | 3/03  |  | 40 years   
|Hunters Glen, Midland, TX                  |  |                        | 1,804  |              |   | 519                                      |  |              | 2,075                                       |       |   | 321 |      |   | (217                    | )(4) |           |   | 519                      |                                                                   |                      | 2,179  |  |               | 2,698  |  |   | 736   |  | 1982 |   |  | 1/98  |  | 5-40 years 
|Island Bay, Galveston, TX                  |  |                        | 14,748 |              |   | 2,095                                    |  |              | 18,852                                      |       |   |    |      |   | (2,756                  | )    |           |   | 2,095                    |                                                                   |                      | 16,096 |  |               | 18,191 |  |   | 1,512 |  | 1973 |   |  | 9/01  |  | 40 years   
|Kingsland Ranch, Houston, TX               |  |                        | 21,790 |              |   | 1,188                                    |  |              | 23,387                                      |       |   |    |      |   |                        |      |           |   | 1,188                    |                                                                   |                      | 23,387 |  |               | 24,575 |  |   | 536   |  | 2005 |   |  | 3/03  |  | 40 years   
|Laguna Vista, Farmers Branch, TX           |  |                        | 5,148  |              |   | 288                                      |  |              | 6,638                                       |       |   |    |      |   |                        |      |           |   | 288                      |                                                                   |                      | 6,638  |  |               | 6,926  |  |   |      |  | (7   | ) |  | 12/04 |  | 40 years   
|Lake Forest, Houston, TX                   |  |                        | 12,728 |              |   | 334                                      |  |              | 13,708                                      |       |   |    |      |   |                        |      |           |   | 334                      |                                                                   |                      | 13,708 |  |               | 14,042 |  |   |      |  | 2005 |   |  | 1/04  |  | 40 years   
|Legends of El Paso, El Paso, TX            |  |                        | 4,204  |              |   | 1,318                                    |  |              | 4,009                                       |       |   |    |      |   |                        |      |           |   | 1,318                    |                                                                   |                      | 4,009  |  |               | 5,327  |  |   |      |  | (7   | ) |  | 7/05  |  | 40 years   
|Limestone Canyon, Austin, TX               |  |                        | 12,213 |              |   | 1,998                                    |  |              | 12,247                                      |       |   |    |      |   | 1,895                   | (7)  |           |   | 1,998                    |                                                                   |                      | 12,938 |  |               | 14,936 |  |   | 1,851 |  | 1997 |   |  | 7/98  |  | 40 years   
|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |     |      |   | (1,204                  | )(4) |           |   |                          |                                                                   |                      |        |  |               |        |  |   |       |  |      |   |  |       |  |            
|Limestone Ranch, Lewisville, TX            |  |                        | 12,471 |              |   | 1,620                                    |  |              | 13,058                                      |       |   |    |      |   | (1,095                  | )(4) |           |   | 1,620                    |                                                                   |                      | 11,963 |  |               | 13,583 |  |   | 1,115 |  | 2001 |   |  | 5/01  |  | 40 years   
|Marina Landing, Galveston, TX              |  |                        | 12,565 |              |   | 1,240                                    |  |              | 11,161                                      |       |   |    |      |   | (925                    | )    |           |   | 1,240                    |                                                                   |                      | 10,236 |  |               | 11,476 |  |   | 864   |  | 1985 |   |  | 9/01  |  | 40 years   
|Mariposa Villas, Dallas, TX                |  |                        | 12,243 |              |   | 788                                      |  |              | 13,130                                      |       |   |    |      |   |                        |      |           |   | 788                      |                                                                   |                      | 13,130 |  |               | 13,918 |  |   | 607   |  | 2002 |   |  | 1/02  |  | 40 years   
|Med Villas, San Antonio, TX                |  |                        | 2,653  |              |   | 712                                      |  |              | 2,848                                       |       |   |    |      |   |                        |      |           |   | 712                      |                                                                   |                      | 2,848  |  |               | 3,560  |  |   | 557   |  | 1967 |   |  | 2/98  |  | 40 years   
|Mission Oaks, San Antonio, TX              |  |                        | 10,945 |              |   |                                         |  |              | 12,073                                      |       |   |    |      |   |                        |      |           |   |                         |                                                                   |                      | 12,073 |  |               | 12,073 |  |   |      |  | (7   | ) |  | 5/05  |  | 40 years   
|Mountain Plaza, El Paso, TX                |  |                        | 5,110  |              |   | 837                                      |  |              | 3,347                                       |       |   | 139 |      |   | (323                    | )(4) |           |   | 837                      |                                                                   |                      | 3,163  |  |               | 4,000  |  |   | 783   |  | 1972 |   |  | 1/98  |  | 5-40 years 
|Oak Park IV, Clute, TX                     |  |                        | 902    |              |   | 224                                      |  |              | 674                                         |       |   | 27  |      |   | (157                    | )(4) |           |   | 224                      |                                                                   |                      | 544    |  |               | 768    |  |   | 196   |  | 1981 |   |  | 6/94  |  | 5-40 years 
|Oak Tree, Grandview, MO                    |  |                        | 3,860  |              |   | 304                                      |  |              | 3,543                                       |       |   | 245 |      |   | (188                    | )(4) |           |   | 304                      |                                                                   |                      | 3,600  |  |               | 3,904  |  |   | 2,542 |  | 1968 |   |  | 3/82  |  | 18-40 years
|Paramount Terrace, Amarillo, TX            |  |                        | 3,119  |              |   | 340                                      |  |              | 3,061                                       |       |   |    |      |   | (254                    | )(4) |           |   | 340                      |                                                                   |                      | 2,807  |  |               | 3,147  |  |   | 529   |  | 1983 |   |  | 5/00  |  | 40 years   
|Parc at Maumelle, Maumelle, AR             |  |                        | 9,447  |              |   | 1,153                                    |  |              | 10,096                                      |       |   |    |      |   |                        |      |           |   | 1,153                    |                                                                   |                      | 10,096 |  |               | 11,249 |  |   |      |  | (7   | ) |  | 12/04 |  | 40 years   
|Parc at Metro Center Apts, Nashville, TN   |  |                        | 1,956  |              |   | 960                                      |  |              | 2,284                                       |       |   |    |      |   | (960                    | )    |           |   | 960                      |                                                                   |                      | 1,324  |  |               | 2,284  |  |   |      |  | (7   | ) |  | 5/05  |  | 40 years   
|Plantation, Tulsa, OK                      |  |                        | 2,214  |              |   | 344                                      |  |              | 2,396                                       |       |   |    |      |   | (204                    | )    |           |   | 344                      |                                                                   |                      | 2,192  |  |               | 2,536  |  |   | 481   |  | 1968 |   |  | 12/99 |  | 40 years   
|Quail Oaks, Balch Springs, TX              |  |                        | 2,553  |              |   | 90                                       |  |              | 2,160                                       |       |   | 152 |      |   | (352                    | )(4) |           |   | 90                       |                                                                   |                      | 1,960  |  |               | 2,050  |  |   | 1,154 |  | 1982 |   |  | 2/87  |  | 5-40 years 
|River Oaks, Wiley, TX                      |  |                        | 9,708  |              |   | 590                                      |  |              | 11,768                                      |       |   |    |      |   | (991                    | )(4) |           |   | 590                      |                                                                   |                      | 10,777 |  |               | 11,367 |  |   | 1,312 |  | 2001 |   |  | 10/01 |  | 40 years   
|Sendero Ridge, San Antonio, TX             |  |                        | 24,178 |              |   | 2,635                                    |  |              | 26,725                                      |       |   |    |      |   | (1,855                  | )(4) |           |   | 2,635                    |                                                                   |                      | 24,870 |  |               | 27,505 |  |   | 1,183 |  | 2001 |   |  | 11/01 |  | 40 years   
|Somerset, Texas City, TX                   |  |                        | 2,722  |              |   | 936                                      |  |              | 2,811                                       |       |   | 179 |      |   | (711                    | )(4) |           |   | 936                      |                                                                   |                      | 2,279  |  |               | 3,215  |  |   | 861   |  | 1985 |   |  | 12/93 |  | 5-40 years 
|Southgate, Odessa, TX                      |  |                        | 1,860  |              |   | 335                                      |  |              | 1,338                                       |       |   | 318 |      |   | (149                    | )(4) |           |   | 335                      |                                                                   |                      | 1,507  |  |               | 1,842  |  |   | 618   |  | 1976 |   |  | 8/96  |  | 5-40 years 
|Spy Glass, Mansfield, TX                   |  |                        | 15,856 |              |   | 1,376                                    |  |              | 15,963                                      |       |   |    |      |   | (1,083                  | )(4) |           |   | 1,376                    |                                                                   |                      | 14,880 |  |               | 16,256 |  |   | 946   |  | 2002 |   |  | 3/02  |  | 40 years   



96



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |        |  |      |  |       |  |            
|------------------------------------------ |  | ---------------------- | ------ | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ------ | ---- | - | ----------------------- | ---- | --------- | - | ----------------------------------------------------------------- |  | -------------------- | ------ | ------------- | - | ------ |  | - | ------ |  | ---- |  | ----- |  | -----------
|                                           |  |                        |        | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried atEnd of Year |       |   |        |      |   |                         |      |           |   | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |        | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |        | Land |   | Building & Improvements |      | (1) Total |   | Accumulated Depreciation                                          |  | Date of Construction |        | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |        |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |        |  |      | 
|Apartments(continued)                     |  |                        |        |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |        |  |      |  |       |  |            
|Stonebridge @ City Park, Houston, TX       |  | $                      | 14,452 |              | $ | 1,545                                    |  | $            | 14,883                                      |       | $ |       |      | $ |                        |      |           | $ | 1,545                                                             |  | $                    | 14,883 |               | $ | 16,428 |  | $ | 233    |  | 2005 |  | 1/04  |  | 40 years   
|Sunchase, Odessa, TX                       |  |                        | 3,178  |              |   | 742                                      |  |              | 2,842                                       |       |   | 458    |      |   | (302                    | )(4) |           |   | 742                                                               |  |                      | 2,998  |               |   | 3,740  |  |   | 977    |  | 1981 |  | 10/97 |  | 5-40 years 
|Sunset, Odessa, TX                         |  |                        | 2,995  |              |   | 345                                      |  |              | 1,382                                       |       |   |       |      |   |                        |      |           |   | 345                                                               |  |                      | 1,382  |               |   | 1,727  |  |   | 271    |  | 1981 |  | 3/02  |  | 40 years   
|Timbers, Tyler, TX                         |  |                        | 2,240  |              |   | 497                                      |  |              | 1,988                                       |       |   |       |      |   | (185                    | )(4) |           |   | 497                                                               |  |                      | 1,803  |               |   | 2,300  |  |   | 368    |  | 1973 |  | 12/97 |  | 40 years   
|Tivoli, Dallas, TX                         |  |                        | 9,824  |              |   | 1,355                                    |  |              | 12,592                                      |       |   |       |      |   | (1,040                  | )(4) |           |   | 1,355                                                             |  |                      | 11,552 |               |   | 12,907 |  |   | 868    |  | 2001 |  | 12/01 |  | 40 years   
|Treehouse, Irving, TX                      |  |                        | 5,668  |              |   | 312                                      |  |              | 2,807                                       |       |   |       |      |   | (233                    | )    |           |   | 312                                                               |  |                      | 2,574  |               |   | 2,886  |  |   | 105    |  | 1974 |  | 5/04  |  | 5-40 years 
|Verandas at City View, Fort Worth, TX      |  |                        | 19,229 |              |   | 2,545                                    |  |              | 20,599                                      |       |   |       |      |   | (1,160                  | )(4) |           |   | 2,545                                                             |  |                      | 19,439 |               |   | 21,984 |  |   | 946    |  | 2001 |  | 9/01  |  | 40 years   
|Villa Del Mar, Wichita, KS                 |  |                        | 3,460  |              |   | 387                                      |  |              | 3,134                                       |       |   | 116    |      |   | (13                     | )(4) |           |   | 387                                                               |  |                      | 3,237  |               |   | 3,624  |  |   | 2,364  |  | 1971 |  | 10/81 |  | 17-40 years
|Villager, Ft. Walton, FL                   |  |                        | 788    |              |   | 125                                      |  |              | 1,145                                       |       |   | 2      |      |   |                        |      |           |   | 125                                                               |  |                      | 1,147  |               |   | 1,272  |  |   | 109    |  | 1972 |  | 3/02  |  | 40 years   
|Vistas at Pinnacle Park, Dallas, TX        |  |                        | 18,979 |              |   | 1,750                                    |  |              | 19,820                                      |       |   |       |      |   |                        |      |           |   | 1,750                                                             |  |                      | 19,820 |               |   | 21,570 |  |   | 710    |  | 2002 |  | 10/02 |  | 40 years   
|Vistas at Vance Jackson, San Antonio, TX   |  |                        | 15,196 |              |   | 1,265                                    |  |              | 15,776                                      |       |   |       |      |   |                        |      |           |   | 1,265                                                             |  |                      | 15,776 |               |   | 17,041 |  |   | 13     |  | 2005 |  | 1/04  |  | 40 years   
|Westwood, Mary Ester, FL                   |  |                        | 3,423  |              |   | 149                                      |  |              | 1,337                                       |       |   |       |      |   |                        |      |           |   | 149                                                               |  |                      | 1,337  |               |   | 1,486  |  |   | 125    |  | 1972 |  | 3/02  |  | 40 years   
|Westwood, Odessa, TX                       |  |                        | 500    |              |   | 85                                       |  |              | 341                                         |       |   | 91     |      |   | (39                     | )(4) |           |   | 85                                                                |  |                      | 393    |               |   | 478    |  |   | 175    |  | 1977 |  | 8/96  |  | 5-40 years 
|Whispering Pines, Topeka, KS               |  |                        | 7,177  |              |   | 228                                      |  |              | 4,331                                       |       |   | 1,054  |      |   | 27                      | (4)  |           |   | 228                                                               |  |                      | 5,412  |               |   | 5,640  |  |   | 4,260  |  | 1972 |  | 2/78  |  | 15-40 years
|Wildflower Villas, Temple, TX              |  |                        | 13,065 |              |   | 1,119                                    |  |              | 14,482                                      |       |   |       |      |   |                        |      |           |   | 1,119                                                             |  |                      | 14,482 |               |   | 15,601 |  |   | 7      |  | 2005 |  | 3/04  |  | 40 years   
|Willow Creek, El Paso, TX                  |  |                        | 2,133  |              |   | 608                                      |  |              | 1,832                                       |       |   | 76     |      |   | (332                    | )(4) |           |   | 608                                                               |  |                      | 1,576  |               |   | 2,184  |  |   | 548    |  | 1972 |  | 5/94  |  | 5-40 years 
|Willo-Wick, Pensacola, FL                  |  |                        | 2,852  |              |   | 747                                      |  |              | 2,990                                       |       |   | 174    |      |   | (552                    | )    |           |   | 747                                                               |  |                      | 2,612  |               |   | 3,359  |  |   | 894    |  | 1974 |  | 5/95  |  | 5-40 years 
|Windsong, Fort Worth, TX                   |  |                        | 10,636 |              |   | 790                                      |  |              | 11,526                                      |       |   |       |      |   |                        |      |           |   | 790                                                               |  |                      | 11,526 |               |   | 12,316 |  |   | 532    |  | 2003 |  | 7/03  |  | 40 years   
|Woodlake, Carrollton, TX                   |  |                        | 8,082  |              |   | 585                                      |  |              | 5,848                                       |       |   | 1,041  |      |   | (156                    | )(4) |           |   | 585                                                               |  |                      | 6,733  |               |   | 7,318  |  |   | 5,216  |  | 1979 |  | 8/78  |  | 15-40 years
|Woodview, Odessa, TX                       |  |                        | 1,890  |              |   | 716                                      |  |              | 2,864                                       |       |   | 102    |      |   | (275                    | )(4) |           |   | 716                                                               |  |                      | 2,691  |               |   | 3,407  |  |   | 630    |  | 1974 |  | 5/98  |  | 5-40 years 
|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       
|Office Buildings                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |        |  |      |  |       |  |            
|1010 Commons, New Orleans, LA              |  |                        | 16,151 |              |   | 2,113                                    |  |              | 15,010                                      |       |   | 20,145 |      |   | (3,810                  | )(4) |           |   | 2,113                                                             |  |                      | 31,345 |               |   | 33,458 |  |   | 13,934 |  | 1971 |  | 3/98  |  | 5-40 years 
|225 Baronne, New Orleans, LA               |  |                        | 5,130  |              |   | 1,162                                    |  |              | 10,457                                      |       |   | 6,274  |      |   | (3,144                  | )(4) |           |   | 1,162                                                             |  |                      | 13,587 |               |   | 14,749 |  |   | 7,011  |  | 1960 |  | 3/98  |  | 5-40 years 
|600 Las Colinas, Irving, TX                |  |                        | 40,087 |              |   | 5,751                                    |  |              | 51,759                                      |       |   |       |      |   |                        |      |           |   | 5,751                                                             |  |                      | 51,759 |               |   | 57,510 |  |   | 539    |  | 1984 |  | 8/05  |  | 5-40 years 
|Amoco, New Orleans, LA                     |  |                        | 8,269  |              |   | 894                                      |  |              | 3,582                                       |       |   | 7,085  |      |   | (1,907                  | )(4) |           |   | 894                                                               |  |                      | 8,760  |               |   | 9,654  |  |   | 5,590  |  | 1974 |  | 7/97  |  | 5-40 years 
|Cooley Building, Farmers Branch, TX        |  |                        | 2,525  |              |   | 729                                      |  |              | 2,918                                       |       |   | 124    |      |   | (1,137                  | )(4) |           |   | 729                                                               |  |                      | 1,905  |               |   | 2,634  |  |   | 796    |  | 1996 |  | 5/99  |  | 5-40 years 



