Edgar Filing: AMERICAN REALTY INVESTORS INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2002
REGISTRATION NO. _________

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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AMERICAN REALTY INVESTORS, INC.
(Exact name of Registrant as specified in its charter)

NEVADA 6510 75-2847135
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)

1800 VALLEY VIEW LANE, SUITE 300, DALLAS, TX 75234
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)

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ROBERT A. WALDMAN
1800 VALLEY VIEW LANE, SUITE 300
DALLAS, TEXAS 75234
(469) 522-4200
(469) 522-4360 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

----------

WITH COPIES TO:

STEVEN C. METZGER, ESQ. JEFFREY M. SONE, ESQ.
PRAGER METZGER & KROEMER, PLLC JACKSON WALKER L.L.P.
2626 COLE AVENUE, SUITE 900 901 MAIN STREET, SUITE 6000
DALLAS, TEXAS 75204 DALLAS, TEXAS 75202
(214) 969-7600 (214) 953-6000
(214) 523-3838 (FAX) (214) 953-5822(FAX)

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Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date of this Registration
Statement.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. .............................[ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ...............................[ ]

If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ............................................[ ]

CALCULATION OF REGISTRATION FEE

PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT PRICE FEE
--------------------------------- ------------ ---------------- ------------------ ------------

10% Series G Cumulative Convertible preferred stock,
par value $2.00 4,021,254(1) Not applicable $128,119,079.97(2) $11,786.96(3)
Common Stock, par value $0.01 per share 10,060,393(4) Not applicable $ 0(5) $ 0(6)
10% Series H Cumulative Convertible preferred stock,
par value $2.00 per share 683,282(7) Not applicable $ 24,821,801.25(8) $ 2,283.61(9)
Common Stock, par value $0.01 per share 1,538,734(10) Not applicable $ 0(5) $ 0(6)
--------------- ----------
Total: $152,940,881.22 $14,070.57
=============== ==========

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(1) Represents the maximum number of shares of Series G preferred stock of
American Realty Investors, Inc. ("ARL") estimated to be issued in connection
with the merger of Transcontinental Realty Investors, Inc. ("TCI") described
herein at the exchange ratio of one share of Series G preferred stock for each
share of TCI's common stock outstanding (other than shares owned by ARL and its
subsidiaries).

(2) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rules 457(f)(1) and 457(c) of the Securities Act of 1933, as amended
(the "Securities Act"), the registration fee is based on the product of (i)
$15.93, the average of the high and low sales price of TCI common stock on
February 15, 2002, as reported by the New York Stock Exchange, and (ii) the
maximum number of shares of TCI common stock estimated to be converted or
cancelled pursuant to the merger.

(3) Computed in accordance with Rule 457(f) under the Securities Act to be
$11,786.96, which is equal to 0.000092 multiplied by the proposed maximum
offering price of $128,119,079.97.

(4) Represents the maximum number of shares of common stock of ARL estimated to
be issued upon conversion of the shares of Series G preferred stock, assuming
each record holder receives one share of ARL common stock in lieu of a
fractional share. Pursuant to Rule 416, there are also registered hereunder an
indeterminate number of additional shares of ARL common stock as may be issuable
as a result of stock splits, stock dividends and other provisions of the Series
G preferred stock.

(5) No additional consideration will be received in connection with the
conversion of the shares of preferred stock.

(6) Pursuant to Rule 457(i), no filing fee is due.

(7) Represents the maximum number of shares of Series H preferred stock of ARL
estimated to be issued in connection with the merger of Income Opportunity
Realty Investors, Inc. ("IOT") described herein at the exchange ratio of one
share of Series H preferred stock for each share of IOT's common stock
outstanding (other than shares owned by ARL and its subsidiaries and TCI).

(8) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rules 457(f)(1) and 457(c) of the Securities Act, the registration
fee is based on the product of (i) $17.25, the average of the high and low sales
price of IOT common stock on February 15, 2002, as reported by the American
Stock Exchange, and (ii) the maximum number of shares of IOT common stock
estimated to be converted or cancelled pursuant to the merger.

(9) Computed in accordance with Rule 457(f) under the Securities Act to be
$2,283.61, which is equal to 0.000092 multiplied by the proposed maximum
offering price of $24,821,801.25.

(10) Represents the maximum number of shares of common stock of ARL estimated
to be issued upon conversion of the shares of Series H preferred stock, assuming
each record holder receives one share of ARL common stock in lieu of a
fractional share. Pursuant to Rule 416, there are also registered hereunder an
indeterminate number of additional shares of ARL common stock as may be issuable
as a result of stock splits, stock dividends and other provisions of the Series
H preferred stock.

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

AMERICAN REALTY TRANSCONTINENTAL REALTY INCOME OPPORTUNITY
INVESTORS, INC. INVESTORS, INC. REALTY INVESTORS, INC.

To the stockholders of American Realty Investors, Inc.,
Transcontinental Realty Investors, Inc. and Income Opportunity Realty Investors,
Inc.:

As the result of a court approved settlement of litigation involving,
among others, a subsidiary of American Realty Investors, Inc. ("ARL"),
Transcontinental Realty Investors, Inc. ("TCI") and Income Opportunity Realty
Investors, Inc. ("IOT"), ARL has agreed to acquire all of the outstanding common
stock of TCI and IOT through the merger of TCI and IOT with two subsidiaries of
ARL. The mergers will not be consummated unless, in each case, sufficient cash
is available to ARL to pay the cash merger consideration due as a result of the
mergers. If the mergers are approved by the ARL, TCI and IOT stockholders and
sufficient cash is available to ARL, wholly-owned subsidiaries of ARL will be
merged into TCI and IOT, with TCI and IOT being the surviving corporations (the
mergers and related transactions are collectively referred to as the business
combination).

In order to complete the business combination, we must, among other
things, obtain the required approval of the ARL, TCI and IOT stockholders.
However, if the stockholders of ARL and only one of either TCI or IOT approve
their merger, that merger alone may be consummated. In addition to being a
condition to the settlement of the lawsuit, we believe that the business
combination will benefit the stockholders of all three companies and we ask for
your support in voting for the mergers at the special meetings.

When the mergers are completed, holders of TCI's common stock (other
than ARL and its affiliates) will receive $17.50 in cash less any dividends
declared and paid on the TCI common stock after January 2, 2002 or, if they
affirmatively elect, one share of newly issued ARL Series G preferred stock for
each share of TCI common stock they currently own. IOT stockholders (other than
ARL and its affiliates) will receive $19.00 in cash less any dividends declared
and paid on the IOT common stock after January 2, 2002 or, if they affirmatively
elect, one share of newly issued ARL Series H preferred stock for each share of
IOT common stock they currently own. Each share of TCI common stock held by
certain affiliates of ARL will be converted into one share of the Series G
preferred stock. Shares of the TCI common stock held by ARL and its affiliates
will be cancelled. Each share of IOT common stock held by certain affiliates of
ARL will be converted into one share of the Series H preferred stock. Shares of
IOT common stock held by ARL, its affiliates and TCI will be cancelled.

1,168,774 shares of the Series G preferred stock and 106,802 shares of
the Series H preferred stock will be issued to affiliates of ARL. In the event
that each stockholder of TCI and IOT, other than persons or entities affiliated
with ARL, elects to receive shares of the Series G preferred stock or the Series
H preferred stock, respectively, persons not affiliated with ARL will hold
approximately 2,853,080 shares of Series G preferred stock and 576,480 shares of
Series H preferred stock, representing approximately 70.9% and 84.4% of all
issued and outstanding shares of the Series G preferred stock and the Series H
preferred stock, respectively.

The boards of directors of ARL, TCI and IOT have approved the mergers
and recommend that their respective stockholders vote for the merger proposals
as described in the attached materials. You should also consider the matters
discussed under "Risk Factors" beginning on page 24 of this document.

ARL stockholders will vote at ARL's special meeting on Wednesday, March
27, 2002, at 2:00 p.m., local time, at 1800 Valley View Lane, Suite 300, Dallas,
Texas.

TCI stockholders will vote at TCI's special meeting on Wednesday, March
27, 2002, at 3:00 p.m., local time, at 1800 Valley View Lane, Suite 300, Dallas,
Texas.

IOT stockholders will vote at IOT's special meeting on Wednesday, March
27, 2002, at 4:00 p.m., local time, at 1800 Valley View Lane, Suite 300, Dallas,
Texas.

Your vote is important, regardless of the number of shares you own.
Please vote as soon as possible to make sure that your shares are represented at
the special meetings. You may vote your shares by completing the enclosed proxy
card, by telephoning the transfer agent or by voting on the Internet. You may
also cast your vote in person at the special meetings.

/s/ Robert A. Waldman /s/ Robert A. Waldman /s/ Robert A. Waldman
------------------------------- ------------------------------ ------------------------------
Robert A. Waldman, Robert A. Waldman, Robert A. Waldman,
Senior Vice President, General Senior Vice President, General Senior Vice President, General
Counsel and Secretary Counsel and Secretary Counsel and Secretary
American Realty Investors, Inc. Transcontinental Realty Income Opportunity Realty
Investors, Inc. Investors, Inc.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE PREFERRED STOCK OR COMMON STOCK TO
BE ISSUED UNDER THIS JOINT PROXY STATEMENT AND PROSPECTUS OR DETERMINED IF THIS
JOINT PROXY STATEMENT AND PROSPECTUS IS TRUTHFUL OR INCOMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

This joint proxy statement and prospectus is dated ___________, 2002, and is
first being mailed to stockholders on or about _____________, 2002.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
AMERICAN REALTY INVESTORS, INC.
TO BE HELD MARCH 27, 2002 AT 2:00 P.M.

To Our Stockholders:

You are invited to attend the special meeting of stockholders of
American Realty Investors, Inc. ("ARL"). The meeting will be held at 1800 Valley
View Lane, Suite 300, Dallas, Texas on March 27, 2002 at 2:00 p.m. local time.
At the special meeting, ARL's stockholders will be asked to consider and vote
upon:

o A PROPOSAL TO APPROVE THE TCI MERGER WHEREBY ARL WILL ACQUIRE
ALL OF THE OUTSTANDING COMMON STOCK OF TRANSCONTINENTAL REALTY
INVESTORS, INC. ("TCI") THROUGH THE MERGER OF A RECENTLY
FORMED WHOLLY-OWNED SUBSIDIARY OF ARL WITH AND INTO TCI;

o A PROPOSAL TO APPROVE THE IOT MERGER WHEREBY ARL WILL ACQUIRE
ALL OF THE OUTSTANDING COMMON STOCK OF INCOME OPPORTUNITY
REALTY INVESTORS, INC. ("IOT") THROUGH THE MERGER OF A
RECENTLY FORMED WHOLLY-OWNED SUBSIDIARY OF ARL WITH AND INTO
IOT; AND

o ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY ADJOURNMENTS THEREOF.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR THE
MERGERS DESCRIBED ABOVE.

Only holders of record of ARL's common stock at the close of business
on February 9, 2002, the record date, are entitled to notice of, and to vote at,
the special meeting and any adjournments or postponements thereof. None of the
stockholders are entitled to dissenters' or appraisal rights in connection with
the mergers.

Your vote is important. Whether or not you plan to attend the Special
Meeting, please complete, sign and date the accompanying proxy card and return
it in the enclosed prepaid envelope. You may also submit a proxy by telephone or
by internet by following the instructions in the proxy statement and on the
enclosed proxy card. If you attend the Special Meeting, you may revoke your
proxy and vote in person if you wish to do so. However, if you hold your shares
in a brokerage account, you cannot vote in person at the Special Meeting. If you
have instructed your broker to vote your shares, you must follow your broker's
instructions regarding how to change your vote.

By Order of the Board of Directors of
AMERICAN REALTY INVESTORS, INC.

/s/ Robert A. Waldman
-----------------------------------------
Robert A. Waldman, Senior Vice President,
General Counsel and Secretary
American Realty Investors, Inc.

Dallas, Texas
, 2002
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
TRANSCONTINENTAL REALTY INVESTORS, INC.
TO BE HELD MARCH 27, 2002 AT 3:00 P.M.

To Our Stockholders:

You are invited to attend the special meeting of stockholders of
Transcontinental Realty Investors, Inc. ("TCI"). The meeting will be held at
1800 Valley View Lane, Suite 300, Dallas, Texas on March 27, 2002 at 3:00 p.m.
local time. At the special meeting, TCI's stockholders will be asked to consider
and vote upon:

o A PROPOSAL TO APPROVE THE TCI MERGER WHEREBY AMERICAN REALTY
INVESTORS, INC., ("ARL") WILL ACQUIRE ALL OF THE OUTSTANDING
COMMON STOCK OF TCI THROUGH THE MERGER OF A RECENTLY FORMED
WHOLLY-OWNED SUBSIDIARY OF ARL WITH AND INTO TCI; and

o ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY ADJOURNMENTS THEREOF.

After careful consideration, the board of directors of TCI have
determined that the terms of the proposed TCI merger are fair to and in the best
interests of TCI's stockholders.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR THE
MERGER AND OTHER MATTERS DESCRIBED ABOVE.

Only holders of record of TCI's common stock at the close of business
on February 9, 2002, the record date, are entitled to notice of, and to vote at,
the special meeting and any adjournments or postponements thereof. None of the
stockholders are entitled to dissenters' or appraisal rights in connection with
the merger.

By Order of the Board of Directors of
TRANSCONTINENTAL REALTY INVESTORS, INC.

/s/ Robert A. Waldman
-----------------------------------------
Robert A. Waldman, Senior Vice President,
General Counsel and Secretary
Transcontinental Realty Investors, Inc.

Dallas, Texas
, 2002
----------- ---

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
INCOME OPPORTUNITY REALTY INVESTORS, INC.
TO BE HELD MARCH 27, 2002 AT 4:00 P.M.

To Our Stockholders:

You are invited to attend the special meeting of stockholders of Income
Opportunity Realty Investors, Inc. ("IOT"). The meeting will be held at 1800
Valley View Lane, Suite 300, Dallas, Texas on March 27, 2002 at 4:00 p.m. local
time. At the special meeting, IOT's stockholders will be asked to consider and
vote upon:

o A PROPOSAL TO APPROVE THE IOT MERGER WHEREBY AMERICAN REALTY
INVESTORS, INC. ("ARL"), WILL ACQUIRE ALL OF THE OUTSTANDING
COMMON STOCK OF IOT THROUGH THE MERGER OF A RECENTLY FORMED
WHOLLY-OWNED SUBSIDIARY OF ARL WITH AND INTO IOT; AND

o ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY ADJOURNMENTS THEREOF.

