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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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



For the Year Ended December 31, 2003

Commission File Number 1-15663



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American Realty Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)





|                                                                                       |  |                                              
|-------------------------------------------------------------------------------------- |  | ---------------------------------------------
|Nevada(State or Other Jurisdiction ofIncorporation or Organization)                    |  | 75-2847135(I.R.S. EmployerIdentification No.)
|                                                                                       | 
|1800 Valley View Lane, Suite 300,Dallas, Texas(Address of Principal Executive Offices) |  | 75234(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 Common Stock, $.01 par value |  | Name of each exchange on which registered New York Stock Exchange



Securities
Registered Pursuant to Section 12(g) of the Act:



NONE



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 at least the past 90 days.    Yes  x    No ̈



Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 an accelerated filer (as defined in Rule 12b-2 of the
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 sales price of the Common Stock on the New York Stock Exchange as of June 30, 2003 (the last business day of the Registrants most recently completed second
fiscal quarter) was $27,707,663 based upon a total of 2,261,850 shares held as of June 30, 2003 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 19, 2004, there were 11,390,272 shares of common stock outstanding, including
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. 1-14784



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INDEX TO

ANNUAL REPORT ON FORM 10-K



|               |  |                                                                                       |  |    
|-------------- |  | ------------------------------------------------------------------------------------- |  | ---
|               |  | Page                                                                                 
|               | 
|PART I         |  |                                                                                      
|               |  |                                                                                      
|Item 1.        |  | Business                                                                              |  | 3  
|               |  |                                                                                      
|Item 2.        |  | Properties                                                                            |  | 8  
|               |  |                                                                                      
|Item 3.        |  | Legal Proceedings                                                                     |  | 25 
|               |  |                                                                                      
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                   |  | 26 
|               | 
|PART II        |  |                                                                                      
|               |  |                                                                                      
|Item 5.        |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 27 
|               |  |                                                                                      
|Item 6.        |  | Selected Financial Data                                                               |  | 29 
|               |  |                                                                                      
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 30 
|               |  |                                                                                      
|Item 7A.       |  | Quantitative and Qualitative Disclosures Regarding Market Risk                        |  | 46 
|               |  |                                                                                      
|Item 8.        |  | Consolidated Financial Statements and Supplementary Data                              |  | 47 
|               |  |                                                                                      
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 115
|               |  |                                                                                      
|Item 9A.       |  | Controls and Procedures                                                               |  | 115
|               | 
|PART III       |  |                                                                                      
|               |  |                                                                                      
|Item 10.       |  | Directors, Executive Officers and Advisor of the Registrant                           |  | 115
|               |  |                                                                                      
|Item 11.       |  | Executive Compensation                                                                |  | 122
|               |  |                                                                                      
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 124
|               |  |                                                                                      
|Item 13.       |  | Certain Relationships and Related Transactions                                        |  | 125
|               |  |                                                                                      
|Item 14.       |  | Principal Accounting Fees and Services                                                |  | 134
|               | 
|PART IV        |  |                                                                                      
|               |  |                                                                                      
|Item 15.       |  | Exhibits, Financial Statements, Schedules and Reports on Form 8-K                     |  | 136
|               | 
|Signature Page |  | 138                                                                                  





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PART I



ITEM 1.BUSINESS



The
predecessor to American Realty Investors, Inc. (ARI) was organized in 1961 to provide investors with a professionally managed, diversified portfolio of equity real estate and mortgage loan investments selected to provide opportunities
for capital appreciation as well as current income.



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 a 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 offer for the IORI and TCI shares. The tender offer was 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 offer, ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offer fulfilled the obligations under the Olive
Settlement, and the Olive Litigation originally filed in February 1990 was dismissed with prejudice.



After the tender offer, ARI subsidiaries owned 64.8% of the outstanding shares of TCI and 62.5% of the outstanding shares of IORI (46.9% owned directly by
ARI subsidiaries 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 offer 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, 2003, ARI and TCI have
the same Board of Directors, and three of the directors of IORI also served as directors of ARI. At March 31, 2004, only one director of ARI (Ted Stokely) also serves as a director of IORI. Effective July 1, 2003, ARI and TCI have the same advisor.



On June 2, 2003, ARI subsidiaries exchanged all of their
674,971 IORI shares with Basic Capital Management, Inc. (BCM), receiving 650,000 TCI shares from BCM. In addition, BCM has executed a promissory note in favor of an ARI subsidiary in the amount of $526,000 (see NOTE 3. NOTES AN
INTEREST RECEIVABLE). After the exchange, ARI subsidiaries 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
Corporation (One Realco) to BCM, receiving 314,141 TCI shares from BCM (See NOTE 3. NOTES RECEIVABLE). After the transaction, ARI subsidiaries owned 76.8% of the outstanding shares of TCI. In December 2003, ARI subsidiaries
purchased 88,600 TCI shares in open market transactions and 204,633 TCI shares in transactions with related parties for a total of $1.4 million. At December 31, 2003, ARI subsidiaries owned 80.0% of the outstanding shares of TCI. ARI no longer
directly owns any IORI shares. At December 31, 2003, TCI owned 24.0% of IORI shares. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003.



On June 30, 2003, ARI sold its 71.4% interest in Realty Advisors Korea, Ltd. (RAK) to Realty Advisors, Inc.
(Realty Advisors), a related party, for $6.0 million, reducing ARIs affiliate debt. Realty Advisors also paid ARI $600,000, representing 10% interest on the $6.0 million price paid by ARI to purchase the 71.4% interest in RAK in
2002.



Effective July 1, 2003, Prime Asset Management, Inc.
(PAMI) became the advisor to ARI and TCI. PAMI is owned by Realty Advisors (79%) and Syntek West, Inc. (Syntek West) (21%), related parties. Syntek West is owned by Gene Phillips. Effective August 18, 2003, PAMI changed its
name to Prime Income Asset



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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, ITEM 3. NOTES AND INTEREST
RECEIVABLE and in Schedules III and IV to the Consolidated Financial Statements included at ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ARI has six operating segments: apartments, commercial properties,
hotels, land ownership, quick-service restaurants and notes receivables. See Note 19 to the Consolidated Financial Statements.



ARIs business objective is to maximize long-term profitability 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 offering properties in multiple markets and operating as a leading landlord within the industry. ARI
believes that 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 access to 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. When ARIs marketing efforts identify opportunities, ARI will, in appropriate
instances, pursue those opportunities. ARI seeks to maximize the profitability of its apartments and commercial properties by endeavoring to maintain high occupancy levels while obtaining competitive rental rates, controlling costs and focusing on
customer service efforts.



Current general economic conditions
have resulted in downward pressure on rental rates, and market rental rates have declined on a year-to-year basis. ARI seeks to generate increased cash flow from apartments and commercial properties in operation through annual contractual increases
in rental rates under leases. ARI also seeks to identify the best practices across operating platforms in order to enhance cost savings and other efficiencies. ARI and its subsidiaries employ an annual capital improvement and preventative
maintenance program designed to reduce the operating costs of the apartments and commercial properties and maintain the long-term value of those real estate assets.



ARI also pursues attractive development opportunities, focusing primarily upon new construction or development, either
directly or in concert with non-affiliated 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. During the year ended December 31, 2003, ARI, through its subsidiaries, acquired eight properties and disposed of 38 properties. ARIs
subsidiaries dispose of properties and land held for development which no longer fit within ARIs business plan or with respect to which management believes it can optimize cash proceeds.



Although ARI seeks to maximize long-term profitability for its stockholders
through the development, acquisition and disposition of properties, ARI intends to continue to pursue its development, acquisition and disposition strategies. ARI at all times, and currently, is 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.



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Substantially all properties are owned by separate subsidiaries of ARI, many of which are single-asset
entities. This 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, which creates the possibility of risks that do not exist with properties solely owned by an ARI subsidiary. In those instances
where other participants are involved, those other participants may, at any time, have business, economic or other objectives that are inconsistent with ARIs objectives which may require a different action for the operation or ultimate
disposition of the asset in question.



Real estate generally
cannot be sold quickly. ARI and its subsidiaries may not be able to dispose of properties promptly 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 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 three years. Similarly, ARI and its subsidiaries finance acquisitions at times through non-recourse mortgages, internally-generated funds, and to the 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 indebtedness. When properties are acquired in such manner, ARI and its subsidiaries
customarily seek to refinance the asset in order to properly leverage the asset for future operation.



ARI, through its subsidiary, Milano Restaurants International, Inc. (MRI), operates and franchises several quick-service restaurant concepts
including pizzerias featuring pizza delivery, carry-out and dine-in under the trademarks Me-N-Eds Pizzerias, Me-N-Eds Slices and Angelo & Vitos Pizzerias. The first Me-N-Eds Pizzeria
opened in 1958. At December 31, 2003, there were 60 restaurants in operation, consisting of 43 owned and 17 franchised. Two of the restaurants were located in Texas and the remainder were in California. In addition to the Pizzerias, MRI has
developed two new concepts: Pizzeria del Pane, a bakery/café concept and Zia Mias Cucina Italiana, a full service Italian restaurant. The initial locations for each of the concepts are set to open in 2004.



ARIs businesses are not seasonal. With regard to real estate
investments, ARI is seeking 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 or
commercial properties or 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, 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, ITEM 3. NOTES AND INTEREST RECEIVABLE and Schedules III and IV to the Consolidated Financial Statements included at 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 as 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.



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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 supervision of the Board. The duties of Prime include, among other things, locating, investigating,
evaluating and recommending real estate and mortgage note investment 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 indirectly owned by a trust for the children of 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 making of investment decisions for itself and ARI. As of March 19, 2004, PIAMI, Primes parent, owned 1,437,208
shares of ARIs Common Stock, approximately 12.6% of the shares then outstanding. Prime is more fully described in ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR 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. 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 BCM. The limited partner of Triad is Highland Realty Services, Inc. (Highland), a related party. Until
December 2002, Triad subcontracted the property-level management and leasing of 47 of ARIs commercial properties (shopping centers, office buildings and a merchandise mart) to Regis Realty, Inc. (Regis), a related party, which was
a company owned by GS Realty Services, Inc. Regis was entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Since January 1, 2003,
Regis Realty I, LLC (Regis I), has provided these services. Regis I is owned by Highland. Since January 1, 2003, Regis Hotel I, LLC, has managed ARIs 12 hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. Carmel
is a company owned by First Equity Properties, Inc., which is a company affiliated with Prime.



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, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANTThe Advisor.



ARI has no employees
itself, but MRI has 895 employees. 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 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 with respect to
commercial properties are the ease of access to the property, the adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and
mix of the units



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and the ability to provide a community atmosphere for the tenants. 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 rate at which properties are renovated or the rate new properties are developed in the vicinity of each of ARIs properties, in particular
its improved and unimproved land, are also competitive 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.



As described above and in ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSRelated Party Transactions, the officers of ARI also
serve as officers of IORI and TCI, both of which have business objectives similar to ARIs. ARIs officers and advisor 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 and the advisor consider the respective investment objectives of each and the appropriateness of a particular investment in light of the existing real estate and mortgage notes
receivable portfolios of each. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity will 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 or some of the entities.



In addition, also as described in ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ARI also competes with entities which are
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 continue 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 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 IORI and 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.



Pizza Parlors.    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.



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The quick-service restaurant industry is extremely competitive with respect to price, service, location
and food quality. MRI and its franchisees compete with a variety of other restaurants in the quick-service restaurant industry, including those that offer dine-in, carry-out 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 MRI and its franchisees. MRI competes for qualified franchisees with many other restaurant concepts, including national and regional restaurant chains.



MRI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 MRIs operations. 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, 2003, MRI owned and operated 43 and franchised 17 pizza parlors. The results achieved by MRI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 MRIs relatively small pizza parlor base, an unsuccessful pizza parlor has a more significant effect on MRIs results
of operations than would be the case in a company owning more pizza parlors.



MRIs existing pizza parlors, both owned and franchised, are located in California or Texas. At December 31, 2003, there were 58 pizza parlors in California and two in Texas. Accordingly, MRIs results of
operations may be affected by economic or other conditions in those regions. Also, given MRIs present geographic concentration, publicity relating to MRIs pizza parlors could have a more pronounced effect on MRIs overall sales than
might be the case if MRIs pizza parlors were geographically dispersed.



All of MRI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 MRI will be able to renew
leases upon expiration or that the lease terms upon renewal will be as favorable as the current lease terms. In 2003, MRI opened two new company-owned stores, closed two company-owned stores, sold three company-owned stores as franchises, and opened
two new franchise stores. In 2004, five new franchise stores are scheduled to open.



In July 2003, ARI sold its interest in MRI 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% of Gruppa, thereby retaining a 20% interest in MRI. 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 MRI, management has determined that this 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.



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, 2003, are set forth in Schedules III and IV, respectively, to the Consolidated Financial Statements included at 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, 2003, no single asset accounted for 10% or more of total
assets. At December 31, 2003, 85% of ARIs assets consisted of real estate, and 6% consisted of notes and interest receivable. The remaining



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9% of ARIs assets were cash, cash equivalents, marketable equity securities, pizza parlor 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. At December
31, 2003, 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 at ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA for a detailed description of ARIs notes receivable portfolio.



Geographic Regions



LOGO

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|* |  | Includes one commercial property in Alaska.
|- |  | -------------------------------------------



Excluded from above are 75 parcels of improved and unimproved land, a hotel in Wroclaw, Poland and a single family residence, as described below.



Real Estate



At December 31, 2003, 85% of ARIs assets were invested in real estate
and the equity securities of IORI. ARI invests in real estate located throughout the continental United States, either on a leveraged or nonleveraged basis. ARIs real estate portfolio consists of properties held for investment, investments in
partnerships, properties held for sale and investments in equity securities of IORI.





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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 nonaffiliated parties or affiliates (subject to approval by the 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, such as cost overruns and construction delays, associated with such higher risk projects.



At December 31, 2003, ARI had the following properties under construction:

|                        |  |                 |  |           |  |                |        |                           |   |                         |  |   |       
|----------------------- |  | --------------- |  | --------- |  | -------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------
|Property                |  | Location        |  | Units     |  | AmountExpended |        | AdditionalAmountto Expend |   | ConstructionLoanFunding
|Apartments              |  |                 |  |           |  |                |        |                           |   |                         |  |   |       
|Bluffs at Vista Ridge   |  | Lewisville, TX  |  | 272 Units |  | $              | 2,201  |                           | $ | 18,385                  |  | $ | 15,500
|Breakwater Bay          |  | Beaumont, TX    |  | 176 Units |  |                | 2,691  |                           |   | 7,776                   |  |   | 9,545 
|Capitol Hill            |  | Little Rock, AR |  | 156 Units |  |                | 3,303  |                           |   | 7,276                   |  |   | 9,500 
|DeSoto Ranch            |  | DeSoto, TX      |  | 248 Units |  |                | 16,184 |                           |   | 2,036                   |  |   | 16,273
|Heather Creek           |  | Mesquite, TX    |  | 200 Units |  |                | 3,658  |                           |   | 9,644                   |  |   | 12,079
|Kingsland Ranch         |  | Houston, TX     |  | 398 Units |  |                | 14,206 |                           |   | 11,449                  |  |   | 23,000
|Verandas at City View   |  | Fort Worth, TX  |  | 314 Units |  |                | 14,339 |                           |   | 8,505                   |  |   | 19,393
|Vistas at Pinnacle Park |  | Dallas, TX      |  | 322 Units |  |                | 3,261  |                           |   | 17,921                  |  |   | 19,149



In 2003, ARI completed
the 186 unit Blue Lake Villas in Waxahachie, Texas; the 216 unit Echo Valley Apartments in Dallas, Texas; the 284 unit Falcon Lakes in Arlington, Texas; the 180 unit River Oaks Apartments in Wylie, Texas; the 384 unit Sendero Ridge Apartments in San
Antonio, Texas; the 256 unit Spyglass Apartments in Mansfield, Texas; and the 188 unit Windsong Apartments in Ft. Worth, Texas.



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



The following table sets forth the percentages, by property type and
geographic region, of owned real estate (excluding 75 parcels of improved and unimproved land, a hotel in Wroclaw, Poland and a single family residence, described below) at December 31, 2003.



|          |  |            |   |  |                      |   |  |        |  
|--------- |  | ---------- | - |  | -------------------- | - |  | ------ | -
|Region    |  | Apartments |   |  | CommercialProperties |   |  | Hotels |  
|Midwest   |  | 8          | % |  | 16                   | % |  | 11     | %
|Mountain  |  |           |   |  | 14                   |   |  | 11     |  
|Pacific   |  |           |   |  | 1                    |   |  | 49     |  
|Southeast |  | 15         |   |  | 18                   |   |  | 29     |  
|Southwest |  | 77         |   |  | 51                   |   |  |       |  
|          |  |            |   |  |                      |   |  |        |  
|          |  | 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 Schedule III to the Consolidated Financial Statements
included in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for a detailed description of owned real estate.



10



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Excluded from the table above are a 165 room hotel in Wroclaw, Poland, a single family residence in
Dallas, Texas and 75 parcels of improved and unimproved land consisting of: 2 parcels in Las Colinas, Texas, totaling 49.1 acres; seven parcels in Dallas County, Texas, totaling 392.4 acres; four parcels in Irving, Texas, totaling 39.9 acres; two
parcels in Tarrant County, Texas, totaling 34.4 acres; a 130.6 acre parcel in Harris County, Texas; six parcels in Collin County, Texas, totaling 366.2 acres; 19 parcels in Farmers Branch, Texas, totaling 766.8 acres; two parcels in Plano, Texas,
totaling 36.3 acres; four parcels in Austin, Texas, totaling 484.2 acres; a 110.5 acre parcel in Palm Desert, California; a 63.3 acre parcel in Travis County, Texas; two parcels in Houston, Texas, totaling 75.3 acres; an 80.3 acre parcel in
Lewisville, Texas; a 7.6 acre parcel in Carrollton, Texas; a 127.4 acre parcel in Nashville, Tennessee; six parcels in Dallas, Texas, totaling 63.7 acres; a 0.4 acre parcel in New Orleans, Louisiana; a 4.0 acres parcel in Springfield, Virginia; a
0.7 acre parcel in San Angelo, Texas; an 18.9 acre parcel in Fort Wayne, Indiana; a 4.7 acre parcel in Fruitland Park, Florida; a 16.9 acre parcel in Humble, Texas; two parcels in Fort Worth, Texas, totaling 59.4 acres; a 10.8 acre parcel in
Maumelle, Arkansas; a 21.9 acre parcel in Pulaski County, Arkansas; a 13.9 acre parcel in Grand Prairie, Texas; a 20.7 acre parcel in Siskiyou County, California; 2 parcels in Allen, Texas, totaling 216.2 acres; and a 105.4 acre parcel in Denton
County, Texas. See Schedule III to the Consolidated Financial Statements included at ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for a detailed description of ARIs real estate portfolio.



A summary of the activity in the owned real estate portfolio during 2003 is
as follows:



|                                                                    |  |     |  
|------------------------------------------------------------------- |  | --- | -
|Owned properties at January 1, 2003                                 |  | 100 |  
|Properties obtained through consolidation of TCI                    |  | 146 |  
|Properties obtained through foreclosure                             |  | 2   |  
|Properties purchased (excluding additions to existing land parcels) |  | 6   |  
|Properties exchanged for other assets                               |  | (1  | )
|Properties sold (excluding partial sales)                           |  | (37 | )
|                                                                    |  |     |  
|Owned properties at December 31, 2003                               |  | 216 |  
|                                                                    |  |     |  



Operating
Properties.    Set forth below are ARIs operating properties and the monthly rental rate for apartments and the average annual rental rate for commercial properties and the average daily room rate and room revenue
divided by total available rooms for hotels and occupancy at December 31, 2003, 2002 and 2001 for apartments and commercial properties and average occupancy during 2003, 2002 and 2001 for hotels. The 2002 and 2001 information for the properties
added through the consolidation of TCI, as identified with (T), is provided for comparative purposes only.



|                          |  |                    |      |                           |      |                     |      |             |      |      |      |   |      |  |     |  |    |  |   
|------------------------- |  | ------------------ | ---- | ------------------------- | ---- | ------------------- | ---- | ----------- | ---- | ---- | ---- | - | ---- |  | --- |  | -- |  | --
|Property                  |  | Location           |      | Units/Square Footage      |      | Rent PerSquare Foot |      | Occupancy %
|                          |  |                    | 2003 |                           | 2002 |                     | 2001 |             | 2003 |      | 2002 |   | 2001
|Apartments                |  |                    |      |                           |      |                     |      |             |      |      |      |   |      |  |     |  |    |  |   
|4400 (T)                  |  | Midland, TX        |      | 92 Units/94,472 Sq. Ft.   |      | $                   | .49  |             | $    | .49  |      | $ | .49  |  | 86  |  | 86 |  | 95
|Apple Lane (T)            |  | Lawrence, KS       |      | 75 Units/30,000 Sq. Ft.   |      |                     | 1.05 |             |      | 1.04 |      |   | 1.04 |  | 100 |  | 93 |  | 99
|Arbor Point (T)           |  | Odessa, TX         |      | 195 Units/178,920 Sq. Ft. |      |                     | .45  |             |      | .43  |      |   | .41  |  | 95  |  | 87 |  | 91
|Arlington Place           |  | Pasadena, TX       |      | 230 Units/205,476 Sq. Ft. |      |                     | .76  |             |      | .75  |      |   | .73  |  | 97  |  | 94 |  | 97
|Ashton Way (T)            |  | Midland, TX        |      | 178 Units/138,964 Sq. Ft. |      |                     | .43  |             |      | .43  |      |   | .43  |  | 87  |  | 82 |  | 89
|Autumn Chase (T)          |  | Midland, TX        |      | 64 Units/58,652 Sq. Ft.   |      |                     | .55  |             |      | .54  |      |   | .53  |  | 98  |  | 98 |  | 94
|Bay Walk (T)              |  | Galveston, TX      |      | 192 Units/153,120 Sq. Ft. |      |                     | .75  |             |      | .74  |      |   | .74  |  | 95  |  | 95 |  | 92
|Bluelake Villas (T)       |  | Waxahachie, TX     |      | 180 Units/169,746 Sq. Ft. |      |                     | .91  |             |      | *    |      |   | *    |  | 93  |  | *  |  | * 
|Bluffs at Vista Ridge (T) |  | Lewisville, TX     |      | 272 Units/257,432 Sq. Ft. |      |                     | **   |             |      | **   |      |   | **   |  | **  |  | ** |  | **
|Breakwater Bay (T)        |  | Beaumont, TX       |      | 176 Units/145.688 Sq. Ft. |      |                     | **   |             |      | **   |      |   | **   |  | **  |  | ** |  | **
|Bridgestone (T)           |  | Friendswood, TX    |      | 76 Units/65,519 Sq. Ft.   |      |                     | .74  |             |      | .74  |      |   | .71  |  | 96  |  | 92 |  | 93
|By the Sea (T)            |  | Corpus Christi, TX |      | 153 Units/123,945 Sq. Ft. |      |                     | .88  |             |      | .86  |      |   | .83  |  | 91  |  | 88 |  | 93
|Capitol Hill (T)          |  | Little Rock, AR    |      | 156 Units/151,116 Sq. Ft. |      |                     | **   |             |      | **   |      |   | **   |  | **  |  | ** |  | **
|Château                   |  | Bellevue, NE       |      | 115 Units/99,220 Sq. Ft.  |      |                     | .73  |             |      | .71  |      |   | .71  |  | 86  |  | 96 |  | 94
|Château Bayou             |  | Ocean Springs, MS  |      | 122 Units/105,536 Sq. Ft. |      |                     | .67  |             |      | .67  |      |   | .67  |  | 94  |  | 94 |  | 97



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|                            |  |                   |      |                            |      |                     |      |             |      |      |      |   |      |  |     |  |    |  |    
|--------------------------- |  | ----------------- | ---- | -------------------------- | ---- | ------------------- | ---- | ----------- | ---- | ---- | ---- | - | ---- |  | --- |  | -- |  | ---
|Property                    |  | Location          |      | Units/Square Footage       |      | Rent PerSquare Foot |      | Occupancy %
|                            |  |                   | 2003 |                            | 2002 |                     | 2001 |             | 2003 |      | 2002 |   | 2001
|Cliffs of Eldorado (T)      |  | McKinney, TX      |      | 208 Units/182,288 Sq. Ft.  |      | $                   | .85  |             | $    | .85  |      | $ | .84  |  | 89  |  | 86 |  | 94 
|Courtyard (T)               |  | Midland, TX       |      | 133 Units/111,576 Sq. Ft.  |      |                     | .46  |             |      | .45  |      |   | .43  |  | 99  |  | 93 |  | 89 
|Coventry (T)                |  | Midland, TX       |      | 120 Units/105,608 Sq. Ft.  |      |                     | .44  |             |      | .43  |      |   | .43  |  | 84  |  | 91 |  | 77 
|DeSoto Ranch (T)            |  | DeSoto, TX        |      | 248 Units/ 240,718 Sq. Ft. |      |                     | .94  |             |      | *    |      |   | *    |  | 98  |  | *  |  | *  
|Echo Valley (T)             |  | Dallas, TX        |      | 216 Units/199,656 Sq. Ft.  |      |                     | .89  |             |      | *    |      |   | *    |  | 97  |  | *  |  | *  
|El Chapparal (T)            |  | San Antonio, TX   |      | 190 Units/174,220 Sq. Ft.  |      |                     | .73  |             |      | .72  |      |   | .72  |  | 96  |  | 79 |  | 92 
|Fairway View Estates (T)    |  | El Paso, TX       |      | 264 Units/204,000 Sq. Ft.  |      |                     | .64  |             |      | .63  |      |   | .62  |  | 96  |  | 92 |  | 86 
|Fairways (T)                |  | Longview, TX      |      | 152 Units/134,176 Sq. Ft.  |      |                     | .58  |             |      | .56  |      |   | .54  |  | 93  |  | 92 |  | 93 
|Falcon House                |  | Ft. Walton, FL    |      | 82 Units/71,220 Sq. Ft.    |      |                     | .67  |             |      | .65  |      |   | .64  |  | 100 |  | 98 |  | 100
|Falcon Lakes (T)            |  | Arlington, TX     |      | 284 Units/207,960 Sq. Ft.  |      |                     | .96  |             |      | .97  |      |   | *    |  | 94  |  | 11 |  | *  
|Fountain Lake (T)           |  | Texas City, TX    |      | 166 Units/161,220 Sq. Ft.  |      |                     | .62  |             |      | .62  |      |   | .59  |  | 96  |  | 89 |  | 96 
|Fountains of Waterford (T)  |  | Midland, TX       |      | 172 Units/129,200 Sq. Ft.  |      |                     | .53  |             |      | .53  |      |   | .53  |  | 99  |  | 85 |  | 94 
|Foxwood                     |  | Memphis, TN       |      | 220 Units/212,000 Sq. Ft.  |      |                     | .61  |             |      | .61  |      |   | .58  |  | 83  |  | 85 |  | 91 
|Governors Square           |  | Tallahassee, FL   |      | 169 Units/146,550 Sq. Ft.  |      |                     | .73  |             |      | .66  |      |   | .65  |  | 95  |  | 95 |  | 95 
|Harpers Ferry (T)          |  | Lafayette, LA     |      | 122 Units/112,500 Sq. Ft.  |      |                     | .60  |             |      | .59  |      |   | .58  |  | 90  |  | 83 |  | 91 
|Heather Creek (T)           |  | Mesquite, TX      |      | 200 Units/170,212 Sq. Ft.  |      |                     | **   |             |      | **   |      |   | **   |  | **  |  | ** |  | ** 
|Hunters Glen (T)            |  | Midland, TX       |      | 212 Units/174,180 Sq. Ft.  |      |                     | .39  |             |      | .38  |      |   | .38  |  | 94  |  | 81 |  | 91 
|In the Pines (T)            |  | Gainesville, FL   |      | 242 Units/294,860 Sq. Ft.  |      |                     | .54  |             |      | .54  |      |   | .54  |  | 96  |  | 93 |  | 96 
|Island Bay (T)              |  | Galveston, TX     |      | 458 Units/374,784 Sq. Ft.  |      |                     | .83  |             |      | .81  |      |   | .81  |  | 91  |  | 90 |  | 87 
|Kingsland Ranch (T)         |  | Houston, TX       |      | 398 Units/350,574 Sq. Ft.  |      |                     | **   |             |      | **   |      |   | **   |  | **  |  | ** |  | ** 
|La Mirada                   |  | Jacksonville, FL  |      | 320 Units/341,400 Sq. Ft.  |      |                     | .56  |             |      | .56  |      |   | .56  |  | 90  |  | 93 |  | 87 
|Limestone Canyon (T)        |  | Austin, TX        |      | 260 Units/216,000 Sq. Ft.  |      |                     | 1.06 |             |      | 1.06 |      |   | 1.06 |  | 91  |  | 88 |  | 91 
|Limestone Ranch (T)         |  | Lewisville, TX    |      | 252 Units/219,600 Sq. Ft.  |      |                     | .94  |             |      | .94  |      |   | *    |  | 91  |  | 91 |  | *  
|Longwood                    |  | Long Beach, MS    |      | 200 Units/187,048 Sq. Ft.  |      |                     | .58  |             |      | *    |      |   | *    |  | 90  |  | *  |  | *  
|Marina Landing (T)          |  | Galveston, TX     |      | 256 Units/205,504 Sq. Ft.  |      |                     | .83  |             |      | .82  |      |   | .87  |  | 95  |  | 96 |  | 90 
|Mediterranean Villas        |  | San Antonio, TX   |      | 140 Units/158,960 Sq. Ft.  |      |                     | .56  |             |      | .55  |      |   | .55  |  | 92  |  | 84 |  | 89 
|Mountain Plaza (T)          |  | El Paso, TX       |      | 188 Units/220,710 Sq. Ft.  |      |                     | .52  |             |      | .51  |      |   | .49  |  | 94  |  | 97 |  | 95 
|Oak Park IV (T)             |  | Clute, TX         |      | 108 Units/78,708 Sq. Ft.   |      |                     | .56  |             |      | .56  |      |   | .54  |  | 91  |  | 95 |  | 94 
|Oak Tree                    |  | Grandview, MO     |      | 189 Units/160,591 Sq. Ft.  |      |                     | .66  |             |      | .65  |      |   | .65  |  | 93  |  | 89 |  | 91 
|Paramount Terrace (T)       |  | Amarillo, TX      |      | 181 Units/123,840 Sq. Ft.  |      |                     | .60  |             |      | .59  |      |   | .57  |  | 93  |  | 91 |  | 94 
|Park Avenue                 |  | Tallahassee, FL   |      | 121 Units/78,979 Sq. Ft.   |      |                     | .91  |             |      | .89  |      |   | .87  |  | 99  |  | 98 |  | 94 
|Plantation (T)              |  | Tulsa, OK         |      | 138 Units/103,500 Sq. Ft.  |      |                     | .61  |             |      | .61  |      |   | .59  |  | 92  |  | 90 |  | 93 
|Quail Oaks (T)              |  | Balch Springs, TX |      | 131 Units/72,848 Sq. Ft.   |      |                     | .83  |             |      | .83  |      |   | .81  |  | 95  |  | 85 |  | 93 
|Quail Pointe                |  | Huntsville, AL    |      | 184 Units/202,602 Sq. Ft.  |      |                     | .46  |             |      | .47  |      |   | .47  |  | 91  |  | 90 |  | 89 
|River Oaks (T)              |  | Wylie, TX         |      | 180 Units/164,604 Sq. Ft.  |      |                     | .86  |             |      | *    |      |   | *    |  | 98  |  | *  |  | *  
|Sandstone (T)               |  | Mesa, AZ          |      | 238 Units/146,320 Sq. Ft.  |      |                     | .90  |             |      | .90  |      |   | .90  |  | 94  |  | 83 |  | 88 
|Sendero Ridge (T)           |  | San Antonio, TX   |      | 384 Units/340,880 Sq. Ft.  |      |                     | 1.01 |             |      | *    |      |   | *    |  | 80  |  | *  |  | *  
|Somerset (T)                |  | Texas City, TX    |      | 200 Units/163,368 Sq. Ft.  |      |                     | .68  |             |      | .68  |      |   | .66  |  | 88  |  | 87 |  | 91 
|Southgate (T)               |  | Odessa, TX        |      | 180 Units/151,656 Sq. Ft.  |      |                     | .43  |             |      | .43  |      |   | .42  |  | 93  |  | 90 |  | 95 
|Spy Glass (T)               |  | Mansfield, TX     |      | 256 Units/ 239,264 Sq. Ft. |      |                     | .95  |             |      | *    |      |   | *    |  | 97  |  | *  |  | *  
|Sunchase (T)                |  | Odessa, TX        |      | 300 Units/223,048 Sq. Ft.  |      |                     | .49  |             |      | .49  |      |   | .44  |  | 96  |  | 91 |  | 96 
|Sun Hollow                  |  | El Paso, TX       |      | 216 Units/156,000 Sq. Ft.  |      |                     | .74  |             |      | .72  |      |   | .71  |  | 92  |  | 91 |  | 84 
|Sunset                      |  | Odessa, TX        |      | 240 Units/160,400 Sq. Ft.  |      |                     | .50  |             |      | .47  |      |   | .45  |  | 100 |  | 89 |  | 88 
|Terrace Hills (T)           |  | El Paso, TX       |      | 310 Units/233,192 Sq. Ft.  |      |                     | .70  |             |      | .69  |      |   | .67  |  | 96  |  | 93 |  | 91 
|Tiberon Trails              |  | Merrillville, IN  |      | 376 Units/317,821 Sq. Ft.  |      |                     | .76  |             |      | .76  |      |   | *    |  | 89  |  | 94 |  | *  
|Timbers (T)                 |  | Tyler, TX         |      | 180 Units/101,666 Sq. Ft.  |      |                     | .60  |             |      | .59  |      |   | .57  |  | 92  |  | 93 |  | 92 
|Tivoli (T)                  |  | Dallas, TX        |      | 190 Units/168,862 Sq. Ft.  |      |                     | .95  |             |      | .96  |      |   | *    |  | 92  |  | 27 |  | *  
|Verandas at City View (T)   |  | Fort Worth, TX    |      | 314 Units/295,170 Sq. Ft.  |      |                     | .60  |             |      | *    |      |   | *    |  | 92  |  | *  |  | *  
|Villa Del Mar               |  | Wichita, KS       |      | 162 Units/128,004 Sq. Ft.  |      |                     | .62  |             |      | .62  |      |   | .62  |  | 89  |  | 86 |  | 91 
|Villager                    |  | Ft. Walton, FL    |      | 33 Units/22,840 Sq. Ft.    |      |                     | .79  |             |      | .77  |      |   | .76  |  | 100 |  | 88 |  | 94 
|Vistas at Pinnacle Park (T) |  | Dallas, TX        |      | 332 Units/276,928 Sq. Ft.  |      |                     | **   |             |      | **   |      |   | **   |  | **  |  | ** |  | ** 
|Waters Edge III             |  | Gulfport, MS      |      | 238 Units/212,216 Sq. Ft.  |      |                     | .64  |             |      | .63  |      |   | .63  |  | 91  |  | 90 |  | 90 
|Waters Edge IV (T)          |  | Gulfport, MS      |      | 80 Units/76,400 Sq. Ft.    |      |                     | .76  |             |      | .76  |      |   | *    |  | 94  |  | 74 |  | *  
|Westwood                    |  | Mary Ester, FL    |      | 120 Units/93,000 Sq. Ft.   |      |                     | .74  |             |      | .72  |      |   | .71  |  | 100 |  | 98 |  | 88 
|Westwood (T)                |  | Odessa, TX        |      | 79 Units/49,001 Sq. Ft.    |      |                     | .44  |             |      | .49  |      |   | .48  |  | 100 |  | 80 |  | 92 
|Whispering Pines            |  | Topeka, KS        |      | 320 Units/299,264 Sq. Ft.  |      |                     | .55  |             |      | .54  |      |   | .54  |  | 91  |  | 91 |  | 94 
|Willow Creek (T)            |  | El Paso, TX       |      | 112 Units/103,140 Sq. Ft.  |      |                     | .57  |             |      | .55  |      |   | .54  |  | 96  |  | 94 |  | 94 
|Willo-Wick Gardens (T)      |  | Pensacola, FL     |      | 152 Units/153,360 Sq. Ft.  |      |                     | .55  |             |      | .54  |      |   | .54  |  | 91  |  | 84 |  | 91 
|Windsong (T)                |  | Ft. Worth, TX     |      | 188 Units/169,464 Sq. Ft.  |      |                     | .89  |             |      | *    |      |   | *    |  | 91  |  | *  |  | *  



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|                              |  |                      |      |                           |      |                     |       |             |      |       |      |   |       |  |     |  |     |  |    
|----------------------------- |  | -------------------- | ---- | ------------------------- | ---- | ------------------- | ----- | ----------- | ---- | ----- | ---- | - | ----- |  | --- |  | --- |  | ---
|Property                      |  | Location             |      | Units/Square Footage      |      | Rent PerSquare Foot |       | Occupancy %
|                              |  |                      | 2003 |                           | 2002 |                     | 2001  |             | 2003 |       | 2002 |   | 2001 
|Windsor Tower                 |  | Ocala, FL            |      | 64 Units/66,000 Sq. Ft.   |      | $                   | .56   |             | $    | .55   |      | $ | .54   |  | 98  |  | 97  |  | 94 
|Woodhollow                    |  | San Antonio, TX      |      | 546 Units/348,692 Sq. Ft. |      |                     | .71   |             |      | .68   |      |   | .67   |  | 79  |  | 84  |  | 96 
|Woodlake                      |  | Carrollton, TX       |      | 256 Units/210,208 Sq. Ft. |      |                     | .87   |             |      | .85   |      |   | .84   |  | 92  |  | 89  |  | 94 
|Woodview (T)                  |  | Odessa, TX           |      | 232 Units/165,840 Sq. Ft. |      |                     | .52   |             |      | .51   |      |   | .48   |  | 94  |  | 85  |  | 95 
|                              |  |                      |      |                           |      |                     |       |            
|Office Buildings              |  |                      |      |                           |      |                     |       |             |      |       |      |   |       |  |     |  |     |  |    
|1010 Common (T)               |  | New Orleans, LA      |      | 494,579 Sq. Ft.           |      |                     | 13.63 |             |      | 12.77 |      |   | 11.28 |  | 82  |  | 74  |  | 36 
|225 Baronne (T)               |  | New Orleans, LA      |      | 416,834 Sq. Ft.           |      |                     | 10.63 |             |      | 9.89  |      |   | 9.77  |  | 65  |  | 76  |  | 75 
|4135 Belt Line Road (T)       |  | Addison, TX          |      | 90,000 Sq. Ft.            |      |                     | 10.01 |             |      | 9.00  |      |   | 10.33 |  | 14  |  |    |  |   
|9033 Wilshire (T)             |  | Los Angeles, CA      |      | 44,253 Sq. Ft.            |      |                     | 30.16 |             |      | 29.24 |      |   | 27.67 |  | 70  |  | 63  |  | 88 
|Ambulatory Surgery Center (T) |  | Sterling, VA         |      | 33,832 Sq. Ft.            |      |                     | 23.32 |             |      | 23.12 |      |   | 20.37 |  | 100 |  | 100 |  | 100
|Amoco (T)                     |  | New Orleans, LA      |      | 378,244 Sq. Ft.           |      |                     | 13.37 |             |      | 12.73 |      |   | 12.07 |  | 78  |  | 79  |  | 79 
|Atrium (T)                    |  | Palm Beach, FL       |      | 74,603 Sq. Ft.            |      |                     | 10.68 |             |      | 12.73 |      |   | 12.69 |  | 63  |  | 64  |  | 82 
|Bay Plaza (T)                 |  | Tampa, FL            |      | 75,780 Sq. Ft.            |      |                     | 14.98 |             |      | 15.85 |      |   | 15.96 |  | 80  |  | 86  |  | 99 
|Bay Plaza II (T)              |  | Tampa, FL            |      | 78,882 Sq. Ft.            |      |                     | 13.23 |             |      | 13.01 |      |   | 13.03 |  | 78  |  | 72  |  | 91 
|Brandeis (T)                  |  | Omaha, NE            |      | 319,234 Sq. Ft.           |      |                     | 14.16 |             |      | 12.98 |      |   | 10.88 |  | 73  |  | 76  |  | 89 
|Centura (T)                   |  | Farmers Branch, TX   |      | 410,901 Sq. Ft.           |      |                     | 23.79 |             |      | 24.02 |      |   | *     |  | 61  |  | 52  |  | *  
|Cooley Building               |  | Farmers Branch, TX   |      | 27,000 Sq. Ft.            |      |                     | 12.63 |             |      | 11.49 |      |   | 11.69 |  | 100 |  | 100 |  | 69 
|Corporate Pointe (T)          |  | Chantilly, VA        |      | 65,918 Sq. Ft.            |      |                     | 20.85 |             |      | 20.24 |      |   | 19.72 |  | 100 |  | 100 |  | 100
|Countryside Retail Center (T) |  | Sterling, VA         |      | 133,422 Sq. Ft.           |      |                     | 15.69 |             |      | 16.12 |      |   | 16.02 |  | 94  |  | 97  |  | 89 
|Durham Center (T)             |  | Durham, NC           |      | 207,171 Sq. Ft.           |      |                     | 17.73 |             |      | 17.79 |      |   | 17.65 |  | 83  |  | 98  |  | 94 
|Eton Square (T)               |  | Tulsa, OK            |      | 222,654 Sq. Ft.           |      |                     | 11.60 |             |      | 11.35 |      |   | 11.27 |  | 38  |  | 42  |  | 63 
|Executive Court               |  | Memphis, TN          |      | 41,840 Sq. Ft.            |      |                     | 8.00  |             |      | 11.24 |      |   | 11.06 |  |    |  |    |  | 73 
|Forum (T)                     |  | Richmond, VA         |      | 79,791 Sq. Ft.            |      |                     | 14.23 |             |      | 15.32 |      |   | 15.99 |  | 61  |  | 60  |  | 70 
|Four Hickory Centre           |  | Farmers Branch, TX   |      | 226,911 Sq. Ft.           |      |                     | 18.70 |             |      | *     |      |   | *     |  | 4   |  | *   |  | *  
|Harmon (T)                    |  | Sterling, VA         |      | 72,062 Sq. Ft.            |      |                     | 17.70 |             |      | 19.79 |      |   | 19.72 |  | 61  |  | 61  |  | 70 
|Institute Place (T)           |  | Chicago, IL          |      | 144,915 Sq. Ft.           |      |                     | 17.21 |             |      | 17.13 |      |   | 16.23 |  | 83  |  | 88  |  | 95 
|Lexington Center (T)          |  | Colorado Springs, CO |      | 74,603 Sq. Ft.            |      |                     | 12.33 |             |      | 13.41 |      |   | 12.88 |  | 70  |  | 84  |  | 83 
|Mimado (T)                    |  | Sterling, VA         |      | 35,127 Sq. Ft.            |      |                     | 19.98 |             |      | 19.77 |      |   | 19.97 |  | 64  |  | 79  |  | 73 
|One Hickory Centre            |  | Farmers Branch, TX   |      | 102,615 Sq. Ft.           |      |                     | 20.34 |             |      | 20.42 |      |   | 18.95 |  | 74  |  | 74  |  | 99 
|One Steeplechase (T)          |  | Sterling, VA         |      | 103,376 Sq. Ft.           |      |                     | 18.35 |             |      | 17.76 |      |   | 17.19 |  | 100 |  | 100 |  | 100
|Parkway North (T)             |  | Dallas, TX           |      | 71,041 Sq. Ft.            |      |                     | 18.08 |             |      | 17.41 |      |   | 17.00 |  | 64  |  | 72  |  | 73 
|Two Hickory Centre            |  | Farmers Branch, TX   |      | 96,127 Sq. Ft.            |      |                     | 21.47 |             |      | 21.23 |      |   | 20.89 |  | 100 |  | 93  |  | 75 
|University Square             |  | Anchorage, AK        |      | 22,260 Sq. Ft.            |      |                     | 14.64 |             |      | 15.54 |      |   | 14.73 |  | 100 |  | 100 |  | 100
|Venture Center (T)            |  | Atlanta, GA          |      | 38,272 Sq. Ft.            |      |                     | 17.87 |             |      | 18.53 |      |   | 17.85 |  | 28  |  | 71  |  | 100
|Westgrove Air Plaza (T)       |  | Addison, TX          |      | 78,326 Sq. Ft.            |      |                     | 13.26 |             |      | 13.96 |      |   | 13.54 |  | 94  |  | 66  |  | 81 
|                              |  |                      |      |                           |      |                     |       |            
|Industrial Warehouses         |  |                      |      |                           |      |                     |       |             |      |       |      |   |       |  |     |  |     |  |    
|5360 Tulane (T)               |  | Atlanta, GA          |      | 30,000 Sq. Ft.            |      |                     | 2.80  |             |      | 2.75  |      |   | 2.75  |  | 65  |  | 100 |  | 100
|5700 Tulane (T)               |  | Atlanta, GA          |      | 67,850 Sq. Ft.            |      |                     | 2.14  |             |      | 2.45  |      |   | 2.93  |  | 65  |  | 12  |  | 7  
|Addison Hanger (T)            |  | Addison, TX          |      | 23,650 Sq. Ft.            |      |                     | 7.94  |             |      | 8.12  |      |   | 10.07 |  | 100 |  | 98  |  | 86 
|Addison Hanger II (T)         |  | Addison, TX          |      | 29,000 Sq. Ft.            |      |                     | 9.64  |             |      | 9.33  |      |   | 7.21  |  | 92  |  | 97  |  | 12 
|Encon (T)                     |  | Fort Worth, TX       |      | 256,410 Sq. Ft.           |      |                     | 3.17  |             |      | 3.17  |      |   | 3.08  |  | 100 |  | 100 |  | 100
|Kelly (T)                     |  | Dallas, TX           |      | 259,464 Sq. Ft.           |      |                     | 3.63  |             |      | 3.67  |      |   | 3.61  |  | 8   |  | 51  |  | 94 
|Ogden Industrial (T)          |  | Ogden, UT            |      | 107,112 Sq. Ft.           |      |                     | 3.07  |             |      | 2.95  |      |   | 2.94  |  | 95  |  | 100 |  | 100
|Space Center (T)              |  | San Antonio, TX      |      | 101,500 Sq. Ft.           |      |                     | 3.43  |             |      | 3.46  |      |   | 3.18  |  | 84  |  | 84  |  | 89 
|Texstar (T)                   |  | Arlington, TX        |      | 97,846 Sq. Ft.            |      |                     | 2.28  |             |      | 2.19  |      |   | 2.11  |  | 100 |  | 100 |  | 100
|                              |  |                      |      |                           |      |                     |       |            
|Shopping Centers              |  |                      |      |                           |      |                     |       |             |      |       |      |   |       |  |     |  |     |  |    
|Bridgeview Plaza (T)          |  | LaCrosse, WI         |      | 116,008 Sq. Ft.           |      |                     | 7.25  |             |      | *     |      |   | *     |  | 90  |  | *   |  | *  
|Collection                    |  | Denver, CO           |      | 267,812 Sq. Ft.           |      |                     | 11.32 |             |      | 11.13 |      |   | 10.43 |  | 83  |  | 85  |  | 88 
|Cross County Mall             |  | Mattoon, IL          |      | 304,575 Sq. Ft.           |      |                     | 5.44  |             |      | 5.34  |      |   | 5.24  |  | 88  |  | 87  |  | 93 
|Cullman                       |  | Cullman, AL          |      | 92,466 Sq. Ft.            |      |                     | 3.53  |             |      | 3.39  |      |   | 3.38  |  | 95  |  | 91  |  | 98 
|Dunes Plaza (T)               |  | Michigan City, IN    |      | 223,869 Sq. Ft.           |      |                     | 5.51  |             |      | 5.83  |      |   | 5.81  |  | 61  |  | 69  |  | 62 
|K-Mart (T)                    |  | Cary, NC             |      | 92,033 Sq. Ft.            |      |                     | 3.28  |             |      | 3.28  |      |   | 3.28  |  | 100 |  | 100 |  | 100
|Plaza on Bachman Creek        |  | Dallas, TX           |      | 80,278 Sq. Ft.            |      |                     | 12.86 |             |      | 10.73 |      |   | *     |  | 73  |  | 76  |  | *  
|Promenade (T)                 |  | Highland Ranch, CO   |      | 133,558 Sq. Ft.           |      |                     | 10.94 |             |      | 12.41 |      |   | 13.06 |  | 79  |  | 81  |  | 75 
|Sadler Square (T)             |  | Amelia Island, FL    |      | 70,295 Sq. Ft.            |      |                     | 7.64  |             |      | 7.41  |      |   | 7.21  |  | 94  |  | 92  |  | 93 



13



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##### Table of Contents

|                            |  |            |      |                      |      |                      |       |             |      |       |      |   |       |  |    |  |    |  |   
|--------------------------- |  | ---------- | ---- | -------------------- | ---- | -------------------- | ----- | ----------- | ---- | ----- | ---- | - | ----- |  | -- |  | -- |  | --
|Property                    |  | Location   |      | Units/Square Footage |      | Rent Per Square Foot |       | Occupancy %
|                            |  |            | 2003 |                      | 2002 |                      | 2001  |             | 2003 |       | 2002 |   | 2001 
|                            |  |            |      |                      |      |                      |       |            
|Merchandise Mart            |  |            |      |                      |      |                      |       |             |      |       |      |   |       |  |    |  |    |  |   
|Denver Mart                 |  | Denver, CO |      | 509,508 Sq. Ft       |      | $                    | 11.75 |             | $    | 11.48 |      | $ | 11.20 |  | 92 |  | 92 |  | 92
|                            |  |            |      |                      |      |                      |       |            
|Single Family Residence     |  |            |      |                      |      |                      |       |             |      |       |      |   |       |  |    |  |    |  |   
|Tavel Circle                |  | Dallas, TX |      | 2,271 Sq. Ft.        |      |                      |       |             |      |       |      |   |       |  |    |  |    |  |   
|                            |  |            |      |                      |      |                      |       |            
|Other                       |  |            |      |                      |      |                      |       |             |      |       |      |   |       |  |    |  |    |  |   
|Signature Athletic Club (T) |  | Dallas, TX |      | 56,532 Sq. Ft.       |      |                      |       |             |      |       |      |   |       |  |    |  |    |  |   



|                                |  |                    |      |           |      |                   |        |             |      |                                                    |      |   |        |  |      |  |      |  |      |  |   |       |  |   |       |  |   |      
|------------------------------- |  | ------------------ | ---- | --------- | ---- | ----------------- | ------ | ----------- | ---- | -------------------------------------------------- | ---- | - | ------ |  | ---- |  | ---- |  | ---- |  | - | ----- |  | - | ----- |  | - | -----
|Property                        |  | Location           |      | Rooms     |      | Average Room Rate |        | Occupancy % |      | Total Room RevenuesDivided ByTotal Available Rooms
|                                |  |                    | 2003 |           | 2002 |                   | 2001   |             | 2003 |                                                    | 2002 |   | 2001   |  | 2003 |  | 2002 |  | 2001
|Hotels                          |  |                    |      |           |      |                   |        |             |      |                                                    |      |   |        |  |      |  |      |  |      |  |   |       |  |   |       |  |   |      
|Akademia (T)                    |  | Wroclaw, Poland    |      | 165 Rooms |      | $                 | 47.78  |             | $    | 48.92                                              |      | $ | *      |  | 51   |  | 33   |  | *    |  | $ | 46.86 |  | $ | 15.97 |  | $ | *    
|Best Western                    |  | Virginia Beach, VA |      | 110 Rooms |      |                   | 108.92 |             |      | 105.78                                             |      |   | 108.20 |  | 65   |  | 69   |  | 53   |  |   | 70.56 |  |   | 72.79 |  |   | 57.83
|Château Inn                     |  | Fresno, CA         |      | 78 Rooms  |      |                   | 63.42  |             |      | 61.89                                              |      |   | 57.29  |  | 58   |  | 53   |  | 59   |  |   | 36.52 |  |   | 32.56 |  |   | 34.07
|City Suites (T)                 |  | Chicago, IL        |      | 45 Rooms  |      |                   | 120.16 |             |      | 131.46                                             |      |   | 131.16 |  | 58   |  | 56   |  | 61   |  |   | 76.78 |  |   | 73.38 |  |   | 81.13
|Majestic Inn (T)                |  | San Francisco, CA  |      | 57 Rooms  |      |                   | 107.67 |             |      | 141.62                                             |      |   | 174.85 |  | 52   |  | 37   |  | 41   |  |   | 66.68 |  |   | 52.25 |  |   | 79.10
|Piccadilly Airport              |  | Fresno, CA         |      | 185 Rooms |      |                   | 79.25  |             |      | 75.18                                              |      |   | 70.87  |  | 63   |  | 61   |  | 59   |  |   | 50.04 |  |   | 45.83 |  |   | 42.04
|Piccadilly Shaw                 |  | Fresno, CA         |      | 194 Rooms |      |                   | 81.19  |             |      | 78.24                                              |      |   | 73.12  |  | 69   |  | 69   |  | 70   |  |   | 55.70 |  |   | 53.87 |  |   | 50.84
|Piccadilly University           |  | Fresno, CA         |      | 190 Rooms |      |                   | 68.21  |             |      | 69.58                                              |      |   | 65.18  |  | 63   |  | 59   |  | 62   |  |   | 43.03 |  |   | 40.93 |  |   | 40.38
|Quality Inn                     |  | Denver, CO         |      | 161 Rooms |      |                   | 56.10  |             |      | 53.62                                              |      |   | 53.75  |  | 55   |  | 60   |  | 67   |  |   | 30.80 |  |   | 32.13 |  |   | 35.75
|The Majestic (T)                |  | Chicago, IL        |      | 55 Rooms  |      |                   | 124.47 |             |      | 133.79                                             |      |   | 129.63 |  | 48   |  | 52   |  | 55   |  |   | 57.86 |  |   | 64.31 |  |   | 71.52
|Williamsburg  Hospitality House |  | Williamsburg, VA   |      | 296 Rooms |      |                   | 93.97  |             |      | 99.79                                              |      |   | 99.04  |  | 53   |  | 49   |  | 52   |  |   | 49.98 |  |   | 48.86 |  |   | 51.88
|Willows (T)                     |  | Chicago, IL        |      | 52 Rooms  |      |                   | 121.24 |             |      | 129.76                                             |      |   | 130.37 |  | 53   |  | 49   |  | 53   |  |   | 69.54 |  |   | 63.35 |  |   | 69.65

---

|* |  | Property was purchased or constructed in 2002 or 2003.
|- |  | ------------------------------------------------------

|** |  | Property was under construction in 2003.
|-- |  | ----------------------------------------



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



In 2003, ARI purchased the following property:



|                  |  |                    |  |             |  |               |        |              |   |              |  |   |              |     |  |              |     |  |      
|----------------- |  | ------------------ |  | ----------- |  | ------------- | ------ | ------------ | - | ------------ |  | - | ------------ | --- |  | ------------ | --- |  | -----
|Property          |  | Location           |  | Units/Acres |  | PurchasePrice |        | Net CashPaid |   | DebtIncurred |  |   | InterestRate |     |  | MaturityDate
|Apartments        |  |                    |  |             |  |               |        |              |   |              |  |   |              |     |  |              |     |  |      
|Breakwater Bay(1) |  | Beaumont, TX       |  | 176 Units   |  | $             | 1,979  |              | $ | 383          |  | $ | 1,554        |     |  | 5.50         | %   |  | 08/44
|Capitol Hill(1)   |  | Little Rock, AR    |  | 156 Units   |  |               | 1,904  |              |   | 615          |  |   | 1,289        |     |  | 5.50         |     |  | 10/44
|Longwood          |  | Long Beach, MS     |  | 200 Units   |  |               | 6,349  |              |   | 334          |  |   | 6,349        | (2) |  | 7.60         |     |  | 04/12
|                  |  |                    |  |             |  |               |       
|Land              |  |                    |  |             |  |               |        |              |   |              |  |   |              |     |  |              |     |  |      
|Pulaski           |  | Pulaski County, AR |  | 21.9 Acres  |  |               | 2,000  |              |   | 695          |  |   | 1,400        |     |  | 6.50         |     |  | 05/05
|Sheffield Village |  | Grand Prairie, TX  |  | 13.9 Acres  |  |               | 1,500  |              |   | 632          |  |   | 975          |     |  | 5.50         | (3) |  | 09/04
|Travelers(4)      |  | Farmers Branch, TX |  | 202.0 Acres |  |               | 25,000 |              |   | 1,947        |  |   | 22,802       |     |  | 5.49         |     |  | 10/06

---

|(1) |  | Land purchased for apartment construction.
|--- |  | ------------------------------------------

|(2) |  | Assumed debt of seller.
|--- |  | -----------------------

|(3) |  | Variable interest rate
|--- |  | ----------------------

|(4) |  | Purchased from IORI.
|--- |  | --------------------



In February 1990, ARI sold the Bridgeview Plaza Shopping Center, located in LaCrosse, Wisconsin, providing purchase money financing of $5.0 million in the
form of a wrap mortgage. In 1996, the first lienholder called a default under the ARI wrap note, and directed future payments be made directly to them. Because of that action, ARI began legal proceedings against the first lienholder. In December
1999, ARI sold the note to BCM at its carrying value of $489,000, retaining the right to receive any amounts collected by BCM in excess of the



14



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##### Table of Contents

amount paid, plus accrued interest. In 2002, ARI prevailed in its litigation and ARIs lien on the property was restored. The borrower continued in
default, and ARI foreclosed on the property in March 2003. The property was subsequently sold to TCI. See NOTE 8. RELATED PARTY TRANSACTIONS.