97



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      |  |       |  |            
|------------------------------------------ |  | ---------------------- | ------ | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ----- | ---- | - | ----------------------- | ---- | --------- | - | ----------------------------------------------------------------- |  | -------------------- | ------ | ------------- | - | ------ |  | - | ----- |  | ---- |  | ----- |  | -----------
|                                           |  |                        |        | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried atEnd of Year |       |   |       |      |   |                         |      |           |   | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |        | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |       | Land |   | Building & Improvements |      | (1) Total |   | Accumulated Depreciation                                          |  | Date of Construction |        | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      | 
|Office Buildings(continued)               |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      |  |       |  |            
|Durham Centre, Durham, NC                  |  | $                      | 11,222 |              | $ | 4,233                                    |  | $            | 16,932                                      |       | $ | 1,470 |      | $ | (2,875                  | )(4) |           | $ | 4,233                                                             |  | $                    | 15,527 |               | $ | 19,760 |  | $ | 3,910 |  | 1988 |  | 7/97  |  | 40 years   
|Eton Square, Tulsa, OK                     |  |                        | 10,012 |              |   | 1,469                                    |  |              | 13,217                                      |       |   | 2,585 |      |   | (1,139                  | )(4) |           |   | 1,469                                                             |  |                      | 14,663 |               |   | 16,132 |  |   | 2,543 |  | 1985 |  | 9/99  |  | 5-40 years 
|Executive Court, Memphis, TN               |  |                        |       |              |   | 271                                      |  |              | 2,099                                       |       |   | 749   |      |   | (34                     | )(4) |           |   | 271                                                               |  |                      | 2,814  |               |   | 3,085  |  |   | 2,110 |  | 1980 |  | 12/04 |  | 5-40 years 
|Forum, Richmond, VA                        |  |                        | 4,775  |              |   | 1,360                                    |  |              | 5,439                                       |       |   | 1,336 |      |   | (554                    | )(4) |           |   | 1,360                                                             |  |                      | 6,221  |               |   | 7,581  |  |   | 2,444 |  | 1987 |  | 10/92 |  | 2-40 years 
|Four Hickory Center, Farmers Branch, TX    |  |                        | 12,633 |              |   | 303                                      |  |              | 27,723                                      |       |   | 493   |      |   | (12,583                 | )(4) |           |   | 303                                                               |  |                      | 15,633 |               |   | 15,936 |  |   | 1,490 |  | 2003 |  | 2001  |  | 5-40 years 
|Lexington Center, Colorado Springs, CO     |  |                        | 3,768  |              |   | 1,103                                    |  |              | 4,413                                       |       |   | 711   |      |   | (453                    | )(4) |           |   | 1,103                                                             |  |                      | 4,671  |               |   | 5,774  |  |   | 1,431 |  | 1986 |  | 12/97 |  | 3-40 years 
|One Hickory Center, Farmers Branch, TX     |  |                        | 6,903  |              |   | 335                                      |  |              | 7,651                                       |       |   | 3,905 |      |   | 218                     |      |           |   | 335                                                               |  |                      | 11,774 |               |   | 12,109 |  |   | 4,084 |  | 1998 |  | 2000  |  | 7-40 years 
|Park West, Dallas, TX                      |  |                        | 5,976  |              |   | 1,036                                    |  |              | 9,324                                       |       |   |      |      |   |                         |      |           |   | 1,036                                                             |  |                      | 9,324  |               |   | 10,360 |  |   | 175   |  | 1984 |  | 4/05  |  | 5-40 years 
|Parkway North, Dallas, TX                  |  |                        | 3,439  |              |   | 1,173                                    |  |              | 4,692                                       |       |   | 1,040 |      |   | (508                    | )(4) |           |   | 1,173                                                             |  |                      | 5,224  |               |   | 6,397  |  |   | 1,767 |  | 1980 |  | 2/98  |  | 2-40 years 
|Signature, Dallas, TX                      |  |                        | 2,257  |              |   | 1,075                                    |  |              | 2,921                                       |       |   | 1,384 |      |   | (1,627                  | )(4) |           |   | 1,075                                                             |  |                      | 2,678  |               |   | 3,753  |  |   | 798   |  | 1985 |  | 2/99  |  | 5-40 years 
|Two Hickory Center, Farmers Branch, TX     |  |                        | 7,331  |              |   | 318                                      |  |              | 7,827                                       |       |   | 1,693 |      |   | (21                     | )    |           |   | 318                                                               |  |                      | 9,499  |               |   | 9,817  |  |   | 1,846 |  | 2000 |  | 2000  |  | 3-40 years 
|University Square, Anchorage, AK           |  |                        | 1,025  |              |   | 562                                      |  |              | 3,276                                       |       |   | 265   |      |   | (1,848                  | )(2) |           |   | 562                                                               |  |                      | 1,445  |               |   | 2,007  |  |   | 1,523 |  | 1981 |  | 12/81 |  | 17-40 years
|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   | (248                    | )(4) |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      |  |       |  |            
|Westgrove Air Plaza, Addison, TX           |  |                        | 2,928  |              |   | 211                                      |  |              | 1,898                                       |       |   | 311   |      |   | (410                    | )(4) |           |   | 211                                                               |  |                      | 1,799  |               |   | 2,010  |  |   | 667   |  | 1982 |  | 10/97 |  | 5-40 years 
|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |      
|Hotels                                     |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |           |   |                                                                   |  |                      |        |               |   |        |  |   |       |  |      |  |       |  |            
|Akademia, Wroclaw, Poland                  |  |                        | 20,967 |              |   | 2,184                                    |  |              | 17,187                                      |       |   |      |      |   | (1,353                  | )(4) |           |   | 2,184                                                             |  |                      | 15,834 |               |   | 18,018 |  |   | 2,356 |  | 2001 |  | 2/01  |  | 40 years   
|Best Western Hotel, Virginia Beach, VA     |  |                        | 3,492  |              |   | 1,521                                    |  |              | 5,754                                       |       |   | 1,501 |      |   | (281                    | )(4) |           |   | 1,521                                                             |  |                      | 6,974  |               |   | 8,495  |  |   | 2,394 |  | 1983 |  | 12/96 |  | 7-40 years 
|Chateau Inn, Fresno, CA                    |  |                        | 1,939  |              |   |                                         |  |              | 3,906                                       |       |   | 74    |      |   | (174                    | )(2) |           |   |                                                                   |  |                      | 3,806  |               |   | 3,806  |  |   | 900   |  | 1989 |  | 10/97 |  | 7-40 years 
|City Suites, Chicago, IL                   |  |                        | 3,587  |              |   | 950                                      |  |              | 3,847                                       |       |   | 1,129 |      |   | (521                    | )(4) |           |   | 950                                                               |  |                      | 4,455  |               |   | 5,405  |  |   | 1,608 |  | 1995 |  | 12/98 |  | 5-40 years 
|Comfort Inn, Denver, CO                    |  |                        | 3,427  |              |   |                                         |  |              | 302                                         |       |   | 2,656 |      |   | (211                    | )(4) |           |   |                                                                  |  |                      | 2,747  |               |   | 2,747  |  |   | 2,318 |  | 1974 |  | 6/94  |  | 7-40 years 
|Piccadilly Airport, Fresno, CA             |  |                        | 4,608  |              |   |                                         |  |              | 7,834                                       |       |   | 490   |      |   | (199                    | )(2) |           |   |                                                                   |  |                      | 8,125  |               |   | 8,125  |  |   | 2,035 |  | 1970 |  | 10/97 |  | 7-40 years 
|Piccadilly Shaw, Fresno, CA                |  |                        | 5,351  |              |   | 2,392                                    |  |              | 9,567                                       |       |   | 958   |      |   | (487                    | )(2) |           |   | 2,392                                                             |  |                      | 10,038 |               |   | 12,430 |  |   | 2,561 |  | 1973 |  | 10/97 |  | 7-40 years 
|Piccadilly University, Fresno, CA          |  |                        | 5,204  |              |   |                                         |  |              | 12,011                                      |       |   | 297   |      |   | (294                    | )(2) |           |   |                                                                  |  |                      | 12,014 |               |   | 12,014 |  |   | 2,732 |  | 1984 |  | 10/97 |  | 7-40 years 



98



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|------------------------------------------ |  | ---------------------- | ------- | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ------ | ---- | - | ----------------------- | ---- |  | --------- | ------- | ----------------------------------------------------------------- | - | -------------------- | - | ------------- | - | ------- |  | - | ------- |  | --------- |  | ----- |  | ----------
|                                           |  |                        |         | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried at Endof Year |       |   |        |      |   |                         |      |  |           |         | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |         | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |        | Land |   | Building & Improvements |      |  | (1) Total |         | Accumulated Depreciation                                          |   | Date of Construction |   | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |        
|Shopping Centers                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|The Majestic, Chicago, IL                  |  | $                      | 3,186   |              | $ | 572                                      |  | $            | 2,287                                       |       | $ | 1,617  |      | $ | (405                    | )(4) |  | $         | 572     |                                                                   | $ | 3,499                |   |               | $ | 4,071   |  | $ | 1,365   |  | 1995      |  | 12/98 |  | 5-40 years
|Williamsburg Hospitality House             |  |                        | 10,953  |              |   | 4,049                                    |  |              | 16,195                                      |       |   | 2,875  |      |   | (1,360                  | )(2) |  |           | 4,049   |                                                                   |   | 17,710               |   |               |   | 21,759  |  |   | 5,592   |  | 1973      |  | 09/97 |  | 7-40 years
|Williamsburg, VA                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|Willows, Chicago, IL                       |  |                        | 3,449   |              |   | 945                                      |  |              | 3,779                                       |       |   | 1,490  |      |   | (544                    | )(4) |  |           | 945     |                                                                   |   | 4,725                |   |               |   | 5,670   |  |   | 1,961   |  | 1995      |  | 12/98 |  | 5-40 years
|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |       
|Industrial Warehouses                      |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|5360 Tulane, Atlanta, GA                   |  |                        | 353     |              |   | 95                                       |  |              | 514                                         |       |   | 129    |      |   | (90                     | )(4) |  |           | 95      |                                                                   |   | 553                  |   |               |   | 648     |  |   | 341     |  | 1970      |  | 11/97 |  | 5-40 years
|Addison Hangar, Addison, TX                |  |                        | 4,308   |              |   | 928                                      |  |              | 1,481                                       |       |   | 51     |      |   | (182                    | )(4) |  |           | 928     |                                                                   |   | 1,350                |   |               |   | 2,278   |  |   | 248     |  | 1992      |  | 12/99 |  | 5-40 years
|Addison Hanger II, Addison, TX             |  |                        |        |              |   |                                         |  |              | 1,150                                       |       |   | 248    |      |   | (104                    | )(4) |  |           |        |                                                                   |   | 1,294                |   |               |   | 1,294   |  |   | 756     |  | 2000      |  | 12/99 |  | 5-40 years
|Encon, Fort Worth, TX                      |  |                        | 3,336   |              |   | 984                                      |  |              | 3,934                                       |       |   | 67     |      |   | (372                    | )(4) |  |           | 984     |                                                                   |   | 3,629                |   |               |   | 4,613   |  |   | 809     |  | 1958      |  | 10/97 |  | 5-40 years
|Space Center, San Antonio, TX              |  |                        | 1,025   |              |   | 247                                      |  |              | 1,332                                       |       |   | 112    |      |   | (247                    | )(4) |  |           | 247     |                                                                   |   | 1,197                |   |               |   | 1,444   |  |   | 862     |  | 1970      |  | 11/97 |  | 5-40 years
|Bridgeview Plaza, LaCrosse, WI             |  |                        | 7,093   |              |   | 870                                      |  |              | 7,830                                       |       |   | 130    |      |   | (8,700                  | )(4) |  |           | 870     |                                                                   |   | (740                 | ) |               |   | 130     |  |   | 421     |  | 1979      |  | 3/03  |  |           
|Cross County Mall, Mattoon, IL             |  |                        | 4,569   |              |   | 608                                      |  |              | 6,468                                       |       |   | 7,085  |      |   | (1,633                  | )(4) |  |           | 608     |                                                                   |   | 11,920               |   |               |   | 12,528  |  |   | 10,656  |  | 1971      |  | 8/79  |  | 5-40 years
|Cullman, Cullman, AL                       |  |                        | 1,284   |              |   | 200                                      |  |              | 1,800                                       |       |   |       |      |   | (15                     | )(4) |  |           | 200     |                                                                   |   | 667                  |   |               |   | 867     |  |   | 241     |  | 1979      |  | 3/03  |  |           
|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   | (1,118                  | )(4) |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|Dunes Plaza, Michigan City, IN             |  |                        | 3,749   |              |   | 1,230                                    |  |              | 5,430                                       |       |   | 2,054  |      |   | (482                    | )(5) |  |           | 1,230   |                                                                   |   | 6,398                |   |               |   | 7,024   |  |   | 2,861   |  | 1978      |  | 3/92  |  | 5-40 years
|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   | (604                    | )(4) |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|Willowbrook Village, Coldwater, MI         |  |                        | 6,496   |              |   | 852                                      |  |              | 7,663                                       |       |   |       |      |   |                         |      |  |           | 852     |                                                                   |   | 7,663                |   |               |   | 8,515   |  |   | 32      |  | 1991      |  | 10/05 |  |           
|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |       
|Merchandise Mart                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|Denver Mart, Denver, CO                    |  |                        | 25,897  |              |   | 4,824                                    |  |              | 5,184                                       |       |   | 17,330 |      |   | 198                     |      |  |           | 4,824   |                                                                   |   | 22,712               |   |               |   | 27,536  |  |   | 8,156   |  | 1965/1986 |  | 4/94  |  | 7-40 years
|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |       
|Single Family Residence                    |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|Tavel Circle, Dallas, TX                   |  |                        | 38      |              |   | 53                                       |  |              | 214                                         |       |   |       |      |   |                        |      |  |           | 53      |                                                                   |   | 214                  |   |               |   | 267     |  |   | 52      |  | 1978      |  | 5/96  |  | 30 years  
|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |        |      |   |                         |      |  |           |         |                                                                   |   |                      |   |               |   |         |  |   |         |  |           |  |       |  |           
|                                           |  |                        | 795,209 |              |   | 103,936                                  |  |              | 848,831                                     |       |   | 98,391 |      |   | (72,553                 | )    |  |           | 103,936 |                                                                   |   | 874,669              |   |               |   | 978,001 |  |   | 164,497 |  |           |  |       |  |           



99



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |       |              |   |                                          |  |              |                                             |       |   |     |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |     |  |   |  |       |  |  
|------------------------------------------ |  | ---------------------- | ----- | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | --- | ---- | - | ----------------------- | ---- |  | --------- | ------ | ----------------------------------------------------------------- | - | -------------------- | - | ------------- | - | ----- |  | - | --- |  | - |  | ----- |  | -
|                                           |  |                        |       | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried at Endof Year |       |   |     |      |   |                         |      |  |           |        | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |       | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |     | Land |   | Building & Improvements |      |  | (1) Total |        | Accumulated Depreciation                                          |   | Date of Construction |   | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |       |              |   |                                          |  |              |                                             |       |   |     |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |    
|Land                                       |  |                        |       |              |   |                                          |  |              |                                             |       |   |     |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |     |  |   |  |       |  |  
|1013 Commons, New Orleans, LA              |  | $                      |      |              | $ | 615                                      |  | $            |                                            |       | $ | 718 |      | $ | (88                     | )(4) |  | $         | 615    |                                                                   | $ | 630                  |   |               | $ | 1,245 |  | $ | 114 |  |  |  | 8/98  |  | 
|Addison Park  Residential, Addison, TX    |  |                        | 626   |              |   | 825                                      |  |              |                                            |       |   |    |      |   |                        |      |  |           | 825    |                                                                   |   |                     |   |               |   | 825   |  |   |    |  |  |  | 11/05 |  | 
|Addison Park  Retail, Addison, TX         |  |                        | 1,180 |              |   | 1,555                                    |  |              |                                            |       |   |    |      |   |                        |      |  |           | 1,555  |                                                                   |   |                     |   |               |   | 1,555 |  |   |    |  |  |  | 11/05 |  | 
|Alliance Airport 8, Tarrant County, TX     |  |                        | 408   |              |   | 738                                      |  |              |                                            |       |   |    |      |   |                        |      |  |           | 738    |                                                                   |   |                     |   |               |   | 738   |  |   |    |  |  |  | 10/05 |  | 
|Alliance Airport 52, Tarrant County, TX    |  |                        | 1,610 |              |   | 2,656                                    |  |              |                                            |       |   |    |      |   |                        |      |  |           | 2,656  |                                                                   |   |                     |   |               |   | 2,656 |  |   |    |  |  |  | 10/05 |  | 
|Alliance Airport Land,Tarrant County, TX   |  |                        | 553   |              |   | 895                                      |  |              |                                            |       |   |    |      |   |                        |      |  |           | 895    |                                                                   |   |                     |   |               |   | 895   |  |   |    |  |  |  | 5/05  |  | 
|Backlick, Springfield, VA                  |  |                        |      |              |   | 74                                       |  |              |                                            |       |   |    |      |   |                        |      |  |           | 74     |                                                                   |   |                     |   |               |   | 74    |  |   |    |  |  |  | 1990  |  |  
|Bonneau, Dallas County, TX(6)              |  |                        |      |              |   | 1,102                                    |  |              |                                            |       |   |    |      |   |                        |      |  |           | 1,102  |                                                                   |   |                     |   |               |   | 1,102 |  |   |    |  |  |  | 2/98  |  |  
|Centura, Farmers Branch, TX                |  |                        | 6,769 |              |   | 13,300                                   |  |              |                                            |       |   | 555 |      |   | (6,230                  | )(4) |  |           | 13,300 |                                                                   |   | (6,796               | ) |               |   | 6,504 |  |   |    |  |  |  | 12/02 |  | 
|                                           |  |                        |       |              |   |                                          |  |              |                                             |       |   |     |      |   | (1,121                  | )(4) |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |     |  |   |  |       |  |  
|Chase Oaks, Plano, TX(6)                   |  |                        |      |              |   | 4,511                                    |  |              |                                            |       |   | 377 |      |   | (3,898                  | )(3) |  |           | 4,511  |                                                                   |   | (3,521               | ) |               |   | 990   |  |   |    |  |  |  | 5/97  |  |  
|Cooks Lane, Ft. Worth, TX                  |  |                        | 550   |              |   | 1,046                                    |  |              |                                            |       |   |    |      |   |                        |      |  |           | 1,046  |                                                                   |   |                     |   |               |   | 1,046 |  |   |    |  |  |  | 6/04  |  | 
|Croslin, Dallas, TX                        |  |                        |      |              |   | 327                                      |  |              |                                            |       |   | 6   |      |   |                        |      |  |           | 327    |                                                                   |   | 6                    |   |               |   | 333   |  |   |    |  |  |  | 10/98 |  |  
|Dalho, Farmers Branch, TX(6)               |  |                        |      |              |   | 331                                      |  |              |                                            |       |   |    |      |   |                        |      |  |           | 331    |                                                                   |   |                     |   |               |   | 331   |  |   |    |  |  |  | 10/97 |  |  
|Denton, Denton, TX                         |  |                        | 1,365 |              |   | 2,234                                    |  |              |                                            |       |   |    |      |   |                        |      |  |           | 2,234  |                                                                   |   |                     |   |               |   | 2,234 |  |   |    |  |  |  | 10/05 |  | 
|Denton Andrew B Land, Denton, TX           |  |                        | 554   |              |   | 895                                      |  |              |                                            |       |   |    |      |   |                        |      |  |           | 895    |                                                                   |   |                     |   |               |   | 895   |  |   |    |  |  |  | 12/05 |  | 
|Denton Andrew C Land, Denton, TX           |  |                        | 197   |              |   | 318                                      |  |              |                                            |       |   |    |      |   |                        |      |  |           | 318    |                                                                   |   |                     |   |               |   | 318   |  |   |    |  |  |  | 12/05 |  | 
|Denton Coonrod, Denton, TX                 |  |                        | 840   |              |   | 1,886                                    |  |              |                                            |       |   | 14  |      |   |                        |      |  |           | 1,886  |                                                                   |   | 14                   |   |               |   | 1,900 |  |   | 2   |  |  |  | 10/04 |  | 
|DeSoto, DeSoto, TX                         |  |                        | 1,635 |              |   | 2,651                                    |  |              |                                            |       |   | 25  |      |   |                        |      |  |           | 2,651  |                                                                   |   | 25                   |   |               |   | 2,676 |  |   |    |  |  |  | 10/04 |  | 
|Dominion, Dallas, TX                       |  |                        | 1,275 |              |   | 3,931                                    |  |              |                                            |       |   |    |      |   | (331                    | )(4) |  |           | 3,931  |                                                                   |   | (331                 | ) |               |   | 3,600 |  |   |    |  |  |  | 3/99  |  | 
|Elm Fork Land, Denton County, TX           |  |                        | 7,740 |              |   | 17,294                                   |  |              |                                            |       |   | 206 |      |   | (10,481                 | )(3) |  |           | 17,294 |                                                                   |   | (10,483              | ) |               |   | 6,811 |  |   |    |  |  |  | 3/01  |  |  
|                                           |  |                        |       |              |   |                                          |  |              |                                             |       |   |     |      |   | (208                    | )(4) |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |    |  |  |  |       |  |  
|Fiesta, San Angelo, TX                     |  |                        |      |              |   | 44                                       |  |              |                                            |       |   |    |      |   | (4                      | )(4) |  |           | 44     |                                                                   |   | (4                   | ) |               |   | 40    |  |   |    |  |  |  | 12/91 |  | 