After careful consideration, the board of directors of IOT have
determined that the terms of the proposed IOT merger are fair to and in the best
interests of IOT's stockholders.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR THE
MERGER AND OTHER MATTERS DESCRIBED ABOVE.

Only holders of record of IOT's common stock at the close of business
on February 9, 2002, the record date, are entitled to notice of, and to vote at,
the special meeting and any adjournments or postponements thereof. None of the
stockholders are entitled to dissenters' or appraisal rights in connection with
the merger.

By Order of the Board of Directors of
INCOME OPPORTUNITY REALTY INVESTORS, INC.

/s/ Robert A. Waldman
------------------------------------------
Robert A. Waldman, Senior Vice President,
General Counsel and Secretary
Income Opportunity Realty Investors, Inc.

Dallas, Texas
, 2002
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TABLE OF CONTENTS

Page
----

Joint Proxy Statement and Prospectus..............................................................................1
Summary...........................................................................................................1
Forward Looking Statements.......................................................................................22
Risk Factors.....................................................................................................24
The Special Meetings.............................................................................................35
Special Factors..................................................................................................39
Interests of Certain Persons in the Business Combination.........................................................69
The Plans of Merger..............................................................................................71
Comparison of Ownership of Shares................................................................................76
The Advisor - BCM................................................................................................88
Certain Relationships and Related Transactions of BCM, ARL, TCI and IOT..........................................94
Certain Information Regarding TCI Common Stock and IOT Common Stock.............................................101
Unaudited Pro Forma Consolidated Financial Information..........................................................104
INFORMATION CONCERNING ARL:
Business of ARL.................................................................................................135
Properties of ARL...............................................................................................138
Selected Financial Data of ARL..................................................................................158
Management's Discussion and Analysis of Financial Condition and Results of
Operations of ARL...............................................................................................159
Quantitative and Qualitative Disclosures About Market Risks of ARL..............................................172
Management of ARL...............................................................................................173
Security Ownership of Certain Beneficial Owners and Management of ARL...........................................175
Description of the Capital Stock of ARL.........................................................................178
Charter and Bylaws of ARL.......................................................................................186
Anti-Takeover Provisions of the Organizational Documents of ARL.................................................189
ARL Policies with Respect to Certain Activities.................................................................190
INFORMATION CONCERNING TCI:
Business of TCI.................................................................................................193
Business Plan and Investment Policy of TCI......................................................................193
Competition.....................................................................................................194
Properties of TCI...............................................................................................195
Selected Financial Data of TCI..................................................................................210
Management's Discussion and Analysis of Financial Condition and Results of
Operations of TCI...............................................................................................211
Quantitative and Qualitative Disclosures Regarding Market Risk of TCI...........................................220
Management of TCI...............................................................................................222
Security Ownership of Certain Beneficial Owners and Management of TCI...........................................225
INFORMATION CONCERNING IOT:
Business of IOT.................................................................................................228
Competition.....................................................................................................228
Properties of IOT...............................................................................................230
Selected Financial Data of IOT..................................................................................236
Management's Discussion and Analysis of Financial Condition and Results of
Operations of IOT...............................................................................................237

Quantitative and Qualitative Disclosures Regarding Market Risk of IOT...........................................243
Management of IOT...............................................................................................245
Security Ownership of Certain Beneficial Owners and Management of IOT...........................................247
OTHER MATTERS:
Securityholder Proposals........................................................................................250
Legal Matters...................................................................................................250
Experts.........................................................................................................250
Glossary Of Terms...............................................................................................252
Financial Statements:...........................................................................................F-1
APPENDICES:
Agreement and Plan of Merger (TCI Merger)................................................................Appendix A
Agreement and Plan of Merger (IOT Merger)................................................................Appendix B
Certificate of Designation of the Series G Preferred Stock ..............................................Appendix C
Certificate of Designation of the Series H Preferred Stock ..............................................Appendix D
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. Fairness Opinion
Concerning TCI......................................................................................Appendix E
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. Fairness Opinion
Concerning IOT......................................................................................Appendix F

JOINT PROXY STATEMENT AND PROSPECTUS

This joint proxy statement and prospectus is being used to solicit
votes with respect to stockholder meetings for each of American Realty
Investors, Inc., Transcontinental Realty Investors, Inc. and Income Opportunity
Realty Investors, Inc. called to approve a proposed business combination of
those companies. "We", "us" and "our" as used in this joint proxy statement and
prospectus means American Realty Investors, Inc., Transcontinental Realty
Investors, Inc. and Income Opportunity Realty Investors, Inc.

SUMMARY

This summary highlights selected information from this joint proxy
statement and prospectus and may not contain all information that is important
to you. You should read carefully this entire joint proxy statement and
prospectus and the documents to which we have referred you. The following
summary is qualified in its entirety by reference to the detailed information
appearing elsewhere in this joint proxy statement and prospectus.

OVERVIEW

As part of this joint proxy statement and prospectus, three public
companies, American Realty Investors, Inc. ("ARL"), Transcontinental Realty
Investors, Inc. ("TCI") and Income Opportunity Realty Investors, Inc. ("IOT"),
are seeking stockholder approval of two proposed mergers whereby TCI and IOT
will become subsidiaries of ARL. Together, these mergers are often referred to
as the "business combination." The business combination is the result of a court
approved settlement that is described below under "The Olive Settlement."

THE PARTIES

The material parties that are discussed throughout this joint proxy
statement and prospectus statement include the following:

AMERICAN REALTY INVESTORS, INC. ("ARL") is a publicly traded Nevada
corporation engaged primarily in the business of owning and operating a
portfolio of real estate and financing real estate and real estate
activities through investments in mortgage loans. ARL holds a diverse
portfolio of equity real estate located across the U.S., including office
buildings, apartments, hotels, shopping centers and developed and
undeveloped land. The day-to-day operations of ARL are managed by Basic
Capital Management, Inc. ("BCM"), a contractual advisor, under the
supervision of ARL's board of directors.

TRANSCONTINENTAL REALTY INVESTORS, INC. ("TCI") is a publicly traded
Nevada corporation engaged primarily in the business of owning and
operating a portfolio of real estate and financing real estate and real
estate activities through investments in mortgage loans similar to ARL.
The day-to-day operations of TCI are performed by BCM, a contractual
advisor, under the supervision of TCI's board of directors.

INCOME OPPORTUNITY REALTY INVESTORS, INC. ("IOT") is a publicly traded
Nevada corporation primarily engaged in the business of owning and
operating a portfolio of real estate and financing real estate and real
estate activities through investments in mortgage

loans. IOT is a real estate investment trust. The day-to-day operations of
IOT are performed by BCM, a contractual advisor, under the supervision of
IOT's board of directors.

BASIC CAPITAL MANAGEMENT, INC. ("BCM") is a contractual advisor that is
responsible for managing the affairs of ARL, TCI and IOT and for advising
the respective boards on setting the policies which guide ARL, TCI and
IOT. The day-to-day operations of ARL, TCI and IOT are performed by BCM
under the supervision of each respective board. Among other things, BCM
locates, investigates, evaluates and recommends real estate and mortgage
loan investments and sales opportunities, as well as financing and
refinancing sources. BCM also serves as a consultant to ARL's, TCI's and
IOT's boards of directors in connection with the business plan and
investment policy decisions made by each board.

GENE E. PHILLIPS ("MR. PHILLIPS") serves as the representative of a trust
for the benefit of his children that indirectly owns BCM. As
representative of the trust, Mr. Phillips had, until June 2000,
substantial contact with the management of BCM and input with respect to
BCM's performance of advisory services for ARL, TCI and IOT. Mr. Phillips
does not own any stock of ARL, TCI or IOT.

ARL, TCI, IOT and BCM have substantially the same management and have
ownership affiliations as seen in the chart below.

ARL TCI IOT

Out of 11,375,127 shares of ARL common Out of 8,042,629 shares of TCI common Out of 1,438,945 shares of IOT common
stock outstanding as of February 11, stock outstanding as of February 11, stock outstanding as of February 11,
2002: 2002: 2002:
o BCM owns 6,269,344 (55.1%) o ARL indirectly owns 3,994,300 o ARL indirectly owns 409,935
o TCI owns 746,972 (6.6%) (49.7%) (28.5%)
o Non-affiliates own 4,331,209 o BCM directly and indirectly o BCM owns 106,802 (7.4%)
(38.1%) owns 1,193,422 (14.8%) o TCI owns 345,728 (24.0%)
o Non-affiliates own 2,853,080 o Non-affiliates own 576,480
(35.5%) (40.06%)

The principal operating offices of each of ARL, TCI, IOT and BCM are
located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234. The telephone
number for each corporation is 469-522-4200.

THE OLIVE SETTLEMENT

The business combination being proposed results from a court approved
settlement of a lawsuit styled Jack Olive, et. al. v. Gene E. Phillips, et al,
Case No. C89 4331 MHP pending in the United States District Court for the
Northern District of California (the "Olive Litigation"). The claims in the
Olive Litigation related to the operation and management of TCI and IOT.
Defendants in the lawsuit included, among others, American Realty Trust, Inc. (a
subsidiary of ARL, "ART"), TCI, IOT, BCM and Mr. Phillips.

TCI and IOT are parties to a 1990 settlement of litigation known as the
Olive Settlement. The original settlement has been modified and the modification
has been the subject of an amendment. Periodically, since 1990, designated
Settlement Counsel, George Donaldson, has challenged the compliance of the
parties under the Olive Settlement, the modification and the amendment and has
unsuccessfully sought to remove BCM from its advisory position to TCI, IOT and
other entities. Mr. Donaldson also sought to, from time to time, remove some or
all of the directors of TCI, IOT and other entities.

The parties to the lawsuit acknowledged that further and substantial
expense and time would be necessary to litigate the matters raised by the
pending requests made by Settlement Counsel that the court exercise its retained
jurisdiction over the parties' prior settlement agreements. Thus, in order to
finally put an end to the Olive Litigation and to avoid the anticipated expense,
inconvenience, distraction, and risk of further legal proceedings, the parties
concluded that it was desirable to compromise, settle and discharge all claims
arising from such matters while at the same time devising a mechanism to enable
all stockholders of TCI and IOT to convert their common stock in TCI or IOT into
cash or, if they affirmatively elected, preferred stock of ARL.

To that end, after arm's length negotiations, TCI, IOT and ARL, as the
parent corporation of ART, entered into the Second Amendment to the Modification
of Stipulation of Settlement (the "Settlement Agreement"), dated October 17,
2001. The Settlement Agreement provides that if the stockholders so approve, TCI
and IOT will become subsidiaries of ARL through the mechanism of freeze-out
mergers. As part of the mergers, stockholders (other than Mr. Phillips, BCM, ARL
and ART (collectively the "Affiliated Entities") or their affiliates) are to
receive $19 per share in cash for IOT common stock or $17.50 per share in cash
for TCI common stock, which amounts shall be reduced by any dividends paid after
January 2, 2002 on the TCI or IOT common stock, respectively. In the mergers,
the stockholders of TCI and IOT not affiliated with the Affiliated Entities have
the opportunity (but no obligation) to affirmatively elect to receive shares of
preferred stock of ARL having a liquidation value of $21.50 per share in
exchange for IOT common stock or $20 per share in exchange for TCI common stock,
which amounts shall be reduced by any dividends paid after January 2, 2002 on
the TCI or IOT common stock, respectively. In the mergers, the Affiliated
Entities will receive shares of the ARL preferred stock for the shares of common
stock of TCI and IOT held by them, provided, however, that shares of TCI and IOT
common stock held by ARL and its subsidiaries will be cancelled. The purchase
prices and liquidation values have been established under the Settlement
Agreement. The cash consideration to be paid to the non-affiliated TCI and IOT
stockholders is to be guaranteed by and becomes an obligation of the Affiliated
Entities. The mergers are to occur only after the satisfaction of certain
conditions, including the approval of each merger by a majority of the shares
held by the non-affiliated TCI and IOT stockholders, as applicable, who vote by
in person or by proxy at meetings of stockholders called for that purpose. The
ARL board of directors has determined that it will not enter into the TCI and
IOT mergers until, in each case, sufficient cash is available to ARL, either
from its own resources or from TCI or IOT immediately after the mergers, to pay
the cash merger consideration due as a result of the mergers.

In order to proceed with the mergers under the Settlement Agreement,
the Affiliated Entities have been required to perform certain matters which are
described in this joint proxy

statement and prospectus, including filing of materials with the Securities and
Exchange Commission ("SEC") and completion of that process prior to a specified
date. The other requirements were:

o obtaining a fairness opinion from a reputable investment
banking firm that the consideration to be paid to the
non-affiliated TCI and IOT stockholders in each merger (or the
tender offers described below) is fair from a financial point
of view, and

o placement of a $1,000,000 deposit in escrow to cover the costs
and fees necessary to compel the payment of any liquidated
damages.

If the SEC review process of this joint proxy statement and prospectus
was not completed by a specified date, unless extended by the consent of
settlement counsel, the Affiliated Entities would be in default under the
Settlement Agreement and liable for liquidated damages equal to $5 for each
share of TCI and IOT common stock. The Affiliated Entities may cure that default
by filing tender offers for all of the shares of IOT and TCI stock held by
non-affiliated stockholders, with respect to the cash option, at a cash price
equal to or better than the amount specified under the mergers ($19 per share
for IOT common stock, and $17.50 per share for TCI common stock). If the tender
offers are substantially completed within 120 days following the making of such
tender offers, the Affiliated Entities will be deemed to have fully complied
with the Settlement Agreement.

Under the Settlement Agreement, except to the extent necessary to
obtain the requisite quorum of any vote of stockholders in connection with the
mergers, the Affiliated Entities and TCI and IOT will not engage in any
solicitation activity directed at the non-affiliated stockholders in any manner
which would have the effect of causing a non-affiliated stockholder to accept
preferred stock rather than cash.

QUESTIONS AND ANSWERS ABOUT THE BUSINESS COMBINATION

1.Q: WHAT IS BEING PROPOSED? (SEE PAGE 71)

A: Two separate mergers are being proposed as the result of the
Settlement Agreement. In the TCI merger, a newly formed subsidiary of ARL would
be merged with and into TCI and TCI would become a subsidiary of ARL. In the IOT
merger, a newly formed subsidiary of ARL would be merged with and into IOT and
IOT would become a subsidiary of ARL.