In 2003, ARI sold the following properties:



|                                   |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|---------------------------------- |  | ------------------ |  | ------------------------ |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | - | ------------------ | --- |  | - | ------ | ----
|Property                           |  | Location           |  | Units/Sq.Ft./Acres/Rooms |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  |   | Gain/(Loss)on Sale |    
|Apartments                         |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Bay Anchor                         |  | Panama City, FL    |  | 12 Units                 |  | $          | 369    |                         | $ |      |                |  | $ | 291                |     |  | $ | 174    |     
|Confederate Point                  |  | Jacksonville, FL   |  | 206 Units                |  |            | 10,700 |                         |   | 2,780 |                |  |   | 7,241              | (3) |  |   | 8,373  |     
|Georgetown                         |  | Panama City, FL    |  | 44 Units                 |  |            | 1,175  |                         |   | 323   |                |  |   | 789                | (3) |  |   | 72     |     
|Greenbriar                         |  | Tallahassee, FL    |  | 50 Units                 |  |            | 1,700  |                         |   | 594   |                |  |   | 976                | (3) |  |   | 1,025  |     
|Lake Château                       |  | Thomasville, GA    |  | 98 Units                 |  |            | 1,600  |                         |   | 460   |                |  |   | 1,033              |     |  |   | 147    |     
|Landing & Marina                   |  | Pensacola, FL      |  | 52 Units                 |  |            | 1,825  |                         |   | 576   |                |  |   | 1,162              | (3) |  |   | 492    |     
|Lincoln Court                      |  | Dallas, TX         |  | 55 Units                 |  |            | 3,038  |                         |   | 1,834 |                |  |   | 1,208              | (3) |  |   | 1,895  |     
|Marquis at Vista Ridge             |  | Lewisville, TX     |  | 288 Units                |  |            | 17,700 |                         |   | 2,175 |                |  |   | 15,525             | (3) |  |   | 125    | (2) 
|Northside Villas                   |  | Tallahassee, FL    |  | 81 Units                 |  |            | 5,575  |                         |   | 1,806 |                |  |   | 2,784              |     |  |   | 915    |     
|Pinecrest                          |  | North Augusta, SC  |  | 120 Units                |  |            | 2,707  |                         |   | 1,136 |                |  |   | 1,429              |     |  |   | (304   | )   
|Quail Creek                        |  | Lawrence, KS       |  | 96 Units                 |  |            | 4,700  |                         |   | 1,188 |                |  |   | 3,260              |     |  |   | 1,683  |     
|Regency                            |  | Lincoln, NE        |  | 106 Units                |  |            | 4,880  |                         |   | 838   |                |  |   | 3,179              |     |  |   | 2,815  |     
|Rolling Hills                      |  | Tallahassee, FL    |  | 134 Units                |  |            | 5,061  |                         |   | 1,361 |                |  |   | 2,785              |     |  |   | 1,182  |     
|Seville                            |  | Tallahassee, FL    |  | 62 Units                 |  |            | 2,795  |                         |   |      |                |  |   | 2,360              |     |  |   | 697    |     
|Stone Oak                          |  | San Antonio, TX    |  | 252 Units                |  |            | 6,930  |                         |   | 3,670 |                |  |   | 2,699              |     |  |   | 4,490  |     
|Summerfield                        |  | Orlando, FL        |  | 224 Units                |  |            | 9,415  |                         |   | 4,845 |                |  |   | 4,476              |     |  |   | 4,268  |     
|Treehouse                          |  | Irving, TX         |  | 160 Units                |  |            | 7,500  |                         |   |      |                |  |   | 5,083              | (3) |  |   | 4,762  | (8) 
|Willow Wick                        |  | North Augusta, SC  |  | 104 Units                |  |            | 2,707  |                         |   | 255   |                |  |   | 1,943              |     |  |   | 1,140  |     
|                                   |  |                    |  |                          |  |           
|Shopping Centers                   |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Bridgeview Plaza                   |  | LaCrosse, WI       |  | 116,008 Sq.Ft.           |  |            | 8,700  |                         |   |      |                |  |   |                   |     |  |   | 8,700  | (1) 
|Cullman                            |  | Cullman, AL        |  | 92,466 Sq.Ft.            |  |            | 2,000  |                         |   |      |                |  |   | 2,650              | (5) |  |   | 1,118  | (1) 
|Oak Tree Village                   |  | Lubbock, TX        |  | 45,623 Sq.Ft.            |  |            | 3,366  |                         |   | 1,527 |                |  |   | 1,328              |     |  |   | 820    |     
|Parkway Centre                     |  | Dallas, TX         |  | 28,374 Sq.Ft.            |  |            | 4,000  |                         |   |      |                |  |   | 1,640              | (3) |  |   | 2,470  | (8) 
|Sheboygan                          |  | Sheboygan, WI      |  | 74,532 Sq.Ft.            |  |            | 1,225  |                         |   | 669   |                |  |   | 569                |     |  |   | 181    |     
|Westwood                           |  | Tallahassee, FL    |  | 149,855 Sq.Ft.           |  |            | 8,950  |                         |   | 5,045 |                |  |   | 1,880              |     |  |   | 5,787  |     
|                                   |  |                    |  |                          |  |           
|Land                               |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Eagle Crest                        |  | Dallas, TX         |  | 20.0 Acres               |  |            | 4,000  |                         |   |      |                |  |   | 4,000              | (3) |  |   | 1,918  | (8) 
|Jeffries Ranch                     |  | Oceanside, CA      |  | 82.4 Acres               |  |            | 2,900  |                         |   | 151   |                |  |   |                   |     |  |   | 1,474  |     
|Katrina                            |  | Palm Desert, CA    |  | 89.3 Acres               |  |            | 8,550  |                         |   | (410  | )              |  |   | 2,800              |     |  |   | (40    | )   
|Keller                             |  | Tarrant County, TX |  | 30.0 Acres               |  |            | 2,800  |                         |   | 2,676 |                |  |   |                   |     |  |   | 2,063  |     
|Mason Goodrich                     |  | Houston, TX        |  | 8.0 Acres                |  |            | 210    |                         |   |      | (5)            |  |   |                   |     |  |   | (149   | )   
|Mason Goodrich                     |  | Houston, TX        |  | 1.6 Acres                |  |            | 209    |                         |   | 12    |                |  |   | 169                |     |  |   | 113    |     
|Mason Goodrich                     |  | Houston, TX        |  | 7.7 Acres                |  |            | 900    |                         |   | 36    |                |  |   | 764                |     |  |   | 466    |     
|Mason Goodrich                     |  | Houston, TX        |  | 2.8 Acres                |  |            | 250    |                         |   | 14    |                |  |   | 197                |     |  |   | 97     |     
|Mason Goodrich                     |  | Houston, TX        |  | 6.6 Acres                |  |            | 1,350  |                         |   | 84    |                |  |   | 1,124              |     |  |   | 964    |     
|McKinney Corners II                |  | Collin County, TX  |  | 2.1 Acres                |  |            | 300    |                         |   | (60   | )              |  |   | 285                |     |  |   | 208    |     
|Nashville                          |  | Nashville, TN      |  | 1.1 Acres                |  |            | 201    |                         |   | 9     |                |  |   | 170                |     |  |   | 135    |     
|Nashville                          |  | Nashville, TN      |  | 8.8 Acres                |  |            | 235    |                         |   | (11   | )              |  |   | 217                |     |  |   | 114    |     
|Palm Desert                        |  | Palm Desert, CA    |  | 25.1 Acres               |  |            | 2,600  |                         |   | (88   | )(9)           |  |   |                   |     |  |   | 797    |     
|Pioneer Crossing                   |  | Austin, TX         |  | 196.6 Acres              |  |            | 3,911  |                         |   | 2,839 |                |  |   |                   |     |  |   | (285   | )   
|Pioneer Crossing                   |  | Austin, TX         |  | 113.7 Acres              |  |            | 1,839  |                         |   | 718   |                |  |   |                   |     |  |   | (94    | )   
|Pioneer Crossing                   |  | Austin, TX         |  | 33.4 Acres               |  |            | 2,386  |                         |   | (78   | )              |  |   |                   |     |  |   | 1,776  | (11)
|Pioneer Crossing                   |  | Austin, TX         |  | 367.4 Acres              |  |            | 22,500 |                         |   | 4,948 |                |  |   |                   |     |  |   | 13,916 |     
|Scout                              |  | Tarrant County, TX |  | 51.6 Acres               |  |            | 2,788  |                         |   | 485   |                |  |   |                   |     |  |   | 2,321  |     
|Sendero Ranch                      |  | Ft. Worth, TX      |  | 14.0 Acres               |  |            | 300    |                         |   | 292   |                |  |   |                   |     |  |   | (770   | )   
|Solco-Valley Ranch                 |  | Farmers Branch, TX |  | 6.1 Acres                |  |            | 1,999  |                         |   | (90   | )(7)           |  |   |                   |     |  |   | 529    |     
|State Highway 121/Watters Road(10) |  | Collin County, TX  |  | 37.1 Acres               |  |            | 2,188  |                         |   | 1,197 |                |  |   | 912                |     |  |   | 1,410  |     
|Vineyards II                       |  | Tarrant County, TX |  | 4.8 Acres                |  |            | 2,617  |                         |   | 225   |                |  |   | 1,570              |     |  |   | 14     |     
|Vista Ridge                        |  | Lewisville, TX     |  | 14.5 Acres               |  |            | 2,250  |                         |   | 713   |                |  |   | 1,343              |     |  |   | 622    |     



15



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##### Table of Contents

|                       |  |                   |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|---------------------- |  | ----------------- |  | ------------------------ |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | - | ------------------ | --- |  | - | ----- | ----
|Property               |  | Location          |  | Units/Sq.Ft./Acres/Rooms |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  |   | Gain/(Loss)on Sale |    
|                       |  |                   |  |                          |  |           
|Hotels                 |  |                   |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|Clarion KC Airport     |  | Kansas City, MO   |  | 196 Rooms                |  | $          | 2,070  |                         | $ |      |                |  | $ | 4,888              | (6) |  | $ |      |     
|Grand Hotel Sofia      |  | Sofia, Bulgaria   |  | 136 Rooms                |  |            | 24,750 |                         |   | 6,258 |                |  |   | 4,209              | (3) |  |   | (31   | )(4)
|                       |  |                   |  |                          |  |           
|Industrial Warehouses  |  |                   |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|Kelly (108th Street)   |  | Dallas, TX        |  | 20,871 Sq.Ft.            |  |            | 675    |                         |   |      |                |  |   | 634                |     |  |   | 357   |     
|Kelly (301 Hilltop)    |  | Dallas, TX        |  | 76,946 Sq.Ft.            |  |            | 1,800  |                         |   |      |                |  |   | 1,712              |     |  |   | 639   |     
|McLeod                 |  | Orlando, FL       |  | 110,914 Sq.Ft.           |  |            | 5,450  |                         |   | 2,980 |                |  |   | 1,902              |     |  |   | 2,805 |     
|Tricon                 |  | Atlanta, GA       |  | 570,877 Sq.Ft.           |  |            | 13,084 |                         |   | 3,364 |                |  |   | 9,395              |     |  |   | 5,579 |     
|                       |  |                   |  |                          |  |           
|Office Buildings       |  |                   |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|56 Expressway          |  | Oklahoma City, OK |  | 54,649 Sq.Ft.            |  |            | 1,702  |                         |   | 103   |                |  |   | 1,478              | (3) |  |   | 1,253 |     
|Bonita Plaza           |  | Bonita, CA        |  | 47,777 Sq.Ft.            |  |            | 8,034  |                         |   | 1,698 |                |  |   | 5,944              |     |  |   | 2,798 |     
|Encino Executive Plaza |  | Encino, CA        |  | 177,211 Sq.Ft.           |  |            | 37,040 |                         |   | 1,947 |                |  |   | 33,145             |     |  |   | (67   | )   
|Remington Tower        |  | Tulsa, OK         |  | 90,009 Sq.Ft.            |  |            | 3,360  |                         |   | (80   | )              |  |   | 3,360              | (3) |  |   | (579  | )   

---

|(1) |  | Sold to TCI to satisfy affiliate debt. Gain deferred until sale to unrelated party.
|--- |  | -----------------------------------------------------------------------------------

|(2) |  | Sold to Housing for Seniors of Lewisville, LLC, a related party. Gain deferred until sale to unrelated party.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(3) |  | Debt assumed by purchaser.
|--- |  | --------------------------

|(4) |  | Includes recognition of $3.1 million of accumulated foreign currency translation gains.
|--- |  | ---------------------------------------------------------------------------------------

|(5) |  | Cash of $210,000 was received by BCM and applied to ARIs affiliate debt.
|--- |  | -------------------------------------------------------------------------

|(6) |  | Sold at foreclosure auction. Impairment of $3.3 million and debt forgiveness of $2.8 million recognized.
|--- |  | --------------------------------------------------------------------------------------------------------

|(7) |  | Cash of $2.0 million was received by BCM and applied to ARIs affiliate debt.
|--- |  | -----------------------------------------------------------------------------

|(8) |  | Sold to IORI to satisfy affiliate debt. Gain deferred until sale to unrelated party.
|--- |  | ------------------------------------------------------------------------------------

|(9) |  | Cash of $2.6 million was received by Prime and applied to ARIs affiliate debt.
|--- |  | -------------------------------------------------------------------------------

|(10) |  | Approximately 20.0 acres of Watters Road land and 17.1 acres of State Highway 121 land were sold together in a single transaction.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Gain deferred until collection of note receivable.
|---- |  | --------------------------------------------------



In 2003, ARI financed/refinanced or obtained second mortgage financing on the following:



|                    |  |                    |  |                     |  |              |       |     |                |   |                        |  |   |              |     |  |              |     |  |       |    
|------------------- |  | ------------------ |  | ------------------- |  | ------------ | ----- | --- | -------------- | - | ---------------------- |  | - | ------------ | --- |  | ------------ | --- |  | ----- | ---
|Property            |  | Location           |  | Units/Acres/Sq. Ft. |  | DebtIncurred |       |     | DebtDischarged |   | NetCashReceived/(Paid) |  |   | InterestRate |     |  | MaturityDate |    
|Land                |  |                    |  |                     |  |              |       |     |                |   |                        |  |   |              |     |  |              |     |  |       |    
|Elm Fork            |  | Denton County, TX  |  | 101.0 Acres         |  | $            | 5,000 |     |                | $ | 1,551                  |  | $ | 2,885        |     |  | 10.75        | %   |  | 03/04 | (5)
|Katrina             |  | Palm Desert, CA    |  | 52.0 Acres          |  |              | 5,100 |     |                |   | 3,000                  |  |   | 1,795        |     |  | 6.25         | (1) |  | 05/05 |    
|Keller              |  | Tarrant County, TX |  | 30.1 Acres          |  |              | 2,016 | (4) |                |   | 450                    |  |   | 1,494        |     |  | 7.50         |     |  | 07/04 |    
|Lacy Longhorn       |  | Farmers Branch, TX |  | 17.1 Acres          |  |              |      | (4) |                |   |                       |  |   |             |     |  |             |     |  |      |    
|Las Colinas         |  | Las Colinas, TX    |  | 13.0 Acres          |  |              |      | (4) |                |   |                       |  |   |             |     |  |             |     |  |      |    
|Las Colinas         |  | Las Colinas, TX    |  | 55.7 Acres          |  |              | 6,885 |     |                |   | 17,338                 |  |   | (11,622      | )   |  | 7.00         | (1) |  | 11/04 |    
|Mason Goodrich      |  | Houston, TX        |  | 84.0 Acres          |  |              | 3,750 |     |                |   | 757                    |  |   | 2,850        |     |  | 6.25         | (1) |  | 06/04 |    
|McKinney Corners II |  | Collin County, TX  |  | 11.0 Acres          |  |              |      | (4) |                |   |                       |  |   |             |     |  |             |     |  |      |    
|Nashville           |  | Nashville,TN       |  | 113.8 Acres         |  |              | 6,059 |     |                |   | 807                    |  |   | 4,725        |     |  | 14.00        |     |  | 03/04 | (5)
|Nashville           |  | Nashville, TN      |  | 113.8 Acres         |  |              | 941   |     |                |   |                       |  |   | 737          |     |  | 14.00        |     |  | 03/04 | (5)
|Rasor               |  | Plano, TX          |  | 23.7 Acres          |  |              | 1,260 |     |                |   |                       |  |   | 1,214        |     |  | 7.00         | (1) |  | 11/04 |    
|Thompson            |  | Farmers Branch, TX |  | 3.3 Acres           |  |              |      | (4) |                |   |                       |  |   |             |     |  |             |     |  |      |    
|Tomlin              |  | Farmers Branch, TX |  | 9.0 Acres           |  |              |      | (4) |                |   |                       |  |   |             |     |  |             |     |  |      |    
|Valwood             |  | Dallas County, TX  |  | 235.0 Acres         |  |              | 8,100 |     |                |   | 5,400                  |  |   | 1,745        |     |  | 7.00         | (1) |  | 11/06 |    
|Vineyards II        |  | Tarrant County, TX |  | 18.6 Acres          |  |              | 3,280 |     |                |   | 3,750                  |  |   | (583         | )   |  | 6.75         | (1) |  | 02/06 |    
|                    |  |                    |  |                     |  |              |      
|Apartments          |  |                    |  |                     |  |              |       |     |                |   |                        |  |   |              |     |  |              |     |  |       |    
|Arlington Place     |  | Pasadena, TX       |  | 230 Units           |  |              | 1,500 |     |                |   |                       |  |   |             | (2) |  | 5.00         |     |  | 05/03 | (3)
|Plantation          |  | Tulsa, OK          |  | 138 Units           |  |              | 2,320 |     |                |   | 1,924                  |  |   | 173          |     |  | 5.60         |     |  | 06/29 |    
|Tree House          |  | Irving, TX         |  | 160 Units           |  |              | 5,100 |     |                |   | 2,518                  |  |   | 2,132        |     |  | 5.00         | (1) |  | 08/13 |    
|Windsor Tower       |  | Ocala, FL          |  | 64 Units            |  |              | 2,000 |     |                |   | 1,989                  |  |   | (104         | )   |  | 4.75         |     |  | 08/08 |    
|                    |  |                    |  |                     |  |              |      
|Shopping Centers    |  |                    |  |                     |  |              |       |     |                |   |                        |  |   |              |     |  |              |     |  |       |    
|Bridgeview          |  | LaCrosse, WI       |  | 116,008 Sq.Ft.      |  |              | 6,500 |     |                |   |                       |  |   | 6,152        |     |  | 6.25         | (1) |  | 04/05 |    
|Cullman             |  | Cullman, AL        |  | 92,433 Sq.Ft.       |  |              | 1,700 |     |                |   | 2,650                  |  |   | 1,048        |     |  | 6.25         | (1) |  | 04/05 |    



16



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##### Table of Contents

|                          |  |                    |  |                     |  |              |        |     |                |   |                        |  |              |       |  |              |      |  |      
|------------------------- |  | ------------------ |  | ------------------- |  | ------------ | ------ | --- | -------------- | - | ---------------------- |  | ------------ | ----- |  | ------------ | ---- |  | -----
|Property                  |  | Location           |  | Units/Acres/Sq. Ft. |  | DebtIncurred |        |     | DebtDischarged |   | NetCashReceived/(Paid) |  | InterestRate |       |  | MaturityDate
|                          |  |                    |  |                     |  |              |       
|Industrial Warehouse      |  |                    |  |                     |  |              |        |     |                |   |                        |  |              |       |  |              |      |  |      
|Ogden Industrial          |  | Ogden, UT          |  | 107,112 Sq.Ft.      |  | $            | 1,800  |     |                | $ |                       |  | $            | 1,722 |  | 6.25         | (1)% |  | 04/05
|                          |  |                    |  |                     |  |              |       
|Office Building           |  |                    |  |                     |  |              |        |     |                |   |                        |  |              |       |  |              |      |  |      
|One Hickory Centre        |  | Farmers Branch, TX |  | 102,615 Sq. Ft.     |  |              | 11,973 | (6) |                |   |                       |  |              |      |  | 5.49         |      |  | 10/06
|1010 Common               |  | New Orleans, LA    |  | 494,579 Sq. Ft.     |  |              | 5,574  |     |                |   | 7,876                  |  |              | 1,320 |  | 5.50         | (1)  |  | 12/06
|225 Baronne               |  | New Orleans, LA    |  | 416,834 Sq. Ft.     |  |              | 6,286  |     |                |   | 7,108                  |  |              |      |  | 5.50         | (1)  |  | 12/06
|Ambulatory Surgery Center |  | Sterling, VA       |  | 33,832 Sq. Ft.      |  |              | 3,425  |     |                |   | 6,269                  |  |              |      |  | 5.25         | (1)  |  | 12/06
|Amoco                     |  | New Orleans, LA    |  | 378,244 Sq. Ft.     |  |              | 10,140 |     |                |   | 14,408                 |  |              |      |  | 5.50         | (1)  |  | 12/06
|Countryside Retail Center |  | Sterling, VA       |  | 133,422 Sq. Ft.     |  |              | 17,342 |     |                |   | 16,102                 |  |              | 101   |  | 5.25         | (1)  |  | 12/06
|Harmon                    |  | Sterling, VA       |  | 72,062 Sq. Ft.      |  |              | 8,869  |     |                |   | 7,569                  |  |              |      |  | 5.25         | (1)  |  | 12/06
|Mimado                    |  | Sterling, VA       |  | 35,127 Sq. Ft.      |  |              | 4,790  |     |                |   | 4,486                  |  |              |      |  | 5.25         | (1)  |  | 12/06

---

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

|(2) |  | Cash of $1.5 million was received by BCM and applied to ARIs affiliate debt.
|--- |  | -----------------------------------------------------------------------------

|(3) |  | Paid in July 2003.
|--- |  | ------------------

|(4) |  | Single note, with all properties as collateral.
|--- |  | -----------------------------------------------

|(5) |  | Extended on a month-to-month basis.
|--- |  | -----------------------------------

|(6) |  | Payable to IORI. In April 2002, ARI sold the company that owned One Hickory Centre to TCI. The transaction was accounted for as a note payable. (See NOTE 8. NOTES AND INTEREST
PAYABLE.) In October 2003, TCI sold One Hickory Centre to IORI for $12.2 million, providing purchase money wrap-around financing of $12.0 million. Also in October 2003, IORI sold One Hickory Centre to ARI for $12.2 million, providing purchase
money wrap-around financing of $12.0 million. These additional transactions discharged the 2002 financing from TCI.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 
|2524 Valley View   |  | Farmers Branch, TX |  | 0.5  
|Alamo Springs      |  | Dallas, TX         |  | 0.7  
|Backlick           |  | Springfield, VA    |  | 4.0  
|Bee Street         |  | Farmers Branch, TX |  | 0.5  
|Bonneau            |  | Dallas County, TX  |  | 8.4  
|Centura            |  | Farmers Branch, TX |  | 8.8  
|Chase Oaks         |  | Plano, TX          |  | 11.8 
|Croslin            |  | Dallas County, TX  |  | 0.8  
|Dalho              |  | Farmers Branch, TX |  | 3.4  
|Dominion           |  | Dallas, TX         |  | 14.4 
|Eagle Crest        |  | Farmers Branch, TX |  | 18.9 
|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     |  | 7.6  



17



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##### Table of Contents

|                    |  |                     |  |      
|------------------- |  | ------------------- |  | -----
|Property            |  | Location            |  | Acres
|Katrina             |  | Palm Desert, CA     |  | 110.5
|Katy Road           |  | Harris County, TX   |  | 130.6
|Kelly               |  | Dallas County, TX   |  | 0.8  
|Lacy Longhorn       |  | Farmers Branch, TX  |  | 17.1 
|Lakeshore Villas    |  | Humble, TX          |  | 16.9 
|Lamar/Parmer        |  | Austin, TX          |  | 17.1 
|Las Colinas         |  | Las Colinas, TX     |  | 4.7  
|Las Colinas I       |  | Las Colinas, TX     |  | 44.4 
|Lemmon Carlisle     |  | Dallas, TX          |  | 2.1  
|Leone               |  | Irving, TX          |  | 8.2  
|Limestone Canyon II |  | Austin, TX          |  | 10.0 
|Manhattan           |  | Farmers Branch, TX  |  | 108.9
|Marine Creek        |  | Ft. Worth, TX       |  | 54.0 
|Mason/Goodrich      |  | Houston, TX         |  | 57.3 
|Mason Park          |  | Houston, TX         |  | 18.0 
|Maumelle            |  | Maumelle, AR        |  | 10.8 
|McKinney 36         |  | Collin County, TX   |  | 34.6 
|McKinney Corners II |  | Collin County, TX   |  | 18.5 
|Mendoza             |  | Dallas County, TX   |  | 0.4  
|Mercer Crossing     |  | Farmers Branch, TX  |  | 261.1
|Mira Lago           |  | Farmers Branch, TX  |  | 8.9  
|Nashville           |  | Nashville, TN       |  | 127.4
|Pac Trust           |  | Farmers Branch, TX  |  | 7.1  
|Pioneer Crossing    |  | Austin, TX          |  | 439.1
|Pulaski             |  | Pulaski County, AR  |  | 21.9 
|Rasor               |  | Plano, TX           |  | 24.5 
|Red Cross           |  | Dallas, TX          |  | 2.9  
|Round Mountain      |  | Austin, TX          |  | 18.0 
|Sandison            |  | Collin County, TX   |  | 98.0 
|Seminary West       |  | Ft. Worth, TX       |  | 5.4  
|Sheffield Village   |  | Grand Prairie, TX   |  | 13.9 
|Siskiyou            |  | Siskiyou County, CA |  | 20.7 
|Sladek              |  | Travis County, TX   |  | 63.3 
|Solco  Allen       |  | Allen, TX           |  | 55.8 
|Stacy Road          |  | Allen, TX           |  | 160.4
|Stagliano           |  | Farmers Branch, TX  |  | 3.2  
|State Highway 121   |  | Collin County, TX   |  | 101.9
|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          |  | 6.8  
|Valley Ranch III    |  | Irving, TX          |  | 12.5 
|Valley Ranch IV     |  | Irving, TX          |  | 12.4 
|Valley View 34      |  | Farmers Branch, TX  |  | 33.9 
|Valwood             |  | Dallas County, TX   |  | 246.1
|Vineyards           |  | Tarrant County, TX  |  | 15.8 
|Vineyards II        |  | Tarrant County, TX  |  | 18.6 
|Vista Ridge         |  | Lewisville, TX      |  | 80.3 
|Walker              |  | Dallas County, TX   |  | 132.6
|Watters Road        |  | Collin County, TX   |  | 97.0 
|West End            |  | Dallas, TX          |  | 6.8  
|Whisenant           |  | Collin County, TX   |  | 16.2 



18



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##### Table of Contents

Partnership Properties.    ARI accounts for partnership properties
using the equity method. Set forth below is the property owned by partnerships, the average annual rental rate for commercial properties, and occupancy rates at December 31, 2003, 2002 and 2001:



|                  |  |                    |      |                |      |                      |      |             |      |   |      |   |       |  |   |  |   |  |    |  
|----------------- |  | ------------------ | ---- | -------------- | ---- | -------------------- | ---- | ----------- | ---- | - | ---- | - | ----- |  | - |  | - |  | -- | -
|Property          |  | Location           |      | SquareFootage  |      | Rent Per Square Foot |      | Occupancy % |     
|                  |  |                    | 2003 |                | 2002 |                      | 2001 |             | 2003 |   | 2002 |   | 2001  | 
|Office Building   |  |                    |      |                |      |                      |      |             |      |   |      |   |       |  |   |  |   |  |    |  
|Prospect Park #29 |  | Rancho Cordova, CA |      | 40,807 Sq. Ft. |      | $                    |     |             | $    |  |      | $ | 19.52 |  |  |  |  |  | 72 | %



ARI is a 30% general
partner in Sacramento Nine (SAC 9), which owns the Prospect Park #29 Office Building.



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 that 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, 2003, consisted of two apartments, seven 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.



As of December 31, 2003, the obligors on $44.3 million or 59%
of the mortgage notes receivable portfolio were affiliates of ARI. Also at that date, $10.9 million or 15% of the mortgage notes receivable portfolio was nonperforming.



The following table sets forth the percentages (based on the outstanding mortgage loan balance at December 31, 2003), by
property type and geographic region, of the income producing properties that serve as collateral for ARIs mortgage notes receivable. Excluded are $53.7 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   |  | 14                   | %
|Southwest |  | 86                   |  
|          |  |                      |  
|          |  | 100                  | %
|          |  |                      |  



A summary of the
activity in the mortgage notes receivable portfolio during 2003 is as follows:



|                                               |  |    |  
|---------------------------------------------- |  | -- | -
|Mortgage notes receivable at January 1, 2003   |  | 14 |  
|Loans funded                                   |  | 20 |  
|Loans obtained through consolidation of TCI    |  | 8  |  
|Loans collected in full                        |  | (9 | )
|Loans foreclosed                               |  | (1 | )
|Loans sold                                     |  | (7 | )
|                                               |  |    |  
|Mortgage notes receivable at December 31, 2003 |  | 25 |  
|                                               |  |    |  



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During 2003, $4.6 million in interest and $29.6 million in principal were collected on mortgage notes
receivable.



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 or 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 2003, as well as events during 2003 that affected previously funded first mortgage loans.



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 paydown 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 will begin accruing after improvements to the site have been completed by ARI. At April 2004, the improvements have begun. The future costs to ARI to complete the improvements, estimated to be $2.5 million, were accrued in 2002. A principal
payment of $450,000 is due within ten days after a Tentative Parcel Map (the Map) is recorded. ARI expects that the Map will be recorded by the end of June 2004. Interest payments will be due on the first day of each calendar quarter,
beginning with the first quarter following the completion of the site improvements.



In March 2003, ARI sold the Grand Hotel Sofia for $24.8 million, receiving $6.3 million in cash after paying closing costs and debt assumption and providing purchase money financing of $13.5 million. The note was
non-interest-bearing for 90 days, then bore interest at 9.0% per annum for the next 90 days and matured in September 2003. In September 2003, the note was collected in full.



In June 2003, ARI sold the 104 unit Willow Wick Apartments in North Augusta, South Carolina, for $2.7 million, receiving
$255,000 after payment of closing costs and debt pay down and providing purchase money financing of $42,000. The note bears interest at 5.0% per annum and requires all interest and principal be paid at maturity in December 2003. The maturity date
was extended to February 2004. At March 2004, negotiations are ongoing to extend the loan further.



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 paydown. 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 October 2003, ARI sold a 33.4 acre tract of its Pioneer Crossing land parcel for $2.4 million, paying $78,000 after payment of closing costs and
providing purchase money financing of $2.4 million. The note bears interest at 10.0% per annum, requires interest-only payments beginning in November 2007 and matures in October 2008.



In November 2003, ARI sold its Scout land parcel for $2.8 million, receiving $485,000 in cash after paying closing costs and
providing purchase money financing of $2.1 million. The note bore interest at 6.25% per annum, required monthly payments of accrued interest beginning in December 2003 and matured in November 2006. All principal and accrued but unpaid interest were
due at maturity. In December 2003, the note was sold to Realty Advisors for $2.1 million, plus accrued interest, to reduce ARIs affiliate debt.



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In December 2003, ARI sold its Jeffries Ranch land parcel for $2.9 million, receiving $151,000 after
payment of closing costs and providing purchase money financing of $2.5 million. Also in December 2003, the note was sold to Realty Advisors for $2.5 million, to reduce ARIs affiliate debt.



In September 2002, ARI sold its Messick land parcel and an 80.0 acre tract of
its Katrina land parcel for $12.8 million, paying $1.5 million after payment of closing costs and debt paydown and providing purchase money financing of $9.6 million. The note bore interest at 8.0% per annum, matured in September 2004 and required
quarterly payments of accrued interest. All principal and accrued interest were due at maturity. In February 2003, ARI accepted $7.4 million as full payment for $7.7 million in principal and accrued interest. In March 2003, the remaining $1.9
million note balance was sold to an unrelated party for $1.8 million plus accrued and unpaid interest.



In December 2002, ARI sold its Willow Springs land parcel for $9.8 million, paying $1.3 million after payment of closing costs and debt paydown and
providing purchase money financing of $7.8 million. The note bore interest at 8.0% per annum, matured in December 2005 and required periodic interest payments beginning in June 2003. In March 2003, the note was sold to an unrelated party for $7.5
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 $4.9 million upon completion
of the sale of the note.



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. At March 2004, negotiations are underway to modify and extend the terms of the note. In July 2003, ARI advanced an additional $357,000 to the borrower. The new
note bore interest at 8.0% per annum and matured in July 2004. All principal and interest were due at maturity. In November 2003, the note was collected in full, including accrued but unpaid interest.



In July 2001, ARI funded a $1.7 million mortgage loan secured by a first lien
on 44.6 acres of unimproved land in Fort Worth, Texas, and a 100% interest in a partnership. The note receivable bore interest at 16.0% per annum, required monthly interest only payments and matured in June 2002. In September 2002, ARI received $1.3
million on the note. With this payment, ARI agreed to release the lien on the 44.6 acres substituting a second lien on 21.61 acres of unimproved land in Tarrant County, Texas, from the borrower to secure the remaining $689,000 in debt. ARI extended
the maturity to November 2002. In May 2003, the loan was paid in full, including accrued but unpaid interest.



Junior participations.    In December 2002, ARI sold a 171.1 acre tract of its Desert Wells land parcel for $11.9 million,
receiving $1.4 million after payment of closing costs and debt paydown and providing purchase money financing of $8.9 million. The loan bore no interest and matured in March 2003. The principal was due at maturity. In December 2002, interest in $7.7
million of the loan was sold to an unrelated party for $7.7 million. ARI retained a junior interest in $1.2 million of the loan. In March 2003, the note was collected in full.



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 bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matured in January 2003. On January 22, 2003, ARI agreed to extend the maturity date until May 1, 2003. The agreement requires
interest to accrue at the default rate of 18%. As of December 2003, ARI has funded a total of $4.3 million and the note was classified as nonperforming. Management is continuing to negotiate new terms and collateral for this loan.



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Other.    In July 2001, ARI agreed to fund a $4.4 million line of credit
secured by a second lien on 1,714.16 acres of unimproved land in Tarrant Country, Texas. As of April 2003, ARI had funded $2.9 million of the line of credit and it was classified as nonperforming. In May 2003, ARI received a $433,000 principal
paydown. Also during May 2003, ARI received 14.373 acres of unimproved land in Tarrant County, Texas, valued at $1.1 million, as a principal paydown. As of July 2003, the line of credit had been paid in full.



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. The financing bore interest at 16.0% per annum, required monthly payments of interest only at
6.0%, beginning in February 2000 and required a $200,000 principal paydown in December 1999, which was not received, and matured in August 2000. ARI had the option of obtaining the buyers general and limited partnership interests in the
collateral partnerships in full satisfaction of the financing. In March 2000, ARI agreed to forbear foreclosing on the collateral securing the note and released one of the partnership interests, in exchange for a payment of $250,000 and executed
deeds of trusts on certain properties owned by the buyer. In March 2000, the borrower made a $1.1 million payment, upon receipt of which ARI returned the deeds of trust. 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.



Related Party.    On June 2, 2003, ARI exchanged all of its 674,971 IORI shares with BCM, receiving 650,000 TCI shares from BCM. In addition, BCM has executed a promissory note in favor of
ARI in the amount of $526,000. The note bore interest at 2% over the prime rate, currently 6.00% per annum, matured in June 2004 and required monthly interest payments beginning in June 2003 and quarterly principal payments beginning in September
2003. In December 2003, ARI obtained 24,184 shares of TCI common stock from BCM in payment of the final $394,000 balance due on the note.



In July 2003, ARI sold its interest in MRI to Gruppa for $18.5 million, receiving $7.4 million in cash after debt assumption and providing purchase money
financing of $2.3 million. The note bore interest at 10.0% per annum, matured in August 2013 and required monthly payments of principal and interest beginning in September 2003. ARI owns 20% of Gruppa, thereby retaining a 20% interest in MRI. Due to
debt guarantees and ARIs continuing ownership interest in MRI, management has determined that this should be accounted for as a financing transaction. In September 2003, ARI sold the note to Syntek West for $2.3 million, plus accrued but
unpaid interest, to reduce affiliate debt.



In October 2003,
ARI advanced $1.6 million to the Class A Limited Partners of Encino Executive Plaza, Ltd., of which ARI is the general partner. The loans bear interest at 8.5% per annum and mature in June 2006. Interest due to ARI will be deducted from the
quarterly return owed by ARI to the Class A Limited Partners, eliminating the quarterly payments. The outstanding principal is due at maturity.



In June 2002, ARI converted $4.5 million of its receivable from BCM to a recourse note receivable. This transaction was to provide ARI with additional
security over that provided by an unsecured receivable. The note bore interest at 10.0% per annum, matured in March 2004 and required quarterly payments of principal and accrued interest, beginning in December 2002. In December 2003, ARI received
92,052 shares of TCI common stock in payment of the final $1.5 million balance due on the note.



In December 2002, ARI sold the Lakeshore Villas Apartments to Housing for Seniors of Humble, LLC (Humble), a related party, for $22.0 million,
paying $764,000 after payment of closing costs and debt paydown and providing purchase money financing of $8.4 million. One note had a principal amount of $2.0 million. The note was unsecured, and was guaranteed by Unified Housing Foundation, Inc.
(Unified), a related party. The second note had a principal amount of $6.4 million, and was secured by a pledge by Unified of 100% of the Member interest in Humble. Both notes bore interest at 11.5% per annum, matured in December 2009
and required quarterly payments beginning in March 2003. Richard W. Humphrey, a Director of ARI until July 2003, is the President of Humble and the President and Treasurer of Unified. Ted P. Stokely, Chairman of the Board



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and a Director of ARI, is the General Manager of Unified. In December 2003, both notes were sold to IORI for $8.4 million, plus accrued interest, to reduce
ARIs affiliate debt.



In March 2001, ARI funded $13.6
million of a $15.0 million unsecured line of credit to 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 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. BASIS OF PRESENTATION.) 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 2% over the prime rate, currently at 6.0%. All principal and interest are due at
maturity. Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer of ARI, is a 10% shareholder of One Realco. Mr. Kimbrough does not participate in the day-to-day operations or management of One
Realco.



In December 2000, an unsecured loan with a remaining
principal balance of $1.8 million to Warwick of Summit, Inc. (Warwick) matured. The loan was made to provide funds to purchase, renovate and expand a shopping center property in Warwick, Rhode Island. All principal and interest were due
at maturity. In February 2002, $275,000 of interest was received. In March 2003, $27,000 of principal and $223,000 of interest was received. In April 2003, $149,000 of principal and $26,000 of interest was received. In July 2003, $10,000 of interest
was received. Richard D. Morgan, a Warwick shareholder, served as a director of ARI until October 2001. In December 2003, the note was sold to Prime for $1.8 million, to reduce ARIs affiliate debt.



In December 2000, a loan with a principal balance of $1.6 million to Bordeaux
Investments Two, L.L.C. (Bordeaux), matured. The loan, to provide funds to purchase and renovate a shopping center property in Oklahoma City, Oklahoma, was secured by (1) a 100% interest in Bordeaux, which owns a shopping center in
Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux members. Richard D. Morgan, a Bordeaux member
until July 2003, served as a director of ARI until October 2001. In July 2003, the members of Bordeaux assigned 100% of the membership interest in Bordeaux to ARI in payment of the note. ARI recorded real estate assets of $8.8 million and assumed
$7.2 million of mortgage debt and other liabilities on the shopping center and the undeveloped land. No gain or loss was recorded on this transaction. In December 2003, the shopping center was exchanged with Regis I, a related party, for three notes
receivable: $1.4 million from Unified Housing of Harvest Hill, LLC (Harvest Hill); $1.4 million from Unified Housing of Harvest Hill I, LLC (Harvest Hill I); and $2.1 million from Unified Housing of Harvest Hill III, LLC
(Harvest Hill III), related parties. All three notes bear interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the extent surplus cash is available, beginning in November 2003 and are guaranteed by
Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, a related party, which is the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



In March 2000, a loan with a remaining principal balance of
$2.6 million to Lordstown, L.P., matured. The loan, to provide funds to purchase for resale various parcels of land, is secured by a second lien on land in Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital,
Ltd., the limited partner of Lordstown, L.P., and a profits interest in subsequent land sales. A corporation controlled by Richard D. Morgan is the general partner of Lordstown, L.P. Mr. Morgan served as a director of ARI until October 2001. In
December 2003, the note was exchanged with Regis I, a related party, for three notes receivable: $1.4 million



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from Harvest Hill, $1.4 million from Harvest Hill I, and $2.1 million from Harvest Hill III, related parties. All three notes bear interest at 12.0%, mature
in October 2013, and require monthly payments of interest, to the extent surplus cash is available, beginning in November 2003 and are guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a
Director of ARI, is the General Manager of Unified, a related party, which is the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



Investments in Real Estate Companies and Real Estate Partnerships



Real estate entities.    ARIs investment in real estate entities includes 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, 2003, 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, 2003, ARI and its subsidiaries owned no shares of common stock
of IORI but TCI continued to own 345,728 IORI shares (approximately 24% 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, 2003.



Pertinent information regarding ARIs investment in the equity securities of the IORI at December 31, 2003, is summarized below (dollars in
thousands):



|         |  |                                                 |   |  |                                                 |       |                                                  |   |                                               |  |   |      
|-------- |  | ----------------------------------------------- | - |  | ----------------------------------------------- | ----- | ------------------------------------------------ | - | --------------------------------------------- |  | - | -----
|Investee |  | Percentage ofARIsOwnership atDecember 31, 2003 |   |  | Carrying Valueof Investment atDecember 31, 2003 |       | EquivalentInvestee BookValue atDecember 31, 2003 |   | Market Value ofInvestment atDecember 31, 2003
|IORI     |  | 19.20                                           | % |  | $                                               | 4,423 |                                                  | $ | 9,381                                         |  | $ | 5,331



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 will probably incur losses in periods in which it does not. ARIs reported income or loss
attributable to IORI will differ materially from its cash flow attributable to it.



IORI is a Nevada corporation which was originally organized on December 14, 1984, as a California business trust and commenced operations on April 10, 1985. IORIs business is investing in real estate through
direct equity investments and partnerships. IORI holds equity investments in apartments and commercial properties in the Southeast and Southwest regions of the continental United States, with a concentration in the Southwest region. At December 31,
2003, IORI owned 13 income producing properties located in two states. These properties consisted of eight apartments comprising 937 units and three office buildings, a shopping center and an industrial warehouse with an aggregate of 303,758 sq. ft.
In addition, IORI owned two parcels of unimproved land, totaling 10 acres.



IORI reported net income of $1.8 million in 2003 as compared to net income of $2.1 million in 2002. IORIs net income in 2003 included gains on sale of real estate of $3.8 million. IORIs cash flow from
property operations was $92,000 in 2003. At December 31, 2003, IORI had total assets of $101.1 million, which consisted of $50.4 million in real estate held for investment, $45.5 million in notes and interest receivable, $5.2 million in investments
in partnerships and other assets and $58,000 in cash and cash equivalents.



ARI received no dividends from IORI in 2003.



Realty Advisors Korea, Ltd.    On June 30, 2002, ARI obtained 71.4% interest in Realty Advisors Korea, Ltd. (RAK), a Korean real estate advisory company, from BCM, a related
party, for $6.0 million. The business



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purpose of the transaction was to reduce the affiliate payable owed by BCM to ARI. ARIs receivable from BCM was reduced by $6.0 million, and no cash
was paid by ARI. At the date of acquisition, RAKs assets consisted of $2.3 million in cash, $3.0 million in deposits and marketable securities, and $225,000 in other assets. RAKs net equity was $5.5 million. ARI recorded $1.9 million in
goodwill as a result of this transaction.



On June 30, 2003,
ARI sold its 71.4% interest in RAK to Realty Advisors, a related party, for $6.0 million, reducing ARIs affiliate debt. Realty Advisors also paid ARI $600,000, representing 10% interest on the $6.0 million price paid by ARI to purchase the
71.4% interest in RAK in 2002. The $6.0 million sales price reduced ARIs affiliate debt. ARI ceased consolidation of RAKs accounts and operations effective June 30, 2003.



ITEM 3.LEGAL PROCEEDINGS



Matisse.    In August 2002, ARI obtained a favorable jury verdict in the legal action entitled American Realty Trust v.
Matisse Partners, L.L.C. (Matisse). However, the judge set aside the jury verdict and imposed a judgment against ARI in excess of $6.0 million, including interest. The judgment was appealed, and, in the opinion of ARIs
management and legal counsel, there was a reasonable probability that the adverse judgment would be set aside and the jury verdict reinstated. Therefore, ARI did not recognize any expense nor establish any reserve for this judgment. In November
2002, ARI posted a $6.0 million supercedeas bond. In July 2003, ARI obtained a letter of credit, which was substituted for the $6.0 million bond. The $6.0 million cash was returned to ARI. In April 2003, an additional judgment was issued against ARI
for $1.4 million in legal fees. ARI also appealed this judgment, and posted a $1.4 million bond in May 2003. ARI did not recognize any expense nor establish any reserve for this additional judgment. In December 2003, the United States Court of
Appeals for the Fifth Circuit ruled in favor of ARI, with respect to the damages and the legal fees awarded by the judge, and $1.1 million of the $1.4 million bond was returned to ARI.



Sunset Management.    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% per annum, while the remaining $500,000 bears interest at 20% per annum. The loan is secured by a collateral of 3,672,305 shares of TCI common stock held by BCM and wholly-owned subsidiaries of
ARI. The loan was also secured by a lien on real property owned by ART Williamsburg, Inc. (AWI). 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 paydown. 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 (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 and sought certain declaratory relief against Sunset as well as a temporary and permanent
anti-suit injunction against Sunset.



During January 2003,
without notice to the plaintiffs in the Texas Litigation, Sunset instituted an action in a federal district court in Las Vegas, Nevada against Commonwealth Land Title (Commonwealth) seeking disposition of the TCI common stock held by
Commonwealth as Pledge Holder. On January 31, 2003, after a Temporary Restraining Order was issued in the Texas Litigation, Sunset instigated a separate lawsuit in state court in Nevada styled Sunset Management, LLC v. American Realty Trust, Inc.
et al., Case No. A462587 pending in the District Court of Clark County, Nevada (the Nevada Litigation). On February 12, 2003, the Nevada state court held a hearing on Sunsets request for emergency relief and denied all
Sunsets requested relief and indicated that a stay of the Nevada Litigation may be appropriate, which stay of litigation (including claims against TCI) was granted on May 2, 2003. Notwithstanding the stay of the Nevada Litigation, Sunset



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continued to seek to relitigate the underlying fact issues already determined in the Texas Litigation and the Nevada Litigation through cross-claims and
counterclaims in the Texas Litigation and a renewed motion for preliminary injunction and appointment of receiver over TCI in the Nevada Litigation.



Sunset has sought expedited relief and an expedited hearing of the Texas Litigation, which the court refused to grant. In addition, the borrowers on the
loan have sought to tender cash collateral to the court in lieu of the TCI stock, which motion was denied. TCI has only recently been added to the Texas Litigation as a party.



Even though the relief sought by Sunset in the Texas Litigation and the Nevada Litigation has either been denied or stayed,
on June 10, 2003, an attorney representing Sunset appeared at the Annual Meeting of Shareholders of TCI attempting to vote 3,673,115 Shares of common stock of TCI under purported irrevocable proxies against the election of the four directors
nominated in favor of the election of four affiliates of Sunset that Sunset seeks to nominate to serve as directors of TCI. The Inspector of Election at the Annual Meeting advised that Sunsets attempt to exercise voting rights under proxies
for the 3,673,115 shares was improper and would not be allowed, advising that BCM and the ARI subsidiaries held the absolute right to vote the 3,673,115 shares of TCI common stock so long as there was no event of default under the Sunset loan
agreement. The Inspector of Election also observed at the Stockholders meeting that no evidence was before the Inspector from a court of law finding an event of default had occurred with respect the Sunset loan documents, and therefore, such proxies
would not be honored at that time. Subsequently, representatives of Sunset delivered on July 7, 2003 to TCI a form captioned Schedule 13D for an event occurring June 10, 2003, making certain disclosures, including an allegation that Sunset
acquired voting rights to 3,673,115 shares of TCI to protect the value of Sunsets security interest in the 3,673,115 shares of TCI pledged as collateral for . . . obligations to Sunset. Actually, only 3,672,305 shares of TCI common stock
were pledged [810 shares less than Sunset alleges]. Such schedule 13D also provides that Sunset plans to foreclose on the pledged TCI shares as soon as possible. Such Schedule 13D advises that Sunset would prefer to replace the
four management directors [of TCI] with neutral individuals . . . or if neutral individuals are unavailable, Sunset intends to nominate and [vote] for the election of affiliates of Sunset as directors of TCI on an interim basis until neutral
individuals with satisfactory backgrounds and knowledge can be elected as directors.



On September 10, 2003, AWI removed the Texas Litigation to the bankruptcy court for the Northern Division of Texas. On September 25, 2003, the Texas Litigation was transferred to the Eastern District of Texas. A
scheduling conference in this matter was set for December 3, 2003. At the December scheduling conference, the bankruptcy court set an April trial date, subject to all parties agreeing to allow the bankruptcy court to conduct a jury trial. However,
all parties did not consent to the trial being held by a non-Article III judge, so the case is now in the process of being referred to a United States District Judge for trial assignment. It is uncertain when this process will be completed or a
trial date selected. In the interim, the parties have engaged in substantial discovery and motion practice.



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



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



Not applicable.



26



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##### Table of Contents

PART II



|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- |  | ---------------------------------------------------------------------



ARIs Common Stock is traded on the New York Stock Exchange using 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, 2004 (through March 19, 2004) |  | $    | 11.25 |     | $ | 7.58 
|                                        |  |     
|March 31, 2003                          |  |      | 10.65 |     |   | 7.50 
|June 30, 2003                           |  |      | 13.10 |     |   | 8.30 
|September 30, 2003                      |  |      | 12.25 |     |   | 10.00
|December 31, 2003                       |  |      | 12.55 |     |   | 8.95 
|                                        |  |     
|March 31, 2002                          |  |      | 9.95  |     |   | 6.40 
|June 30, 2002                           |  |      | 11.27 |     |   | 6.70 
|September 30, 2002                      |  |      | 11.50 |     |   | 8.20 
|December 31, 2002                       |  |      | 10.34 |     |   | 7.50 



As of March 19, 2004,
the closing market price of ARIs Common Stock on the New York Stock Exchange was $8.27 per share.



As of March 19, 2004, ARIs Common Stock was held by approximately 3,000 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 2003. 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% 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% of the average daily closing price of ARIs Common Stock for the prior 20 trading days.
At December 31, 2003, 3,225,370 shares of Series A Preferred Stock were outstanding and 1,743,920 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. In January 2004, 200,000 shares were issued to Prime, ARIs advisor. In
February 2004, 50,000 additional shares were issued to Prime.



80,000 shares of Series B 10% 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 $100.00 per share plus accrued but
unpaid dividends. The Series B Preferred Stock bore an annual dividend of $11.00 per share or $2.75 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 B Preferred Stock was reserved for conversion of the Class A limited partner units of Valley Ranch, L.P. In March 1999, an agreement was reached for ARI to acquire the eight million Class A units then outstanding, for $1.00 per unit. At
December 31, 2002, all



27



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##### Table of Contents

of the Class A units had been repurchased. In August 2003, Series B Cumulative Convertible Preferred Stock was eliminated.



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, 2003, 10,188,750 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. At June 30, 2003,
shares of Series C Preferred Stock could be converted into 57,500 shares of ARI Common Stock. On or after December 31, 2005, additional shares of Series C Preferred Stock may be converted into 16,250 shares of ARI Common Stock. On or after December
31, 2006, all remaining 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% of the average daily closing price of ARIs Common
Stock for the prior 20 trading days. In January 2001, 2.5 million Class A limited partner units of ART Palm were redeemed for $2.5 million in cash. In December 2001, 7.2 million Class A limited partner units of ART Palm were redeemed for $5.8
million, including $2.5 million in cash. ARI gave a note payable for the remaining $3.3 million. The note was paid in full in January 2003, including accrued but unpaid interest. In July 2002, 1.6 million Class A limited partner units of ART Palm
were redeemed for $1.6 million in cash. In August 2003, 1.6 million Class A limited partner units of ART Palm were redeemed for $1.6 million in cash. At December 31, 2003, no Series C Preferred Stock was outstanding.



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, 2003, no Series D Preferred Stock was outstanding.



500,000 shares of Series E 6% 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, 2003, 50,000 shares of Series E Preferred Stock were outstanding.



10,000 shares of Series I 8% 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 $1,000.00 per share. Dividends were payable at the annual rate of $80.00 per share or $20.00 per quarter to stockholders of record on the last date of each March, June, September and December when and as
declared by the Board of Directors. In February 2003, 10,000 shares were issued to ART Morgan, Inc., a wholly-owned subsidiary of ARI. Dividends were not paid on these shares. In September 2003, the shares were returned to ARI and were canceled. In
October 2003, Series I Cumulative Preferred Stock was eliminated.



28



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##### Table of Contents

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



|                                                          |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|--------------------------------------------------------- |  | ---------------------------------------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                          |  | For the Years Ended December 31, ,       |           
|                                                          |  | 2003                                     |            |   | 2002        |   |            | 2001        |  |   | 2000       |   |  | 1999 |           
|                                                          |  |                                          |            |   | Restated(1) |   |            | Restated(1) |  |   |            |   |  |      |           
|                                                          |  | (dollars in thousands, except per share) |           
|EARNINGS DATA                                             |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Operating income                                          |  | $                                        | 50,454     |   |             | $ | 16,187     |             |  | $ | 18,368     |   |  | $    | 32,788     |   |  | $ | 38,954     |  
|Gain on land sales                                        |  |                                          | 43,831     |   |             |   | 16,727     |             |  |   | 7,883      |   |  |      | 29,001     |   |  |   | 23,552     |  
|Pizza parlor gross margin                                 |  |                                          | 7,006      |   |             |   | 6,750      |             |  |   | 6,278      |   |  |      | 5,784      |   |  |   | 4,503      |  
|                                                          |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Income from operations                                    |  |                                          | 101,291    |   |             |   | 39,664     |             |  |   | 32,529     |   |  |      | 67,573     |   |  |   | 67,009     |  
|Equity in loss of investees                               |  |                                          | (4,441     | ) |             |   | (20,914    | )           |  |   | (13,352    | ) |  |      | (4,581     | ) |  |   | (5,512     | )
|Loss on sale of investments in equity investees           |  |                                          |           |   |             |   | (286       | )           |  |   | (387       | ) |  |      | (8,744     | ) |  |   |           |  
|Equity in gain on sale of real estate by equity investees |  |                                          |           |   |             |   |           |             |  |   | 22,542     |   |  |      | 18,571     |   |  |   | 17,359     |  
|Other income                                              |  |                                          | 24,640     |   |             |   | 8,590      |             |  |   | 2,448      |   |  |      | 2,039      |   |  |   | 5,568      |  
|Other expenses                                            |  |                                          | 154,108    |   |             |   | 84,795     |             |  |   | 96,219     |   |  |      | 129,431    |   |  |   | 178,695    |  
|Gain on sale of real estate                               |  |                                          |           |   |             |   |           |             |  |   | 77,816     |   |  |      | 67,727     |   |  |   | 105,708    |  
|                                                          |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss) from continuing operations              |  |                                          | (32,618    | ) |             |   | (57,741    | )           |  |   | 25,377     |   |  |      | 13,154     |   |  |   | 11,437     |  
|Net income (loss) from discontinued operations            |  |                                          | 43,290     |   |             |   | 49,277     |             |  |   | (8,023     | ) |  |      | (10,475    | ) |  |   | (1,139     | )
|Net income (loss)                                         |  |                                          | 10,672     |   |             |   | (8,464     | )           |  |   | 17,354     |   |  |      | 2,679      |   |  |   | 10,298     |  
|Preferred dividend requirement                            |  |                                          | (2,351     | ) |             |   | (2,401     | )           |  |   | (2,485     | ) |  |      | (2,327     | ) |  |   | (2,281     | )
|                                                          |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Income (loss) applicable to Common shares                 |  | $                                        | 8,321      |   |             | $ | (10,865    | )           |  | $ | 14,869     |   |  | $    | 352        |   |  | $ | 8,017      |  
|                                                          |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|PER SHARE DATA                                            |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss) from continuing operations              |  | $                                        | (3.24      | ) |             | $ | (5.29      | )           |  | $ | 1.95       |   |  | $    | 1.04       |   |  | $ | .85        |  
|Net income (loss) from discontinued operations            |  |                                          | 4.01       |   |             |   | 4.33       |             |  |   | (.68       | ) |  |      | (1.01      | ) |  |   | (.10       | )
|                                                          |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss) applicable to Common shares             |  | $                                        | .77        |   |             | $ | (.96       | )           |  | $ | 1.27       |   |  | $    | .03        |   |  | $ | .75        |  
|                                                          |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Dividends per Common share                                |  | $                                        |           |   |             | $ |           |             |  | $ |           |   |  | $    |           |   |  | $ | .05        |  
|Weighted average shares outstanding                       |  |                                          | 10,789,352 |   |             |   | 11,375,127 |             |  |   | 11,714,374 |   |  |      | 10,399,890 |   |  |   | 10,759,416 |  
|                                                          |  |                                          |            |   |            
|BALANCE SHEET DATA                                        |  |                                          |            |   |             |   |            |             |  |   |            |   |  |      |            |   |  |   |            |  
|Real estate, net                                          |  | $                                        | 1,054,036  |   |             | $ | 466,042    |             |  | $ | 590,488    |   |  | $    | 653,744    |   |  | $ | 771,630    |  
|Notes and interest receivable, net                        |  |                                          | 70,595     |   |             |   | 82,133     |             |  |   | 30,382     |   |  |      | 13,831     |   |  |   | 38,604     |  
|Total assets                                              |  |                                          | 1,240,181  |   |             |   | 711,330    |             |  |   | 761,048    |   |  |      | 787,015    |   |  |   | 919,546    |  
|Notes and interest payable                                |  |                                          | 986,769    |   |             |   | 475,433    |             |  |   | 564,298    |   |  |      | 616,331    |   |  |   | 706,196    |  
|Margin borrowings                                         |  |                                          | 21,194     |   |             |   | 8,558      |             |  |   | 28,040     |   |  |      | 13,485     |   |  |   | 33,264     |  
|Stockholders equity                                      |  |                                          | 75,680     |   |             |   | 79,527     |             |  |   | 88,169     |   |  |      | 73,402     |   |  |   | 46,266     |  
|Book value per share                                      |  | $                                        | 7.11       |   |             | $ | 6.99       |             |  | $ | 7.75       |   |  | $    | 6.21       |   |  | $ | 3.43       |  

---

|(1) |  | The 2003 Restatement adjustments affecting the years 2002 and 2001 are set forth in the following table:
|--- |  | --------------------------------------------------------------------------------------------------------



|                                          |  |                        |         |   |            |   |         |                       |  |            |         |  |   |        
|----------------------------------------- |  | ---------------------- | ------- | - | ---------- | - | ------- | --------------------- |  | ---------- | ------- |  | - | -------
|                                          |  | 2002                   |         |   | 2001      
|                                          |  | As PreviouslyReported  |         |   | AsRestated |   |         | As PreviouslyReported |  | AsRestated
|                                          |  | (dollars in thousands)
|Net income (loss)                         |  | $                      | (10,865 | ) |            | $ | (10,865 | )                     |  | $          | 12,584  |  | $ | 14,869 
|Net income (loss) per Common Share        |  | $                      | (.96    | ) |            | $ | (.96    | )                     |  | $          | 1.07    |  | $ | 1.27   
|Financial Position Data (at December 31): |  |                        |         |   |            |   |         |                       |  |            |         |  |   |        
|Total Assets                              |  | $                      | 709,045 |   |            | $ | 711,330 |                       |  | $          | 758,763 |  | $ | 761,048
|Stockholders Equity                      |  | $                      | 77,242  |   |            | $ | 79,527  |                       |  | $          | 85,884  |  | $ | 88,169 



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##### Table of Contents

The 2003 Restatement adjustments affecting the years 2002 and 2001 are adjustments with respect to net
income (loss), as described in ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.NOTE 26. RESTATEMENT OF 2002 AND 2001 FINANCIAL STATEMENTS.



|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



Introduction



ARI was organized in 1999. In August 2000, ARI acquired ART and NRLP. 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 owns a portfolio of real estate and mortgage loan investments.



Critical Accounting Policies



Critical accounting policies are those that are both important to the
presentation of ARIs financial condition and results of operations and require managements most difficult, complex or subjective judgements. ARIs critical accounting policies relate to the evaluation of impairment of long-lived
assets and the evaluation of the collectibility of accounts and notes receivable.



If events or changes in circumstances indicate that the carrying value of a rental property to be held and used or land held for development may be impaired, management performs a recoverability analysis based on
estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment
loss is recognized. If management decides to sell rental properties or land held for development, management evaluates the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable
from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and an impairment loss is recognized within income from continuing operations. ARIs estimates of cash flow and fair values of the
properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with
purchasers or prospective purchasers. ARIs estimates are subject to revision as market conditions and ARIs assessments of them change. In the second quarter of 2003, ARI recognized asset impairments of $2.4 million. In the fourth quarter
of 2003, ARI recognized asset impairments of $17.5 million.



ARIs allowance for doubtful accounts receivable and notes receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past due accounts. Management considers such
information as the nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant or other debtor and ARIs assessment of its ability to meet its lease or interest obligations.
ARIs estimate of the required allowance, which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions.



ARIs management periodically discusses criteria for estimates and
disclosures of its estimates with the Audit Committee of its Board of Directors.



Recent Accounting pronouncements.    In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which requires the
consolidation of variable interest entities, as defined FIN 46 is applicable to financial statements to be issued by ARI after 2003; however, disclosures are required currently if ARI expects to consolidate any variable interest entities. ARI does
not currently believe that any entities will be consolidated as a result of FIN 46.



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In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires the issuer to classify a financial instrument that is within the scope of the standard as a liability if such financial instrument embodies an obligation of the issuer. The adoption of SFAS No. 150 is not expected
to require ARI to reclass any financial instruments currently on its balance sheet.



Obligations and Commitments



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, 2003. (Dollars in thousands.)



|                                                                                   |       |                        |                 |  |           |         |           |   |                  |  |   |         |  |   |        
|---------------------------------------------------------------------------------- | ----- | ---------------------- | --------------- |  | --------- | ------- | --------- | - | ---------------- |  | - | ------- |  | - | -------
|Contractual Obligations                                                            |       | Payments Due by Period
|                                                                                   | Total |                        | Less than1 year |  | 1-3 years |         | 3-5 years |   | More than5 years
|Long-Term Debt Obligations                                                         |       | $                      | 976,223         |  | $         | 288,952 |           | $ | 182,269          |  | $ | 156,386 |  | $ | 348,616
|Capital Lease Obligations                                                          |       |                        |                |  |           |        |           |   |                 |  |   |        |  |   |       
|Operating Lease Obligations                                                        |       |                        | 12,551          |  |           | 2,350   |           |   | 3,928            |  |   | 2,967   |  |   | 3,306  
|Purchase Obligations                                                               |       |                        |                |  |           |        |           |   |                 |  |   |        |  |   |       
|Other Long-Term Liabilities Reflected on the Registrants Balance Sheet under GAAP |       |                        |                |  |           |        |           |   |                 |  |   |        |  |   |       
|Total                                                                              |       | $                      | 988,774         |  | $         | 291,302 |           | $ | 186,197          |  | $ | 159,353 |  | $ | 351,922



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.



Liquidity and Capital Resources



General.    Cash and cash equivalents at December 31, 2003 totaled $9.5 million, compared with $8.4 million at December 31,
2002. Although ARI anticipates that during 2004 it will generate excess cash from operations, as discussed below, such excess cash will not be sufficient to discharge all of ARIs debt obligations as they mature. ARI will, therefore, again rely
on externally generated funds, including aggressive land sales, selected sales of income producing properties, borrowings against its investments in various real estate entities, refinancing of properties and, to the extent necessary, borrowings to
meet its debt service obligations, pay taxes, interest and other non-property related expenses. Historically, management has been successful at extending 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.



Notes payable totaling $289.0 million are scheduled to mature during 2004. During the first quarter of 2004, ARI either extended, refinanced, paid
down, paid off or received commitments from lenders to extend or refinance $110.7 million of the debt scheduled to mature in 2004. See NOTE 2. REAL ESTATE, NOTE 8. NOTES AND INTEREST PAYABLE and NOTE 25. SUBSEQUENT
EVENTS.



ARI reported net income of $10.7 million for
2003, which included the following non-cash charges and credits: gain on sale of real estate of $92.6 million, depreciation and amortization of real estate held for investment and intangible assets of $28.8 million, amortization of deferred
borrowing costs of $11.0 million, equity in loss of equity investees of $4.4 million, writedown of assets held for sale of $19.9 million, gain on extinguishment of debt of $7.2 million, gain on condemnation award of $4.8 million, discount on sale of
notes receivable of $2.3 million, and loss on foreign currency transactions of $3.3 million. Net cash used in operating



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activities was $15.8 million. Interest receivable increased by $4.0 million due to additional notes receivable for seller financing, other assets decreased
by $6.7 million primarily due to reduced escrow deposits, interest payable increased by $1.7 million primarily due to unpaid interest on disputed notes payable, decrease in minority interest primarily due to allocation of losses to minority owners,
and other liabilities increased by $7.7 million primarily due to increased deferred gains from property sales.