100



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |       |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |   |  |   |  |       |  |  
|------------------------------------------ |  | ---------------------- | ----- | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ----- | ---- | - | ----------------------- | ---- |  | --------- | ------ | ----------------------------------------------------------------- | - | -------------------- | - | ------------- | - | ----- |  | - | - |  | - |  | ----- |  | -
|                                           |  |                        |       | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried at Endof Year |       |   |       |      |   |                         |      |  |           |        | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |       | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |       | Land |   | Building & Improvements |      |  | (1) Total |        | Accumulated Depreciation                                          |   | Date of Construction |   | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |       |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |  
|Land(continued)                           |  |                        |       |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |   |  |   |  |       |  |  
|Five Hickory Center, Farmers Branch, TX    |  | $                      |      |              | $ |                                         |  | $            |                                            |       | $ | 38    |      | $ |                        |      |  | $         |       |                                                                   | $ | 38                   |   |               | $ | 38    |  | $ |  |  |   |  |       |  |  
|Folsom, Dallas, TX                         |  |                        |      |              |   | 1,781                                    |  |              |                                            |       |   | 450   |      |   | (188                    | )(4) |  |           | 1,781  |                                                                   |   | 262                  |   |               |   | 2,043 |  |   |  |  |  |  | 10/00 |  | 
|Fort Wayne, Ft Wayne, IN                   |  |                        |      |              |   | 3                                        |  |              |                                            |       |   |      |      |   |                        |      |  |           | 3      |                                                                   |   |                     |   |               |   | 3     |  |   |  |  |  |  | 8/96  |  | 
|Fruitland, Fruitland Park, FL              |  |                        |      |              |   | 253                                      |  |              |                                            |       |   | 15    |      |   | (113                    | )(4) |  |           | 253    |                                                                   |   | (98                  | ) |               |   | 155   |  |   | 2 |  |  |  | 5/92  |  | 
|FRWM Cummings, Farmers Branch, TX          |  |                        |      |              |   | 1,284                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 1,284  |                                                                   |   |                     |   |               |   | 1,284 |  |   |  |  |  |  | 5/98  |  | 
|Hollywood Casino, Farmers Branch, TX       |  |                        | 4,710 |              |   | 16,987                                   |  |              |                                            |       |   | 22    |      |   | (7,502                  | )(4) |  |           | 16,987 |                                                                   |   | (8,912               | ) |               |   | 9,507 |  |   |  |  |  |  | 6/02  |  | 
|                                           |  |                        |       |              |   |                                          |  |              |                                             |       |   |       |      |   | (1,432                  | )(4) |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |  |  |  |  |       |  | 
|HSM, Farmers Branch, TX(6)                 |  |                        | 2,488 |              |   | 2,361                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 2,361  |                                                                   |   |                     |   |               |   | 2,361 |  |   |  |  |  |  | 8/98  |  | 
|JHL Connell, Carrollton, TX(6)             |  |                        |      |              |   | 1,451                                    |  |              |                                            |       |   |      |      |   | (713                    | )(3) |  |           | 1,451  |                                                                   |   | (713                 | ) |               |   | 738   |  |   |  |  |  |  | 2/98  |  | 
|Katrina, Palm Desert, CA                   |  |                        |      |              |   | 40,211                                   |  |              |                                            |       |   | 8,000 |      |   | (45,399                 | )(3) |  |           | 40,211 |                                                                   |   | (40,046              | ) |               |   | 165   |  |   |  |  |  |  | 7/98  |  | 
|                                           |  |                        |       |              |   |                                          |  |              |                                             |       |   |       |      |   | (2,647                  | )(2) |  |           |        |                                                                   |   |                      |   |               |   |       |  |   |  |  |  |  |       |  | 
|Kaufman Cogen Land, Kaufman, TX            |  |                        |      |              |   | 6,109                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 6,109  |                                                                   |   |                     |   |               |   | 6,109 |  |   |  |  |  |  | 12/05 |  | 
|Kaufman Taylor Land, Kaufman, TX           |  |                        |      |              |   | 486                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 486    |                                                                   |   |                     |   |               |   | 486   |  |   |  |  |  |  | 11/05 |  | 
|Keenan Bridge, Farmers Branch, TX          |  |                        |      |              |   | 510                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 510    |                                                                   |   |                     |   |               |   | 510   |  |   |  |  |  |  | 1/05  |  | 
|Kelly Lots, Collin County, TX              |  |                        |      |              |   | 131                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 131    |                                                                   |   |                     |   |               |   | 131   |  |   |  |  |  |  | 3/00  |  | 
|Lacy Longhorn, Farmers Branch, TX          |  |                        | 1,926 |              |   | 1,908                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 1,908  |                                                                   |   |                     |   |               |   | 1,908 |  |   |  |  |  |  | 6/04  |  | 
|LaDue, Farmers Branch, TX                  |  |                        | 1,203 |              |   | 1,821                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 1,821  |                                                                   |   |                     |   |               |   | 1,821 |  |   |  |  |  |  | 9/04  |  | 
|Lakeshore Villas, Harris County, TX        |  |                        |      |              |   | 84                                       |  |              |                                            |       |   |      |      |   | (6                      | )(4) |  |           | 84     |                                                                   |   | (6                   | ) |               |   | 78    |  |   |  |  |  |  | 3/02  |  | 
|Lamar Parmer/Limestone II, Austin, TX      |  |                        |      |              |   | 1,999                                    |  |              |                                            |       |   | 564   |      |   | (216                    | )(4) |  |           | 1,999  |                                                                   |   | 348                  |   |               |   | 2,347 |  |   |  |  |  |  | 1/00  |  | 
|Las Colinas, Las Colinas, TX               |  |                        |      |              |   | 995                                      |  |              |                                            |       |   | 5     |      |   | (84                     | )(4) |  |           | 995    |                                                                   |   | (79                  | ) |               |   | 916   |  |   |  |  |  |  | 1/96  |  | 
|Las Colinas I, Las Colinas, TX             |  |                        |      |              |   | 14,076                                   |  |              |                                            |       |   | 28    |      |   | (13,891                 | )(3) |  |           | 14,076 |                                                                   |   | (13,863              | ) |               |   | 213   |  |   |  |  |  |  | 5/95  |  | 
|LCLLP, Las Colinas, TX                     |  |                        | 1,831 |              |   | 4,950                                    |  |              |                                            |       |   | 26    |      |   | (3,222                  | )(4) |  |           | 4,950  |                                                                   |   | (3,196               | ) |               |   | 1,754 |  |   |  |  |  |  | 12/04 |  | 
|Leone, Irving, TX                          |  |                        | 1,210 |              |   | 1,625                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 1,625  |                                                                   |   |                     |   |               |   | 1,625 |  |   |  |  |  |  | 1996  |  | 
|Lubbock, Lubbock, TX                       |  |                        |      |              |   | 234                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 234    |                                                                   |   |                     |   |               |   | 234   |  |   |  |  |  |  | 1/04  |  | 
|Luna Rd Land, Farmers Branch, TX           |  |                        |      |              |   | 261                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 261    |                                                                   |   |                     |   |               |   | 261   |  |   |  |  |  |  | 7/05  |  | 



101



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |         |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |    |  |   |  |       |  |  
|------------------------------------------ |  | ---------------------- | ------ | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ----- | ---- | - | ----------------------- | ------- |  | --------- | ------ | ----------------------------------------------------------------- | - | -------------------- | - | ------------- | - | ------ |  | - | -- |  | - |  | ----- |  | -
|                                           |  |                        |        | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried at Endof Year |       |   |       |      |   |                         |         |  |           |        | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |        | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |       | Land |   | Building & Improvements |         |  | (1) Total |        | Accumulated Depreciation                                          |   | Date of Construction |   | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |         |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |   
|Land(continued)                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |         |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |    |  |   |  |       |  |  
|Mandahl Bay Land, US Virgin Islands        |  | $                      | 3,500  |              | $ | 14,660                                   |  | $            |                                            |       | $ |      |      | $ |                        |         |  | $         | 14,660 |                                                                   | $ |                     |   |               | $ | 14,660 |  | $ |   |  |  |  | 11/05 |  | 
|Manhattan, Farmers Branch, TX              |  |                        |       |              |   | 11,186                                   |  |              |                                            |       |   | 888   |      |   | (1,020                  | )(4)    |  |           | 11,186 |                                                                   |   | (132                 | ) |               |   | 11,054 |  |   | 34 |  |  |  | 2/00  |  | 
|Mansfield Land, Mansfield, TX              |  |                        | 943    |              |   | 1,520                                    |  |              |                                            |       |   |      |      |   |                        |         |  |           | 1,520  |                                                                   |   |                     |   |               |   | 1,520  |  |   |   |  |  |  | 9/05  |  | 
|Marine Creek, Ft. Worth, TX                |  |                        | 1,750  |              |   | 2,923                                    |  |              |                                            |       |   | 231   |      |   | (1,886                  | )(4)    |  |           | 2,923  |                                                                   |   | (2,989               | ) |               |   | 1,268  |  |   |   |  |  |  | 6/02  |  | 
|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   | (1,334                  | )(4)    |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |    |  |   |  |       |  | 
|Mason Park, Houston, TX                    |  |                        |       |              |   | 2,790                                    |  |              |                                            |       |   | 326   |      |   | (2,339                  | )(3)(4) |  |           | 2,790  |                                                                   |   | (2,013               | ) |               |   | 777    |  |   |   |  |  |  | 6/02  |  | 
|Mason/Goodrich, Houston, TX                |  |                        |       |              |   | 783                                      |  |              |                                            |       |   |      |      |   |                        | (3)     |  |           | 783    |                                                                   |   |                     |   |               |   | 783    |  |   |    |  |  |  | 11/98 |  | 
|McKinney 36, Collin County, TX             |  |                        | 3,995  |              |   | 2,203                                    |  |              |                                            |       |   |      |      |   | (396                    | )(4)    |  |           | 2,203  |                                                                   |   | (396                 | ) |               |   | 1,807  |  |   |   |  |  |  | 1/98  |  | 
|McKinney Corners II, Collin County, TX(6)  |  |                        |       |              |   | 5,911                                    |  |              |                                            |       |   |      |      |   | (5,386                  | )(3)    |  |           | 5,911  |                                                                   |   | (5,386               | ) |               |   | 525    |  |   |   |  |  |  | 4/97  |  | 
|McKinney Ranch Land, Collin County, TX     |  |                        | 28,051 |              |   | 47,327                                   |  |              |                                            |       |   |      |      |   | (3,882                  | )       |  |           | 47,327 |                                                                   |   | (3,882               | ) |               |   | 43,445 |  |   |   |  |  |  | 12/05 |  | 
|Meloy/Portage, Kent, Ohio                  |  |                        | 3,745  |              |   | 5,243                                    |  |              |                                            |       |   |       |      |   | (124                    | )(2)    |  |           | 5,243  |                                                                   |   | (124                 | ) |               |   | 5,119  |  |   |   |  |  |  | 2/04  |  | 
|Mendoza, Dallas, TX                        |  |                        |       |              |   | 192                                      |  |              |                                            |       |   |      |      |   |                        |         |  |           | 192    |                                                                   |   |                     |   |               |   | 192    |  |   |   |  |  |  | 10/98 |  | 
|Mira Lago, Farmers Branch, TX              |  |                        |       |              |   | 253                                      |  |              |                                            |       |   |      |      |   | (50                     | )(4)    |  |           | 253    |                                                                   |   | (50                  | ) |               |   | 203    |  |   |   |  |  |  | 5/01  |  | 
|Nakash, Malden, MO                         |  |                        |       |              |   | 113                                      |  |              |                                            |       |   |      |      |   | (10                     | )(4)    |  |           | 113    |                                                                   |   | (10                  | ) |               |   | 103    |  |   |   |  |  |  |       |  | 
|Nashville, Nashville, TN                   |  |                        |       |              |   | 1,890                                    |  |              |                                            |       |   | 34    |      |   | (160                    | )(4)    |  |           | 1,890  |                                                                   |   | (126                 | ) |               |   | 1,764  |  |   |   |  |  |  | 6/02  |  | 
|Nashville, Nashville, TN                   |  |                        | 5,621  |              |   | 7,774                                    |  |              |                                            |       |   |      |      |   | (3,738                  | )(3)    |  |           | 7,774  |                                                                   |   | (3,738               | ) |               |   | 4,036  |  |   |   |  |  |  | 5/99  |  | 
|Pac-Trust, Dallas, TX                      |  |                        |       |              |   | 1,232                                    |  |              |                                            |       |   |      |      |   | (104                    | )(4)    |  |           | 1,232  |                                                                   |   | (104                 | ) |               |   | 1,128  |  |   |   |  |  |  | 10/01 |  | 
|Palmer Lane, Austin, TX                    |  |                        | 14,300 |              |   | 24,806                                   |  |              |                                             |       |   |       |      |   |                        |         |  |           | 24,806 |                                                                   |   |                     |   |               |   | 24,806 |  |   |   |  |  |  | 12/05 |  | 
|Pantaze Land, Dallas, TX                   |  |                        |       |              |   | 275                                      |  |              |                                            |       |   |      |      |   |                        |         |  |           | 275    |                                                                   |   |                     |   |               |   | 275    |  |   |   |  |  |  | 11/05 |  | 
|Payne, Las Colinas, TX                     |  |                        | 6,732  |              |   | 17,500                                   |  |              |                                            |       |   |      |      |   | (8,638                  | )(2)    |  |           | 17,500 |                                                                   |   | (8,638               | ) |               |   | 8,862  |  |   |   |  |  |  | 12/04 |  | 
|Pioneer Crossing, Austin, TX               |  |                        |       |              |   | 23,255                                   |  |              |                                            |       |   | 2,904 |      |   | (17,469                 | )(3)    |  |           | 23,255 |                                                                   |   | (14,565              | ) |               |   | 8,690  |  |   |   |  |  |  | 5/97  |  | 
|Pulaski, Pulaski County, AR                |  |                        | 1,257  |              |   | 2,095                                    |  |              |                                            |       |   |      |      |   |                        |         |  |           | 2,095  |                                                                   |   |                     |   |               |   | 2,095  |  |   |   |  |  |  | 6/03  |  | 
|Railroad, Dallas, TX                       |  |                        |       |              |   | 782                                      |  |              |                                            |       |   | 55    |      |   |                        |         |  |           | 782    |                                                                   |   | 55                   |   |               |   | 837    |  |   |   |  |  |  | 3/04  |  | 
|Rochelle I, Las Colinas, TX                |  |                        | 2,547  |              |   | 3,750                                    |  |              |                                            |       |   |      |      |   | (2,085                  | )(4)    |  |           | 3,750  |                                                                   |   | (2,085               | ) |               |   | 1,665  |  |   |   |  |  |  | 12/04 |  | 
|Rochelle II, Las Colinas, TX               |  |                        | 4,338  |              |   | 6,445                                    |  |              |                                            |       |   |      |      |   | (3,583                  | )(4)    |  |           | 6,445  |                                                                   |   | (3,583               | ) |               |   | 2,862  |  |   |   |  |  |  | 12/04 |  | 