2.Q: WHAT WILL I RECEIVE IN THE MERGER? (SEE PAGES 71 TO 72)

A: Each share of TCI common stock will be converted into $17.50 in cash
(less the amount of any dividends paid by TCI on TCI common stock after January
2, 2002) or, at the affirmative election of the TCI stockholder, one share of
ARL 10% Series G Cumulative Convertible preferred stock (the "Series G preferred
stock"). Outstanding shares of TCI common stock held by ARL or its subsidiaries
will be canceled and shares of TCI common stock held by BCM and other affiliates
of ARL will be exchanged for shares of Series G preferred stock. If all of the
holders of the TCI common stock other than BCM and other affiliates of ARL elect
to convert their shares of TCI common stock to Series G preferred stock, they
will own approximately 70.9% of the issued and outstanding shares of the Series
G preferred stock. BCM and other affiliates of ARL would own the remaining
shares of Series G preferred stock.

Preferred stock of TCI outstanding prior to the mergers will continue
to be outstanding after the mergers on the same terms and conditions.

Each share of IOT common stock will be converted into $19.00 in cash
(less the amount of any dividends paid by IOT on IOT common stock after January
2, 2002) or, at the affirmative election of the IOT stockholder, one share of
the ARL 10% Series H Cumulative Convertible preferred stock (the "Series H
preferred stock"). Outstanding shares of IOT held by ARL, its subsidiaries or
TCI will be canceled and each share of IOT common stock held by BCM and other
affiliates of ARL will be exchanged for shares of Series H preferred stock. If
all of the holders of IOT common stock other than BCM and other affiliates of
ARL elect to convert their shares to Series H preferred stock, they would own
approximately 84.4% of the issued and outstanding shares of the Series H
preferred stock. BCM and other affiliates of ARL would own the remaining shares
of Series H preferred stock.

ARL will apply to list the Series G and Series H preferred stock, and
the shares of ARL common stock issuable upon conversion of the Series G and
Series H preferred stock, on the New York Stock Exchange ("NYSE"), however, the
Exchange may not accept the shares for listing.

3.Q: WHAT ARE THE MATERIAL TERMS OF THE TCI MERGER AND THE IOT MERGER? (SEE
PAGES 71 TO 72)

A: Copies of the forms of agreements and plans of merger that have been
approved by each board of directors as applicable are attached as APPENDIX A and
APPENDIX B to this joint proxy statement and prospectus.

According to the terms of the agreements and plans of merger, two
recently formed wholly-owned subsidiaries of ARL will be merged with and into
TCI and IOT, respectively. TCI and IOT will survive the merger as subsidiaries
of ARL. The two acquisitions are

not dependent upon each other, and if the stockholders of one company do not
approve their merger, only the approved merger will be consummated.

The execution and delivery of the merger agreements and the closings of
the transactions in connection therewith cannot take place until the conditions
of the merger agreements have been met. Although ARL, TCI and IOT boards of
directors have approved the terms of the merger agreements, the merger
agreements will not be executed until after the stockholders approve the mergers
and other conditions precedent thereto. The material conditions include
obtaining the approval of the stockholders of TCI or IOT of their respective
mergers. Additionally, ARL has determined not to enter into the merger
agreements unless it has sufficient cash available to it to pay the cash merger
consideration.

CONDITIONS OF THE MERGERS. Completion of the mergers is dependent upon
the fulfillment of a number of conditions, including the following material
conditions:

o all necessary consents from third parties having been obtained

o no restraining order, injunction, order or decree of any court
having been issued

o the filing by the parties of all documents and instruments
required to be filed with governmental entities

o no action having been taken by any state or federal government
or agency which would prevent the merger or impose material
conditions on the merger

o Although not part of the merger agreements, ARL has determined
not to enter into the merger agreements unless it has
sufficient cash available to it, either from its own resources
or from TCI or IOT immediately after the mergers, to pay the
cash merger consideration

The merger agreements may be terminated by one or more parties at any
time prior to the effective time of the mergers if specific events occur.

4.Q: WHAT ARE THE TERMS OF THE SERIES G AND SERIES H PREFERRED STOCK? (SEE PAGE
184)

A: The Series G and Series H preferred shares will have a liquidation
value of $20 and $21.50 per share, respectively, and will be convertible into
ARL common stock during a 75 day period commencing on the 15th day after ARL
publicly files its first Form 10-Q with the SEC following the consummation of
the respective TCI and IOT mergers. The liquidation value of the Series G and
Series H preferred shares shall be reduced by any dividends paid on the TCI and
IOT common stock, respectively, after January 2, 2002 and prior to conversion.
During such conversion period, each share of Series G preferred stock shall be
convertible at the election of such holder into 2.5 shares of ARL Common Stock,
and each share of Series H preferred stock shall be convertible at the election
of such holder into 2.25 shares of ARL Common Stock. ARL may provide notice of
its intention to redeem the Series G or Series H preferred stock no earlier than
45 days after ARL publicly files its first Form 10-Q with the SEC following the

consummation of the TCI and IOT mergers, respectively. ARL may redeem any or all
of the Series G and Series H preferred stock upon payment of the liquidation
value plus all accrued and unpaid dividends by giving the holder thereof not
less than 45 days nor more than 60 days notice thereof prior to the date on
which ARL desires such shares redeemed.

The holders of Series G and Series H preferred stock do not vote for
the election of directors or on any matter except: (i) as otherwise provided by
law, (ii) with respect to an amendment to ARL's articles of incorporation or
bylaws that would materially alter or change the existing terms of the Series G
and Series H preferred stock, respectively, (iii) as to the Series G preferred
stock, at any time or times for the election of two directors when all or any
portion of the dividends on the Series G preferred stock for any six quarterly
dividends, whether or not consecutive, shall be in arrears and unpaid; and (iv)
as to the Series H preferred stock, at any time or times for the election of two
directors when all or any portion of the dividends on the Series H preferred
stock for any six quarterly dividends, whether or not consecutive, shall be in
arrears and unpaid. In the event of (iii) above, the number of directors
constituting the board of directors of ARL shall be increased by two and the
holders of Series G preferred stock, voting separately as a class, shall be
entitled to elect two directors to fill the newly created directorships with
each holder being entitled to one vote in the election for each share of Series
G preferred stock held. In the event of (iv) above, the number of directors
constituting the board of directors of ARL shall be increased by two and the
holders of Series H preferred stock, voting separately as a class, shall be
entitled to elect two directors to fill the newly created directorships with
each holder being entitled to one vote in the election for each share of Series
H preferred stock held. The full text of the description of the Series G and
Series H preferred shares is set forth in APPENDIX C and D, respectively. For a
comparison of the differences in the Series G and Series H preferred stock and
the TCI common stock and IOT common stock, respectively, see "Comparison of
Ownership of Shares."

5.Q: WHAT IS THE INTENDED ACCOUNTING TREATMENT OF THE TCI MERGER AND IOT MERGER?
(SEE PAGE 74)

A: ARL will account for the mergers under the purchase method of
accounting.

6.Q: WILL I RECOGNIZE INCOME TAX GAIN OR LOSS IN THE TCI MERGER OR IOT MERGER?
(SEE PAGE 67)

A: The mergers involve numerous federal income tax consequences to you,
depending in part on whether you are a common stockholder of TCI or IOT.

Each merger will be a taxable event for United States federal income
tax purposes. The TCI and IOT stockholders who do not affirmatively elect to
receive preferred stock in the mergers will recognize gain or loss equal to the
difference between (i) the amount of cash they receive in connection with the
merger and (ii) their tax basis in their stock of TCI common stock or IOT common
stock, as the case may be. The TCI and IOT stockholders who affirmatively elect
to receive preferred stock in connection with the mergers will recognize gain or
loss equal to the difference between (i) the fair market value of the shares of
preferred stock received in the merger and (ii) their tax basis in their shares
of TCI common stock or IOT common stock, as the case may be. The mergers will
not be a taxable event to the ARL stockholders. We urge you to

carefully read the complete explanation of the tax consequences of the mergers
on pages 66 through 68.

TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE
MERGER TO STOCKHOLDERS WILL DEPEND UPON THE FACTS OF EACH INDIVIDUAL'S
SITUATION. WE URGE YOU TO CONSULT YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF
THE MERGER'S TAX CONSEQUENCES TO YOU.

7.Q: ARE THERE RISKS INVOLVED IN THE MERGERS? (SEE PAGE 24)

A: Yes. In considering whether or not to vote in favor of your merger,
ARL, TCI and IOT stockholders should carefully consider all of the information
set forth in this joint proxy statement and prospectus and, in particular,
should evaluate the factors set forth under the caption "Risk Factors" herein.
These factors include, among other things:

RISKS RELATED TO THE MERGERS

o SUBSTANTIAL AMOUNTS OF CASH ARE REQUIRED FOR THE MERGERS. A
substantial amount of cash is required to fund the cash
payments to the stockholders of TCI and IOT in the mergers and
to pay expenses associated with the mergers. If ARL, TCI and
IOT are not able to raise the cash, the mergers may be delayed
or abandoned.

o LENDER CONSENT MAY BE NECESSARY. ARL, TCI and IOT have each
borrowed substantial amounts of money to buy and develop real
estate. If they are unable to get any necessary lender
consents or have disagreements with their lenders regarding
the mergers, their businesses may be adversely affected and
the mergers may be delayed or abandoned.

o THE MERGERS ARE SEPARATE TRANSACTIONS. If one of TCI or IOT
does not approve the merger, ARL may be adversely affected and
the merger of ARL and the other company may be delayed or
abandoned.

o A TENDER OFFER MAY BE REQUIRED. ARL can make a tender offer
for the shares of the common stock of the company or companies
that did not approve the merger. Making a tender offer for the
shares of TCI or IOT would be expensive for ARL, and there can
be no assurance that it would be able to arrange the necessary
financing to consummate such a transaction.

RISKS RELATED TO THE ARL PREFERRED STOCK

o VALUE OF THE ARL PREFERRED STOCK IS UNCERTAIN. There can be no
assurance regarding the value of the ARL preferred stock. The
NYSE may not accept the preferred shares for listing, and even
if accepted, an active trading market for them may not
develop.

o THE ARL PREFERRED STOCK HAS LIMITED VOTING RIGHTS. The shares
of Series G preferred stock and Series H preferred stock have
very limited voting rights.

o AFFILIATES OF ARL MAY HOLD A MAJORITY OF THE ARL PREFERRED
STOCK. Affiliates of ARL own a substantial number of shares of
the common stock of TCI and IOT, and may be able to control
any vote of holders of the Series G and H preferred stock,
including any vote to amend the terms of the Series G and H
preferred stock and the rights of the holders of the Series G
and H preferred stock.

RISKS RELATED TO THE COMBINED BUSINESS

o ARL WILL NEED TO SELL PROPERTY AND BORROW MONEY TO MEET ITS
LIQUIDITY NEEDS. The combined business of ARL, TCI and IOT
will need to sell properties or borrow additional amounts to
repay maturing debt and to fund their ongoing business
operations.

o ARL WILL HAVE SUBSTANTIAL DEBT. ARL, TCI and IOT each have
substantial indebtedness and the combined business of ARL, TCI
and IOT will be highly leveraged.

o CONTROL BY BCM. ARL, TCI and IOT are each managed and
controlled by BCM and the combined business will continue to
be managed by BCM. The interests of BCM may be different from
those of other stockholders.

o DEPENDENCE ON REAL ESTATE INVESTMENTS. ARL, TCI and IOT each
invest primarily in real estate, which are subject to varying
degrees of risk and are relatively illiquid. The performance
of real estate assets and ARL's resulting ability to pay
dividends to its stockholders may be adversely affected by a
number of factors.

o COMPETITION. Developing and managing real estate assets is a
highly competitive business. Many of the competitors in the
business of purchasing, developing and managing real estate
are considerably larger, have greater financial resources and
may have management personnel with more experience than the
officers of the combined business of ARL, TCI and IOT will
have.

o GEOGRAPHIC CONCENTRATION. A substantial portion of assets of
the combined business of ARL, TCI and IOT will consist of real
estate and mortgage notes receivable secured by income
producing real estate located in the Midwest, Northeast and
Southwest regions of the United States. Specific geographic
regions of the United States from time to time will experience
weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and
delinquency on mortgage loans.

o REAL ESTATE OPERATING RISKS. The real estate assets of the
combined business of ARL, TCI and IOT will be subject to
industry-specific operating risks, any or all of which may
adversely affect the results of the operations of the combined
business. If operating expenses increase, the local rental
market, governmental regulations or the lease may limit the
extent to which rents may be increased to meet expenses
without decreasing occupancy rates. To the extent rents cannot
be

increased or costs controlled, the cash flow and financial
condition of the combined business of ARL, TCI and IOT will be
adversely affected.

8.Q: HOW WILL THE BUSINESS COMBINATION BE FINANCED? (SEE PAGE 49)

A: The estimated cash requirements to pay the amounts to the
non-affiliated TCI and IOT stockholders if each takes the cash merger
consideration and to pay all expenses (including prepayments of indebtedness) of
the transactions is approximately $94,235,000. The actual amount required to
purchase the TCI common stock and IOT common stock will depend on the number of
stockholders who affirmatively elect to take Series G and Series H preferred
stock. Consequently, the greater number of stockholders who affirmatively elect
to receive Series G and Series H preferred stock the less funds will be required
to pay the cash merger consideration. ARL intends to first seek new loans, which
it expects to be able to obtain from several lenders aggregating at least
$43,000,000. ARL, TCI and IOT also have available a number of assets which, if
necessary, should be able to be sold (or utilized as collateral for loans) to
realize at least $93,700,000. These sums total an estimated $136,700,000. If all
such loans are entered into and all available properties are sold any remaining
difference (presently estimated at $36,100,000) will be available to ARL for
working capital purposes. ARL presently has no written commitments for any of
the expected loans and has no written or oral contracts to sell any assets.

9.Q: WILL I HAVE DISSENTERS' OR APPRAISAL RIGHTS IN THE MERGER? (SEE PAGE 37)

A: No.

10.Q: HAVE TCI AND IOT RECEIVED A FAVORABLE OPINION FROM THEIR FINANCIAL
ADVISORS CONCERNING THE TCI MERGER AND IOT MERGER AS APPLICABLE? (SEE PAGES 54
TO 62)

A: Yes. Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan Lokey"), has delivered its opinion to the board of TCI that, based
upon the assumptions and analyses contained in its letter dated February 1,
2002, after allowing for the factors and assumptions stated in its opinion and
as of that date, the consideration being offered to the public stockholders of
TCI, other than ARL and its affiliates, in the merger is fair from a financial
point of view.

Houlihan Lokey has delivered its opinion to the board of IOT that,
based upon the assumptions and analyses contained in its letter dated February
1, 2002 after allowing for the factors and assumptions stated in its opinion and
as of that date, the consideration being offered to the public stockholders of
IOT, other than ARL and its affiliates, in the merger is fair from a financial
point of view.