Net cash provided by investing activities of $119.1 million was primarily due to proceeds from sale of real estate of $163.1 million, proceeds from the
sale of notes receivable of $33.9 million, and collection of notes receivable of $29.6 million. These inflows were offset by real estate improvements of $51.0 million, investments in real estate entities of $25.7 million, acquisition of real estate
of $15.3 million, and earnest money deposits of $8.6 million.



Net cash used in financing activities of $102.2 million was primarily comprised of proceeds from the funding or refinancing of notes payable of $178.5 million, net margin borrowings of $11.9 million and net advances from affiliates of $2.5
million; offset by payouts of $285.3 million to pay down existing notes payable, $7.5 million for financing costs, and $2.4 million in dividends on Preferred Stock.



If ARI continues to dispose of operating properties, a further decline in cash from property operations would be expected.



In 2003, ARI purchased a total of 237.8 acres of land in Grand
Prairie and Farmers Branch, Texas and Pulaski County, Arkansas, in separate transactions for a total of $28.5 million. ARI paid $3.1 million in cash, including closing costs. ARI obtained one apartment and land for two apartments for a total of
$10.2 million. ARI paid $1.3 million in cash, including closing costs.



In 2003, ARI sold a total of 1,124.7 acres of land in Austin, Farmers Branch, Fort Worth, Houston, Lewisville, Dallas, Collin County, and Tarrant County, Texas; Palm Desert and Oceanside, California; and Nashville, Tennessee in 23 separate
transactions for a total of $67.3 million. ARI received net cash of $13.7 million, after paying off or paying down or assumption by the purchaser of $13.6 million in mortgage debt secured by such land parcels and after providing purchase money
financing of $35.3 million. ARI also sold 18 apartments, four office buildings, four industrial warehouses, two hotels, and six shopping centers for a total of $216.6 million. ARI received net cash of $47.4 million, after the payoff or assumption by
the purchaser of mortgage debt totaling $133.0 million and after providing purchase money financing of $13.5 million.



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.



ARI expects that it
will be necessary for it to sell $60.2 million, $10.5 million and $31.6 million of its land holdings during each of the next three years to satisfy the debt on the land as it matures. If ARI is unable to sell at least the minimum amount of land to
satisfy the land debt obligations as they mature, ARI, intends to extend such debt or sell other of its assets, specifically income producing properties, to pay the debt.



Stock Loans Payable.    ARI has margin arrangements with various brokerage firms and financial
institutions which provide for borrowings of up to 50% of the market value of marketable equity securities. The borrowings under the margin arrangements are secured by the equity securities and bear interest rates ranging from 5.00% to 24.0%. Margin
borrowings totaled $21.2 million (approximately 22.2% of market value) at December 31, 2003, compared to $8.6 million at December 31, 2002. See NOTE 9. MARGIN BORROWINGS.



32



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##### Table of Contents

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. See ITEM 1. BUSINESS for discussion of the tender offer for shares of TCI and IORI common stock by ARI and the current ownership of TCI and IORI by ARI.



Equity securities of IORI and TCI held by ARI may be deemed to be
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.



ARIs cash flow from these investments is dependent on
the ability of IORI to make distributions. In December 2000, the Board of IORI suspended the payment of quarterly dividends. ARI received no distributions from IORI in 2003, and ARI anticipates receiving no distributions from IORI in 2004.



In 2003, ARI paid dividends to its Preferred stockholders
totaling $2.4 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
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.



Commitments



ARI will rely on externally generated funds, including aggressive land sales, selected sales of income producing properties,
refinancing of properties and, to the extent necessary, borrowings to meet these commitments.



Results of Operations



2003 Compared to 2002.    ARI reported net income of $10.7 million in 2003 compared to a net loss of $8.5 million in 2002. ARIs net income in 2003 included gains on the sale of real estate of $92.6 million
compared to gains on the sale of real estate of $48.4 million in 2002. The primary factors contributing to ARIs net income are discussed in the following paragraphs.



33



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##### Table of Contents

ARI began consolidating TCIs operations effective March 31, 2003. (See ITEM 1.
BUSINESS.) The consolidation is the principal factor for the increase during 2003 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, 2003 results are also presented without the effect of the consolidation of TCIs operations.



|                             |  |          |         |             |   |        |  |   |       
|---------------------------- |  | -------- | ------- | ----------- | - | ------ |  | - | ------
|                             |  | 2003     |         | 2002       
|                             |  | with TCI |         | without TCI |  
|Rents (dollars in thousands) |  |          |         |             |   |        |  |   |       
|Commercial                   |  | $        | 63,696  |             | $ | 21,196 |  | $ | 21,268
|Apartments                   |  |          | 65,036  |             |   | 24,808 |  |   | 23,533
|Hotels                       |  |          | 35,880  |             |   | 28,666 |  |   | 27,675
|Land                         |  |          | 455     |             |   | 46     |  |   | 575   
|Other                        |  |          | 1,841   |             |   | 1,841  |  |   | 246   
|                             |  |          |         |             |   |        |  |   |       
|                             |  | $        | 166,908 |             | $ | 76,557 |  | $ | 73,297
|                             |  |          |         |             |   |        |  |   |       



The increase in
apartment rents, without the effect of the consolidation of TCIs operations, was primarily attributable to [the acquisition of one apartment complex and the construction of one apartment complex in 2002 and one apartment complex in 2003. The
increase in hotel rents was primarily attributable to increased occupancy. Rents are expected to increase in 2004, as a result of completed apartment construction.



|                                                    |  |          |         |             |   |        |  |   |       
|--------------------------------------------------- |  | -------- | ------- | ----------- | - | ------ |  | - | ------
|                                                    |  | 2003     |         | 2002       
|                                                    |  | with TCI |         | without TCI |  
|Property Operations Expenses (dollars in thousands) |  |          |         |             |   |        |  |   |       
|Commercial                                          |  | $        | 37,528  |             | $ | 14,008 |  | $ | 14,010
|Apartments                                          |  |          | 45,819  |             |   | 18,458 |  |   | 15,593
|Hotels                                              |  |          | 27,488  |             |   | 22,115 |  |   | 20,977
|Land                                                |  |          | 5,229   |             |   | 4,041  |  |   | 6,002 
|Other                                               |  |          | 390     |             |   | 390    |  |   | 528   
|                                                    |  |          |         |             |   |        |  |   |       
|                                                    |  | $        | 116,454 |             | $ | 59,012 |  | $ | 57,110
|                                                    |  |          |         |             |   |        |  |   |       



The increase in
apartment operations expense, without the effect of the consolidation of TCIs operations, was primarily attributable to the acquisition of one apartment complex and the construction of one apartment complex in 2002 and one apartment complex in
2003. The increase in hotel operations expense was primarily attributable to increased personnel costs and an increase in repairs and replacement expenses. The decrease in land operations expense was primarily attributable to lower property taxes
due to land sales. Property operations expense is expected to increase in 2004, as a result of completed apartment construction.



Pizza parlor sales and cost of sales increased to $33.1 million and $26.1 million in 2003 from $32.0 million and $25.3 million in 2002. The increases were
primarily attributable to same-store sales increases of 4.6% in 2003 from 2002 levels. Pizza parlor gross margin in 2004 is expected to approximate 2003, unless costs change significantly.



Interest income increased to $9.2 million in 2003 from $3.1 million income in
2002. The increase was primarily attributable to interest earned by RAK during ARIs ownership, interest received by ARI upon the sale of RAK to Realty Advisors, and notes receivable from property sales late in 2002 and early in 2003. Interest
income is expected to decrease in 2004, as over $4.0 million of the interest income in 2003 will not recur in 2004.



Equity in loss of investees improved to $(4.4) million in 2003, from $(20.9) million in 2002. The improvement was primarily attributable to the
consolidation of TCIs operations by ARI effective March 31,



34



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##### Table of Contents

2003, following ARIs acquisition of more than 50% of TCIs common stock. Prior to March 31, 2003, and in 2002, ARIs equity in loss of
investees included equity in TCIs operations. See NOTE 6. INVESTMENTS IN EQUITY INVESTEES.



Loss on sale of investments in equity investees was $(286,000) in 2002, recognizing the loss on the sale of Villas Continental Apartments.



Gain on extinguishment of debt was $7.2 million in 2003. The 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.



Other income decreased to $3.4 million in 2003 from $5.4 million in 2002. The decrease was primarily due to $2.2 million received in 2002 in settlement of a lawsuit against a brokerage firm for improper sales in 2000 of TCI common stock
owned by ARI and held by the brokerage firm, and $1.4 million received in 2002 as partial settlement of a lawsuit against a lender for improperly attempting to seize, in 1996, a mortgage note receivable due to ARI. ARI sold the note to BCM in 1999,
with the provision that any settlement received in excess of the amount paid by BCM, plus accrued interest, would be returned to ARI.



|                                        |  |          |        |             |   |        |  |   |       
|--------------------------------------- |  | -------- | ------ | ----------- | - | ------ |  | - | ------
|                                        |  | 2003     |        | 2002       
|                                        |  | with TCI |        | without TCI |  
|Interest Expense (dollars in thousands) |  |          |        |             |   |        |  |   |       
|Commercial                              |  | $        | 21,235 |             | $ | 8,020  |  | $ | 7,755 
|Apartments                              |  |          | 19,648 |             |   | 8,120  |  |   | 8,573 
|Hotels                                  |  |          | 5,071  |             |   | 3,455  |  |   | 3,822 
|Land                                    |  |          | 17,404 |             |   | 14,397 |  |   | 19,763
|MRI                                     |  |          | 1,127  |             |   | 1,127  |  |   | 840   
|Other                                   |  |          | 6,523  |             |   | 6,523  |  |   | 11,351
|                                        |  |          |        |             |   |        |  |   |       
|                                        |  | $        | 71,008 |             | $ | 41,642 |  | $ | 52,104
|                                        |  |          |        |             |   |        |  |   |       



The decrease in land
and other interest expense, without the effect of the consolidation of TCIs operations, was primarily attributable to reduced balances payable on stock loans and land mortgages. In 2002, ARI recognized a $912,000 loss on an interest rate swap
contract. See NOTE 22. DERIVATIVE FINANCIAL INSTRUMENTS.



|                                                     |  |          |        |             |   |       |  |   |      
|---------------------------------------------------- |  | -------- | ------ | ----------- | - | ----- |  | - | -----
|                                                     |  | 2003     |        | 2002       
|                                                     |  | with TCI |        | without TCI |  
|Depreciation and Amortization (dollars in thousands) |  |          |        |             |   |       |  |   |      
|Commercial                                           |  | $        | 13,851 |             | $ | 2,849 |  | $ | 2,891
|Apartments                                           |  |          | 5,523  |             |   | 1,842 |  |   | 1,762
|Hotels                                               |  |          | 4,945  |             |   | 3,590 |  |   | 1,920
|MRI                                                  |  |          | 1,484  |             |   | 1,484 |  |   | 1,268
|Other                                                |  |          | 45     |             |   |      |  |   | 39   
|                                                     |  |          |        |             |   |       |  |   |      
|                                                     |  | $        | 25,848 |             | $ | 9,765 |  | $ | 7,880
|                                                     |  |          |        |             |   |       |  |   |      



The increase in hotel
depreciation and amortization, without the effect of the consolidation of TCIs operations, was primarily attributable to improvements at one hotel.



Discount on sale of notes receivable was $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 RECEIVABLE.



35



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##### Table of Contents

General and administrative expenses increased to $22.1 million in 2003 from $12.5 million in 2002. The
expenses in 2003 include $3.1 million of one-time reimbursements to BCM for legal fees. Without the effect of the consolidation, general and administrative expenses increased to $14.6 million, which included $1.4 million of the legal fee
reimbursement to BCM.



Advisory fees increased to $9.3 million
in 2003 from $5.9 million in 2002. Without the effect of the consolidation, advisory fees increased to $6.0 million. Advisory fees are expected to decrease in 2004, as ARIs gross asset base, the basis for the fee, is expected to decrease
through property sales.



Writedown of assets held for sale
increased to $19.9 million in 2003, from $4.2 million in 2002. In 2003, the carrying value of an office building in Encino, California (sold in the third quarter of 2003), a hotel in Kansas City, Missouri (sold in the third quarter of 2003), an
office building in Omaha, Nebraska (returned to the lender via a Deed in Lieu of Foreclosure in the first quarter of 2004), an apartment in Merrillville, Indiana (sold in the first quarter of 2004), a 2.9 acre tract of land in Dallas, Texas (sold in
the first quarter of 2004), and an office building in Farmers Branch, Texas, were reduced to their net realizable value. In 2002, the carrying values of a shopping center in Fort Worth, Texas (sold in the fourth quarter of 2002) and an 89.3 acre
tract of land in Palm Desert, California (sold in the first quarter of 2003) were reduced to their net realizable value.



Minority interest decreased to $347,000 in 2003 from $1.3 million in 2002. Minority interest is the earnings attributable to owners, other than ARI, of
certain controlled entities. Minority interest in 2003 and 2002 was attributable, in part, to the preferred return limited partner units of Ocean Beach Partners, L.P., Valley Ranch, L.P., Edina Park Plaza Associates, L.P., Hawthorne Lakes
Associates, L.P., ART Florida Portfolio I, ART Florida Portfolio II, ART Florida Portfolio III and ART Palm, L.P. The decrease is primarily attributable to reduced minority participation in ARI partnerships and to the consolidation of TCIs
operations by ARI effective March 31, 2003, following ARIs acquisition of more than 50% of TCIs common shares.



Gains on sale of real estate increased to $92.6 million in 2003 from $48.4 million in 2002. In 2003, gains of $29.6 million were recognized on the sale of
17 apartments: Bay Anchor, Confederate Point, Georgetown, Greenbriar, Lake Chateau, Landing & Marina, Lincoln Court, Marquis at Vista Ridge, Northside Villas, Quail Creek, Regency, Rolling Hills, Seville, Stone Oak, Summerfield, Treehouse, and
Willow Wick; $20.2 million on the sale of 12 commercial properties: Bridgeview Plaza, Cullman, Oak Tree Village, Parkway Centre, Sheboygan, Westwood, 56 Expressway, Bonita Plaza, Kelly (108th Street), Kelly (301 Hilltop), McLeod, and Tricon; and
$45.2 million on the sale of land: 20.0 acres of Eagle Crest land, 82.4 acres of Jeffries Ranch land, 30.0 acres of Keller land, four tracts totaling 18.7 acres of Mason Goodrich land, 2.1 acres of McKinney Corners II land, 9.9 acres of Nashville
land, 25.1 acres of Palm Desert land, two tracts totaling 400.8 acres of Pioneer Crossing land, 14.0 acres of Sendero Ranch land, 6.1 acres of Solco-Valley Ranch land, 37.1 acres of State Highway 121/Watters Road land, 4.8 acres of Vineyards II
land, and 14.5 acres of Vista Ridge land. In 2003, losses of $2.3 million were recognized on the sale of Pinecrest Apartments, Encino Executive Plaza, Remington Tower, 89.3 acres of Katrina land, 8.0 acres of Mason Goodrich land, two tracts totaling
310.3 acres of Pioneer Crossing land, and 14.0 acres of Sendero Ranch land. Included in the gain recognized in 2003 was $19.9 million that was deferred in prior years. Without the effect of the consolidation, gains on sale of real estate increased
to $64.6 million.



In 2002, gains of $28.7 million were
recognized on the sale of 14 apartments: Conradi House, Daluce, Grand Lagoon, Lee Hills, Morning Star, Oak Hill, Pheasant Ridge, Pinecrest West, Regency, Stonebridge, Valley Hi, Villas, Westwood Parc and Woodsong; $3.4 million on the sale of two
commercial properties: Melrose Business Park and Rosedale Towers; and $18.9 million on the sale of land: 171.1 acres of Desert Wells land, 8.8 acres of Eldorado Parkway land, three tracts totaling 45.4 acres of Elm Fork land, two tracts totaling 3.9
acres of Katrina land, five tracts totaling 69.7 acres of Mason Goodrich land, 71.0 acres of Messick land, 61.0 acres of Monterrey land, 1.0 acre of Nashville land, 129.7 acres of Varner Road land and two tracts totaling 13.9 acres of Vista Ridge
land. In 2002, losses of $2.6 million were recognized on the sale of Stonegate Apartments, White Pines Apartments, 10.8 acres of Frisco Bridges land, 80.0 acres of Katrina land, and 0.2 acres of Thompson II land.



36



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##### Table of Contents

Equity in gain on sale of real estate by equity investees decreased to $715,000 in 2003 from $24.1
million in 2002. The decrease is primarily attributable to the consolidation of TCIs operations in 2003. In 2002, ARIs equity in TCIs gains was included in this caption.



Net income from discontinued operations was $43.3 million in 2003 compared to $49.3 million in 2002. The net income relates
to 23 properties and leasehold interests in oil and gas properties that ARI sold during 2002, 32 properties that ARI sold in 2003, and four properties that ARI sold in 2004. The following table summarizes revenue and expense information for the
properties sold.



|                                                          |  |      |        |   |      |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                          |  | 2003 |        |   | 2002 |  
|Revenue                                                   |  |      |        |   |      |   |        |  
|Rental                                                    |  | $    | 20,744 |   |      | $ | 37,592 |  
|Property operations                                       |  |      | 15,373 |   |      |   | 23,996 |  
|                                                          |  |      |        |   |      |   |        |  
|                                                          |  |      | 5,371  |   |      |   | 13,596 |  
|Expenses                                                  |  |      |        |   |      |   |        |  
|Interest                                                  |  |      | 8,618  |   |      |   | 13,729 |  
|Depreciation                                              |  |      | 2,984  |   |      |   | 6,365  |  
|                                                          |  |      |        |   |      |   |        |  
|                                                          |  |      | 11,602 |   |      |   | 20,094 |  
|Net loss from discontinued operations                     |  |      | (6,231 | ) |      |   | (6,498 | )
|Gain on sale of real estate                               |  |      | 48,806 |   |      |   | 31,706 |  
|Equity in gain on sale of real estate by equity investees |  |      | 715    |   |      |   | 24,069 |  
|                                                          |  |      |        |   |      |   |        |  
|Net income from discontinued operations                   |  | $    | 43,290 |   |      | $ | 49,277 |  
|                                                          |  |      |        |   |      |   |        |  



2002 Compared to
2001.    ARI reported a net loss of $8.5 million in 2002 compared to net income of $17.4 million in 2001. ARIs net income in 2002 included gains on the sale of real estate of $48.4 million compared to gains on the sale
of real estate of $85.7 million in 2001. The primary factors contributing to ARIs net income are discussed in the following paragraphs.



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|                             |  | 2002 |        | 2001
|Rents (dollars in thousands) |  |      |        |      |   |       
|Commercial                   |  | $    | 21,268 |      | $ | 20,841
|Apartments                   |  |      | 23,533 |      |   | 37,517
|Hotels                       |  |      | 27,675 |      |   | 27,470
|Land                         |  |      | 575    |      |   | 253   
|Other                        |  |      | 246    |      |   | 693   
|                             |  |      |        |      |   |       
|                             |  | $    | 73,297 |      | $ | 86,774
|                             |  |      |        |      |   |       



The decrease in
apartment rents was primarily due to the sale of 17 apartments in 2001.



|                                                   |  |      |        |      |   |       
|-------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                   |  | 2002 |        | 2001
|Property Operations Expense (dollars in thousands) |  |      |        |      |   |       
|Commercial                                         |  | $    | 14,010 |      | $ | 13,117
|Apartments                                         |  |      | 15,593 |      |   | 24,218
|Hotels                                             |  |      | 20,977 |      |   | 21,895
|Land                                               |  |      | 6,002  |      |   | 8,577 
|Other                                              |  |      | 528    |      |   | 598   
|                                                   |  |      |        |      |   |       
|                                                   |  | $    | 57,110 |      | $ | 68,405
|                                                   |  |      |        |      |   |       



37



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##### Table of Contents

The increase in commercial operations expense was primarily attributable to increased subleasing costs at
three properties. The decrease in apartment operations expense was primarily due to the sale of 17 apartments in 2001. The decrease in hotel operations expense was primarily due to a reduction in property improvement costs. The decrease in land
operations expense was primarily due to the sale of 34 land parcels in 2001.



Pizza parlor sales and cost of sales increased to $32.0 million and $25.3 million in 2002 from $29.4 million and $23.1 million in 2001. The increases were primarily attributable to same-store sales increases of 7.9%
in 2002 from 2001 levels.



Interest income of $3.1 million in
2002 approximated the $2.8 million income in 2001.



Equity in
loss of investees was $(20.9) million in 2002, compared to $(13.4) million in 2001. The change was primarily attributable to increased net losses, before gains on sale of real estate, for TCI and IORI in 2002. See NOTE 6. INVESTMENTS IN EQUITY
INVESTEES.



Loss on sale of investments in equity
investees improved to $(286,000) in 2002 from $(387,000) in 2001. In 2002, loss on the sale of Villas Continental Apartments was recognized. In 2001, loss on the sale of TCI common stock was recognized.



Equity in gain on sale of real estate by equity investees increased to $24.1
million in 2002, from $22.5 million in 2001. The 2002 results are reported as a component of net income (loss) from discontinued operations, and the 2001 results are reported as a component of net income (loss) from continuing operations. See NOTE
6. INVESTMENTS IN EQUITY INVESTEES.



Other income
increased to $5.4 million in 2002 from a loss of $369,000 in 2001. The increase was primarily due to $2.2 million received in settlement of a lawsuit against a brokerage firm for improper sales in 2000 of TCI common stock owned by ARI and held by
the brokerage firm, and $1.4 million received as partial settlement of a lawsuit against a lender for improperly attempting to seize, in 1996, a mortgage note receivable due to ARI. ARI sold the note to BCM in 1999, with the provision that any
settlement received in excess of the amount paid by BCM, plus accrued interest, would be returned to ARI.



|                                        |  |      |        |      |   |       
|--------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                        |  | 2002 |        | 2001
|Interest Expense (dollars in thousands) |  |      |        |      |   |       
|Commercial                              |  | $    | 7,755  |      | $ | 7,335 
|Apartments                              |  |      | 8,573  |      |   | 12,490
|Hotels                                  |  |      | 3,822  |      |   | 3,894 
|Land                                    |  |      | 19,763 |      |   | 28,885
|MRI                                     |  |      | 840    |      |   | 939   
|Other                                   |  |      | 11,351 |      |   | 6,063 
|                                        |  |      |        |      |   |       
|                                        |  | $    | 52,104 |      | $ | 59,606
|                                        |  |      |        |      |   |       



The decrease in
interest expense for apartments and land was primarily attributable to property sales in 2002 and 2001. The increase in other interest expense was primarily due to higher interest rates and higher balances on stock loans.



|                                                     |  |      |       |      |   |      
|---------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                     |  | 2002 |       | 2001
|Depreciation and Amortization (dollars in thousands) |  |      |       |      |   |      
|Commercial                                           |  | $    | 2,891 |      | $ | 3,561
|Apartments                                           |  |      | 1,762 |      |   | 2,634
|Hotels                                               |  |      | 1,920 |      |   | 2,062
|MRI                                                  |  |      | 1,268 |      |   | 1,320
|Other                                                |  |      | 39    |      |   | 13   
|                                                     |  |      |       |      |   |      
|                                                     |  | $    | 7,880 |      | $ | 9,590
|                                                     |  |      |       |      |   |      



38



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##### Table of Contents

The decrease in depreciation and amortization from commercial and apartments was primarily attributable
to property sales in 2002 and 2001.



General and administrative
expenses of $12.5 million in 2002 approximated the $12.7 million in 2001.



Advisory fees decreased to $5.9 million in 2002 from $6.7 million in 2001. The decrease was attributable to the decrease in ARIs gross assets, the basis for such fee.



There was no net income fee to affiliate in 2002, compared to $166,000 in
2001. The net income fee payable to ARIs advisor is 10% of the net income for the year, in excess of a 10% return on shareholders equity. For 2002, ARIs net income was below the 10% return threshold.



There was no incentive fee to affiliate in 2002, compared to $3.8 million in
2001. The incentive fee is only due if ARI is also subject to the net income fee. For 2002, the net income fee requirements were not met; therefore, no incentive fee was due. This fee represents 10% of the excess of net capital gains over net
capital losses from sales of operating properties.



Writedown
of assets held for sale increased to $4.2 million in 2002, from $2.5 million in 2001. In 2002, the carrying values of a shopping center in Fort Worth, Texas, sold in the fourth quarter of 2002 and an 89.3 acre tract of land in Palm Desert,
California, sold in the first quarter of 2003, were reduced to their net realizable value. In 2001, the carrying value of a hotel in Sofia, Bulgaria was reduced to its net realizable value.



Minority interest increased to $1.3 million in 2002 from $972,000 in 2001.
Minority interest is the earnings attributable to owners other than ARI, of certain controlled entities. Minority interest in 2002 and 2001 was attributable, in part, to the preferred return limited partner units of Ocean Beach Partners, L.P.,
Valley Ranch, L.P., Grapevine American, L.P., Edina Park Plaza Associates, L.P., Hawthorne Lakes Associates, L.P., ART Florida Portfolio 1, ART Florida Portfolio II, ART Florida Portfolio III and ART Palm, L.P. In 2001, minority interest includes,
in addition to the preferred returns discussed above, $(429,000) reflecting 20% minority interest in the net loss from the Grand Hotel Sofia.



Gains on sale of real estate decreased to $48.4 million in 2002 from $83.4 million in 2001. In 2002, gains of $28.7 million were recognized on the sale of
14 apartments: Conradi House, Daluce, Grand Lagoon, Lee Hills, Morning Star, Oak Hill, Pheasant Ridge, Pinecrest West, Regency, Stonebridge, Valley Hi, Villas, Westwood Parc and Woodsong; $3.4 million on the sale of two commercial properties:
Melrose Business Park and Rosedale Towers; and $18.9 million on the sale of land: 171.1 acres of Desert Wells land, 8.8 acres of Eldorado Parkway land, three tracts totaling 45.4 acres of Elm Fork land, two tracts totaling 3.9 acres of Katrina land,
five tracts totaling 69.7 acres of Mason Goodrich land, 71.0 acres of Messick land, 61.0 acres of Monterrey land, 1.0 acre of Nashville land, 129.7 acres of Varner Road land and two tracts totaling 13.9 acres of Vista Ridge land. In 2002, losses of
$2.6 million were recognized on the sale of Stonegate Apartments, White Pines Apartments, 10.8 acres of Frisco Bridges land, 80.0 acres of Katrina land, and 0.2 acres of Thompson II land.



In 2001, gains of $73.5 million were recognized on the sale of 15 apartments: Rockborough, Carriage Park, Kimberly Woods,
Place One, Shadowood, Bent Tree, Club Mar, Covered Bridge, Crossing at Church, Chalet I, Chalet II, Nora Pines, Timbercreek, Blackhawk, and Woodstock; $2.2 million on the sale of Regency Pointe Shopping Center; and $16.3 million on the sale of land:
two tracts totaling 27.2 acres of Chase Oaks land, 10.0 acres of Elm Fork land, 27.8 acres of Frisco Bridges land, 1.7 acres of Las Colinas land, 22.1 acres of Mason Goodrich land, 4.2 acres of Nashville land, 5 tracts totaling 49.7 acres of Katrina
land, 6.6 acres of Rasor land, 12.7 acres of Santa Clarita land, 232.8 acres of Scoggins land, 408.0 acres of Scout land, 10.4 acres of Tree Farm land, 5.0 acres of Vista Ridge land, and 0.4 acres of Waters Edge Apartment land. In 2001, losses of
$6.3 million were recognized on the sale of Glenwood Apartments, 12.0 acres of Plano Parkway land, 120.4 acres of Yorktown land, two tracts totaling 3.2 acres of Nashville land, Ashford Apartments, 6.7 acres of Santa Clarita land and 107.0 acres of
Elm Fork land.



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Net income from discontinued operations was $49.2 million in 2002 compared to a net loss from
discontinued operations of ($8.0) million in 2001. The net income (loss) relates to 23 properties and leasehold interests in oil and gas properties that ARI sold during 2002, 32 properties that ARI sold in 2003, and four properties that ARI sold in
2004. The following table summarizes revenue and expense information for the properties sold.



|                                                          |  |      |        |   |      |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                          |  | 2002 |        |   | 2001 |  
|Revenue                                                   |  |      |        |   |      |   |        |  
|Rental                                                    |  | $    | 37,592 |   |      | $ | 42,585 |  
|Property operations                                       |  |      | 23,996 |   |      |   | 25,049 |  
|                                                          |  |      |        |   |      |   |        |  
|                                                          |  |      | 13,596 |   |      |   | 17,536 |  
|Expenses                                                  |  |      |        |   |      |   |        |  
|Interest                                                  |  |      | 13,729 |   |      |   | 17,442 |  
|Depreciation                                              |  |      | 6,365  |   |      |   | 8,117  |  
|                                                          |  |      |        |   |      |   |        |  
|                                                          |  |      | 20,094 |   |      |   | 25,559 |  
|Net loss from discontinued operations                     |  |      | (6,498 | ) |      |   | (8,023 | )
|Gain on sale of real estate                               |  |      | 31,706 |   |      |   |       |  
|Equity in gain on sale of real estate by equity investees |  |      | 24,069 |   |      |   |       |  
|                                                          |  |      |        |   |      |   |        |  
|Net income (loss) from discontinued operations            |  | $    | 49,277 |   |      | $ | (8,023 | )
|                                                          |  |      |        |   |      |   |        |  



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 1997, ARI
entered into leases with BCM and an affiliate of BCM for space at the One Hickory Centre Office Building, construction of which was completed in December 1998. The BCM leases, effective upon ARI obtaining permanent financing of the building, were
for 75,852 sq.ft. (approximately 75% of the building), had terms of ten and fifteen years and provided for annual base rent of $19.25 per sq.ft. for the first year. In January 2001, both leases were terminated, and ARI entered into a new lease with
BCM, effective October 1, 2000. The new lease is for 59,463 sq.ft. (approximately 62% of the building), has a term of three years, and provides for annual base rent of $1.3 million or $21.50 per sq.ft. Effective March 1, 2002, the lease was amended
to 57,879 sq.ft. (approximately 59% of the building), with an annual base rent of $1.2 million, or $21.50 per sq.ft.



ARI received rents of $175,000 in 2003 from BCM for BCMs lease at Addison Hanger. BCM owns a corporate jet that is housed at the hanger and ARI has
available space at the hanger.



In 2003, ARI paid BCM, Prime,
their affiliates and a related party $9.3 million in advisory fees, $1.3 million in loan arrangement fees, $371,000 in property acquisition fees, $6.2 million in real estate brokerage commissions, $4.1 million in construction supervision fees and
$4.3 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of BCM. In addition, as provided in the Advisory Agreement, BCM and Prime received cost
reimbursements of $5.2 million. Also in 2003, ARI paid an additional $3.1 million to BCM in a one-time reimbursement of legal fees.



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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% 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 outstanding Class A units as follows: December 31, 20051,625,000 units; and December 31, 20068,563,750 units.



Advances and Loans



From time-to-time, ARI and its affiliates have made advances to each other, which have not had specific repayment terms, do
not bear interest, are unsecured and have been reflected in ARIs financial statements as other assets or other liabilities. At December 31, 2003, after accounting for affiliate purchases and sales, amounts still owed by ARI were $627,000 and
$1.2 million to IORI and Regis, respectively. Also at December 31, 2003, ARI was owed $2.0 million, $4.4 million and $1.7 million by BCM, Prime and Regis, respectively.



Activity in 2003 included:



In March 2000, a loan with a remaining principal balance of $2.6 million to Lordstown, L.P., matured. The loan, to provide funds to purchase for resale
various parcels of land, is secured by a second lien on land in Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital, Ltd., the limited partner of Lordstown, L.P., and a profits interest in subsequent land sales.
A corporation controlled by Richard D. Morgan is the general partner of Lordstown, L.P. Mr. Morgan served as a director of ARI until October 2001. In December 2003, the note was exchanged with Regis I, a related party, for three notes receivable:
$1.4 million from Harvest Hill; $1.4 million from Harvest Hill I; and $2.1 million from Harvest Hill III, related parties. All three notes bear interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the extent
surplus cash is available, beginning in November 2003 and are guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, a related party, which is
the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



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 subordinate pledge of
850,000 shares of ARI Common Stock owned by BCM. The shares are also pledged to a lender on ARIs behalf. The interest rate was changed to 2% over the prime rate, currently 6.25% per annum, and the accrued but unpaid interest of $984,000 was
added to the principal. The new principal balance is $5.6 million. All principal and accrued interest are due at maturity.



In December 2000, an unsecured loan with a remaining principal balance of $1.8 million to Warwick of Summit, Inc. (Warwick) matured. The loan
was made to provide funds to purchase, renovate and expand a shopping center property in Warwick, Rhode Island. All principal and interest were due at maturity. Richard D. Morgan, a Warwick shareholder, served as a director of ARI until October
2001. In December 2003, the note was sold to Prime for $1.8 million, to reduce ARIs affiliate debt.



In December 2000, a loan with a principal balance of $1.6 million to Bordeaux matured. The loan, to provide funds to purchase and renovate a shopping
center in Oklahoma City, Oklahoma, was secured by (1) a 100% interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock



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of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux
members. Richard D. Morgan, a Bordeaux member until July 2003, served as a director of ARI until October 2001. In July 2003, the members of Bordeaux assigned 100% of the membership interest in Bordeaux to ARI, in payment of the note. ARI recorded
real estate assets of $8.8 million and assumed $7.2 million of mortgage debt and other liabilities on the shopping center and the undeveloped land. No gain or loss was recorded on this transaction. In December 2003, the shopping center was exchanged
with Regis I, a related party, for three notes receivable: $1.4 million from Harvest Hill; $1.4 million from Harvest Hill I; and $2.1 million from Harvest Hill III, related parties. All three notes bear interest at 12.0%, mature in October 2013, and
require monthly payments of interest, to the extent surplus cash is available, beginning in November 2003 and are guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the
General Manager of Unified, a related party, which is the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to 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 bears 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 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 ITEM 1. BUSINESS.) 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 2% over the prime rate, currently 6.0%. All principal and interest are due at maturity. Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer of ARI, is a
10% shareholder of One Realco. Mr. Kimbrough does not participate in day-to-day operations or management of One Realco.



On June 2, 2003, a subsidiary of ARI exchanged all of its 674,971 IORI shares with BCM, receiving 650,000 TCI shares from BCM. In addition, BCM has
executed a promissory note in favor of the subsidiary of ARI in the amount of $526,000. The note bore interest at 2% over the prime rate, currently 6.00% per annum, matured in June 2004 and required monthly interest payments beginning in June 2003
and quarterly principal payments beginning in September 2003. In December 2003, ARI obtained 24,184 shares of TCI common stock from BCM in payment of the final $394,000 balance due on the note.



In July 2003, ARI sold its interest in MRI to Gruppa for $18.5 million,
receiving $7.4 million in cash after debt assumption and providing purchase money financing of $2.3 million. The note bore interest at 10.0% per annum, matured in August 2013 and required monthly payments of principal and interest beginning in
September 2003. ARI owns 20% of Gruppa, thereby retaining a 20% interest in MRI. Due to debt guarantees and ARIs continuing ownership interest in MRI, management has determined that this should be accounted for as a financing transaction. In
September 2003, ARI sold the note to Syntek West for $2.3 million, plus accrued but unpaid interest, to reduce affiliate debt.



In October 2003, ARI advanced $1.6 million to the Class A Limited Partners of Encino Executive Plaza, Ltd., of which ARI is the general partner. The loans
bear interest at 8.5% per annum and mature in June 2006. Interest due to ARI will be deducted from the quarterly return owed by ARI to the Class A Limited Partners, eliminating the quarterly payments. The outstanding principal is due at maturity.



In June 2002, ARI converted $4.5 million of its receivable
from BCM to a recourse note receivable. This transaction was to provide ARI with additional security over that provided by an unsecured receivable. The note



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bore interest at 10.0% per annum, matured in March 2004 and required quarterly payments of principal and accrued interest, beginning in December 2002. In
December 2003, ARI received 92,052 shares of TCI common stock in payment of the final $1.5 million balance due on the note.



In December 2002, ARI sold the Lakeshore Villas Apartments to Humble, a related party, for $22.0 million, paying $764,000 after payment of closing costs
and debt paydown and providing purchase money financing of $8.4 million. One note had a principal amount of $2.0 million. The note was unsecured, and was guaranteed by Unified, a related party. The second note had a principal amount of $6.4 million,
and was secured by a pledge by Unified of 100% of the Member interest in Humble. Both notes bore interest at 11.5% per annum, matured in December 2009 and required quarterly payments beginning in March 2003. Richard W. Humphrey, a Director of ARI
until July 2003, is the President of Humble and the President and Treasurer of Unified. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified. In December 2003, both notes were sold to IORI for $8.4 million,
plus accrued interest, to reduce ARIs affiliate debt.



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%.



Property Transactions



Activity in 2003
included:



In January 2002, IORI purchased 100% of the
outstanding common shares of Rosedale Corporation (Rosedale), a wholly-owned subsidiary of ARI, for $5.1 million. The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of
net operating income. Rosedale owned the Rosedale Towers Office Building. ARI guaranteed that the asset would produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset failed to
produce the 12% return, ARI would pay IORI any shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, IORI could require ARI to repurchase the shares of Rosedale for the purchase price. The business purpose of the
transaction was for IORI to make an equity investment in Rosedale, anticipating a profitable return, and for ARI to receive cash for its equity investment. Management classified this related party transaction as a note payable to IORI. After IORI
sold the Rosedale Towers Office Building to an unrelated buyer in December 2002, ARI owed $2.1 million to IORI for remaining principal and 12% return. In April 2003, ARI repaid $2.0 million in principal and accrued interest. In August 2003, ARI
repaid the remaining principal and accrued interest.



In April
2002, TCI purchased all of the general and limited partnership interests in Garden Confederate Point, L.P. (Confederate Point) from ARI for $1.9 million. The purchase price was determined based upon the market value of the property,
using a market rate multiple of net operating income. Confederate Point owned the Confederate Point Apartments. ARI guaranteed that the asset would produce at least a 12% annual return on the purchase price for a period of three years from the
purchase date. If the asset failed to produce the 12% return, ARI would pay TCI any shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, TCI could require ARI to repurchase the partnership interests in
Confederate Point for the purchase price. The business purpose of this transaction was for TCI to make an equity investment in Confederate Point, anticipating a profitable return, and to reduce ARIs affiliate debt. Management classified this
related party transaction as a note payable to TCI. In November 2003, the property was sold to an unrelated buyer. ARI repaid $2.0 million in principal and accrued interest.



In April 2002, TCI purchased 100% of the common shares of ART One Hickory Corporation (One Hickory), a
wholly-owned subsidiary of ARI, for $4.5 million. The purchase price was determined based upon the market value of the property using a market rate multiple of net operating income. One Hickory owned the One Hickory Centre office building (One
Hickory Centre.) ARI guaranteed that the asset would produce at



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least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI would
pay TCI any shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, TCI could require ARI to repurchase the share of One Hickory for the purchase price. The business purpose of this transaction was for TCI to make
an equity investment in One Hickory, anticipating a profitable return, and to reduce ARIs affiliate debt. Management classified this related party transaction as a note payable. In October 2003, TCI sold One Hickory Centre to IORI for $12.2
million, providing purchase money wrap-around financing of $12.0 million. Also in October 2003, IORI sold One Hickory Centre to ARI for $12.2 million, providing purchase money wrap-around financing of $12.0 million. These additional transactions
discharged the 2002 financing for TCI.



On June 30, 2002, ARI
obtained 71.4% interest in RAK from BCM for $6.0 million. The business purpose of the transaction was to reduce the affiliate payable owed by BCM to ARI. ARIs receivable from BCM was reduced by $6.0 million, and no cash was paid by ARI. At the
date of the acquisition, RAKs assets consisted of $2.3 million in cash, $3.0 million in deposits and marketable securities, and $225,000 in other assets. RAKs net equity was $5.5 million. ARI recorded $1.9 million in goodwill as a result
of this transaction. On June 30, 2003, ARI sold its 71.4% interest in RAK to Realty Advisors and Syntek West for $6.0 million, reducing ARIs affiliate debt. Realty Advisors also paid ARI $600,000, representing 10% interest on ARIs
purchase price in 2002.



In March 2003, TCI purchased the
Bridgeview Plaza and Cullman shopping centers from ARI for $8.7 million and $2.0 million, respectively. The business purpose of the transaction was to reduce ARIs affiliate debt. The purchase price was determined using a market rate multiple
of net operating income.



In October 2003, ARI purchased the
Travelers land from IORI for $25.0 million, paying $1.9 million in cash and giving a wrap note payable to IORI for $22.8 million. The note bears interest at 5.49% per annum, requires monthly payments sufficient to pay the installments due on the
underlying debt and matures in October 2006. The principal is due at maturity.



In December 2003, ARI sold seven properties to subsidiaries of Unified Housing Foundation, Inc. (UHF), a Texas Non-Profit 501(c)3 Corporation. 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 include 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 will not be
recorded as sales. Instead, these transactions will be accounted for on the deposit method and the properties and corresponding debt will continue to be 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. Management is seeking lender approval on the transfer of the notes associated with these property transactions.



In December 2003, ARI sold the Marquis at Vista Ridge Apartments to Housing for Seniors of Lewisville, LLC
(Lewisville,) a related party, for $17.7 million, receiving $2.2 million in cash after debt assumption. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, the sole member of Lewisville.



Also in December 2003, ARI sold the Treehouse Apartments,
Parkway Centre Shopping Center and the Eagle Crest land parcel to IORI for a total sales price of $15.5 million, discharging debt of $10.7 million and reducing affiliate debt by a total of $4.7 million.



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Environmental Matters



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



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



Inflation



The effects
of inflation on ARIs operations are not quantifiable. Revenues from 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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|ITEM 7A.QUANTITATIVE |  | AND QUALITATIVE DISCLOSURES REGARDING 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.



The following table contains only those exposures
that existed at December 31, 2003. 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.



|                                      |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | - |  | - | ------- |  | - | -------
|                                      |  | 2004 |         |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |        |   | Thereafter |   | Total 
|Assets                                |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Trading InstrumentsEquity Price Risk |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Marketable securities at market value |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 5,020  
|Notes receivable                      |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Variable interest ratefair value     |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 9,810  
|Instruments maturities               |  | $    | 9,936   |   |      | $ |       |      |  | $ |       |   |  | $    |       |   |            | $ |       |   |  | $ |        |  | $ | 9,936  
|Instruments amortization             |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |   |  |   |        |  |   |       
|Interest                              |  |      | 348     |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |   |  |   |        |  |   | 348    
|Average rate                          |  |      | 7.0     | % |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |   |  |   |        |  |   |        
|Fixed interest ratefair value        |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 60,054 
|Instruments maturities               |  | $    | 38,690  |   |      | $ | 355    |      |  | $ | 9,529  |   |  | $    | 4,367  |   |            | $ | 2,417  |   |  | $ | 5,884   |  | $ | 61,242 
|Instruments amortization             |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |   |  |   |        |  |   |       
|Interest                              |  |      | 3,371   |   |      |   | 2,333  |      |  |   | 1,391  |   |  |      | 938    |   |            |   | 723    |   |  |   | 3,363   |  |   | 12,119 
|Average rate                          |  |      | 8.0     | % |      |   | 10.4   | %    |  |   | 8.0    | % |  |      | 11.5   | % |            |   | 10.2   | % |  |   |         |  |   |        
|Liabilities                           |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Notes payable                         |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  |   |        
|Variable interest ratefair value     |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 152,413
|Instruments maturities               |  | $    | 94,998  |   |      | $ | 29,217 |      |  | $ | 733    |   |  | $    | 26,108 |   |            | $ |       |   |  | $ | 10,566  |  | $ | 161,622
|Instruments amortization             |  |      | 3,674   |   |      |   | 4,607  |      |  |   | 2,297  |   |  |      | 2,401  |   |            |   | 609    |   |  |   | 11,776  |  |   | 25,364 
|Interest                              |  |      | 8,224   |   |      |   | 3,656  |      |  |   | 2,311  |   |  |      | 1,731  |   |            |   | 1,589  |   |  |   | 12,329  |  |   | 29,840 
|Average rate                          |  |      | 6.0     | % |      |   | 5.1    | %    |  |   | 4.4    | % |  |      | 4.7    | % |            |   | 7.0    | % |  |   |         |  |   |        
|Fixed interest ratefair value        |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |   |  |   |         |  | $ | 810,180
|Instruments maturities               |  | $    | 179,271 |   |      | $ | 33,353 |      |  | $ | 87,244 |   |  | $    | 61,381 |   |            | $ | 46,570 |   |  | $ | 164,090 |  | $ | 571,909
|Instruments amortization             |  |      | 11,009  |   |      |   | 12,661 |      |  |   | 12,157 |   |  |      | 9,841  |   |            |   | 9,476  |   |  |   | 162,184 |  |   | 217,328
|Interest                              |  |      | 48,603  |   |      |   | 41,263 |      |  |   | 38,171 |   |  |      | 32,829 |   |            |   | 28,551 |   |  |   | 313,406 |  |   | 502,823
|Average rate                          |  |      | 7.0     | % |      |   | 7.1    | %    |  |   | 7.6    | % |  |      | 7.8    | % |            |   | 8.0    | % |  |   |         |  |   |        



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##### Table of Contents



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



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                             |  |     
|-------------------------------------------------------------------------------------------- |  | ----
|                                                                                             |  | Page
|Financial Statements                                                                         |  |     
|Report of Independent Certified Public Accountants                                           |  | 48  
|Consolidated Balance SheetsDecember 31, 2003 and 2002                                       |  | 49  
|Consolidated Statements of OperationsYears Ended December 31, 2003, 2002 and 2001           |  | 50  
|Consolidated Statements of Stockholders EquityYears Ended December 31, 2003, 2002 and 2001 |  | 51  
|Consolidated Statements of Cash FlowsYears Ended December 31, 2003, 2002 and 2001           |  | 52  
|Notes to Consolidated Financial Statements                                                   |  | 54  
|                                                                                             | 
|Financial Statement Schedules                                                                |  |     
|Schedule IIIReal Estate and Accumulated Depreciation                                        |  | 101 
|Schedule IVMortgage Loans on Real Estate                                                    |  | 111 



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.



47



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##### Table of Contents

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors of

American Realty Investors, Inc.



We have audited the accompanying consolidated balance sheets of American Realty Investors, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders equity, other
comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2003. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe our audits
provide a reasonable basis for our opinion.



In our opinion,
the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Realty Investors, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



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



As
described in Note 23, American Realty Investors, Inc.s management has indicated its intent to sell both land and operating properties and refinance or extend debt coming due, to meet its liquidity needs.



As described in Note 26, Restatement of 2002 and 2001 Financial Statements,
the Company has restated previously issued financial statements.



BDO SEIDMAN, LLP



Dallas, Texas

April 15, 2004



48



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AMERICAN REALTY INVESTORS, INC.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | ----------- | - | ------- | -
|                                                                                                                                                                                                                                                        |  | December 31,                            |          
|                                                                                                                                                                                                                                                        |  | 2003                                    |           |   | 2002        |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   | As Restated |  
|                                                                                                                                                                                                                                                        |  | (dollars in thousands,except per share) |          
|Assets                                                                                                                                                                                                                                                  |  |                                         |           |   |             |   |         |  
|Real estate held for investment                                                                                                                                                                                                                         |  | $                                       | 1,015,385 |   |             | $ | 378,080 |  
|Lessaccumulated depreciation                                                                                                                                                                                                                           |  |                                         | (173,453  | ) |             |   | (96,036 | )
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  |                                         | 841,932   |   |             |   | 282,044 |  
|Real estate held for sale, net of depreciation                                                                                                                                                                                                          |  |                                         | 212,104   |   |             |   | 183,998 |  
|Notes and interest receivable                                                                                                                                                                                                                           |  |                                         |           |   |             |   |         |  
|Performing ($37,697 in 2003 and $34,442 in 2002 from affiliates)                                                                                                                                                                                        |  |                                         | 64,296    |   |             |   | 77,354  |  
|Nonperforming ($6,838 in 2002 from affiliates)                                                                                                                                                                                                          |  |                                         | 10,932    |   |             |   | 7,856   |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  |                                         | 75,228    |   |             |   | 85,210  |  
|Lessallowance for estimated losses                                                                                                                                                                                                                     |  |                                         | (4,633    | ) |             |   | (3,077  | )
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  |                                         | 70,595    |   |             |   | 82,133  |  
|Pizza parlor equipment                                                                                                                                                                                                                                  |  |                                         | 12,237    |   |             |   | 12,557  |  
|Lessaccumulated depreciation                                                                                                                                                                                                                           |  |                                         | (5,385    | ) |             |   | (4,562  | )
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  |                                         | 6,852     |   |             |   | 7,995   |  
|Marketable equity securities, at market value                                                                                                                                                                                                           |  |                                         | 5,020     |   |             |   | 209     |  
|Cash and cash equivalents                                                                                                                                                                                                                               |  |                                         | 9,543     |   |             |   | 8,432   |  
|Investments in equity investees                                                                                                                                                                                                                         |  |                                         | 4,987     |   |             |   | 80,990  |  
|Goodwill, net of accumulated amortization ($1,763 in 2003 and 2002)                                                                                                                                                                                     |  |                                         | 11,858    |   |             |   | 13,784  |  
|Other intangibles, net of accumulated amortization ($822 in 2003 and $773 in 2002)                                                                                                                                                                      |  |                                         | 1,529     |   |             |   | 1,744   |  
|Other assets ($8,098 in 2003 from affiliate)                                                                                                                                                                                                            |  |                                         | 75,761    |   |             |   | 50,001  |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  | $                                       | 1,240,181 |   |             | $ | 711,330 |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                    |  |                                         |           |   |             |   |         |  
|Liabilities                                                                                                                                                                                                                                             |  |                                         |           |   |             |   |         |  
|Notes and interest payable ($34,775 in 2003 and $15,600 in 2002 to affiliate)                                                                                                                                                                           |  | $                                       | 886,615   |   |             | $ | 349,740 |  
|Liabilities related to assets held for sale                                                                                                                                                                                                             |  |                                         | 100,154   |   |             |   | 125,693 |  
|Margin borrowings                                                                                                                                                                                                                                       |  |                                         | 21,194    |   |             |   | 8,558   |  
|Accounts payable and other liabilities ($2,934 in 2003 and $41,085 in 2002 to affiliates)                                                                                                                                                               |  |                                         | 96,360    |   |             |   | 127,872 |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  |                                         | 1,104,323 |   |             |   | 611,863 |  
|Minority interest                                                                                                                                                                                                                                       |  |                                         | 60,178    |   |             |   | 19,940  |  
|Stockholders equity                                                                                                                                                                                                                                    |  |                                         |           |   |             |   |         |  
|Preferred Stock, $2.00 par value, authorized 50,000,000 shares, issued and outstanding Series A, 3,225,370 shares in 2003 and 3,226,858 shares
in 2002 (liquidation preference $32,254), including 900,000 shares in 2003 and 2002 held by subsidiaries |  |                                         | 4,651     |   |             |   | 4,654   |  
|Series E, 50,000 shares in 2003 and 2002 (liquidation preference $500)                                                                                                                                                                                  |  |                                         | 100       |   |             |   | 100     |  
|Common Stock, $.01 par value, authorized 100,000,000 shares; issued 11,392,272 in 2003 and 11,375,127 shares in 2002                                                                                                                                    |  |                                         | 114       |   |             |   | 114     |  
|Treasury stock, at cost, 746,972 shares in 2003                                                                                                                                                                                                         |  |                                         | (9,924    | ) |             |   |        |  
|Paid-in capital                                                                                                                                                                                                                                         |  |                                         | 92,464    |   |             |   | 93,954  |  
|Accumulated deficit                                                                                                                                                                                                                                     |  |                                         | (11,826   | ) |             |   | (22,499 | )
|Accumulated other comprehensive income                                                                                                                                                                                                                  |  |                                         | 101       |   |             |   | 3,204   |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  |                                         | 75,680    |   |             |   | 79,527  |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  
|                                                                                                                                                                                                                                                        |  | $                                       | 1,240,181 |   |             | $ | 711,330 |  
|                                                                                                                                                                                                                                                        |  |                                         |           |   |             |   |         |  



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



49



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AMERICAN REALTY INVESTORS



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ---------- | - | ---- | - | ---------- | ----------- |  | - | ---------- | -
|                                                                                               |  | Years Ended December 31,                 |           
|                                                                                               |  | 2003                                     |            |   | 2002 |   |            | 2001        | 
|                                                                                               |  |                                          |            |   |      |   |            | As Restated | 
|                                                                                               |  | (dollars in thousands, except per share) |           
|Property revenue                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Rents                                                                                          |  | $                                        | 166,908    |   |      | $ | 73,297     |             |  | $ | 86,774     |  
|Property operations expenses ($4,273 in 2003, $4,325 in 2002 and $3,918 in 2001 to affiliates) |  |                                          | 116,454    |   |      |   | 57,110     |             |  |   | 68,406     |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Operating income                                                                               |  |                                          | 50,454     |   |      |   | 16,187     |             |  |   | 18,368     |  
|Land operations                                                                                |  |                                          |            |   |      |   |            |             |  |   |            |  
|Sales                                                                                          |  |                                          | 67,283     |   |      |   | 127,750    |             |  |   | 51,841     |  
|Cost of sales                                                                                  |  |                                          | 39,883     |   |      |   | 75,718     |             |  |   | 43,063     |  
|Deferral of gains on current period sales                                                      |  |                                          | 3,493      |   |      |   | 36,135     |             |  |   | 895        |  
|Recognition of previously deferred gains                                                       |  |                                          | 19,924     |   |      |   | 830        |             |  |   |           |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Gain on land sales                                                                             |  |                                          | 43,831     |   |      |   | 16,727     |             |  |   | 7,883      |  
|Pizza parlor operations                                                                        |  |                                          |            |   |      |   |            |             |  |   |            |  
|Sales                                                                                          |  |                                          | 33,057     |   |      |   | 32,036     |             |  |   | 29,383     |  
|Cost of sales                                                                                  |  |                                          | 26,051     |   |      |   | 25,286     |             |  |   | 23,105     |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Gross margin                                                                                   |  |                                          | 7,006      |   |      |   | 6,750      |             |  |   | 6,278      |  
|Income from operations                                                                         |  |                                          | 101,291    |   |      |   | 39,664     |             |  |   | 32,529     |  
|                                                                                               |  |                                          |           
|Other income                                                                                   |  |                                          |            |   |      |   |            |             |  |   |            |  
|Interest income ($4,035 in 2003, $2,515 in 2002 and $2,239 in 2001 from affiliates)            |  |                                          | 9,222      |   |      |   | 3,145      |             |  |   | 2,817      |  
|Equity in loss of investees                                                                    |  |                                          | (4,441     | ) |      |   | (20,914    | )           |  |   | (13,352    | )
|Gain on extinguishment of debt                                                                 |  |                                          | 7,210      |   |      |   |           |             |  |   |           |  
|Gain on condemnation award                                                                     |  |                                          | 4,800      |   |      |   |           |             |  |   |           |  
|Loss on sale of investments in equity investees                                                |  |                                          |           |   |      |   | (286       | )           |  |   | (387       | )
|Gain on sale of real estate                                                                    |  |                                          |           |   |      |   |           |             |  |   | 77,816     |  
|Equity in gain on sale of real estate by equity investees                                      |  |                                          |           |   |      |   |           |             |  |   | 22,542     |  
|Other ($300 in 2002 from affiliates)                                                           |  |                                          | 3,408      |   |      |   | 5,445      |             |  |   | (369       | )
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|                                                                                               |  |                                          | 20,199     |   |      |   | (12,610    | )           |  |   | 89,067     |  
|Other expenses                                                                                 |  |                                          |            |   |      |   |            |             |  |   |            |  
|Interest ($833 in 2003 and $1,703 in 2002 to affiliates)                                       |  |                                          | 71,008     |   |      |   | 52,104     |             |  |   | 59,606     |  
|Depreciation and amortization                                                                  |  |                                          | 25,848     |   |      |   | 7,880      |             |  |   | 9,590      |  
|Discount on sale of notes receivable                                                           |  |                                          | 2,220      |   |      |   |           |             |  |   |           |  
|General and administrative ($8,282 in 2003, $2,546 in 2002 and $2,845 in 2001 to affiliates)   |  |                                          | 22,124     |   |      |   | 12,479     |             |  |   | 12,743     |  
|Advisory fee to affiliate                                                                      |  |                                          | 9,345      |   |      |   | 5,899      |             |  |   | 6,715      |  
|Net income fee to affiliate                                                                    |  |                                          |           |   |      |   |           |             |  |   | 166        |  
|Incentive fee to affiliate                                                                     |  |                                          |           |   |      |   |           |             |  |   | 3,827      |  
|Litigation settlement                                                                          |  |                                          | 15         |   |      |   | 916        |             |  |   | 100        |  
|Writedown of assets held for sale                                                              |  |                                          | 19,892     |   |      |   | 4,171      |             |  |   | 2,500      |  
|Loss on foreign currency transactions                                                          |  |                                          | 3,309      |   |      |   |           |             |  |   |           |  
|Minority interest                                                                              |  |                                          | 347        |   |      |   | 1,346      |             |  |   | 972        |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|                                                                                               |  |                                          | 154,108    |   |      |   | 84,795     |             |  |   | 96,219     |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Net income (loss) from continuing operations                                                   |  |                                          | (32,618    | ) |      |   | (57,741    | )           |  |   | 25,377     |  
|                                                                                               |  |                                          |           
|Discontinued operations:                                                                       |  |                                          |            |   |      |   |            |             |  |   |            |  
|Loss from operations                                                                           |  |                                          | (6,231     | ) |      |   | (6,498     | )           |  |   | (8,023     | )
|Gain on sale of real estate                                                                    |  |                                          | 48,806     |   |      |   | 31,706     |             |  |   |           |  
|Equity in gain on sale of real estate by equity investees                                      |  |                                          | 715        |   |      |   | 24,069     |             |  |   |           |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Net income (loss) from discontinued operations                                                 |  |                                          | 43,290     |   |      |   | 49,277     |             |  |   | (8,023     | )
|                                                                                               |  |                                          |           
|Net income (loss)                                                                              |  |                                          | 10,672     |   |      |   | (8,464     | )           |  |   | 17,354     |  
|Preferred dividend requirement                                                                 |  |                                          | (2,351     | ) |      |   | (2,401     | )           |  |   | (2,485     | )
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Net income (loss) applicable to Common shares                                                  |  | $                                        | 8,321      |   |      | $ | (10,865    | )           |  | $ | 14,869     |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Earnings per sharebasic and diluted                                                           |  |                                          |            |   |      |   |            |             |  |   |            |  
|Net income (loss) from continuing operations                                                   |  | $                                        | (3.24      | ) |      | $ | (5.29      | )           |  | $ | 1.95       |  
|Discontinued operations                                                                        |  |                                          | 4.01       |   |      |   | 4.33       |             |  |   | (.68       | )
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Net income (loss) applicable to Common shares                                                  |  | $                                        | 77         |   |      | $ | (.96       | )           |  | $ | 1.27       |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  
|Weighted average Common shares used in computing earnings per share                            |  |                                          | 10,789,352 |   |      |   | 11,375,127 |             |  |   | 11,714,374 |  
|                                                                                               |  |                                          |            |   |      |   |            |             |  |   |            |  



Convertible Preferred
Stock (2,325,370, 2,326,858 and 2,424,910 shares) and options to purchase 98,250, 105,750 and 183,750 shares of ARIs Common Stock were excluded from the computation of diluted earnings per share for 2003, 2002 and 2001, respectively, because
the effect of their inclusion would be antidilutive.