102



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |   |  |   |  |       |  |        
|------------------------------------------ |  | ---------------------- | ------ | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ----- | ---- | - | ----------------------- | ---- |  | --------- | ------ | ----------------------------------------------------------------- | - | -------------------- | - | ------------- | - | ------ |  | - | - |  | - |  | ----- |  | -------
|                                           |  |                        |        | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried at Endof Year |       |   |       |      |   |                         |      |  |           |        | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |        | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |       | Land |   | Building & Improvements |      |  | (1) Total |        | Accumulated Depreciation                                          |   | Date of Construction |   | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |  
|Land(continued)                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   |                         |      |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |   |  |   |  |       |  |        
|Rogers, Rogers, AR                         |  | $                      |       |              | $ | 1,749                                    |  | $            |                                            |       | $ |      |      | $ |                        |      |  | $         | 1,749  |                                                                   | $ |                     |   |               | $ | 1,749  |  | $ |  |  |  |  | 4/04  |  |       
|Seminary West, Fort Worth, TX              |  |                        |       |              |   | 234                                      |  |              |                                            |       |   |      |      |   | (20                     | )(4) |  |           | 234    |                                                                   |   | (20                  | ) |               |   | 214    |  |   |  |  |  |  | 6/01  |  |       
|Senlac Land, Farmers Branch, TX            |  |                        |       |              |   | 656                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 656    |                                                                   |   |                     |   |               |   | 656    |  |   |  |  |  |  | 8/05  |  |       
|Senlac VHP Land, Farmers Branch, TX        |  |                        |       |              |   | 622                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 622    |                                                                   |   |                     |   |               |   | 622    |  |   |  |  |  |  | 12/05 |  |       
|Sheffield Village, Grand Prairie, TX       |  |                        | 975    |              |   | 1,643                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 1,643  |                                                                   |   |                     |   |               |   | 1,643  |  |   |  |  |  |  | 9/03  |  |       
|Siskiyou, Siskiyou County, CA              |  |                        |       |              |   | 3                                        |  |              |                                            |       |   |      |      |   |                        |      |  |           | 3      |                                                                   |   |                     |   |               |   | 3      |  |   |  |  |  |  | 8/96  |  |       
|Sladek Land, Travis County, TX             |  |                        |       |              |   | 764                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 764    |                                                                   |   |                     |   |               |   | 764    |  |   |  |  |  |  | 5/00  |  |       
|Southwood Plantation, Tallahassee, FL      |  |                        |       |              |   | 556                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 556    |                                                                   |   |                     |   |               |   | 556    |  |   |  |  |  |  | 6/05  |  |       
|Stagliano, Farmers Branch, TX(6)           |  |                        |       |              |   | 566                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 566    |                                                                   |   |                     |   |               |   | 566    |  |   |  |  |  |  | 12/97 |  |       
|Stanley Tools Land, Farmers Branch TX      |  |                        | 2,420  |              |   | 4,169                                    |  |              |                                            |       |   | 84    |      |   |                        |      |  |           | 4,169  |                                                                   |   | 84                   |   |               |   | 4,253  |  |   |  |  |  |  | 9/02  |  |       
|Thompson, Farmers Branch, TX               |  |                        |       |              |   | 948                                      |  |              |                                            |       |   |      |      |   |                        |      |  |           | 948    |                                                                   |   |                      |   |               |   | 948    |  |   |  |  |  |  | 10/97 |  |       
|Thompson II, Dallas County, TX             |  |                        |       |              |   | 505                                      |  |              |                                            |       |   |      |      |   | (31                     | )(3) |  |           | 505    |                                                                   |   | (31                  | ) |               |   | 474    |  |   |  |  |  |  | 7/98  |  |       
|Tomlin, Farmers Branch, TX                 |  |                        |       |              |   | 1,878                                    |  |              |                                            |       |   |      |      |   |                        |      |  |           | 1,878  |                                                                   |   |                     |   |               |   | 1,878  |  |   |  |  |  |  | 10/97 |  |       
|Travelers, Farmers Branch, TX              |  |                        | 10,910 |              |   | 25,000                                   |  |              |                                            |       |   |      |      |   | (2,354                  | )(2) |  |           | 25,000 |                                                                   |   | (2,354               | ) |               |   | 22,646 |  |   |  |  |  |  | 11/03 |  |       
|Valley Ranch, Irving, TX                   |  |                        |       |              |   | 6,500                                    |  |              |                                            |       |   |      |      |   | (1,479                  | )(4) |  |           | 6,500  |                                                                   |   | (1,479               | ) |               |   | 5,021  |  |   |  |  |  |  | 12/04 |  |       
|Valley View 34, Farmers Branch, TX         |  |                        |       |              |   | 1,652                                    |  |              |                                            |       |   | 1,035 |      |   |                        |      |  |           | 1,652  |                                                                   |   | 1,035                |   |               |   | 2,687  |  |   |  |  |  |  | 8/96  |  | 7 Years
|Valwood, Dallas, TX                        |  |                        | 10,345 |              |   | 13,969                                   |  |              |                                            |       |   | 1,256 |      |   | (3,124                  | )(3) |  |           | 13,969 |                                                                   |   | (1,868               | ) |               |   | 12,101 |  |   |  |  |  |  | 8/96  |  |       
|Vineyards, Grapevine, TX                   |  |                        |       |              |   | 4,982                                    |  |              |                                            |       |   |      |      |   | (3,859                  | )(3) |  |           | 4,982  |                                                                   |   | (3,859               | ) |               |   | 1,123  |  |   |  |  |  |  | 10/97 |  |       
|Vineyards II, Grapevine, TX                |  |                        | 1,009  |              |   | 6,934                                    |  |              |                                            |       |   | 7     |      |   | (3,178                  | )(3) |  |           | 6,934  |                                                                   |   | (3,171               | ) |               |   | 3,763  |  |   |  |  |  |  | 6/99  |  |       
|Vista Ridge, Lewisville, TX(6)             |  |                        | 4,650  |              |   | 16,322                                   |  |              |                                            |       |   | 440   |      |   | (12,431                 | )(3) |  |           | 16,322 |                                                                   |   | (11,991              | ) |               |   | 4,331  |  |   |  |  |  |  | 9/98  |  |       
|Walker, Dallas County, TX                  |  |                        | 8,750  |              |   | 13,534                                   |  |              | 34                                          |       |   |      |      |   |                        |      |  |           | 13,534 |                                                                   |   | 34                   |   |               |   | 13,568 |  |   |  |  |  |  | 7/98  |  |       
|West End, Dallas, TX                       |  |                        | 2,000  |              |   | 11,405                                   |  |              |                                            |       |   | 77    |      |   | (5,756                  | )(3) |  |           | 11,405 |                                                                   |   | (6,309               | ) |               |   | 5,096  |  |   |  |  |  |  | 8/97  |  |       
|                                           |  |                        |        |              |   |                                          |  |              |                                             |       |   |       |      |   | (630                    | )(4) |  |           |        |                                                                   |   |                      |   |               |   |        |  |   |   |  |   |  |       |  |        



103



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005



|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |         |      |   |                         |   |  |           |         |                                                                   |   |                      |   |               |   |           |  |   |         |  |   |  |      |  |  
|------------------------------------------ |  | ---------------------- | ------- | ------------ | - | ---------------------------------------- |  | ------------ | ------------------------------------------- | ----- | - | ------- | ---- | - | ----------------------- | - |  | --------- | ------- | ----------------------------------------------------------------- | - | -------------------- | - | ------------- | - | --------- |  | - | ------- |  | - |  | ---- |  | -
|                                           |  |                        |         | Initial Cost |   | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts ofWhich Carried at Endof Year |       |   |         |      |   |                         |   |  |           |         | Life onWhichDepreciationIn LatestStatement ofOperation isComputed
|Property/Location                          |  | Encumbrances           |         | Land         |   | Building & Improvements                  |  | Improvements |                                             | Other |   |         | Land |   | Building & Improvements |   |  | (1) Total |         | Accumulated Depreciation                                          |   | Date of Construction |   | Date Acquired |  
|                                           |  | (dollars in thousands)
|Properties Held for Investment(continued) |  |                        |         |              |   |                                          |  |              |                                             |       |   |         |      |   |                         |   |  |           |         |                                                                   |   |                      |   |               |   |           |  |   |        
|Land(continued)                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |         |      |   |                         |   |  |           |         |                                                                   |   |                      |   |               |   |           |  |   |         |  |   |  |      |  |  
|Whorton Land Dallas, TX                    |  | $                      | 3,828   |              | $ | 4,530                                    |  | $            |                                            |       | $ |        |      | $ |                        |   |  | $         | 4,530   |                                                                   | $ |                     |   |               | $ | 4,530     |  | $ |        |  |  |  | 6/05 |  | 
|Wilmer 88 Land Dallas, TX                  |  |                        |        |              |   | 668                                      |  |              |                                            |       |   |         |      |   |                        |   |  |           | 668     |                                                                   |   |                     |   |               |   | 668       |  |   |        |  |  |  | 8/05 |  | 
|                                           |  |                        | 160,336 |              |   | 461,445                                  |  |              | 34                                          |       |   | 18,348  |      |   | (182,840                | ) |  |           | 461,445 |                                                                   |   | (164,458             | ) |               |   | 299,753   |  |   | 152     |  |   |  |      |  |  
|                                           |  |                        |         |              |   |                                          |  |              |                                             |       |   |         |      |   |                         |   |  |           |         |                                                                   |   |                      |   |               |   |           |  |   |         |  |   |  |      |  |  
|                                           |  | $                      | 955,545 |              | $ | 565,381                                  |  | $            | 848,865                                     |       | $ | 116,739 |      | $ | (255,393                | ) |  | $         | 565,381 |                                                                   | $ | 710,211              |   |               | $ | 1,277,754 |  | $ | 164,649 |  |   |  |      |  |  

---

|(1) | The aggregate cost for federal income tax purposes is $1,322.8 million.
|--- | -----------------------------------------------------------------------

|(2) | Write-down of property to estimated net realizable value.
|--- | ---------------------------------------------------------

|(3) | Cost basis assigned to portion of property sold.
|--- | ------------------------------------------------

|(4) | Purchase accounting basis adjustment.
|--- | -------------------------------------

|(5) | Forgiveness of debt and cash received deducted from the basis of the property, offset by land acquired in 1992.
|--- | ---------------------------------------------------------------------------------------------------------------

|(6) | Pledged as collateral on a loan primarily secured by another parcel of land.
|--- | ----------------------------------------------------------------------------

|(7) | Property under construction.
|--- | ----------------------------



104



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE III

(Continued)

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION(Continued)



|                                           |  |                        |           |   |      |   |           |      |  |   |           |  
|------------------------------------------ |  | ---------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                           |  | 2005                   |           |   | 2004 |   |           | 2003 | 
|                                           |  | (dollars in thousands) |          
|Reconciliation of Real Estate              |  |                        |           |   |      |   |           |      |  |   |           |  
|Balance at January 1,                      |  | $                      | 1,155,586 |   |      | $ | 1,233,057 |      |  | $ | 567,731   |  
|Additions                                  |  |                        |           |   |      |   |           |      |  |   |           |  
|Initial consolidation of TCI properties    |  |                        |          |   |      |   |          |      |  |   | 866,464   |  
|Acquisitions and improvements              |  |                        | 259,137   |   |      |   | 198,006   |      |  |   | 139,006   |  
|Deductions                                 |  |                        |           |   |      |   |           |      |  |   |           |  
|Sales of real estate                       |  |                        | (136,969  | ) |      |   | (249,703  | )    |  |   | (261,694  | )
|Purchase accounting write-down             |  |                        |          |   |      |   | (8,434    | )    |  |   | (58,558   | )
|Property write-down                        |  |                        |          |   |      |   | (17,340   | )    |  |   | (19,892   | )
|                                           |  |                        |           |   |      |   |           |      |  |   |           |  
|Balance at December 31,                    |  | $                      | 1,277,754 |   |      | $ | 1,155,586 |      |  | $ | 1,233,057 |  
|                                           |  |                        |           |   |      |   |           |      |  |   |           |  
|Reconciliation of Accumulated Depreciation |  |                        |           |   |      |   |           |      |  |   |           |  
|Balance at January 1,                      |  | $                      | 172,164   |   |      | $ | 179,021   |      |  | $ | 101,689   |  
|Additions                                  |  |                        |           |   |      |   |           |      |  |   |           |  
|Initial consolidation of TCI properties    |  |                        |          |   |      |   |          |      |  |   | 84,550    |  
|Depreciation                               |  |                        | 23,981    |   |      |   | 30,440    |      |  |   | 28,832    |  
|Deductions                                 |  |                        |           |   |      |   |           |      |  |   |           |  
|Sales of real estate                       |  |                        | (31,496   | ) |      |   | (37,297   | )    |  |   | (36,050   | )
|                                           |  |                        |           |   |      |   |           |      |  |   |           |  
|Balance at December 31,                    |  | $                      | 164,649   |   |      | $ | 172,164   |      |  | $ | 179,021   |  
|                                           |  |                        |           |   |      |   |           |      |  |   |           |  



105



---

##### Table of Contents

##### Index to Financial Statements

SCHEDULE IV

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE

December 31, 2005



|                                                                                                        |  |              |   |  |                   |  |                                                                      |  |                        |        |                         |   |                                   |  |                                                                       |        |  |   |      
|------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ----------------- |  | -------------------------------------------------------------------- |  | ---------------------- | ------ | ----------------------- | - | --------------------------------- |  | --------------------------------------------------------------------- | ------ |  | - | -----
|Description                                                                                             |  | InterestRate |   |  | FinalMaturityDate |  | Periodic Payment Terms                                               |  | PriorLiens             |        | Face Amount of Mortgage |   | CarryingAmounts ofMortgage (1)(2) |  | Principal Amount of Loans Subject to Delinquent Principal or Interest
|                                                                                                        |  |              |   |  |                   |  |                                                                      |  | (Dollars in Thousands)
|FIRST MORTGAGE                                                                                          |  |              |   |  |                   |  |                                                                      |  |                        |        |                         |   |                                   |  |                                                                       |        |  |   |      
|400 St. Paul                                                                                            |  | 7.0          | % |  | 03/07             |  | Monthly interest only payments.                                      |  | $                      |       |                         | $ | 5,400                             |  | $                                                                     | 4,898  |  | $ | 4,896
|Secured by an office building in Dallas, TX. Includes LOC of $250,000.                                  |  |              |   |  |                   |  |                                                                      |  |                        |        |                         |   |                                   |  |                                                                       |        |  |   |      
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|La Quinta Village Center, LLC First lien on 134.3 gross acres in Palm Desert, CA.                       |  | 8.0          | % |  | 02/06             |  | Interest accrual and payments based on completion dates not yet met. |  |                        |       |                         |   | 5,650                             |  |                                                                       | 5,650  |  |   | 5,650
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|Mason Creek, L.P. 1st lien on 8 acres, Harris County, TX.                                               |  | 10.0         | % |  | 03/06             |  | Monthly interest payments.                                           |  |                        |       |                         |   | 523                               |  |                                                                       | 405    |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|Today McKinney Ranch, L.P. Secured by 27.192 acres of unimproved land in McKinney, TX.                  |  | 8.0          | % |  | 12/07             |  | Monthly interest only payments.                                      |  |                        |       |                         |   | 7,552                             |  |                                                                       | 7,552  |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|Today McKinney Ranch, L.P. Secured by 3.73 acres of unimproved land in McKinney, TX.                    |  | 8.0          | % |  | 12/07             |  | Monthly interest only payments.                                      |  |                        |       |                         |   | 1,036                             |  |                                                                       | 1,036  |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|WRAPAROUND MORTGAGE                                                                                     |  |              |   |  |                   |  |                                                                      |  |                        |        |                         |   |                                   |  |                                                                       |        |  |   |      
|Nakash Secured by a shopping center in Malden, MO.                                                      |  |              |   |  |                   |  | Monthly interest only payments.                                      |  |                        |        |                         |   | 902                               |  |                                                                       | 902    |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|JUNIOR MORTGAGE                                                                                         |  |              |   |  |                   |  |                                                                      |  |                        |        |                         |   |                                   |  |                                                                       |        |  |   |      
|Dallas Fund XVII Secured by an assignment of partnership interests and litigation proceeds.             |  | 9.0          | % |  | 10/06             |  | Principal and interest due at maturity.                              |  |                        |       |                         |   | 4,303                             |  |                                                                       | 4,402  |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|One Hickory Secured by an office building in Farmers Branch, TX.                                        |  | 5.49         | % |  | 10/06             |  | Monthly interest only payments.                                      |  |                        | 6,903  |                         |   | 11,974                            |  |                                                                       | 11,974 |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|JMJ Circle, LLC 2nd lien on 1,092 acres of land in Austin, TX and membership interests in the borrower. |  | 10.0         | % |  | 03/08             |  | Principal and interest due at maturity.                              |  |                        | 18,000 |                         |   | 3,200                             |  |                                                                       | 3,953  |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|Pinemont Secured by an office building in Houston, TX.                                                  |  | 10.4         | % |  | 07/08             |  | Monthly principal and interest payments.                             |  |                        | 152    |                         |   | 467                               |  |                                                                       | 161    |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|Pioneer Development Secured by 33.33 acres of unimproved land in Travis County, TX.                     |  | 10.0         | % |  | 10/08             |  | Interest only payments start in November 2007.                       |  |                        | 12,000 |                         |   | 2,386                             |  |                                                                       | 2,889  |  |   |     
|                                                                                                        |  |              |   |  |                   |  |                                                                     
|Unified Housing of Chase Oaks 2nd lien on 22 acres of land in Collin County, TX.                        |  | 4.0          | % |  | Demand            |  | Excess property cash flow payments.                                  |  |                        |       |                         |   | 341                               |  |                                                                       | 341    |  |   |     



106



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##### Index to Financial Statements

SCHEDULE IV

(Continued)