These opinions are attached as APPENDICES E and F. We encourage you to
read these opinions.

11.Q: DO PERSONS INVOLVED IN THE MERGERS HAVE INTERESTS THAT DIFFER FROM MINE?
(SEE PAGES 69 TO 70)

A: Yes. In considering your board's recommendation that you vote for
the merger, you should be aware that the determination of the boards of ARL, TCI
and IOT to participate in the mergers may have been affected by conflicts of
interest. In particular:

The boards of directors of TCI and IOT are identical. Additionally, the
executive officers of ARL, TCI, IOT and BCM are essentially the same persons.
Each of the individuals, as a result of their multiple positions, owe fiduciary
duties to the stockholders of all three of ARL,

TCI and IOT. At times, they may be confronted by issues, including the mergers,
that present them with potentially conflicting interests and obligations.
Furthermore, in accordance with the advisory agreements that each of ARL, TCI
and IOT have with BCM (as discussed under the heading "The Advisor"), BCM will
receive a fee upon the sale, if any, of the properties that may be sold to fund
the payment of the cash merger consideration. For the properties available for
sale as of February 1, 2002, the amount of the fee is estimated to be
$3,038,815. See "Special Factors - Financing the Business Combination."

It is currently expected that the officers and directors of ARL, TCI
and IOT will remain the same after the business combination with the exception
that the TCI and IOT board members shall become members of the ARL board. As a
result of these business relationships, the directors and officers of ARL, TCI
and IOT could be more likely to support or recommend the business combination,
the agreements and plans of merger and related matters than might otherwise be
the case. You should consider whether these interests may have influenced these
directors and officers to support or recommend the business combination. The
directors of ARL, TCI and IOT were aware of these interests and considered them
in approving the mergers.

12.Q: WHAT PERCENTAGE OF OUTSTANDING SHARES OF ARL, TCI AND IOT ARE HELD BY
OFFICERS, DIRECTORS AND THEIR AFFILIATES? (SEE PAGES 36 TO 37)

A: The directors, executive officers and the affiliates of the
directors and executive officers of ARL beneficially own 61.7% of the
outstanding shares of ARL voting with respect to the TCI and IOT mergers.

The directors, executive officers and the affiliates of the directors
and executive officers of TCI (including ARL and its affiliates) own 64.5% of
the outstanding shares of TCI voting with respect to the TCI merger.

The directors, executive officers and the affiliates of the directors
and executive officers of IOT (including ARL, TCI and their affiliates) own
59.9% of the outstanding shares of IOT voting with respect to the IOT merger.

13.Q: WHAT VOTE IS REQUIRED TO APPROVE MY MERGER? (SEE PAGE 36)

A: Approval of the TCI merger requires:

o The affirmative vote of a majority of the votes cast at the
TCI meeting;

o The affirmative vote of a majority of the votes cast by the
holders of shares of TCI common stock voting at the TCI
meeting not held by Mr. Phillips, BCM or ARL and their
affiliates; and

o The affirmative vote of a majority of the votes cast in favor
of the TCI merger at the ARL meeting.

Approval of the IOT merger requires:

o The affirmative vote of a majority of the votes cast at the
IOT meeting;

o The affirmative vote of a majority of the votes cast by the
holders of shares of IOT common stock voting at the IOT
meeting not held by Mr. Phillips, BCM or ARL and their
affiliates; and

o The affirmative vote of a majority of the votes cast in favor
of the IOT merger at the ARL meeting.

In the event the stockholders of either TCI or IOT approve their merger
but the stockholders of the other company do not, the approved merger may be
consummated, but the other one will not.

ARL and its affiliates currently own 5,215,324 shares of TCI common
stock representing approximately 64.5% of the outstanding TCI shares and 862,465
shares of IOT common stock representing approximately 59.9% of the outstanding
IOT shares.

14.Q: IF THE MERGERS ARE APPROVED AND I AFFIRMATIVELY ELECT TO RECEIVE SHARES OF
THE ARL PREFERRED STOCK WILL THESE SHARES BE LISTED FOR TRADING? (SEE PAGE 21)

A: ARL will apply to list the Series G and Series H preferred stock,
and the shares of ARL common stock issuable upon conversion of the Series G and
Series H preferred stock, on the NYSE. There can be, however, no assurance that
the shares will be listed. The listing of the preferred and common shares for
trading on the NYSE is not a condition to the respective obligations of TCI and
IOT to consummate the mergers.

15.Q: DO THE BOARDS OF DIRECTORS OF ARL, TCI AND IOT RECOMMEND VOTING IN FAVOR
OF THE TCI MERGER AND IOT MERGER AS APPLICABLE? (SEE PAGES 45, 46 TO 49)

A: ARL. The ARL board of directors has approved the TCI merger
agreement and the IOT merger agreement and unanimously recommends that its
stockholders vote "for" the mergers. In reaching its decision to approve and
recommend the mergers, the ARL board of directors considered, among other
factors, the following:

o The current and historical market prices of the TCI and IOT common stock
relative to the historical market prices of the ARL common stock and
relative to the merger consideration.

o The view of the ARL board of directors that an increase in the size and
diversity of ARL's portfolio of developed and undeveloped real estate
would benefit the company.

o The view of the ARL board of directors that stockholders of ARL would
benefit from an increase in the size of ARL's asset base and a
diversification of its real estate portfolio.

o The expectation of the ARL board of directors that the cash to be paid
as merger consideration could be raised in large part from sales of real
estate held by TCI and IOT.

o The fact that stockholders of TCI and IOT affiliated with ARL will
accept preferred stock of ARL in lieu of cash as merger consideration.

o The expectation of the ARL board of directors that the TCI and IOT
mergers would not be consummated unless, in each case, sufficient cash
was available to ARL to pay the cash merger consideration due as a
result of the mergers.

o The fact that the TCI and IOT mergers are not conditioned upon one
another.

o The ARL board of directors understanding that any regulatory approvals
necessary to consummate the TCI and IOT mergers could be obtained.

TCI. The TCI board of directors has determined that the terms of the
proposed TCI merger are fair to and in the best interests of the non-affiliated
TCI stockholders, approved the

TCI merger agreement and unanimously recommends that its stockholders vote "for"
the TCI merger. In reaching its decision to approve and recommend the TCI
merger, the TCI board of directors considered, among other factors, the
following:

o The current and historical market prices of TCI common stock relative to
the merger consideration and the fact that the $17.50 per share merger
consideration represented a 44.6% premium over the average closing price
of TCI common stock over the thirty trading days prior to October 23,
2001.

o The fact that the merger consideration is all cash.

o The fact that holders of TCI common stock have the opportunity to
affirmatively elect to receive ARL preferred stock instead of cash.

o The view of the TCI board of directors that the trading value for shares
of TCI common stock was not likely to exceed the merger price in the
near term if TCI remained independent.

o The potential stockholder value that could be expected to be generated
from other strategic options available to TCI.

o The financial presentation of Houlihan Lokey and the opinion to the
effect that the consideration to be offered to the non-affiliated TCI
public stockholders pursuant to the TCI merger agreement was fair from a
financial point of view to those holders.

o The terms of the TCI merger agreement, as reviewed by the TCI board of
directors with TCI legal advisors.

o The TCI board of directors' determination, based on the fact that no
other offers to acquire TCI common stock have been made at a level equal
to or better than the merger consideration of $17.50 per share after
initial press reports on and after October 23, 2001, that ARL had agreed
to acquire the non-affiliated stockholder interest in TCI and after
discussing with TCI's advisors the potential risks, costs and benefits
of contacting other third parties, that there was insufficient reason to
justify the risk of delay in proceeding with the favorable transaction
with ARL.

o The view of the TCI board of directors that the regulatory approvals
necessary to consummate the TCI merger could be obtained.

o The fact that TCI will no longer exist as an independent company and its
stockholders will no longer participate in the growth of TCI.

o The fact that gains from an all cash transaction would be taxable to TCI
stockholders for U.S. federal income tax purposes.

IOT. The IOT board of directors has determined that the terms of the
proposed IOT merger are fair to and in the best interests of the non-affiliated
IOT stockholders, approved the IOT merger agreement and unanimously recommends
that its stockholders vote "for" the IOT merger. In reaching its decision to
approve and recommend the IOT merger, the IOT board of directors considered,
among other factors, the following:

o The current and historical market prices of IOT common stock relative to
the merger consideration and the fact that the $19.00 per share merger
consideration represented a 28.7% premium over the average closing price
of IOT common stock over the thirty trading days prior to October 23,
2001.

o The fact that the merger consideration is all cash.

o The fact that holders of IOT stock have the opportunity to affirmatively
elect to receive ARL preferred stock instead of cash.

o The view of the IOT board of directors that the trading value for shares
of IOT common stock was not likely to exceed the merger price in the
near term if IOT remained independent.

o The potential stockholder value that can be expected to be generated
from other strategic options available to IOT.

o The financial presentation of Houlihan Lokey and the opinion to the
effect that the consideration to be offered to the non-affiliated IOT
public stockholders pursuant to the IOT merger agreement was fair from a
financial point of view to those holders.

o The terms of the IOT merger agreement, as reviewed by the IOT board of
directors with IOT legal advisors.

o The IOT board of directors' determination, based on the fact that no
other offers to acquire IOT common stock have been made at a level equal
to or better than the merger consideration of $19 per share after
initial press reports on and after October 23, 2001, that ARL had agreed
to acquire the non-affiliated stockholder interest in IOT and after
discussing with IOT's advisors the potential risks, costs and benefits
of contacting other third parties, that there was insufficient reason to
justify the risk of delay in proceeding with the favorable transaction
with ARL.

o The view of the IOT board of directors, the regulatory approvals
necessary to consummate the IOT merger could be obtained.

o IOT will no longer exist as an independent company and its stockholders
will no longer participate in the growth of IOT.

o The fact that gains from an all cash transaction would be taxable to IOT
stockholders for U.S. federal income tax purposes.

16.Q: WHEN DO THE COMPANIES EXPECT TO COMPLETE THE MERGERS? (SEE PAGE 71)

A: Assuming the mergers receive the required stockholder approval from
the stockholders of ARL, TCI and IOT, the mergers will occur at the time ARL
determines it has sufficient cash available to it, either from its own resources
or from TCI or IOT, immediately after the mergers, to pay the cash merger
consideration due as a result of the mergers.

17.Q: WHEN DO I ELECT WHETHER TO RECEIVE ARL PREFERRED STOCK OR CASH? (SEE PAGE
73)

A: At the time you send in the letter of transmittal mentioned below
you will elect whether to receive ARL preferred stock or cash.

18.Q: WHERE AND AT WHAT TIME WILL THE MEETINGS BE HELD? (SEE PAGE 35)

A: The ARL special meeting will be held on Wednesday, March 27, 2002,
at the offices of ARL at 1800 Valley View Lane, Suite 300, Dallas, Texas, at
2:00 p.m., Central Time.

The TCI special meeting will be held on Wednesday, March 27, 2002, at
the offices of TCI at 1800 Valley View Lane, Suite 300, Dallas, Texas, at 3:00
p.m., Central Time.

The IOT special meeting will be held on Wednesday, March 27, 2002, at
the offices of IOT at 1800 Valley View Lane, Suite 300, Dallas, Texas, at 4:00
p.m., Central Time.

19.Q: WHAT DO I NEED TO DO NOW? (SEE PAGE 35)

A: Please mail your signed proxy card in the enclosed return envelope
as soon as possible so that your shares of stock may be represented at the
appropriate meeting.

20.Q: IF MY SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
(SEE PAGE 37)

A: Your broker may vote shares on the merger only if you instruct your
broker how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. If you do not tell
your broker how to vote, your shares will not be voted on the merger. If you
hold your shares in a brokerage account, you cannot vote in person at your
meeting.

21.Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD? (SEE PAGE
37)

A: Yes. You may change your vote at any time before your proxy is voted
at your meeting. You may do this by sending a written notice stating that you
would like to revoke your proxy or by completing and submitting a new proxy card
bearing a later date than the proxy relating to the same shares to our transfer
agent, American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New
York 11219, attention Joe Alicia. You may also attend your meeting and vote in
person. Simply attending the meeting, however, will not revoke your proxy. If
you hold your shares in a brokerage account and you have instructed your broker
to vote, you must follow your broker's instructions regarding how to change your
vote.

22.Q: SHOULD I SEND IN MY CERTIFICATES NOW? (SEE PAGE 73)

A: No. After the mergers are approved and the business combination is
consummated, you will receive a letter of transmittal with instructions for
exchanging shares in TCI and IOT for cash or, at your affirmative election,
shares of either Series G preferred stock or Series H preferred stock,
respectively.

23.Q: I'VE LOST MY CERTIFICATE. WHAT SHOULD I DO? (SEE PAGE 73)

A: The letter of transmittal mentioned above will contain complete
instructions for a lost certificate.

24.Q: WHO CAN I CONTACT FOR MORE INFORMATION? (SEE PAGE 35)

A: ARL, TCI and IOT stockholders who have questions about the mergers
may call Investor Relations at 1-800-400-6407.

RATIO OF EARNINGS TO FIXED CHARGES

The following table summarizes the ratio of ARL's earnings to fixed
charges and preferred stock dividends at the dates set forth below:

Years Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----

Ratio of earnings to fixed charges
and preferred stock dividends 1.35 1.54 ** ** **

**Earnings were inadequate to cover fixed charges and preferred stock dividends
by $19,307,000, $11,247,000 and $6,167,000 in 1998, 1997 and 1996, respectively.
For the period ended September 30, 2001, the ratio of earnings to fixed charges
and preferred stock dividend was 1.17.

SUMMARY FINANCIAL DATA OF ARL

The following is a summary of financial data incorporated by reference
in this joint proxy statement and prospectus. You should read the following data
in conjunction with the more detailed information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the ARL consolidated financial statements and related notes included elsewhere
in this joint proxy statement and prospectus.