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



50



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AMERICAN REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ---------------------------------------- | ----- | - | ---------------------- | - | ----------- |  | - | ------------- | - |  | -------------- | ------ | - | ------------------ | - | ------ | ------------------------------------------ |  | - | ------------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Series APreferredStock                   |       |   | Series EPreferredStock |   | CommonStock |  |   | TreasuryStock |   |  | Paid-inCapital |        |   | AccumulatedDeficit |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | StockholdersEquity |  
|                                                         |  | (dollars in thousands, except per share) |      
|Balance, January 1, 2001                                 |  | $                                        | 4,843 |   |                        | $ | 100         |  | $ | 118           |   |  | $              | (17    | ) |                    | $ | 99,747 |                                            |  | $ | (31,389             | ) |  | $ |       |   |  | $ | 73,402 |  
|Series A Preferred Stock cash dividend ($1.00 per share) |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (2,455 | )                                          |  |   |                    |   |  |   |       |   |  |   | (2,455 | )
|Issuance of Series A Preferred Stock                     |  |                                          | 7     |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | 29     |                                            |  |   |                    |   |  |   |       |   |  |   | 36     |  
|Series E Preferred Stock cash dividend ($0.60 per share) |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (30    | )                                          |  |   |                    |   |  |   |       |   |  |   | (30    | )
|Retirement of Treasury Stock                             |  |                                          |      |   |                        |   |            |  |   |              |   |  |                | 17     |   |                    |   | (17    | )                                          |  |   |                    |   |  |   |       |   |  |   |       |  
|Repurchase of Common Stock                               |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (133   | )                                          |  |   |                    |   |  |   |       |   |  |   | (133   | )
|Cancellation of Common Stock                             |  |                                          |      |   |                        |   |            |  |   | (4            | ) |  |                |       |   |                    |   | 4      |                                            |  |   |                    |   |  |   |       |   |  |   |       |  
|Common Stock dividends (pre-merger)                      |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (5     | )                                          |  |   |                    |   |  |   |       |   |  |   | (5     | )
|Net income                                               |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   |       |                                            |  |   | 17,354              |   |  |   |       |   |  |   | 17,354 |  
|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2001 (as Restated)                 |  |                                          | 4,850 |   |                        |   | 100         |  |   | 114           |   |  |                |       |   |                    |   | 97,140 |                                            |  |   | (14,035             | ) |  |   |       |   |  |   | 88,169 |  
|Comprehensive income                                     |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  
|Foreign currency translation gain                        |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   |       |                                            |  |   |                    |   |  |   | 3,204  |   |  |   | 3,204  |  
|Net loss                                                 |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   |       |                                            |  |   | (8,464              | ) |  |   |       |   |  |   | (8,464 | )
|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  
|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   | (5,260 | )
|Series A Preferred Stock cash dividend ($1.00 per share) |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (2,371 | )                                          |  |   |                    |   |  |   |       |   |  |   | (2,371 | )
|Series E Preferred Stock cash dividend ($0.60 per share) |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (30    | )                                          |  |   |                    |   |  |   |       |   |  |   | (30    | )
|Repurchase of Series A Preferred Stock                   |  |                                          | (196  | ) |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (784   | )                                          |  |   |                    |   |  |   |       |   |  |   | (980   | )
|Common Stock dividends (pre-merger)                      |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | (25    | )                                          |  |   |                    |   |  |   |       |   |  |   | (25    | )
|Other                                                    |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   | 24     |                                            |  |   |                    |   |  |   |       |   |  |   | 24     |  
|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2002 (as Restated)                 |  |                                          | 4,654 |   |                        |   | 100         |  |   | 114           |   |  |                |       |   |                    |   | 93,954 |                                            |  |   | (22,499             | ) |  |   | 3,204  |   |  |   | 79,527 |  
|Comprehensive income                                     |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  
|Unrealized foreign currency translation gain             |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   |       |                                            |  |   |                    |   |  |   | 14     |   |  |   | 14     |  
|Sale of foreign operations                               |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   |       |                                            |  |   |                    |   |  |   | (3,117 | ) |  |   | (3,117 | )
|Net income                                               |  |                                          |      |   |                        |   |            |  |   |              |   |  |                |       |   |                    |   |       |                                            |  |   | 10,672              |   |  |   |       |   |  |   | 10,672 |  
|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  
|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   | 7,569  |  
|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 |                                            |  | $ | (11,826             | ) |  | $ | 101    |   |  | $ | 75,680 |  
|                                                         |  |                                          |       |   |                        |   |             |  |   |               |   |  |                |        |   |                    |   |        |                                            |  |   |                     |   |  |   |        |   |  |   |        |  



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



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AMERICAN REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                                                 |  |                              |         |   |      |   |         |             |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | ----------- |  | - | ------- | -
|                                                                                                                                                                 |  | For Years Ended December 31, |        
|                                                                                                                                                                 |  | 2003                         |         |   | 2002 |   |         | 2001        | 
|                                                                                                                                                                 |  |                              |         |   |      |   |         | As Restated | 
|                                                                                                                                                                 |  | (dollars in thousands)       |        
|Cash Flows From Operating Activities                                                                                                                             |  |                              |         |   |      |   |         |             |  |   |         |  
|Net income (loss)                                                                                                                                                |  | $                            | 10,672  |   |      | $ | (8,464  | )           |  | $ | 17,354  |  
|Reconciliation of net income (loss) to net cash used in operating activities Adjustments to reconcile net income (loss) to net cash used in
operating activities |  |                              |         |   |      |   |         |             |  |   |         |  
|Gain on sale of real estate                                                                                                                                      |  |                              | (92,637 | ) |      |   | (48,433 | )           |  |   | (85,699 | )
|Depreciation and amortization                                                                                                                                    |  |                              | 28,832  |   |      |   | 14,245  |             |  |   | 17,707  |  
|Amortization of deferred borrowing costs                                                                                                                         |  |                              | 11,031  |   |      |   | 8,930   |             |  |   | 14,335  |  
|Writedown of assets held for sale                                                                                                                                |  |                              | 19,892  |   |      |   | 4,171   |             |  |   | 2,500   |  
|Discount on sale of notes receivable                                                                                                                             |  |                              | 2,220   |   |      |   |        |             |  |   |        |  
|Litigation settlement                                                                                                                                            |  |                              |        |   |      |   | 916     |             |  |   | 100     |  
|Gain on extinguishment of debt                                                                                                                                   |  |                              | (7,210  | ) |      |   |        |             |  |   |        |  
|Gain on condemnation award                                                                                                                                       |  |                              | (4,800  | ) |      |   |        |             |  |   |        |  
|Equity in (income) loss of investees                                                                                                                             |  |                              | 3,726   |   |      |   | (2,869  | )           |  |   | (8,803  | )
|Loss on foreign currency transactions                                                                                                                            |  |                              | 3,309   |   |      |   |        |             |  |   |        |  
|Distributions from equity investees operating activities                                                                                                        |  |                              |        |   |      |   |        |             |  |   | 53      |  
|Increase in accrued interest receivable                                                                                                                          |  |                              | (3,992  | ) |      |   | (1,586  | )           |  |   | (1,045  | )
|(Increase) decrease in other assets                                                                                                                              |  |                              | 6,686   |   |      |   | (14,481 | )           |  |   | 1,517   |  
|Increase (decrease) in accrued interest payable                                                                                                                  |  |                              | 1,723   |   |      |   | 2,437   |             |  |   | (61     | )
|Increase (decrease) in accounts payable and other liabilities (includes $(36,160) in 2003, $(14,117) in 2002, and $4,526 in 2001 with
affiliates)                |  |                              | 7,825   |   |      |   | (6,277  | )           |  |   | (3,427  | )
|Decrease in minority interest                                                                                                                                    |  |                              | (3,032  | ) |      |   | (1,282  | )           |  |   | (3,142  | )
|                                                                                                                                                                 |  |                              |         |   |      |   |         |             |  |   |         |  
|Net cash used in operating activities                                                                                                                            |  | $                            | (15,755 | ) |      | $ | (52,693 | )           |  | $ | (48,611 | )
|                                                                                                                                                                 |  |                              |         |   |      |   |         |             |  |   |         |  
|Cash Flows From Investing Activities                                                                                                                             |  |                              |         |   |      |   |         |             |  |   |         |  
|Collections on notes receivable ($2,535 in 2003, $776 in 2002 and $21 in 2001 from affiliates)                                                                   |  | $                            | 29,622  |   |      | $ | 7,416   |             |  | $ | 4,995   |  
|Proceeds from sale of notes receivable                                                                                                                           |  |                              | 33,866  |   |      |   | 7,641   |             |  |   |        |  
|Notes receivable funded                                                                                                                                          |  |                              | (3,593  | ) |      |   | (2,169  | )           |  |   | (14,094 | )
|Proceeds from sale of real estate                                                                                                                                |  |                              | 163,097 |   |      |   | 102,772 |             |  |   | 136,171 |  
|Purchase of marketable equity securities                                                                                                                         |  |                              | (1,640  | ) |      |   |        |             |  |   |        |  
|Proceeds from sale of marketable equity securities                                                                                                               |  |                              | 179     |   |      |   | 1,291   |             |  |   |        |  
|Acquisitions of real estate                                                                                                                                      |  |                              | (15,313 | ) |      |   | (1,359  | )           |  |   |        |  
|Real estate improvements                                                                                                                                         |  |                              | (50,997 | ) |      |   | (34,336 | )           |  |   | (19,581 | )
|Pizza parlor equipment purchased                                                                                                                                 |  |                              | (1,615  | ) |      |   | (2,869  | )           |  |   | (1,493  | )
|Proceeds from sale of pizza parlor equipment                                                                                                                     |  |                              | 438     |   |      |   | 1,498   |             |  |   |        |  
|Acquisition of leasehold interests                                                                                                                               |  |                              |        |   |      |   |        |             |  |   | (400    | )
|Purchase of oilfield equipment                                                                                                                                   |  |                              |        |   |      |   |        |             |  |   | (511    | )
|Earnest money deposits                                                                                                                                           |  |                              | (8,594  | ) |      |   | 331     |             |  |   | (1,825  | )
|Distribution to equity investees                                                                                                                                 |  |                              | (648    | ) |      |   |        |             |  |   |        |  
|Settlement of interest rate swap contract                                                                                                                        |  |                              | (31     | ) |      |   | (284    | )           |  |   |        |  
|Investment in real estate entities, net of cash acquired                                                                                                         |  |                              | (25,677 | ) |      |   | (3,976  | )           |  |   | (39,505 | )
|                                                                                                                                                                 |  |                              |         |   |      |   |         |             |  |   |         |  
|Net cash provided by investing activities                                                                                                                        |  | $                            | 119,094 |   |      | $ | 75,956  |             |  | $ | 63,757  |  
|                                                                                                                                                                 |  |                              |         |   |      |   |         |             |  |   |         |  



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



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AMERICAN REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                     |  |                              |          |   |      |   |          |            |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | ---------- |  | - | -------- | -
|                                                                                                                     |  | For Years Ended December 31, |         
|                                                                                                                     |  | 2003                         |          |   | 2002 |   |          | 2001       | 
|                                                                                                                     |  |                              |          |   |      |   |          | AsRestated | 
|                                                                                                                     |  | (dollars in thousands)       |         
|Cash Flows From Financing Activities                                                                                 |  |                              |          |   |      |   |          |            |  |   |          |  
|Proceeds from notes payable                                                                                          |  | $                            | 178,523  |   |      | $ | 103,701  |            |  | $ | 146,773  |  
|Margin borrowings (payments), net                                                                                    |  |                              | 11,886   |   |      |   | (19,548  | )          |  |   | 14,389   |  
|Payments on notes payable                                                                                            |  |                              | (285,307 | ) |      |   | (133,959 | )          |  |   | (171,531 | )
|Deferred borrowing costs                                                                                             |  |                              | (7,450   | ) |      |   | (7,170   | )          |  |   | (9,478   | )
|Net advances from affiliates                                                                                         |  |                              | 2,485    |   |      |   | 43,813   |            |  |   | 3,833    |  
|Dividends paid                                                                                                       |  |                              | (2,351   | ) |      |   | (2,401   | )          |  |   | (2,467   | )
|Repurchase of Preferred Stock                                                                                        |  |                              | (14      | ) |      |   |         |            |  |   |         |  
|Repurchase of Common Stock                                                                                           |  |                              |         |   |      |   |         |            |  |   | (133     | )
|Stock sale profits received from affiliate                                                                           |  |                              |         |   |      |   | 24       |            |  |   |         |  
|                                                                                                                     |  |                              |          |   |      |   |          |            |  |   |          |  
|Net cash used in financing activities                                                                                |  |                              | (102,228 | ) |      |   | (15,540  | )          |  |   | (18,614  | )
|                                                                                                                     |  |                              |          |   |      |   |          |            |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                                 |  |                              | 1,111    |   |      |   | 7,723    |            |  |   | (3,468   | )
|Cash and cash equivalents, beginning of year                                                                         |  |                              | 8,432    |   |      |   | 709      |            |  |   | 4,177    |  
|                                                                                                                     |  |                              |          |   |      |   |          |            |  |   |          |  
|Cash and cash equivalents, end of year                                                                               |  | $                            | 9,543    |   |      | $ | 8,432    |            |  | $ | 709      |  
|                                                                                                                     |  |                              |          |   |      |   |          |            |  |   |          |  
|Supplemental Disclosures of Cash Flow Information                                                                    |  |                              |          |   |      |   |          |            |  |   |          |  
|Cash paid for interest                                                                                               |  | $                            | 80,867   |   |      | $ | 54,400   |            |  | $ | 62,608   |  
|Schedule of noncash investing and financing activities                                                               |  |                              |          |   |      |   |          |            |  |   |          |  
|Notes payable from acquisition of real estate                                                                        |  | $                            | 29,151   |   |      | $ |         |            |  | $ | 2,549    |  
|Notes payable assumed by buyer upon sale of real estate                                                              |  |                              | 45,321   |   |      |   | 80,729   |            |  |   | 34,293   |  
|Series A Preferred Stock issued in conjunction with the acquisition ofEQK Realty Investors, I                        |  |                              |         |   |      |   |         |            |  |   | 36       |  
|Carrying value of real estate exchanged for other real estate                                                        |  |                              |         |   |      |   | 7,224    |            |  |   | 3,726    |  
|Redemption of Series A Preferred Stock                                                                               |  |                              |         |   |      |   | 980      |            |  |   |         |  
|Purchase accounting adjustment of net assets acquired                                                                |  |                              | 58,558   |   |      |   |         |            |  |   |         |  
|Notes receivable from sale of real estate                                                                            |  |                              | 59,440   |   |      |   | 59,578   |            |  |   | 6,336    |  
|Series F Preferred Stock issued in conjunction with the acquisition of leasehold interests in oil and gas properties |  |                              |         |   |      |   |         |            |  |   | 3,969    |  
|Cancellation of Series F Preferred Stock                                                                             |  |                              |         |   |      |   | 3,969    |            |  |   |         |  
|Note receivable from sale of leasehold interests                                                                     |  |                              |         |   |      |   | 1,300    |            |  |   |         |  
|Contribute new pizza restaurant to new venture                                                                       |  |                              |         |   |      |   |         |            |  |   | 210      |  
|Asset impairment writedown                                                                                           |  |                              | 19,892   |   |      |   | 4,171    |            |  |   | 2,500    |  
|Acquisition of property to satisfy debt                                                                              |  |                              |         |   |      |   | 19,789   |            |  |   |         |  
|Disposal of property to satisfy debt                                                                                 |  |                              | 4,760    |   |      |   | 41,050   |            |  |   |         |  
|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                                                 |  |                              | 1,500    |   |      |   |         |            |  |   |         |  
|Foreign currency translation gain                                                                                    |  |                              |         |   |      |   | 3,204    |            |  |   |         |  
|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                                                                         |  |                              | 14       |   |      |   |         |            |  |   |         |  
|Issuance of Common Stock                                                                                             |  |                              | 195      |   |      |   |         |            |  |   |         |  
|Subsidiary shares of parent Common Stock                                                                             |  |                              | 9,924    |   |      |   |         |            |  |   |         |  
|Exchange of investments with affiliate                                                                               |  |                              | 678      |   |      |   |         |            |  |   |         |  



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



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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 are in thousands, except per share amounts.



Certain balances for 2001 and 2002 have been reclassified to conform to the
2003 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 that 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
unitholders, 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 offer for the IORI
and TCI shares. The tender offer was 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 offer, ARI acquired 265,036 IORI shares and
1,213,226 TCI shares. The completion of the tender offer fulfills the obligations under the Olive Settlement and the Olive Litigation has been dismissed with prejudice.



After the tender offer, 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 offer 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, 2003, ARI and TCI have
the same Board of Directors and three of the directors of IORI also serve as directors of ARI.



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. In addition, BCM has executed a promissory note in favor



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of ARI in the amount of $526,000 (see NOTE 3. NOTES AND INTEREST RECEIVABLE). 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 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, 2003, ARI owned 80.0% of the outstanding shares of TCI. ARI no longer directly owns any IORI shares. At December 31, 2003, ARI owned 19.2% 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 of each year presented.



|                               |  |      |         |      |   |         |  
|------------------------------ |  | ---- | ------- | ---- | - | ------- | -
|                               |  | 2003 |         | 2002 |  
|Revenue, as reported           |  | $    | 267,248 |      | $ | 233,083 |  
|Revenue, pro forma             |  |      | 296,556 |      |   | 300,163 |  
|Net income (loss), as reported |  |      | 10,672  |      |   | (8,464  | )
|Net income (loss), pro forma   |  |      | 9,739   |      |   | (5,358  | )
|Earnings per share:            |  |      |         |      |   |         |  
|Basic, as reported             |  | $    | .77     |      | $ | (.96    | )
|Basic, pro forma               |  | $    | .70     |      | $ | (.73    | )
|Diluted, as reported           |  | $    | .77     |      | $ | (.96    | )
|Diluted, pro forma             |  | $    | .70     |      | $ | (.73    | )



On June 30, 2003, ARI
sold its 71.4% interest in Realty Advisors Korea, Ltd. (RAK) to Realty Advisors, Inc. (Realty Advisors), a related party, for $6.0 million, reducing ARIs affiliate debt. Realty Advisors also paid ARI $600,000,
representing 10% interest on the $6.0 million price paid by ARI to purchase the 71.4% interest in RAK in 2002.



Effective July 1, 2003, Prime Asset Management, Inc. (PAMI) became the advisor to ARI and TCI. PAMI is owned by Realty Advisors (79%) and
Syntek West, Inc. (Syntek West) (21%), related parties. Syntek West is owned by Gene 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 LLC), which is 100% owned by PIAMI, replaced PIAMI as the advisor to ARI and TCI.



Basis of consolidation.    The Consolidated Financial Statements include the accounts of ARI, and all controlled subsidiaries
and partnerships. All significant intercompany transactions and balances have been eliminated.



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.



Nonperforming notes receivable.    ARI considers a note receivable to be nonperforming 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 nonperforming will also be considered nonperforming, without regard to the
borrowers adherence to payment terms.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 January
2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be
issued by ARI after 2003; however, disclosures are required currently if ARI expects to consolidate any variable interest entities. ARI does not currently believe that any entities will be consolidated as a result of FIN 46.



In May 2003, the FASB issued Statement of Financial Accounting Standard No.
150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). This statement establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires the issuer to classify a financial instrument that is within the scope of the standard as a liability if such financial instrument embodies an obligation of the issuer. The adoption of SFAS
No. 150 is not expected to require ARI to reclass any financial instruments currently on its balance sheet.



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.



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



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 remeasurement 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 $3.3 million in 2003.



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.



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 nonperforming 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. Basic earnings per share is determined utilizing only the weighted average of outstanding common shares. The effect of potentially dilutive options, warrants and convertible
securities is included in the calculation of diluted per share data. Options, warrants and convertible securities have not been considered since their inclusion would be anti-dilutive.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. 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 (loss) and net income (loss) per share would have been the pro forma amounts indicated below.



|                                                                                                                                             |  |                                                 |       |      |   |         |      |  |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----- | ---- | - | ------- | ---- |  | - | ------
|                                                                                                                                             |  | 2003                                            |       | 2002 |   |         | 2001
|                                                                                                                                             |  | (dollars in thousands, except per shareamounts)
|Net income (loss) applicable to Common Shares, as reported                                                                                   |  | $                                               | 8,321 |      | $ | (10,865 | )    |  | $ | 14,869
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax
effects |  |                                                 | 21    |      |   | 114     |      |  |   | 669   
|                                                                                                                                             |  |                                                 |       |      |   |         |      |  |   |       
|Pro forma net income (loss)                                                                                                                  |  | $                                               | 8,320 |      | $ | (10,979 | )    |  | $ | 14,200
|                                                                                                                                             |  |                                                 |       |      |   |         |      |  |   |       
|Net income (loss) per share                                                                                                                  |  |                                                 |       |      |   |         |      |  |   |       
|Basic, as reported                                                                                                                           |  | $                                               | .77   |      | $ | (.96    | )    |  | $ | 1.27  
|Basic, pro forma                                                                                                                             |  | $                                               | .77   |      | $ | (.97    | )    |  | $ | 1.21  
|Diluted, as reported                                                                                                                         |  | $                                               | .77   |      | $ | (.96    | )    |  | $ | 1.27  
|Diluted, pro forma                                                                                                                           |  | $                                               | .77   |      | $ | (.97    | )    |  | $ | 1.21  



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:



|                          |  |      |   |  |      |   |  |      |  
|------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                          |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Dividend yield            |  |     |   |  |     |   |  |     |  
|Expected volatility       |  | 65   | % |  | 69   | % |  | 72   | %
|Risk-free interest rate   |  | 4.04 | % |  | 3.95 | % |  | 1.25 | %
|Expected lives (in years) |  | 10   |   |  | 10   |   |  | 10   |  
|Forfeitures               |  | 10   | % |  | 10   | % |  | 10   | %



The weighted average
fair value per share of options granted in 2003 was $7.05.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2.REAL ESTATE



In 2003, ARI purchased the following properties:



|                  |  |                    |  |             |  |               |        |              |   |              |  |   |              |     |  |              |     |  |      
|----------------- |  | ------------------ |  | ----------- |  | ------------- | ------ | ------------ | - | ------------ |  | - | ------------ | --- |  | ------------ | --- |  | -----
|Property          |  | Location           |  | Units/Acres |  | PurchasePrice |        | Net CashPaid |   | DebtIncurred |  |   | InterestRate |     |  | MaturityDate
|Apartments        |  |                    |  |             |  |               |        |              |   |              |  |   |              |     |  |              |     |  |      
|Breakwater Bay(1) |  | Beaumont, TX       |  | 176 Units   |  | $             | 1,979  |              | $ | 383          |  | $ | 1,554        |     |  | 5.50         | %   |  | 08/44
|Capitol Hill(1)   |  | Little Rock, AR    |  | 156 Units   |  |               | 1,904  |              |   | 615          |  |   | 1,289        |     |  | 5.50         |     |  | 10/44
|Longwood          |  | Long Beach, MS     |  | 200 Units   |  |               | 6,349  |              |   | 334          |  |   | 6,349        | (2) |  | 7.60         |     |  | 04/12
|Land              |  |                    |  |             |  |               |        |              |   |              |  |   |              |     |  |              |     |  |      
|Pulaski           |  | Pulaski County, AR |  | 21.9 Acres  |  |               | 2,000  |              |   | 695          |  |   | 1,400        |     |  | 6.50         |     |  | 05/05
|Sheffield Village |  | Grand Prairie, TX  |  | 13.9 Acres  |  |               | 1,500  |              |   | 464          |  |   | 975          |     |  | 5.50         | (3) |  | 09/04
|Travelers(4)      |  | Farmers Branch, TX |  | 202.0 Acres |  |               | 25,000 |              |   | 1,947        |  |   | 22,802       | (5) |  | 5.49         |     |  | 10/06

---

|(1) |  | Land purchased for apartment construction.
|--- |  | ------------------------------------------

|(2) |  | Assumed debt of seller.
|--- |  | -----------------------

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

|(4) |  | Purchased from IORI.
|--- |  | --------------------

|(5) |  | Seller financing.
|--- |  | -----------------



In February 1990, ARI sold the Bridgeview Plaza Shopping Center, located in LaCrosse, Wisconsin, providing purchase money financing of $5.0 million in the
form of a wrap mortgage. In 1996, the first lienholder called a default under the ARI wrap note, and directed future payments be made directly to them. ARI began legal proceedings against the first lienholder. In December 1999, ARI sold the note to
BCM at its carrying value of $489,000, retaining the right to receive any amounts collected by BCM in excess of the amount paid, plus accrued interest. In 2002, ARI prevailed in its litigation and ARIs lien on the property was restored. The
borrower continued in default, and ARI foreclosed on the property in March 2003. The property was subsequently sold to TCI. See NOTE 8. RELATED PARTY TRANSACTIONS.



In 2002, ARI purchased the following property:



|                          |  |                   |  |                    |  |               |        |              |   |              |  |   |              |     |  |              |   |  |      
|------------------------- |  | ----------------- |  | ------------------ |  | ------------- | ------ | ------------ | - | ------------ |  | - | ------------ | --- |  | ------------ | - |  | -----
|Property                  |  | Location          |  | Units/Sq.Ft./Acres |  | PurchasePrice |        | Net CashPaid |   | DebtIncurred |  |   | InterestRate |     |  | MaturityDate
|Apartments                |  |                   |  |                    |  |               |        |              |   |              |  |   |              |     |  |              |   |  |      
|Pinecrest(1)              |  | North Augusta, SC |  | 120 Units          |  | $             | 2,979  |              | $ |             |  | $ | 1,423        | (3) |  | 8.75         | % |  | 03/03
|Tiberon Trails(1)         |  | Merrillville, IN  |  | 376 Units          |  |               | 12,336 |              |   |             |  |   | 6,417        | (3) |  | 9.00         |   |  | 07/06
|Shopping Center           |  |                   |  |                    |  |               |        |              |   |              |  |   |              |     |  |              |   |  |      
|Alta Mesa(1)              |  | Ft. Worth, TX     |  | 59,933 Sq.Ft.      |  |               | 3,797  |              |   |             |  |   | 1,804        | (3) |  | 10.43        |   |  | 10/04
|Plaza on Bachman Creek(2) |  | Dallas, TX        |  | 80,278 Sq.Ft.      |  |               | 3,103  |              |   |             |  |   |             |     |  |             |   |  |     
|Land                      |  |                   |  |                    |  |               |        |              |   |              |  |   |              |     |  |              |   |  |      
|Pioneer Crossing          |  | Austin, TX        |  | 79.4 Acres         |  |               | 1,165  |              |   | 1,213        |  |   |             |     |  |             |   |  |     
|Willow Springs            |  | Beaumont, CA      |  | 20.7 Acres         |  |               | 140    |              |   | 146          |  |   |             |     |  |             |   |  |     

---

|(1) |  | Property received from BCM for forgiveness of debt.
|--- |  | ---------------------------------------------------

|(2) |  | Exchanged with TCI for the Oaktree Village Shopping Center, Rasor land parcel and Lakeshore Villas land parcel.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(3) |  | Assumed debt of seller.
|--- |  | -----------------------



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2003, ARI sold the following properties:



|                                   |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|---------------------------------- |  | ------------------ |  | ------------------------ |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | - | ------------------ | --- |  | - | ------ | ----
|Property                           |  | Location           |  | Units/Sq.Ft./Acres/Rooms |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  |   | Gain/(Loss)on Sale |    
|Apartments                         |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Bay Anchor                         |  | Panama City, FL    |  | 12 Units                 |  | $          | 369    |                         | $ |      |                |  | $ | 291                |     |  | $ | 174    |     
|Confederate Point                  |  | Jacksonville, FL   |  | 206 Units                |  |            | 10,700 |                         |   | 2,780 |                |  |   | 7,241              | (3) |  |   | 8,373  |     
|Georgetown                         |  | Panama City, FL    |  | 44 Units                 |  |            | 1,175  |                         |   | 323   |                |  |   | 789                | (3) |  |   | 72     |     
|Greenbriar                         |  | Tallahassee, FL    |  | 50 Units                 |  |            | 1,700  |                         |   | 594   |                |  |   | 976                | (3) |  |   | 1,025  |     
|Lake Château                       |  | Thomasville, GA    |  | 98 Units                 |  |            | 1,600  |                         |   | 460   |                |  |   | 1,033              |     |  |   | 147    |     
|Landing & Marina                   |  | Pensacola, FL      |  | 52 Units                 |  |            | 1,825  |                         |   | 576   |                |  |   | 1,162              | (3) |  |   | 492    |     
|Lincoln Court                      |  | Dallas, TX         |  | 55 Units                 |  |            | 3,038  |                         |   | 1,834 |                |  |   | 1,208              | (3) |  |   | 1,895  |     
|Marquis at Vista Ridge             |  | Lewisville, TX     |  | 288 Units                |  |            | 17,700 |                         |   | 2,175 |                |  |   | 15,525             | (3) |  |   | 125    | (2) 
|Northside Villas                   |  | Tallahassee, FL    |  | 81 Units                 |  |            | 5,575  |                         |   | 1,806 |                |  |   | 2,784              |     |  |   | 915    |     
|Pinecrest                          |  | North Augusta, SC  |  | 120 Units                |  |            | 2,707  |                         |   | 1,136 |                |  |   | 1,429              |     |  |   | (304   | )   
|Quail Creek                        |  | Lawrence, KS       |  | 96 Units                 |  |            | 4,700  |                         |   | 1,188 |                |  |   | 3,260              |     |  |   | 1,683  |     
|Regency                            |  | Lincoln, NE        |  | 106 Units                |  |            | 4,880  |                         |   | 838   |                |  |   | 3,179              |     |  |   | 2,815  |     
|Rolling Hills                      |  | Tallahassee, FL    |  | 134 Units                |  |            | 5,061  |                         |   | 1,361 |                |  |   | 2,785              |     |  |   | 1,182  |     
|Seville                            |  | Tallahassee, FL    |  | 62 Units                 |  |            | 2,795  |                         |   |      |                |  |   | 2,360              |     |  |   | 697    |     
|Stone Oak                          |  | San Antonio, TX    |  | 252 Units                |  |            | 6,930  |                         |   | 3,670 |                |  |   | 2,699              |     |  |   | 4,490  |     
|Summerfield                        |  | Orlando, FL        |  | 224 Units                |  |            | 9,415  |                         |   | 4,845 |                |  |   | 4,476              |     |  |   | 4,268  |     
|Treehouse                          |  | Irving, TX         |  | 160 Units                |  |            | 7,500  |                         |   |      |                |  |   | 5,083              | (3) |  |   | 4,762  | (8) 
|Willow Wick                        |  | North Augusta, SC  |  | 104 Units                |  |            | 2,707  |                         |   | 255   |                |  |   | 1,943              |     |  |   | 1,140  |     
|Shopping Centers                   |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Bridgeview Plaza                   |  | LaCrosse, WI       |  | 116,008 Sq.Ft.           |  |            | 8,700  |                         |   |      |                |  |   |                   |     |  |   | 8,700  | (1) 
|Cullman                            |  | Cullman, AL        |  | 92,466 Sq.Ft.            |  |            | 2,000  |                         |   |      |                |  |   | 2,650              | (3) |  |   | 1,118  | (1) 
|Oak Tree Village                   |  | Lubbock, TX        |  | 45,623 Sq.Ft.            |  |            | 3,366  |                         |   | 1,527 |                |  |   | 1,328              |     |  |   | 820    |     
|Parkway Centre                     |  | Dallas, TX         |  | 28,374 Sq.Ft.            |  |            | 4,000  |                         |   |      |                |  |   | 1,640              | (3) |  |   | 2,470  | (8) 
|Sheboygan                          |  | Sheboygan, WI      |  | 74,532 Sq.Ft.            |  |            | 1,225  |                         |   | 669   |                |  |   | 569                |     |  |   | 181    |     
|Westwood                           |  | Tallahassee, FL    |  | 149,855 Sq.Ft.           |  |            | 8,950  |                         |   | 5,045 |                |  |   | 1,880              |     |  |   | 5,787  |     
|Office Buildings                   |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|56 Expressway                      |  | Oklahoma City, OK  |  | 54,649 Sq. Ft.           |  |            | 1,702  |                         |   | 103   |                |  |   | 1,478              | (3) |  |   | 1,253  |     
|Bonita Plaza                       |  | Bonita, CA         |  | 47,777 Sq.Ft.            |  |            | 8,034  |                         |   | 1,698 |                |  |   | 5,944              |     |  |   | 2,798  |     
|Encino Executive Plaza             |  | Encino, CA         |  | 177,211 Sq.Ft.           |  |            | 37,040 |                         |   | 1,947 |                |  |   | 33,145             |     |  |   | (67    | )   
|Remington Tower                    |  | Tulsa, OK          |  | 90,009 Sq.Ft.            |  |            | 3,360  |                         |   | (80   | )              |  |   | 3,360              | (3) |  |   | (579   | )   
|Land                               |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Eagle Crest                        |  | Dallas, TX         |  | 20.0 Acres               |  |            | 4,000  |                         |   |      |                |  |   | 4,000              | (8) |  |   | 1,918  | (8) 
|Jeffries Ranch                     |  | Oceanside, CA      |  | 82.4 Acres               |  |            | 2,900  |                         |   | 151   |                |  |   |                   |     |  |   | 1,474  |     
|Katrina                            |  | Palm Desert, CA    |  | 89.3 Acres               |  |            | 8,550  |                         |   | (410  | )              |  |   | 2,800              |     |  |   | (40    | )   
|Keller                             |  | Tarrant County, TX |  | 30.0 Acres               |  |            | 2,800  |                         |   | 2,676 |                |  |   |                   |     |  |   | 2,063  |     
|Mason Goodrich                     |  | Houston, TX        |  | 8.0 Acres                |  |            | 210    |                         |   |      | (5)            |  |   |                   |     |  |   | (149   | )   
|Mason Goodrich                     |  | Houston, TX        |  | 1.6 Acres                |  |            | 209    |                         |   | 12    |                |  |   | 169                |     |  |   | 113    |     
|Mason Goodrich                     |  | Houston, TX        |  | 7.7 Acres                |  |            | 900    |                         |   | 36    |                |  |   | 764                |     |  |   | 466    |     
|Mason Goodrich                     |  | Houston, TX        |  | 2.8 Acres                |  |            | 250    |                         |   | 14    |                |  |   | 197                |     |  |   | 97     |     
|Mason Goodrich                     |  | Houston, TX        |  | 6.6 Acres                |  |            | 1,350  |                         |   | 84    |                |  |   | 1,124              |     |  |   | 964    |     
|McKinney Corners II                |  | Collin County, TX  |  | 2.1 Acres                |  |            | 300    |                         |   | (60   | )              |  |   | 285                |     |  |   | 208    |     
|Nashville                          |  | Nashville, TN      |  | 1.1 Acres                |  |            | 201    |                         |   | 9     |                |  |   | 170                |     |  |   | 135    |     
|Nashville                          |  | Nashville, TN      |  | 8.8 Acres                |  |            | 235    |                         |   | (11   | )              |  |   | 217                |     |  |   | 114    |     
|Palm Desert                        |  | Palm Desert, CA    |  | 25.1 Acres               |  |            | 2,600  |                         |   | (88   | )(9)           |  |   |                   |     |  |   | 797    |     
|Pioneer Crossing                   |  | Austin, TX         |  | 367.4 Acres              |  |            | 22,500 |                         |   | 4,948 |                |  |   |                   |     |  |   | 13,916 |     
|Pioneer Crossing                   |  | Austin, TX         |  | 33.4 Acres               |  |            | 2,386  |                         |   | (78   | )              |  |   |                   |     |  |   | 1,776  | (11)
|Pioneer Crossing                   |  | Austin, TX         |  | 113.7 Acres              |  |            | 1,839  |                         |   | 718   |                |  |   |                   |     |  |   | (94    | )   
|Pioneer Crossing                   |  | Austin, TX         |  | 196.6 Acres              |  |            | 3,911  |                         |   | 2,839 |                |  |   |                   |     |  |   | (285   | )   
|Sendero Ranch                      |  | Ft. Worth, TX      |  | 14.0 Acres               |  |            | 300    |                         |   | 292   |                |  |   |                   |     |  |   | (770   | )   
|Scout                              |  | Tarrant County, TX |  | 51.6 Acres               |  |            | 2,788  |                         |   | 485   |                |  |   |                   |     |  |   | 2,321  |     
|Solco-Valley Ranch                 |  | Farmers Branch, TX |  | 6.1 Acres                |  |            | 1,999  |                         |   | (90   | )(7)           |  |   |                   |     |  |   | 529    |     
|State Highway 121/Watters Road(10) |  | Collin County, TX  |  | 37.1 Acres               |  |            | 2,188  |                         |   | 1,197 |                |  |   | 912                |     |  |   | 1,410  |     
|Vineyards II                       |  | Tarrant County, TX |  | 4.8 Acres                |  |            | 2,617  |                         |   | 225   |                |  |   | 1,570              |     |  |   | 14     |     
|Vista Ridge                        |  | Lewisville, TX     |  | 14.5 Acres               |  |            | 2,250  |                         |   | 713   |                |  |   | 1,343              |     |  |   | 622    |     
|Hotels                             |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Clarion KC Airport(6)              |  | Kansas City, MO    |  | 196 Rooms                |  |            | 2,070  |                         |   |      |                |  |   | 4,888              | (6) |  |   |       |     
|Grand Hotel Sofia                  |  | Sofia, Bulgaria    |  | 136 Rooms                |  |            | 24,750 |                         |   | 6,258 |                |  |   | 4,209              | (3) |  |   | (31    | )(4)
|Industrial Warehouses              |  |                    |  |                          |  |            |        |                         |   |       |                |  |   |                    |     |  |   |        |     
|Kelly (108th Street)               |  | Dallas, TX         |  | 20,871 Sq.Ft.            |  |            | 675    |                         |   |      |                |  |   | 634                |     |  |   | 357    |     
|Kelly (301 Hilltop)                |  | Dallas, TX         |  | 76,946 Sq.Ft.            |  |            | 1,800  |                         |   |      |                |  |   | 1,712              |     |  |   | 639    |     
|McLeod                             |  | Orlando, FL        |  | 110,914 Sq.Ft.           |  |            | 5,450  |                         |   | 2,980 |                |  |   | 1,902              |     |  |   | 2,805  |     
|Tricon                             |  | Atlanta, GA        |  | 570,877 Sq.Ft.           |  |            | 13,084 |                         |   | 3,364 |                |  |   | 9,395              |     |  |   | 5,579  |     



60



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



---

|(1) |  | Sold to TCI to satisfy affiliate debt. Gain deferred until sale to unrelated party.
|--- |  | -----------------------------------------------------------------------------------

|(2) |  | Sold to Housing for Seniors of Lewisville, LLC, a related party. Gain deferred until sale to unrelated party.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(3) |  | Debt assumed by purchaser.
|--- |  | --------------------------

|(4) |  | Includes recognition of $3.1 million of accumulated foreign currency translation gains.
|--- |  | ---------------------------------------------------------------------------------------

|(5) |  | Cash of $210,000 was received by BCM and applied to ARIs affiliate debt.
|--- |  | -------------------------------------------------------------------------

|(6) |  | Sold at foreclosure auction. Impairment of $3.3 million and debt forgiveness of $2.8 million recognized.
|--- |  | --------------------------------------------------------------------------------------------------------

|(7) |  | Cash of $2.0 million was received by BCM and applied to ARIs affiliate debt.
|--- |  | -----------------------------------------------------------------------------

|(8) |  | Sold to IORI to satisfy affiliate debt. Gain deferred until sale to unrelated party.
|--- |  | ------------------------------------------------------------------------------------

|(9) |  | Cash of $2.6 million was received by Prime and applied to ARIs affiliate debt.
|--- |  | -------------------------------------------------------------------------------

|(10) |  | Approximately 20.0 acres of Watters Road land and 17.1 acres of State Highway 121 land were sold together in a single transaction.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Gain deferred until collection of note receivable.
|---- |  | --------------------------------------------------

|
|

In 2002, ARI sold the following properties:



|                      |  |                    |  |                    |  |            |        |                         |   |       |                |  |   |                    |      |  |   |        |    
|--------------------- |  | ------------------ |  | ------------------ |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | - | ------------------ | ---- |  | - | ------ | ---
|Property              |  | Location           |  | Units/Acres/Sq.Ft. |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  |   | Gain/(Loss)on Sale |     
|Apartments            |  |                    |  |                    |  |            |        |                         |   |       |                |  |   |                    |      |  |   |        |    
|Conradi House         |  | Tallahassee, FL    |  | 98 Units           |  | $          | 1,809  |                         | $ | 388   |                |  | $ | 1,047              |      |  | $ | 435    |    
|Daluce                |  | Tallahassee, FL    |  | 112 Units          |  |            | 3,634  |                         |   | 779   |                |  |   | 2,494              | (3)  |  |   | 735    |    
|Grand Lagoon          |  | Panama City, FL    |  | 54 Units           |  |            | 2,750  |                         |   | 285   |                |  |   | 2,083              |      |  |   | 1,572  |    
|Lakeshore Villas      |  | Harris County, TX  |  | 312 Units          |  |            | 21,957 |                         |   | (764  | )              |  |   | 13,593             |      |  |   | 8,942  | (7)
|Lee Hills             |  | Tallahassee, FL    |  | 16 Units           |  |            | 445    |                         |   | 355   |                |  |   |                   |      |  |   | 127    |    
|Mallard Lake(1)       |  | Greensboro, NC     |  | 336 Units          |  |            | 14,400 |                         |   |      |                |  |   | 7,362              |      |  |   |       |    
|Morning Star          |  | Tallahassee, FL    |  | 82 Units           |  |            | 2,217  |                         |   | 718   |                |  |   | 1,187              |      |  |   | 618    |    
|Oak Hill              |  | Tallahassee, FL    |  | 92 Units           |  |            | 3,200  |                         |   | 156   | (4)            |  |   | 2,550              |      |  |   | 285    |    
|Pheasant Ridge        |  | Bellevue, NE       |  | 264 Units          |  |            | 10,400 |                         |   | 2,576 |                |  |   | 6,237              |      |  |   | 6,763  |    
|Pinecrest West        |  | Tallahassee, FL    |  | 48 Units           |  |            | 1,600  |                         |   | (48   | )              |  |   | 1,386              |      |  |   | 653    |    
|Regency               |  | Tampa, FL          |  | 78 Units           |  |            | 3,200  |                         |   | 851   |                |  |   | 1,710              |      |  |   | 541    |    
|Stonebridge           |  | Florissant, MO     |  | 100 Units          |  |            | 4,340  |                         |   | 1,142 |                |  |   | 2,893              |      |  |   | 3,081  |    
|Stonegate             |  | Tallahassee, FL    |  | 83 Units           |  |            | 1,785  |                         |   | 486   |                |  |   | 1,026              |      |  |   | (320   | )  
|Valley Hi             |  | Tallahassee, FL    |  | 54 Units           |  |            | 1,452  |                         |   | 75    |                |  |   | 1,159              |      |  |   | 413    |    
|Villas                |  | Plano, TX          |  | 208 Units          |  |            | 8,525  |                         |   | 3,701 |                |  |   | 4,023              |      |  |   | 5,615  |    
|Westwood Parc         |  | Tallahassee, FL    |  | 94 Units           |  |            | 2,523  |                         |   | 817   |                |  |   | 1,370              |      |  |   | 759    |    
|White Pines           |  | Tallahassee, FL    |  | 85 Units           |  |            | 764    |                         |   | 10    |                |  |   | 593                |      |  |   | (127   | )  
|Woodsong              |  | Smyrna, GA         |  | 190 Units          |  |            | 9,200  |                         |   | 2,573 |                |  |   | 8,196              |      |  |   | 7,128  |    
|Office Building       |  |                    |  |                    |  |            |        |                         |   |       |                |  |   |                    |      |  |   |        |    
|Centura               |  | Dallas, TX         |  | 410,901 Sq.Ft.     |  |            | 50,000 |                         |   |      |                |  |   | 43,739             | (3)  |  |   | 5,762  | (5)
|Melrose Business Park |  | Oklahoma City, OK  |  | 124,200 Sq.Ft.     |  |            | 1,890  |                         |   | 953   |                |  |   | 816                |      |  |   | 1,399  |    
|Rosedale Towers       |  | Minneapolis, MN    |  | 84,798 Sq.Ft.      |  |            | 7,235  |                         |   | 3,324 |                |  |   | 7,665              |      |  |   | 2,028  | (8)
|Shopping Center       |  |                    |  |                    |  |            |        |                         |   |       |                |  |   |                    |      |  |   |        |    
|Alta Mesa             |  | Fort Worth, TX     |  | 59,933 Sq.Ft.      |  |            | 3,617  |                         |   | 1,399 |                |  |   | 1,791              |      |  |   |       |    
|Oaktree Village(2)    |  | Lubbock, TX        |  | 45,623 Sq.Ft.      |  |            | 2,302  |                         |   | 131   |                |  |   | 1,389              | (10) |  |   |       |    
|Land                  |  |                    |  |                    |  |            |        |                         |   |       |                |  |   |                    |      |  |   |        |    
|Centura Holdings      |  | Farmers Branch, TX |  | 5.1 Acres          |  |            | 7,747  |                         |   |      |                |  |   | 7,242              | (3)  |  |   | 1,236  | (5)
|Clark                 |  | Farmers Branch, TX |  | 3.3 Acres          |  |            | 4,961  |                         |   |      |                |  |   |                   |      |  |   | 2,675  | (5)
|Desert Wells          |  | Palm Desert, CA    |  | 171.1 Acres        |  |            | 11,900 |                         |   | 1,421 |                |  |   | 1,000              |      |  |   | 5,955  |    
|Desert Wells          |  | Palm Desert, CA    |  | 238.0 Acres        |  |            | 23,785 |                         |   | 321   |                |  |   | 1,050              |      |  |   | 15,024 | (9)
|Eldorado Parkway      |  | Collin County, TX  |  | 8.8 Acres          |  |            | 1,180  |                         |   | 1,030 |                |  |   | 50                 |      |  |   | 104    |    
|Elm Fork              |  | Denton County, TX  |  | 14.5 Acres         |  |            | 2,745  |                         |   | (105  | )              |  |   | 2,633              |      |  |   | 1,615  |    
|Elm Fork              |  | Denton County, TX  |  | 14.2 Acres         |  |            | 1,526  |                         |   | (54   | )              |  |   | 701                |      |  |   | 527    |    
|Elm Fork              |  | Denton County, TX  |  | 16.7 Acres         |  |            | 1,617  |                         |   | (299  | )              |  |   | 1,554              |      |  |   | 429    |    
|Frisco Bridges        |  | Collin County, TX  |  | 10.8 Acres         |  |            | 1,881  |                         |   | 151   |                |  |   | 1,500              |      |  |   | (94    | )  



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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 |     
|Landcontinued      |  |                    |  |                    |  |            |        |                         |   |        |                |  |   |                    |      |  |   |        |    
|Hollywood Casino    |  | Farmers Branch, TX |  | 42.8 Acres         |  | $          | 16,987 |                         | $ |       |                |  | $ | 6,222              | (3)  |  | $ | 7,520  | (5)
|Katrina             |  | Palm Desert, CA    |  | 2.1 Acres          |  |            | 1,323  |                         |   | (40    | )              |  |   | 1,237              |      |  |   | 978    |    
|Katrina             |  | Palm Desert, CA    |  | 80.0 Acres         |  |            | 6,778  |                         |   | (1,382 | )              |  |   | 2,500              |      |  |   | (2,032 | )  
|Katrina             |  | Palm Desert, CA    |  | 1.8 Acres          |  |            | 700    |                         |   | 648    |                |  |   |                   |      |  |   | 464    |    
|Lakeshore Villas(2) |  | Harris County, TX  |  | 16.9 Acres         |  |            | 1,499  |                         |   | 215    |                |  |   |                   |      |  |   |       |    
|Marine Creek        |  | Ft. Worth, TX      |  | 54.2 Acres         |  |            | 3,700  |                         |   |       |                |  |   | 1,500              | (10) |  |   | 1,334  | (5)
|Mason Goodrich      |  | Houston, TX        |  | 7.9 Acres          |  |            | 672    |                         |   | 46     |                |  |   | 554                |      |  |   | 268    |    
|Mason Goodrich      |  | Houston, TX        |  | 10.3 Acres         |  |            | 1,444  |                         |   | 93     |                |  |   | 1,225              |      |  |   | 895    |    
|Mason Goodrich      |  | Houston, TX        |  | 18.0 Acres         |  |            | 2,790  |                         |   |       |                |  |   | 2,690              | (10) |  |   | 1,982  | (5)
|Mason Goodrich      |  | Houston, TX        |  | 13.0 Acres         |  |            | 1,150  |                         |   | (445   | )              |  |   | 400                |      |  |   | 521    |    
|Mason Goodrich      |  | Houston, TX        |  | 31.5 Acres         |  |            | 2,800  |                         |   | 132    |                |  |   | 1,425              |      |  |   | 324    |    
|Mason Goodrich      |  | Houston, TX        |  | 7.0 Acres          |  |            | 760    |                         |   | 93     |                |  |   | 593                |      |  |   | 396    |    
|Messick             |  | Palm Desert, CA    |  | 71.0 Acres         |  |            | 6,015  |                         |   | (163   | )              |  |   | 1,300              |      |  |   | 2,056  |    
|Monterrey           |  | Riverside, CA      |  | 61.0 Acres         |  |            | 4,625  |                         |   |       |                |  |   |                   |      |  |   | 61     | (6)
|Nashville           |  | Nashville, TN      |  | 16.6 Acres         |  |            | 1,890  |                         |   |       |                |  |   | 955                | (10) |  |   | 1,016  | (5)
|Nashville           |  | Nashville, TN      |  | 1.0 Acres          |  |            | 140    |                         |   | (4     | )              |  |   | 125                |      |  |   | 73     |    
|Rasor(2)            |  | Plano, TX          |  | 24.5 Acres         |  |            | 1,211  |                         |   | 174    |                |  |   |                   |      |  |   |       |    
|Thompson II         |  | Dallas County, TX  |  | .2 Acres           |  |            | 21     |                         |   | 20     |                |  |   |                   |      |  |   | (11    | )  
|Varner Road         |  | Riverside, CA      |  | 129.7 Acres        |  |            | 3,700  |                         |   | 671    |                |  |   |                   |      |  |   | 1,413  |    
|Vista Ridge         |  | Lewisville, TX     |  | 10.0 Acres         |  |            | 1,525  |                         |   | 130    |                |  |   | 1,220              |      |  |   | 401    |    
|Vista Ridge         |  | Lewisville, TX     |  | 3.9 Acres          |  |            | 630    |                         |   | 1      |                |  |   | 531                |      |  |   | 170    |    
|Willow Springs      |  | Beaumont, CA       |  | 1,503.0 Acres      |  |            | 9,800  |                         |   | (1,345 | )              |  |   | 2,600              |      |  |   | 4,872  | (9)
|Woolley             |  | Farmers Branch, TX |  | 0.4 Acres          |  |            | 637    |                         |   |       |                |  |   |                   |      |  |   | 466    | (5)

---

|(1) |  | Exchanged for Governors Square, Grand Lagoon, Park Avenue, Greenbriar, Regency and Westwood Apartments.
|--- |  | --------------------------------------------------------------------------------------------------------

|(2) |  | Exchanged with TCI for the Plaza on Bachman Creek Shopping Center.
|--- |  | ------------------------------------------------------------------

|(3) |  | Debt assumed by purchaser.
|--- |  | --------------------------

|(4) |  | Represents dividends on and redemption of Innovo Preferred Stock. See NOTE 8. NOTES AND INTEREST PAYABLE.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(5) |  | Sold to TCI to satisfy debt. Gain deferred until sale to unrelated party.
|--- |  | -------------------------------------------------------------------------

|(6) |  | Sold to TCI to satisfy debt. In September 2002, gain of $34,000 recognized upon sale of 36 acres to unrelated party. In September 2003, gain of $27,000 recognized upon sale of 25
acres to unrelated party.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Sold to Housing for Seniors of Humble, LLC (Humble), a related party. Gain deferred until sale to unrelated party.
|--- |  | --------------------------------------------------------------------------------------------------------------------

|(8) |  | The cash received from the sale was not sufficient to repay the entire amount of the financing obtained from IORI in January 2002. In April 2003, ARI repaid $2.0 million in
principal and accrued interest. In August 2003, ARI repaid the remaining principal and accrued interest.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Gain deferred until collection of mortgage note receivable in March 2003.
|--- |  | -------------------------------------------------------------------------

|(10) |  | Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------



62



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2003, ARI had the following properties under construction:



|                        |  |                 |  |           |  |                |        |                           |   |                         |  |   |       
|----------------------- |  | --------------- |  | --------- |  | -------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------
|Property                |  | Location        |  | Units     |  | AmountExpended |        | AdditionalAmountto Expend |   | ConstructionLoanFunding
|Apartments              |  |                 |  |           |  |                |        |                           |   |                         |  |   |       
|Bluffs at Vista Ridge   |  | Lewisville, TX  |  | 272 Units |  | $              | 2,201  |                           | $ | 18,385                  |  | $ | 15,500
|Breakwater Bay          |  | Beaumont, TX    |  | 176 Units |  |                | 2,691  |                           |   | 7,776                   |  |   | 9,545 
|Capitol Hill            |  | Little Rock, AR |  | 156 Units |  |                | 3,303  |                           |   | 7,276                   |  |   | 9,500 
|DeSoto Ranch            |  | DeSoto, TX      |  | 248 Units |  |                | 16,184 |                           |   | 2,036                   |  |   | 16,273
|Heather Creek           |  | Mesquite, TX    |  | 200 Units |  |                | 3,658  |                           |   | 9,644                   |  |   | 12,079
|Kingsland Ranch         |  | Houston, TX     |  | 398 Units |  |                | 14,206 |                           |   | 11,449                  |  |   | 23,000
|Verandas at City View   |  | Fort Worth, TX  |  | 314 Units |  |                | 14,339 |                           |   | 8,505                   |  |   | 19,393
|Vistas at Pinnacle Park |  | Dallas, TX      |  | 322 Units |  |                | 3,261  |                           |   | 17,921                  |  |   | 19,149



During 2003, ARI
completed the 186 unit Blue Lake Villas in Waxahachie, Texas; the 216 unit Echo Valley Apartments in Dallas, Texas; the 284 unit Falcon Lakes in Arlington, Texas; the 180 unit River Oaks Apartments in Wylie, Texas; the 384 unit Sendero Ridge
Apartments in San Antonio, Texas; and the 256 unit Spyglass Apartments in Mansfield, Texas; and the 188 unit Windsong Apartments in Ft. Worth, Texas.



NOTE 3.NOTES AND INTEREST RECEIVABLE



|                                                                                  |  |                    |        |           |   |                    |  |           |        |  |   |       
|--------------------------------------------------------------------------------- |  | ------------------ | ------ | --------- | - | ------------------ |  | --------- | ------ |  | - | ------
|                                                                                  |  | 2003               |        | 2002     
|                                                                                  |  | EstimatedFairValue |        | BookValue |   | EstimatedFairValue |  | BookValue
|Notes receivable                                                                  |  |                    |        |           |   |                    |  |           |        |  |   |       
|Performing (including $35,054 in 2003 and $33,260 in 2002 from affiliates)        |  | $                  | 60,064 |           | $ | 60,359             |  | $         | 62,937 |  | $ | 76,068
|Nonperforming (including $6,097 in 2002 from affiliates)                          |  |                    | 9,800  |           |   | 10,819             |  |           | 7,092  |  |   | 7,114 
|                                                                                  |  |                    |        |           |   |                    |  |           |        |  |   |       
|                                                                                  |  | $                  | 69,864 |           |   | 71,178             |  | $         | 70,029 |  |   | 83,182
|                                                                                  |  |                    |        |           |   |                    |  |           |        |  |   |       
|Interest receivable (including $2,643 in 2003 and $1,923 in 2002 from affiliates) |  |                    |        |           |   | 4,050              |  |           |        |  |   | 2,028 
|                                                                                  |  |                    |        |           |   |                    |  |           |        |  |   |       
|                                                                                  |  |                    |        |           | $ | 75,228             |  |           |        |  | $ | 85,210
|                                                                                  |  |                    |        |           |   |                    |  |           |        |  |   |       



Interest income is
recognized on nonperforming notes receivable on a cash basis. For the years 2003, 2002 and 2001 unrecognized interest income on such nonperforming notes receivable totaled $583,000, $706,000 and $233,000, respectively.



Notes receivable at December 31, 2003, mature from 2003 to 2013 with interest
rates ranging from 4.25% to 18.0% per annum and a weighted average rate of 8.9% per annum. Notes receivable are generally collateralized by real estate or interests in real estate and personal guarantees of the borrower. A majority of the notes
receivable provide for principal to be paid at maturity. Scheduled principal maturities of $48.6 million are due in 2004.



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 paydown
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 will begin accruing after improvements to the site have been completed by
ARI. At April 2004, the



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



improvements have begun. The future costs to ARI to complete the improvements, estimated to be $2.5 million, were accrued in 2002. A principal payment of
$450,000 is due within ten days after a Tentative Parcel Map (the Map) is recorded. ARI expects that the Map will be recorded by the end of June 2004. Interest payments will be due on the first day of each calendar quarter, beginning
with the first quarter following the completion of the site improvements.



In March 2003, ARI sold the Grand Hotel Sofia for $24.8 million, receiving $6.3 million in cash after paying closing costs and debt assumption and providing purchase money financing of $13.5 million. The note was
non-interest-bearing for 90 days, then bore interest at 9.0% per annum for the next 90 days and matured in September 2003. In September 2003, the note was collected in full, including accrued but unpaid interest.



In June 2003, ARI sold the 104 unit Willow Wick Apartments in North Augusta,
South Carolina, for $2.7 million, receiving $255,000 after payment of closing costs and debt pay down and providing purchase money financing of $42,000. The note bears interest at 5.0% per annum and requires all interest and principal be paid at
maturity in December 2003. In December 2003, the maturity date was extended to February 2004. As of March 2004, negotiations are underway to further extend the terms of the note.



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 paydown. 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 paying closing costs.



In October 2003, ARI sold a 33.4 acre tract of its Pioneer Crossing land parcel for $2.3 million, paying $78,000 after payment of closing costs and
providing purchase money financing of $2.4 million. The note bears interest at 10.0% per annum, requires interest-only payments beginning in November 2007 and matures in October 2008.



In November 2003, ARI sold its Scout land parcel for $2.8 million, receiving $485,000 in cash after paying closing costs and
providing purchase money financing of $2.1 million. The note bore interest at 6.25% per annum, required monthly payments of accrued interest beginning in December 2003 and matured in November 2006. All principal and accrued but unpaid interest were
due at maturity. In December 2003, the note was sold to Realty Advisors for $2.1 million, plus accrued interest, to reduce ARIs affiliate debt.



In December 2003, ARI sold its Jeffries Ranch land parcel for $2.9 million, receiving $151,000 after payment of closing costs and providing purchase money
financing of $2.5 million. Also in December 2003, the note was sold to Realty Advisors for $2.5 million, to reduce ARIs affiliate debt.



In May 2002, ARI sold its leasehold interests in various oil and gas mineral development properties for $1.3 million, receiving a note from the buyer for
the purchase price. The note bore interest at 10.0% per annum, matured in May 2004 and required monthly payments of principal and accrued interest. See NOTE 5. OIL AND GAS OPERATIONS. In November 2002, the note was sold to 10300 Gaywood
Trust, a related party, for $1.3 million plus accrued but unpaid interest, to satisfy debt. No cash was received by ARI for the sale of the note.



In August 2002, ARI sold a 14.2 acre tract of its Elm Fork land parcel for $1.5 million, paying $54,000 after payment of closing costs and debt paydown
and providing purchase money financing of $763,000. The loan bore



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



interest at 10.0% per annum and matured in October 2002. All principal and interest were due at maturity. In October 2002, the note was collected in full,
including accrued but unpaid interest.



In September 2002, ARI
sold its Messick land parcel and an 80.0 acre tract of its Katrina land parcel for $12.8 million, paying $1.5 million after payment of closing costs and debt paydown and providing purchase money financing of $9.6 million. The loan bears interest at
8.0% per annum, matures in September 2004 and requires quarterly payments of accrued interest. All principal and accrued interest are due at maturity. In February 2003, ARI accepted $7.4 million as full payment for $7.7 million in principal and
accrued interest. In March 2003, the remaining $1.9 million loan balance was sold to an unrelated party for $1.8 million plus accrued and unpaid interest.



In October 2002, ARI sold its Varner Road land parcel for $3.7 million, receiving $671,000 after payment of closing costs and providing purchase money
financing of $2.8 million. The loan bears interest at 9.0% per annum, matures in October 2004 and requires quarterly interest payments. All principal and accrued but unpaid interest are due at maturity.



In December 2002, ARI sold its Willow Springs land parcel for $9.8 million,
paying $1.3 million after payment of closing costs and debt paydown and providing purchase money financing of $7.8 million. The loan bore interest at 8.0% per annum, matured in December 2005 and required periodic interest payments beginning in June
2003. In March 2003, the loan was sold to an unrelated party for $7.5 million plus accrued and unpaid interest.



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. At March 2004, negotiations are
underway to modify and extend the terms of the note. In July 2003, ARI advanced an additional $357,000 to the borrower. The new note bore interest at 8.0% per annum and matured in July 2004. In November 2003, the note was collected in full,
including accrued but unpaid interest.



In December 2002, ARI
sold a 171.1 acre tract of its Desert Wells land parcel for $11.9 million receiving $1.4 million after payment of closing costs and debt paydown and providing purchase money financing of $8.9 million. The loan bore no interest and matured in March
2003. The principal was due at maturity. In December 2002, interest in $7.7 million of the loan was sold to an unrelated party for $7.7 million. ARI retained a junior interest in $1.2 million of the loan. In March 2003, the note was collected in
full.



In March 2001, ARI sold a 20.0 acre tract of its Katrina
land parcel for $2.8 million, receiving $700,000 in cash and providing purchase money financing of the remaining $2.1 million of the sales price. The loan bore interest at 12.0% per annum and matured in July 2001. All principal and interest were due
at maturity. In January 2002, $274,000 in principal and $226,000 in interest was collected. In March 2002, the note was collected in full, including accrued but unpaid interest.