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE

December 31, 2005



|                                                                                          |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|----------------------------------------------------------------------------------------- |  | ------------ | - |  | ----------------- |  | ----------------------------------------------- |  | ---------------------- | - | ---------------------- | - | --------------------------------- |  | ------------------------------------------------------------------ | ----- |  | - | -
|Description                                                                               |  | InterestRate |   |  | FinalMaturityDate |  | Periodic Payment Terms                          |  | PriorLiens             |   | Face Amountof Mortgage |   | CarryingAmounts ofMortgage (1)(2) |  | Principal Amount ofLoans Subject toDelinquentPrincipal or Interest
|                                                                                          |  |              |   |  |                   |  |                                                 |  | (dollars in thousands)
|OTHER                                                                                     |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|Apartment Development Services Secured by 100% interest in partnership.                   |  | 12.0         | % |  | 06/06             |  | Principal and interest due at maturity.         |  | $                      |  |                        | $ | 300                               |  | $                                                                  | 107   |  | $ | 
|                                                                                          |  |              |   |  |                   |  |                                                
|Countryside, L.P.                                                                         |  | 7.25         | % |  | 01/07             |  | Quarterly interest payments.                    |  |                        |  |                        |   | 2,300                             |  |                                                                    | 2,300 |  |   | 
|Secured by Class A partnership units in TCI Countryside, L.P.                             |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|Countryside, L.P.                                                                         |  | 7.25         | % |  | 07/12             |  | Quarterly interest payments.                    |  |                        |  |                        |   | 1,050                             |  |                                                                    | 740   |  |   | 
|Secured by Class A partnership units in TCI Countryside, L.P.                             |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|Edwin Schreiber                                                                           |  | 8.5          | % |  | 06/06             |  | Interest only paid quarterly.                   |  |                        |  |                        |   | 200                               |  |                                                                    | 200   |  |   | 
|Class A limited partnership interests in Encino Executive Plaza Limited.                  |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|UHF Kensington                                                                            |  | 12.0         | % |  | 04/09             |  | Excess property cash flow.                      |  |                        |  |                        |   | 125                               |  |                                                                    | 140   |  |   | 
|100% interest in UH of Kensington, LLC.                                                   |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|SSG Management                                                                            |  | 8.5          | % |  | 06/06             |  | Interest only paid quarterly.                   |  |                        |  |                        |   | 296                               |  |                                                                    | 296   |  |   | 
|Class A limited partnership interests in Encino Executive Plaza Limited                   |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|Sarah Gross                                                                               |  | 8.5          | % |  | 06/06             |  | Interest only paid quarterly.                   |  |                        |  |                        |   | 951                               |  |                                                                    | 951   |  |   | 
|Class A limited partnership interests in Encino Executive Plaza Limited                   |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|Barry Gross                                                                               |  | 8.5          | % |  | 06/06             |  | Interest only paid quarterly.                   |  |                        |  |                        |   | 120                               |  |                                                                    | 120   |  |   | 
|Class A limited partnership interests in Encino Executive Plaza Limited                   |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|Realty Advisors                                                                           |  | Prime + 2.0  | % |  | 11/06             |  | All principal and interest are due at maturity. |  |                        |  |                        |   | 5,633                             |  |                                                                    | 5,633 |  |   | 
|Secured by a pledge of 850,000 shares of ARI Common Stock owned by BCM.                   |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|Mark Small                                                                                |  | 8.0          | % |  | 09/06             |  | All principal and interest due at maturity.     |  |                        |  |                        |   | 600                               |  |                                                                    | 587   |  |   | 
|Secured by Collateral Assignment of Contract Proceeds.                                    |  |              |   |  |                   |  |                                                 |  |                        |   |                        |   |                                   |  |                                                                    |       |  |   |  
|                                                                                          |  |              |   |  |                   |  |                                                
|Robert Baylis Class A limited partnership interests in Edina Park Plaza Associates LP.    |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly.                   |  |                        |  |                        |   | 193                               |  |                                                                    | 193   |  |   | 
|                                                                                          |  |              |   |  |                   |  |                                                
|Herrick Partners Class A limited partnership interests in Edina Park Plaza Associates, LP |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly.                   |  |                        |  |                        |   | 91                                |  |                                                                    | 91    |  |   | 



107



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##### Table of Contents

##### Index to Financial Statements

SCHEDULE IV

(Continued)

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE

December 31, 2005



|                                                                                               |  |              |   |  |                   |  |                               |  |                        |   |                        |   |                                   |  |                                                                    |     |  |   |  
|---------------------------------------------------------------------------------------------- |  | ------------ | - |  | ----------------- |  | ----------------------------- |  | ---------------------- | - | ---------------------- | - | --------------------------------- |  | ------------------------------------------------------------------ | --- |  | - | -
|Description                                                                                    |  | InterestRate |   |  | FinalMaturityDate |  | Periodic Payment Terms        |  | PriorLiens             |   | Face Amountof Mortgage |   | CarryingAmounts ofMortgage (1)(2) |  | Principal Amount ofLoans Subject toDelinquentPrincipal or Interest
|                                                                                               |  |              |   |  |                   |  |                               |  | (dollars in thousands)
|2410 Partnership Class A limited partnership interests in Edina Park Plaza Associates, LP      |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  | $                      |  |                        | $ | 145                               |  | $                                                                  | 145 |  | $ | 
|                                                                                               |  |              |   |  |                   |  |                              
|Michale Witte Class A limited partnership interests in Edina Park Plaza Associates, LP         |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 96                                |  |                                                                    | 96  |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Richard Schmaltz Class A limited partnership interests in Edina Park Plaza Associates, LP      |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 203                               |  |                                                                    | 203 |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Willingham Trust Class A limited partnership interests in Edina Park Plaza Associates, LP.     |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 96                                |  |                                                                    | 96  |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Michael Monier Class A limited partnership interests in Edina Park Plaza Associates, LP.       |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 304                               |  |                                                                    | 304 |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Harold Wolfe Class A limited partnership interests in Edina Park Plaza Associates, LP          |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 193                               |  |                                                                    | 193 |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Compton Partners Class A limited partnership interests in Edina Park Plaza Associates, LP      |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 289                               |  |                                                                    | 289 |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Christine Tunney Class A limited partnership interests in Edina Park Plaza Associates, LP      |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 48                                |  |                                                                    | 48  |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Edward Samson Class A limited partnership interests in Edina Park Plaza Associates, LP         |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 96                                |  |                                                                    | 96  |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Hammon Operating Corp Class A limited partnership interests in Edina Park Plaza Associates, LP |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 193                               |  |                                                                    | 193 |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Palmer Brown Madden Class A limited partnership interests in Edina Park Plaza Associates, LP   |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 96                                |  |                                                                    | 96  |  |   | 
|                                                                                               |  |              |   |  |                   |  |                              
|Quintin Smith Jr. Class A limited partnership interests in Edina Park Plaza Associates, LP     |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 193                               |  |                                                                    | 193 |  |   | 



108



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##### Table of Contents

##### Index to Financial Statements

SCHEDULE IV

(Continued)

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE

December 31, 2005



|                                                                                                     |  |              |   |  |                   |  |                               |  |                        |   |                        |   |                                   |  |                                                                    |     |  |   |  
|---------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ----------------- |  | ----------------------------- |  | ---------------------- | - | ---------------------- | - | --------------------------------- |  | ------------------------------------------------------------------ | --- |  | - | -
|Description                                                                                          |  | InterestRate |   |  | FinalMaturityDate |  | Periodic Payment Terms        |  | PriorLiens             |   | Face Amountof Mortgage |   | CarryingAmounts ofMortgage (1)(2) |  | Principal Amount ofLoans Subject toDelinquentPrincipal or Interest
|                                                                                                     |  |              |   |  |                   |  |                               |  | (dollars in thousands)
|                                                                                                     |  |              |   |  |                   |  |                              
|William Ingram Class A limited partnership interests in Edina Park Plaza Associates, LP              |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  | $                      |  |                        | $ | 96                                |  | $                                                                  | 96  |  | $ | 
|                                                                                                     |  |              |   |  |                   |  |                              
|Earl Samson Class A limited partnership interests in Edina Park Plaza Associates, LP                 |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 96                                |  |                                                                    | 96  |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|Mary Ann MacLean Class A limited partnership interests in Edina Park Plaza Associates, LP            |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 193                               |  |                                                                    | 193 |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|Peter Van Dyk Berg Class A limited partnership interests in Edina Park Plaza Associates, LP          |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 193                               |  |                                                                    | 193 |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|William Urkie Class A limited partnership interests in Edina Park Plaza Associates, LP               |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 96                                |  |                                                                    | 96  |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|Sherman Bull Class A limited partnership interests in Edina Park Plaza Associates, LP                |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 193                               |  |                                                                    | 193 |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|David Monier Class A limited partnership interests in Edina Park Plaza Associates, LP                |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 96                                |  |                                                                    | 96  |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|TrustJoseph Monier Class A limited partnership interests in Edina Park Plaza Associates, LP         |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 32                                |  |                                                                    | 32  |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|Trust-Brett & Nicole Monier Class A limited partnership interests in Edina Park Plaza Associates, LP |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 31                                |  |                                                                    | 31  |  |   | 
|                                                                                                     |  |              |   |  |                   |  |                              
|Trust-David Monier Class A limited partnership interests in Edina Park Plaza Associates, LP          |  | 10.0         | % |  | 09/17             |  | Interest only paid quarterly. |  |                        |  |                        |   | 31                                |  |                                                                    | 31  |  |   | 



109



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##### Table of Contents

##### Index to Financial Statements

SCHEDULE IV

(Continued)

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE

December 31, 2005



|                               |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       
|------------------------------ |  | ------------ | - |  | ----------------- |  | ----------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------------------- | - | --------------------------------- |  | - | ------------------------------------------------------------------ | - |  | - | ------
|Description                    |  | InterestRate |   |  | FinalMaturityDate |  | Periodic Payment Terms                                                        |  | PriorLiens             |        | Face Amountof Mortgage |   | CarryingAmounts ofMortgage (1)(2) |  |   | Principal Amount ofLoans Subject toDelinquentPrincipal or Interest
|                               |  |              |   |  |                   |  |                                                                               |  | (dollars in thousands)
|                               |  |              |   |  |                   |  |                                                                              
|UNSECURED                      |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       
|                               |  |              |   |  |                   |  |                                                                              
|BCMK-Mart Cary                |  | 9.25         | % |  | 04/08             |  | Monthly interest payments.                                                    |  | $                      |       |                        | $ | 1,523                             |  | $ | 1,523                                                              |   |  | $ |      
|                               |  |              |   |  |                   |  |                                                                              
|BCMTexstar Warehouse          |  | 9.25         | % |  | 04/08             |  | Monthly interest payments.                                                    |  |                        |       |                        |   | 1,252                             |  |   | 1,252                                                              |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                              
|Garden Centura L.P.            |  | 7.0          | % |  | None              |  | Excess property cash flow payments or property sales                          |  |                        |       |                        |   |                                  |  |   | 603                                                                |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                              
|One Realco                     |  | Prime + 3.0  | % |  | 02/07             |  | All principal and interest due at maturity.                                   |  |                        |       |                        |   | 18,000                            |  |   | 9,949                                                              |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                              
|Today Forest Park Investment   |  | 0.0          | % |  | None              |  | Partnership distribution as available.                                        |  |                        |       |                        |   | 678                               |  |   | 546                                                                |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                              
|Treetops/Colony Meadows        |  | 0.0          | % |  | 01/09             |  | All principal and interest due at maturity.                                   |  |                        |       |                        |   | 1,000                             |  |   | 1,000                                                              |   |  |   | 1,000 
|                               |  |              |   |  |                   |  |                                                                              
|Harvest Hill I, LLC            |  | 12.0         | % |  | 09/13             |  | Interest compounded annually. All principal and interest are due at maturity. |  |                        |       |                        |   | 1,429                             |  |   | 1,795                                                              |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                              
|Harvest Hill II, LLC           |  | 12.0         | % |  | 09/13             |  | Interest compounded annually. All principal and interest are due at maturity. |  |                        |        |                        |   | 1,426                             |  |   | 1,800                                                              |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                              
|Harvest Hill III, LLC          |  | 12.0         | % |  | 09/13             |  | Interest compounded annually. All principal and interest are due at maturity. |  |                        |       |                        |   | 2,127                             |  |   | 2,678                                                              |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                               |  | $                      | 37,055 |                        | $ | 86,037                            |  |   | 79,676                                                             |   |  | $ | 11,546
|                               |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       
|Interest receivable            |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  |   | 2,764                                                              |   |  |   |       
|Allowance for estimated losses |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  |   | (1,000                                                             | ) |  |   |       
|                               |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       
|                               |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  | $ | 81,440                                                             |   |  |   |       
|                               |  |              |   |  |                   |  |                                                                               |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       

---

|(1) | The aggregate cost for federal income tax purposes is $79.7 million.
|--- | --------------------------------------------------------------------

|(2) | Interest rates and maturity dates shown are as stipulated in the loan documents at December 31, 2005. Where applicable, these rates have been adjusted at issuance to yield
between 8.0% and 12.0%.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



110



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##### Index to Financial Statements

SCHEDULE IV

(Continued)

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE



|                                                        |  |                        |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                        |  | 2005                   |         |   | 2004 |   |         | 2003 | 
|                                                        |  | (dollars in thousands) |        
|Balance at January 1,                                   |  | $                      | 73,359  |   |      | $ | 71,178  |      |  | $ | 83,092  |  
|Additions                                               |  |                        |         |   |      |   |         |      |  |   |         |  
|New mortgage loans                                      |  |                        | 59,717  |   |      |   | 46,660  |      |  |   | 67,464  |  
|Initial consolidation of TCI loans                      |  |                        |        |   |      |   |        |      |  |   | 15,873  |  
|Funding of existing loans                               |  |                        | 727     |   |      |   | 1,296   |      |  |   |        |  
|Deductions                                              |  |                        |         |   |      |   |         |      |  |   |         |  
|Collections of principal                                |  |                        | (12,406 | ) |      |   | (12,368 | )    |  |   | (56,592 | )
|Conversion to property interest                         |  |                        | (8,356  | ) |      |   |        |      |  |   | (1,612  | )
|Mortgages eliminated from consolidation of partnerships |  |                        |        |   |      |   | (23,754 | )    |  |   |        |  
|Reclass to accounts receivable                          |  |                        |        |   |      |   | (1,387  | )    |  |   |        |  
|Sale of Notes Receivable                                |  |                        | (33,365 | ) |      |   | (8,266  | )    |  |   | (37,047 | )
|                                                        |  |                        |         |   |      |   |         |      |  |   |         |  
|Balance at December 31,                                 |  | $                      | 79,676  |   |      | $ | 73,359  |      |  | $ | 71,178  |  
|                                                        |  |                        |         |   |      |   |         |      |  |   |         |  



111



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##### Index to Financial Statements

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

During 2004, a change in accountants occurred as previously reported from BDO Seidman LLP to Farmer, Fuqua & Huff, P.C., and no disagreement
existed between the Company and BDO Seidman LLP concerning any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.



|ITEM 9A.CONTROLS | AND PROCEDURES
|---------------- | --------------

The Companys
internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting
Principles in the United States of America (GAAP). Because of the inherent limitations of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls, material
misstatements may not be prevented or detected on a timely basis. Accordingly, even internal controls determined to be effective can provide only reasonable assurance that information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and represented within the time periods required. Furthermore, projections of any evaluation of the effectiveness to future periods are subject to the risks that such controls may become
inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Evaluation of Disclosure
Controls and Procedures

Management, under the supervision and with the participation of the acting Principal Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures as of December 31, 2005. Based upon that most recent evaluation, which was completed as of the end of the period covered by this Form
10-K, the acting Principal Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective at December 31, 2005 to ensure that information required to be disclosed in
reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in Securities and Exchange Commission Rules and Forms.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Registrants internal control over financial reporting during the quarter ended December 31, 2005, that have materially affected, or are reasonably likely to materially affect, the
Registrants internal control over financial reporting.

ITEM 9B.OTHER INFORMATION

Not applicable.



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PART III



|ITEM 10.DIRECTORS | AND EXECUTIVE OFFICERS OF THE REGISTRANT
|----------------- | ----------------------------------------

Directors

The affairs of American Realty Investors, Inc. (ARI) are managed by a Board of Directors. The Directors are elected at the
annual meeting of stockholders or are appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or appointed.

After December 31, 2003, a number of changes occurred in the composition of the Board of Directors of ARI, the creation of certain Board Committees, the
adoption of Committee charters, the adoption of a code of Ethics for Senior Financial Officers, and the adoption of Guidelines for Director Independence. Also, the composition of the members of the Board of Directors changed with the resignation of
Earl D. Cecil (on February 29, 2004), as well as the election of independent directors, Ted R. Munselle and Sharon Hunt, on February 20, 2004, and Robert A. Jakuszewski on November 22, 2005.

It is the Boards objective that a majority of the Board consists of independent directors. For a Director to be considered independent, the Board
must determine that the Director does not have any direct or indirect material relationship with ARI. The Board has established guidelines to assist it in determining director independence which conform to, or are more exacting than, the
independence requirements in the New York Stock Exchange listing rules. The independence guidelines are set forth in ARIs Corporate Governance Guidelines. The text of this document has been posted on ARIs Internet website at
http://www.amrealtytrust.com and is available in print to any shareholder who requests it. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independence determination.

ARI has adopted a code of conduct that applies to all Directors, officers and employees, including our principal executive officer,
principal financial officer, and principal accounting officer. Stockholders may find our code of conduct on our website by going to our website address at http://www.amrealtytrust.com. We will post any amendments to the code of conduct, as
well as any waivers that are required to be disclosed by the rules of the SEC or the New York Stock Exchange, on our website.

Our Board of
Directors has adopted charters for our Audit, Compensation, and Governance and Nominating Committees of the Board of Directors. Stockholders may find these documents on our website by going to the website address at
http://www.amrealtytrust.com. You may also obtain a printed copy of the materials referred to by contacting us at the following address:

American Realty Investors, Inc.