Nine Months Ended
September 30, For the Years Ended December 31,
-------------------------- ---------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ---------- ----------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA

Revenue ...................... $ 126,182 $ 133,313 $ 172,750 $ 193,980 $ 87,086 $ 57,031 $ 41,522
Expense ...................... 186,210 213,373 272,045 324,789 165,111 90,252 52,601
----------- ----------- ----------- ----------- ----------- ---------- ----------

(Loss) from operations ....... (60,028) (80,060) (99,295) (130,809) (78,025) (33,221) (11,079)
Equity in income of
investees .................... 9,157 2,873 5,246 11,847 37,966 10,497 1,485
Gain on sale of real
estate ....................... 62,860 78,828 96,728 129,260 17,254 20,296 3,659
----------- ----------- ----------- ----------- ----------- ---------- ----------

Income (loss) before
extraordinary gain ........... 11,989 1,641 2,679 10,298 (22,805) (2,428) (5,935)
Extraordinary gain ........... -- -- -- -- -- -- 381
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net income (loss) ............ 11,989 1,641 2,679 10,298 (22,805) (2,428) (5,554)
Preferred dividend
requirement .................. (1,868) (1,661) (2,327) (2,281) (1,177) (206) (113)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Income (loss)
applicable to common
shares ....................... $ 10,121 $ (20) $ 352 $ 8,017 $ (23,982) $ (2,634) $ (5,667)
=========== =========== =========== =========== =========== ========== ==========

PER SHARE DATA

(Loss) before
extraordinary gain ........... $ 1.00 $ -- $ .03 $ .75 $ (2.24) $ (.22) $ (.46)
Extraordinary gain ........... -- -- -- -- -- -- .03
----------- ----------- ----------- ----------- ----------- ---------- ----------

Net income (loss)
applicable to Common
shares ....................... $ 1.00 $ -- $ .03 $ .75 $ (2.24) $ (.22) $ (.43)
=========== =========== =========== =========== =========== ========== ==========
Dividends per Common
share ........................ $ -- $ -- $ -- $ .05 $ .20 $ .20 $ .15
Weighted average shares
outstanding .................. 10,141,840 10,496,364 10,399,890 10,759,416 10,695,388 1,710,013 2,765,082

December 31,
September 30, --------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------------- -------- -------- -------- -------- --------
(unaudited) (dollars in thousands, except per share)

BALANCE SHEET DATA

Real estate, net ............. $604,589 $653,744 $771,630 $734,907 $302,453 $119,035
Notes and interest ........... 29,222 13,831 38,604 52,053 25,526 48,485
receivable, net
Total assets ................. 780,378 787,015 919,546 918,605 433,799 239,783
Notes and interest ........... 582,139 616,331 706,196 768,272 261,986 127,863
payable
Margin borrowings ............ 28,703 13,485 33,264 35,773 53,376 40,044
Preferred stock .............. 3,969 -- -- -- -- --
Stockholders' equity ......... 83,420 73,402 46,266 38,272 63,453 47,786
Book value per share ......... $ 8.23 $ 7.06 $ 4.30 $ 3.58 $ 5.42 $ 3.74

SUMMARY FINANCIAL DATA OF TCI

The following is a summary of financial data incorporated by reference
in this joint proxy statement and prospectus. You should read the following data
in conjunction with the more detailed information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the TCI consolidated financial statements and related notes included elsewhere
in this joint proxy statement and prospectus.

Nine Months Ended
September 30, For the Years Ended December 31,
-------------------------- -----------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA

Rents ..................... $ 103,464 $ 103,855 $ 139,357 $ 82,039 $ 69,829 $ 54,462 $ 45,405
Property expense .......... 60,084 56,659 78,061 44,497 38,282 32,424 28,491
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income .......... 43,380 47,196 61,296 37,542 31,547 22,038 16,914
Other income .............. (2,254) 1,451 1,814 555 739 2,311 1,453
Other expense ............. 62,892 61,187 83,878 48,395 38,320 33,154 28,008
Gain on sale of real
estate .................... 47,529 29,562 50,550 40,517 12,940 21,404 1,579
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ......... 25,763 17,022 29,782 30,219 6,906 12,599 (8,062)
Preferred dividend
requirement ............... (22) (22) (22) (30) (1) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
applicable to Common
shares .................... $ 25,741 $ 17,000 $ 29,760 $ 30,189 $ 6,905 $ 12,599 $ (8,062)
Basic and Diluted
Earnings Per Share Net
income (loss)
applicable to Common
shares ....................
Basic ................... $ 2.98 1.97 $ 3.45 $ 7.05 $ 1.78 3.22 $ (2.02)
=========== =========== =========== =========== =========== =========== ===========
Diluted ................. $ 2.97 $ 1.97 $ 3.45 $ 7.05 $ 1.78 $ 3.22 $ (2.02)
=========== =========== =========== =========== =========== =========== ===========
Dividends per Common
share ..................... -- .54 $ .54 $ .60 $ .60 $ .28* $ .28
Weighted average Common
shares outstanding ........ 8,675,230 8,630,029 8,631,621 4,283,574 3,876,797 3,907,221 3,994,687

----------
* Does not include a special dividend of $1.00 per share.

BALANCE SHEET DATA

Real estate held for
investment, net .............. $604,571 $639,040 $599,746 $347,389 $269,845 $217,010
Real estate held for
sale, net
Foreclosed .............. 504 1,824 1,790 1,356 1,356 910
Other ................... -- -- -- -- 3,630 2,089
Notes and interest
receivable, net .............. 13,802 8,172 11,530 1,493 3,947 8,606
Total assets ................. 708,789 731,885 714,195 382,203 319,135 244,971
Notes and interest
payable ...................... 460,275 501,734 503,406 282,688 222,029 158,692
Redeemable preferred
stock ........................ 1,500 1,500 -- -- -- --
Stockholders' equity ......... 216,811 200,560 179,112 91,132 86,133 78,959
Book value per share ......... $ 24.99 $ 23.22 $ 20.76 $ 23.35 $ 22.15 $ 20.11

SUMMARY FINANCIAL DATA OF IOT

The following is a summary of financial data incorporated by reference
in this joint proxy statement and prospectus. You should read the following data
in conjunction with the more detailed information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the IOT consolidated financial statements and related notes included elsewhere
in this joint proxy statement and prospectus.

Nine Months Ended
September 30, For the Years Ended December 31,
--------------------------- ---------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA

Rents ....................... $ 9,759 $ 10,732 $ 13,731 $ 15,968 $ 14,326 $ 12,221 $ 8,666
Property expense ............ 5,292 5,286 6,969 6,768 6,462 5,900 4,358
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income ............ 4,467 5,446 6,762 9,200 7,864 6,321 4,308

Interest income ............. 142 206 319 29 172 266 339
Income (loss) from
equity partnerships ......... (27) (71) (61) 148 113 52 85
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gain on sale of real
estate ...................... -- 20,878 20,878 1,525 180 3,953 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
115 21,013 21,136 1,702 465 4,271 424

Other expense ............... 7,780 8,537 11,104 9,580 9,008 7,275 5,300
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ........... $ (3,198) $ 17,922 $ 16,794 $ 1,322 $ (679) $ 3,317 $ (568)
=========== =========== =========== =========== =========== =========== ===========

PER SHARE DATA

Net income (loss) ........... $ (2.11) $ 11.70 $ 11.03 $ .87 $ (.44) $ 2.18 $ (.37)
=========== =========== =========== =========== =========== =========== ===========
Dividends per share ......... $ -- $ .45 $ .45 $ .60 $ .60 $ .40 $ .40
Weighted average Common
shares outstanding .......... 1,512,119 1,531,177 1,522,510 1,527,386 1,521,832 1,519,888 1,530,008

December 31,
September 30, ---------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------------- ------- ------- ------- ------- -------
(unaudited) (dollars in thousands, except per share)

BALANCE SHEET DATA

Real estate held for
investment, net .............. $85,781 $86,277 $86,542 $83,691 $81,914 $46,693
Real estate held for
sale, net .................... -- -- -- -- -- 6,623
Notes and interest
receivable, net .............. 505 1,500 -- -- 2,010 1,998
Total assets ................. 92,874 96,519 91,185 88,695 90,309 63,593
Notes and interest
payable ...................... 54,329 54,206 62,852 60,786 61,323 38,957
Stockholders' equity ......... 35,486 39,998 23,991 23,560 25,131 22,381
Book value per share ......... $ 24.66 $ 26.42 $ 15.69 $ 15.44 $ 16.53 $ 14.63

COMPARATIVE PER SHARE INFORMATION

The following table sets forth per share data of the shares of TCI and
IOT common stock on a historical, pro forma combined and pro forma equivalent
basis. Pro forma equivalent information for ARL, TCI and IOT was calculated by
multiplying the pro forma per share amounts for ARL by the exchange ratio for
TCI and IOT common stock, respectively. This table should be read in conjunction
with the historical financial statements and notes thereto contained elsewhere
in this joint proxy statement and prospectus and in conjunction with the
unaudited pro forma combined financial information included elsewhere in this
joint proxy statement and prospectus.

ARL COMMON STOCK

Historical Proforma Combined
---------- -----------------

Income (loss) per common share, diluted
Nine months ended September 30, 2001 $1.00 $2.19
Year ended December 31, 2000 .04 2.16

Cash dividend per common share
Nine months ended September 30, 2001 -- --
Year ended December 31, 2000 -- --

Book value per common share at September 30, 2001 7.05 9.30

-----------

TCI COMMON STOCK

Historical Proforma Combined
---------- -----------------

Income (loss) per common share, diluted
Nine months ended September 30, 2001 $ 2.97 $ 2.34
Year ended December 31, 2000 3.45 1.77

Cash dividend per common share
Nine months ended September 30, 2001 -0- -0-
Year ended December 31, 2000 .54 -0-

Book value per common share at September 30, 2001 26.96 9.72

-----------

IOT COMMON STOCK

Historical Proforma Combined
---------- -----------------

Income (loss) per common share
Nine months ended September 30, 2001 $(2.11) $ .71
Year ended December 31, 2000 11.03 .92

Cash distribution per common share
Nine months ended September 30, 2001 -0- -0-
Year ended December 31, 2000 .45 -0-

Book value per common share 24.66 7.25

MARKET PRICES AND DIVIDEND INFORMATION

As of October 22, 2001, the last full trading day prior to the public
announcement of the mergers, the table below sets forth the closing prices per
share of the common stock of ARL, TCI and IOT:

Closing Price

ARL common stock....................... $11.62
TCI common stock....................... $12.00
IOT common stock....................... $14.76

The shares of ARL common stock and the shares of TCI common stock are
traded on the NYSE under the symbols "ARL" and "TCI," respectively. The shares
of IOT common stock are traded on the American Stock Exchange ("AMEX") under the
symbol "IOT." As of the record date, there were 5,415 record holders of ARL
common stock, 7,258 record holders of TCI common stock and 1,351 record holders
of IOT common stock. As of the record date, there were no restrictions on TCI's
or IOT's ability to pay dividends. The following table sets forth the quarterly
high and low reported sales prices of ARL, TCI and IOT common stock, as well as
the quarterly distributions, declared per share, as applicable, for the periods
indicated below.

ARL TCI IOT
COMMON STOCK(1) COMMON STOCK COMMON STOCK
------------------------------------- ------------------------------------ ---------------------------------
HIGH LOW DIVIDENDS(2) HIGH LOW DIVIDENDS(3) HIGH LOW DIVIDENDS(3)
----------- ---------- ------------ --------- ---------- ------------ -------- --------- ------------

1999:

First Quarter $ -- $ -- $ -- $ 16 3/8 $ 11 5/8 $ .15 $ 8 $ 6 3/8 $ .15
Second Quarter -- -- -- 12 1/2 11 3/8 .15 7 3/4 5 5/8 .15
Third Quarter -- -- -- 13 7/16 10 7/8 .15 7 1/8 5 1/8 .15
Fourth Quarter -- -- -- 13 7/16 11 1/4 .15 5 7/8 4 3/4 .15

2000:

First Quarter -- -- -- 13 10 13/16 .18 7 1/2 5 1/4 .15
Second Quarter -- -- -- 13 1/2 2 7/8 .18 7 1/2 2 .15
Third Quarter 17 7 -- 16 11 1/2 .18 10 1/4 6 3/4 .15
Fourth Quarter 17 1/4 13 7/16 -- 16 8 7/8 -- 9 1/4 8 --

2001:

First Quarter 14 1/2 12 1/2 -- 12 9/16 8 3/16 -- 9 1/16 7 5/8 --
Second Quarter 12 10/16 9 3/4 -- 16 8 15/16 -- 8 3/16 6 15/16 --
Third Quarter 12 10 1/8 -- 14 3/4 11 11/16 -- 13 1/2 9 1/16 --
Fourth Quarter 13 9 3/4 -- 16 3/8 11 5/8 -- 23 1/2 12 3/4 --

Although ARL will apply to have the Series G and Series H preferred
stock, and the shares of ARL common stock issuable upon conversion of the Series
G and Series H preferred stock, listed on the NYSE, there is no assurance the
NYSE will list the shares. The listing of the preferred and common shares for
trading on the NYSE is not a condition to the respective obligations of TCI and
IOT to consummate the mergers.

----------

(1) Trading of ARL common stock on the NYSE commenced on August 3, 2000.

(2) It is the policy of ARL to determine annually whether to pay dividends. In
accordance with that policy, ARL did not pay any dividends in 2000 or 2001.

(3) During the fourth quarter of 2000, IOT and TCI discontinued the payment of
dividends.

FORWARD LOOKING STATEMENTS

The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. These statements may be made directly in this
joint proxy statement and prospectus referring to ARL, TCI or IOT, and they may
also be made a part of this joint proxy statement and prospectus by reference to
other documents filed by us with the SEC, which is known as "incorporation by
reference."

Words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," "target," "objective," "strategy," "goal" and words and terms
of similar substance used in connection with any discussion of future operating
or financial performance, or the acquisition by ARL of TCI and/or IOT, identify
forward-looking statements. Forward-looking statements are based on management's
current views about future events and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. The following risks could cause or
contribute to actual results differing materially from those described in the
forward-looking statements:

o inability to obtain, or to meet conditions imposed for,
regulatory approval of pending acquisitions and divestitures

o availability, terms and development of capital

o business abilities and judgment of personnel

o changes in, or the failure to comply with, governmental
regulations, particularly those affecting the environment and
water quality

o competition

o success of operating initiatives, advertising and promotional
efforts

o existence of adverse publicity or litigation

o changes in business strategy or plans

o quality of management

o general economic, business and financial market conditions

o the ability to satisfy the conditions to closing set forth in
the merger agreements

o other factors described in our filings with the SEC

We caution you not to place undue reliance on our forward-looking
statements, which speak only as of the date of this joint proxy statement and
prospectus or the date of the documents incorporated by reference in this joint
proxy statement and prospectus. Except as required by law, we are under no
obligation, and expressly disclaim any obligation, to update or

alter any forward-looking statements, whether as a result of new information,
future events or otherwise.

For additional information about factors that could cause actual
results to differ materially from those described in the forward-looking
statements, please see the quarterly reports on Form 10-Q and the annual reports
on Form 10-K as well as current reports on Form 8-K that ARL, TCI and IOT have
filed with the SEC as described under "Where You Can Find More Information."