In July 2001, ARI funded a $1.7 million mortgage loan secured by a first lien on 44.6 acres of unimproved land in Fort
Worth, Texas, and a 100% interest in a partnership. The note receivable bore interest at 16.0% per annum, required monthly interest only payments and matured in June 2002. In September 2002, ARI received $1.3 million on the note. With this payment,
ARI agreed to release the lien on the 44.6 acres substituting a second lien on 21.61 acres of unimproved land in Tarrant County, Texas, from the borrower to secure the remaining $689,000 in debt. ARI extended the maturity to November 2002. In May
2003, the loan was paid in full, including accrued but unpaid interest.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matured in January 2003. On January 22, 2003, ARI agreed to extend the maturity date until May 1, 2003.
The agreement requires interest to accrue at the default rate of 18%. As of December 2003, ARI has funded a total of $4.3 million and the note was classified as nonperforming. Management is continuing to negotiate new terms and collateral for this
loan.



In November 2001, ARI sold a 12.71 acre tract of its
Santa Clarita land parcel for $1.9 million, receiving $1.5 million in cash and providing purchase money financing of the remaining $437,000 of the sales price. The loan bore interest at 8.00% per annum and matured in November 2002. In November 2002,
the note was collected in full, including accrued but unpaid interest.



Also in November 2001, ARI sold the Blackhawk Apartments for $7.1 million receiving $1.5 million in cash after the assumption of $4.0 million of mortgage debt and providing purchase money financing of the remaining $1.6 million of the sales
price. The loan bore interest at 10.00% per annum and matured in May 2002. Monthly principal and interest payments were required. In April 2002, the note was collected in full, including accrued but unpaid interest.



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. The financing bore interest at 16.0% per annum, required monthly payments of interest only at 6.0%
per annum, beginning in February 2000 and required a $200,000 principal paydown in December 1999, which was not received, and matured in August 2000. ARI had the option of obtaining the buyers general and limited partnership interests in the
collateral partnerships in full satisfaction of the financing. In March 2000, ARI agreed to forbear foreclosing on the collateral securing the note and released one of the partnership interests, in exchange for a payment of $250,000 and executed
deeds of trusts on certain properties owned by the buyer. In March 2000, the borrower made a $1.1 million payment, upon receipt of which ARI returned the deeds of trust. 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 December 1999, a note with a principal balance of $1.2 million and secured by a pledge of a partnership interest in a partnership which owns real estate in Addison, Texas, matured. The maturity date was extended to
April 2000 in exchange for an increase in the interest rate to 14.0% per annum. All other terms remained the same. In February 2001, the loan amount was increased to $1.6 million and the maturity date was extended to June 2001. In February 2002,
$1.5 million in principal and $87,000 in interest was collected. In July 2002, the note was collected in full, including accrued but unpaid interest.



Related Party.    On June 2, 2003, ARI exchanged all of its 674,971 IORI shares with BCM, receiving 650,000 TCI shares
from BCM. In addition, BCM has executed a promissory note in favor of ARI in the amount of $526,000. The note bore interest at 2% over the prime rate, currently 6.00% per annum, matured in June 2004 and required monthly interest payments beginning
in June 2003 and quarterly principal payments beginning in September 2003. In December 2003, ARI obtained 24,184 shares of TCI common stock from BCM in payment of the final $394,000 balance due on the note.



In July 2003, ARI sold its interest in MRI to 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 1. BASIS OF PRESENTATION). The note bore interest at 10.0% per annum, matured in August 2013 and required monthly
payments of principal and interest beginning in September 2003. ARI owns 20% of Gruppa, thereby retaining a



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



20% interest in MRI. Due to debt guarantees and ARIs continuing ownership interest in MRI, management has determined that this should be accounted for
as a financing transaction. In September 2003, ARI sold the note to Syntek West for $2.3 million, plus accrued but unpaid interest, to reduce affiliate debt.



In October 2003, ARI advanced $1.6 million to the Class A Limited Partners of Encino Executive Plaza, Ltd., of which ARI is the general partner. The loans
bear interest at 8.5% per annum and mature in June 2006. Interest due to ARI will be deducted from the quarterly return owed by ARI to the Class A Limited Partners, eliminating the quarterly payments. The outstanding principal is due at maturity.



In June 2002, ARI converted $4.5 million of its receivable
from BCM to a recourse note receivable. This transaction was to provide ARI with additional security over that provided by an unsecured receivable. The note bore interest at 10.0% per annum, matured in March 2004 and required quarterly payments of
principal and accrued interest, beginning in December 2002. In December 2003, ARI received 92,052 shares of TCI common stock in payment of the final $1.5 million balance due on the note.



In December 2002, ARI sold the Lakeshore Villas Apartments to Humble, for $22.0 million, paying $764,000 after payment of
closing costs and debt paydown and providing purchase money financing of $8.4 million. One note had a principal amount of $2.0 million. The note was unsecured, and was guaranteed by Unified Housing Foundation, Inc. (Unified), a related
party. The second note had a principal amount of $6.4 million, and was secured by a pledge by Unified of 100% of the Member Interest in Humble. Both notes bore interest at 11.5% per annum, matured in December 2009 and required quarterly payments
beginning in March 2003. Richard W. Humphrey, a Director of ARI until July 2003, is the President of Humble and the President and Treasurer of Unified. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified.
In December 2003, both notes were sold to IORI for $8.4 million, plus accrued interest, to reduce ARIs affiliate debt.



In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to 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 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. BASIS OF PRESENTATION.) 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 2% over the prime rate, currently at 6.0%. All principal and interest are due at maturity. Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial
Officer of ARI, is a 10% shareholder of One Realco. Mr. Kimbrough does not participate in the day-to-day operations or management of One Realco.



In December 2000, an unsecured loan with a remaining principal balance of $1.8 million to Warwick of Summit, Inc. (Warwick) matured. The loan
was made to provide funds to purchase, renovate and expand a shopping center property in Warwick, Rhode Island. All principal and interest were due at maturity. In February 2002, $275,000 of interest was received. In March 2003, $27,000 of principal
and $223,000 of interest was



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



received. In April 2003, $149,000 of principal and $26,000 of interest was received. In July 2003, $10,000 of interest was received. Richard D. Morgan, a
Warwick shareholder, served as a director of ARI until October 2001. In December 2003, the note was sold to Prime for $1.8 million to reduce ARIs affiliate debt.



In December 2000, a loan with a principal balance of $1.6 million to Bordeaux Investments Two, L.L.C.
(Bordeaux), matured. The loan, to provide funds to purchase and renovate a shopping center property in Oklahoma City, Oklahoma, was secured by (1) a 100% interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2)
100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux members. Richard D. Morgan, a Bordeaux member until July 2003, served as a
director of ARI until October 2001. In July 2003, the members of Bordeaux assigned 100% of the membership interest in Bordeaux to ARI in payment of the note. ARI recorded real estate assets of $8.8 million and assumed $7.2 million of mortgage debt
and other liabilities on the shopping center and the undeveloped land. No gain or loss was recorded on this transaction. In December 2003, the shopping center was exchanged with Regis Realty I, LLC (Regis I), a related party, for three
notes receivable: $1.4 million from Unified Housing of Harvest Hill, LLC (Harvest Hill); $1.4 million from Unified Housing of Harvest Hill I, LLC (Harvest Hill I); and $2.1 million from Unified Housing of Harvest Hill III,
LLC (Harvest Hill III), related parties. All three notes bear interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the extent surplus cash is available, beginning in November 2003 and are guaranteed by
Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, a related party, which is the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



In March 2000, a loan with a remaining principal balance of
$2.6 million to Lordstown, L.P., matured. The loan, to provide funds to purchase for resale various parcels of land, is secured by a second lien on land in Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital,
Ltd., the limited partner of Lordstown, L.P., and a profits interest in subsequent land sales. A corporation controlled by Richard D. Morgan is the general partner of Lordstown, L.P. Mr. Morgan served as a director of ARI until October 2001. In
December 2003, the note was exchanged with Regis I, a related party, for three notes receivable: $1.4 million from Harvest Hill; $1.4 million from Harvest Hill I; and $2.1 million from of Harvest Hill III, related parties. All three notes bear
interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the extent surplus cash is available, beginning in November 2003 and are guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman
of the Board and a Director of ARI, is the General Manager of Unified, a related party, which is the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



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 subordinate pledge of 850,000 shares of ARI Common Stock owned by BCM. The shares are also pledged to a lender on ARIs behalf. The interest rate was changed
to 2% over the prime rate, currently 6.00% per annum, and the accrued but unpaid interest of $984,000 was added to the principal. The new principal balance is $5.6 million. All principal and accrued interest are due at maturity.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 4.ALLOWANCE FOR ESTIMATED LOSSES



Activity in the allowance for estimated losses was as follows:

|                      |  |      |       |      |   |       |  |   |      
|--------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                      |  | 2003 |       | 2002 |   | 2001 
|Balance January 1,    |  | $    | 3,077 |      | $ | 2,577 |  | $ | 2,577
|TCI allowance         |  |      | 1,456 |      |   |      |  |   |     
|Increase in provision |  |      | 100   |      |   | 500   |  |   |     
|                      |  |      |       |      |   |       |  |   |      
|Balance December 31,  |  | $    | 4,633 |      | $ | 3,077 |  | $ | 2,577
|                      |  |      |       |      |   |       |  |   |      



NOTE
5.OIL AND GAS OPERATIONS



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



In May 2002, ARI sold the leasehold interests for $1.3 million, receiving a note from the buyer for the purchase price. The note bore interest at 10.0%
per annum, matured in May 2004 and required monthly payments of principal and accrued interest. As part of the sale, the notes payable given by ARI for the purchase of the Operators Interest, ($350,000) and the Working Interests ($250,000)
were canceled. The 3,968.75 shares of ARI Series F Preferred Stock were also returned to ARI and canceled.



In November 2002, the note was sold to 10300 Gaywood Trust, a related party, for $1.3 million plus accrued but unpaid interest, to reduce ARIs
affiliate debt. No cash was received by ARI for the sale of the note.



NOTE
6.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.



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. In addition, BCM has executed a promissory note in favor of ARI in the amount of $526,000 (see NOTE 3. NOTES RECEIVABLE). 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



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



with related parties for a total of $1.4 million. At December 31, 2003, ARI owned 80.0% of the outstanding shares of TCI. ARI no longer directly owns any
IORI shares. At December 31, 2003, ARI owned 19.2% of IORI through TCIs ownership of IORI shares. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003.



ARI is a non-controlling 30% general partner in Sacramento Nine, which at
December 31, 2003 owned an office building in Rancho Cordova, California.



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 8. NOTES AND INTEREST PAYABLE and NOTE 9. MARGIN BORROWINGS.



Investments in equity investees consisted of the following:



|         |  |                                            |   |  |                                                 |        |                                                  |   |                                               |  |   |       
|-------- |  | ------------------------------------------ | - |  | ----------------------------------------------- | ------ | ------------------------------------------------ | - | --------------------------------------------- |  | - | ------
|Investee |  | Percentage ofOwnership atDecember 31, 2003 |   |  | Carrying Value ofInvestment atDecember 31, 2003 |        | EquivalentInvestee BookValue atDecember 31, 2003 |   | Market Value ofInvestment atDecember 31, 2003
|IORI     |  | 19.20                                      | % |  | $                                               | 4,423  |                                                  | $ | 9,381                                         |  | $ | 5,331 
|Other    |  |                                            |   |  |                                                 | 564    |                                                  |   |                                               |  |   |       
|         |  |                                            |   |  |                                                 |        |                                                  |   |                                               |  |   |       
|         |  |                                            |   |  | $                                               | 4,987  |                                                  |   |                                               |  |   |       
|         |  |                                            |   |  |                                                 |        |                                                  |   |                                               |  |   |       
|         |  |                                            |   | 
|Investee |  | Percentage ofOwnership atDecember 31, 2002 |   |  | Carrying Value ofInvestment atDecember 31, 2002 |        | EquivalentInvestee BookValue atDecember 31, 2002 |   | Market Value ofInvestment atDecember 31, 2002
|IORI     |  | 28.49                                      | % |  | $                                               | 7,383  |                                                  | $ | 10,628                                        |  | $ | 7,711 
|TCI      |  | 49.81                                      |   |  |                                                 | 71,035 |                                                  |   | 110,769                                       |  |   | 70,926
|         |  |                                            |   |  |                                                 |        |                                                  |   |                                               |  |   |       
|         |  |                                            |   |  |                                                 | 78,418 |                                                  | $ | 121,397                                       |  | $ | 78,637
|         |  |                                            |   |  |                                                 |        |                                                  |   |                                               |  |   |       
|Other    |  |                                            |   |  |                                                 | 2,572  |                                                  |   |                                               |  |   |       
|         |  |                                            |   |  |                                                 |        |                                                  |   |                                               |  |   |       
|         |  |                                            |   |  | $                                               | 80,990 |                                                  |   |                                               |  |   |       
|         |  |                                            |   |  |                                                 |        |                                                  |   |                                               |  |   |       



ART Florida
Portfolio II, Ltd.    In January 2002, Investors Choice Florida Public Funds II, in which ART Florida Portfolio II, Ltd. owned an interest, sold Villas Continental Apartments. ARI received $1.3 million in cash from the sale.
ARIs share of the loss incurred on the sale was $286,000, which is included in loss on sale of investments in equity investees in the Consolidated Statements of Operations.



Set forth below are summary financial data for equity investees:



|                                   |  |      |         |   |      |   |          |  
|---------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                   |  | 2003 |         |   | 2002 |  
|Property and notes receivable, net |  | $    | 95,896  |   |      | $ | 862,190  |  
|Other assets                       |  |      | 5,248   |   |      |   | 86,484   |  
|Notes payable                      |  |      | (60,825 | ) |      |   | (653,784 | )
|Other liabilities                  |  |      | (1,230  | ) |      |   | (35,189  | )
|                                   |  |      |         |   |      |   |          |  
|Equity                             |  | $    | 39,089  |   |      | $ | 259,701  |  
|                                   |  |      |         |   |      |   |          |  



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                           |  |      |         |   |      |   |         |      |  |   |          |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                           |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Revenues                                   |  | $    | 35,306  |   |      | $ | 121,055 |      |  | $ | 128,099  |  
|Depreciation                               |  |      | (5,817  | ) |      |   | (20,799 | )    |  |   | (19,021  | )
|Provision for losses                       |  |      | (956    | ) |      |   | (4,316  | )    |  |   | (281     | )
|Interest                                   |  |      | (11,517 | ) |      |   | (43,679 | )    |  |   | (42,006  | )
|Operating expenses                         |  |      | (26,287 | ) |      |   | (93,760 | )    |  |   | (100,334 | )
|Gain on sale of real estate                |  |      |        |   |      |   |        |      |  |   | 48,961   |  
|                                           |  |      |         |   |      |   |         |      |  |   |          |  
|Income (loss) from continuing operations   |  |      | (9,271  | ) |      |   | (41,499 | )    |  |   | 15,418   |  
|Income (loss) from discontinued operations |  |      | (1,685  | ) |      |   | (2,675  | )    |  |   | 931      |  
|Gain from sale of discontinued operations  |  |      | 5,334   |   |      |   | 51,110  |      |  |   |         |  
|                                           |  |      |         |   |      |   |         |      |  |   |          |  
|Net income (loss)                          |  | $    | (5,622  | ) |      | $ | 6,936   |      |  | $ | 16,349   |  
|                                           |  |      |         |   |      |   |         |      |  |   |          |  



ARIs equity
share of:



|                                         |  |      |        |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | 2003 |        |   | 2002 |   |         | 2001 | 
|Loss before gains on sale of real estate |  | $    | (4,441 | ) |      | $ | (20,938 | )    |  | $ | (13,646 | )
|Gains on sale of real estate             |  |      | 715    |   |      |   | 24,069  |      |  |   | 22,542  |  
|                                         |  |      |        |   |      |   |         |      |  |   |         |  
|Net income (loss)                        |  | $    | (3,726 | ) |      | $ | 3,131   |      |  | $ | 8,896   |  
|                                         |  |      |        |   |      |   |         |      |  |   |         |  



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 initially acquired its investment in IORI and TCI in 1989.



NOTE 7.MARKETABLE EQUITY SECURITIES



Since 1994, ARI has purchased equity securities of entities other than those of the IORI and TCI to diversify and increase
the liquidity of its margin accounts and its trading portfolio. The acquisition of RAK added $1.4 million in marketable securities of which $1.3 million were sold in 2002. Trading portfolio securities are carried at market value. In 2003, ARI
purchased 1.6 million and sold 108,000 of marketable securities. At December 31, 2003, ARI recognized an unrealized increase in the market value of trading portfolio securities of $7,000. In 2003, ARI realized $66,000 in gains from the sale of
trading portfolio securities. At December 31, 2002, ARI recognized an unrealized decline in the market value of trading portfolio securities of $25,000. In 2002, ARI realized no gains or losses from the sale of trading portfolio securities and
received no dividends. At December 31, 2001, ARI recognized an unrealized decline in the market value of trading portfolio securities of $55,000. In 2001, ARI realized no gains or losses from the sale of trading portfolio securities and received no
dividends. Unrealized and realized gains and losses in trading portfolio securities are included in other income in the accompanying Consolidated Statements of Operations.



In March 2003, ARI obtained a loan in the amount of $5.0 million to acquire equity securities of Realty Korea CR-REIT Co.,
Ltd. No. 1 representing approximately a 9.2% ownership interest. As of May 2003, the loan was paid in full. This investment is considered an available-for-sale security.



71



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 8.NOTES AND INTEREST PAYABLE



Notes and interest payable consisted of the following:



|                                       |  |                     |         |           |   |                     |  |           |         |  |   |        
|-------------------------------------- |  | ------------------- | ------- | --------- | - | ------------------- |  | --------- | ------- |  | - | -------
|                                       |  | 2003                |         | 2002     
|                                       |  | EstimatedFair Value |         | BookValue |   | EstimatedFair Value |  | BookValue
|Notes payable                          |  |                     |         |           |   |                     |  |           |         |  |   |        
|Mortgage loans                         |  | $                   | 911,991 |           | $ | 926,034             |  | $         | 455,888 |  | $ | 448,051
|Borrowings from financial institutions |  |                     | 19,104  |           |   | 15,414              |  |           | 8,022   |  |   | 8,897  
|Notes payable to affiliates            |  |                     | 31,498  |           |   | 34,775              |  |           | 15,181  |  |   | 14,346 
|                                       |  |                     |         |           |   |                     |  |           |         |  |   |        
|                                       |  | $                   | 962,593 |           |   | 976,223             |  | $         | 479,091 |  |   | 471,294
|                                       |  |                     |         |           |   |                     |  |           |         |  |   |        
|Interest payable                       |  |                     |         |           |   | 10,546              |  |           |         |  |   | 4,139  
|                                       |  |                     |         |           |   |                     |  |           |         |  |   |        
|                                       |  |                     |         |           | $ | 986,769             |  |           |         |  | $ | 475,433
|                                       |  |                     |         |           |   |                     |  |           |         |  |   |        



Scheduled principal
payments on notes payable are due as follows:



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 288,952
|2005       |  |   | 79,838 
|2006       |  |   | 102,431
|2007       |  |   | 99,731 
|2008       |  |   | 56,655 
|Thereafter |  |   | 348,616
|           |  |   |        
|           |  | $ | 976,223
|           |  |   |        



Stated interest rates
on notes payable ranged from 3.3% to 17.9% per annum at December 31, 2003, and matured in varying installments between 2004 and 2044. At December 31, 2003, notes payable were collateralized by deeds of trust on real estate with a net carrying value
of $1,099.5 million.



In January 2002, the lender on three of
ARIs residential properties located in Florida commenced foreclosure actions, due to ARIs failure to pay the loans at maturity on January 1, 2002. ARI has filed counterclaims asserting the lender had abruptly withdrawn from discussions
for refinancing. The balance owed on the three loans was $7.2 million. In May 2002, the lenders claims were dismissed voluntarily.



ARI is currently in default on a $1.0 million loan secured by interests in the partnership which owns the Tivoli Apartments in Dallas, Texas. ARI
attempted to negotiate an extension for this loan maturing in December 2002. In January 2003, the lender commenced a lawsuit against ARI to collect the amount. In August 2003, ARI cured this default.



ARI is currently in default on a $5.3 million loan secured by the Majestic
Hotel in San Francisco, California. ARI ceased making monthly payments of principal and interest in May 2002 and attempted to restructure the debt.



In February 2003, the lender on one of ARIs hotel properties located in Virginia and three hotel properties in Chicago notified ARI that the loans
on the properties were in default, due to ARIs failure to make timely debt service payments. The balance owed on the loans was $21.2 million. In April 2003, the lender and ARI agreed to terms to cure the default and extend the maturity dates
of the loans. In May 2003, ARI failed to satisfy the conditions in the lenders Loan Modification Offer (the Offer), and the Offer was revoked. In March 2004, ARI paid off these loans through other refinancings.



72



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 is $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 expects to reacquire the property after the debt is restructured. This transaction was not accounted for as a sale by ARI. The property and related debt remain on ARIs
balance sheet.



In March 2003, ARI received a loan for $5.0
million that was secured by its investment in equity securities of Realty Korea CR-REIT Co., Ltd. No. 1. The loan was also secured by a second deed of trust on commercial properties in North Carolina and Texas. The loan bore interest at the prime
rate plus 1%, currently 5.0%, required monthly interest only payments and matured in August 2004. In May 2003, the loan was paid in full.



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 October 2003, ARI received a construction loan for $15.5 million for the construction of a new apartment development in
Lewisville, Texas.



In January 2004, the lender on three of
ARIs land properties located in Texas notified ARI that the loans on the properties were in default, due to ARIs failure to make timely debt service payments. The balance owed on the loans is $10.3 million.



73



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2003, ARI financed/refinanced or obtained second mortgage financing on the following:



|                          |  |                    |  |                           |  |              |        |     |                |   |                         |  |   |              |     |  |              |     |  |       |    
|------------------------- |  | ------------------ |  | ------------------------- |  | ------------ | ------ | --- | -------------- | - | ----------------------- |  | - | ------------ | --- |  | ------------ | --- |  | ----- | ---
|Property                  |  | Location           |  | Units/ Acres/     Sq. Ft. |  | DebtIncurred |        |     | DebtDischarged |   | Net CashReceived/(Paid) |  |   | InterestRate |     |  | MaturityDate |    
|Land                      |  |                    |  |                           |  |              |        |     |                |   |                         |  |   |              |     |  |              |     |  |       |    
|Elm Fork                  |  | Denton County, TX  |  | 101.0 Acres               |  | $            | 5,000  |     |                | $ | 1,551                   |  | $ | 2,885        |     |  | 10.75        | %   |  | 03/04 | (5)
|Katrina                   |  | Palm Desert, CA    |  | 52.0 Acres                |  |              | 5,100  |     |                |   | 3,000                   |  |   | 1,795        |     |  | 6.25         | (1) |  | 05/05 |    
|Keller                    |  | Tarrant County, TX |  | 30.1 Acres                |  |              | 2,016  | (4) |                |   | 450                     |  |   | 1,494        |     |  | 7.50         |     |  | 07/04 |    
|Lacy Longhorn             |  | Farmers Branch, TX |  | 17.1 Acres                |  |              |       | (4) |                |   |                        |  |   |             |     |  |             |     |  |      |    
|Las Colinas               |  | Las Colinas, TX    |  | 13.0 Acres                |  |              |       | (4) |                |   |                        |  |   |             |     |  |             |     |  |      |    
|Las Colinas               |  | Las Colinas, TX    |  | 55.7 Acres                |  |              | 6,885  |     |                |   | 17,338                  |  |   | (11,622      | )   |  | 7.00         | (1) |  | 11/04 |    
|Mason Goodrich            |  | Houston, TX        |  | 84.0 Acres                |  |              | 3,750  |     |                |   | 757                     |  |   | 2,850        |     |  | 6.25         | (1) |  | 06/04 |    
|McKinney Corners II       |  | Collin County, TX  |  | 11.0 Acres                |  |              |       | (4) |                |   |                        |  |   |             |     |  |             |     |  |      |    
|Nashville                 |  | Nashville,TN       |  | 113.8 Acres               |  |              | 6,059  |     |                |   | 807                     |  |   | 4,725        |     |  | 14.00        |     |  | 03/04 | (5)
|Nashville                 |  | Nashville, TN      |  | 113.8 Acres               |  |              | 941    |     |                |   |                        |  |   | 737          |     |  | 14.00        |     |  | 03/04 | (5)
|Rasor                     |  | Plano, TX          |  | 23.7 Acres                |  |              | 1,260  |     |                |   |                        |  |   | 1,214        |     |  | 7.00         | (1) |  | 11/04 |    
|Thompson                  |  | Farmers Branch, TX |  | 3.3 Acres                 |  |              |       | (4) |                |   |                        |  |   |             |     |  |             |     |  |      |    
|Tomlin                    |  | Farmers Branch, TX |  | 9.0 Acres                 |  |              |       | (4) |                |   |                        |  |   |             |     |  |             |     |  |      |    
|Valwood                   |  | Dallas County, TX  |  | 235.0 Acres               |  |              | 8,100  |     |                |   | 5,400                   |  |   | 1,745        |     |  | 7.00         | (1) |  | 11/06 |    
|Vineyards II              |  | Tarrant County, TX |  | 18.6 Acres                |  |              | 3,280  |     |                |   | 3,750                   |  |   | (583         | )   |  | 6.75         | (1) |  | 02/06 |    
|Apartments                |  |                    |  |                           |  |              |        |     |                |   |                         |  |   |              |     |  |              |     |  |       |    
|Arlington Place           |  | Pasadena, TX       |  | 230 Units                 |  |              | 1,500  |     |                |   |                        |  |   |             | (2) |  | 5.00         |     |  | 05/03 | (3)
|Plantation                |  | Tulsa, OK          |  | 138 Units                 |  |              | 2,320  |     |                |   | 1,924                   |  |   | 173          |     |  | 5.60         |     |  | 06/29 |    
|Tree House                |  | Irving, TX         |  | 160 Units                 |  |              | 5,100  |     |                |   | 2,518                   |  |   | 2,132        |     |  | 5.00         | (1) |  | 08/13 |    
|Windsor Tower             |  | Ocala, FL          |  | 64 Units                  |  |              | 2,000  |     |                |   | 1,989                   |  |   | (104         | )   |  | 4.75         |     |  | 08/08 |    
|Shopping Centers          |  |                    |  |                           |  |              |        |     |                |   |                         |  |   |              |     |  |              |     |  |       |    
|Bridgeview                |  | LaCrosse, WI       |  | 116,008 Sq.Ft.            |  |              | 6,500  |     |                |   |                        |  |   | 6,152        |     |  | 6.25         | (1) |  | 04/05 |    
|Cullman                   |  | Cullman, AL        |  | 92,433 Sq.Ft.             |  |              | 1,700  |     |                |   | 2,650                   |  |   | 1,048        |     |  | 6.25         | (1) |  | 04/05 |    
|Industrial Warehouse      |  |                    |  |                           |  |              |        |     |                |   |                         |  |   |              |     |  |              |     |  |       |    
|Ogden Industrial          |  | Ogden, UT          |  | 107,112 Sq.Ft.            |  |              | 1,800  |     |                |   |                        |  |   | 1,722        |     |  | 6.25         | (1) |  | 04/05 |    
|Office Building           |  |                    |  |                           |  |              |        |     |                |   |                         |  |   |              |     |  |              |     |  |       |    
|1010 Common               |  | New Orleans, LA    |  | 494,579 Sq. Ft.           |  |              | 5,574  |     |                |   | 7,876                   |  |   | 1,320        |     |  | 5.50         | (1) |  | 12/06 |    
|225 Baronne               |  | New Orleans, LA    |  | 416,834 Sq. Ft.           |  |              | 6,286  |     |                |   | 7,108                   |  |   |             |     |  | 5.50         | (1) |  | 12/06 |    
|Ambulatory Surgery Center |  | Sterling, VA       |  | 33,832 Sq. Ft.            |  |              | 3,425  |     |                |   | 6,269                   |  |   |             |     |  | 5.25         | (1) |  | 12/06 |    
|Amoco                     |  | New Orleans, LA    |  | 378,244 Sq. Ft.           |  |              | 10,140 |     |                |   | 14,408                  |  |   |             |     |  | 5.50         | (1) |  | 12/06 |    
|Countryside Retail Center |  | Sterling, VA       |  | 133,422 Sq. Ft.           |  |              | 17,342 |     |                |   | 16,102                  |  |   | 101          |     |  | 5.25         | (1) |  | 12/06 |    
|Harmon                    |  | Sterling, VA       |  | 72,062 Sq. Ft.            |  |              | 8,869  |     |                |   | 7,569                   |  |   |             |     |  | 5.25         | (1) |  | 12/06 |    
|Mimado                    |  | Sterling, VA       |  | 35,127 Sq. Ft.            |  |              | 4,790  |     |                |   | 4,486                   |  |   |             |     |  | 5.25         | (1) |  | 12/06 |    
|One Hickory Centre        |  | Farmers Branch, TX |  | 102,615 Sq. Ft.           |  |              | 11,973 | (6) |                |   |                        |  |   |             |     |  | 5.49         |     |  | 10/06 |    

---

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

|(2) |  | Cash of $1.5 million was received by BCM and applied to ARIs affiliate debt.
|--- |  | -----------------------------------------------------------------------------

|(3) |  | Paid in July 2003.
|--- |  | ------------------

|(4) |  | Single note, with all properties as collateral.
|--- |  | -----------------------------------------------

|(5) |  | Extended on a month-to-month basis.
|--- |  | -----------------------------------

|(6) |  | Payable to IORI. In April 2002, ARI sold the company that owned One Hickory Centre to TCI. The transaction was accounted for as a note payable. (See NOTE 8. NOTES AND INTEREST
PAYABLE.) In October 2003, TCI sold One Hickory Centre to IORI for $12.2 million, providing purchase money wrap-around financing of $12.0 million. Also in October 2003, IORI sold One Hickory Centre to ARI for $12.2 million, providing purchase
money wrap-around financing of $12.0 million. These additional transactions discharged the 2002 financing from TCI.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2002, ARI financed/refinanced or obtained second mortgage financing on the following:



|                       |  |                    |  |                     |  |              |        |     |                |   |                         |  |   |              |   |  |              |      |  |       |    
|---------------------- |  | ------------------ |  | ------------------- |  | ------------ | ------ | --- | -------------- | - | ----------------------- |  | - | ------------ | - |  | ------------ | ---- |  | ----- | ---
|Property               |  | Location           |  | Units/ Acres/Sq.Ft. |  | DebtIncurred |        |     | DebtDischarged |   | Net CashReceived/(Paid) |  |   | InterestRate |   |  | MaturityDate |     
|Apartments             |  |                    |  |                     |  |              |        |     |                |   |                         |  |   |              |   |  |              |      |  |       |    
|Lee Hills              |  | Tallahassee, FL    |  | 16 Units            |  | $            | 1,750  | (2) |                | $ | 117                     |  | $ | 590          |   |  | 6.625        | %(1) |  | 06/05 |    
|Valley Hi              |  | Tallahassee, FL    |  | 54 Units            |  |              |       | (2) |                |   | 878                     |  |   |             |   |  |             |      |  |      |    
|White Pines            |  | Tallahassee, FL    |  | 85 Units            |  |              |       | (2) |                |   |                        |  |   |             |   |  |             |      |  |      |    
|Land                   |  |                    |  |                     |  |              |        |     |                |   |                         |  |   |              |   |  |              |      |  |       |    
|Desert Wells           |  | Palm Desert, CA    |  | 244.3 Acres         |  |              | 9,500  |     |                |   | 9,500                   |  |   | 959          |   |  | 10.250       | (1)  |  | 12/04 |    
|Katrina                |  | Palm Desert, CA    |  | 201.7 Acres         |  |              | 3,000  |     |                |   | 5,735                   |  |   | (3,071       | ) |  | 10.250       | (1)  |  | 12/03 |    
|Walker                 |  | Dallas County, TX  |  | 90.6 Acres          |  |              | 8,500  |     |                |   | 8,500                   |  |   | (1,411       | ) |  | 11.250       | (1)  |  | 01/03 | (3)
|Shopping Center        |  |                    |  |                     |  |              |        |     |                |   |                         |  |   |              |   |  |              |      |  |       |    
|Plaza on Bachman Creek |  | Dallas, TX         |  | 80,278 Sq.Ft.       |  |              | 5,000  |     |                |   |                        |  |   | 4,444        |   |  | 6.625        | (1)  |  | 04/04 |    
|Office Buildings       |  |                    |  |                     |  |              |        |     |                |   |                         |  |   |              |   |  |              |      |  |       |    
|Four Hickory Centre    |  | Farmers Branch, TX |  | 226,911 Sq.Ft.      |  |              | 12,500 |     |                |   |                        |  |   | 3,399        |   |  | 13.000       |      |  | 05/03 |    
|Two Hickory Centre     |  | Farmers Branch, TX |  | 96,127 Sq.Ft.       |  |              | 7,500  |     |                |   | 5,942                   |  |   | 1,277        |   |  | 7.750        |      |  | 06/03 |    
|University Square      |  | Anchorage, AK      |  | 22,260 Sq.Ft.       |  |              | 1,250  |     |                |   |                        |  |   | 1,216        |   |  | 8.500        | (1)  |  | 10/17 |    



Related Party
Transactions.    In each of the following transactions, except those footnoted as (6), a related party has purchased an entity, which owns the listed property asset, from ARI. ARI has guaranteed that the asset will produce at
least a 12% return on the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% return, ARI will pay the purchaser any shortfall. In addition, if the asset fails to produce the 12% return for a
calendar year, the purchaser may require ARI to repurchase the entity for the purchase price. Management has classified these related party transactions as notes payable.



|                   |  |                    |  |                |  |              |       |                |   |                  |  |              |       |  |              |   |  |       |        
|------------------ |  | ------------------ |  | -------------- |  | ------------ | ----- | -------------- | - | ---------------- |  | ------------ | ----- |  | ------------ | - |  | ----- | -------
|Property           |  | Location           |  | Units/Sq.Ft.   |  | DebtIncurred |       | DebtDischarged |   | Net CashReceived |  | InterestRate |       |  | MaturityDate |  
|Apartments         |  |                    |  |                |  |              |       |                |   |                  |  |              |       |  |              |   |  |       |        
|Bay Anchor         |  | Panama City, FL    |  | 12 Units       |  | $            | 255   |                | $ |                 |  | $            | 203   |  | 5.000        | % |  | 05/03 | (6)(13)
|Confederate Point  |  | Jacksonville, FL   |  | 206 Units      |  |              | 1,929 |                |   |                 |  |              |      |  | 12.000       |   |  | 04/05 | (7)    
|Foxwood            |  | Memphis, TN        |  | 220 Units      |  |              | 1,093 |                |   |                 |  |              |      |  | 12.000       |   |  | 04/05 | (8)    
|Governor Square    |  | Tallahassee, FL    |  | 168 Units      |  |              | 4,480 |                |   | 3,196            |  |              | 611   |  | 7.120        |   |  | 05/07 | (6)    
|Grand Lagoon       |  | Panama City, FL    |  | 54 Units       |  |              | 2,083 |                |   | 1,209            |  |              | 655   |  | 5.000        |   |  | 05/03 | (6)(10)
|Oak Hill           |  | Tallahassee, FL    |  | 92 Units       |  |              | 2,550 |                |   | 1,875            |  |              | 478   |  | 5.000        |   |  | 05/03 | (6)(12)
|Park Avenue        |  | Tallahassee, FL    |  | 121 Units      |  |              | 4,400 |                |   | 2,756            |  |              | 1,341 |  | 7.120        |   |  | 05/07 | (6)    
|Seville            |  | Tallahassee, FL    |  | 62 Units       |  |              | 1,955 |                |   | 1,263            |  |              | 473   |  | 5.000        |   |  | 05/03 | (6)(13)
|Westwood           |  | Mary Ester, FL     |  | 120 Units      |  |              | 3,382 |                |   | 2,327            |  |              | 1,023 |  | 7.570        |   |  | 05/12 | (6)    
|Windsor Tower      |  | Ocala, FL          |  | 64 Units       |  |              | 1,989 |                |   | 1,128            |  |              | 702   |  | 5.000        |   |  | 05/03 | (6)    
|Woodhollow         |  | San Antonio, TX    |  | 546 Units      |  |              | 8,160 |                |   | 5,349            |  |              | 2,775 |  | 7.120        |   |  | 05/07 | (6)    
|Woodsong           |  | Smyrna, GA         |  | 190 Units      |  |              | 2,544 |                |   |                 |  |              |      |  | 12.000       |   |  | 04/05 | (9)    
|Office Building    |  |                    |  |                |  |              |       |                |   |                  |  |              |       |  |              |   |  |       |        
|One Hickory Centre |  | Farmers Branch, TX |  | 102,615 Sq.Ft. |  |              | 4,468 |                |   |                 |  |              |      |  | 12.000       |   |  | 04/05 | (11)   
|Rosedale Towers    |  | Minneapolis, MN    |  | 84,798 Sq.Ft.  |  |              | 5,109 |                |   |                 |  |              | 5,109 |  | 12.000       |   |  | 01/05 | (4)    
|Two Hickory Centre |  | Farmers Branch, TX |  | 96,127 Sq.Ft.  |  |              | 4,448 |                |   |                 |  |              | 4,448 |  | 12.000       |   |  | 01/05 | (5)    

---

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

|(2) |  | Single note with all properties as collateral.
|--- |  | ----------------------------------------------

|(3) |  | Maturity date extended to July 2004.
|--- |  | ------------------------------------

|(4) |  | IORI purchased 100% of the outstanding common shares of Rosedale Corporation (Rosedale), a wholly-owned subsidiary of ARI, for $5.1 million. The
purchase price was determined based upon the market value of the property, using a market rate multiple of net operating income. Rosedale owned the Rosedale Towers Office Building. The business purpose of this transaction was for IORI to make an
equity investment in Rosedale, anticipating a profitable return, and for ARI to receive cash for its equity
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | investment. After the property was sold to an unrelated buyer in December 2002, ARI owed $2.1 million to IORI for remaining principal and 12% return. In
April 2003, ARI repaid $2.0 million in principal and accrued interest. In August 2003, ARI repaid the remaining principal and accrued interest.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | TCI purchased 100% of the common shares of ART Two Hickory Corporation (Two Hickory), a wholly-owned subsidiary of ARI, for $4.4 million. The purchase price was
determined based upon the market value of the property, using a market rate multiple of net operating income. Two Hickory owns the Two Hickory Centre Office Building. The business purpose of this transaction was for TCI to make an equity investment
in Two Hickory, anticipating a profitable return, and for ARI to receive cash for its equity investment.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Properties sold 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, a Director of ARI, controls approximately 11.67% of the outstanding common stock of Innovo. Management has determined to treat this sale as a refinancing transaction. ARI will continue to report the assets and the
new debt incurred by Metra on its financial statements. ARI also received $6.3 million of 8% non-recourse, non-convertible Series A Preferred Stock (Preferred Shares) of Innovo. The dividend on the Preferred Shares will be funded
entirely and solely through member distributions from cash flows generated by the operation and subsequent sale of the sold properties. In the event the cash flows for the properties are insufficient to cover the 8% annual dividend, Innovo will have
no obligation to cover any shortfall. The Preferred Shares have a mandatory redemption feature, and are redeemable from the cash proceeds received by Innovo from the operation and sale of the properties. All member distributions that are in excess
of current and accrued 8% dividends must be used by Innovo to redeem the Preferred Shares. Since redemption of these shares is subject to the above future events, management has elected to record no basis in the Preferred Shares.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | TCI purchased all of the general and limited partnership interests in Garden Confederate Point, L.P. (Confederate Point) from ARI for $1.9 million. The purchase price
was determined based upon the market value of the property, using a market rate multiple of net operating income. Confederate Point owns the Confederate Point Apartments. The business purpose of this transaction was for TCI to make an equity
investment in Confederate Point, anticipating a profitable return, and to reduce ARIs payable to BCM. Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.
In November 2003, the property was sold to an unrelated buyer. ARI repaid $2.0 million in principal and accrued interest.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | TCI purchased all of the general and limited partnership interests in Garden Foxwood, L.P. (Foxwood) from ARI for $1.1 million. The purchase price was determined based
upon the market value of the property, using a market rate multiple of net operating income. Foxwood owns the Foxwood Apartments. The business purpose of this transaction was for TCI to make an equity investment in Foxwood, anticipating a profitable
return, and to reduce ARIs payable to BCM. Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | TCI purchased all of the general and limited partnership interests in Garden Woodsong, L.P. (Woodsong) from ARI for $2.5 million. The purchase price was determined based
upon the market value of the property, using a market rate multiple of net operating income. Woodsong owned the Woodsong Apartments. The business purpose of this transaction was for TCI to make an equity investment in Woodsong, anticipating a
profitable return, and to reduce ARIs payable to BCM. TCI sold the Woodsong Apartments in July 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Sold to unrelated buyer in December 2002
|---- |  | ----------------------------------------

|(11) |  | TCI purchased 100% of the common shares of ART One Hickory Corporation (One Hickory), a wholly-owned subsidiary of ARI, for $4.5 million. The purchase
price was determined based upon the market value of the property, using a market rate multiple of net operating income. One Hickory owns the One Hickory Centre Office Building (One Hickory Centre.) The business purpose of this
transaction was for
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | TCI to make an equity investment in One Hickory, anticipating a profitable return, and to reduce ARIs payable to BCM. Failure to notify and receive
approval from the lender for this transaction may constitute an event of default under the terms of the debt. In October 2003, TCI sold One Hickory Centre to IORI for $12.2 million, providing purchase money financing of $12.0 million. Also in
October 2003, IORI sold One Hickory Centre to ARI for $12.2 million, providing purchase money financing of $12.0 million. These additional transactions discharged the 2002 financing from TCI.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Sold to unrelated party in June 2002.
|---- |  | -------------------------------------

|(13) |  | Sold to unrelated party in January 2003.
|---- |  | ----------------------------------------



NOTE 9.MARGIN BORROWINGS



ARI has margin arrangements with various financial institutions and brokerage firms which provide for borrowings of up to 50% of the market value of
marketable equity securities. The borrowings under such margin arrangements are secured by the equity securities of IORI and TCI and ARIs trading portfolio securities and bear interest rates ranging from 5.0% to 24.0% per annum. Margin
borrowings were $21.2 million at December 31, 2003 and $8.6 million at December 31, 2002, representing 22.2% and 14.7%, respectively, of the market values of the equity securities at those dates.



Sunset Management Loan.    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% per annum, while the remaining $500,000 bears interest at 20% per annum. The loan is secured by 3,672,305 shares of TCI common stock held by BCM
and wholly-owned subsidiaries of ARI. The loan was also secured by a lien on real property owned by ART Williamsburg, Inc. (AWI). 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 paydown. 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 (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 and
sought certain declaratory relief against Sunset as well as a temporary and permanent anti-suit injunction against Sunset.



During January 2003, without notice to the plaintiffs in the Texas Litigation, Sunset instituted an action in a federal district court in Las Vegas,
Nevada against Commonwealth Land Title (Commonwealth) seeking disposition of the TCI common stock held by Commonwealth as Pledge Holder. On January 31, 2003, after a Temporary Restraining Order was issued in the Texas Litigation, Sunset
instigated a separate lawsuit in state court in Nevada styled Sunset Management, LLC v. American Realty Trust, Inc. et al., Case No. A462587 pending in the District Court of Clark County, Nevada (the Nevada Litigation). On
February 12, 2003, the Nevada state court held a hearing on Sunsets request for emergency relief and denied all Sunsets requested relief and indicated that a stay of the Nevada Litigation may be appropriate, which stay of litigation
(including claims against TCI) was granted on May 2, 2003. Notwithstanding the stay of the Nevada Litigation, Sunset continued to seek to relitigate the underlying fact issues already determined in the Texas Litigation and the Nevada Litigation
through cross-claims and counterclaims in the Texas Litigation and a renewed motion for preliminary injunction and appointment of receiver over TCI in the Nevada Litigation.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Sunset has sought expedited relief and an expedited hearing of the Texas Litigation, which the court
refused to grant. In addition, the borrowers on the loan have sought to tender cash collateral to the court in lieu of the TCI stock, which motion was denied.



Even though the relief sought by Sunset in the Texas Litigation and the Nevada Litigation has either been denied or stayed, on June 10, 2003, an
attorney representing Sunset appeared at the Annual Meeting of Shareholders of TCI attempting to vote 3,673,115 Shares of common stock of TCI under purported irrevocable proxies against the election of the four directors nominated in favor of the
election of four affiliates of Sunset that Sunset seeks to nominate to serve as directors of TCI. The Inspector of Election at the Annual Meeting advised that Sunsets attempt to exercise voting rights under proxies for the 3,673,115 shares was
improper and would not be allowed, advising that BCM and the ARI subsidiaries held the absolute right to vote the 3,673,115 shares of TCI common stock so long as there was no event of default under the Sunset loan agreement. The Inspector of
Election also observed at the Stockholders meeting that no evidence was before the Inspector from a court of law finding an event of default had occurred with respect the Sunset loan documents, and therefore, such proxies would not be honored at
that time. Subsequently, representatives of Sunset delivered on July 7, 2003 to TCI a form captioned Schedule 13D for an event occurring June 10, 2003, making certain disclosures, including an allegation that Sunset acquired voting rights to
3,673,115 shares of TCI to protect the value of Sunsets security interest in the 3,673,115 shares of TCI pledged as collateral for . . . obligations to Sunset. Actually, only 3,672,305 shares of TCI common stock were pledged [810 shares
less than Sunset alleges]. Such schedule 13D also provides that Sunset plans to foreclose on the pledged TCI shares as soon as possible. Such Schedule 13D advises that Sunset would prefer to replace the four management directors
[of TCI] with neutral individuals . . . or if neutral individuals are unavailable, Sunset intends to nominate and [vote] for the election of affiliates of Sunset as directors of TCI on an interim basis until neutral individuals with satisfactory
backgrounds and knowledge can be elected as directors.



On September 10, 2003, AWI removed the Texas Litigation to the bankruptcy court for the Northern District of Texas. On September 25, 2003, the Texas Litigation was transferred to the Eastern District of Texas. A scheduling conference on
this matter was set for December 3, 2003. At the December scheduling conference, the bankruptcy court set an April trial date, subject to all parties agreeing to allow the bankruptcy court to conduct a jury trial. However, all parties did not
consent to the trial being held by a non-Article III judge, so the case is now in the process of being referred to a United States District Judge for trial assignment. It is uncertain when this process will be completed or a trial date selected. In
the interim, the parties have engaged in substantial discovery and motion practice.



Security Loans.    In August 2003, ARI obtained a security loan in the amount of 5.0 million from a financial institution in Bulgaria. The funds were used for earnest money for a
potential property acquisition in Bulgaria. The loan bore interest at 4.33% over the six-month EURIBOR rate and matured in November 2003. Principal and accrued interest were due at maturity. The loan was secured by 825,666 shares of TCI common stock
held by ARI. In October 2003, the earnest money was returned to ARI. In November, the loan was repaid.



In September 2003, ARI obtained a security loan in the amount of $12.5 million from a financial institution. The loan bears interest at 12.0% over the
30-day LIBOR rate, currently 13.1%, requires monthly payments of interest only and matures in September 2004. The loan is secured by 1,656,537 shares of TCI common stock held by ARI.



In September 2003, ARI obtained a security loan in the amount of $1.0 million from a financial institution. The loan bears
interest at 12.0% over the 30-day LIBOR rate, currently 13.1%, requires monthly payments of interest only and matures in September 2004. The loan is secured by 250,000 shares of IORI common stock held by ARI.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In October 2003, ARI obtained a security loan in the amount of $2.6 million from a financial
institution. The loan bears interest at 9.0% over the six month LIBOR rate, currently 10.19% (not to exceed 10.5% per annum), requires monthly interest payments and matures in November 2004. Principal is due at maturity. At December 31, 2003, $1.8
million had been advanced to ARI.



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, currently 5.0% per annum, required monthly payments of interest only and matured in October 2003. The loan is
callable upon 60 days prior notice, and is 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 January 2005. The remaining balance is $450,000.



NOTE
10.RELATED PARTY TRANSACTIONS



In March 2003, ARI sold the Bridgeview Plaza and Cullman shopping centers to TCI for $10.7 million to satisfy debt. TCI assumed debt of $2.7 million on Cullman. TCI received $5.1 million cash on the subsequent
financing of the shopping centers.



On June 2, 2003, ARI
exchanged all of its 674,971 IORI shares with BCM, receiving 650,000 TCI shares from BCM. In addition, BCM has executed a promissory note in favor of ARI in the amount of $526,000 (see NOTE 3. NOTES RECEIVABLE). 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, 2003, ARI owned 80.0% of the outstanding shares of TCI. ARI no longer directly owns any IORI shares. At December 31, 2003, ARI owned 19.2% of IORI through TCIs ownership of IORI shares. ARI ceased consolidation of
IORIs accounts and operations effective June 2, 2003.



In
May 2003, ARI sold its Solco-Valley Ranch land parcel. The proceeds of the sale were received by BCM. The funds were used to reduce ARIs affiliate debt by $2.0 million. (See NOTE 2. REAL ESTATE.)



In June 2003, ARI received funds of $757,000 from an affiliate reducing the
affiliate receivable. The funds paid down a note secured by undeveloped land in Harris County, Texas.



Effective July 1, 2003, PAMI became the advisor to ARI and TCI. PAMI is owned by Realty Advisors (79%) and Syntek West, (21%). Syntek West is owned by
Gene Phillips. 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.



In July 2003, ARI sold its interest in MRI to 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% of Gruppa, thereby retaining a 20% interest in MRI. 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 MRI, management has determined that this should be accounted for as a financing transaction. In September 2003,
ARI sold the note to Syntek West for $2.3 million, plus accrued but unpaid interest, to reduce affiliate debt.



In July 2003, ARI paid $3.1 million to BCM for prior years legal fees incurred by Gene Phillips. Mr. Phillips is a related party and advisor to ARI.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In September 2003, ARI sold its Palm Desert land parcel. The proceeds of the sale were received by an
affiliate. The funds were used to reduce ARIs affiliate debt by $2.6 million. (See NOTE 2. REAL ESTATE.)



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 October 2003, ARI advanced $1.6 million to the Class A Limited Partners of Encino Executive Plaza, Ltd., of which ARI is
the general partner. The loans bear interest at 8.5% per annum and mature in June 2006. Interest due to ARI will be deducted from the quarterly return owed by ARI to the Class A Limited Partners, eliminating the quarterly payments. The outstanding
principal is due at maturity.



In October 2003, ARI purchased
the Travelers land from IORI for $25.0 million, paying $1.9 million in cash and giving a wrap note payable to IORI for $22.8 million. The note bears interest at 5.49% per annum, requires monthly payments sufficient to pay the installments due on the
underlying debt and matures in October 2006. The principal is due at maturity.



In November 2003, ARI sold its Scout land parcel for $2.8 million, receiving $485,000 in cash after paying closing costs and providing purchase money financing of $2.1 million. The note bore interest at 6.25% per
annum, required monthly payments of accrued interest beginning in December 2003 and matured in November 2006. All principal and accrued but unpaid interest were due at maturity. In December 2003, the note was sold to Realty Advisors, a related
party, for $2.1 million, plus accrued interest, to reduce ARIs affiliate debt.



In December 2003, ARI sold Treehouse Apartments and Parkway Centre to IORI for $11.5 million, including the assumption of debt. This transaction was used to reduce ARIs affiliate debt by $4.8 million. (See NOTE
2. REAL ESTATE.)



In December 2003, ARI sold Eagle
Crest land to IORI for $4.0 million. This transaction was used to reduce ARIs affiliate debt by $4.0 million. (See NOTE 2. REAL ESTATE.)



In December 2003, ARIs Board of Directors approved the payment to Regis of a six percent (6%) construction management fee on all construction
projects in process at December 31, 2003, to be applied to all construction costs incurred during 2003 on each project. The resulting calculation of $4.1 million was treated as a reduction in the affiliate receivable balance from Prime.



In December 2003, ARI sold seven properties to subsidiaries of Unified
Housing Foundation, Inc. (UHF), a Texas Non-Profit 501(c)3 Corporation. 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 include 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 will not be recorded as sales. Instead, these transactions will be accounted for on the deposit method and the
properties and corresponding debt will continue to be 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. Management is seeking lender
approval on the transfer of the notes associated with these property transactions.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 subordinate pledge of 850,000 shares of ARI Common Stock owned by BCM. The shares are also pledged to a lender on
ARIs behalf. The interest rate was changed to 2% over the prime rate, currently 6.25% per annum, and the accrued but unpaid interest of $984,000 was added to the principal. The new principal balance is $5.6 million. All principal and accrued
interests are due at maturity.



In December 2000, an unsecured
loan with a remaining principal balance of $1.8 million to Warwick of Summit, Inc. (Warwick) matured. The loan was made to provide funds to purchase, renovate and expand a shopping center property in Warwick, Rhode Island. All principal
and interest were due at maturity. In February 2002, $275,000 of interest was received. In March 2003, $27,000 of principal and $223,000 of interest was received. In April 2003, $149,000 of principal and $26,000 of interest was received. In July
2003, $10,000 of interest was received. Richard D. Morgan, a Warwick shareholder, served as a director of ARI until October 2001. In December 2003, the note was sold to Prime for $1.8 million, to reduce ARIs affiliate debt.



In December 2000, a loan with a principal balance of $1.6 million to Bordeaux
Investments Two, L.L.C. (Bordeaux), matured. The loan, to provide funds to purchase and renovate a shopping center property in Oklahoma City, Oklahoma, was secured by (1) a 100% interest in Bordeaux, which owns a shopping center in
Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux members. Richard D. Morgan, a Bordeaux member
until July 2003, served as a director of ARI until October 2001. In July 2003, the members of Bordeaux assigned 100% of the membership interest in Bordeaux to ARI in payment of the note. ARI recorded real estate assets of $8.8 million and assumed
$7.2 million of mortgage debt and other liabilities on the shopping center and the undeveloped land. No gain or loss was recorded on this transaction. In December 2003, the shopping center was exchanged with Regis I, a related party, for three notes
receivable: $1.4 million from Harvest Hill; $1.4 million from Harvest Hill I; and $2.1 million from Harvest Hill III, related parties. All three notes bear interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the
extent surplus cash is available, beginning in November 2003 and are guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, a related party,
which is the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



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% 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 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. BASIS OF PRESENTATION). 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 2% over the prime rate, currently 6.0%. All principal and interest are due at maturity.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer of ARI, is a 10% shareholder of One Realco. Mr.
Kimbrough does not participate in day-to-day operations or management of One Realco.



In March 2000, a loan with a remaining principal balance of $2.6 million to Lordstown, L.P., matured. The loan, to provide funds to purchase for resale various parcels of land, is secured by a second lien on land in
Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital, Ltd., the limited partner of Lordstown, L.P., and a profits interest in subsequent land sales. A corporation controlled by Richard D. Morgan is the general
partner of Lordstown, L.P. Mr. Morgan served as a director of ARI until October 2001. In December 2003, the note was exchanged with Regis I, a related party, for three notes receivable: $1.4 million from Harvest Hill; $1.4 million from Harvest Hill
I; and $2.1 million from Harvest Hill III, related parties. All three notes bear interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the extent surplus cash is available, beginning in November 2003 and are
guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, a related party, which is the sole member of Harvest Hill, Harvest Hill I, and Harvest
Hill III.



In January 2002, IORI purchased 100% of the
outstanding common shares of Rosedale Corporation (Rosedale), a wholly-owned subsidiary of ARI, for $5.1 million. The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of
net operating income. Rosedale owned the Rosedale Towers Office Building. ARI guaranteed that the asset would produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset failed to
produce the 12% return, ARI would pay IORI any shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, IORI could require ARI to repurchase the shares of Rosedale for the purchase price. The business purpose of the
transaction was for IORI to make an equity investment in Rosedale, anticipating a profitable return, and for ARI to receive cash for its equity investment. Management classified this related party transaction as a note payable to IORI. After IORI
sold the Rosedale Towers Office Building to an unrelated buyer in December 2002, ARI owed $2.1 million to IORI for remaining principal and 12% return. In April 2003, ARI repaid $2.0 million in principal and accrued interest. In August 2003, ARI
repaid the remaining principal and accrued interest.



In
January 2002, TCI purchased 100% of the common shares of ART Two Hickory Corporation (Two Hickory), a wholly-owned subsidiary of ARI, for $4.4 million. The purchase price was determined based upon the market value of the property
exchanged, using a market rate multiple of net operating income. Two Hickory owns the Two Hickory Centre Office Building. ARI has guaranteed that the asset will produce at least a 12% annual return on the purchase price for a period of three years
from the purchase date. If the asset fails to produce the 12% return, ARI will pay TCI any shortfall. In addition, if the asset fails to produce the 12% return for a calendar year, TCI may require ARI to repurchase the shares of Two Hickory for the
purchase price. The business purpose of the transaction was for TCI to make an equity investment in Two Hickory, anticipating a profitable return, and for ARI to receive cash for its equity investment. Management has classified this related party
transaction as a note payable to TCI.



In March 2002, ARI
received $520,000 and exchanged with TCI a 24.5 acre tract of Rasor land, a 16.89 acre tract of Lakeshore Villas Apartments land and the 45,623 sq.ft. Oaktree Village Shopping Center for the 80,278 sq.ft. Plaza on Bachman Creek Shopping Center. The
exchange value prices for the shopping centers were determined using a market rate multiple of net operating income, and the values of the land parcels were determined using appraised rates. The business purpose of the transaction was for TCI to
construct apartments on the Rasor and Lakeshore Villas land. To give ample value for the property TCI exchanged, the Oaktree Village Shopping Center was added to the transaction. ARI received $4.4 million on the subsequent financing of the shopping
center.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In April 2002, TCI purchased all of the general and limited partnership interests in Garden
Confederate Point, L.P. (Confederate Point) from ARI for $1.9 million. The purchase price was determined based upon the market value of the property, using a market rate multiple of net operating income. Confederate Point owned the
Confederate Point Apartments. ARI guaranteed that the asset would produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI would pay TCI any
shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, TCI could require ARI to repurchase the partnership interests in Confederate Point for the purchase price. The business purpose of this transaction was for
TCI to make an equity investment in Confederate Point, anticipating a profitable return, and to reduce ARIs affiliate debt. Management classified this related party transaction as a note payable to TCI. In November 2003, the property was sold
to an unrelated buyer. ARI repaid the $2.0 million in principal and accrued interest.



In April 2002, TCI purchased 100% of the common shares of ART One Hickory Corporation (One Hickory), a wholly-owned subsidiary of ARI, for $4.5 million. The purchase price was determined based upon the
market value of the property using a market rate multiple of net operating income. One Hickory owned the One Hickory Centre office building (One Hickory Centre.) ARI guaranteed that the asset would produce at least a 12% annual return on
the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI would pay TCI any shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, TCI could require
ARI to repurchase the shares of One Hickory for the purchase price. The business purpose of this transaction was for TCI to make an equity investment in One Hickory, anticipating a profitable return, and to reduce ARIs affiliate debt.
Management classified this related party transaction as a note payable. In October 2003, TCI sold One Hickory Centre to IORI for $12.2 million, providing purchase money wrap-around financing of $12.0 million. Also in October 2003, IORI sold One
Hickory Centre to ARI for $12.2 million, providing purchase money wrap-around financing of $12.0 million. These additional transactions discharged the 2002 financing from TCI.



In April 2002, TCI purchased all of the general and limited partnership interests in Garden Foxwood, L.P.
(Foxwood) from ARI for $1.1 million. The purchase price was determined based upon the market value of the property, using a market rate multiple of net operating income. Foxwood owns the Foxwood Apartments. The business purpose of this
transaction was for TCI to make an equity investment in Foxwood, anticipating a favorable return, and to reduce ARIs affiliate debt. ARI has guaranteed that the asset will produce at least a 12% annual return on the purchase price for a period
of three years from the purchase date. If the asset fails to produce the 12% return, ARI will pay TCI any shortfall. In addition, if the asset fails to produce the 12% for a calendar year, TCI may require ARI to repurchase the interests in Foxwood
for the purchase price. The business purpose of the transaction was for TCI to make an equity investment in Foxwood, anticipating a profitable return, and to reduce ARIs affiliate debt. Failure to notify and receive approval from the lender
for this transaction may constitute an event of default under the terms of the debt assumed by TCI. Management classified this related party transaction as a note payable.



In April 2002, TCI purchased all of the general and limited partnership interests in Garden Woodsong, L.P.
(Woodsong) from ARI for $2.5 million. The purchase price was determined based upon the market value of the property, using a market rate multiplie of net operating income. Woodsong owned the Woodsong Apartments. The business purpose of
this transaction was for TCI to make an equity investment in Woodsong, anticipating a profitable return, and to reduce ARIs affiliate debt. ARI guaranteed that the asset would produce at least a 12% annual return on the purchase price for a
period of three years from the purchase date. If the asset failed to produce the 12% return, ARI would pay TCI any shortfall. In addition, if the asset failed to produce the 12% for a calendar year, TCI could require ARI to repurchase the interests
in Woodsong for the purchase price. The business purpose of this transaction was for TCI to make an equity investment in Woodsong, anticipating a profitable return, and to reduce ARIs affiliate debt. Management classified this related party
transaction as a note payable. TCI sold the Woodsong Apartments in July 2002.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In June 2002, TCI purchased Centura Tower, Ltd. partnership, which owns the Centura Tower Office
Building, from ARI for $50.0 million. See NOTE 2. REAL ESTATE. The purchase price for the Centura Tower was determined based on appraised value and replacement cost. The business purpose of the transaction was for TCI to acquire a Class
A office building with significant upside potential anticipating a profitable return and for ARI to satisfy debt.