Attn: Investor Relations

1800 Valley View Lane, Suite 300

Dallas, Texas 75234

Telephone: 469-522-4200

All members of the
Audit Committee and the Governance and Nominating Committee must be independent directors. Members of the Audit Committee must also satisfy additional independence requirements, which provide (i) that they may not accept, directly or
indirectly, any consulting, advisory, or compensatory fee from ARI or any of its subsidiaries other than their Directors compensation (other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other
committee of the Board), and (ii) no member of the Audit Committee may be an affiliated person of ARI or any of its subsidiaries, as defined by the Securities and Exchange Commission.



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The current Directors of ARI are listed below, together with their ages, terms of service, all positions
and offices with ARI, its former advisor (BCM), or current advisor (Prime), which took over as contractual advisor for BCM on July 1, 2003, their principal occupations, business experience, and directorships with other companies during the last
five years or more. The designation Affiliated, when used below with respect to a Director, means that the Director is an officer, director, or employee of BCM or Prime, an officer of ARI, or an officer or director of an affiliate of
ARI. The designation Independent, when used below with respect to a Director, means that the Director is neither an officer of ARI nor a director, officer, or employee of BCM or Prime (but may be a director of ARI), although ARI may have
certain business or professional relationships with such Director as discussed in ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSCertain Business Relationships.

TED P. STOKELY: Age 72, Director and Chairman of the Board (Affiliate) (since November 2002).

General Manager (since January 1995) of ECF Senior Housing Corporation, a nonprofit corporation; General Manager (since January 1993) of
Housing Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid consultant (since January 1993) and paid consultant (April 1992 to December 1992) of Eldercare Housing Foundation, a nonprofit corporation; General Manager (since April
2002) of Unified Housing Foundation, Inc., a nonprofit corporation; Director (since April 1990) and Chairman of the Board (since January 1995) of Income Opportunity Realty Investors, Inc. (IORI) and Transcontinental Realty Investors,
Inc. (TCI).

HENRY A. BUTLER:Age 55, Director (Affiliate) (since July 2003).

BrokerLand Sales (since July 2003) for Prime and 1992 to June 2003 for BCM; Owner/Operator (1989 to 1991) of Butler Interests, Inc.;
Director of ARI; and Director (December 2001 to July 2003) of IORI.

SHARON HUNT:Age 63, Director (Independent) (since February
2004).

Licensed Realtor in the Dallas, Texas area with Virginia Cook Realtors; President and Owner of Sharons
Pretzels, Inc. (until sold in 1997) a Dallas, Texas food products entity; Director (1991 to 2000) of a 501(c)(3) non-profit corporation involved in the acquisition, renovation and operation of real estate; and Director (since February 2004) of TCI.

ROBERT A. JAKUSZEWSKI:Age 43, Director (Independent) (since November 2005).

Vice PresidentSales and Marketing (since September 1998) of New Horizons Communications, Inc., Consultant (January 1998
 September 1998) for New Horizon Communications, Inc.; Regional Sales Manager (1996-1998) of Continental Funding; Territory Manager (1992-1996) of Sigvaris, Inc.; Senior Sales Representative (1988-1992) of Mead Johnson Nutritional
Division, USPNG; Sales Representative (1986-1987) of Muro Pharmaceutical, Inc.; and Director of IORI since March 16, 2004.

TED R.
MUNSELLE:Age 50, Director (Independent) (since February 2004).

Vice President and Chief Financial Officer (since
October 1998) of Landmark Nurseries, Inc.; employed in the accounting industry from 1977 until 1998; Certified Public Accountant in the State of Texas; and Director (since February 2004) of TCI.

Board Meetings and Committees

The Board of Directors
held eight meetings during 2005. For such year, no incumbent Director attended fewer than 75.0% of the aggregate of (1) the total number of meetings held by the Board during the period for which he had been a Director and (2) the total
number of meetings held by all committees of the Board on which he served during the periods that he served.

The Board of Directors has
standing Audit, Compensation, and Governance and Nominating Committees.



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Audit Committee.    The current Audit Committee was formed on
February 19, 2004, and its function is to review ARIs operating and accounting procedures. The charter of the Audit Committee has also been adopted by the Board. The charter of the Audit Committee was adopted on February 19, 2004 and
is available on the companys investor relations website (www.amrealtytrust.com). The Audit Committee is an audit committee for purposes of Section 3(a) (58) of the Securities Exchange Act of 1934. The current
members of the Audit Committee, all of whom are independent within the meaning of the SEC Regulations, the listing standards of the New York Stock Exchange, Inc., and ARIs Corporate Governance Guidelines, are Messrs. Jakuszewski and Munselle
(Chairman) and Ms. Hunt. Mr. Ted R. Munselle, a member of the Committee, is qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the Board has determined that he has accounting and related
financial management expertise within the meaning of the listing standards of the New York Stock Exchange, Inc. All of the members of the Audit Committee meet the experience requirements of the listing standards of the listing standards of the New
York Stock Exchange. The Audit Committee met eight times during 2005.

Governance and Nominating
Committee.    The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of ARIs
Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the
Boards annual review of director independence and the Boards performance self-evaluation. The Charter of the Governance and Nominating Committee was adopted on March 22, 2004. The members of the Committee are Messrs. Jakuszewski
(Chairman), and Munselle and Ms. Hunt. The Governance and Nominating Committee met one time during 2005.

Compensation
Committee.    The Compensation Committee is responsible for overseeing the policies of the Company relating to compensation to be paid by the Company to the Companys principal executive officer and any other officers
designated by the Board and make recommendations to the Board with respect to such policies, produce necessary reports and executive compensation for inclusion in the Companys Proxy Statement in accordance with applicable rules and regulations
and to monitor the development and implementation of succession plans for the principal executive officers and other key executives and make recommendations to the Board with respect to such plans. The charter of the Compensation Committee was
adopted on March 22, 2004, and is available on the Companys Investor Relations website (www.amrealtytrust.com). The current members of the Compensation Committee are Ms. Hunt (Chairman) and Messrs. Jakuszewski and Munselle.
All of the members of the Compensation Committee are independent within the meaning of the listing standards of the NYSE and the Companys Corporate Governance Guidelines. The Compensation Committee is to be comprised of at least two directors
who are independent of Management and the Company. The Compensation Committee met one time during 2005.

The members of the Board of
Directors on the date of this Report and the Committees of the Board on which they serve are identified below:



|                      |  |                 |  |                                     |   |                        |  |   | 
|--------------------- |  | --------------- |  | ----------------------------------- | - | ---------------------- |  | - | 
|                      |  | Audit Committee |  | Governance and Nominating Committee |   | Compensation Committee
|Ted P. Stokely        |  |                 |  |                                     |   |                        |  |   | 
|Henry A. Butler       |  |                 |  |                                     |   |                        |  |   | 
|Sharon Hunt           |  | ü               |  |                                     | ü |                        |  | ü | 
|Robert A. Jakuszewski |  | ü               |  |                                     | ü |                        |  | ü | 
|Ted R. Munselle       |  | ü               |  |                                     | ü |                        |  | ü | 

Presiding Director

In March 2004, the Board created a new position of presiding director, whose primary responsibility is to preside over periodic executive sessions of the Board in which Management directors and other members of
Management do not participate. The presiding director also advises the Chairman of the Board and, as



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appropriate, Committee Chairs with respect to agendas and information needs relating to Board and Committee meetings, provides advice with respect to the
selection of Committee Chairs and performs other duties that the Board may from time to time delegate to assist the Board in fulfillment of its responsibilities.

Martin L. White, a director until November 22, 2005, served in such position from March 2004 through November 22, 2005. On November 22, 2005, the non-management members of the Board designated Ted R.
Munselle to serve in this position until the Companys Annual Meeting of Stockholders to be held following the fiscal year ending December 31, 2005.

Determination of Directors Independence

In February 2004, the Board adopted its Corporate Governance Guidelines. The
Guidelines adopted by the Board meet or exceed the new listing standards adopted during that year by the New York Stock Exchange. The full text of the Guidelines can be found on the Companys Investor Relations website
(www.amrealtytrust.com).

Pursuant to the Guidelines, the Board undertook its annual review of director independence in February
2006, and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and ARI and its subsidiaries and affiliates, including those reported under Certain Relationships
and Related Transactions below. The Board also examined transactions and relationships between directors or their affiliates and members of ARIs senior management or their affiliates. As provided in the Guidelines, the purpose of such review
was to determine whether such relationships or transactions were inconsistent with the determination that the director is independent.

As
a result of this review, the Board affirmatively determined of the then directors, Messrs. Munselle and Jakuszewski and Ms. Hunt are each independent of the Company and its Management under the standards set forth in the Corporate Governance
Guidelines.

Executive Officers

Executive officers of ARI are Steven A. Abney, Executive Vice President and Chief Financial Officer; James D. Canon, Executive Vice PresidentMulti-Family Construction; and Louis J. Corna, Executive Vice PresidentTax, General
Counsel/Tax Counsel and Secretary, all of whom are employed by Prime. None of the executive officers receives any direct remuneration from ARI nor do any hold any options granted by ARI. Their positions with ARI are not subject to a vote of
stockholders. The ages, terms of service and all positions and offices with ARI, Prime, BCM, other affiliated entities, other principal occupations, business experience, and directorships with other publicly held companies during the last five years
or more are set forth below.

STEVEN A. ABNEY, 50

Executive Vice President and Chief Financial Officer (since September 2005) of ARI, TCI, BCM, PIAMI, and Prime; Executive Vice
President and Chief Financial Officer (since December 2005) of IORI; Vice President Finance and Chief Accounting Officer/Principal Financial Officer (from November 2001 to February 2005) of and employed (from November 2001 to
August 2005) by CRT Properties, Inc. (f/k/a Koger Equity, Inc.). For more than four years prior thereto, Mr. Abney was Executive Vice President and Chief Financial Officer of Konover and Associates, Inc. a privately-held real estate
developer based in Farmington, Connecticut. Mr. Abney has been a Certified Public Accountant since 1980.

JAMES D. CANON, III, 44

Executive Vice PresidentMulti-Family Construction (effective April 1, 2006) of the Company, TCI, IORI and Prime.
Managing Director (June 2003 to March 2006) of Tarragon Corporation, a New York City-based real estate homebuilder and developer which has securities listed on the NASDAQ National Market System. Prior thereto (from November 2000 to March 2003), he
was Vice President of Southwest Housing



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Management, Inc., a Dallas, Texas-based real estate company, and prior thereto and for more than five years, Senior Vice President (February 1992 to October
2000) of BCM.

LOUIS J. CORNA, 58

Executive Vice President, General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice PresidentTax (October 2001 to February 2004), Executive Vice PresidentTax and Chief Financial
Officer (June 2001 to October 2001) and Senior Vice PresidentTax (December 2000 to June 2001) of ARI, TCI, IORI and BCM; Executive Vice President, General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice
PresidentTax (July 2003 to February 2004) of Prime and PIAMI; Private Attorney (January 2000 to December 2000); Vice PresidentTaxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; Vice PresidentTaxes (July
1991 to February 1998) of Whitman Corporation.

Mark W. Branigan, 51, Executive Vice PresidentMulti-Family
Construction (since September 2004) resigned effective March 31, 2006 to pursue to other opportunities. He was Executive Vice PresidentResidential (June 2001 to September 2004), Director (September 2000 to June 2001) and Executive Vice
President and Chief Financial Officer (August 2000 to June 2001) of ARI, TCI, IORI and BCM. Prior thereto, he was Executive Vice PresidentResidential (July 2003 to September 2004) of Prime and PIAMI; Vice PresidentDirector of
Construction (August 1999 to August 2000) and for more than five years prior thereto, Executive Vice PresidentResidential Asset Management of BCM, TCI and IORI.

In addition to the foregoing executive officers, the Company has several vice presidents and assistant secretaries who are not listed
herein.

Code of Ethics

ARI has
adopted a code of ethics entitled Code of Business Conduct and Ethics that applies to all directors, officers, and employees (including those of the contractual Advisor to ARI). In addition, ARI has adopted a code of ethics entitled
Code of Ethics for Senior Financial Officers that applies to the principal executive officer, president, principal financial officer, chief financial officer, principal accounting officer, and controller. The text of these documents has
been posted on ARIs internet website at http://www.amrealtytrust.com and are available in print to any stockholder who requests them.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Under the securities laws of the United States,
ARIs Directors, executive officers, and any persons holding more than 10 percent of ARIs shares of common stock are required to report their ownership and any changes in that ownership to the Securities and Exchange Commission (the
Commission). Specific due dates for these reports have been established and ARI is required to report any failure to file by these dates. All of these filing requirements were satisfied by ARIs Directors and executive officers and
10 percent holders during the fiscal year ended December 31, 2005. In making these statements, ARI has relied on the written representations of its incumbent Directors and executive officers and its 10 percent holders and copies of the reports
that they have filed with the Commission.

The Advisor

Although the Board of Directors is directly responsible for managing the affairs of ARI and for setting the policies, which guide it, the day-to-day operations of ARI are performed by Prime, a contractual advisor
under the supervision of the Board. The duties of the advisor include, among other things, locating, investigating, evaluating, and recommending real estate and mortgage loan investment and sales opportunities, as well as financing and refinancing
sources. Prime also serves as consultant in connection with ARIs business plan and investment policy decisions made by the Board.



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Prime, an affiliate, is the contractual advisor to ARI. Prime is a single-member limited liability
company, the sole member of which is PIAMI, which is owned 80% by Realty Advisors, Inc. and 20% by Syntek West, Inc. Realty Advisors, Inc. is owned 100% by a trust for the benefit of the children of Gene E. Phillips. Syntek West, Inc. is
owned 100% by Gene E. Phillips. Mr. Phillips is not an officer or director of Prime but serves as a representative of the Trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of
Primes business, including the rendering of advisory services and the investment decisions for Prime and for ARI. See also Directors and Executive Officers of the RegistrantThe Advisor. As of March 24, 2006, PIAMI
owned 1,437,208 shares of ARIs common stock, approximately 13.2% of the shares then outstanding. Also, as of March 24, 2006 One Realco Stock Holdings, Inc., which is wholly owned by Prime of which PIAMI is the sole member, owns 234,500
shares of ARI common stock.

The Advisory Agreement provides for the advisor to receive monthly base compensation at the rate of
0.0625% per month (0.75% on an annualized basis) of Average Invested Assets.

In addition to base compensation, Prime, an affiliate of
Prime, or a related party receives the following forms of additional compensation:

(1) an acquisition fee for locating,
leasing or purchasing real estate for ARI in an amount equal to the lesser of (1) the amount of compensation customarily charged in similar arms-length transactions or (2) up to 6.0% of the costs of acquisition, inclusive of
commissions, if any, paid to non-affiliated brokers;

(2) a disposition fee for the sale of each equity investment in real
estate in an amount equal to the lesser of (1) the amount of compensation customarily charged in similar arms-length transactions or (2) 3.0% of the sales price of each property, exclusive of fees, if any, paid to non-affiliated
brokers;

(3) a loan arrangement fee in an amount equal to 1.0% of the principal amount of any loan made to ARI arranged by
Prime;

(4) an incentive fee equal to 10.0% of net income for the year in excess of a 10.0% return on stockholders
equity, and 10.0% of the excess of net capital gains over net capital losses, if any, realized from sales of assets;

(5) a
mortgage placement fee, on mortgage loans originated or purchased, equal to 50.0%, measured on a cumulative basis, of the total amount of mortgage origination and placement fees on mortgage loans advanced by ARI for the fiscal year;

(6) a construction management fee equal to 6% of the so-called hard costs only of any costs of construction on a completed
basis, based upon amounts set forth as approved on any architect certificate issued in connection with such construction, which fee is payable at such time as the applicable architect certifies other costs for payment to third parties.

The ARI Advisory Agreement further provides that Prime shall bear the cost of certain expenses of its employees, excluding fees paid to ARIs
Directors; rent and other office expenses of both Prime and ARI (unless ARI maintains office space separate from that of Prime); costs not directly identifiable to ARIs assets, liabilities, operations, business or financial affairs; and
miscellaneous administrative expenses relating to the performance by Prime of its duties under the Advisory Agreement.

Effective
July 1, 2005, the Company and Prime entered into a Cash Management Agreement to further define the administration of the Companys day-to-day investment operations, relationship contacts, flow of funds and deposit and borrowing of funds.
Under the Cash Management Agreement, all funds of the Company are delivered to Prime which has a deposit liability to the Company and is responsible for payment of all payables and investment of all excess funds which earn interest at the Wall
Street Journal Prime Rate plus 1% per annum, as set quarterly on the first day of each calendar quarter. Borrowings for the benefit of the Company bear the same interest rate. The term of the Cash Management Agreement is coterminous with
the Advisory Agreement, and it is automatically renewed each year unless terminated with the Advisory Agreement.