All forward-looking statements attributable to us or any person acting
on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section.

RISK FACTORS

You should carefully consider the risks described below and other
information in this joint proxy statement and prospectus before you decide how
to vote on the mergers of TCI and IOT with ARL. If the mergers are approved,
stockholders of TCI and IOT should also consider these risk factors again before
they decide to exercise their right to affirmatively elect to receive preferred
stock of ARL instead of cash for their shares of the common stock of TCI or IOT.

The plan to merge ARL, TCI and IOT involves risk. Some of those risks
relate to the proposed transactions themselves. Other risks relate to the
preferred stock of ARL being offered or to the businesses of ARL, TCI and IOT
themselves.

RISKS RELATED TO THE MERGERS

SUBSTANTIAL AMOUNTS OF CASH ARE REQUIRED FOR THE MERGERS. A substantial
amount of cash is necessary to fund the cash payments to the stockholders of TCI
and IOT required in the mergers and to pay expenses associated with the mergers.
Also, the combined business of ARL, TCI and IOT have substantial indebtedness
due in the next twelve months that must be repaid or refinanced.

o Non-affiliated TCI and IOT stockholders will be entitled to
receive up to an aggregate of $60,882,020 in cash for their
shares of the common stock of TCI and IOT if none
affirmatively elect to receive the preferred stock of ARL

o ARL, TCI and IOT expect to incur approximately $27,149,311 in
costs in connection with the mergers, including prepayment of
indebtedness and fees and commissions associated with property
sales necessary to raise cash to fund payments to the
stockholders of TCI and IOT

o ARL, TCI and IOT have approximately $395,558,476 in loans
coming due in the next twelve months that must be repaid or
refinanced

Approximately $104,235,586 must be raised in order to fund all of the
obligations related to the mergers, and an additional $395,558,477 in the next
twelve months to repay or refinance maturing indebtedness. ARL does not
currently have this much cash presently available. Although ARL, TCI and IOT
expect to be able to raise the cash necessary to fund the transactions required
in connection with the mergers and their continuing combined business by selling
real estate and obtaining new loans, there can be no assurance that sales will
be made or that loans will be obtained, or that they will be made or obtained on
terms favorable to the combined business of ARL, TCI and IOT. The ARL board of
directors has determined that the TCI and IOT mergers would not be consummated
unless, in each case, sufficient cash was available to ARL, either from its own
resources or from TCI or IOT immediately after the mergers, to pay the cash
merger consideration due as a result of the mergers. If ARL, TCI and IOT are not
able to raise the cash anticipated through the sale of real estate and obtaining
new loans, the mergers may be delayed or abandoned and the ongoing combined
business of ARL, TCI and IOT may be adversely affected.

SUBSTANTIAL PROPERTY SALES OR LOANS ARE NECESSARY. ARL, TCI and IOT
expect to raise most of the cash necessary to fund all of the obligations
related to the mergers from the sale of real estate or loans. Because ARL, TCI
and IOT may need to sell assets before the mergers, they may not receive the
best possible prices for their properties and may have to incur higher expenses
than would otherwise be incurred. Real estate assets are not readily saleable.
The consummation of the sales anticipated by ARL, TCI and IOT will be subject to
a number of contingencies outside of their control, including:

o The buyers' ability to obtain any necessary financing;

o The satisfactory completion of any due diligence review made
by the buyers and the buyers' lenders; and

o Satisfactory completion of any environmental review and other
review of the subject properties' legal compliance.

Similarly, the consummation of any potential loans to ARL, TCI or IOT
will be subject to contingencies outside of their control.

LENDER CONSENT MAY BE NECESSARY. ARL, TCI and IOT have each borrowed
substantial amounts of money to buy and develop real estate. Some of ARL, TCI or
IOT's loan agreements may contain provisions limiting their ability to do the
mergers or requiring advance consent for the mergers by lenders. In some cases,
ARL, TCI and IOT may disagree with their lenders about the interpretation of
these provisions. To the extent that ARL, TCI and IOT are unable to get any
necessary lender consents, or to the extent that they have disagreements with
their lenders regarding the mergers, the businesses of ARL, TCI and IOT may be
adversely affected and the mergers may be delayed or abandoned.

THE MERGERS ARE SEPARATE TRANSACTIONS. TCI and IOT are separate
companies. TCI and IOT will each enter into a separate merger agreement with ARL
and their stockholders will receive different compensation as a result of the
merger. It is possible that the stockholders of TCI or IOT will vote to approve
a merger with ARL and that the stockholders of the other will not. If one of
these companies does not approve the merger, ARL may be adversely affected and
may not have sufficient cash to consummate the other merger. If the stockholders
of either TCI or IOT do not approve the merger, but the stockholders of the
other do, the merger of ARL and the other company may be delayed or abandoned.

A TENDER OFFER MAY BE REQUIRED. In connection with the Settlement
Agreement, ARL agreed to propose the mergers to the stockholders of TCI and IOT.
It was also agreed that if the stockholders of TCI or IOT did not approve the
mergers, ARL can make a tender offer for the shares of the common stock of the
company or companies that did not approve the merger. Making a tender offer for
the shares of TCI or IOT would be expensive for ARL, and there can be no
assurance that it would be able to arrange the necessary financing to make and
consummate such a transaction. If ARL does not make the tender offer required by
the Settlement Agreement it could be liable for damages of approximately
$14,265,400 (or $5.00 for each share of TCI stock it does not acquire) and/or
$2,882,400 (or $5.00 for each share of IOT stock it does not acquire.)

RISKS RELATED TO THE ARL PREFERRED STOCK

If the mergers are consummated, stockholders of TCI and IOT will
receive cash for their shares of TCI and IOT common stock unless they elect to
receive shares of ARL preferred stock instead. The opportunity to receive shares
of ARL preferred stock instead of cash will be given to stockholders of TCI and
IOT after the mergers are completed, if they are completed. Electing to receive
shares of ARL preferred stock is a decision to invest in the stock of ARL and is
subject to the risks of investing in the combined business of ARL, TCI and IOT.
Investing in the preferred stock of ARL is also subject to risks related to the
terms and nature of the Series G and Series H preferred stock. TCI and IOT
stockholders should carefully review the risks described below before electing
to take ARL preferred stock instead of cash.

VALUE OF THE ARL PREFERRED STOCK IS UNCERTAIN. There can be no
assurance regarding the value of the ARL preferred stock. Along with the risks
associated with owning securities generally, stockholders of TCI and IOT should
consider the following specific risks associated with the ARL preferred stock:

o Although ARL will apply to list the preferred shares to be
offered to TCI and IOT stockholders on the NYSE, the exchange
may not accept them for listing. Even if the shares of ARL
preferred stock are listed on an exchange, an active trading
market for them may not develop

o There can be no assurance that an active trading market for
the ARL preferred stock will develop, even if those shares are
listed on the NYSE. As a result, holders of the ARL preferred
stock may not be able to sell those shares for cash when they
wish to or may be limited in the number of shares that they
are able to sell at any one time

o Stockholders of TCI and IOT who affirmatively elect to receive
ARL preferred stock instead of cash for their shares of TCI or
IOT will be investing in the combined business of ARL. If
there is a trading market for the ARL preferred stock after
the mergers, the value of those shares will rise and fall
based upon many factors, including the results of ARL's
business operations and its financial condition. There can be
no assurance that the ARL preferred stock will rise in value

o The preferred shares to be offered to stockholders of TCI and
IOT will have a annual dividend which will be payable
quarterly. Although the preferred shares have a dividend, ARL
is only obligated to pay the dividend when it is declared and
when it has sufficient funds to do so. Unpaid dividends will
accumulate until paid, but will not bear interest. Because ARL
will need to pay substantial amounts to consummate the mergers
and to repay or refinance indebtedness in the next twelve
months, there can be no assurance that ARL will have
sufficient cash to pay the dividend contemplated on the shares
of ARL preferred stock to be offered to stockholders of TCI
and IOT

o Even if it is able to fund its near term cash needs, ARL's
ability to declare and pay dividends on its preferred stock
will depend upon the results of its business operations, the
terms of loan agreements it may have and the amount of cash it
has available from time to time. Dividends on ARL's preferred
stock will only be payable when its board of directors
determines it has sufficient cash available and that it is
otherwise appropriate to do so. Unpaid dividends on the ARL
preferred stock will not bear interest

o ARL has other shares of preferred stock outstanding that are
entitled to dividends. ARL can only pay dividends on its
preferred stock if it pays dividends on all of the shares of
preferred stock entitled to dividends at the same time.
Currently, ARL has 2,778,869.75 shares of its Series A, E and
F preferred stock outstanding. Those shares require the
payment of a total of approximately $688,725 in dividends
quarterly. If all of the stockholders of TCI and IOT elect to
receive preferred stock instead of cash, ARL will add
approximately 7,484,006 shares of preferred stock outstanding
with a dividend requirement of approximately $1,736,398
quarterly

o Stockholders of TCI and IOT who affirmatively elect to receive
shares of ARL preferred stock instead of cash will each
receive one share of preferred stock for each share of TCI or
IOT common stock that they hold. No adjustment in this
exchange ratio will be made to reflect changes in the market
prices of the shares of ARL, TCI or IOT. Shares of the ARL
preferred stock to be issued to TCI and IOT stockholders who
elect to receive them instead of cash will be convertible into
shares of ARL common stock in the future. The number of shares
of ARL common stock you will receive if you convert a share of
ARL preferred stock has already been set and will not be
adjusted if the market value of ARL's common stock declines in
the future

THE ARL PREFERRED HAS LIMITED VOTING RIGHTS. The ARL shares of Series G
preferred stock and Series H preferred stock have very limited voting rights.
The holders of Series G preferred stock and Series H preferred stock are not
voting for the election of directors or on any matter except: (i) as otherwise
provided by law, (ii) with respect to an amendment to ARL's articles of
incorporation or bylaws that would materially alter or change the existing terms
of such series of preferred stock, and (iii) at any time or times for the
election of two directors when all or any portion of the dividends on such
series of preferred stock for any six quarterly dividends, whether or not
consecutive, shall be in arrears and unpaid. In the latter event, the number of
directors constituting the board of directors of ARL shall be increased by two
and the holders of such Series G preferred stock or Series H preferred stock, as
applicable, voting separately as a class, shall be entitled to elect two
directors to fill the newly created directorships with each holder being
entitled to one vote in the election for each share of such preferred stock held
by such stockholder.

AFFILIATES OF ARL MAY HOLD A MAJORITY OF THE ARL PREFERRED STOCK.
Affiliates of ARL own a substantial number of shares of the common stock of TCI
and IOT. If the mergers occur, shares of TCI and IOT held by ARL's affiliates
will be converted into preferred stock of ARL. Thus, a majority of the issued
and outstanding shares of the ARL preferred stock to be issued as

a result of the mergers may by held by affiliates of ARL. Affiliates of ARL may
be able to control any vote of holders of the Series G and H ARL preferred
stock, including any vote to amend the terms of the Series G and H ARL preferred
stock and the rights of the holders of the Series G and H ARL preferred stock.

RISKS RELATED TO THE COMBINED BUSINESS

The combined businesses of ARL, TCI and IOT will be subject to risks.
If the mergers are consummated, stockholders of TCI and IOT will receive cash
for their shares of TCI and IOT common stock unless they affirmatively elect to
receive shares of ARL preferred stock instead. The opportunity to receive shares
of ARL preferred stock instead of cash will be given to stockholders of TCI and
IOT after the mergers are completed, if they are completed. Electing to receive
shares of ARL preferred stock is a decision to invest in the stock of ARL and is
subject to the risks of investing in the combined businesses of ARL, TCI and
IOT. TCI and IOT stockholders should carefully review the risks described below
before affirmatively electing to take ARL preferred stock instead of cash.

ARL WILL NEED TO SELL PROPERTY AND BORROW MONEY TO MEET ITS LIQUIDITY
NEEDS. The combined business of ARL, TCI and IOT will need to sell properties or
borrow additional amounts to repay maturing debt and to fund their ongoing
business operations. There can be no assurance that the combined business will
be able to make the required property sales for favorable prices or at all, or
that it will be able to borrow additional funds on favorable terms or at all. In
connection with considering an investment in the ARL preferred stock,
stockholders of TCI and IOT should consider the following risks related to the
indebtedness and liquidity needs of the combined business of ARL, TCI and IOT:

o In addition to the substantial amounts of cash that will be
needed to fund the cash payments to the non-affiliated
stockholders, the combined business of ARL, TCI and IOT will
need to raise approximately $395,558,476 to repay or refinance
debts maturing in the next twelve months. The combined
business of ARL, TCI and IOT will have approximately
$395,558,476 of indebtedness coming due in the next twelve
months out of a total debt of $1,196,996,000. After
consummating the mergers and paying related expenses, assuming
no stockholders of TCI or IOT elect to receive ARL preferred
stock instead of cash, ARL expects to have approximately
$10,000,000 of cash and negotiable securities on hand to meet
its obligations

o ARL, TCI and IOT have significant debt service obligations
when compared to their available cash flow. As of September
30, 2001, after giving effect to the mergers and related
transactions on a pro forma basis, the combination of ARL, TCI
and IOT would have had total debt of approximately
$1,196,996,000 and total stockholders equity of approximately
$110,072,000, if no stockholders of TCI and IOT elect to
receive ARL preferred stock instead of cash. For the nine
months ended September 30, 2001, after giving effect to the
mergers and assuming that no TCI or IOT stockholder elects to
receive ARL preferred stock instead of cash, the interest
expense for the combined business of ARL, TCI and

IOT would have been $92,191,000 as compared to net available
cash flow of approximately $93,034,000

o The ongoing business operations of the combined business of
ARL, TCI and IOT will require substantial amounts of cash from
property sales, new borrowings or sales of securities. A large
portion of the assets of ARL, TCI and IOT consist of
undeveloped real estate that produces little or no income. In
addition, ARL, TCI and IOT have made substantial commitments
in connection with the development of property. For the nine
months ended September 30, 2001, the combined business
operations of ARL, TCI and IOT, on a pro forma basis, would
have had revenues of approximately $279,156,000 and expenses,
exclusive of debt service and non cash expenses such as
depreciation and amortization of approximately $231,382,000.
ARL anticipates requiring additional cash of approximately
$50,522,713 in excess of its expected revenues to fund the
ongoing business operations of the combined business of ARL,
TCI and IOT during the next twelve months