In June 2002, TCI purchased five parcels of unimproved land from ARI for $30.0 million: the Hollywood Casino, Marine Creek, Mason Park, Nashville and
Monterrey land parcels. See NOTE 2. REAL ESTATE. The purchase price of the Hollywood Casino land was determined based on an appraised value of $9.10 per square foot. The business purpose of the transaction was for TCI to consolidate its
holdings within the Mercer Crossing development. The purchase price for the Marine Creek, Mason Park, Nashville and Monterrey land parcels was determined based on appraised rates. The business purpose of the transaction was for TCI to develop
apartments on these four tracts of land and for ARI to satisfy debt. Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt assumed by TCI.



In June 2002, ARI purchased all the general and limited partnership interests
in Chalet North, L.P. (Chalet North) from BCM for $3.0 million. Chalet North owns the Pinecrest Apartments (Pinecrest). 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 $1.4 million. ARIs receivable from BCM was reduced by $1.6 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 June 2003, ARI sold Pinecrest to an unrelated buyer (See NOTE 2. REAL ESTATE).



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.)



In June 2002, ARI purchased the Alta Mesa Shopping Center (Alta Mesa) from BCM for $3.8 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 $1.8 million. ARIs receivable from BCM was reduced by $2.0 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 October 2002, ARI sold Alta Mesa to an unrelated buyer (See NOTE 2. REAL ESTATE).



On June 30, 2002, ARI obtained 71.4% interest in RAK from BCM for $6.0 million. The business purpose of the transaction was
to reduce the affiliate payable owed by BCM to ARI. ARIs receivable from BCM was reduced by $6.0 million, and no cash was paid by ARI. At the date of acquisition, RAKs assets consisted of $2.3 million in cash, $3.0 million in deposits
and marketable securities, and $225,000 in other assets. RAKs net equity was $5.5 million. ARI recorded $1.9 million in goodwill as a result of this transaction. In June 2003, ARI sold its 71.4% interest in RAK to Realty Advisors and Syntek
West for $6.0 million, reducing ARIs affiliate debt. Realty Advisors also paid ARI $600,000, representing 10% interest on ARIs investment.



In December 2002, ARI sold the Lakeshore Villas Apartments to Humble for $22.0 million, paying $764,000 after payment of closing costs and debt paydown
and providing purchase money financing of $8.4 million. One note had a principal amount of $2.0 million. The loan was unsecured, and was guaranteed by Unified Housing Foundation, Inc. (Unified), a related party. The second note had a
principal amount of $6.4 million, and was secured by a pledge by Unified of 100% of the Member Interest in Humble. Both notes bore



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



interest at 11.5% per annum, matured in December 2009 and required quarterly payments beginning in March 2003. Richard W. Humphrey, a Director of ARI until
July 2003, is the President of Humble and the President and Treasurer of Unified. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified. In December 2003, both notes were sold to IORI for $8.4 million, plus
accrued interest, to reduce ARIs affiliate debt.



In
December 2002, TCI purchased the NLP/CH, Ltd. partnership, which owns the Centura Holdings, Clark and Woolley land parcels, from ARI for $13.3 million. See NOTE 2. REAL ESTATE. The purchase price was determined based on an appraised rate
of $34.89 per share foot. The business purpose of the transaction was for TCI to construct apartments on the land and for ARI to satisfy debt.



In January 2003, ARIs Board of Directors approved the payment to BCM of a 6% construction management fee on all construction projects in process at
December 31, 2002, to be applied to all labor and materials costs incurred to date on each project. The resulting calculation of $1.9 million was treated as an increase in the affiliate payable balance to BCM.



During 2002, ARIs Board of Directors authorized ARIs Chief
Financial Officer to advance funds either to or from ARI, through BCM, 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.



In June
2002, BCM partially repaid its affiliate payable to ARI by transferring Alta Mesa Shopping Center, Pinecrest Apartments, Tiberon Trails Apartments and Realty Advisors Korea, Ltd. to ARI.



Also in June 2002, BCM converted $4.5 million of its unsecured payable to ARI to a note payable.



During 2002, ARIs payable to BCM was increased by advisory fees,
reimbursable expenses and insurance reimbursements of $549,000, $517,000 and $435,000, respectively.



During 2002, ARI made payments on BCMs and TCIs behalf of $2.2 million and $2.8 million, respectively, while BCM made payments on ARIs
behalf of $4.1 million.



In November 2002, ARI sold its note
receivable from the sale of leasehold interest in oil and gas mineral development properties to 10300 Gaywood Trust for a reduction of the affiliate payable to BCM in the amount of $1.3 million.



In July 2002, ARI sold Garden Woodsong to an unrelated party. The proceeds of
$2.8 million increased ARIs affiliate payable to TCI.



In
December 2002, ARI sold the Rosedale Towers to an unrelated party. The proceeds of $3.5 million increased ARIs affiliate payable with IORI.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table reconciles the beginning and ending balances of accounts receivable from
(accounts payable to) affiliates as of December 31, 2003.



|                                               |  |     |          |   |       |   |          |      |  |   |        |  
|---------------------------------------------- |  | --- | -------- | - | ----- | - | -------- | ---- |  | - | ------ | -
|                                               |  | BCM |          |   | PRIME |   |          | IORI | 
|Balance, December 31, 2002                     |  | $   | (15,245  | ) |       | $ |         |      |  | $ | (8,714 | )
|Cash transfers to affiliates                   |  |     | 103,103  |   |       |   | 117,817  |      |  |   | 650    |  
|Cash transfers from affiliates                 |  |     | (108,986 | ) |       |   | (123,730 | )    |  |   |       |  
|Repayments through property transfers          |  |     |         |   |       |   | 4,760    |      |  |   | 4,000  |  
|Repayments through purchase of note receivable |  |     |         |   |       |   | (2,428   | )    |  |   |       |  
|Fees and reimbursements payable to Advisor     |  |     | (680     | ) |       |   | (2,790   | )    |  |   |       |  
|Other additions                                |  |     | 57,438   |   |       |   | 37,393   |      |  |   |       |  
|Other repayments                               |  |     | (39,493  | ) |       |   | (43,539  | )    |  |   | 3,437  |  
|Advance through affiliate refinance            |  |     | (757     | ) |       |   | 1,226    |      |  |   |       |  
|Sale of notes receivable                       |  |     | 18       |   |       |   | 15,124   |      |  |   |       |  
|Advance through property sale receipts         |  |     | 6,600    |   |       |   | 1,640    |      |  |   |       |  
|Repayment through property sale receipts       |  |     |         |   |       |   | (1,080   | )    |  |   |       |  
|                                               |  |     |          |   |       |   |          |      |  |   |        |  
|Balance, December 31, 2003                     |  | $   | 1,998    |   |       | $ | 4,393    |      |  | $ | (627   | )
|                                               |  |     |          |   |       |   |          |      |  |   |        |  



Also at December 31,
2003, ARI owed $1.2 million to affiliates for unbilled loan arrangement fees and real estate brokerage commissions, and $1.4 million to affiliates related to cash received upon the sale of apartments to Metra. At December 31, 2003, an affiliate owed
ARI $1.7 million in accrued rent.



Returns on Metra
Properties.    As described more fully in NOTE 8. NOTES AND INTEREST PAYABLE, ARI sold nine of its properties during 2002 to partnerships controlled by Metra. The partnership agreement for each of these
partnerships states 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 residential properties. These distributions to the Metra Partners have priority over distributions to any of the
other partners.



NOTE
11.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 Common Stock were
declared for 2002 or 2003. 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 12.PREFERRED STOCK



There are 15,000,000 shares of Series A 10% 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% of the average daily closing price of
ARIs Common Stock for the prior 20 trading days. At December 31, 2003, 3,225,370 shares of Series A Preferred Stock were outstanding and 1,743,920 shares were reserved for issuance as future consideration in various business transactions. Of
the outstanding shares, 300,000 shares are owned by



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. In January 2004, 200,000 shares were issued to Prime, ARIs advisor. In February 2004, 50,000 additional shares were issued to Prime.



There were 80,000 shares of Series B 10% Cumulative Convertible Preferred Stock authorized, with a par value of $2.00 per share and a liquidation
preference of $100.00 per share plus accrued but unpaid dividends. The Series B Preferred Stock bore an annual dividend of $11.00 per share or $2.75 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 B Preferred Stock was reserved for conversion of the Class A limited partner units of Valley Ranch, L.P. In March 1999, an agreement was reached for ARI to acquire the eight million Class A
units for $1.00 per unit. At December 31, 2002, all of the Class A units had been repurchased. In August 2003, Series B Cumulative Convertible Preferred Stock was eliminated.



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, 2003,
10,188,750 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. At June 30, 2003, shares of Series C Preferred Stock could be
converted into 57,500 shares of ARI Common Stock. On or after December 31, 2005, additional shares of Series C Preferred Stock may be converted into 16,250 shares of ARI Common Stock. On or after December 31, 2006, all remaining 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% of the average daily closing price of ARIs Common Stock for the prior 20 trading days. In
January 2001, 2.5 million Class A limited partner units of ART Palm were redeemed for $2.5 million in cash. In December 2001, 7.2 million Class A limited partner units of ART Palm were redeemed for $5.8 million, including $2.5 million in cash. ARI
gave a note payable for the remaining $3.3 million. The note bore interest at 10.0% per annum, with a payment of $1.9 million plus accrued but unpaid interest due in June 2002, and the remaining principal and accrued but unpaid interest due at
maturity in December 2002. The note was paid in full in January 2003, including accrued but unpaid interest. In July 2002, 1.6 million Class A limited partner units of ART Palm were redeemed for $1.6 million cash. In August 2003, 1.6 million Class A
limited partner units of ART Palm were redeemed for $1.6 million in cash. At December 31, 2003, no 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, 2003, no Series D Preferred Stock was outstanding.



There are 500,000 shares of Series E 6% 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, 2003, 50,000 shares of Series E Preferred Stock were outstanding.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



There were 10,000 shares of Series I 8% Cumulative Preferred Stock authorized, with a par value of
$2.00 per share and a liquidation preference of $1,000.00 per share. Dividends were payable at the annual rate of $80.00 per share or $20.00 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. In February 2003, 10,000 shares were issued to ART Morgan, Inc., a wholly-owned subsidiary of ARI. In September 2003, the shares were returned to ARI and were canceled. In October 2003, Series I Cumulative
Preferred Stock was eliminated.



NOTE
13.STOCK OPTIONS



In January 1998, stockholders approved the 1997 Stock Option Plan (the Option Plan). Under the Option Plan, options have been granted to certain ARI officers and key employees of BCM and its affiliates. The Option Plan provides
for options to purchase up to 300,000 shares of Common Stock. All grants are determined by the Option Committee of the Board of Directors. Options granted pursuant to the Option Plan are exercisable, based upon vesting of 20% 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, 2003, 89,750 options were exercisable at an exercise price of $16.35 per Common share and 2,000
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 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 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 and 2004, 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 and $9.13 per Common share, respectively. Each Independent Director will be awarded an option to purchase an additional 1,000 Common shares on January 1 of each year. At
December 31, 2003, 6,000 options were exercisable at prices ranging from $8.09 to $13.625 per Common share.



|                            |  |                 |   |      |               |             |                 |         |   |                |   |                 |  |         |                |  |   |             
|--------------------------- |  | --------------- | - | ---- | ------------- | ----------- | --------------- | ------- | - | -------------- | - | --------------- |  | ------- | -------------- |  | - | ------------
|                            |  | 2003            |   | 2002 |               | 2001       
|                            |  | Numberof Shares |   |      | ExercisePrice |             | Numberof Shares |         |   | Exercise Price |   | Numberof Shares |  |         | Exercise Price
|Outstanding at January 1,   |  | 105,750         |   |      | $             | 9.87-18.53  |                 | 183,750 |   |                | $ | 13.63-18.53     |  | 210,750 |                |  | $ | 16.35-18.53 
|Granted                     |  | 3,000           |   |      |               | $8.09       |                 | 3,000   |   |                |   | $  9.87         |  | 5,000   |                |  |   | $13.63      
|Canceled                    |  | (10,500         | ) |      |               | $9.87-18.53 |                 | (81,000 | ) |                |   | $13.63-18.53    |  | (32,000 | )              |  |   | $16.35-18.53
|                            |  |                 |   |      |               |             |                 |         |   |                |   |                 |  |         |                |  |   |             
|Outstanding at December 31, |  | 98,250          |   |      | $             | 8.09-18.53  |                 | 105,750 |   |                | $ | 9.87-18.53      |  | 183,750 |                |  | $ | 13.63-18.53 
|                            |  |                 |   |      |               |             |                 |         |   |                |   |                 |  |         |                |  |   |             



NOTE
14.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 indirectly owned by Gene E. Phillips and a trust for the
children of Gene E. Phillips. Mr. Phillips is not an officer or



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 making of investment decisions for itself and for ARI.



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% of net income for the year in excess of a 10% return on stockholders equity, and 10% 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
15.PROPERTY MANAGEMENT



Affiliates of Prime provided 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 5% or less of the monthly gross rents collected on the residential properties under its management and 3% 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 BCM. The limited partner of Triad is Highland Realty Services, Inc. (Highland), a related party.
Until December 2002, Triad subcontracted the property-level management and leasing of 47 of ARIs commercial properties (shopping centers, office buildings and a merchandise mart) and eight of its hotels to Regis Realty, Inc.
(Regis), a related party, which was a company owned by GS Realty Services, Inc. (GS Realty). Regis was entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Triad. Since January 1, 2003, Regis Realty I, LLC (Regis I), has provided these services. Regis I is owned by Highland. Regis Hotel Corporation, a related party, managed ARIs 12 hotels,
until December 2002. Since January 1, 2003, Regis Hotel I, LLC, has managed ARIs 12 hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. Carmel is a company owned by First Equity Properties, Inc., which is a company
affiliated with BCM.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 16.ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.



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



|                          |  |      |        |      |   |       |  |   |       
|------------------------- |  | ---- | ------ | ---- | - | ----- |  | - | ------
|                          |  | 2003 |        | 2002 |   | 2001 
|Fees                      |  |      |        |      |   |       |  |   |       
|Advisory fee              |  | $    | 9,345  |      | $ | 5,899 |  | $ | 6,715 
|Net income fee            |  |      |       |      |   |      |  |   | 166   
|Incentive fee             |  |      |       |      |   |      |  |   | 3,827 
|Loan arrangement          |  |      | 1,256  |      |   | 689   |  |   | 1,221 
|Property acquisition fees |  |      | 371    |      |   | 13    |  |   |      
|                          |  |      |        |      |   |       |  |   |       
|                          |  | $    | 10,972 |      | $ | 6,601 |  | $ | 11,929
|                          |  |      |        |      |   |       |  |   |       
|Cost reimbursements       |  | $    | 5,182  |      | $ | 2,546 |  | $ | 2,845 
|                          |  |      |        |      |   |       |  |   |       



Fees paid to Triad, an
affiliate, and GS Realty and Highland, related parties:



|                                                              |  |      |        |      |   |        |  |   |      
|------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | -----
|                                                              |  | 2003 |        | 2002 |   | 2001  
|Fees                                                          |  |      |        |      |   |        |  |   |      
|Real estate brokerage                                         |  | $    | 6,247  |      | $ | 5,322  |  | $ | 5,883
|Construction supervision fee                                  |  |      | 4,050  |      |   | 1,937  |  |   |     
|Property and construction management and leasing commissions* |  |      | 4,273  |      |   | 4,325  |  |   | 3,919
|                                                              |  |      |        |      |   |        |  |   |      
|                                                              |  | $    | 14,570 |      | $ | 11,584 |  | $ | 9,802
|                                                              |  |      |        |      |   |        |  |   |      

---

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



NOTE 17.INCOME TAXES



ARI had a loss for federal income tax purposes after the use of net operating loss carryforwards in 2002 and losses for
federal income tax purposes for 2003 and 2001; therefore, it recorded no provision for income taxes. ARI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, 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 is more than offset by notes payable and deferred revenue which have a financial statement basis that exceeds their tax basis by $134.8
million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes by approximately $73.2 million. Additionally, at December 31, 2003, ARI had carryforward capital and net operating
losses of $129.1 million expiring through the year 2023. 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 cannot determine that it is more likely than not that ARI will realize the benefit of the deferred tax asset, a 100% valuation allowance has been established.



During the third quarter of 2000, due to a concentration of ownership, TCI no
longer met the requirements for tax treatment as a Real Estate Investment Trust (REIT), as defined by Sections 856 through 860 of the



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Internal Revenue Code of 1986, as amended (the Code), under the Code, and is prohibited from re-qualifying for REIT tax status for at least five
years.



TCI had net income for federal income tax purposes
before the application of operating loss carryforwards in 2003, 2002 and 2001; 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. Additionally, at December 31, 2003, TCI has current and prior tax net operating loss carryforwards of $33.8
million expiring through the year 2018. Also, TCIs state income tax expense is included in general and administrative expense on the Consolidated Statements of Operations.



At December 31, 2003, TCI had a net deferred tax asset of $14.6 million due to tax deductions available to it in future
years. However, as management cannot determine that it is more likely than not that TCI will realize the benefit of the deferred tax asset, a 100% valuation allowance has been established.



NOTE 18.RENTS UNDER OPERATING LEASES



ARIs operations include the leasing of commercial
properties (office buildings, shopping centers and a merchandise mart). The leases thereon expire at various dates through 2014. The following is a schedule of minimum future rents under non-cancelable operating leases as of December 31, 2003:



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 41,519 
|2005       |  |   | 34,963 
|2006       |  |   | 25,173 
|2007       |  |   | 18,443 
|2008       |  |   | 12,238 
|Thereafter |  |   | 30,774 
|           |  |   |        
|           |  | $ | 163,110
|           |  |   |        



MRI conducts its
operations from leased facilities which include office space, a warehouse, and 60 pizza parlor locations for which a lease was signed and the pizza parlor was either open at December 31, 2003 or scheduled to open thereafter. The leases expire over
the next 18 years. MRI also leases vehicles under operating leases.



The following is a schedule of minimum future rent commitments under operating leases as of December 31, 2003:



|           |  |   |       
|---------- |  | - | ------
|2004       |  | $ | 2,350 
|2005       |  |   | 2,103 
|2006       |  |   | 1,825 
|2007       |  |   | 1,580 
|2008       |  |   | 1,387 
|Thereafter |  |   | 3,306 
|           |  |   |       
|           |  | $ | 12,551
|           |  |   |       



Total facilities and
automobile rent expense relating to these leases was $2.5 million in 2003, $2.5 million in 2002 and $2.2 million in 2001.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 19.OPERATING SEGMENTS



Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based
on their net operating income and cash flow. Items of income that are not reflected in the segments are equity in loss of investees, gain on extinguishment of debt, gain on condemnation award, loss on sale of investments in equity investees, equity
in gain on sale of real estate by equity investees and other income which totaled $11.7 million in 2003, $8.3 million in 2002 and $8.4 million in 2001. Expenses that are not reflected in the segments are general and administrative expenses, minority
interest, incentive fees, advisory fees, net income fees, litigation settlement expenses, writedown of assets held for sale, loss on foreign currency transactions and discontinued operations, which totaled $61.3 million in 2003, $31.3 million in
2002 and 35.0 million in 2001. Excluded from operating segment assets are assets of $94.8 million in 2003, $141.2 million in 2002 and $118.7 million in 2001 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; RAK (South Korea), which ARI acquired in 2002 and sold in June 2003;
and Hotel Akademia (Poland), which began operations in 2002. See NOTE 2. REAL ESTATE and NOTE 3. NOTES AND INTEREST RECEIVABLE.



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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
2003, 2002 and 2001.



|                               |  |                      |         |            |   |         |  |   |        |   |  |     |         |                   |  |       |        |  |   |        |  |   |          
|------------------------------ |  | -------------------- | ------- | ---------- | - | ------- |  | - | ------ | - |  | --- | ------- | ----------------- |  | ----- | ------ |  | - | ------ |  | - | ---------
|                               |  | CommercialProperties |         | Apartments |   | Hotels  |  |   | Land   |   |  | MRI |         | Receivables/Other |  | Total
|2003                           |  |                      |         |            |   |         |  |   |        |   |  |     |         |                   |  |       |        |  |   |        |  |   |          
|Operating revenue              |  | $                    | 63,696  |            | $ | 65,036  |  | $ | 35,880 |   |  | $   | 455     |                   |  | $     | 33,057 |  | $ | 1,841  |  | $ | 199,965  
|Interest income                |  |                      |        |            |   |        |  |   |       |   |  |     |        |                   |  |       |       |  |   | 9,222  |  |   | 9,222    
|Operating expenses             |  |                      | 37,528  |            |   | 45,819  |  |   | 27,488 |   |  |     | 5,229   |                   |  |       | 26,051 |  |   | 390    |  |   | 142,505  
|                               |  |                      |         |            |   |         |  |   |        |   |  |     |         |                   |  |       |        |  |   |        |  |   |          
|Operating income (loss)        |  | $                    | 26,168  |            | $ | 19,217  |  | $ | 8,392  |   |  | $   | (4,774  | )                 |  | $     | 7,006  |  | $ | 10,673 |  | $ | 66,682   
|                               |  |                      |         |            |   |         |  |   |        |   |  |     |         |                   |  |       |        |  |   |        |  |   |          
|Depreciation and amortization  |  | $                    | 13,851  |            | $ | 5,523   |  | $ | 4,945  |   |  | $   |        |                   |  | $     | 1,484  |  | $ | 45     |  | $ | 25,848   
|Interest                       |  |                      | 21,235  |            |   | 19,648  |  |   | 5,071  |   |  |     | 17,404  |                   |  |       | 1,127  |  |   | 6,523  |  |   | 71,008   
|Capital expenditures           |  |                      | 5,763   |            |   | 53,178  |  |   | 3,391  |   |  |     | 3,978   |                   |  |       | 1,615  |  |   |       |  |   | 67,925   
|Assets                         |  |                      | 294,849 |            |   | 388,505 |  |   | 89,228 |   |  |     | 281,454 |                   |  |       | 20,766 |  |   | 70,595 |  |   | 1,145,397
|                               |  |                      |         |            |   |         | 
|                               |  | CommercialProperties |         | Apartments |   | Hotels  |  |   | Land   |   |  |     |         |                   |  | Total
|Property Sales                 |  |                      |         |            |   |         |  |   |        |   |  |     |         |                   |  |       |        |  |   |        |  |   |          
|Sales price                    |  | $                    | 99,386  |            | $ | 90,378  |  |   | 26,820 |   |  | $   | 67,283  |                   |  |       |        |  |   |        |  | $ | 283,867  
|Cost of sales                  |  |                      | 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   
|                               |  |                      |         |            |   |         |  |   |        |   |  |     |         |                   |  |       |        |  |   |        |  |   |          



|                               |  |                      |         |            |   |        |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|------------------------------ |  | -------------------- | ------- | ---------- | - | ------ |  | ---- | ------ |  | --- | ------- | ----------------- |  | ----- | ------ |  | - | ------ |  | - | -------
|                               |  | CommercialProperties |         | Apartments |   | Hotels |  | Land |        |  | MRI |         | Receivables/Other |  | Total
|2002                           |  |                      |         |            |   |        |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Operating revenue              |  | $                    | 21,268  |            | $ | 23,533 |  | $    | 27,675 |  | $   | 575     |                   |  | $     | 32,036 |  | $ | 246    |  | $ | 105,333
|Interest income                |  |                      |        |            |   |       |  |      |       |  |     |        |                   |  |       |       |  |   | 3,145  |  |   | 3,145  
|Operating expenses             |  |                      | 14,010  |            |   | 15,593 |  |      | 20,977 |  |     | 6,002   |                   |  |       | 25,286 |  |   | 528    |  |   | 82,396 
|                               |  |                      |         |            |   |        |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Operating income (loss)        |  | $                    | 7,258   |            | $ | 7,940  |  | $    | 6,698  |  | $   | (5,427  | )                 |  | $     | 6,750  |  | $ | 2,863  |  | $ | 26,082 
|                               |  |                      |         |            |   |        |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Depreciation and amortization  |  | $                    | 2,891   |            | $ | 1,762  |  | $    | 1,920  |  | $   |        |                   |  | $     | 1,268  |  | $ | 39     |  | $ | 7,880  
|Interest                       |  |                      | 7,755   |            |   | 8,573  |  |      | 3,822  |  |     | 19,763  |                   |  |       | 840    |  |   | 11,351 |  |   | 52,104 
|Capital expenditures           |  |                      | 15,567  |            |   | 16,204 |  |      | 832    |  |     | 3,092   |                   |  |       | 2,869  |  |   |       |  |   | 38,563 
|Assets                         |  |                      | 135,750 |            |   | 92,322 |  |      | 90,540 |  |     | 147,430 |                   |  |       | 21,912 |  |   | 82,133 |  |   | 570,087
|                               |  |                      |         |            |   |        | 
|                               |  | CommercialProperties |         | Apartments |   |        |  | Land |        |  |     |         |                   |  | Total
|Property Sales                 |  |                      |         |            |   |        |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Sales price                    |  | $                    | 63,524  |            | $ | 79,800 |  |      |        |  | $   | 127,750 |                   |  |       |        |  |   |        |  | $ | 271,074
|Cost of sales                  |  |                      | 54,777  |            |   | 42,579 |  |      |        |  |     | 75,718  |                   |  |       |        |  |   |        |  |   | 173,074
|Deferred current gain          |  |                      | 5,320   |            |   | 8,942  |  |      |        |  |     | 36,135  |                   |  |       |        |  |   |        |  |   | 50,397 
|Recognized prior deferred gain |  |                      |        |            |   |       |  |      |        |  |     | 830     |                   |  |       |        |  |   |        |  |   | 830    
|                               |  |                      |         |            |   |        |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Gain on sale                   |  | $                    | 3,427   |            | $ | 28,279 |  |      |        |  | $   | 16,727  |                   |  |       |        |  |   |        |  | $ | 48,433 
|                               |  |                      |         |            |   |        |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                              |  |                      |         |            |   |         |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|----------------------------- |  | -------------------- | ------- | ---------- | - | ------- |  | ---- | ------ |  | --- | ------- | ----------------- |  | ----- | ------ |  | - | ------ |  | - | -------
|                              |  |                      |         |            |   |         | 
|                              |  | CommercialProperties |         | Apartments |   | Hotels  |  | Land |        |  | MRI |         | Receivables/Other |  | Total
|2001                          |  |                      |         |            |   |         |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Operating revenue             |  | $                    | 20,841  |            | $ | 37,517  |  | $    | 27,470 |  | $   | 253     |                   |  | $     | 29,383 |  | $ | 693    |  | $ | 116,157
|Interest income               |  |                      |        |            |   |        |  |      |       |  |     |        |                   |  |       |       |  |   | 2,817  |  |   | 2,817  
|Operating expenses            |  |                      | 13,117  |            |   | 24,218  |  |      | 21,895 |  |     | 8,578   |                   |  |       | 23,105 |  |   | 598    |  |   | 91,511 
|                              |  |                      |         |            |   |         |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Operating income (loss)       |  | $                    | 7,724   |            | $ | 13,299  |  | $    | 5,575  |  | $   | (8,325  | )                 |  | $     | 6,278  |  | $ | 2,912  |  | $ | 27,463 
|                              |  |                      |         |            |   |         |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Depreciation and amortization |  | $                    | 3,561   |            | $ | 3,634   |  | $    | 2,062  |  | $   |        |                   |  | $     | 1,320  |  | $ | 13     |  | $ | 9,590  
|Interest                      |  |                      | 7,335   |            |   | 12,490  |  |      | 3,894  |  |     | 28,884  |                   |  |       | 940    |  |   | 6,063  |  |   | 59,606 
|Capital expenditures          |  |                      | 9,838   |            |   | 166     |  |      | 7,754  |  |     | 1,823   |                   |  |       | 1,493  |  |   | 511    |  |   | 21,585 
|Assets                        |  |                      | 172,712 |            |   | 111,008 |  |      | 89,940 |  |     | 214,543 |                   |  |       | 20,976 |  |   | 30,872 |  |   | 640,051
|                              |  |                      |         |            |   |         | 
|                              |  | CommercialProperties |         | Apartments |   |         |  | Land |        |  |     |         |                   |  | Total
|Property Sales                |  |                      |         |            |   |         |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Sales price                   |  | $                    | 7,350   |            | $ | 128,580 |  |      |        |  | $   | 51,841  |                   |  |       |        |  |   |        |  | $ | 187,771
|Cost of sales                 |  |                      | 5,118   |            |   | 52,996  |  |      |        |  |     | 43,063  |                   |  |       |        |  |   |        |  |   | 101,177
|Deferred current gain         |  |                      |        |            |   |        |  |      |        |  |     | 895     |                   |  |       |        |  |   |        |  |   | 895    
|                              |  |                      |         |            |   |         |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        
|Gain on sale                  |  | $                    | 2,232   |            | $ | 75,584  |  |      |        |  | $   | 7,883   |                   |  |       |        |  |   |        |  | $ | 85,699 
|                              |  |                      |         |            |   |         |  |      |        |  |     |         |                   |  |       |        |  |   |        |  |   |        



NOTE
20.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.



For 2003, 2002 and 2001, income (loss) from discontinued operations relates to 23 properties and leasehold interests in oil
and gas properties that ARI sold during 2002, 32 properties that ARI sold during 2003 and four properties that ARI sold during 2004 that are classified as held-for-sale at December 31, 2003. The following table summarizes revenue and expense
information for these properties sold and held-for-sale.



|                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                          |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Revenue                                                   |  |      |        |   |      |   |        |      |  |   |        |  
|Rental                                                    |  | $    | 20,744 |   |      | $ | 37,592 |      |  | $ | 42,585 |  
|Property operations                                       |  |      | 15,373 |   |      |   | 23,996 |      |  |   | 25,049 |  
|                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|                                                          |  |      | 5,371  |   |      |   | 13,596 |      |  |   | 17,536 |  
|Expenses                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Interest                                                  |  |      | 8,618  |   |      |   | 13,729 |      |  |   | 17,442 |  
|Depreciation                                              |  |      | 2,984  |   |      |   | 6,365  |      |  |   | 8,117  |  
|                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|                                                          |  |      | 11,602 |   |      |   | 20,094 |      |  |   | 25,559 |  
|Net loss from discontinued operations                     |  |      | (6,231 | ) |      |   | (6,498 | )    |  |   | (8,023 | )
|Gain on sale of real estate                               |  |      | 48,806 |   |      |   | 31,706 |      |  |   |       |  
|Equity in gain on sale of real estate by equity investees |  |      | 715    |   |      |   | 24,069 |      |  |   |       |  
|                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|Net income (loss) from discontinued operations            |  | $    | 43,290 |   |      | $ | 49,277 |      |  | $ | (8,023 | )
|                                                          |  |      |        |   |      |   |        |      |  |   |        |  



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.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 21.QUARTERLY RESULTS OF OPERATIONS



The following is a tabulation of quarterly results of operations for the
years 2003 and 2002 (unaudited):



|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------ | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                                          |  | Three Months Ended |       
|                                                          |  | March 31,          |        |   | June 30, |   |        | September 30, |  |   | December 31, |  
|2003                                                      |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Operating income                                          |  | $                  | 5,075  |   |          | $ | 16,679 |               |  | $ | 15,407       |   |  | $ | 13,293  |  
|Gain on land sales                                        |  |                    | 19,971 |   |          |   | 15,498 |               |  |   | 959          |   |  |   | 7,403   |  
|Pizza parlor gross margin                                 |  |                    | 1,460  |   |          |   | 1,738  |               |  |   | 1,712        |   |  |   | 2,096   |  
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Income from operations                                    |  |                    | 26,506 |   |          |   | 33,915 |               |  |   | 18,078       |   |  |   | 22,792  |  
|Equity in loss of investees                               |  |                    | (4,339 | ) |          |   | (204   | )             |  |   | 264          |   |  |   | (162    | )
|Interest and other income                                 |  |                    | 2,238  |   |          |   | 1,850  |               |  |   | 3,650        |   |  |   | 16,902  |  
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Total other income                                        |  |                    | (2,101 | ) |          |   | 1,646  |               |  |   | 3,914        |   |  |   | 16,740  |  
|Total other expenses                                      |  |                    | 19,670 |   |          |   | 39,737 |               |  |   | 39,886       |   |  |   | 54,815  |  
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income (loss) from continuing operations              |  |                    | 4,735  |   |          |   | (4,176 | )             |  |   | (17,894      | ) |  |   | (15,283 | )
|Discontinued operations:                                  |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Loss from operations                                      |  |                    | (557   | ) |          |   | (2,616 | )             |  |   | (1,228       | ) |  |   | (1,830  | )
|Gain on sale of real estate                               |  |                    | 3,013  |   |          |   | 18,222 |               |  |   | 12,806       |   |  |   | 14,765  |  
|Equity in gain on sale of real estate by equity investees |  |                    |       |   |          |   | (165   | )             |  |   |             |   |  |   | 880     |  
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income from discontinued operations                   |  |                    | 2,456  |   |          |   | 15,441 |               |  |   | 11,578       |   |  |   | 13,815  |  
|Net income (loss)                                         |  |                    | 7,191  |   |          |   | 11,265 |               |  |   | (6,316       | ) |  |   | (1,468  | )
|Preferred dividend requirement                            |  |                    | (588   | ) |          |   | (587   | )             |  |   | (633         | ) |  |   | (543    | )
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income (loss) attributable to Common shares           |  | $                  | 6,603  |   |          | $ | 10,678 |               |  | $ | (6,949       | ) |  | $ | (2,011  | )
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Earnings per share                                        |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income (loss) from continuing operations              |  | $                  | .37    |   |          | $ | (1.71  | )             |  | $ | (.44         | ) |  | $ | (1.46   | )
|Discontinued operations                                   |  |                    | .22    |   |          |   | 1.06   |               |  |   | 1.45         |   |  |   | 1.28    |  
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income (loss) attributable to Common shares           |  | $                  | .59    |   |          | $ | (.65   | )             |  | $ | 1.01         |   |  | $ | (.18    | )
|                                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|--------------------------------------------------------- |  | ------------------ | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | ------ | -
|                                                          |  | Three Months Ended |        
|                                                          |  | March 31,          |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|2002                                                      |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Operating income                                          |  | $                  | 4,124   |   |          | $ | 3,919   |               |  | $ | 5,226        |   |  | $ | 2,918  |  
|Gain on land sales                                        |  |                    | 2,199   |   |          |   | 1,164   |               |  |   | 2,618        |   |  |   | 10,746 |  
|Pizza parlor gross margin                                 |  |                    | 1,587   |   |          |   | 1,942   |               |  |   | 1,629        |   |  |   | 1,592  |  
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Income from operations                                    |  |                    | 7,910   |   |          |   | 7,025   |               |  |   | 9,473        |   |  |   | 15,256 |  
|Equity in loss of investees                               |  |                    | (4,012  | ) |          |   | (5,221  | )             |  |   | (4,790       | ) |  |   | (6,891 | )
|Gain (loss) on sale of investments in equity investees    |  |                    | (531    | ) |          |   |        |               |  |   |             |   |  |   | 245    |  
|Interest and other income                                 |  |                    | 796     |   |          |   | 927     |               |  |   | 699          |   |  |   | 6,168  |  
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Total other income                                        |  |                    | (3,747  | ) |          |   | (4,294  | )             |  |   | (4,091       | ) |  |   | (478   | )
|Total other expenses                                      |  |                    | 21,596  |   |          |   | 20,976  |               |  |   | 20,059       |   |  |   | 22,164 |  
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Net loss from continuing operations                       |  |                    | (17,433 | ) |          |   | (18,245 | )             |  |   | (14,677      | ) |  |   | (7,386 | )
|Discontinued operations:                                  |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Loss from operations                                      |  |                    | (1,250  | ) |          |   | (2,692  | )             |  |   | (416         | ) |  |   | (2,140 | )
|Gain on sale of real estate                               |  |                    | 5,615   |   |          |   | 2,150   |               |  |   | 15,375       |   |  |   | 8,566  |  
|Equity in gain on sale of real estate by equity investees |  |                    | 4,131   |   |          |   | 4,149   |               |  |   | 6,616        |   |  |   | 9,173  |  
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Net income from discontinued operations                   |  |                    | 8,496   |   |          |   | 3,607   |               |  |   | 21,575       |   |  |   | 15,599 |  
|Net income (loss)                                         |  |                    | (8,937  | ) |          |   | (14,638 | )             |  |   | 6,898        |   |  |   | 8,213  |  
|Preferred dividend requirement                            |  |                    | (611    | ) |          |   | (589    | )             |  |   | (601         | ) |  |   | (600   | )
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Net income (loss) attributable to Common shares           |  | $                  | (9,548  | ) |          | $ | (15,227 | )             |  | $ | 6,297        |   |  | $ | 7,613  |  
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Earnings per share                                        |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Net loss from continuing operations                       |  | $                  | (1.59   | ) |          | $ | (1.66   | )             |  | $ | (1.33        | ) |  | $ | (.71   | )
|Discontinued operations                                   |  |                    | .75     |   |          |   | .32     |               |  |   | 1.89         |   |  |   | 1.37   |  
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  
|Net income (loss) attributable to Common shares           |  | $                  | (.84    | ) |          | $ | (1.34   | )             |  | $ | .56          |   |  | $ | .66    |  
|                                                          |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |        |  



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During the first quarter of 2002, ARI entered into an interest rate swap agreement with a bank. This
agreement contains a notional amount of $12.8 million and requires ARI to pay the bank a fixed rate of 4.3%, and requires 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. The swap agreement expires on December 9, 2004.



ARI has not designated 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 are recognized in earnings during the period of change and reflected in the statement of operations as
interest expense.



The fair value of the swap agreement at
December 31, 2003 represents a liability to ARI of $370,000 and is included within other liabilities in the accompanying balance sheet. Amounts paid or received under the swap agreement are settled monthly and are reflected as a reduction in the
liability when paid. Interest expense at December 31, 2003, was decreased by $191,000 representing both amounts paid to the bank under the agreement and decreases in the fair value of the related liability.



NOTE 23.COMMITMENTS AND CONTINGENCIES AND
LIQUIDITY



Liquidity.    Although management anticipated that ARI would generate excess cash from operations in 2003, 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 2004, ARI will rely on aggressive land sales, selected income producing property sales and,
to the extent necessary, additional borrowings to meet its cash requirements.



Partnership Buyouts.    ARI is the limited partner in 12 partnerships formed to construct residential properties. As permitted in the respective partnership agreements, TCI 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, 2003 is approximately $2.3 million.



Commitments.    In March 1999, an agreement was reached with the Class A unitholders of Valley
Ranch, L.P. to acquire their eight million Class A units for $1.00 per unit. In 1999, three million units were purchased. Additionally one million units were purchased in January 2000 and two million units were purchased in May 2001. ARI purchased
the remaining two million units in 2002. See NOTE 11. PREFERRED STOCK.



During 2002, MRI, then a wholly-owned subsidiary of ARI, sold two restaurants to a corporation owned in part by an officer of MRI. In conjunction with the sale of these restaurants, MRI 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 MRI. The amount of the debt outstanding that is subject to the guaranty is $1.1
million at December 31, 2003. In July 2003, ARI sold its interest in MRI to 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% of Gruppa, thereby retaining a 20% interest in MRI. 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 MRI, management has determined that this should be accounted for as a financing transaction. In September 2003, ARI sold the note to Syntek West for $2.3 million, plus accrued but unpaid interest, to
reduce affiliate debt.



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



ARI has entered into an agreement with one of the investors in the Realty Korea CR-REIT Co. Ltd. No.
1 (REIT), that is advised by RAK, whereby the investor has been granted the opportunity to require ARI to buy their shares in the REIT, for their original investment amount, during the 30-day period beginning April 29, 2004. Their
investment is approximately $4.2 million.



Litigation.    In August 2002, ARI obtained a favorable jury verdict in the legal action entitled American Realty Trust v. Matisse Partners, L.L.C. (Matisse). However, the judge set aside the
jury verdict and imposed a judgment against ARI in excess of $6.0 million, including interest. The judgment was appealed, and, in the opinion of ARIs management and legal counsel, there was a reasonable probability that the adverse judgment
will be set aside and the jury verdict reinstated. Therefore, ARI did not recognize any expense nor establish any reserve for this judgment. In November 2002, ARI posted a $6.0 million supercedeas bond. In July 2003, ARI obtained a letter of credit,
which was substituted for the $6.0 million bond. The $6.0 million cash was returned to ARI. In April 2003, an additional judgment was issued against ARI for $1.4 million in legal fees. ARI also appealed this judgment and posted a $1.4 million bond
in May 2003. ARI did not recognize any expense nor establish any reserve for this additional judgment. In December 2003, the United States Court of Appeals for the Fifth Circuit ruled in favor of ARI, with respect to the damages and the legal fees
awarded by the judge, and $1.1 million of the $1.4 million bond was returned to ARI.



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% per annum, while the remaining $500,000 bears interest at 20% per annum. The loan is
secured by 3,672,305 shares of TCI common stock 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 paydown. 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 9. MARGIN BORROWINGS.



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



NOTE
24.GOODWILL AND OTHER INTANGIBLESADOPTION OF SFAS 142



In June 2001, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS 141), and No. 142,Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that ARI recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS
141 applies to all business combinations initiated after June 30, 2001. It also requires, upon adoption of SFAS 142, that ARI reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.



SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that ARI identify reporting units in



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



order to assess potential future impairment of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. SFAS 142 requires that an intangible asset with an indefinite useful life be tested for impairment in accordance with specified guidelines. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 required ARI to complete a transitional goodwill impairment test six months
from the date of adoption. ARI was also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142.



The adoption of SFAS 141 did not have a material impact on ARIs results of operations and financial position. ARI
adopted SFAS 142 on January 1, 2002, and, accordingly, ceased amortizing costs in excess of net assets acquired. In connection with the adoption of SFAS 142, ARI completed the first step of the goodwill impairment test during the quarter ended June
30, 2002. Based on the results of this step, ARI believes that the fair value of its reporting unit that carries goodwill exceeds its carrying amount. Since the first step of the goodwill impairment test indicates that goodwill is not impaired, the
second step of the goodwill impairment test is not necessary.



Transitional Disclosures.    Net income (loss) and earnings per share, including the after-tax effect of amortization expense related to costs in excess of net assets acquired for 2003, 2002 and 2001 are as
follows:



|                                                       |  |      |        |      |   |        |      |  |   |       
|------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | ---- |  | - | ------
|                                                       |  | 2003 |        | 2002 |   |        | 2001
|Net income (loss)                                      |  | $    | 10,672 |      | $ | (8,464 | )    |  | $ | 17,354
|Add back:                                              |  |      |        |      |   |        |      |  |   |       
|Amortization of costs in excess of net assets acquired |  |      |       |      |   |       |      |  |   | 344   
|                                                       |  |      |        |      |   |        |      |  |   |       
|Adjusted net income (loss)                             |  | $    | 10,672 |      | $ | (8,464 | )    |  | $ | 17,698
|                                                       |  |      |        |      |   |        |      |  |   |       
|Earnings per share:                                    |  |      |        |      |   |        |      |  |   |       
|Net income (loss)                                      |  | $    | .99    |      | $ | (.74   | )    |  | $ | 1.48  
|Amortization of costs in excess of net assets acquired |  |      |       |      |   |       |      |  |   | .03   
|                                                       |  |      |        |      |   |        |      |  |   |       
|Adjusted net income (loss)                             |  | $    | .99    |      | $ | (.74   | )    |  | $ | 1.51  
|                                                       |  |      |        |      |   |        |      |  |   |       



Acquisitions.    On June 30, 2002, ARI acquired RAK from BCM, a related party, for $6.0 million. ARI recorded $1.9 million in goodwill as a result of this transaction. RAK was subsequently sold to Realty Advisors,
a related party. See NOTE 10. RELATED PARTY TRANSACTIONS. ARI made no acquisitions resulting in goodwill during 2003 or 2001.



NOTE 25.SUBSEQUENT EVENTS



In 2004, ARI purchased the following property:



|           |  |          |  |            |  |                |       |               |   |               |  |              |       |  |              |      |  |      
|---------- |  | -------- |  | ---------- |  | -------------- | ----- | ------------- | - | ------------- |  | ------------ | ----- |  | ------------ | ---- |  | -----
|Property   |  | Location |  | Acres      |  | Purchase Price |       | Net Cash Paid |   | Debt Incurred |  | InterestRate |       |  | MaturityDate
|Land       |  |          |  |            |  |                |       |               |   |               |  |              |       |  |              |      |  |      
|Meloy Road |  | Kent, OH |  | 58.0 Acres |  | $              | 3,900 |               | $ | 343           |  | $            | 3,900 |  | 5.00         | %(1) |  | 01/06

---

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



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AMERICAN REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2004, ARI sold the following property:



|                       |  |                  |  |                     |  |            |        |                  |   |                |  |   |             |     |  |   |      
|---------------------- |  | ---------------- |  | ------------------- |  | ---------- | ------ | ---------------- | - | -------------- |  | - | ----------- | --- |  | - | -----
|Property               |  | Location         |  | Units/Sq. Ft./Acres |  | SalesPrice |        | Net CashReceived |   | DebtDischarged |  |   | Gainon Sale
|Apartments             |  |                  |  |                     |  |            |        |                  |   |                |  |   |             |     |  |   |      
|Tiberon Trails         |  | Merrillville, IN |  | 376 Units           |  | $          | 10,325 |                  | $ | 2,618          |  | $ | 6,189       | (1) |  | $ |     
|Shopping Centers       |  |                  |  |                     |  |            |        |                  |   |                |  |   |             |     |  |   |      
|Countryside Retail     |  | Sterling, VA     |  | 133,422 Sq.Ft.      |  |            | 27,100 |                  |   | 3,407          |  |   | 22,800      |     |  |   | 5,475
|Harmon                 |  | Sterling, VA     |  | 79,791 Sq.Ft.       |  |            | 2,650  |                  |   | 216            |  |   | 2,200       |     |  |   | 1,861
|Plaza on Bachman Creek |  | Dallas, TX       |  | 80,278 Sq.Ft.       |  |            | 7,850  |                  |   | 1,808          |  |   | 5,358       |     |  |   | 3,682
|Land                   |  |                  |  |                     |  |            |        |                  |   |                |  |   |             |     |  |   |      
|Mason Goodrich         |  | Houston, TX      |  | 5.7 Acres           |  |            | 686    |                  |   | 45             |  |   | 588         |     |  |   | 379  
|Mason Goodrich         |  | Houston, TX      |  | 8.0 Acres           |  |            | 1,045  |                  |   | 248            |  |   | 200         |     |  |   | 617  
|Red Cross              |  | Dallas, TX       |  | 2.9 Acres           |  |            | 8,500  |                  |   | 3,768          |  |   | 4,450       |     |  |   |     
|Industrial Warehouse   |  |                  |  |                     |  |            |        |                  |   |                |  |   |             |     |  |   |      
|Ogden Industrial       |  | Ogden, UT        |  | 107,112 Sq. Ft.     |  |            | 2,600  |                  |   | 756            |  |   | 1,775       |     |  |   | 1,361

---

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



In February 2004, ARI received $1.9 million as a deposit on the Sandstone Apartments in Mesa, Arizona. The buyer has the option to purchase the property
within 90 days of receipt of the deposit.



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



|                   |  |                    |  |             |  |              |       |                |   |                  |  |   |              |   |  |              |     |  |      
|------------------ |  | ------------------ |  | ----------- |  | ------------ | ----- | -------------- | - | ---------------- |  | - | ------------ | - |  | ------------ | --- |  | -----
|Property           |  | Location           |  | Acres       |  | DebtIncurred |       | DebtDischarged |   | Net CashReceived |  |   | InterestRate |   |  | MaturityDate
|Land               |  |                    |  |             |  |              |       |                |   |                  |  |   |              |   |  |              |     |  |      
|Katy               |  | Harris County, TX  |  | 130.6 Acres |  | $            | 7,500 |                | $ |                 |  | $ | 18           |   |  | 6.00         | %   |  | 02/07
|Dominion/Hollywood |  | Farmers Branch, TX |  | 57.2 Acres  |  |              | 6,985 |                |   | 6,222            |  |   | 33           |   |  | 7.00         |     |  | 02/05
|Marine Creek(2)    |  | Fort Worth, TX     |  | 54.0 Acres  |  |              | 1,286 |                |   | 991              |  |   |             |   |  | 5.25         |     |  | 06/05
|Centura            |  | Farmers Branch, TX |  | 8.7 Acres   |  |              | 4,485 |                |   | 4,400            |  |   | (138         | ) |  | 5.00         | (1) |  | 04/07

---

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

|(2) |  | Construction loan for apartment construction.
|--- |  | ---------------------------------------------



In March 2004, ARI sold an 8.0 acre tract of its Mason Goodrich land parcel for $1.0 million, receiving $248,000 after payment of closing costs and
providing purchase money financing of $523,000. The 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.



NOTE 26.RESTATEMENT OF 2002 AND 2001 FINANCIAL
STATEMENTS



During 2003, a computational error
of $2.3 million was discovered, relating to a property sale that occurred in the 4thquarter of 2001. Accordingly,
the 2001 and 2002 consolidated financial statements have been restated to correct the error, the effect of which increases net income for 2001 to $14.9 million (from $12.6 million) and increases Real Estate Held for Sale and Total Assets by $2.3
million for 2002.



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SCHEDULE III



AMERICAN REALTY
INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                    |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|----------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ------ | --------------------- | - | ----------------------- | ---- | ---------------------------------------------------------------------- | - | ----- |  | - | ------ |  | - | ------ |  | - | ----- |  | ---- |  | ----- |  | -----------
|                                    |  |                        |        | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |        | Date ofConstruc- tion |   | Date Acquired           |      | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                   |  | Encum- brances         |        | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |        | Land                  |   | Building & Improvements |      | (1) Total                                                              |   |       |  |  
|                                    |  | (dollars in thousands)
|Operating Properties                |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Apartments                          |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|4400, Midland, TX                   |  | $                      | 1,024  |              | $ | 349                                        |  | $              | 1,396                                         |       | $                           |       |                       | $ | (116                    | )(4) |                                                                        | $ | 349   |  | $ | 1,280  |  | $ | 1,629  |  | $ | 190   |  | 1981 |  | 04/98 |  | 40 years   
|Apple Lane, Lawrence, KS            |  |                        | 1,400  |              |   | 168                                        |  |                | 1,259                                         |       |                             |       |                       |   | (95                     | )(4) |                                                                        |   | 168   |  |   | 1,164  |  |   | 1,332  |  |   | 126   |  | 1989 |  | 01/00 |  | 40 years   
|Arbor Point, Odessa, TX             |  |                        | 2,010  |              |   | 321                                        |  |                | 1,285                                         |       |                             | 526    |                       |   | (142                    | )(4) |                                                                        |   | 321   |  |   | 1,669  |  |   | 1,990  |  |   | 722   |  | 1975 |  | 02/87 |  | 5-40 years 
|Arlington Place, Pasadena, TX       |  |                        | 4,134  |              |   | 330                                        |  |                | 3,275                                         |       |                             | 752    |                       |   | 398                     | (4)  |                                                                        |   | 330   |  |   | 4,425  |  |   | 4,755  |  |   | 3,347 |  | 1973 |  | 11/76 |  | 10-40 years
|Ashton Way, Midland, TX             |  |                        | 1,024  |              |   | 384                                        |  |                | 1,536                                         |       |                             | 52     |                       |   | (131                    | )(4) |                                                                        |   | 384   |  |   | 1,457  |  |   | 1,841  |  |   | 276   |  | 1978 |  | 10/01 |  | 40 years   
|Autumn Chase, Midland, TX           |  |                        | 873    |              |   | 141                                        |  |                | 1,265                                         |       |                             |       |                       |   | (93                     | )(4) |                                                                        |   | 141   |  |   | 1,172  |  |   | 1,313  |  |   | 111   |  | 1985 |  | 04/00 |  | 40 years   
|Baywalk, Galveston, TX              |  |                        | 5,359  |              |   | 679                                        |  |                | 6,106                                         |       |                             |       |                       |   | (451                    | )(4) |                                                                        |   | 679   |  |   | 5,655  |  |   | 6,334  |  |   | 362   |  | 1979 |  | 09/01 |  | 40 years   
|Blue Lake Villas, Waxahachie, TX    |  |                        | 8,632  |              |   | 1,049                                      |  |                |                                              |       |                             | 9,770  |                       |   | (709                    | )(4) |                                                                        |   | 1,049 |  |   | 9,061  |  |   | 10,110 |  |   | 93    |  | 2002 |  | 01/02 |  | 40 years   
|Bluffs at Vista Ridge               |  |                        | 2,201  |              |   |                                           |  |                |                                              |       |                             | 2,791  |                       |   | (7                      | )(4) |                                                                        |   |      |  |   | 2,784  |  |   | 2,784  |  |   |      |  |     |  | 08/03 |  |           
|Breakwater Bay, Beaumont, TX        |  |                        | 1,554  |              |   | 740                                        |  |                |                                              |       |                             | 1,951  |                       |   |                        |      |                                                                        |   | 740   |  |   | 1,951  |  |   | 2,691  |  |   |      |  |     |  | 05/03 |  |           
|Bridgestone, Friendswood, TX        |  |                        | 2,040  |              |   | 169                                        |  |                | 1,780                                         |       |                             | 192    |                       |   | 227                     | (4)  |                                                                        |   | 169   |  |   | 2,199  |  |   | 2,368  |  |   | 1,370 |  | 1979 |  | 06/82 |  | 5-40 years 
|By the Sea, Corpus Christi, TX      |  |                        | 5,393  |              |   | 644                                        |  |                | 5,797                                         |       |                             |       |                       |   | (428                    | )(4) |                                                                        |   | 644   |  |   | 5,369  |  |   | 6,013  |  |   | 344   |  | 1973 |  | 08/01 |  | 40 years   
|Capitol Hill, Little Rock, AR       |  |                        | 1,718  |              |   | 932                                        |  |                | 973                                           |       |                             | 1,398  |                       |   |                        |      |                                                                        |   | 932   |  |   | 2,371  |  |   | 3,303  |  |   |      |  |     |  | 03/03 |  |           
|Château, Bellevue, NE               |  |                        | 3,261  |              |   | 130                                        |  |                | 1,723                                         |       |                             | 141    |                       |   | 270                     | (4)  |                                                                        |   | 130   |  |   | 2,134  |  |   | 2,264  |  |   | 1,347 |  | 1968 |  | 02/81 |  | 5-40 years 
|Château Bayou, Ocean Springs, MS    |  |                        | 3,827  |              |   | 591                                        |  |                | 2,364                                         |       |                             |       |                       |   |                        |      |                                                                        |   | 591   |  |   | 2,364  |  |   | 2,955  |  |   | 345   |  | 1973 |  | 03/02 |  | 10-40 years
|Cliffs of Eldorado, McKinney, TX    |  |                        | 10,369 |              |   | 2,647                                      |  |                | 10,589                                        |       |                             |       |                       |   | (880                    | )(4) |                                                                        |   | 2,647 |  |   | 9,709  |  |   | 12,356 |  |   | 1,419 |  | 1997 |  | 10/98 |  | 40 years   
|Courtyard, Midland, TX              |  |                        | 997    |              |   | 151                                        |  |                | 1,359                                         |       |                             |       |                       |   | (100                    | )(4) |                                                                        |   | 151   |  |   | 1,259  |  |   | 1,410  |  |   | 83    |  | 1976 |  | 05/01 |  | 40 years   
|Coventry, Midland, TX               |  |                        | 1,197  |              |   | 236                                        |  |                | 369                                           |       |                             | 173    |                       |   | (52                     | )(4) |                                                                        |   | 236   |  |   | 490    |  |   | 726    |  |   | 233   |  | 1977 |  | 08/96 |  | 5-40 years 
|DeSoto Ranch, DeSoto, TX            |  |                        | 15,586 |              |   | 1,472                                      |  |                |                                              |       |                             | 17,186 |                       |   | (949                    | )(4) |                                                                        |   | 1,472 |  |   | 16,237 |  |   | 17,709 |  |   |      |  | 2002 |  | 05/02 |  | 40 years   
|Echo Valley, Dallas, TX             |  |                        | 8,801  |              |   | 788                                        |  |                |                                              |       |                             | 10,057 |                       |   | (295                    | )(4) |                                                                        |   | 788   |  |   | 9,762  |  |   | 10,550 |  |   |      |  | 2002 |  | 01/02 |  | 40 years   
|El Chapparal, San Antonio, TX       |  |                        | 4,125  |              |   | 279                                        |  |                | 2,821                                         |       |                             |       |                       |   | (581                    | )(4) |                                                                        |   | 279   |  |   | 2,240  |  |   | 2,519  |  |   | 1,007 |  | 1963 |  | 01/88 |  | 5-40 years 
|Fairway View Estates, El Paso, TX   |  |                        | 4,963  |              |   | 547                                        |  |                | 4,530                                         |       |                             | 261    |                       |   | (355                    | )(4) |                                                                        |   | 547   |  |   | 4,436  |  |   | 4,983  |  |   | 714   |  | 1977 |  | 03/99 |  | 40 years   
|Fairways, Longview, TX              |  |                        | 3,441  |              |   | 657                                        |  |                | 1,532                                         |       |                             | 119    |                       |   | (402                    | )(4) |                                                                        |   | 657   |  |   | 1,249  |  |   | 1,906  |  |   | 481   |  | 1980 |  | 03/93 |  | 5-40 years 
|Falcon House, Ft. Walton, FL        |  |                        | 1,966  |              |   | 219                                        |  |                | 1,817                                         |       |                             |       |                       |   |                        |      |                                                                        |   | 219   |  |   | 1,817  |  |   | 2,036  |  |   | 90    |  | 1969 |  | 03/02 |  | 10-40 years
|Falcon Lakes, Arlington, TX         |  |                        | 11,120 |              |   | 1,437                                      |  |                |                                              |       |                             | 13,058 |                       |   | (933                    | )(4) |                                                                        |   | 1,437 |  |   | 12,125 |  |   | 13,562 |  |   | 239   |  | 2001 |  | 10/01 |  | 40 years   
|Fountain Lake, Texas City, TX       |  |                        | 3,226  |              |   | 861                                        |  |                | 2,585                                         |       |                             | 19     |                       |   | (461                    | )(4) |                                                                        |   | 861   |  |   | 2,143  |  |   | 3,004  |  |   | 604   |  | 1975 |  | 12/94 |  | 5-40 years 
|Fountains of Waterford, Midland, TX |  |                        | 1,682  |              |   | 311                                        |  |                | 852                                           |       |                             | 1,538  |                       |   | (180                    | )(4) |                                                                        |   | 311   |  |   | 2,210  |  |   | 2,521  |  |   | 1,300 |  | 1977 |  | 05/98 |  | 5-40 years 
|Foxwood, Memphis, TN                |  |                        | 6,811  |              |   | 218                                        |  |                | 3,188                                         |       |                             | 950    |                       |   | 743                     | (4)  |                                                                        |   | 218   |  |   | 4,881  |  |   | 5,099  |  |   | 3,219 |  | 1974 |  | 08/79 |  | 7-40 years 