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The terms of TCIs Advisory Agreement with Prime are not identical to those of ARIs Advisory
Agreement. The provisions of TCIs Advisory Agreement are:



| | (1) | The TCI Advisory Agreement provides for Prime to be responsible for the day-to-day operations of TCI and to receive an advisory fee comprised of a gross asset fee of .0625% per
month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of TCIs net income.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The TCI Advisory Agreement also provides for Prime to receive an annual incentive sales fee equal to 10.0% of the amount, if any, by which the aggregate sales consideration for all
real estate sold by TCI during such fiscal year exceeds the sum of: (1) the cost of each such property as originally recorded in TCIs books for tax purposes (without deduction for depreciation, amortization or reserve for losses),
(2) capital improvements made to such assets during the period owned, and (3) all closing costs, (including real estate commissions) incurred in the sale of such real estate; provided, however, no incentive fee shall be paid unless
(a) such real estate sold in such fiscal year, in the aggregate, has produced an 8.0% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5.0% higher in the current fiscal year than in the prior fiscal year.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Pursuant to the TCI Advisory Agreement, Prime, or an affiliate of Prime, is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real
estate equal to the lesser of (1) up to 1.0% of the cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers or (2) the compensation customarily charged in arms-length transactions by others rendering
similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage
commissions) may not exceed such propertys appraised value at acquisition.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The TCI Advisory Agreement requires Prime or any affiliate of Prime to pay to TCI, one-half of any compensation received from third parties with respect to the origination,
placement or brokerage of any loan made by TCI; provided, however, that the compensation retained by Prime or any affiliate of Prime shall not exceed the lesser of (1) 2.0% of the amount of the loan commitment or (2) a loan brokerage and
commitment fee which is reasonable and fair under the circumstances.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | The TCI Advisory Agreement also provides that Prime or an affiliate of Prime is to receive a mortgage or loan acquisition fee with respect to the acquisition or purchase of any
existing mortgage loan by TCI equal to the lesser of (1) 1.0% of the amount of the loan purchased or (2) a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the
origination or funding of any mortgage loan by TCI.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Under the TCI Advisory Agreement, Prime or an affiliate of Prime also is to receive a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties
equal to the lesser of (1) 1.0% of the amount of the loan or the amount refinanced or (2) a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from
Prime or an affiliate of Prime without the approval of TCIs Board of Directors. No fee shall be paid on loan extensions.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | The TCI Advisory Agreement also provides for all activities in connection with or related to construction for TCI and its subsidiaries, Prime shall receive a fee
equal to 6% of the so-called hard costs only of any costs of construction on a completed basis, based upon amounts set forth as approved on any architect certificate issued in connection with such construction, which fee is payable at
such time as the applicable architect certifies other costs for payment to third parties. The phrase hard costs means all actual costs of construction paid to contractors, subcontractors and third parties
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | for materials or labor performed as part of the construction but does not include items generally regarded as soft costs, which are consulting
fees, attorneys fees, architectural fees, permit fees and fees of other professionals.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Under the TCI Advisory Agreement, Prime receives reimbursement of certain expenses incurred by it in the performance of advisory services.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Under the TCI Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if the Operating Expenses of TCI (as defined in the Advisory Agreement)
exceed certain limits specified in the Advisory Agreement based on the book value, net asset value, and net income of TCI during the fiscal year. Prime was required to refund $2.4 million in 2005 and $1.3 million in 2003 under this provision.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Effective July 1, 2005, TCI and Prime entered into a Cash Management Agreement substantially in the same form and with
the same terms as the Cash Management Agreement between ARI and Prime.

If and to the extent that ARI shall request Prime, or any director,
officer, partner, or employee of Prime, to render services to ARI other than those required to be rendered by Prime under the Advisory Agreement, such additional services, if performed, will be compensated separately on terms agreed upon between
such party and ARI from time-to-time.

The Advisory Agreement automatically renews from year-to-year unless terminated in accordance with
its terms. ARIs management believes that the terms of the Advisory Agreement are at least as fair as could be obtained from unaffiliated third parties.

Situations may develop in which the interests of ARI are in conflict with those of one or more directors or officers in their individual capacities or of Prime, or of their respective affiliates. In addition to
services performed for ARI, as described above, Prime actively provides similar services as agent for, and advisor to, other real estate enterprises, including persons and entities involved in real estate development and financing, including TCI.
The Advisory Agreement provides that Prime may also serve as advisor to other entities.

As advisor, Prime is a fiduciary of ARIs
public investors. In determining to which entity a particular investment opportunity will be allocated, Prime will consider the respective investment objectives of each entity and the appropriateness of a particular investment in light of each such
entitys existing mortgage note and real estate portfolios and business plan. To the extent any particular investment opportunity is appropriate to more than one such entity, such investment opportunity will be allocated to the entity that has
had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among various entities. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSCertain Business
Relationships.

The managers and principal officers of Prime are set forth below:



|                    |  |                                                                                         
|------------------- |  | ----------------------------------------------------------------------------------------
|Mickey N. Phillips: |  | Manager                                                                                 
|                    | 
|Ryan T. Phillips:   |  | Manager                                                                                 
|                    | 
|Steven A. Abney:    |  | Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer
|                    | 
|Mark W. Branigan:   |  | Executive Vice PresidentResidential Construction                                       
|                    | 
|Louis J. Corna:     |  | Executive Vice PresidentTax, General Counsel/Tax Counsel and Secretary                 

Mickey N. Phillips is the brother of Gene E. Phillips, and Ryan T. Phillips is the son of Gene E.
Phillips. Gene E. Phillips indirectly owns 20.0% of Prime and serves as a representative of the trust established for the benefit of his children, which indirectly owns 80.0% of Prime and, in such capacity, has substantial contact with the
management of Prime and input with respect to its performance of advisory services for ARI.



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Property Management and Real Estate Brokerage

Affiliates of Prime provide property management services to ARI. Currently, Triad and Carmel provide property management services to ARIs properties
for a fee of 6.0% or less of the monthly gross rents collected on the residential properties under its management and 3.0% or less of the monthly gross rents collected on the commercial properties under its management. Triad and Carmel subcontract
with other entities for the provision of the property-level management services at various rates. The general partner of Triad is PIAMI. The limited partner of Triad is Highland. Triad subcontracts the property-level management and leasing of
ARIs commercial properties (shopping centers, office buildings and individual warehouses) to Regis I, which is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Triad. Regis Hotel I, LLC, manages ARIs hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. Carmel is owned by Regis I.

Regis I, a related party, provides real estate brokerage services to ARI and receives brokerage commissions in accordance with the Advisory Agreement.



|ITEM 11.EXECUTIVE | COMPENSATION
|----------------- | ------------

ARI has no employees, payroll,
or benefit plans, and pays no compensation to its executive officers. The Directors and executive officers of ARI who are also officers or employees of Prime are compensated by Prime. Such affiliated Directors and executive officers perform a
variety of services for Prime and the amount of their compensation is determined solely by Prime. Prime does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANTThe Advisor for a more detailed discussion of compensation payable to Prime by ARI.

The
only direct remuneration paid by ARI is to those Directors who are not officers or employees of Prime or its affiliated companies. Each non-employee Director is compensated at the rate of $45,000 per year, plus $300 per Audit Committee meeting
attended. The Chairman of the Board of Directors is compensated at the rate of $49,500 per year. The Chairman of the Audit Committee receives an annual fee of $500. Also, each non-employee Director receives an additional fee of $1,000 per day for
any special services rendered outside of their ordinary duties as Director, plus reimbursement of expenses. During 2005, $184,500 was paid to non-employee Directors in total Directors fees for all services including the annual fee for service
during the period January 1, 2005 through December 31, 2005, and 2005 special service fees as follows: Sharon Hunt, $45,000; Robert A. Jakuszewski, -0-, Ted R. Munselle, $45,000; Ted P. Stokely, $49,500; and Martin L. White (a director
until November 22, 2005), $45,000.

In January 1999, stockholders approved the Directors Stock Option Plan (the
Directors Plan) which provides for options to purchase up to 40,000 shares of common stock. Options granted pursuant to the Directors Plan are immediately exercisable and expire on the earlier of the first anniversary of the
date on which a Director ceases to be a Director or ten years from the date of grant. Each Independent Director was granted an option to purchase 1,000 shares at an exercise price of $17.71 per share on January 11, 1999, the date stockholders
approved the plan. On January 1, 2000, 2001, 2002, 2003, 2004, and 2005, each Independent Director was granted an option to purchase 1,000 shares at an exercise price of $18.53, $13.625, $9.87, $8.09, $9.13, and $9.70 per share, respectively.
In December 2005, the Directors Plan was terminated. At December 31, 2005, 1,000 options were exercisable at $8.09 per share, 2,000 options were exercisable at $9.13 per share, and 4,000 options were exercisable at $9.70 per share.

In January 1998, stockholders approved the 1997 Stock Option Plan (the Option Plan), which provides for options to purchase up
to 300,000 shares of common stock. In December 2005, the Option Plan was terminated. At December 31, 2005, there were 63,750 options outstanding under the Option Plan.



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Performance Graph

The following graph compares the cumulative total stockholder return on ARIs shares of common stock with the Dow Jones Equity Market Index (Dow Jones US Total Market) and the Dow Jones Real Estate
Investment Index (Dow Jones US Real Estate). The comparison assumes that $100 was invested on December 31, 2000 in shares of common stock and in each of the indices and further assumes the reinvestment of all dividends. Past
performance is not necessarily an indicator of future performance.



LOGO



|                                |  |                         |  |        |  |        |  |        |  |        |  |       
|------------------------------- |  | ----------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                                |  | Cumulative Total Return
|                                |  | 2000                    |  | 2001   |  | 2002   |  | 2003   |  | 2004   |  | 2005  
|AMERICAN REALTY INVESTORS, INC. |  | 100.00                  |  | 72.44  |  | 59.38  |  | 67.01  |  | 71.19  |  | 58.86 
|DOW JONES US TOTAL MARKET       |  | 100.00                  |  | 88.08  |  | 68.64  |  | 89.74  |  | 100.52 |  | 106.88
|DOW JONES US REAL ESTATE        |  | 100.00                  |  | 111.80 |  | 115.86 |  | 158.61 |  | 208.12 |  | 228.18



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|ITEM 12.SECURITY | OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|---------------- | -----------------------------------------------------

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of
December 31, 2005 regarding compensation plans under which equity securities of ARI are authorized for issuance.

Equity
Compensation Plan Information



|                                                       |  |                                                                                          |  |                                                                          |       |                                                                                                                                        |  
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | -------------------------------------------------------------------------------------------------------------------------------------- | -
|Plan Category                                          |  | Number of Securities tobe Issued Upon Exerciseof Outstanding Options,Warrants and
Rights |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of SecuritiesRemaining Available forFuture Issuance Under EquityCompensation
Plans(Excluding SecuritiesReflected in Column) (a)
|                                                       |  | (a)                                                                                      |  | (b)                                                                      |       | (c)                                                                                                                                   
|Equity compensation plans approved by security holders |  | 70,750                                                                                   |  | $                                                                        | 15.73 |                                                                                                                                        | 0

See NOTE 12. STOCK OPTIONS for information regarding the material features of the
above plans.

Security Ownership of Certain Beneficial Owners.    The following table sets forth the ownership
of ARIs common stock both beneficially and of record, both individually and in the aggregate, for those persons or entities known by ARI to be the owner of more than 5.0% of the shares of ARIs common stock as of the close of business on
March 24, 2006.



|                                                                                            |  |                                           |           |  |                                |  
|------------------------------------------------------------------------------------------- |  | ----------------------------------------- | --------- |  | ------------------------------ | -
|Name and Address of Beneficial Owner                                                        |  | Amount and Nature of Beneficial Ownership |           |  | ApproximatePercent ofClass (1) |  
|Basic Capital Management, Inc. 1800 Valley View Lane Suite 300 Dallas, Texas 75234          |  | 6,703,045                                 | (2)       |  | 61.5                           | %
|                                                                                            |  |                                          
|Prime Income Asset Management, Inc. 1800 Valley View Lane Suite 300 Dallas, Texas 75234     |  | 1,671,708                                 | (3)       |  | 15.3                           | %
|                                                                                            |  |                                          
|Transcontinental Realty Investors, Inc. 1800 Valley View Lane Suite 300 Dallas, Texas 75234 |  | 746,972                                   | (4)       |  | 6.9                            | %
|                                                                                            |  |                                          
|Realty Advisors, Inc. 1800 Valley View Lane Suite 300 Dallas, Texas 75234                   |  | 8,374,753                                 | (2)(3)    |  | 76.9                           | %
|                                                                                            |  |                                          
|Ryan T. Phillips 1800 Valley View Lane Suite 300 Dallas, Texas 75234                        |  | 8,402,355                                 | (2)(3)(5) |  | 77.1                           | %

---

|(1) | Percentages are based upon 10,895,972 shares outstanding as of March 24, 2006.
|--- | ------------------------------------------------------------------------------

|(2) | Includes 6,703,045 shares owned by BCM, over which each of the directors of BCM, Ryan T. Phillips and Mickey Ned Phillips, may be deemed to be beneficial owners by virtue of their
positions as directors of BCM. The directors of BCM disclaim beneficial ownership of such shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) | Includes 1,437,208 shares owned by PIAMI and 234,500 shares owned by One Realco Stock Holding, Inc. which is owned by Prime, the sole member of which is PIAMI, over which each of
the directors of PIAMI, Ryan T. Phillips and Mickey Ned Phillips, may be deemed to be beneficial owners by virtue of their positions as directors of PIAMI. The directors of PIAMI disclaim beneficial ownership of such shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Each of the directors of TCI, Henry A. Butler, Sharon Hunt, Robert A. Jakuszewski, Ted R. Munselle, and Ted P. Stokely, may be deemed to be the beneficial owners by virtue of their
positions as directors of TCI. The directors of TCI disclaim such beneficial ownership.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 27,602 shares owned by the Gene E. Phillips Childrens Trust. Ryan T. Phillips is a beneficiary of the trust.
|--- | -----------------------------------------------------------------------------------------------------------------------

Security Ownership of Management.    The following table sets forth the ownership of shares of ARIs common stock, both
beneficially and of record, both individually in the aggregate, for the Directors and executive officers of ARI, as of the close of business on March 24, 2006.



|                                                            |  |                                    |              |  |                     |  
|----------------------------------------------------------- |  | ---------------------------------- | ------------ |  | ------------------- | -
|Name of Beneficial Owner                                    |  | Number of SharesBeneficially Owned |              |  | Percent ofClass (1) |  
|Steven A. Abney                                             |  | 9,121,725                          | (4)(5)(6)    |  | 83.7                | %
|Mark W. Branigan                                            |  | 9,121,725                          | (4)(5)(6)    |  | 83.7                | %
|Henry A. Butler                                             |  | 749,972                            | (3)          |  | 6.9                 | %
|Louis J. Corna                                              |  | 9,121,725                          | (4)(5)(6)    |  | 83.7                | %
|Sharon Hunt                                                 |  | 747,972                            | (2)(3)       |  | 6.9                 | %
|Robert A. Jakuszewski                                       |  | 746,972                            | (2)(3)       |  | 6.9                 | %
|Ted R. Munselle                                             |  | 747,972                            | (2)(3)       |  | 6.9                 | %
|Ted P. Stokely                                              |  | 749,972                            | (2)(3)       |  | 6.9                 | %
|All Directors and Executive Officers as a group (8 persons) |  | 9,128,725                          | (4)(5)(6)(7) |  | 83.8                | %

---

|(1) | Percentage is based upon 10,895,972 shares outstanding as of March 24, 2006.
|--- | ----------------------------------------------------------------------------

|(2) | Each of Messrs. Butler, Munselle, and Stokely, and Ms. Hunt, have options to purchase shares of common stock of ARI, which are exercisable within 60 days of March 24,
2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 746,972 shares owned by TCI, over which the members of the Board of Directors of ARI may be deemed to be the beneficial owners by virtue of their positions as members of
the Board of Directors of TCI. The members of the Board of Directors of ARI disclaim beneficial ownership of such shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 746,972 shares owned by TCI, over which the executive officers of ARI may be deemed to be the beneficial owners by virtue of their positions as executive officers of TCI.
The executive officers of ARI disclaim beneficial ownership of such shares.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 6,703,045 shares owned by BCM, over which the executive officers of ARI may be deemed to be the beneficial owners by virtue of their positions as executive officers of BCM.
The executive officers of ARI disclaim beneficial ownership of such shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 1,437,208 shares owned by PIAMI and 234,500 shares owned by One Realco Stock Holdings, Inc., over which the executive officers of ARI may be deemed to be the beneficial
owners by virtue of their positions as executive officers of PIAMI. The executive officers of ARI disclaim beneficial ownership of such shares.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes 7,000 shares, which may be acquired by the Directors of ARI pursuant to stock option plans.
|--- | ----------------------------------------------------------------------------------------------------



|ITEM 13.CERTAIN | RELATIONSHIPS AND RELATED TRANSACTIONS
|--------------- | --------------------------------------

Policies with
Respect to Certain Activities

Article ELEVENTH of ARIs Articles of Incorporation provides that ARI shall not, directly or
indirectly, contract or engage in any transaction with (1) any director, officer or employee of ARI, (2) any director, officer or employee of the advisor, (3) the advisor, or (4) any affiliate or associate (as such terms are
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless



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(a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction
are disclosed to or are known by ARIs Board of Directors or the appropriate committee thereof and (b) ARIs Board of Directors or committee thereof determines that such contract or transaction is fair to ARI and simultaneously
authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of ARI entitled to vote thereon.

Article ELEVENTH defines an Independent Director (for purposes of that Article) as one who is neither an officer or employee of ARI, nor a director, officer or employee of ARIs advisor. This definition predates ARIs
director independence guidelines adopted in February 2004.

ARIs policy is to have such contracts or transactions approved or
ratified by a majority of the disinterested Directors with full knowledge of the character of such transactions, as being fair and reasonable to the stockholders at the time of such approval or ratification under the circumstances then prevailing.
Such Directors also consider the fairness of such transactions to ARI. Management believes that, to date, such transactions have represented the best investments available at the time and they were at least as advantageous to ARI as other
investments that could have been obtained.

ARI may enter into future transactions with entities, the officers, directors, or stockholders
of which are also officers, directors, or stockholders of ARI, if such transactions would be beneficial to the operations of ARI and consistent with ARIs then-current investment objectives and policies, subject to approval by a majority of
disinterested Directors as discussed above.

ARI does not prohibit its officers, directors, stockholders, or related parties from engaging
in business activities of the types conducted by ARI.

Certain Business Relationships

Prime, ARIs advisor, is a company for which Messrs. Abney, Branigan, Canon, and Corna serve as executive officers. Prime is a single-member limited
liability company, the sole member of which is PIAMI, which is owned 80% by Realty Advisors, Inc. and 20% by Syntek West, Inc. Realty Advisors, Inc. is owned 100% by a trust for the benefit of the children of Gene E. Phillips. Syntek West,
Inc. is owned 100% by Gene E. Phillips. Mr. Phillips is not an officer or director of Prime but serves as a representative of the Trust, is involved in daily consultation with the officers of Prime and has significant influence over the
conduct of Primes business, including the rendering of advisory services and the investment decisions for Prime and for ARI. See also Directors and Executive Officers of the RegistrantThe Advisor.

The executive officers of ARI also serve as executive officers of TCI, and Messrs. Abney, Branigan, and Corna also serve as executive officers of IORI.
As such, they owe fiduciary duties to that entity as well as to Prime under applicable law. TCI has the same relationship with Prime, as does ARI.