ARL WILL HAVE SUBSTANTIAL DEBT. ARL, TCI and IOT each have substantial
indebtedness and the combined business of ARL, TCI and IOT will be highly
leveraged. This high level of indebtedness will subject the combined business to
risk. Among those risks are the following:

o the combined businesses of ARL, TCI and IOT may be limited in
their ability to grow by a lack of cash or the availability of
loans for new acquisitions

o the combined business of ARL, TCI and IOT may be forced to
sell properties on disadvantageous terms if it is unable to
refinance maturing debt obligations

o the interest expense of the combined business of ARL, TCI and
IOT could increase if general interest rates increase, because
28.3% of their loans are floating rate loans and another 55.1%
come due and must be refinanced within the next three years

o the substantial leverage of the combined business of ARL, TCI
and IOT will increase their vulnerability to economic
downturns and could place them at a competitive disadvantage
to competitors having lower levels of debt

o high levels of debt could limit the ability of the combined
businesses of ARL, TCI and IOT to react to changing conditions
in the real estate industry or the economy generally

o failure by the combined business to comply with financial and
other restrictive covenants in loan agreements, or failure to
make debt service payments could result in events of default
under those and other loan agreements that, if not cured or
waived, could harm the business or could result in the
bankruptcy of one or more subsidiaries of ARL, TCI or IOT or
of the combined business as a whole

CONTROL BY BCM. ARL, TCI and IOT are each managed and controlled by
BCM. The combined business of ARL, TCI and IOT will continue to be managed BCM
as well. ARL, TCI and IOT have no employees. Instead, pursuant to a written
advisory agreement, BCM provides services for specific compensation. This
arrangement will continue after the mergers. Also, BCM and its affiliates own or
control more than a majority of the voting securities of each of ARL, TCI and
IOT, and will own more than a majority of the voting securities of ARL after the
merger. The interest of BCM may be different from those of other stockholders of
ARL, TCI and IOT, and may be different from those of other holders of the ARL
preferred stock. BCM's position may have a number of effects on the combined
business of ARL, TCI and IOT which may affect the value of the ARL common and
preferred stock, including:

o BCM and its affiliates can control the election of all members
of the board of directors of ARL at the present time, and
will continue to have that control after the mergers

o BCM and its affiliates is able, and will be able after the
mergers, to prevent any transaction that would result in a
change of control of ARL

o Dealings between ARL and BCM after the mergers may not be at
arms length

DEPENDENCE ON REAL ESTATE INVESTMENTS. ARL, TCI and IOT each invest
primarily in real estate. Real estate investments are subject to varying degrees
of risk and are relatively illiquid. The performance of real estate assets and
ARL's resulting ability to pay dividends to its stockholders may be adversely
affected by a number of factors, including:

o the general economic climate and local real estate conditions
(such as oversupply of or reduced demand for space and changes
in market rental rates)

o the perceptions of prospective tenants of the safety,
convenience and attractiveness of the properties

o the ability of the owner of the properties to provide adequate
management, maintenance and insurance

o the ability to collect on a timely basis all rent from tenants
and interest from borrowers

o the expense of periodically renovating, repairing and
reletting spaces

o increasing operating costs (including real estate taxes and
utilities) which may not be passed through to tenants. Certain
significant expenditures associated with investments in real
estate (such as mortgage payments, real estate taxes,
insurance and maintenance costs) are generally not reduced
when circumstances cause a reduction in rental revenues from
the investment

o governmental regulations, local rent control or stabilization
ordinances

ENVIRONMENTAL REGULATIONS. Under various federal, state and local
environmental laws, ordinances and regulations, an owner of real estate may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances on the property. These laws often impose environmental liability
without regard to whether the owner knew of, or was responsible for, the
presence of hazardous or toxic substances. The presence of hazardous substances,
or the failure to remediate them properly, may adversely affect the owner's
ability to sell or rent the property or to borrow money using the property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
these substances at a disposal or treatment facility, whether or not the
facility is owned or operated by this person. Certain laws impose liability for
release of asbestos-containing materials into the air and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with asbestos-containing materials. In connection with the ownership
(directly or indirectly), operation, management and development of real
properties, the combined business of ARL, TCI and IOT may be considered an owner
or operator of these properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and, therefore, potentially liable
for removal or remediation costs, as well as for other related costs, including
governmental fines and injuries to persons and property.

COMPETITION. Developing and managing real estate assets is a highly
competitive business. The combined business of ARL, TCI and IOT will compete
with many public and private real estate investment entities, including
financial institutions (such as mortgage banks, pension funds and real estate
investment trusts), other institutional investors and individuals for property
to purchase. In addition, developed real estate owned by the combined business
of ARL, TCI and IOT will compete for tenants and customers with other developed
real estate owned by third parties. Many of the competitors in the business of
purchasing, developing and managing real estate are considerably larger, have
greater financial resources and may have management personnel with more
experience than the officers of the combined business of ARL, TCI and IOT will
have.

GEOGRAPHIC CONCENTRATION. A substantial portion of assets of the
combined business of ARL, TCI and IOT will consist of real estate and mortgage
notes receivable secured by income producing real estate such as apartment
complexes, office buildings, shopping centers and partnership interests located
in the Midwest, Northeast and Southwest regions of the United States. Specific
geographic regions of the United States from time to time will experience weaker
regional economic conditions and housing markets, and, consequently, will
experience higher rates of loss and delinquency on mortgage loans. Any
concentration of assets in a region may present risks in addition to those
generally present for similar real estate assets or mortgage-backed or
asset-backed securities without this concentration.

REAL ESTATE OPERATING RISKS. The real estate assets of the combined
business of ARL, TCI and IOT will be subject to industry-specific operating
risks, any or all of which may adversely affect the results of the operations of
the combined business. All properties are subject to increases in operating
expenses, including: cleaning, electricity, heating, ventilation and
air-conditioning, elevator repair and maintenance, insurance and administrative
costs, and other general costs associated with security, landscaping, repairs,
regulatory compliance and maintenance. While commercial tenants are often
obligated to pay a portion of these escalating costs, there can be no assurance
that they will agree to pay these costs in the absence of a

contractual duty or that their payments will fully cover these costs. If
operating expenses increase, the local rental market, governmental regulations
or the lease may limit the extent to which rents may be increased to meet
expenses without decreasing occupancy rates. To the extent rents cannot be
increased or costs controlled, the cash flow and financial condition of the
combined business of ARL, TCI and IOT will be adversely affected. Industry
specific risks related to the asset of the combined business of ARL, TCI and IOT
include the following:

o APARTMENT PROPERTIES. Market values of apartments can be
affected significantly by the supply and demand in the
geographic market for the properties and, therefore, may be
subject to adverse economic conditions. Market values of
apartments may vary as a result of economic events or
governmental regulations outside the control of the borrower
or lender. Governmental regulations such as rent control laws
may impact the future cash flow of the apartments

o UNDEVELOPED PROPERTY. Undeveloped real estate (raw land)
generates little or no income. To the extent that undeveloped
real estate is purchased with the proceeds of debt, as a
result, the costs of holding it will greatly exceed any income
it may generate. In addition, the market value of undeveloped
real estate tends to fluctuate greatly, depending upon many
factors, including local and national economic conditions,
interest rates, local development conditions, local land use
regulations, the nature and quality of surrounding developed
real estate

o HOTEL PROPERTIES. Like any income producing property, the
income generated by a hotel property is subject to local,
regional and national economic conditions and competition.
However, because the income is primarily generated by
short-term occupancies, the level of income responds more
quickly to market conditions. Sensitivity to competition may
require more frequent improvements and renovations than other
properties. To the extent a hotel is affiliated with a
regional, national or international chain, changes in the
public perception of the affiliated chain may have an impact
on the income generated by the hotel. In addition, since the
hotel industry is generally seasonal, income generated by a
hotel property will fluctuate in accordance with the
particular demand characteristics of the market in which it is
located

o OFFICE AND RETAIL PROPERTIES. The market value of office
buildings and shopping centers is affected by the risk that a
lease may not be renewed, that the space may not be released
and that the terms of renewal or release (including the cost
of required renovations or concessions to tenants) may be less
favorable than current lease terms

o INVESTMENTS IN NON-RECOURSE MORTGAGE LOANS. Mortgage loans may
or may not be recourse obligations of the borrower and
generally will not be insured or guaranteed by governmental
agencies or otherwise. In the event of a default under this
type of a loan, ARL may have to foreclose the mortgage or
protect its investment by acquiring title to the property.
Taking title to a property may require investing in
substantial improvements or repairs in order to maximize the
property's investment potential. Borrowers may contest
enforcement of

foreclosure or other remedies, seek bankruptcy protection
against foreclosure and/or bring claims for lender liability
in response to actions to enforce mortgage obligations.
Because of relatively high "loan-to-value" ratios and declines
in the value of the mortgaged property, the amount received in
foreclosure may be less than the amount outstanding under the
mortgage loan

o PARTICIPATION IN LOANS MADE BY OTHERS. The combined business
of ARL, TCI and IOT may participate in loans originated by
other real estate lenders or investors such as financial
institutions. A participant in a loan or investment originated
by another entity may not have the sole authority, or any
authority, to declare a default under the mortgage or to
control the management or disposition of the financed property
or any related foreclosure proceedings

o SUBORDINATED INTERESTS. The combined business of ARL, TCI and
IOT may make loans that are subordinated to other obligations
of the debtor. Any investments in subordinated mortgage loans
involve additional risks, including the lack of control over
collateral and related foreclosure proceedings

o INVESTMENTS IN PARTNERSHIPS OR JOINT VENTURES. The combined
business of ARL, TCI and IOT will have investments in one of
more partnerships, joint ventures or similar entities where
responsibility for the conduct of the business of the
investment is shared with a third party. As a result, the
success of such an investment will be subject to risks that
the third party may become bankrupt or fail to perform its
obligations, have different economic goals than the combined
business, take actions which are contrary to the interests of
the combined business or be unable to agree upon the proper
conduct of the investment's business

o RISK OF TERRORISM. Office buildings, hotels and other
properties are subject to the risk that terrorists or other
persons may damage or destroy them, or that their value may be
damaged or destroyed as a result of damage to or destruction
of neighboring properties. In addition, to the extent that
added security measures made necessary by changing political
conditions increases the cost of operating real property
investments, operating income from and value of such
properties may be reduced

o AMERICANS WITH DISABILITIES ACT. Under the Americans with
Disabilities Act ("ADA"), places of public accommodation and
commercial facilities are required to meet requirements
related to access and use by disabled persons. Compliance with
ADA requirements could require both structural and
non-structural changes to the properties in which the combined
business of ARL, TCI and IOT invests. Noncompliance could
result in fines imposed by the federal government or an award
of damages to private litigants. The combined business of ARL,
TCI and IOT may be required to incur additional and unexpected
costs to ensure compliance with the ADA in the future. A
number of additional federal, state and local laws exist which
impose additional burdens or restrictions on owners with
respect to access by disabled persons. Those laws may require
modifications or restrict renovations to properties owned by
the combined business of ARL, TCI

and IOT. The ultimate amount of the cost of compliance with
the ADA or other related laws is not currently ascertainable.
Any substantial unexpected costs of compliance with the ADA
and similar statutes could adversely affect the results of
operations of the combined business of ARL, TCI and IOT

THE SPECIAL MEETINGS

INTRODUCTION

This joint proxy statement and prospectus is being furnished in
connection with the solicitation of proxies by the ARL, TCI and IOT boards of
directors for use in connection with the special meeting to be held by each
entity and any adjournments or postponements of the meetings.

ARL SPECIAL MEETING

The special meeting of holders of ARL common stock will be held on
March 27, 2002 at 2:00 p.m., Dallas time at 1800 Valley View Lane, Suite 300,
Dallas, Texas. The purpose of the ARL meeting is to consider and vote upon the
proposal to approve the TCI merger and the IOT merger and the corresponding
agreements and plans of merger.

TCI SPECIAL MEETING

The special meeting of holders of TCI common stock will be held on
March 27, 2002 at 3:00 p.m., Dallas time at 1800 Valley View Lane, Suite 300,
Dallas, Texas. The purpose of the TCI meeting is to consider and vote upon the
proposal to approve the TCI merger and the agreement and plan of merger.

IOT SPECIAL MEETING

The special meeting of holders of IOT common stock will be held on
March 27, 2002 at 4:00 p.m., Dallas time at 1800 Valley View Lane, Suite 300,
Dallas, Texas. The purpose of the IOT meeting is to consider and vote upon the
proposal to approve the IOT merger and the agreement and plan of merger.

VOTING INSTRUCTIONS

VOTING BY WRITTEN PROXY CARD. To vote by written proxy card, sign and
date each proxy card you receive and return it in the prepaid envelope. If a
stockholder is a corporation or partnership, the accompanying proxy card must be
signed in the full corporate or partnership name by a duly authorized person. If
the proxy card is signed pursuant to a power of attorney or by an executor,
administrator, trustee or guardian, the signer's full title must be given and a
certificate or other evidence of appointment must be furnished. If shares are
owned jointly, each joint owner must sign the proxy card.

VOTING BY TELEPHONE OR THE INTERNET. Instructions for a stockholder of
record to vote by telephone or the Internet are set forth on the enclosed proxy
card. The telephone and Internet voting procedures are designed to authenticate
votes cast by use of a personal identification number. The procedures, which
comply with Nevada law, allow stockholders to appoint a proxy to vote their
shares and to confirm that their instructions have been properly recorded.

If the stockholders have any questions regarding the business
combination, they should contact Investor Relations at 1-800-400-6407.

RECORD DATE; VOTES REQUIRED

ARL. Only holders of shares of ARL common stock of record at the close
of business on the record date, February 9, 2002, will be entitled to notice of
and to vote at the ARL special meeting. The mergers will be approved by ARL if
the mergers receive the affirmative vote, in person or by proxy, of a majority
of the votes cast at the ARL meeting. The holders of a majority of the
outstanding stock entitled to vote, present in person or by proxy, will
constitute a quorum for purposes of the ARL meeting. As of the record date for
the ARL special meeting, there were 11,375,127 shares of ARL common stock
outstanding. BCM, TCI and the members of the board of directors and executive
officers of ARL and its affiliates beneficially owned, as of the record date,
7,016,316 shares, which represent approximately 61.7% of the outstanding shares.
Each share of ARL common stock entitles its holder to cast one vote on matters
as to which voting is permitted or required by Nevada law. BCM, TCI and, to the
knowledge of ARL, the members of the board of directors and executive officers
of ARL and their affiliates intend to vote their shares in favor of the mergers.
Abstentions and broker non-votes will be excluded when calculating the number of
votes required for approval of the proposals.