101



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                      |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ------ | --------------------- | - | ----------------------- | ---- | ---------------------------------------------------------------------- | - | ----- |  | - | ------ |  | - | ------ |  | - | ----- |  | ---- |  | ----- |  | -----------
|                                      |  |                        |        | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |        | Date ofConstruc- tion |   | Date Acquired           |      | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                     |  | Encum- brances         |        | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |        | Land                  |   | Building & Improvements |      | (1) Total                                                              |   |       |  |  
|                                      |  | (dollars in thousands)
|Operating Properties(continued)      |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Apartments(continued)                |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Governor Square, Tallahassee, FL      |  | $                      | 4,416  |              | $ | 245                                        |  | $              | 2,207                                         |       | $                           |       |                       | $ |                        |      |                                                                        | $ | 245   |  | $ | 2,207  |  | $ | 2,452  |  | $ | 212   |  | 1974 |  | 03/02 |  | 10-40 years
|Harpers Ferry, Lafayette, LA         |  |                        | 3,303  |              |   | 349                                        |  |                | 1,398                                         |       |                             | 223    |                       |   | (131                    | )(4) |                                                                        |   | 349   |  |   | 1,490  |  |   | 1,839  |  |   | 575   |  | 1972 |  | 02/92 |  | 5-40 years 
|Heather Creek, Mesquite, TX           |  |                        | 11,502 |              |   | 1,100                                      |  |                |                                              |       |                             | 11,536 |                       |   |                        |      |                                                                        |   | 1,100 |  |   | 11,536 |  |   | 12,636 |  |   |      |  |     |  | 03/03 |  |           
|Hunters Glen, Midland, TX             |  |                        | 1,844  |              |   | 519                                        |  |                | 2,075                                         |       |                             | 321    |                       |   | (194                    | )(4) |                                                                        |   | 519   |  |   | 2,202  |  |   | 2,721  |  |   | 623   |  | 1982 |  | 01/98 |  | 5-40 years 
|In the Pines, Gainesville, FL         |  |                        | 5,274  |              |   | 1,288                                      |  |                | 5,154                                         |       |                             | 91     |                       |   | (969                    | )(4) |                                                                        |   | 1,288 |  |   | 4,276  |  |   | 5,564  |  |   | 1,176 |  | 1972 |  | 12/94 |  | 5-40 years 
|Island Bay, Galveston, TX             |  |                        | 15,061 |              |   | 2,095                                      |  |                | 18,852                                        |       |                             |       |                       |   | (1,392                  | )(4) |                                                                        |   | 2,095 |  |   | 17,460 |  |   | 19,555 |  |   | 1,133 |  | 1973 |  | 09/01 |  | 40 years   
|Kingsland Ranch, Houston, TX          |  |                        | 12,291 |              |   | 1,188                                      |  |                |                                              |       |                             | 13,018 |                       |   |                        |      |                                                                        |   | 1,188 |  |   | 13,018 |  |   | 14,206 |  |   |      |  |     |  | 03/03 |  |           
|La Mirada, Jacksonville, FL           |  |                        | 7,193  |              |   | 392                                        |  |                | 5,454                                         |       |                             | 1,675  |                       |   | 648                     | (4)  |                                                                        |   | 392   |  |   | 7,777  |  |   | 8,169  |  |   | 5,586 |  | 1971 |  | 01/79 |  | 10-40 years
|Limestone Canyon, Austin, TX          |  |                        | 12,585 |              |   | 1,998                                      |  |                |                                              |       |                             | 12,247 |                       |   | 1,895                   | (7)  |                                                                        |   | 1,998 |  |   | 13,069 |  |   | 15,067 |  |   | 1,297 |  | 1997 |  | 07/98 |  | 40 years   
|                                      |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   | (1,073                  | )(4) |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Limestone Ranch, Lewisville, TX       |  |                        | 13,000 |              |   | 1,620                                      |  |                |                                              |       |                             | 13,058 |                       |   | (976                    | )(4) |                                                                        |   | 1,620 |  |   | 12,082 |  |   | 13,702 |  |   | 519   |  | 2001 |  | 05/01 |  | 40 years   
|Longwood, Long Beach, MS              |  |                        | 6,314  |              |   | 667                                        |  |                | 6,006                                         |       |                             |       |                       |   |                        |      |                                                                        |   | 667   |  |   | 6,006  |  |   | 6,673  |  |   | 112   |  | 1972 |  | 04/03 |  | 40 years   
|Marina Landing, Galveston, TX         |  |                        | 12,927 |              |   | 1,240                                      |  |                | 11,161                                        |       |                             |       |                       |   | (824                    | )(4) |                                                                        |   | 1,240 |  |   | 10,337 |  |   | 11,577 |  |   | 642   |  | 1985 |  | 09/01 |  | 40 years   
|Mediterranean Villas, San Antonio, TX |  |                        | 2,746  |              |   | 712                                        |  |                | 2,848                                         |       |                             |       |                       |   |                        |      |                                                                        |   | 712   |  |   | 2,848  |  |   | 3,560  |  |   | 415   |  | 1967 |  | 1998  |  | 10-40 years
|Mountain Plaza, El Paso, TX           |  |                        | 4,299  |              |   | 837                                        |  |                | 3,347                                         |       |                             | 139    |                       |   | (287                    | )(4) |                                                                        |   | 837   |  |   | 3,199  |  |   | 4,036  |  |   | 632   |  | 1972 |  | 01/98 |  | 5-40 years 
|Oak Park IV, Clute, TX                |  |                        | 969    |              |   | 224                                        |  |                | 674                                           |       |                             | 27     |                       |   | (150                    | )(4) |                                                                        |   | 224   |  |   | 551    |  |   | 775    |  |   | 165   |  | 1981 |  | 06/94 |  | 5-40 years 
|Oak Tree, Grandview, MO               |  |                        | 3,984  |              |   | 304                                        |  |                | 3,543                                         |       |                             | 245    |                       |   | 418                     | (4)  |                                                                        |   | 304   |  |   | 4,206  |  |   | 4,510  |  |   | 2,401 |  | 1968 |  | 03/82 |  | 7-40 years 
|Paramount Terrace, Amarillo, TX       |  |                        | 2,659  |              |   | 340                                        |  |                | 3,061                                         |       |                             |       |                       |   | (226                    | )(4) |                                                                        |   | 340   |  |   | 2,835  |  |   | 3,175  |  |   | 341   |  | 1983 |  | 05/00 |  | 40 years   
|Park Avenue, Tallahassee, FL          |  |                        | 4,337  |              |   | 172                                        |  |                | 1,550                                         |       |                             |       |                       |   |                        |      |                                                                        |   | 172   |  |   | 1,550  |  |   | 1,722  |  |   | 147   |  | 1985 |  | 03/02 |  | 10-40 years
|Plantation, Tulsa, OK                 |  |                        | 2,300  |              |   | 344                                        |  |                | 2,396                                         |       |                             |       |                       |   | (182                    | )(4) |                                                                        |   | 344   |  |   | 2,214  |  |   | 2,558  |  |   | 326   |  | 1968 |  | 12/99 |  | 40 years   
|Quail Point, Huntsville, AL           |  |                        | 3,602  |              |   | 184                                        |  |                | 2,716                                         |       |                             | 267    |                       |   | 217                     | (4)  |                                                                        |   | 184   |  |   | 3,200  |  |   | 3,384  |  |   | 2,523 |  | 1960 |  | 08/75 |  | 7-40 years 
|Quail Oaks, Balch Springs, TX         |  |                        | 2,784  |              |   | 90                                         |  |                | 2,160                                         |       |                             | 152    |                       |   | (334                    | )(4) |                                                                        |   | 90    |  |   | 1,978  |  |   | 2,068  |  |   | 1,080 |  | 1982 |  | 02/87 |  | 5-40 years 
|River Oaks, Wiley, TX                 |  |                        | 9,811  |              |   | 590                                        |  |                |                                              |       |                             | 11,840 |                       |   | (807                    | )(4) |                                                                        |   | 590   |  |   | 11,033 |  |   | 11,623 |  |   | 204   |  | 2001 |  | 10/01 |  | 40 years   
|Sandstone, Mesa, AZ                   |  |                        | 5,526  |              |   | 1,656                                      |  |                | 6,625                                         |       |                             | 95     |                       |   | (557                    | )(4) |                                                                        |   | 1,656 |  |   | 6,163  |  |   | 7,819  |  |   | 1,122 |  | 1986 |  | 10/97 |  | 5-40 years 
|Sendero Ridge, San Antonio, TX        |  |                        | 20,976 |              |   | 2,635                                      |  |                |                                              |       |                             | 22,802 |                       |   | (1,653                  | )(4) |                                                                        |   | 2,635 |  |   | 21,149 |  |   | 23,784 |  |   |      |  | 2001 |  | 11/01 |  | 40 years   
|Somerset, Texas City, TX              |  |                        | 2,872  |              |   | 936                                        |  |                | 2,811                                         |       |                             | 179    |                       |   | (683                    | )(4) |                                                                        |   | 936   |  |   | 2,307  |  |   | 3,243  |  |   | 802   |  | 1985 |  | 12/93 |  | 5-40 years 
|Southgate, Odessa, TX                 |  |                        | 1,743  |              |   | 335                                        |  |                | 1,338                                         |       |                             | 318    |                       |   | (132                    | )(4) |                                                                        |   | 335   |  |   | 1,524  |  |   | 1,859  |  |   | 556   |  | 1976 |  | 08/96 |  | 5-40 years 



102



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                      |  |                        |        |              |   |                                            |  |                |                                               |  |                             |        |                       |      |               |                         |                                                                        |           |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- |  | --------------------------- | ------ | --------------------- | ---- | ------------- | ----------------------- | ---------------------------------------------------------------------- | --------- | - | ----- |  | - | ------ |  | - | ------ |  | - | ----- |  | ---- |  | ----- |  | -----------
|                                      |  |                        |        | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |  | Accumu- latedDepreci- ation |        | Date ofConstruc- tion |      | Date Acquired |                         | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                     |  | Encum- brances         |        | Land         |   | Building & Improvements                    |  | Improve- ments |                                               |  | Other                       |        |                       | Land |               | Building & Improvements |                                                                        | (1) Total |   |       |  |  
|                                      |  | (dollars in thousands)
|Operating Properties(continued)      |  |                        |        |              |   |                                            |  |                |                                               |  |                             |        |                       |      |               |                         |                                                                        |           |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Apartments(continued)                |  |                        |        |              |   |                                            |  |                |                                               |  |                             |        |                       |      |               |                         |                                                                        |           |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Spy Glass, Mansfield, TX              |  | $                      | 15,996 |              | $ | 1,376                                      |  | $              |                                              |  | $                           | 16,498 |                       |      | $             | (90                     | )                                                                      |           | $ | 1,376 |  | $ | 15,443 |  | $ | 16,819 |  | $ |      |  | 2002 |  | 03/02 |  | 40 years   
|                                      |  |                        |        |              |   |                                            |  |                |                                               |  |                             |        |                       |      |               | (965                    | )(4)                                                                   |           |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Sunchase, Odessa, TX                  |  |                        | 3,461  |              |   | 742                                        |  |                | 2,842                                         |  |                             | 458    |                       |      |               | (269                    | )(4)                                                                   |           |   | 742   |  |   | 3,031  |  |   | 3,773  |  |   | 820   |  | 1981 |  | 10/97 |  | 5-40 years 
|Sun Hollow, El Paso, TX               |  |                        | 4,448  |              |   | 385                                        |  |                | 4,159                                         |  |                             | 75     |                       |      |               | 503                     | (4)                                                                    |           |   | 385   |  |   | 4,737  |  |   | 5,122  |  |   | 3,086 |  | 1977 |  | 09/79 |  | 7-40 years 
|Sunset, Odessa, TX                    |  |                        | 1,741  |              |   | 345                                        |  |                | 1,382                                         |  |                             |       |                       |      |               |                        |                                                                        |           |   | 345   |  |   | 1,382  |  |   | 1,727  |  |   | 201   |  | 1981 |  | 03/02 |  | 10-40 years
|Terrace Hills, El Paso, TX            |  |                        | 6,065  |              |   | 1,286                                      |  |                | 5,145                                         |  |                             | 167    |                       |      |               | (439                    | )(4)                                                                   |           |   | 1,286 |  |   | 4,873  |  |   | 6,159  |  |   | 935   |  | 1985 |  | 03/97 |  | 5-40 years 
|Tiberon Trails, Merrillville, IN      |  |                        | 6,214  |              |   | 667                                        |  |                | 11,669                                        |  |                             |       |                       |      |               | (1,984                  | )(2)                                                                   |           |   | 667   |  |   | 9,685  |  |   | 10,352 |  |   | 462   |  | 1975 |  | 07/02 |  | 7-40 years 
|Timbers, Tyler, TX                    |  |                        | 2,429  |              |   | 497                                        |  |                | 1,988                                         |  |                             |       |                       |      |               | (165                    | )(4)                                                                   |           |   | 497   |  |   | 1,823  |  |   | 2,320  |  |   | 280   |  | 1973 |  | 12/97 |  | 40 years   
|Tivoli, Dallas, TX                    |  |                        | 10,000 |              |   | 1,355                                      |  |                |                                              |  |                             | 12,592 |                       |      |               | (927                    | )(4)                                                                   |           |   | 1,355 |  |   | 11,665 |  |   | 13,020 |  |   | 322   |  | 2001 |  | 12/01 |  | 40 years   
|Verandas at City View, Fort Worth, TX |  |                        | 13,745 |              |   | 2,545                                      |  |                |                                              |  |                             | 15,744 |                       |      |               | (1,034                  | )(4)                                                                   |           |   | 2,545 |  |   | 14,710 |  |   | 17,255 |  |   |      |  | 2001 |  | 09/01 |  | 40 years   
|Villa Del Mar, Wichita, KS            |  |                        | 3,571  |              |   | 387                                        |  |                | 3,134                                         |  |                             | 116    |                       |      |               | 546                     | (4)                                                                    |           |   | 387   |  |   | 3,796  |  |   | 4,183  |  |   | 2,247 |  | 1971 |  | 10/81 |  | 7-40 years 
|Villager, Ft. Walton, FL              |  |                        | 513    |              |   | 125                                        |  |                | 1,145                                         |  |                             |       |                       |      |               |                        |                                                                        |           |   | 125   |  |   | 1,145  |  |   | 1,270  |  |   | 52    |  | 1972 |  | 03/02 |  | 10-40 years
|Vistas at Pinnacle park, Dallas, TX   |  |                        | 2,788  |              |   | 1,750                                      |  |                | 2,236                                         |  |                             | 1,048  |                       |      |               | 473                     |                                                                        |           |   | 1,750 |  |   | 3,482  |  |   | 5,232  |  |   |      |  | 2002 |  | 10/02 |  | 40 years   
|                                      |  |                        |        |              |   |                                            |  |                |                                               |  |                             |        |                       |      |               | (275                    | )(4)                                                                   |           |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|Waters Edge III, Gulfport, MS         |  |                        | 7,321  |              |   | 331                                        |  |                | 1,324                                         |  |                             | (14    | )                     |      |               |                        |                                                                        |           |   | 331   |  |   | 1,310  |  |   | 1,641  |  |   | 182   |  | 1968 |  | 1998  |  | 10-40 years
|Waters Edge IV, Gulfport, MS          |  |                        |       |              |   | 443                                        |  |                |                                              |  |                             | 4,258  |                       |      |               | (377                    | )(4)                                                                   |           |   | 443   |  |   | 3,881  |  |   | 4,324  |  |   | 134   |  | 2001 |  | 11/01 |  | 40 years   
|Westwood, Mary Ester, FL              |  |                        | 3,490  |              |   | 149                                        |  |                | 1,337                                         |  |                             |       |                       |      |               |                        |                                                                        |           |   | 149   |  |   | 1,337  |  |   | 1,486  |  |   | 118   |  | 1972 |  | 03/02 |  | 10-40 years
|Westwood, Odessa, TX                  |  |                        |       |              |   | 85                                         |  |                | 341                                           |  |                             | 91     |                       |      |               | (34                     | )(4)                                                                   |           |   | 85    |  |   | 398    |  |   | 483    |  |   | 157   |  | 1977 |  | 08/96 |  | 5-40 years 
|Whispering Pines, Topeka, KS          |  |                        | 7,322  |              |   | 228                                        |  |                | 4,331                                         |  |                             | 1,054  |                       |      |               | 652                     | (4)                                                                    |           |   | 228   |  |   | 6,037  |  |   | 6,265  |  |   | 4,074 |  | 1972 |  | 02/78 |  | 7-40 years 
|Willow Creek, El Paso, TX             |  |                        | 2,369  |              |   | 608                                        |  |                | 1,832                                         |  |                             | 76     |                       |      |               | (313                    | )(4)                                                                   |           |   | 608   |  |   | 1,595  |  |   | 2,203  |  |   | 464   |  | 1972 |  | 05/94 |  | 5-40 years 
|Will-O-Wick, Pensacola, FL            |  |                        | 2,990  |              |   | 747                                        |  |                | 2,990                                         |  |                             | 174    |                       |      |               | (522                    | )(4)                                                                   |           |   | 747   |  |   | 2,642  |  |   | 3,389  |  |   | 776   |  | 1974 |  | 05/95 |  | 5-40 years 
|Windsong, Ft. Worth, TX               |  |                        | 10,745 |              |   | 790                                        |  |                |                                              |  |                             | 11,242 |                       |      |               |                        |                                                                        |           |   | 790   |  |   | 11,242 |  |   | 12,032 |  |   |      |  | 2003 |  | 07/03 |  | 40 years   
|Windsor Tower, Ocala, FL              |  |                        | 1,990  |              |   | 225                                        |  |                | 1,863                                         |  |                             |       |                       |      |               |                        |                                                                        |           |   | 225   |  |   | 1,863  |  |   | 2,088  |  |   | 89    |  | 1982 |  | 03/02 |  | 10-40 years
|Wood Hollow, San Antonio, TX          |  |                        | 8,044  |              |   | 888                                        |  |                | 10,079                                        |  |                             |       |                       |      |               |                        |                                                                        |           |   | 888   |  |   | 10,079 |  |   | 10,967 |  |   | 7,227 |  | 1974 |  | 11/78 |  | 5-40 years 
|Woodlake, Carrollton, TX              |  |                        | 8,331  |              |   | 585                                        |  |                | 5,848                                         |  |                             | 1,041  |                       |      |               | 785                     | (4)                                                                    |           |   | 585   |  |   | 7,674  |  |   | 8,259  |  |   | 4,973 |  | 1979 |  | 08/78 |  | 7-40 years 
|Woodview, Odessa, TX                  |  |                        | 1,991  |              |   | 716                                        |  |                | 2,864                                         |  |                             | 102    |                       |      |               | (245                    | )(4)                                                                   |           |   | 716   |  |   | 2,721  |  |   | 3,437  |  |   | 496   |  | 1974 |  | 05/98 |  | 5-40 years 
|Office Buildings                      |  |                        |        |              |   |                                            |  |                |                                               |  |                             |        |                       |      |               |                         |                                                                        |           |   |       |  |   |        |  |   |        |  |   |       |  |      |  |       |  |            
|1010 Commons, New Orleans, LA         |  |                        | 5,799  |              |   | 2,113                                      |  |                | 15,010                                        |  |                             | 19,291 |                       |      |               | (3,528                  | )(4)                                                                   |           |   | 2,113 |  |   | 30,773 |  |   | 32,886 |  |   | 8,098 |  | 1971 |  | 03/98 |  | 5-40 years 



103



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                        |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |         |  |       |  |            
|--------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ----- | --------------------- | - | ----------------------- | ---- | ---------------------------------------------------------------------- | - | ----- |  | - | ------ |  | - | ------ |  | - | ----- |  | ------- |  | ----- |  | -----------
|                                        |  |                        |        | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |       | Date ofConstruc- tion |   | Date Acquired           |      | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                       |  | Encum- brances         |        | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |       | Land                  |   | Building & Improvements |      | (1) Total                                                              |   |       |  |  
|                                        |  | (dollars in thousands)
|Operating Properties (continued)        |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |         |  |       |  |            
|Office Building (continued)             |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |         |  |       |  |            
|225 Baronne, New Orleans, LA            |  | $                      | 6,258  |              | $ | 1,162                                      |  | $              | 10,457                                        |       | $                           | 7,212 |                       | $ | (2,392                  | )(4) |                                                                        | $ | 1,162 |  | $ | 15,277 |  | $ | 16,439 |  | $ | 4,899 |  | 1960    |  | 03/98 |  | 5-40 years 
|4135 Belt Line, Addison, TX             |  |                        | 2,858  |              |   | 476                                        |  |                | 4,280                                         |       |                             | 182   |                       |   |                        |      |                                                                        |   | 476   |  |   | 4,462  |  |   | 4,938  |  |   | 531   |  | 1981/82 |  | 06/99 |  | 40 years   
|9033 Wilshire Blvd., Los Angeles, CA    |  |                        | 6,618  |              |   | 956                                        |  |                | 8,609                                         |       |                             | 479   |                       |   | (658                    | )(4) |                                                                        |   | 956   |  |   | 8,430  |  |   | 9,386  |  |   | 950   |  | 1957    |  | 04/00 |  | 5-40 years 
|Ambulatory Surgery Center, Sterling, VA |  |                        | 3,388  |              |   | 908                                        |  |                | 8,170                                         |       |                             |      |                       |   | (603                    | )(4) |                                                                        |   | 908   |  |   | 7,567  |  |   | 8,475  |  |   | 656   |  | 1991    |  | 07/00 |  | 40 years   
|AMOCO, New Orleans, LA                  |  |                        | 10,088 |              |   | 894                                        |  |                | 3,582                                         |       |                             | 6,859 |                       |   | (1,825                  | )(4) |                                                                        |   | 895   |  |   | 8,616  |  |   | 9,511  |  |   | 4,951 |  | 1974    |  | 06/97 |  | 5-40 years 
|Atrium, Palm Beach, FL                  |  |                        | 3,773  |              |   | 1,147                                      |  |                | 4,590                                         |       |                             | 221   |                       |   | (393                    | )(4) |                                                                        |   | 1,147 |  |   | 4,418  |  |   | 5,565  |  |   | 762   |  | 1985    |  | 06/98 |  | 40 years   
|Bay Plaza, Tampa, FL                    |  |                        | 2,198  |              |   | 895                                        |  |                | 3,582                                         |       |                             | 557   |                       |   | (690                    | )(4) |                                                                        |   | 895   |  |   | 3,449  |  |   | 4,344  |  |   | 933   |  | 1988    |  | 07/97 |  | 5-40 years 
|Bay Plaza II, Tampa, FL                 |  |                        | 3,416  |              |   | 506                                        |  |                | 4,550                                         |       |                             | 143   |                       |   | (343                    | )(4) |                                                                        |   | 506   |  |   | 4,350  |  |   | 4,856  |  |   | 440   |  | 1985    |  | 06/00 |  | 40 years   
|Brandeis, Omaha, NE                     |  |                        | 8,750  |              |   | 1,451                                      |  |                | 13,061                                        |       |                             | 114   |                       |   | (4,802                  | )    |                                                                        |   | 1,451 |  |   | 7,401  |  |   | 8,852  |  |   | 995   |  | 1921    |  | 11/00 |  | 40 years   
|                                        |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (972                    | )(4) |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |         |  |       |  |            
|Centura, Farmers Branch, TX             |  |                        | 40,239 |              |   | 5,000                                      |  |                | 45,000                                        |       |                             | 705   |                       |   | (8,649                  | )(4) |                                                                        |   | 5,000 |  |   | 37,056 |  |   | 42,056 |  |   | 1,640 |  | 1999    |  | 06/02 |  | 40 years   
|Cooley Building, Farmers Branch, TX     |  |                        | 1,777  |              |   | 729                                        |  |                | 2,918                                         |       |                             | 124   |                       |   | (306                    | )(4) |                                                                        |   | 729   |  |   | 2,736  |  |   | 3,465  |  |   | 538   |  | 1996    |  | 1999  |  | 7-40 years 
|Corporate Point, Chantilly, VA          |  |                        | 3,656  |              |   | 830                                        |  |                | 3,321                                         |       |                             | 547   |                       |   | (312                    | )(4) |                                                                        |   | 830   |  |   | 3,556  |  |   | 4,386  |  |   | 1,137 |  | 1992    |  | 10/94 |  | 5-40 years 
|Countryside Retail Center, Sterling, VA |  |                        | 22,027 |              |   | 2,088                                      |  |                | 18,791                                        |       |                             | 40    |                       |   | (1,390                  | )(4) |                                                                        |   | 2,088 |  |   | 17,441 |  |   | 19,529 |  |   | 1,505 |  | 1986    |  | 09/00 |  | 40 years   
|Durham Center, Durham, NC               |  |                        | 13,315 |              |   | 4,233                                      |  |                | 16,932                                        |       |                             | 1,441 |                       |   | (2,775                  | )(4) |                                                                        |   | 4,233 |  |   | 15,598 |  |   | 19,831 |  |   | 3,545 |  | 1988    |  | 07/97 |  | 5-40 years 
|Eton Square, Tulsa, OK                  |  |                        | 10,045 |              |   | 1,469                                      |  |                | 13,219                                        |       |                             | 615   |                       |   | (1,015                  | )(4) |                                                                        |   | 1,469 |  |   | 12,819 |  |   | 14,288 |  |   | 1,663 |  | 1985    |  | 09/99 |  | 5-40 years 
|Executive Court, Memphis, TN            |  |                        | 1,598  |              |   | 271                                        |  |                | 2,099                                         |       |                             | 749   |                       |   | (6                      | )    |                                                                        |   | 271   |  |   | 2,842  |  |   | 3,113  |  |   | 2,041 |  | 1980    |  | 09/82 |  | 7-40 years 
|Five Hickory Centre, Farmers Branch, TX |  |                        |       |              |   |                                           |  |                |                                              |       |                             | 38    |                       |   |                        |      |                                                                        |   |      |  |   | 38     |  |   | 38     |  |   |      |  |         |  |       |  |            
|Forum, Richmond, VA                     |  |                        | 4,990  |              |   | 1,360                                      |  |                | 5,439                                         |       |                             | 772   |                       |   | (494                    | )(4) |                                                                        |   | 1,360 |  |   | 5,717  |  |   | 7,077  |  |   | 1,963 |  | 1987    |  | 10/92 |  | 2-40 years 
|Four Hickory Centre, Farmers Branch, TX |  |                        | 18,721 |              |   | 303                                        |  |                | 27,723                                        |       |                             | 171   |                       |   | (7,500                  | )(2) |                                                                        |   | 303   |  |   | 20,394 |  |   | 20,697 |  |   | 174   |  | 2003    |  | 2003  |  | 7-40 years 
|Harmon, Sterling, VA                    |  |                        | 8,827  |              |   | 1,054                                      |  |                | 9,487                                         |       |                             | 219   |                       |   | (713                    | )(4) |                                                                        |   | 1,054 |  |   | 8,993  |  |   | 10,047 |  |   | 801   |  | 1987    |  | 09/00 |  | 5-40 years 
|Institute Place, Chicago, IL            |  |                        | 7,886  |              |   | 665                                        |  |                | 7,057                                         |       |                             | 139   |                       |   | (521                    | )(4) |                                                                        |   | 665   |  |   | 6,675  |  |   | 7,340  |  |   | 4,391 |  | 1910    |  | 01/93 |  | 2-40 years 
|Lexington Center, Colorado Springs, CO  |  |                        | 3,975  |              |   | 1,103                                      |  |                | 4,413                                         |       |                             | 558   |                       |   | (404                    | )(4) |                                                                        |   | 1,103 |  |   | 4,567  |  |   | 5,670  |  |   | 1,149 |  | 1986    |  | 12/97 |  | 3-40 years 
|Mimado, Sterling, VA                    |  |                        |       |              |   | 582                                        |  |                | 5,236                                         |       |                             | 52    |                       |   | (390                    | )(4) |                                                                        |   | 582   |  |   | 4,898  |  |   | 5,480  |  |   | 440   |  | 1986    |  | 09/00 |  | 40 years   
|One Hickory Centre, Farmers Branch, TX  |  |                        | 11,973 |              |   | 335                                        |  |                | 7,651                                         |       |                             | 3,549 |                       |   | (20                     | )    |                                                                        |   | 335   |  |   | 11,180 |  |   | 11,515 |  |   | 2,427 |  | 1998    |  | 1998  |  | 10-40 years
|One Steeplechase, Sterling, VA          |  |                        | 7,702  |              |   | 1,380                                      |  |                | 5,520                                         |       |                             | 2,633 |                       |   | 72                      | (7)  |                                                                        |   | 1,380 |  |   | 7,587  |  |   | 8,967  |  |   | 3,946 |  | 1987    |  | 12/92 |  | 5-40 years 
|                                        |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (638                    | )(4) |                                                                        |   |       |  |   |        |  |   |        |  |   |       |  |         |  |       |  |            
|Parkway North, Dallas, TX               |  |                        | 3,566  |              |   | 1,173                                      |  |                | 4,692                                         |       |                             | 980   |                       |   | (452                    | )(4) |                                                                        |   | 1,173 |  |   | 5,220  |  |   | 6,393  |  |   | 1,324 |  | 1980    |  | 02/98 |  | 2-40 years 



104



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  |       |  |       |  |            
|-------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ------ | --------------------- | - | ----------------------- | ---- | ---------------------------------------------------------------------- | - | ----- |  | - | ------ |  | - | ------ |  | - | ------ |  | ----- |  | ----- |  | -----------
|                                       |  |                        |        | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |        | Date ofConstruc- tion |   | Date Acquired           |      | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                      |  | Encum- brances         |        | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |        | Land                  |   | Building & Improvements |      | (1) Total                                                              |   |       |  |  
|                                       |  | (dollars in thousands)
|Operating Properties (continued)       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |       
|Office Buildings (continued)           |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |       
|Signature Athletic Club, Dallas, TX    |  | $                      | 2,453  |              | $ | 1,075                                      |  | $              | 2,921                                         |       | $                           | 1,227  |                       | $ | (781                    | )(4) |                                                                        | $ | 1,075 |  | $ | 3,367  |  | $ | 4,442  |  | $ | 1,134  |  | 1985  |  | 02/99 |  | 5-40 years 
|Two Hickory Centre, Farmers Branch, TX |  |                        | 10,660 |              |   | 318                                        |  |                | 7,827                                         |       |                             | 1,475  |                       |   | (21                     | )    |                                                                        |   | 318   |  |   | 9,281  |  |   | 9,599  |  |   | 1,348  |  | 2000  |  | 2000  |  | 7-40 years 
|University Square, Anchorage, AK       |  |                        | 1,904  |              |   | 562                                        |  |                | 3,276                                         |       |                             | 252    |                       |   | (1,881                  | )(2) |                                                                        |   | 562   |  |   | 1,595  |  |   | 2,157  |  |   | 1,516  |  | 1981  |  | 12/81 |  | 5-40 years 
|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   | (52                     | )(4) |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  |       |  |       |  |            
|Venture Center, Atlanta, GA            |  |                        | 2,567  |              |   | 411                                        |  |                | 2,746                                         |       |                             | 220    |                       |   | (224                    | )(4) |                                                                        |   | 411   |  |   | 2,742  |  |   | 3,153  |  |   | 1,212  |  | 1981  |  | 07/89 |  | 1-40 years 
|Westgrove Air Plaza, Addison, TX       |  |                        | 3,397  |              |   | 211                                        |  |                | 1,898                                         |       |                             | 114    |                       |   | (366                    | )(4) |                                                                        |   | 211   |  |   | 1,646  |  |   | 1,857  |  |   | 370    |  | 1982  |  | 10/97 |  | 5-40 years 
|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       
|Industrial Warehouses                  |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  |       |  |       |  |            
|5360 Tulane, Atlanta, GA               |  |                        | 364    |              |   | 95                                         |  |                | 514                                           |       |                             | 50     |                       |   | (85                     | )(4) |                                                                        |   | 95    |  |   | 479    |  |   | 574    |  |   | 324    |  | 1970  |  | 11/97 |  | 5-40 years 
|5700 Tulane, Atlanta, GA               |  |                        |       |              |   |                                           |  |                |                                              |       |                             | 720    |                       |   | (141                    | )(4) |                                                                        |   |      |  |   | 579    |  |   | 579    |  |   | 145    |  | 1998  |  | 11/97 |  | 40 years   
|Addison Hangar, Addison, TX            |  |                        | 1,168  |              |   | 928                                        |  |                | 1,481                                         |       |                             | 33     |                       |   | (162                    | )(4) |                                                                        |   | 928   |  |   | 1,352  |  |   | 2,280  |  |   | 170    |  | 1992  |  | 12/99 |  | 5-40 years 
|Addison Hanger II, Addison, TX         |  |                        | 1,440  |              |   |                                           |  |                | 1,150                                         |       |                             | 248    |                       |   | (93                     | )(4) |                                                                        |   |      |  |   | 1,305  |  |   | 1,305  |  |   | 468    |  | 2000  |  | 12/99 |  | 5-40 years 
|Encon, Fort Worth, TX                  |  |                        | 3,408  |              |   | 984                                        |  |                | 3,934                                         |       |                             | 67     |                       |   | (331                    | )(4) |                                                                        |   | 984   |  |   | 3,670  |  |   | 4,654  |  |   | 612    |  | 1958  |  | 10/97 |  | 5-40 years 
|Kelly Warehouse, Dallas, TX            |  |                        | 1,910  |              |   | 1,136                                      |  |                | 4,856                                         |       |                             | 224    |                       |   | (2,856                  | )    |                                                                        |   | 1,136 |  |   | 1,890  |  |   | 3,026  |  |   | 705    |  | 1966  |  | 03/95 |  | 5-40 years 
|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   | (334                    | )(4) |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  |       |  |       |  |            
|Ogden, Ogden, UT                       |  |                        | 1,780  |              |   | 52                                         |  |                | 1,568                                         |       |                             | 112    |                       |   | (180                    | )(4) |                                                                        |   | 52    |  |   | 1,500  |  |   | 1,552  |  |   | 619    |  | 1979  |  | 01/86 |  | 5-40 years 
|Space Center, San Antonio, TX          |  |                        | 1,063  |              |   | 247                                        |  |                | 1,332                                         |       |                             | 112    |                       |   | (235                    | )(4) |                                                                        |   | 247   |  |   | 1,209  |  |   | 1,456  |  |   | 818    |  | 1970  |  | 12/99 |  | 5-40 years 
|Texstar, Arlington, TX                 |  |                        | 1,157  |              |   | 333                                        |  |                | 1,331                                         |       |                             | 216    |                       |   | (125                    | )(4) |                                                                        |   | 333   |  |   | 1,422  |  |   | 1,755  |  |   | 537    |  | 1967  |  | 10/97 |  | 5-40 years 
|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       
|Shopping Centers                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  |       |  |       |  |            
|Bridgeview Plaza, LaCrosse, WI         |  |                        | 6,446  |              |   | 870                                        |  |                | 7,830                                         |       |                             |       |                       |   | (578                    | )(4) |                                                                        |   | 870   |  |   | 7,252  |  |   | 8,122  |  |   | 1,950  |  | 1979  |  | 03/03 |  |           
|Collection, Denver, CO                 |  |                        | 13,371 |              |   |                                           |  |                | 20,791                                        |       |                             | 371    |                       |   | (461                    | )    |                                                                        |   |      |  |   | 20,701 |  |   | 20,701 |  |   | 3,394  |  | 1955  |  | 1997  |  | 10-40 years
|Cross County Mall, Mattoon, IL         |  |                        | 7,589  |              |   | 608                                        |  |                | 6,468                                         |       |                             | 6,943  |                       |   | (810                    | )(4) |                                                                        |   | 608   |  |   | 12,601 |  |   | 13,209 |  |   | 10,196 |  | 1971  |  | 08/79 |  | 5-40 years 
|Cullman, Cullman, AL                   |  |                        | 1,684  |              |   | 200                                        |  |                | 1,800                                         |       |                             |       |                       |   | (133                    | )(4) |                                                                        |   | 200   |  |   | 1,667  |  |   | 1,867  |  |   | 442    |  | 1979  |  | 03/03 |  | 7-40 years 
|Dunes Plaza, Michigan City, IN         |  |                        | 2,845  |              |   | 1,230                                      |  |                | 5,430                                         |       |                             | 1,931  |                       |   | (482                    | )(8) |                                                                        |   | 1,230 |  |   | 6,341  |  |   | 7,571  |  |   | 2,315  |  | 1978  |  | 03/92 |  | 5-40 years 
|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   | (538                    | )(4) |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  |       |  |       |  |            
|K-Mart, Cary, NC                       |  |                        | 1,692  |              |   | 1,358                                      |  |                | 1,157                                         |       |                             | 162    |                       |   | (178                    | )(4) |                                                                        |   | 1,358 |  |   | 1,141  |  |   | 2,499  |  |   | 116    |  | 1981  |  | 08/98 |  | 40 years   
|Plaza on Bachman Creek, Dallas, TX     |  |                        | 4,948  |              |   | 466                                        |  |                | 2,898                                         |       |                             | 150    |                       |   | 192                     |      |                                                                        |   | 466   |  |   | 3,240  |  |   | 3,706  |  |   | 304    |  | 1986  |  | 03/02 |  | 5-40 years 
|Promenade, Highlands Ranch, CO         |  |                        | 6,979  |              |   | 1,749                                      |  |                | 6,995                                         |       |                             | 546    |                       |   | (1,222                  | )(4) |                                                                        |   | 1,749 |  |   | 6,319  |  |   | 8,068  |  |   | 1,541  |  | 1985  |  | 07/96 |  | 5-40 years 
|Sadler Square, Amelia Island, FL       |  |                        | 2,722  |              |   | 679                                        |  |                | 2,715                                         |       |                             | 164    |                       |   | (234                    | )(4) |                                                                        |   | 679   |  |   | 2,645  |  |   | 3,324  |  |   | 852    |  | 1987  |  | 11/93 |  | 3-40 years 
|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |       
|Merchandise Mart                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  |       |  |       |  |            
|Denver Mart, Denver, CO                |  |                        | 27,183 |              |   | 4,824                                      |  |                | 5,184                                         |       |                             | 16,359 |                       |   | 9                       |      |                                                                        |   | 4,824 |  |   | 21,552 |  |   | 26,376 |  |   | 6,477  |  | 1965/ |  | 1992  |  | 10-40 years
|                                       |  |                        |        |              |   |                                            |  |                |                                               |       |                             |        |                       |   |                         |      |                                                                        |   |       |  |   |        |  |   |        |  |   |        |  | 1986  |  |       |  |            



105



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                                 |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |   |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |      |  |       |  |            
|------------------------------------------------ |  | ---------------------- | ------- | --- | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ------- | --------------------- | - | ----------------------- | ---- | ---------------------------------------------------------------------- | - | ------- |  | - | ------- |  | - | --------- |  | - | ------- |  | ---- |  | ----- |  | -----------
|                                                 |  |                        |         |     | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |         | Date ofConstruc- tion |   | Date Acquired           |      | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                                |  | Encum- brances         |         |     | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |         | Land                  |   | Building & Improvements |      | (1) Total                                                              |   |         |  |  
|                                                 |  | (dollars in thousands)
|Operating Properties (continued)                 |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |   |                         |      |                                                                        |   |         |  |   |         |  |   |          
|Hotels                                           |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |   |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |      |  |       |  |            
|Akademia, Wroclaw, Poland                        |  | $                      | 21,423  |     |              | $ | 2,184                                      |  | $              |                                              |       | $                           | 16,164  |                       | $ | (1,132                  | )(4) |                                                                        | $ | 2,184   |  | $ | 15,032  |  | $ | 17,216    |  | $ | 1,105   |  | 2001 |  | 02/01 |  | 40 years   
|Best Western Hotel, Virginia Beach, VA           |  |                        | 3,880   |     |              |   | 1,521                                      |  |                | 5,754                                         |       |                             | 1,426   |                       |   |                        |      |                                                                        |   | 1,521   |  |   | 7,180   |  |   | 8,701     |  |   | 1,851   |  | 1983 |  | 1996  |  | 10-40 years
|Château Inn, Fresno, CA                          |  |                        | 2,032   |     |              |   |                                           |  |                | 3,906                                         |       |                             | 74      |                       |   | (33                     | )    |                                                                        |   |        |  |   | 3,947   |  |   | 3,947     |  |   | 680     |  | 1989 |  | 1997  |  | 10-40 years
|City Suites, Chicago, IL                         |  |                        | 3,695   |     |              |   | 950                                        |  |                | 3,847                                         |       |                             | 1,106   |                       |   | (390                    | )(4) |                                                                        |   | 950     |  |   | 4,563   |  |   | 5,513     |  |   | 1,308   |  | 1995 |  | 12/98 |  | 5-40 years 
|Majestic Inn, San Francisco, CA                  |  |                        | 5,255   |     |              |   | 1,139                                      |  |                | 4,555                                         |       |                             | 985     |                       |   |                        |      |                                                                        |   | 1,139   |  |   | 5,540   |  |   | 6,679     |  |   | 2,357   |  | 1902 |  | 12/90 |  | 5-40 years 
|Piccadilly Airport, Fresno, CA                   |  |                        | 4,828   |     |              |   |                                           |  |                | 7,834                                         |       |                             | 490     |                       |   |                        |      |                                                                        |   |        |  |   | 8,324   |  |   | 8,324     |  |   | 1,524   |  | 1970 |  | 1997  |  | 10-40 years
|Piccadilly Shaw, Fresno, CA                      |  |                        | 5,606   |     |              |   | 2,392                                      |  |                | 9,567                                         |       |                             | 958     |                       |   | (3                      | )    |                                                                        |   | 2,392   |  |   | 10,522  |  |   | 12,914    |  |   | 1,918   |  | 1973 |  | 1997  |  | 10-40 years
|Piccadilly University, Fresno, CA                |  |                        | 5,452   |     |              |   |                                           |  |                | 12,011                                        |       |                             | 297     |                       |   | (124                    | )    |                                                                        |   |        |  |   | 12,184  |  |   | 12,184    |  |   | 2,020   |  | 1984 |  | 1997  |  | 10-40 years
|Quality Inn, Denver, CO                          |  |                        | 3,610   |     |              |   |                                           |  |                | 302                                           |       |                             | 2,585   |                       |   | (179                    | )    |                                                                        |   |        |  |   | 2,708   |  |   | 2,708     |  |   | 2,171   |  | 1974 |  | 1994  |  | 10-40 years
|The Majestic, Chicago, IL                        |  |                        | 2,215   |     |              |   | 572                                        |  |                | 2,365                                         |       |                             | 1,515   |                       |   | (292                    | )(4) |                                                                        |   | 572     |  |   | 3,588   |  |   | 4,160     |  |   | 998     |  | 1995 |  | 12/98 |  | 5-40 years 
|Williamsburg Hospitality House, Williamsburg, VA |  |                        | 12,332  |     |              |   | 4,049                                      |  |                | 16,195                                        |       |                             | 2,581   |                       |   |                        |      |                                                                        |   | 4,049   |  |   | 18,776  |  |   | 22,825    |  |   | 4,172   |  | 1973 |  | 1997  |  | 10-40 years
|Willows, Chicago, IL                             |  |                        | 3,670   |     |              |   | 945                                        |  |                | 3,851                                         |       |                             | 1,416   |                       |   | (411                    | )(4) |                                                                        |   | 945     |  |   | 4,856   |  |   | 5,801     |  |   | 1,568   |  | 1995 |  | 12/98 |  | 5-40 years 
|                                                 |  |                        |         |     |              |   |                                            |  |                |                                               |       |                            
|Single Family Residence                          |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |   |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |      |  |       |  |            
|Tavel Circle, Dallas, TX                         |  |                        | 67      |     |              |   | 53                                         |  |                | 214                                           |       |                             |        |                       |   |                        |      |                                                                        |   | 53      |  |   | 214     |  |   | 267       |  |   | 41      |  |      |  |       |  |            
|                                                 |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |   |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |      |  |       |  |            
|                                                 |  |                        | 814,921 |     |              |   | 120,990                                    |  |                | 632,178                                       |       |                             | 323,572 |                       |   | (74,379                 | )    |                                                                        |   | 120,990 |  |   | 881,371 |  |   | 1,002,361 |  |   | 178,883 |  |      |  |       |  |            
|Land Properties                                  |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |   |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |      |  |       |  |            
|1013 Commons, New Orleans, LA                    |  |                        |        |     |              |   | 615                                        |  |                |                                              |       |                             | 159     |                       |   | (83                     | )(4) |                                                                        |   | 691     |  |   |         |  |   | 691       |  |   | 51      |  | N/A  |  | 08/98 |  |           
|2301 Valley Branch, Farmers Branch, TX           |  |                        | 3,023   |     |              |   | 4,169                                      |  |                |                                              |       |                             | 84      |                       |   | (285                    | )(4) |                                                                        |   | 3,968   |  |   |        |  |   | 3,968     |  |   |        |  | N/A  |  | 09/02 |  |           
|2524 Valley View, Farmers Branch, TX             |  |                        |        |     |              |   | 200                                        |  |                |                                              |       |                             |        |                       |   |                        |      |                                                                        |   | 200     |  |   |        |  |   | 200       |  |   |        |  | N/A  |  | 1998  |  |           
|Alamo Springs, Dallas, TX                        |  |                        |        |     |              |   | 1,385                                      |  |                |                                              |       |                             |        |                       |   | (93                     | )(4) |                                                                        |   | 1,292   |  |   |        |  |   | 1,292     |  |   |        |  | N/A  |  | 09/99 |  |           
|Backlick. Springfield, VA                        |  |                        |        |     |              |   | 74                                         |  |                |                                              |       |                             |        |                       |   |                        |      |                                                                        |   | 74      |  |   |        |  |   | 74        |  |   |        |  | N/A  |  | 1990  |  |           
|Bee Street, Farmers Branch, TX                   |  |                        |        |     |              |   | 472                                        |  |                |                                              |       |                             |        |                       |   |                        |      |                                                                        |   | 472     |  |   |        |  |   | 472       |  |   |        |  | N/A  |  | 19    |  |           
|Bonneau, Dallas County, TX                       |  |                        |        | (6) |              |   | 1,102                                      |  |                |                                              |       |                             |        |                       |   |                        |      |                                                                        |   | 1,102   |  |   |        |  |   | 1,102     |  |   |        |  | N/A  |  | 1998  |  |           
|Centura, Farmers Branch, TX                      |  |                        | 6,150   |     |              |   | 13,300                                     |  |                |                                              |       |                             | 65      |                       |   | 30                      |      |                                                                        |   | 8,126   |  |   |        |  |   | 8,126     |  |   |        |  | N/A  |  | 12/02 |  |           
|                                                 |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |   | (5,269                  | )(4) |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |      |  |       |  |            
|Chase Oaks, Plano, TX                            |  |                        | 1,629   |     |              |   | 4,511                                      |  |                |                                              |       |                             | 377     |                       |   | (3,898                  | )(3) |                                                                        |   | 990     |  |   |        |  |   | 990       |  |   |        |  | N/A  |  | 1997  |  |           
|Croslin, Dallas, TX                              |  |                        |        |     |              |   | 327                                        |  |                |                                              |       |                             | 6       |                       |   |                        |      |                                                                        |   | 333     |  |   |        |  |   | 333       |  |   |        |  | N/A  |  | 1998  |  |           
|Dalho, Farmers Branch, TX                        |  |                        |        | (6) |              |   | 331                                        |  |                |                                              |       |                             |        |                       |   |                        |      |                                                                        |   | 331     |  |   |        |  |   | 331       |  |   |        |  | N/A  |  | 1997  |  |           
|Dominion, Dallas, TX                             |  |                        | 552     |     |              |   | 3,931                                      |  |                |                                              |       |                             |        |                       |   | (264                    | )(4) |                                                                        |   | 3,667   |  |   |        |  |   | 3,667     |  |   |        |  | N/A  |  | 03/99 |  |           
|Elm Fork, Denton County, TX                      |  |                        | 4,700   |     |              |   | 17,294                                     |  |                |                                              |       |                             | 207     |                       |   | (10,482                 | )(3) |                                                                        |   | 6,812   |  |   | 207     |  |   | 7019      |  |   |         |  | N/A  |  | 2001  |  |           
|Fiesta, San Angelo, TX                           |  |                        |        |     |              |   | 44                                         |  |                |                                              |       |                             |        |                       |   | (3                      | )(4) |                                                                        |   | 41      |  |   |        |  |   | 41        |  |   |        |  | N/A  |  | 12/91 |  |           
|Fruitland, Fruitland Park, FL                    |  |                        |        |     |              |   | 253                                        |  |                |                                              |       |                             |        |                       |   | (110                    | )(3) |                                                                        |   | 143     |  |   |        |  |   | 143       |  |   |        |  | N/A  |  | 05/92 |  |           



106



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                       |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   |                         |      |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|-------------------------------------- |  | ---------------------- | ------ | --- | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ----- | --------------------- | - | ----------------------- | ---- | ---------------------------------------------------------------------- | - | ------ |  | - | ----- |  | - | ------ |  | - | -- |  | --- |  | ----- |  | -
|                                       |  |                        |        |     | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |       | Date ofConstruc- tion |   | Date Acquired           |      | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                      |  | Encum- brances         |        |     | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |       | Land                  |   | Building & Improvements |      | (1) Total                                                              |   |        |  |  
|                                       |  | (dollars in thousands)
|                                       |  |                        |        |     |              |   |                                            |  |                |                                               |       |                            
|Land Properties (continued)            |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   |                         |      |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Folsom                                 |  | $                      |       |     |              | $ | 1,781                                      |  | $              |                                              |       | $                           | 450   |                       | $ | (150                    | )(4) |                                                                        | $ | 2,081  |  | $ |      |  | $ | 2,081  |  | $ |   |  | N/A |  | 10/00 |  | 
|Fort Wayne, Fort Wayne, IN             |  |                        |       |     |              |   | 3                                          |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 3      |  |   |      |  |   | 3      |  |   |   |  | N/A |  | 1996  |  | 
|FRWM Cummings, Farmers Branch, TX      |  |                        |       |     |              |   | 1,284                                      |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 1,284  |  |   |      |  |   | 1,284  |  |   |   |  | N/A |  | 1998  |  | 
|Hollywood Casino, Farmers Branch, TX   |  |                        | 6,222  |     |              |   | 16,987                                     |  |                |                                              |       |                             | 2     |                       |   | (8,641                  | )(4) |                                                                        |   | 8,348  |  |   |      |  |   | 8,348  |  |   |   |  | N/A |  | 06/02 |  | 
|HSM, Farmers Branch, TX                |  |                        | 4,050  |     |              |   | 2,361                                      |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 2,361  |  |   |      |  |   | 2,361  |  |   |   |  | N/A |  | 1998  |  | 
|JHL Connell, Carrollton, TX            |  |                        |       | (6) |              |   | 1,451                                      |  |                |                                              |       |                             |      |                       |   | (25                     | )(3) |                                                                        |   | 1,426  |  |   |      |  |   | 1,426  |  |   |   |  | N/A |  | 1998  |  | 
|Katrina, Palm Desert, CA               |  |                        | 5,100  |     |              |   | 40,211                                     |  |                |                                              |       |                             | 1,835 |                       |   | (27,439                 | )(3) |                                                                        |   | 10,125 |  |   | 1,835 |  |   | 11,960 |  |   |   |  | N/A |  | 1998  |  | 
|                                       |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (2,647                  | )(2) |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Katy Road, Harris County, TX           |  |                        |       |     |              |   | 5,919                                      |  |                |                                              |       |                             | 53    |                       |   |                        |      |                                                                        |   | 5,919  |  |   | 53    |  |   | 5,972  |  |   |   |  | N/A |  | 1997  |  | 
|Kelly Lots, Collin County, TX          |  |                        | 56     |     |              |   | 131                                        |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 131    |  |   |      |  |   | 131    |  |   |   |  | N/A |  | 2000  |  | 
|Lacy Longhorn, Farmers Branch, TX      |  |                        |       |     |              |   | 1,908                                      |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 1,908  |  |   |      |  |   | 1,908  |  |   |   |  | N/A |  | 1997  |  | 
|Lakeshore Villas, Harris County, TX    |  |                        |       |     |              |   | 950                                        |  |                |                                              |       |                             | 112   |                       |   | (1                      | )    |                                                                        |   | 993    |  |   |      |  |   | 993    |  |   |   |  | N/A |  | 03/02 |  | 
|                                       |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (68                     | )(4) |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Lamar Parmer, Austin, TX               |  |                        |       |     |              |   | 1,999                                      |  |                |                                              |       |                             | 635   |                       |   | (79                     | )    |                                                                        |   | 2,386  |  |   |      |  |   | 2,386  |  |   |   |  | N/A |  | 01/00 |  | 
|                                       |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (169                    | )(4) |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Las Colinas, Las Colinas, TX           |  |                        |       |     |              |   | 995                                        |  |                |                                              |       |                             | 5     |                       |   | (67                     | )(4) |                                                                        |   | 933    |  |   |      |  |   | 933    |  |   |   |  | N/A |  | 01/96 |  | 
|Las Colinas, Las Colinas, TX           |  |                        | 11,435 |     |              |   | 14,076                                     |  |                |                                              |       |                             | 28    |                       |   | (4,419                  | )(3) |                                                                        |   | 9,685  |  |   |      |  |   | 9,685  |  |   |   |  | N/A |  | 1995  |  | 
|Leone, Irving TX                       |  |                        | 1,210  |     |              |   | 1,625                                      |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 1,625  |  |   |      |  |   | 1,625  |  |   |   |  | N/A |  | 1996  |  | 
|Lemon Carlisle, Dallas, TX             |  |                        | 1,745  |     |              |   | 3,576                                      |  |                |                                              |       |                             | 30    |                       |   | (242                    | )(4) |                                                                        |   | 3,364  |  |   |      |  |   | 3,364  |  |   |   |  | N/A |  | 02/98 |  | 
|Manhattan, Farmers Branch, TX          |  |                        | 4,171  |     |              |   | 11,186                                     |  |                |                                              |       |                             | 927   |                       |   | 44                      |      |                                                                        |   | 11,345 |  |   |      |  |   | 11,345 |  |   | 74 |  | N/A |  | 02/00 |  | 
|                                       |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (812                    | )(4) |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Marine Creek, Ft. Worth, TX            |  |                        | 1,012  |     |              |   | 3,713                                      |  |                |                                              |       |                             | 106   |                       |   | (1,584                  | )    |                                                                        |   | 2,235  |  |   |      |  |   | 2,235  |  |   |   |  | N/A |  | 06/02 |  | 
|Mason/Goodrich, Houston, TX            |  |                        | 1,495  |     |              |   | 10,983                                     |  |                |                                              |       |                             | 490   |                       |   | (10,393                 | )(3) |                                                                        |   | 590    |  |   | 490   |  |   | 1,080  |  |   |   |  | N/A |  | 1998  |  | 
|Mason Park, Houston, TX                |  |                        |       |     |              |   | 2,790                                      |  |                |                                              |       |                             | 301   |                       |   | (1,188                  | )    |                                                                        |   | 1,775  |  |   |      |  |   | 1,775  |  |   |   |  | N/A |  | 06/02 |  | 
|                                       |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (128                    | )(4) |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Maumelle, Maumelle, AR                 |  |                        | 640    |     |              |   | 1,153                                      |  |                |                                              |       |                             | 11    |                       |   | (77                     | )(4) |                                                                        |   | 1,087  |  |   |      |  |   | 1,087  |  |   |   |  | N/A |  | 01/03 |  | 
|McKinney Corners II, Collin County, TX |  |                        |       |     |              |   | 5,911                                      |  |                |                                              |       |                             |      |                       |   | (5,386                  | )(3) |                                                                        |   | 525    |  |   |      |  |   | 525    |  |   |   |  | N/A |  | 1997  |  | 
|McKinney 36, Collin County, TX         |  |                        | 50     |     |              |   | 2,203                                      |  |                |                                              |       |                             |      |                       |   | (362                    | )(4) |                                                                        |   | 1,841  |  |   |      |  |   | 1,841  |  |   |   |  | N/A |  | 01/98 |  | 
|Mendoza, Dallas, TX                    |  |                        |       |     |              |   | 192                                        |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 192    |  |   |      |  |   | 192    |  |   |   |  | N/A |  | 1998  |  | 
|Mira Lago, Farmers Branch, TX          |  |                        |       |     |              |   | 541                                        |  |                |                                              |       |                             | 82    |                       |   | (40                     | )(4) |                                                                        |   | 583    |  |   |      |  |   | 583    |  |   |   |  | N/A |  | 05/01 |  | 
|Nashville, Nashville, TN               |  |                        |       |     |              |   | 1,890                                      |  |                |                                              |       |                             | 34    |                       |   | (1,143                  | )(4) |                                                                        |   | 781    |  |   |      |  |   | 781    |  |   |   |  | N/A |  | 06/02 |  | 
|Nashville, Nashville, TN               |  |                        | 6,830  |     |              |   | 7,774                                      |  |                |                                              |       |                             |      |                       |   | (3,344                  | )(3) |                                                                        |   | 4,430  |  |   |      |  |   | 4,430  |  |   |   |  | N/A |  | 1999  |  | 
|Nakash                                 |  |                        | 161    |     |              |   | 113                                        |  |                |                                              |       |                             |      |                       |   | (8                      | )(4) |                                                                        |   | 105    |  |   |      |  |   | 105    |  |   |   |  | N/A |  |       |  | 
|Pac-Trust, Dallas, TX                  |  |                        | 277    |     |              |   | 1,232                                      |  |                |                                              |       |                             |      |                       |   | (83                     | )(4) |                                                                        |   | 1,149  |  |   |      |  |   | 1,149  |  |   |   |  | N/A |  | 10/01 |  | 
|Pioneer Crossing, Austin, TX           |  |                        |       |     |              |   | 23,255                                     |  |                |                                              |       |                             | 2,301 |                       |   | (17,469                 | )(3) |                                                                        |   | 5,786  |  |   | 2,301 |  |   | 8,087  |  |   |   |  | N/A |  | 1997  |  | 
|Puluski, Puluski County, AR            |  |                        | 1,400  |     |              |   | 2,095                                      |  |                |                                              |       |                             |      |                       |   |                        |      |                                                                        |   | 2,095  |  |   |      |  |   | 2,095  |  |   |   |  | N/A |  | 06/03 |  | 
|Rasor, Plano, TX                       |  |                        | 1,260  |     |              |   | 2,319                                      |  |                |                                              |       |                             | 227   |                       |   | (166                    | )(4) |                                                                        |   | 2,380  |  |   |      |  |   | 2,380  |  |   |   |  | N/A |  | 03/02 |  | 



107



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003





|                                     |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   |                         |        |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|------------------------------------ |  | ---------------------- | ------ | --- | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ----- | --------------------- | - | ----------------------- | ------ | ---------------------------------------------------------------------- | - | ------ |  | - | ----- |  | - | ------ |  | - | -- |  | --- |  | ----- |  | -
|                                     |  |                        |        |     | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |       | Date ofConstruc- tion |   | Date Acquired           |        | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location                    |  | Encum- brances         |        |     | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |       | Land                  |   | Building & Improvements |        | (1) Total                                                              |   |        |  |  
|                                     |  | (dollars in thousands)
|Land Properties (continued)          |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   |                         |        |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Red Cross, Dallas, TX                |  | $                      | 4,475  |     |              | $ | 7,676                                      |  | $              |                                              |       | $                           | 2     |                       | $ | (197                    | )      |                                                                        | $ | 6,966  |  | $ |      |  | $ | 6,966  |  | $ |   |  | N/A |  | 05/99 |  | 
|                                     |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (515                    | )(4)   |                                                                        |   |       |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Round Mt, Austin, TX                 |  |                        |       |     |              |   | 5,740                                      |  |                |                                              |       |                             |      |                       |   | (5,421                  | )(2,4) |                                                                        |   | 298    |  |   |      |  |   | 298    |  |   |   |  | N/A |  | 12/86 |  | 
|                                     |  |                        |        |     |              |   |                                            |  |                |                                               |       |                             |       |                       |   | (21                     | )(4)   |                                                                        |   |        |  |   |       |  |   |        |  |   |    |  |     |  |       |  |  
|Sandison, Collin County, TX          |  |                        | 140    | (7) |              |   | 5,021                                      |  |                |                                              |       |                             |      |                       |   | (702                    | )(4)   |                                                                        |   | 4,319  |  |   |      |  |   | 4,319  |  |   |   |  | N/A |  | 05/98 |  | 
|Seminary West, Fort Worth, TX        |  |                        |       |     |              |   | 234                                        |  |                |                                              |       |                             |      |                       |   | (16                     | )(4)   |                                                                        |   | 218    |  |   |      |  |   | 218    |  |   |   |  | N/A |  | 07/01 |  | 
|Sheffield Village, Grand Prairie, TX |  |                        | 975    |     |              |   | 1,643                                      |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 1,643  |  |   |      |  |   | 1,643  |  |   |   |  | N/A |  | 09/03 |  | 
|Siskiyou, Siskiyou County, CA        |  |                        |       |     |              |   | 3                                          |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 3      |  |   |      |  |   | 3      |  |   |   |  | N/A |  | 1996  |  | 
|Sladek, Travis County, TX            |  |                        |       |     |              |   | 764                                        |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 764    |  |   |      |  |   | 764    |  |   |   |  | N/A |  | 2000  |  | 
|Solco Allen, Collin County, TX       |  |                        | 80     | (6) |              |   | 1,388                                      |  |                |                                              |       |                             |      |                       |   | (168                    | )(4)   |                                                                        |   | 1,220  |  |   |      |  |   | 1,220  |  |   |   |  | N/A |  | 05/98 |  | 
|Stacy Road, Allen, TX                |  |                        | 232    | (6) |              |   | 2,665                                      |  |                |                                              |       |                             |      |                       |   | (359                    | )(4)   |                                                                        |   | 2,306  |  |   |      |  |   | 2,306  |  |   |   |  | N/A |  | 04/97 |  | 
|Stagliano, Farmers Branch, TX        |  |                        |       | (6) |              |   | 566                                        |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 566    |  |   |      |  |   | 566    |  |   |   |  | N/A |  | 1997  |  | 
|State Highway 121, Collin County, TX |  |                        | 173    | (6) |              |   | 4,354                                      |  |                |                                              |       |                             |      |                       |   | (2,997                  | )(4)   |                                                                        |   | 1,357  |  |   |      |  |   | 1,357  |  |   |   |  | N/A |  | 02/97 |  | 
|Thompson, Farmers Branch, TX         |  |                        |       | (6) |              |   | 948                                        |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 948    |  |   |      |  |   | 948    |  |   |   |  | N/A |  | 1997  |  | 
|Thompson II, Dallas County, TX       |  |                        |       |     |              |   | 505                                        |  |                |                                              |       |                             |      |                       |   | (31                     | )(3)   |                                                                        |   | 474    |  |   |      |  |   | 474    |  |   |   |  | N/A |  | 1998  |  | 
|Tomlin, Farmers Branch, TX           |  |                        |       | (6) |              |   | 1,878                                      |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 1,878  |  |   |      |  |   | 1,878  |  |   |   |  | N/A |  | 1997  |  | 
|Travelers, Farmers Branch, TX        |  |                        | 22,802 |     |              |   | 25,000                                     |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 25,000 |  |   |      |  |   | 25,000 |  |   |   |  | N/A |  | 2003  |  | 
|Valley Ranch, Irving, TX             |  |                        |       |     |              |   | 16,592                                     |  |                |                                              |       |                             |      |                       |   | (16,008                 | )(3)   |                                                                        |   | 584    |  |   |      |  |   | 584    |  |   |   |  | N/A |  | 1996  |  | 
|Valley Ranch III, Irving, TX         |  |                        |       |     |              |   | 2,248                                      |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 2,248  |  |   |      |  |   | 2,248  |  |   |   |  | N/A |  | 1997  |  | 
|Valley Ranch IV, Irving, TX          |  |                        |       |     |              |   | 2,187                                      |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 2,187  |  |   |      |  |   | 2,187  |  |   |   |  | N/A |  | 1998  |  | 
|Valley View 34, Farmers Branch, TX   |  |                        |       |     |              |   | 1,652                                      |  |                |                                              |       |                             | 1,035 |                       |   | 32                      |        |                                                                        |   | 1,652  |  |   | 1,067 |  |   | 2,719  |  |   | 13 |  | N/A |  | 1996  |  | 
|Valwood, Dallas, TX                  |  |                        | 12,716 |     |              |   | 13,969                                     |  |                |                                              |       |                             | 498   |                       |   | (2,608                  | )(3)   |                                                                        |   | 11,361 |  |   | 498   |  |   | 11,859 |  |   |   |  | N/A |  | 1996  |  | 
|Vineyards, Grapevine, TX             |  |                        | 2,713  |     |              |   | 4,982                                      |  |                |                                              |       |                             |      |                       |   |                        |        |                                                                        |   | 4,982  |  |   |      |  |   | 4,982  |  |   |   |  | N/A |  | 1997  |  | 
|Vineyards II, Grapevine, TX          |  |                        | 1,510  |     |              |   | 6,934                                      |  |                |                                              |       |                             | 7     |                       |   | (1,794                  | )(3)   |                                                                        |   | 5,147  |  |   |      |  |   | 5,147  |  |   |   |  | N/A |  | 1999  |  | 
|Vista Ridge, Lewisville, TX          |  |                        | 5,715  |     |              |   | 16,322                                     |  |                |                                              |       |                             | 440   |                       |   | (8,575                  | )(3)   |                                                                        |   | 7,747  |  |   | 440   |  |   | 8,187  |  |   |   |  | N/A |  | 1998  |  | 
|Walker, Dallas County, TX            |  |                        | 7,950  |     |              |   | 13,534                                     |  |                | 34                                            |       |                             |      |                       |   |                        |        |                                                                        |   | 13,534 |  |   | 34    |  |   | 13,568 |  |   |   |  | N/A |  | 1998  |  | 
|Watters Road, Collin County, TX      |  |                        | 140    | (6) |              |   | 1,787                                      |  |                |                                              |       |                             |      |                       |   | (633                    | )(4)   |                                                                        |   | 1,154  |  |   |      |  |   | 1,154  |  |   |   |  | N/A |  | 02/97 |  | 



108



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                             |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |    |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |     |  |       |  |  
|---------------------------- |  | ---------------------- | ------- | --- | ------------ | - | ------------------------------------------ |  | -------------- | --------------------------------------------- | ----- | --------------------------- | ------- | --------------------- | -- | ----------------------- | ---- | ---------------------------------------------------------------------- | - | ------- |  | - | ------- |  | - | --------- |  | - | ------- |  | --- |  | ----- |  | -
|                             |  |                        |         |     | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |                | Gross Amounts of Which Carried at End of Year |       | Accumu- latedDepreci- ation |         | Date ofConstruc- tion |    | Date Acquired           |      | Life on Which Depreciation In Latest Statement ofOperation is Computed
|Property/Location            |  | Encum- brances         |         |     | Land         |   | Building & Improvements                    |  | Improve- ments |                                               | Other |                             |         | Land                  |    | Building & Improvements |      | (1) Total                                                              |   |         |  |  
|                             |  | (dollars in thousands)
|Land Properties (continued)  |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |    |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |     |  |       |  |  
|West End, Dallas, TX         |  | $                      | 5,766   |     |              | $ | 11,405                                     |  | $              |                                              |       | $                           | 77      |                       | $  | (4,013                  | )(3) |                                                                        | $ | 6,968   |  | $ |        |  | $ | 6,968     |  | $ |        |  | N/A |  | 08/97 |  | 
|                             |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |    | (501                    | )(4) |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |     |  |       |  |  
|Whisenant, Collin County, TX |  |                        | 23      | (6) |              |   | 631                                        |  |                |                                              |       |                             |        |                       |    | (97                     | )(4) |                                                                        |   | 534     |  |   |        |  |   | 534       |  |   |        |  | N/A |  | 05/98 |  | 
|                             |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |    |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |     |  |       |  |  
|                             |  |                        | 128,578 |     |              |   | 371,243                                    |  |                | 34                                            |       |                             | 10,586  |                       |    | (151,167                | )    |                                                                        |   | 223,771 |  |   | 6,925   |  |   | 230,696   |  |   | 138     |  |     |  |       |  |  
|                             |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |    |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |     |  |       |  |  
|                             |  | $                      | 943,499 |     |              | $ | 492,233                                    |  | $              | 632,212                                       |       | $                           | 334,158 |                       | ($ | 225,546                 | )    |                                                                        | $ | 344,761 |  | $ | 888,296 |  | $ | 1,233,057 |  | $ | 179,021 |  |     |  |       |  |  
|                             |  |                        |         |     |              |   |                                            |  |                |                                               |       |                             |         |                       |    |                         |      |                                                                        |   |         |  |   |         |  |   |           |  |   |         |  |     |  |       |  |  

---

|(1) |  | The aggregate cost for federal income tax purposes is $1,102.9 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) |  | Acquisition of ground lease.
|--- |  | ----------------------------

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

|(7) |  | Construction period interest and taxes.
|--- |  | ---------------------------------------

|(8) |  | Forgiveness of debt and cash received deducted from the basis of the property, offset by land acquired in 1992.
|--- |  | ---------------------------------------------------------------------------------------------------------------





109



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##### Table of Contents

SCHEDULE III

(Continued)



AMERICAN
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION(Continued)



|                                           |  |                        |           |   |             |   |          |             |  |   |          |  
|------------------------------------------ |  | ---------------------- | --------- | - | ----------- | - | -------- | ----------- |  | - | -------- | -
|                                           |  | 2003                   |           |   | 2002        |   |          | 2001        | 
|                                           |  |                        |           |   | As Restated |   |          | As Restated | 
|                                           |  | (dollars in thousands) |          
|Reconciliation of Real Estate              |  |                        |           |   |             |   |          |             |  |   |          |  
|Balance at January 1,                      |  | $                      | 567,731   |   |             | $ | 712,284  |             |  | $ | 802,434  |  
|Additions                                  |  |                        |           |   |             |   |          |             |  |   |          |  
|TCI properties                             |  |                        | 866,464   |   |             |   |         |             |  |   |         |  
|Acquisitions and improvements              |  |                        | 139,006   |   |             |   | 58,931   |             |  |   | 39,839   |  
|Deductions                                 |  |                        |           |   |             |   |          |             |  |   |          |  
|Sales of real estate                       |  |                        | (261,694  | ) |             |   | (199,313 | )           |  |   | (127,489 | )
|Purchase accounting write down             |  |                        | (58,558   | ) |             |   |         |             |  |   |         |  
|Property write down                        |  |                        | (19,892   | ) |             |   | (4,171   | )           |  |   | (2,500   | )
|                                           |  |                        |           |   |             |   |          |             |  |   |          |  
|Balance at December 31,                    |  | $                      | 1,233,057 |   |             | $ | 567,731  |             |  | $ | 712,284  |  
|                                           |  |                        |           |   |             |   |          |             |  |   |          |  
|Reconciliation of Accumulated Depreciation |  |                        |           |   |             |   |          |             |  |   |          |  
|Balance at January 1,                      |  | $                      | 101,689   |   |             | $ | 121,796  |             |  | $ | 148,690  |  
|Additions                                  |  |                        |           |   |             |   |          |             |  |   |          |  
|TCI properties                             |  |                        | 84,550    |   |             |   |         |             |  |   |         |  
|Depreciation                               |  |                        | 28,832    |   |             |   | 13,142   |             |  |   | 16,253   |  
|Deductions                                 |  |                        |           |   |             |   |          |             |  |   |          |  
|Sales of real estate                       |  |                        | (36,050   | ) |             |   | (33,249  | )           |  |   | (43,147  | )
|                                           |  |                        |           |   |             |   |          |             |  |   |          |  
|Balance at December 31,                    |  | $                      | 179,021   |   |             | $ | 101,689  |             |  | $ | 121,796  |  
|                                           |  |                        |           |   |             |   |          |             |  |   |          |  





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SCHEDULE IV



AMERICAN REALTY
INVESTORS, INC.