Effective July 1, 2003, PAMI became the advisor to ARI and TCI. Effective August 18, 2003, PAMI changed its name to PIAMI. On October 1, 2003, Prime, which is 100% owned by PIAMI, replaced PIAMI as the advisor to ARI and TCI.

ARI contracts with affiliates of Prime for property management services. Currently, Triad, an affiliate, and Carmel provide such property
management services. The general partner of Triad is PIAMI. The limited partner of Triad is Highland, a related party. Triad subcontracts the property-level management of 29 of ARIs commercial properties (office buildings, shopping centers,
and industrial warehouses) to Regis I, a related party. Regis I also provides real estate brokerage services to ARI and receives brokerage commissions in accordance with the Advisory Agreement. Regis Hotel I, LLC manages ARIs 11 hotels. The
sole member of Regis I and Regis Hotel I, LLC is Highland. Carmel is owned by Regis I See ITEM 2. PROPERTIESInvestments in Real Estate Companies and Real Estate Partnerships.

At December 31, 2005, ARI owned approximately 82.2% of TCIs outstanding common stock through its interest in TCI and approximately 20.4% of
IORIs outstanding common stock.



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Related Party Transactions

Historically, ARI, TCI, IORI, BCM, and Prime have each engaged in, and may continue to engage in, business transactions, including real estate partnerships, with related parties. Management believes that all of the
related party transactions represented the best investments available at the time and were at least as advantageous to ARI as could have been obtained from unrelated parties.

Operating Relationships

In October 2003, ARI entered into a lease with Prime for space at the One
Hickory Centre Office Building. The lease was for 59,115 sq. ft. (approximately 59.0% of the building), has a term of three years, and provided for annual base rent of $1.3 million, or $21.50 per sq. ft. Effective May 1, 2004, the lease was
amended to 54,404 sq. ft. (approximately 56% of the building), with an annual base rent of $1.2 million, or $21.50 per sq. ft. In November 2005, the lease was amended to 48,151 square feet (approximately 49% of the building), with an annual base
rent of $1.0 million, or $21.50 per square foot.

ARI received rents of $56,000 in 2005, $69,000 in 2004, and $175,000 in 2003 from an
affiliate related to the affiliates lease at Addison Hangar. The affiliate owns a corporate jet that has a lease at the hangar.

In 2005,
ARI incurred with Prime, its affiliates, and a related party $9.4 million in advisory fees, $3.7 million in net income fees, $1.1 million in incentive fees, $822,000 in loan arrangements, $3.5 million in property acquisition fees, $5.5 million in
real estate brokerage commissions, $1.7 million in construction supervision fees, and $3.7 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of
Prime. In addition, as provided in the Advisory Agreement, Prime received cost reimbursements of $4.4 million.

Partnership Transactions

BCM has entered into put agreements with certain holders of the Class A limited partner units of Ocean Beach Partners, L.P. The Class A units
are convertible into Series D Cumulative Preferred Stock of ARI. The put price of the Series D Preferred Stock is $20.00 per share plus accrued but unpaid dividends.

BCM has entered into put agreements with the holders of the Class A units of ART Palm, L.P. Such Class A units are convertible into Series C Cumulative Convertible Preferred Stock of ARI. The put price for
the Class A units is $1.00 per unit and the put price for either the Series C Preferred Stock or ARIs common stock is 90.0% of the average daily closing price of ARIs common stock for the prior 20 trading days. The put agreement
calls for ARI to repurchase the 5,188,750 outstanding Class A units on December 31, 2006.

Advances and Loans

From time-to-time, ARI and its affiliates have made advances to each other, which generally have not had specific repayment terms, did not bear interest,
are unsecured, and have been reflected in ARIs financial statements as other assets or other liabilities. Effective July 1, 2005, ARI and the advisor agreed to charge interest on the outstanding balance of funds advanced to or from ARI.
The interest rate, set at the beginning of each quarter, is the prime rate plus 1% on the average daily cash balances advanced. At December 31, 2005, ARI was owed $29.7 million and $1.1 million by Prime and Regis I, respectively.

In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to One Realco Corporation (One Realco). A wholly-owned
subsidiary of One Realco owns approximately 2.1% of the outstanding shares of ARIs common stock. One Realco periodically borrows money to meet its cash obligations. The line of credit bore interest at 12.0% per annum. All principal and
interest were due at maturity in February 2002. The line of credit is guaranteed by BCM. In June 2001, $394,000 in principal and $416,000 in interest was



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##### Index to Financial Statements

collected. In December 2001, $21,000 in principal and $804,000 in interest was collected. In February 2002, the line of credit was increased to $18.0
million, accrued but unpaid interest of $217,000 was added to the principal, and the maturity date was extended to February 2004. In March 2002, ARI funded an additional $1.8 million, increasing the outstanding principal balance to $15.5 million. In
October 2002, $856,900 in interest was collected, by the return of 85,690 shares of ARI Series A Preferred Stock. In June 2003, ARI sold a participating interest in $5.8 million of the $15.5 million balance to BCM; receiving 314,141 TCI shares from
BCM (see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES). In February 2004, $2.3 million in interest was collected, accrued but unpaid interest of $161,000 was added to the principal, the maturity date was extended to February 2007,
and the interest rate was changed to 3.0% over the prime rate, currently 10.25%. In December 2005, $500,000 in interest was collected. All principal and interest are due at maturity.

In October 1999, ARI funded a $4.7 million loan to Realty Advisors, Inc., an affiliate. The loan, to provide funds for acquisitions or working capital
needs, was secured by all of the outstanding shares of common stock of American Reserve Life Insurance Company. The loan bore interest at 10.25% per annum, and matured in November 2001. In January 2000, $100,000 was collected. In November 2001,
the maturity date was extended to November 2004. The collateral was changed to a pledge of 850,000 shares of ARI common stock owned by BCM. The interest rate was changed to 2.0% over the prime rate, currently 9.25% per annum, and the accrued
but unpaid interest of $984,000 was added to the principal. The new principal balance is $5.6 million. In September 2003, $673,000 in accrued interest was collected. In August 2004, $342,000 in accrued interest was collected. In November 2004, the
maturity date was extended to November 2006. In September 2005, $342,000 in accrued interest was collected. All principal and accrued interest are due at maturity.

Property Transactions

In December 2003, ARI sold a tract of Marine Creek land to a subsidiary of Unified Housing
Foundation, Inc. (UHF) for $1.5 million, receiving cash and a note receivable. This sale was not recognized as a sale at that time because UHF is a related party and ARI has continuing involvement and control. In February 2004, Marine
Creek was refinanced by UHF, which paid in full ARIs note payable on the land. ARI recorded the sale of the land and received a note receivable of $270,000, which was the difference between the sales price and the amount of ARIs note
payable. In August 2005 the note was paid in full. ARI recorded the sale of the Marine Creek land due to the payment received on the note receivable.

In May 2004, ARI purchased the Treehouse Apartments from an affiliate, with a net purchase price of $7.5 million after assumption of debt and a note receivable, less cash received of $498,000. The note receivable was
from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of El Dorado was not recorded as a sale for accounting purposes. ARI recorded the sale of the Cliffs of El Dorado in May 2004, due
to payment received for the Cliffs of El Dorado note receivable.

In April 2002, ARI, TCI, and IORI sold 28 apartment properties to
partnerships controlled by Metra Capital, LLC (Metra). Innovo Group, Inc. (Innovo) is a limited partner in the partnerships that purchased the properties. Joseph Mizrachi, then a director of ARI, controlled approximately
11.67% of the outstanding common stock of Innovo. Management determined to treat the sales as financing transactions, and ARI and TCI continued to report the assets and the new debt incurred by Metra on their financial statements. The partnership
agreements for each of these partnerships stated that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15% cumulative compounded annual rate of return on their invested
capital, as well as a cumulative compounded annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these properties. These distributions to the Metra Partners had priority over distributions to any
other partners. In August 2004, ARI, TCI, and IORI instituted an action in Texas State District Court regarding the transaction. During April 2005, resolution of the litigation occurred, settling all liabilities remaining from the original
partnership arrangements which included a return of investor equity, a cessation of any preferential return, prospective asset management fees and miscellaneous fees and transactions costs from the Plaintiffs as a prepayment of a preferred return,
along



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with a delegation of management and corresponding payment of management fees to Prime, and a motion to dismiss the action as a part of the resolution. Of the
prepayment, ARI recognized expense of $525,000 and a reduction in liabilities of $3.2 million during the second quarter of 2005.

During
April 2005 in connection with the resolution of the litigation filed August 10, 2004, by ARI, TCI and IORI, ARI owns 31.3% of Midland Odessa Properties, Inc. (formerly Innovo Realty, Inc.) (MOPI), the balance of which is owned by
TCI (48.8%) and IORI (19.9%). MOPI in turn is a 30% limited partner in several Metra partnerships formed in 2002 when IORI , TCI and ARI sold certain residential properties to partnerships controlled by Metra Capital LLC. The
original sale transactions were accounted for as refinancing transactions with ARI continuing to report the assets and new debt incurred by certain of the Metra partnerships on ARIs financial statements. As properties are sold to
independent third parties, the transactions are reported as sales. See also NOTE 9 to the CONSOLIDATED FINANCIAL STATEMENTS under the sub-caption Returns on Metra Properties.

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table
sets forth the aggregate fees for professional services rendered to ARI for the years 2005 and 2004 by ARIs principal accounting firms, Farmer, Fuqua and Huff, L.P. and BDO Seidman, LLP:



|                   |  |                      |         |     |             |   |         |                      |  |   |             |     |  |   |         |    
|------------------ |  | -------------------- | ------- | --- | ----------- | - | ------- | -------------------- |  | - | ----------- | --- |  | - | ------- | ---
|                   |  | 2005                 |         |     | 2004        |  
|Type of Fee        |  | Farmer, Fuqua & Huff |         |     | BDO Seidman |   |         | Farmer, Fuqua & Huff |  |   | BDO Seidman |    
|Audit Fees         |  | $                    | 464,127 | (1) |             | $ | 40,000  | (2)                  |  | $ | 188,614     | (3) |  | $ | 310,626 | (4)
|Audit Related Fees |  |                      | 36,500  | (7) |             |   |        |                      |  |   |            |     |  |   |        |    
|Tax Fees           |  |                      | 67,394  | (5) |             |   | 73,840  | (6)                  |  |   | 9,550       | (7) |  |   | 219,433 | (8)
|All Other Fees     |  |                      |        |     |             |   |        |                      |  |   |            |     |  |   |        |    
|                   |  |                      |         |     |             |   |         |                      |  |   |             |     |  |   |         |    
|Total              |  | $                    | 568,021 |     |             | $ | 113,840 |                      |  | $ | 198,164     |     |  | $ | 530,059 |    
|                   |  |                      |         |     |             |   |         |                      |  |   |             |     |  |   |         |    

---

|(1) | Includes $280,971 paid by TCI.
|--- | ------------------------------

|(2) | Includes $15,000 paid by TCI.
|--- | -----------------------------

|(3) | Includes $86,148 paid by TCI.
|--- | -----------------------------

|(4) | Includes $102,184 paid by TCI.
|--- | ------------------------------

|(5) | Includes $34,405 paid by TCI.
|--- | -----------------------------

|(6) | Includes $12,913 paid by TCI.
|--- | -----------------------------

|(7) | All paid by TCI.
|--- | ----------------

|(8) | Includes $50,021 paid by TCI.
|--- | -----------------------------

All services rendered by
the principal auditors are permissible under applicable laws and regulations and were pre-approved by either the Board of Directors or the Audit Committee, as required by law. The fees paid the principal auditors for services as described in the
above table fall under the categories listed below:

Audit Fees.    These are fees for professional services
performed by the principal auditor for the audit of the Companys annual financial statements and review of financial statements included in the Companys 10-Q filings and services that are normally provided in connection with statutory
and regulatory filing or engagements.

Audit-Related Fees.    These are fees for assurance and related services
performed by the principal auditor that are reasonably related to the performance of the audit or review of the Companys financial statements. These services include attestations by the principal auditor that are not required by statute or
regulation and consulting on financial accounting/reporting standards.

Tax Fees.    These are fees for
professional services performed by the principal auditor with respect to tax compliance, tax planning, tax consultation, returns preparation, and review of returns. The review of tax returns includes the Company and its consolidated subsidiaries.



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All Other Fees.    These are fees for other permissible work performed by the
principal auditor that do not meet the above category descriptions.

These services are actively monitored (as to both spending level and
work content) by the Audit Committee to maintain the appropriate objectivity and independence in the principal auditors core work, which is the audit of the Companys consolidated financial statements.

Under the Sarbanes-Oxley Act of 2002 (the SO Act) and the rules of the Securities and Exchange Commission (the SEC), the Audit
Committee of the Board of Directors is responsible for the appointment, compensation, and oversight of the work of the independent auditor. The purpose of the provisions of the SO Act and the SEC rules for the Audit Committee role in retaining the
independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation, and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the
auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SO Act, the SEC
issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committees administration of the engagement of the independent auditor. As part of this responsibility, the Audit
Committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditors independence. Accordingly, the Audit Committee has adopted a pre-approval policy
of audit and non-audit services (the Policy), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be pre-approved. Consistent with the SEC rules establishing two
different approaches to pre-approving non-prohibited services, the Policy of the Audit Committee covers pre-approval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services,
pension and benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the
scope of work proposed to be performed and the proposed fees, and approve or reject each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent
auditors independence from management. Typically, in addition to the generally pre-approved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit
Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to pre-approve services to be performed by the independent auditor not exceeding $25,000
in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session.

All the fees for 2005 and 2004 were pre-approved by the Audit Committee or were within the pre-approved guidelines for permitted non-audit services and fees established by the Audit Committee, and there were no
instances of waiver of approved requirements or guidelines during the same periods.



129



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##### Index to Financial Statements

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



| | (a) | The following documents are filed as part of this Report:
| | --- | ---------------------------------------------------------



| | 1. | Consolidated Financial Statements
| | -- | ---------------------------------

Report of Independent Certified Public Accountants

Consolidated Balance SheetsDecember 31, 2005 and 2004

Consolidated Statements of OperationsYears Ended December 31, 2005, 2004 and 2003

Consolidated Statements of Stockholders EquityYears Ended December 31, 2005, 2004 and 2003

Consolidated Statements of Cash FlowsYears Ended December 31, 2005, 2004 and 2003

Notes to Consolidated Financial Statements



| | 2. | Financial Statement Schedules
| | -- | -----------------------------

Schedule IIIReal Estate and Accumulated Depreciation

Schedule IVMortgage Loans on Real Estate

All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements
or the notes thereto.



| | 3. | Incorporated Financial Statements
| | -- | ---------------------------------

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. (Incorporated by reference to Item 8. of Income Opportunity Realty Investors, Inc.s Annual Report on Form 10-K for the year ended December 31,
2005).



130



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##### Index to Financial Statements

| | (b) | Exhibits.
| | --- | ---------

The following documents are filed as Exhibits
to this Report:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|3.1           |  | 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).                                                                                                                                        
|              | 
|3.2           |  | Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc., dated August 29, 2000 (incorporate by
reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                
|              | 
|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 B Cumulative Convertible Preferred Stock dated August 26, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).                  
|              | 
|3.4           |  | 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 the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                              
|              | 
|3.5           |  | By-laws of American Realty Investors, Inc. (incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement on
Form S-4, filed on 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).                                                                                                                                                                              
|              | 
|14.0          |  | Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to the Registrants Annual Report on Form 10-K
for the year ended December 31, 2004).                                                                                                                                                                                                                  
|              | 
|21.1*         |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                
|              | 
|31.1*         |  | Rule 13a-14(a) Certification by Acting Principal Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                                
|              | 
|32.1*         |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                        

---

*Filed herewith.



131



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##### Index to Financial Statements

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: March 31, 2006



AMERICAN REALTY INVESTORS, INC.By:

/S/    STEVEN A.
ABNEYSteven A. AbneyExecutive Vice President and Chief Financial Officer(Principal Financial and Accounting Officer and
ActingPrincipal Executive Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.



|                                                   |  |                                                                                                                                          |  |               
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                          |  | Title                                                                                                                                    |  | Date          
|                                                   |  |                                                                                                                                         
|/s/    TED P. STOKELY Ted P. Stokely               |  | Chairman of the Board and Director                                                                                                       |  | March 31, 2006
|                                                   |  |                                                                                                                                         
|/s/    HENRY A. BUTLER Henry A. Butler             |  | Director                                                                                                                                 |  | March 31, 2006
|                                                   |  |                                                                                                                                         
|/s/    SHARON HUNT Sharon Hunt                     |  | Director                                                                                                                                 |  | March 31, 2006
|                                                   |  |                                                                                                                                         
|/s/    ROBERT A.
JAKUSZEWSKI Robert A. Jakuszewski |  | Director                                                                                                                                 |  | March 31, 2006
|                                                   |  |                                                                                                                                         
|/s/    TED R. MUNSELLE Ted R. Munselle             |  | Director                                                                                                                                 |  | March 31, 2006
|                                                   |  |                                                                                                                                         
|/s/    STEVEN A. ABNEY Steven A. Abney             |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive
Officer) |  | March 31, 2006



132



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##### Index to Financial Statements

ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

For the Year Ended December 31, 2005



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|3.1   |  | 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).                                                                                                                                        
|      | 
|3.2   |  | Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc., dated August 29, 2000 (incorporate by
reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                
|      | 
|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 B Cumulative Convertible Preferred Stock dated August 26, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).                  
|      | 
|3.4   |  | 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 the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                              
|      | 
|3.5   |  | By-laws of American Realty Investors, Inc. (incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement on
Form S-4, filed on 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).                                                                                                                                                                              
|      | 
|14.0  |  | Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to the Registrants Annual Report on Form 10-K
for the year ended December 31, 2004).                                                                                                                                                                                                                  
|      | 
|21.1* |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                
|      | 
|31.1* |  | Rule 13a-14(a) Certification by Acting Principal Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                                
|      | 
|32.1* |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                        

---

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



133