MORTGAGE LOANS ON REAL ESTATE

December 31, 2003



|                                                                                             |  |              |  |                   |  |                                                                     |  |            |        |                        |   |                                   |  |                                                                    |        |  |   |      
|-------------------------------------------------------------------------------------------- |  | ------------ |  | ----------------- |  | ------------------------------------------------------------------- |  | ---------- | ------ | ---------------------- | - | --------------------------------- |  | ------------------------------------------------------------------ | ------ |  | - | -----
|Description                                                                                  |  | InterestRate |  | FinalMaturityDate |  | Periodic Payment Terms                                              |  | PriorLiens |        | Face Amountof Mortgage |   | CarryingAmounts ofMortgage (1)(2) |  | Principal Amount ofLoans Subject toDelinquentPrincipal or Interest
|                                                                                             |  |              |  |                   |  |                                                                     |  |            |        | (dollars in thousands) |   |                                  
|FIRST MORTGAGE                                                                               |  |              |  |                   |  |                                                                     |  |            |        |                        |   |                                   |  |                                                                    |        |  |   |      
|400 St. Paul Secured by an office building in Dallas, TX. Includes LOC of $250,000.          |  | 6.5%         |  | 03/07             |  | Monthly interest only payments.                                     |  | $          |       |                        | $ | 4,299                             |  | $                                                                  | 4,299  |  | $ |     
|                                                                                             |  |              |  |                   |  |                                                                     | 
|La Quinta Village Center, LLC First lien on 134.3 gross acres inPalm Desert, CA              |  | 8.0%         |  | 02/06             |  | Interest accrual and payments based on completion dates not yet met |  |            |       |                        |   | 5,650                             |  |                                                                    | 5,650  |  |   |     
|                                                                                             |  |              |  |                   |  |                                                                     | 
|Mason Park First lien DOT on 13 acres inHarris County, TX                                    |  | 18.0%        |  | 05/03             |  | All principal & interest due at maturity                            |  |            |       |                        |   | 1,360                             |  |                                                                    | 1,360  |  |   | 1,360
|                                                                                             |  |              |  |                   |  |                                                                     | 
|WRAPAROUND MORTGAGE                                                                          |  |              |  |                   |  |                                                                     |  |            |        |                        |   |                                   |  |                                                                    |        |  |   |      
|Pinemont Secured by an office building in Houston, TX.                                       |  | 10.4%        |  | 07/08             |  | Monthly principal and interest payments.                            |  |            | 274    |                        |   | 467                               |  |                                                                    | 266    |  |   |     
|                                                                                             |  |              |  |                   |  |                                                                     | 
|Nakash Secured by a shopping center in Malden, MO.                                           |  |              |  |                   |  | Monthly interest only payments.                                     |  |            | 305    |                        |   | 902                               |  |                                                                    | 902    |  |   |     
|                                                                                             |  |              |  |                   |  |                                                                     | 
|One Hickory Secured by an office building in Farmers Branch, TX.                             |  | 5.49%        |  | 09/04             |  | Monthly interest only payments.                                     |  |            | 7,306  |                        |   | 11,974                            |  |                                                                    | 11,974 |  |   |     
|                                                                                             |  |              |  |                   |  |                                                                     | 
|JUNIOR MORTGAGE                                                                              |  |              |  |                   |  |                                                                     |  |            |        |                        |   |                                   |  |                                                                    |        |  |   |      
|Dallas Fund XVII Secured by an assignment of litigation proceeds. Nonperforming              |  | Varies       |  | 05/03             |  | One note bearing interest at the default rate of 18%.               |  |            |       |                        |   | 4,303                             |  |                                                                    | 4,303  |  |   | 4,303
|                                                                                             |  |              |  |                   |  |                                                                     | 
|Palmer Lane Golf, Inc. First lien on 367 acres of land inTravis County, TX Non-recourse note |  | 8.0%         |  | 09/06             |  | All interest & principal due at maturity                            |  |            |       |                        |   | 8,875                             |  |                                                                    | 8,875  |  |   |     
|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                             |  |                                                                    | 2,386  |  |   |     



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SCHEDULE IV

(Continued)



AMERICAN
REALTY INVESTORS, INC.



MORTGAGE LOANS ON REAL ESTATE

December 31, 2003



|                                                                                                                                                             |  |              |   |  |                   |  |                                                  |  |                        |       |                        |   |                                   |  |                                                                    |       |  |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ----------------- |  | ------------------------------------------------ |  | ---------------------- | ----- | ---------------------- | - | --------------------------------- |  | ------------------------------------------------------------------ | ----- |  | - | -----
|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%        |   |  | 02/04             |  | Principal and interest due at maturity.          |  | $                      |      |                        | $ | 300                               |  | $                                                                  | 300   |  | $ |     
|Edwin Schreiber Class A limited partnership interests in Encino Executive Plaza Limited                                                                      |  | 8.5%         |   |  | 06/06             |  | Interest only paid quarterly                     |  |                        |      |                        |   | 200                               |  |                                                                    | 200   |  |   |     
|SSG Management Class A limited partnership interests in Encino Executive Plaza Limited                                                                       |  | 8.5%         |   |  | 06/06             |  | Interest only paid quarterly                     |  |                        |      |                        |   | 296                               |  |                                                                    | 296   |  |   |     
|                                                                                                                                                             |  |              |   |  |                   |  |                                                 
|Sarah Gross Class A limited partnership interests in Encino Executive Plaza Limited                                                                          |  | 8.5%         |   |  | 06/06             |  | Interest only paid quarterly                     |  |                        |      |                        |   | 951                               |  |                                                                    | 951   |  |   |     
|                                                                                                                                                             |  |              |   |  |                   |  |                                                 
|Barry Gross Class A limited partnership interests in Encino Executive Plaza Limited                                                                          |  | 8.5%         |   |  | 06/06             |  | Interest only paid quarterly                     |  |                        |      |                        |   | 120                               |  |                                                                    | 120   |  |   |     
|                                                                                                                                                             |  |              |   |  |                   |  |                                                 
|Realty Advisors Secured by a subordinate pledge of 850,000 shares of ARI Common Stock owned by BCM. The shares are also pledged to a lender on
ARIs behalf. |  | Prime+2.0%   |   |  | 11/04             |  | All principal and interest are due at maturity.  |  |                        |      |                        |   | 5,633                             |  |                                                                    | 5,633 |  |   |     
|                                                                                                                                                             |  |              |   |  |                   |  |                                                 
|Desert Wells 237, LLC Second lien DOT on 238 acres on Palm Desert, CA                                                                                        |  | 12.0%        |   |  | 03/03             |  | All principal and interest due at maturity.      |  |                        |      |                        |   | 3,568                             |  |                                                                    | 4,139 |  |   | 4,139
|                                                                                                                                                             |  |              |   |  |                   |  |                                                 
|Davilla Family, LLC Second lien DOT on 129.7 acres in Riverside County, CA.                                                                                  |  | 9.0%         |   |  | 10/04             |  | Payments made quarterly, beginning January 2003. |  |                        | 2,423 |                        |   | 2,775                             |  |                                                                    | 2,775 |  |   |     
|UNSECURED                                                                                                                                                    |  |              |   |  |                   |  |                                                  |  |                        |       |                        |   |                                  
|Mehrdad Moayedi                                                                                                                                              |  | 12.0         | % |  | 01/04             |  | Principal and interest due at maturity.          |  |                        |      |                        |   | 34                                |  |                                                                    | 22    |  |   |     
|North Augusta Plans                                                                                                                                          |  | 5.0          | % |  | 02/04             |  | Principal and interest due at maturity.          |  |                        |      |                        |   | 42                                |  |                                                                    | 42    |  |   |     



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SCHEDULE IV

(Continued)



AMERICAN
REALTY INVESTORS, INC.



MORTGAGE LOANS ON REAL ESTATE

December 31, 2003



|                               |  |              |   |  |                   |  |                                                                                                                          |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       
|------------------------------ |  | ------------ | - |  | ----------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------ | ---------------------- | - | --------------------------------- |  | - | ------------------------------------------------------------------ | - |  | - | ------
|Description                    |  | InterestRate |   |  | FinalMaturityDate |  | Periodic Payment Terms                                                                                                   |  | PriorLiens             |        | Face Amountof Mortgage |   | CarryingAmounts ofMortgage (1)(2) |  |   | Principal Amount ofLoans Subject toDelinquentPrincipal or Interest
|                               |  |              |   |  |                   |  |                                                                                                                          |  | (dollars in thousands)
|One Realco                     |  | 12.0         | % |  | 02/04             |  | All principal and interest are due at maturity.                                                                          |  | $                      |       |                        | $ | 18,000                            |  | $ | 9,785                                                              |   |  | $ |      
|Treetops/Colony Meadows        |  | 18.0         | % |  | 04/03             |  | All principal and interest are due at maturity.                                                                          |  |                        |       |                        |   | 1,017                             |  |   | 1,017                                                              |   |  |   | 1,017 
|City of Farmers Branch         |  | 6.0          | % |  | 2019              |  | Reimbursement through the implementation of the funding plan under the Farmers Branch Tax increment Financing District 1 |  |                        |       |                        |   | 901                               |  |   | 901                                                                |   |  |   |      
|Harvest Hill I, LLC            |  | 12.0         | % |  | 09/13             |  | Interest compounded annually. All principal and interest are due at maturity.                                            |  |                        |       |                        |   | 1,426                             |  |   | 1,426                                                              |   |  |   |      
|Harvest Hill, LLC              |  | 12.0         | % |  | 09/13             |  | Interest compounded annually. All principal and interest are due at maturity.                                            |  |                        |       |                        |   | 1,429                             |  |   | 1,429                                                              |   |  |   |      
|Harvest Hill II, LLC           |  | 12.0         | % |  | 09/13             |  | Interest compounded annually. All principal and interest are due at maturity.                                            |  |                        |       |                        |   | 2,127                             |  |   | 2,127                                                              |   |  |   |      
|                               |  |              |   |  |                   |  |                                                                                                                          |  | $                      | 22,308 |                        | $ | 79,035                            |  |   | 71,178                                                             |   |  | $ | 10,819
|                               |  |              |   |  |                   |  |                                                                                                                          |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       
|Interest receivable            |  |              |   |  |                   |  |                                                                                                                          |  |                        |        |                        |   |                                   |  |   | 4,050                                                              |   |  |   |       
|Allowance for estimated losses |  |              |   |  |                   |  |                                                                                                                          |  |                        |        |                        |   |                                   |  |   | (4,633                                                             | ) |  |   |       
|                               |  |              |   |  |                   |  |                                                                                                                          |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       
|                               |  |              |   |  |                   |  |                                                                                                                          |  |                        |        |                        |   |                                   |  | $ | 70,595                                                             |   |  |   |       
|                               |  |              |   |  |                   |  |                                                                                                                          |  |                        |        |                        |   |                                   |  |   |                                                                    |   |  |   |       

---

|(1) |  | The aggregate cost for federal income tax purposes is $86.2 million.
|--- |  | --------------------------------------------------------------------

|(2) |  | Interest rates and maturity dates shown are as stipulated in the loan documents at December 31, 2003. Where applicable, these rates have been adjusted at issuance to yield between
8% and 12%.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|





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SCHEDULE IV

(Continued)



AMERICAN
REALTY INVESTORS, INC.



MORTGAGE LOANS ON REAL ESTATE



|                                |  |                        |         |   |      |   |         |      |  |   |        |  
|------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                |  | 2003                   |         |   | 2002 |   |         | 2001 | 
|                                |  | (dollars in thousands) |        
|Balance at January 1,           |  | $                      | 83,092  |   |      | $ | 31,413  |      |  | $ | 15,027 |  
|Additions                       |  |                        |         |   |      |   |         |      |  |   |        |  
|New mortgage loans              |  |                        | 67,464  |   |      |   | 63,273  |      |  |   | 6,349  |  
|TCI loans                       |  |                        | 15,873  |   |      |   |        |      |  |   |       |  
|Funding of existing loans       |  |                        |        |   |      |   | 2,686   |      |  |   | 15,532 |  
|Deductions                      |  |                        |         |   |      |   |         |      |  |   |        |  
|Collections of principal        |  |                        | (56,592 | ) |      |   | (14,280 | )    |  |   | (5,495 | )
|Conversion to property interest |  |                        | (1,612  | ) |      |   |        |      |  |   |       |  
|Sale of Notes Receivable        |  |                        | (37,047 | ) |      |   |        |      |  |   |       |  
|                                |  |                        |         |   |      |   |         |      |  |   |        |  
|Balance at December 31,         |  | $                      | 71,178  |   |      | $ | 83,092  |      |  | $ | 31,413 |  
|                                |  |                        |         |   |      |   |         |      |  |   |        |  



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



Not applicable.



ITEM 9A.CONTROLS AND PROCEDURES



As required by rule 13a-15(b), ARIs management, including the Acting Principal Executive Officer and Principal Accounting Officer, conducted an
evaluation as of the end of the period covered by this report, of the effectiveness of ARIs disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the chief executive officer and the chief
financial officer concluded that ARIs disclosure controls and procedures were effective as of the end of the period covered by this report. As required by rule 13a-15(d), ARIs management, including the Acting Principal Executive
Officer and Principal Accounting Officer, also conducted an evaluation of ARIs internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, ARIs internal control over financial reporting. Based on the evaluation, there has been no such change during the fourth fiscal quarter.



During 2003, ARI discovered a computational error relating to a property sale that occurred in the 4thquarter of 2001. The correction of the error resulted in a restatement for 2001 and 2002 that increased net income and total
assets for 2001 by $2.3 million (over the amounts originally reported) and increased total assets by $2.3 million for 2002.



ARJ intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures over time, and to correct any
deficiencies that it may discover in the future. The goal is to ensure that management has timely access to all material financial and non-financial information concerning ARIs business.



It should be noted that any system of controls, however well designed and
operated, can only provide reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.



PART III



ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR 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.



It is the Boards objective that a majority of the Board consist 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



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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.



All members of the Audit Committee and the Nominating and Corporate Governance 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.



The current Directors of ARI are listed below, together with their ages, terms of service, all positions and offices with ARI or 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, Prime or 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 70, 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 53,
Director (Affiliate) (since July 2003).



BrokerLand Sales (since 1992) for BCM and Director (December 2001 to July 2003) of IORI.



SHARON HUNT:Age 61, Director (Independent) (since February 2004).



Licensed Realtor in the Dallas, Texas area with Cook Realtors; President and Owner of Sharons
Pretzels, Inc., 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.



TED R. MUNSELLE:Age 48, Director (Independent) (since February 2004).



Vice President and Chief Financial Officer
(since October 1998) of Landmark Nurseries, Inc.; employed in the accounting industry from 1997 until 1998; Certified Public Accountant in the State of Texas; and Director (since February 2004) of TCI.



MARTIN L. WHITE: Age 64, Director (Independent) (since July 2003).



Chief Executive Officer (since 1995) of
Builders Emporium, Inc.; Chairman and Chief Executive Officer (since 1993) of North American Trading Company Ltd.; President and Chief Operating Officer (since 1992) of Community Based Developers, Inc.; and Director (January 1995 to March 2004) of
IORI.



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Executive Officers



The following persons currently serve as executive officers of ARI: Mark W. Branigan, Executive Vice PresidentResidential; Louis J. Corna, Executive
Vice PresidentTax, General Counsel/Tax Counsel and Secretary; and Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer. Their positions with ARI are not subject to a vote of
stockholders. Their ages, terms of service, all positions and offices with ARI, BCM, or Prime, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below.



MARK W. BRANIGAN: Age 49, Executive Vice
PresidentResidential (since June 2001), Director (September 2000 to June 2001), and Executive Vice President and Chief Financial Officer (August 2000 to June 2001).



Executive Vice PresidentResidential (since July 2003) of Prime and Prime Income Asset Management, Inc.
(PIAMI); Executive Vice PresidentResidential (since June 2001), Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice PresidentDirector of Construction (August 1999 to August 2000) and
Executive Vice PresidentResidential Asset Management (January 1992 to October 1997) of BCM, TCI and IORI; Vice PresidentDirector of Construction (August 1999 to August 2000) and Executive Vice PresidentResidential Asset Management
(January 1992 to October 1997) of ART; and real estate consultant (November 1997 to July 1999).



LOUIS J. CORNA:Age 56, Executive Vice PresidentTax, General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice
PresidentTax (October 2001 to February 2004), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice PresidentTax (December 2000 to June 2001).



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



RONALD E. KIMBROUGH: Age 51, Acting Principal Executive Officer (since
February 2002) and Executive Vice President and Chief Financial Officer (since January 2002).



Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer (since July 2003) of Prime and PIAMI; Acting
Principal Executive Officer, Executive Vice President and Chief Financial Officer (since January 2002) of BCM, TCI and IORI; Controller (September 2000 to January 2002) of BCM; Director, Vice President and Treasurer (since February 2002) of First
Equity Properties, Inc.; Vice President and Treasurer (January 1998 to September 2000) of Syntek West, Inc. and One Realco Corporation; and Consultant (1997).



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



Board Meetings and Committees



The Board of Directors held seven meetings during 2003. For such year, no
incumbent Director attended fewer than 75% 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.



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The Board of Directors has standing Audit, Compensation and Governance and Nominating Committees. The
Audit Committee was formed on February 19, 2004, and its function is to review ARIs operating and accounting procedures. A Charter of the Audit Committee has also been adopted by the Board. 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. White 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. The predecessor Audit Committee met nine times during 2003.



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. White (Chairman) and Munselle and Ms. Hunt.



The Board has also formed a Compensation Committee of the Board of Directors, adopted a Charter for the Compensation Committee on March 22, 2004, and selected Messrs. Munselle (Chairman) and White and Ms. Hunt as the
members of such Committee.



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 andNominating Committee |  | Compensation Committee
|Ted P. Stokley  |  |                 |  |                                    |  |                       
|Henry A. Butler |  |                 |  |                                    |  |                       
|Sharon Hunt     |  | X               |  | X                                  |  | X                     
|Ted R. Munselle |  | X               |  | X                                  |  | X                     
|Martin L. White |  | X               |  | X                                  |  | X                     



During February 2004,
the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during the year by the New York Stock Exchange, Inc. Pursuant to the Guidelines, the Board undertook its
annual review of director independence, 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.



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 shareholder who requests them.



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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 during 2003. All of these filing requirements were satisfied by ARIs Directors and executive officers and 10 percent
holders. 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



Prior to July 1, 2003, BCM served as advisor to ARI. The current advisor is Prime. See NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIESOrganization and Business. The Advisory Agreement described in this section contains the same terms as the prior Advisory Agreement with BCM.



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.



Prime, an affiliate, serves as advisor to ARI. Prime is indirectly owned by
Gene E. Phillips (21%) and by a trust for the children of Gene E. Phillips (79%). 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 making of investment decisions for itself and ARI. As of March 19, 2004, PIAMI owned 1,437,208 shares of ARIs Common Stock,
approximately 12.6% of the shares then outstanding.



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% 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% 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% of the principal amount of any loan made to ARI arranged by Prime;
| | --- |  | ------------------------------------------------------------------------------------------------------------------



| | (4) |  | an incentive fee equal to 10% of net income for the year in excess of a 10% return on stockholders equity, and 10% 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%, 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.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The 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.



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% 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% 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% 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% 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% 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% 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% 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.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (7) |  | Under the TCI Advisory Agreement, Prime receives reimbursement of certain expenses incurred by it in the performance of advisory services.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| | (8) |  | 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 $1.3 million of the 2003 advisory fee under this provision. BCM, as advisor
at the time, was required to refund $1.4 million of the 2002 advisory fee under this provision.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 IORI and 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                                                                                 
|                     | 
|Mark W. Branigan:    |  | Executive Vice PresidentResidential                                                    
|                     | 
|Louis J. Corna:      |  | Executive Vice PresidentTax, General Counsel/Tax Counsel and Secretary                 
|                     | 
|Ronald E. Kimbrough: |  | Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer
|                     | 
|Dan S. Allred:       |  | Senior Vice PresidentLand Development                                                  



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 21% of Prime and serves as a representative of the trust established for the benefit of his children which indirectly owns 79% 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 provided 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 5% or less of the monthly gross rents collected on the residential properties under its
management and 3% 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 BCM. The limited partner of Triad is Highland Realty Services, Inc. (Highland), a related party. Until December 2002, Triad subcontracted the property-level management and leasing of 47 of ARIs
commercial properties (shopping centers, office buildings and a merchandise mart) and eight of its hotels to Regis Realty, Inc. (Regis), a related party, which was a company owned by GS Realty Services, Inc. Regis was entitled to receive
property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Since January 1, 2003, Regis Realty I, LLC (Regis I), has provided these services.
Regis I is owned by Highland. Regis Hotel Corporation, a related party, managed 12 of ARIs hotels, until December 2002. Since January 1, 2003, Regis Hotel I, LLC, has managed 12 of ARIs hotels. The sole member of Regis I and Regis Hotel
I, LLC is Highland. Carmel is a company owned by First Equity Properties, Inc., which is a company affiliated with BCM.



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 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR 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. Effective January 1, 2004, 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 2003, $146,000 was paid to non-employee Directors in total Directors fees for all services including the annual fee for service during the
period January 1, 2003 through December 31, 2003, and 2003 special service fees as follows: Earl D. Cecil, $49,000; Joseph Mizrachi, $25,000; Ted P. Stokely, $48,000; and Martin L. White $24,000.



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, and 2003, each Independent Director was granted an option to purchase 1,000 shares at an exercise price of $18.53, $13.625, $9.87 and $9.13 per share, respectively. Each Independent Director will be
awarded an option to purchase an additional 1,000 shares on January 1 of each year. At December 31, 2003, 1,000 options were exercisable at $13.625 per share, 2,000 options were exercisable at $9.87 per share and 3,000 options were exercisable at
$8.09 per share.



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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. At December 31, 2003, there were 92,250 options outstanding under the Option Plan. No options were granted under the Option Plan in 2003.



Performance Graph



The following graph compares the cumulative total stockholder return on ARIs shares (ARTs shares prior to August
2000) of Common Stock with the Dow Jones Equity Market Index (DJ Equity Index) and the Dow Jones Real Estate Investment Index (DJ Real Estate Index). The comparison assumes that $100 was invested on December 31, 1998 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



|                        |  |        |  |        |  |        |  |        |  |        |  |       
|----------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                        |  | 1998   |  | 1999   |  | 2000   |  | 2001   |  | 2002   |  | 2003  
|ARI                     |  | 100.00 |  | 104.17 |  | 83.52  |  | 60.34  |  | 49.57  |  | 55.94 
|Real Estate Index       |  | 100.00 |  | 94.69  |  | 120.74 |  | 134.99 |  | 139.90 |  | 191.51
|                        |  |        |  |        |  |        |  |        |  |        |  |       
|Total U.S. Market Index |  | 100.00 |  | 122.54 |  | 111.35 |  | 98.08  |  | 76.43  |  | 99.92 
|                        |  |        |  |        |  |        |  |        |  |        |  |       



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



Securities Authorized for Issuance Under Equity Compensation Plans [update]



The following table provides information as of December 31, 2003 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 securityholders |  | 98,250                                                                                    |  | $                                                                        | 15.99 |                                                                                                                                        | 241,750



See NOTE 13.
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% of the shares of ARIs Common Stock as of the close of business on March 19, 2004.



|                                                    |  |                                          |           |  |                               |  
|--------------------------------------------------- |  | ---------------------------------------- | --------- |  | ----------------------------- | -
|Name and Address of Beneficial Owner                |  | Amount and Natureof Beneficial Ownership |           |  | ApproximatePercent ofClass(1) |  
|Basic Capital Management, Inc.                      |  | 6,703,045                                | (2)       |  | 58.8                          | %
|1800 Valley View Lane Suite 300 Dallas, Texas 75234 |  |                                          |           |  |                               |  
|                                                    |  |                                         
|Prime Income Asset Management, Inc.                 |  | 1,437,208                                | (3)       |  | 12.6                          | %
|1800 Valley View Lane Suite 300 Dallas, Texas 75234 |  |                                          |           |  |                               |  
|                                                    |  |                                         
|Transcontinental Realty Investors, Inc.             |  | 746,972                                  | (4)       |  | 6.6                           | %
|1800 Valley View Lane Suite 300 Dallas, Texas 75234 |  |                                          |           |  |                               |  
|                                                    |  |                                         
|Realty Advisors, Inc.                               |  | 8,140,253                                | (2)(3)    |  | 71.5                          | %
|1800 Valley View Lane Suite 300 Dallas, Texas 75234 |  |                                          |           |  |                               |  
|                                                    |  |                                         
|Ryan T. Phillips                                    |  | 8,167,855                                | (2)(3)(5) |  | 71.7                          | %
|1800 Valley View Lane Suite 300 Dallas, Texas 75234 |  |                                          |           |  |                               |  

---

|(1) |  | Percentages are based upon 11,390,272 shares outstanding as of March 19, 2004.
|--- |  | ------------------------------------------------------------------------------

|(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, 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, Ted R. Munselle, Ted P. Stokely and Martin L. White, 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 19, 2004.



|                                                            |  |                                    |              |  |                     |  
|----------------------------------------------------------- |  | ---------------------------------- | ------------ |  | ------------------- | -
|Name of Beneficial Owner                                    |  | Number of SharesBeneficially Owned |              |  | Percent ofClass (1) |  
|Mark W. Branigan                                            |  | 8,887,225                          | (4)(5)(6)    |  | 78.0                | %
|Henry A. Butler                                             |  | 749,972                            | (2)(3)       |  | 6.6                 | %
|Louis J. Corna                                              |  | 8,887,225                          | (4)(5)(6)    |  | 78.0                | %
|Sharon Hunt                                                 |  | 746,972                            | (3)          |  | 6.6                 | %
|Ronald E. Kimbrough                                         |  | 8,887,225                          | (4)(5)(6)    |  | 78.0                | %
|Ted R. Munselle                                             |  | 746,972                            | (3)          |  | 6.6                 | %
|Ted P. Stokely                                              |  | 748,972                            | (2)(3)       |  | 6.6                 | %
|Martin L. White                                             |  | 747,972                            | (2)(3)       |  | 6.6                 | %
|All Directors and Executive Officers as a group (8 persons) |  | 8,893,225                          | (4)(5)(6)(7) |  | 78.1                | %

---

|(1) |  | Percentage is based upon 11,390,272 shares outstanding as of March 19, 2004.
|--- |  | ----------------------------------------------------------------------------

|(2) |  | Each of Messrs. Butler, Stokely, White and Earl D. Cecil, a director until February 29, 2004, have options to purchase shares of Common Stock of ARI which are exercisable within 60
days of March 19, 2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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, 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 6,000 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 (a) the material facts as to the relationship
among or financial interest of the relevant individuals or persons and as to the



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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 that 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. Branigan, Corna
and Kimbrough serve as executive officers. Prime is a company indirectly owned by Gene E. Phillips and a trust established for the benefit of the children of Gene E. Phillips.



The executive officers of ARI, also serve as executive officers of IORI and TCI, and owe fiduciary duties to each of those
entities 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. PAMI is owned by Realty Advisors (79%) and Syntek West, (21%). Syntek West is owned by
Gene Phillips. 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 BCM for property management services. Currently, Triad, an affiliate, and Carmel provide
such property management services. The general partner of Triad is BCM. The limited partner of Triad is Highland, a related party. Triad subcontracts the property-level management of 47 of ARIs commercial properties (office buildings, shopping
centers and a merchandise mart) 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 12 hotels.
The sole member of Regis I and Regis Hotel I, LLC is Highland. Carmel is a company owned by First Equity Properties, Inc., which is a company affiliated with BCM. See ITEM 2. PROPERTIESInvestments in Real Estate Companies and Real Estate
Partnerships.



At December 31, 2003, ARI owned
approximately 80.0% of TCIs outstanding common stock and approximately 19.2% of IORIs outstanding common stock, through its interest in TCI.



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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 1997, ARI entered into leases with BCM and an affiliate of BCM
for space at the One Hickory Centre Office Building, construction of which was completed in December 1998. The BCM leases, effective upon ARI obtaining permanent financing of the building, were for 75,852 sq. ft. (approximately 75% of the building),
had terms of ten and fifteen years and provided for annual base rent of $19.25 per sq. ft. for the first year. In January 2001, both leases were terminated, and ARI entered into a new lease with BCM, effective October 1, 2000. The new lease is for
59,463 sq. ft. (approximately 62% of the building), has a term of three years, and provides for annual base rent of $1.3 million or $21.50 per sq.ft. Effective March 1, 2002, the lease was amended to 57,879 sq. ft. (approximately 59% of the
building), with an annual base rent of $1.2 million, or $21.50 per sq. ft.



In 2003, ARI paid the advisors, their affiliates and a related party $9.3 million in advisory fees, $1.3 million in loan arrangements, $371,000 in property acquisition fees, $6.2 million in real estate brokerage
commissions and $4.1 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of BCM and Prime. In addition, as provided in the Advisory Agreement,
the advisors received cost reimbursements of $5.2 million. Also in 2003, ARI paid an additional $3.1 million to BCM in a one-time reimbursement of legal fees.



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% 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 outstanding Class A units as follows: December 31, 2005, 1,625,000 units; and December 31, 2006, 8,563,750 units.



Advances and Loans



From time-to-time, ARI and its affiliates have made advances to each other, which have not had specific repayment terms, do
not bear interest, are unsecured and have been reflected in ARIs financial statements as other assets or other liabilities. At December 31, 2003, after accounting for affiliate purchases and sales, amounts still owed by ARI were $627,000 and
$1.2 million to IORI and Regis and amounts owed to ARI were $2.0 million, $4.4 million and $1.7 million by BCM, Prime and Regis, respectively. ARI also owes $1.4 million to affiliates related to cash received upon the sale of apartments to Metra.



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 subordinate pledge of 850,000 shares of ARI Common Stock



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owned by BCM. The shares are also pledged to a lender on ARIs behalf. The interest rate was changed to 2% over the prime rate, currently 6.25% per
annum, and the accrued but unpaid interest of $984,000 was added to the principal. The new principal balance is $5.6 million. All principal and accrued interest are due at maturity.



In March 2000, a loan with a remaining principal balance of $2.6 million to Lordstown, L.P., matured. The loan, to provide
funds to purchase for resale various parcels of land, is secured by a second lien on land in Ohio and Florida, by 100% of the general and limited partner interest in Partners Capital, Ltd., the limited partner of Lordstown, L.P., and a profits
interest in subsequent land sales. A corporation controlled by Richard D. Morgan is the general partner of Lordstown, L.P. Mr. Morgan served as a director of ARI until October 2001. In December 2003, the note was exchanged with Regis I, a related
party, for three notes receivable: $1.4 million from Unified Housing of Harvest Hill, LLC (Harvest Hill); $1.4 million from Unified Housing of Harvest Hill I, LLC (Harvest Hill I); and $2.1 million from Unified Housing of
Harvest Hill III, LLC (Harvest Hill III), related parties. All three notes bear interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the extent surplus cash is available, beginning in November 2003 and
are guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, a related party, which is the sole member of Harvest Hill, Harvest Hill I, and Harvest
Hill III.



In December 2000, an unsecured loan with a remaining
principal balance of $1.8 million to Warwick of Summit, Inc. (Warwick) matured. The loan was made to provide funds to purchase, renovate and expand a shopping center property in Warwick, Rhode Island. All principal and interest were due
at maturity. In February 2002, $275,000 of interest was received. In March 2003, $27,000 of principal and $223,000 of interest was received. In April 2003, $149,000 of principal and $26,000 of interest was received. In July 2003, $10,000 of interest
was received. Richard D. Morgan, a Warwick shareholder, served as a director of ARI until October 2001. In December 2003, the note was sold to Prime for $1.8 million, to reduce ARIs affiliate debt.



In December 2000, a loan with a principal balance of $1.6 million to Bordeaux
Investments Two, L.L.C. (Bordeaux), matured. The loan, to provide funds to purchase and renovate a shopping center property in Oklahoma City, Oklahoma, was secured by (1) a 100% interest in Bordeaux, which owns a shopping center in
Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux members. Richard D. Morgan, a Bordeaux member
until July 2003, served as a director of ARI until October 2001. In July 2003, the members of Bordeaux assigned 100% of the membership interest in Bordeaux to ARI in payment of the note. ARI recorded real estate assets of $8.8 million and assumed
$7.2 million of mortgage debt and other liabilities on the shopping center and the undeveloped land. No gain or loss was recorded on this transaction. In December 2003, the shopping center was exchanged with Regis I, a related party, for three notes
receivable: $1.4 million from Harvest Hill; $1.4 million from Harvest Hill I; and $2.1 million from Harvest Hill III, related parties. All three notes bear interest at 12.0%, mature in October 2013, and require monthly payments of interest, to the
extent surplus cash is available, beginning in November 2003 and are guaranteed by Regis I. No payments have been received to date. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, a related party,
which is the sole member of Harvest Hill, Harvest Hill I, and Harvest Hill III.



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 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



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BCM (see NOTE 1. BASIS OF PRESENTATION). 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 2% over the prime rate, currently 6.0%. All principal and interest are due at maturity. Ronald E. Kimbrough, Acting Principal Executive
Officer, Executive Vice President and Chief Financial Officer of ARI, is a 10% shareholder of One Realco. Mr. Kimbrough does not participate in day-to-day operations or management of One Realco.



In June 2002, ARI converted $4.5 million of its receivable from BCM to a
recourse note receivable. This transaction was to provide ARI with additional security over that provided by an unsecured receivable. The note bore interest at 10.0% per annum, matured in March 2004 and required quarterly payments of principal and
accrued interest, beginning in December 2002. In December 2003, ARI received 92,052 shares of TCI common stock in payment of the note and accrued interest.



On June 2, 2003, ARI exchanged all of its 674,971 IORI shares with BCM, receiving 650,000 TCI shares from BCM. In addition, BCM has executed a promissory
note in favor of ARI in the amount of $526,000 (see NOTE 3. NOTES RECEIVABLE). 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, 2003, ARI owned 80.0% of the outstanding shares of TCI. ARI no longer directly owns any IORI shares. At December
31, 2003, ARI owned 19.2% of IORI through TCIs ownership of IORI shares. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003.



In July 2003, ARI sold its interest in MRI to 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% of Gruppa, thereby retaining a 20% interest in MRI. 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 MRI, management has determined that this should be accounted for as a financing transaction. In September 2003,
ARI sold the note to Syntek West for $2.3 million, plus accrued but unpaid interest.



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 October 2003, ARI advanced $1.6 million to the Class A Limited Partners of Encino Executive Plaza, Ltd., of which ARI is the general partner. The loans
bear interest at 8.5% per annum and mature in June 2006. Interest due to ARI will be deducted from the quarterly return owed by ARI to the Class A Limited Partners, eliminating the quarterly payments. The outstanding principal is due at maturity.



Property Transactions



In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation (Rosedale), a wholly-owned subsidiary of ARI, for $5.1 million. The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of net operating income. Rosedale
owned the Rosedale Towers Office Building. ARI guaranteed that the asset would produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI would
pay IORI any shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, IORI could require ARI to repurchase the shares of Rosedale for the purchase price. The business purpose of the transaction was for IORI to make
an equity investment in Rosedale, anticipating a profitable return, and for ARI to receive cash for its equity investment. Management classified this related party transaction



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as a note payable to IORI. After IORI sold the Rosedale Towers Office Building to an unrelated buyer in December 2002, ARI owed $2.1 million to IORI for
remaining principal and 12% return. In April 2003, ARI repaid $2.0 million in principal and accrued interest. In August 2003, ARI repaid the remaining principal and accrued interest.



In January 2002, TCI purchased 100% of the common shares of ART Two Hickory Corporation (Two Hickory), a
wholly-owned subsidiary of ARI, for $4.4 million. The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of net operating income. Two Hickory owns the Two Hickory Centre Office Building.
ARI has guaranteed that the asset will produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12% return, ARI will pay TCI any shortfall. In addition, if the
asset fails to produce the 12% return for a calendar year, TCI may require ARI to repurchase the shares of Two Hickory for the purchase price. The business purpose of the transaction was for TCI to make an equity investment in Two Hickory,
anticipating a profitable return, and for ARI to receive cash for its equity investment. Management has classified this related party transaction as a note payable to TCI.



In March 2002, ARI received $520,000 and exchanged with TCI a 24.5 acre tract of Rasor land, a 16.89 acre tract of Lakeshore
Villas Apartments land and the 45,623 sq.ft. Oaktree Village Shopping Center for the 80,278 sq.ft. Plaza on Bachman Creek Shopping Center. The exchange value prices for the shopping centers were determined using a market rate multiple of net
operating income, and the values of the land parcels were determined using appraised rates. The business purpose of the transaction was for TCI to construct apartments on the Rasor and Lakeshore Villas land. To give ample value for the property TCI
exchanged, the Oaktree Village Shopping Center was added to the transaction. ARI received $4.4 million on the subsequent financing of the shopping center.



In April 2002, TCI purchased all of the general and limited partnership interests in Garden Foxwood, L.P. (Foxwood) from ARI for $1.1 million.
The purchase price was determined based upon the market value of the property, using a market rate multiplie of net operating income. Foxwood owns the Foxwood Apartments. The business purpose of this transaction was for TCI to make an equity
investment in Foxwood, anticipating a favorable return, and to reduce ARIs affiliate debt. ARI has guaranteed that the asset will produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If
the asset fails to produce the 12% return, ARI will pay TCI any shortfall. In addition, if the asset fails to produce the 12% for a calendar year, TCI may require ARI to repurchase the interests in Foxwood for the purchase price. The business
purpose of the transaction was for TCI to make an equity investment in Foxwood, anticipating a profitable return, and to reduce ARIs affiliate debt. Failure to notify and receive approval from the lender for this transaction may constitute an
event of default under the terms of the debt assumed by TCI. Management classified this related party transaction as a note payable.



In April 2002, TCI purchased all of the general and limited partnership interest in Garden Confederate Point, L.P. (Confederate Point) from
ARI for $1.9 million. The purchase price was determined based on the market value of the property exchanged using a market rate multiple of net operating income. Confederate Point owned the Confederate Point Apartments. ARI guaranteed that the asset
would produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return for a calendar year, TCI could require ARI to repurchase the interests in Confederate
Point for the purchase price. The business purpose of this transaction was for TCI to make an equity investment in Confederate Point anticipating a profitable return and to reduce ARIs payable to BCM. Management classified this related party
transaction as a note payable to TCI. Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt assumed by TCI. In November 2003, the Confederate Point apartments were
sold to an unrelated buyer. ARI repaid $2.0 million in principal and accrued interest.



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In April 2002, TCI purchased 100% of the common shares of ARI One Hickory Corporation (One
Hickory), a wholly-owned subsidiary of ARI, for $4.5 million. The purchase price was determined based on the market values of the property exchanged, using a market rate multiple of net operating income. One Hickory owned the One Hickory
Centre Office Building (One Hickory Centre). ARI guaranteed that the asset would produce at least a 12% annual return on the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12%
return, ARI would pay TCI any shortfall. In addition, if the asset failed to produce the 12% return for a calendar year, TCI could require ARI to repurchase the interests in One Hickory for the purchase price. The business purpose for the
transaction was for TCI to make an equity investment in One Hickory anticipating a profitable return and to reduce ARIs payable to BCM. Management classified this related party transaction as a note payable to TCI. Failure to notify and
receive approval from the lender for this transaction may constitute an event of default under the terms of the debt assumed by TCI. In October 2003, TCI sold One Hickory Centre to IORI for $12.2 million, providing purchase money wrap-around
financing of $12.0 million. Also in October 2003, IORI sold One Hickory Centre to ARI for $12.2 million, providing purchase money wrap-around financing of $12.0 million. These additional transactions discharged the 2002 financing from TCI.



In April 2002, TCI purchased all of the general and limited
partnership interests in Garden Woodsong, L.P. (Woodsong) from ARI for $2.5 million. The purchase price was determined based upon the market value of the property, using a market rate multiplie of net operating income. Woodsong owned the
Woodsong Apartments. The business purpose of this transaction was for TCI to make an equity investment in Woodsong, anticipating a profitable return, and to reduce ARIs affiliate debt. ARI guaranteed that the asset would produce at least a 12%
annual return on the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI would pay TCI any shortfall. In addition, if the asset failed to produce the 12% for a calendar year, TCI
could require ARI to repurchase the interests in Woodsong for the purchase price. The business purpose of this transaction was for TCI to make an equity investment in Woodsong, anticipating a profitable return, and to reduce ARIs affiliate
debt. Management classified this related party transaction as a note payable. TCI sold the Woodsong Apartments in July 2002.



In June 2002, TCI purchased Centura Tower, Ltd. partnership, which owns the Centura Tower Office Building, from ARI for $50.0 million. See NOTE 2.
REAL ESTATE. The purchase price for the Centura Tower was determined based on appraised value and replacement cost. The business purpose of the transaction was for TCI to acquire a Class A office building with significant upside
potential anticipating a profitable return and for ARI to satisfy debt.



In June 2002, TCI purchased five parcels of unimproved land from ARI for $30.0 million: the Hollywood Casino, Marine Creek, Mason Park, Nashville and Monterrey land parcels. See NOTE 2. REAL ESTATE. The purchase price of the
Hollywood Casino land was determined based on an appraised value of $9.10 per square foot. The business purpose of the transaction was for TCI to consolidate its holdings within the Mercer Crossing development. The purchase price for the Marine
Creek, Mason Park, Nashville and Monterrey land parcels was determined based on appraised rates. The business purpose of the transaction was for TCI to develop apartments on these four tracts of land and for ARI to satisfy debt. Failure to notify
and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt assumed by TCI.



In June 2002, ARI purchased all the general and limited partnership interests in Chalet North, L.P. (Chalet North) from BCM for $3.0 million.
Chalet North owns the Pinecrest Apartments. 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 $1.4 million. ARIs receivable from BCM
was reduced by $1.6 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 June 2003, ARI sold the Pinecrest Apartments to an unrelated party. ARI received $1.1
million cash and recognized a $304,000 loss on the sale.



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In June 2002, ARI purchased the Tiberon Trails Apartments (Tiberon) 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 (see NOTE 25. SUBSEQUENT EVENTS.) In December 2003, ARI recognized a writedown of
$2.0 million to reduce the value of Tiberon to its net realizable value.



In June 2002, ARI purchased the Alta Mesa Shopping Center (Alta Mesa) from BCM for $3.8 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 $1.8 million. ARIs receivable from BCM was reduced by $2.0 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 October 2002, ARI sold Alta Mesa to an unrelated buyer (See NOTE 2. REAL ESTATE).



On June 30, 2002, ARI obtained 71.4% interest in RAK from BCM for $6.0 million. The business purpose of the transaction was to reduce the affiliate
payable owed by BCM to ARI. ARIs receivable from BCM was reduced by $6.0 million, and no cash was paid by ARI. At the date of acquisition, RAKs assets consisted of $2.3 million in cash, $3.0 million in deposits and marketable securities,
and $225,000 in other assets. RAKs net equity was $5.5 million. ARI recorded $1.9 million in goodwill as a result of this transaction. On June 30, 2003, ARI sold its 71.4% interest in RAK to Realty Advisors for $6.0 million, reducing
ARIs affiliate debt. Realty Advisors also paid ARI $600,000, representing 10% interest on the $6.0 million price paid by ARI to purchase the 71.4% interest in RAK in 2002.



In December 2002, ARI sold the Lakeshore Villas Apartments to Housing for Seniors of Humble, LLC (Humble), a
related party, for $22.0 million, paying $764,000 after payment of closing costs and debt paydown and providing purchase money financing of $8.4 million. One note had a principal amount of $2.0 million. The note was unsecured, and was guaranteed by
Unified Housing Foundation, Inc. (Unified), a related party. The second note had a principal amount of $6.4 million, and was secured by a pledge by Unified of 100% of the Member Interest in Humble. Both notes bore interest at 11.5% per
annum, matured in December 2009 and required quarterly payments beginning in March 2003. Richard W. Humphrey, a Director of ARI until July 2003, is the President of Humble and the President and Treasurer of Unified. Ted P. Stokely, Chairman of the
Board and a Director of ARI, is the General Manager of Unified. In December 2003, both notes were sold to IORI for $8.4 million, plus accrued interest, to reduce ARIs affiliate debt.



In December 2002, TCI purchased the NLP/CH, Ltd. partnership, which owns the
Centura Holdings, Clark and Woolley land parcels, from ARI for $13.3 million. See NOTE 2. REAL ESTATE. The purchase price was determined based on an appraised rate of $34.89 per share foot. The business purpose of the transaction was for
TCI to construct apartments on the land and for ARI to satisfy debt.



In January 2003, ARIs Board of Directors approved the payment to BCM of a 6% construction management fee on all construction projects in process at December 31, 2002, to be applied to all labor and materials costs incurred to date on
each project. The resulting calculation of $1.9 million was treated as an increase in the affiliate payable balance to BCM.



During 2002, ARIs Board of Directors authorized ARIs Chief Financial Officer to advance funds either to or from ARI, through BCM, 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.



In June 2002, BCM partially repaid its affiliate payable to ARI by
transferring Alta Mesa Shopping Center, Pinecrest Apartments, Tiberon Trails Apartments and Realty Advisors Korea, Ltd. to ARI.



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During 2002, ARIs payable to BCM was increased by advisory fees, reimbursable expenses and
insurance reimbursements of $549,000, $517,000 and $435,000, respectively.



During 2002, ARI made payments on BCMs and TCIs behalf of $2.2 million and $2.8 million, respectively, while BCM made payments on ARIs behalf of $4.1 million.



In November 2002, ARI sold its note receivable from the sale of leasehold
interest in oil and gas mineral development properties to 10300 Gaywood Trust for a reduction of the affiliate payable to BCM in the amount of $1.3 million.



In July 2002, ARI sold Garden Woodsong to an unrelated party. The proceeds of $2.8 million increased ARIs affiliate payable to TCI.



In December 2002, ARI sold the Rosedale Towers to an unrelated party. The
proceeds of $3.5 million increased ARIs affiliate payable with IORI.



In March 2003, TCI purchased the Bridgeview Plaza and Cullman shopping centers from ARI for $8.7 million and $2.0 million, respectively, to satisfy debt. The purchase price was determined using a market rate multiple
of net operating income. TCI assumed debt of $2.7 million on Cullman. TCI received $5.1 million cash on the subsequent financing of the shopping center.



In October 2003, ARI purchased the Travelers land from IORI for $25.0 million, paying $1.9 million in cash and giving a wrap note payable to IORI for
$22.8 million. The note bears interest at 5.49%, requires monthly payments sufficient to pay the installments due on the underlying debt and matures in October 2006. The principal is due at maturity.



In May 2003, ARI sold its Solco-Valley Ranch land parcel. The proceeds of the
sale were received by BCM. The funds were used to reduce ARIs affiliate debt by $2.0 million. (See NOTE 2. REAL ESTATE.)



In June 2003, ARI received funds of $757,000 from an affiliate reducing the affiliate receivable. The funds paid down a note secured by undeveloped land
in Harris County, Texas.



In September 2003, ARI sold its Palm
Desert land parcel. The proceeds of the sale were received by an affiliate. The funds were used to reduce ARIs affiliate debt by $2.6 million. (See NOTE 2. REAL ESTATE.)



In November 2003, ARI sold its Scout land parcel for $2.8 million, receiving $485,000 in cash after paying closing costs and
providing purchase money financing of $2.1 million. The note bore interest at 6.25% per annum, required monthly payments of accrued interest beginning in December 2003 and matured in November 2006. All principal and accrued but unpaid interest were
due at maturity. In December 2003, the note was sold to Realty Advisors, a related party, for $2.1 million, plus accrued interest, to reduce ARIs affiliate debt.



In December 2003, ARI sold the Marquis at Vista Ridge Apartments to Housing for Seniors of Lewisville, LLC
(Lewisville,) a related party, for $17.7 million, receiving $2.2 million in cash after debt assumption. Ted P. Stokely, Chairman of the Board and a Director of ARI, is the General Manager of Unified, the sole member of Lewisville.



In December 2003, ARI sold Treehouse Apartments and Parkway
Centre to IORI for $11.5 million, including the assumption of debt. This transaction was used to reduce ARIs affiliate debt by $4.8 million. (See NOTE 2. REAL ESTATE.)



In December 2003, ARI sold Eagle Crest land to IORI for $4.0 million. This transaction was used to reduce ARIs
affiliate debt by $4.0 million. (See NOTE 2. REAL ESTATE.)



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In December 2003, ARIs Board of Directors approved the payment to Regis of a six percent (6%)
construction management fee on all construction projects in process at December 31, 2003, to be applied to all construction costs incurred during 2003 on each project. The resulting calculation of $4.1 million was treated as a reduction in the
affiliate receivable balance from Prime.



In December 2003, ARI
sold seven properties to subsidiaries of Unified Housing Foundation, Inc. (UHF), a Texas Non-Profit 501(c)3 Corporation. 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 include 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 will not be recorded as sales. Instead, these transactions will be
accounted for on the deposit method and the properties and corresponding debt will continue to be 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. Management is seeking lender approval on the transfer of the notes associated with these property transactions.



ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES



The following table sets forth the aggregate fees for professional services rendered to ARI for the years 2003 and 2002 by ARIs principal accounting
firm, BDO Seidman, LLP:



|                   |  |      |         |     |      |   |         |    
|------------------ |  | ---- | ------- | --- | ---- | - | ------- | ---
|Type of Fees       |  | 2003 |         |     | 2002 |  
|Audit Fees         |  | $    | 596,155 | (1) |      | $ | 352,568 |    
|Audit Related Fees |  |      |        |     |      |   |        |    
|Tax Fees(2)        |  |      | 210,422 |     |      |   | 214,150 |    
|All Other Fees     |  |      | 13,605  | (3) |      |   | 137,923 | (4)
|                   |  |      |         |     |      |   |         |    
|Total Fees         |  | $    | 820,182 |     |      | $ | 704,641 |    
|                   |  |      |         |     |      |   |         |    

---

|(1) |  | Includes $219,524 paid by TCI.
|--- |  | ------------------------------

|(2) |  | Tax fees include fees for tax planning, tax consultation, return preparation, and review of tax returns. Fees for 2003 include $61,093 paid by TCI
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | All other fees for 2003 are related to ARI Form 8-K ($750), ARIs tender offer for the common shares of TCI and IORI ($3,735), and for training ($9,120).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | All other fees for 2002 are related to ARIs tender offer for the common shares of TCI and IORI ($119,623), debt analysis ($12,300) and other activities ($6,000).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 preapprove 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



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Audit Committee has adopted a preapproval 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 preapproved. Consistent with the SEC rules establishing two different approaches to preapproving non-prohibited services, the Policy of the Audit Committee covers
preapproval 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 the 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 preapproved 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 preapprove 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.



Except for the fees of
$9,120 in 2003 for training, all the fees for 2003 and 2002 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.



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PART IV



ITEM 15.EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K



(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, 2003 and 2002



Consolidated Statements
of OperationsYears Ended December 31, 2003, 2002 and 2001



Consolidated Statements of Stockholders EquityYears Ended December 31, 2003, 2002 and 2001



Consolidated Statements of Cash FlowsYears Ended December 31, 2003, 2002 and 2001



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, 2003).



(b)    Reports on Form 8-K:



A Current Report on Form 8-K, dated October 1, 2003, was filed with respect to Item 5. Other Events and Item 7.
Financial Statements and Exhibits, which reports the assignment of ARIs Advisory Agreement with Prime Income Asset Management, Inc. to Prime Income Asset Management, LLC, effective October 1, 2003.



A Current Report on Form 8-K, dated October 17, 2003, was
filed with respect to the Item 5. Other Events, which reports the appellate judgment in favor of ARI in the Matisse litigation.



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(c)    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 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2002).                                                                                                       
|              | 
|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
Registrants Registration Statement on Form S-4, dated February 24, 2002).                                                                                                                                                                                  
|              | 
|21.1          |  | Subsidiaries of the Registrant, filed herewith.                                                                                                                                                                                                                                                                                                                                                
|              | 
|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.                                                                                                                                                                                                                                                        



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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: April 16, 2004

AMERICAN REALTY INVESTORS, INC.By:

/s/    RONALD E.
KIMBROUGHRonald E. Kimbrough Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal 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.
STOKELYTed P.
Stokely           |  | Chairman of the Board and Director                                                                                                       |  | April 16, 2004
|                                              |  |                                                                                                                                         
|/S/    HENRY A.
BUTLERHenry A.
Butler         |  | Director                                                                                                                                 |  | April 16, 2004
|                                              |  |                                                                                                                                         
|/S/    SHARON
HUNTSharon Hunt                 |  | Director                                                                                                                                 |  | April 16, 2004
|                                              |  |                                                                                                                                         
|/S/    TED R.
MUNSELLETed R.
Munselle         |  | Director                                                                                                                                 |  | April 16, 2004
|                                              |  |                                                                                                                                         
|/S/    MARTIN L.
WHITEMartin L.
White         |  | Director                                                                                                                                 |  | April 16, 2004
|                                              |  |                                                                                                                                         
|/S/    RONALD E.
KIMBROUGHRonald E.
Kimbrough |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive
Officer) |  | April 16, 2004



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ANNUAL REPORT ON FORM 10-K



EXHIBIT INDEX



For the Year Ended December 31, 2003



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2002).                                                                                                       
|     | 
|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
Registrants Registration Statement on Form S-4, dated February 24, 2002).                                                                                                                                                                                  
|     | 
|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.                                                                                                                                                                                                                                                        



139