TCI. Only holders of shares of TCI common stock of record at the close
of business on the record date, February 9, 2002, will be entitled to notice of
and to vote at the TCI special meeting. The TCI merger and the TCI merger
agreement will be approved by TCI if the TCI merger receives the affirmative
vote, in person or by proxy, of (1) a majority of the votes cast at the TCI
meeting and (2) a majority of the votes cast by the holders of shares of TCI
common stock not held by Mr. Phillips, BCM or ARL, voting at the TCI meeting,
whether in person or by proxy. The holders of a majority of the shares of voting
stock, present in person or by proxy, will constitute a quorum for purposes of
the TCI meeting. As of the record date for the TCI special meeting, there were
8,042,629 shares of TCI common stock outstanding. Each share of TCI common stock
entitles its holder to cast one vote on matters as to which voting is permitted
or required by Nevada law. ARL (indirectly), BCM (directly and indirectly) and
the members of the board of directors and executive officers of TCI and its
affiliates beneficially owned, as of the record date for the TCI special
meeting, 5,187,722 shares, which represent approximately 64.5% of the
outstanding shares. ARL, BCM and, to the knowledge of TCI, the members of the
board of directors and the executive officers of TCI and its affiliates intend
to vote their shares in favor of the TCI merger. Abstentions and broker
non-votes will be excluded when calculating the number of votes required for
approval of the proposals.

IOT. Only holders of shares of IOT common stock record at the close of
business on the record date, February 9, 2002, will be entitled to notice of and
to vote at the IOT special meeting. The IOT merger and merger agreement will be
approved by IOT if the merger receives the affirmative vote, in person or by
proxy, of (1) a majority of the votes cast at the IOT meeting and (2) a majority
of the votes cast by the holders of shares of IOT common stock not held by Mr.
Phillips, BCM or ARL, voting at the IOT meeting, whether in person or by proxy.
The holders of a majority of the shares of voting stock, present in person or by
proxy, will constitute a quorum for purposes of the IOT meeting. As of the
record date for the IOT special meeting, there were 1,438,945 shares of IOT
common stock outstanding. Each share of IOT common stock entitles its holder to
cast one vote on matters as to which voting is permitted or required by Nevada
law. ARL (indirectly),

BCM and the members of the board of directors and executive officers of IOT and
its affiliates beneficially owned, as of the record date for the IOT special
meeting, 862,465 shares, which represent approximately 59.9% of the outstanding
shares. ARL, TCI, BCM and, to the knowledge of IOT, directors and members of
management of IOT and its affiliates intend to vote their shares in favor of the
IOT merger. Abstentions and broker non-votes will be excluded when calculating
the number of votes required for approval of the proposals.

APPRAISAL RIGHTS

None of the ARL, TCI or IOT stockholders will be entitled to dissenters
or appraisal rights as a result of or in connection with the mergers.

PROXY

Enclosed is a form of proxy which should be completed, dated, signed
and returned by each ARL, TCI and IOT stockholder before the ARL, TCI and IOT
special meetings to ensure that each stockholder's shares will be voted at the
meeting. Any ARL, TCI or IOT stockholder signing and delivering a proxy has the
power to revoke the proxy at any time prior to its use by:

a. filing with the corporate secretary of ARL, TCI or IOT, as
applicable, a written revocation of the proxy or a duly executed proxy;

b. submitting another proper proxy bearing a later date than that of
the proxy first given by:

o signing and returning a proxy card to either the
corporate secretary of ARL, TCI or IOT, as
applicable;

o following the telephone voting instructions;

o following the Internet voting instructions; or

c. attending and voting in person at the meeting.

Shares represented by a properly executed proxy, and all properly
completed proxies voted by telephone or the Internet, which are delivered
pursuant to this solicitation (and not later revoked) will be voted in
accordance with the instructions indicated on the proxy, and at the discretion
of the proxy holders on all other matters properly addressed at the meeting. If
an ARL, TCI or IOT stockholder executes a proxy without instructions, the votes
represented by the proxy will be submitted in favor of the proposals.

Your broker may vote shares on the merger only if you instruct your
broker how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. If you do not tell
your broker how to vote, your shares will not be voted on the merger. If you
hold your shares in a brokerage account, you cannot vote in person at your
meeting. If you hold your shares in a brokerage account and you have instructed
your broker to vote, you must follow your broker's instructions regarding how to
change your vote.

SOLICITATION OF PROXIES

The boards of directors of ARL, TCI and IOT are soliciting proxies for
use in connection with the special meetings to be held by each entity and any
adjournments or postponements of either meeting. ARL, TCI and IOT will bear
equally the expense of the proxy solicitation. The costs of the proxy
solicitation are estimated to be $7,000. Georgeson Shareholder Communications,
Inc. has been retained to act as proxy solicitor in connection with the special
meetings. The proxy solicitor may contact ARL, TCI and IOT stockholders by mail,
telephone, telex, telegraph and personal interviews and may request brokers,
dealers and other nominee

stockholders to forward the proxy materials to beneficial owners of ARL, TCI or
IOT shares. The proxy solicitor will receive a fee estimated not to exceed
$30,000 for these services, plus reimbursement of out-of-pocket expenses. ARL,
TCI and IOT will indemnify the proxy solicitor against certain liabilities and
expenses in connection with the mergers, including liabilities under federal
securities laws. The telephone number of the proxy solicitor is 212-805-7000.

OTHER MATTERS FOR ACTION AT THE SPECIAL MEETINGS

The ARL, TCI and IOT boards of directors are not aware of any matters
to be presented for action at any of the special meetings other than those
described in this joint proxy statement and prospectus. If other matters should
properly come before any special meeting, it is intended that the holders of
proxies solicited by this joint proxy statement and prospectus will vote on
those matters in their discretion.

SPECIAL FACTORS

GENERAL

The following is a description of all material matters concerning the
business combination. Pursuant to the business combination, wholly-owned
subsidiaries of ARL will be merged with and into TCI and IOT and TCI and IOT
will become subsidiaries of ARL. If the TCI stockholders approve their merger
and the merger is consummated, each share of outstanding TCI common stock will
be converted into $17.50 in cash (less the amount of any dividend declared and
paid after January 2, 2002 by TCI on the TCI common stock) unless the TCI
stockholder affirmatively elects to receive one share of Series G preferred
stock in exchange for each share of outstanding TCI common stock. Outstanding
shares of TCI common stock held by ARL, its subsidiaries or TCI will be canceled
and shares of TCI common stock held by BCM and other affiliates of ARL will be
exchanged for shares of Series G preferred stock. Similarly, if the IOT
stockholders approve their merger, each share of outstanding IOT common stock
will be converted into $19.00 in cash (less the amount of any dividends declared
and paid after January 2, 2002 by IOT on the IOT common stock) unless the IOT
stockholder affirmatively elects to receive one share of Series H preferred
stock. Outstanding shares of IOT held by ARL, its subsidiaries TCI or IOT will
be canceled and each share of IOT common stock held by BCM and other affiliates
of ARL will be exchanged for shares of Series H preferred stock. Notwithstanding
the foregoing, the ARL board of directors has determined that ARL would not
enter into the merger agreements unless, in each case, sufficient cash was
available to ARL, either from its own resources or from TCI or IOT immediately
after the mergers, to pay the cash merger consideration due as a result of the
mergers.

THE COMPANIES

AMERICAN REALTY INVESTORS, INC. ("ARL"). A publicly traded (NYSE) Nevada
corporation engaged primarily in the business of owning and operating a
portfolio of real estate and financing real estate and real estate
activities through investments in mortgage loans.

TRANSCONTINENTAL REALTY INVESTORS, INC. ("TCI"). A publicly traded (NYSE)
Nevada corporation engaged primarily in the business of owning and
operating a portfolio of real estate and financing real estate and real
estate activities through investments in mortgage loans.

INCOME OPPORTUNITY REALTY INVESTORS, INC. ("IOT"). A publicly traded
(AMEX) Nevada corporation engaged primarily in the business of owning and
operating a portfolio of real estate and financing real estate and real
estate activities through investments in mortgage loans. IOT is a real
estate investment trust.

TRANSCONTINENTAL REALTY ACQUISITION CORPORATION. A Nevada corporation
recently formed as a wholly-owned subsidiary of ARL that will merge with
and into TCI.

INCOME OPPORTUNITY ACQUISITION CORPORATION. A Nevada corporation recently
formed as a wholly-owned subsidiary of ARL that will merge with and into
IOT.

The principal operating offices of each of ARL, TCI, IOT, Income
Opportunity Acquisition Corporation and Transcontinental Realty Acquisition
Corporation are located at 1800 Valley View Lane, Suite 300, Dallas, Texas
75234. The telephone number for each corporation is 469-522-4200.

BACKGROUND OF THE BUSINESS COMBINATION

On June 14, 2000, Mr. Phillips and A. Cal Rossi, Jr. were indicted* by
a Grand Jury in the Southern District of New York, charged with conspiracy to
commit securities fraud and kickback and wire fraud schemes. Mr. Phillips is a
representative of a trust for the benefit of his children that indirectly owns
BCM. As a representative of the trust, Mr. Phillips had, until June 2000,
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services for ARL, TCI and IOT. Until June 2000, Mr.
Rossi served as an officer of BCM. Following the announcement of the indictments
the market values of TCI and IOT common stock declined precipitously, thereby
exposing certain owners of the securities to margin calls. Sales under margin
calls were averted in almost all instances, but one brokerage firm sold a large
block of stock in TCI to an investment fund. On October 3, 2001, American Realty
Trust, Inc. ("ART"), a subsidiary of ARL, entered into an option to purchase the
TCI common stock from the investment fund at a price of $16.50 per share.
Settlement Counsel under the Olive Settlement, read of the purchase option
agreement and inquired as to whether or not there was interest in a transaction
whereby all of the shares owned by non-affiliates in IOT and TCI might be
purchased by ART for cash.

In early July 2000, Henry W. Simon, Jr. and the Fort Worth, Texas law
firm of Simon, Warner & Doby, were employed to represent BCM, Mr. Phillips, ART
and ARL. On October 12, 2000, Simon attended a hearing in San Francisco in the
Olive Litigation. After the hearing there was a brief conversation between Simon
and Donaldson in which the possibility of finally settling the disputes in the
Olive Settlement by offering cash to non-affiliated TCI and IOT stockholders was
discussed.

On October 31, 2000, Simon met with his clients and others about the
status and possibilities of the Olive Settlement. These parties contacted
Donaldson by telephone, informing him that there was some willingness to
consider attempts to determine cash prices which would be agreeable to all
parties and acceptable to Judge Marilyn H. Patel, Chief Judge, United States
District Court for the Northern District of California. Judge Patel would have
to make a finding that each price offered was fair pursuant to the class action
provisions which govern the

----------

* On February 13, 2002, following a lengthy trial, Messrs. Phillips and Rossi
were acquitted of all charges in the U.S. District Court, Southern District of
New York.

derivative litigation. Later the same date, Simon attended a meeting with Ted
Stokely, Chairman of the Board of TCI and IOT, and Robert A. Waldman, General
Counsel to ARL, TCI and IOT, to discuss the mechanics leading toward a possible
settlement. On November 3, 2000, Messrs. Donaldson, Mr. Phillips and Simon met
to negotiate a possible pricing structure. Mr. Phillips indicated that he might
consider recommending that ARL acquire the shares of common stock held by
non-affiliated TCI stockholders for $16 per share and non-affiliated IOT
stockholders for $14 per share.

On November 15, 2000, Waldman contacted representatives of Houlihan
Lokey in Los Angeles, California to discuss Houlihan Lokey's interest in
providing a fairness opinion which would be necessary in the event the parties
reached an agreement on prices. Houlihan Lokey indicated that they would be
pleased to work in furtherance of the transaction. Houlihan Lokey prepared a
draft retainer agreement among IOT, TCI and Houlihan Lokey, and sent it to
Waldman.

On November 17, 2000, at meetings of the boards of directors of TCI and
IOT, the members were advised that Donaldson had expressed an initial interest
in a buy out by ARL of all non-affiliated stockholders at $16 per TCI share and
$14 per IOT share, subject to further information and negotiation as to price.
In attendance at that meeting were directors R. Douglas Leonhard*, Martin L.
White, Edward G. Zampa* and Ted P. Stokely. Also attending that meeting were
Mark W. Branigan, then a director of ARL and Chief Financial Officer of ARL, TCI
and IOT, Karl L. Blaha, then a director of ARL and President of ARL, TCI and
IOT, and Robert A. Waldman, Senior Vice President, General Counsel and Secretary
of ARL, TCI and IOT.

On November 20, 2000, Messrs. Donaldson, Waldman, Mr. Phillips and
Simon met in Dallas to discuss the proposals made and responses received between
the parties. At that time Donaldson indicated that he would not consider any
price less than $16.50 per share for the TCI shares, which was the option price
agreed to between ARL and the investment fund. Donaldson also advised that
whatever price might be agreed upon would be based upon a current appraisal and
evaluation of the underlying assets of the subject companies. Donaldson advised
that in order to go forward he wished to engage Green Street Advisors, Inc.
("Green Street") in Newport Beach, California, to review asset values of TCI and
IOT.

The ARL board of directors met on November 22, 2000, to consider the
possible acquisition of the shares of non-affiliated stockholders at TCI and
IOT. Present at that meeting were ARL directors Richard D. Morgan**, Karl L.
Blaha***, Collene C. Currie, Roy E. Bode****, Joseph Mizrachi and Mark W.
Branigan and Waldman. The ARL board determined that management should proceed
with negotiations on this matter.

During the month of December 2000, Simon discussed with Donaldson the
appropriate procedure to advise Judge Patel that the parties were considering
settlement. On December 21, 2000, Simon approved a form of Statement of the Case
to be submitted by Settlement Counsel, Mr. Donaldson, which would formally
advise Judge Patel that the parties were discussing a

----------

* Messrs. Leonhard and Zampa resigned as directors of TCI and IOT on December
14, 2001.

** Richard D. Morgan resigned as a director of ARL on October 25, 2001.

*** Karl L. Blaha resigned as a director of ARL on February 5, 2002.

**** Roy E. Bode did not stand for re-election at ARL's Annual Meeting on July
10, 2001 and therefore ceased to be a director of ARL on that date.

settlement. During January 2001, Simon and Waldman prepared at the request of
Donaldson certain historical summaries of the trading values of stocks involved
and facilitated the exchange of information between BCM and Green Street in
order to expedite the analysis of the underlying values of TCI and IOT. On
February 14, 2001, Simon discussed with Donaldson certain discounts and other
assumptions which ARL felt were appropriate in reaching final values. These
discussions continued with telephone conversations on February 22, 23, and 28,
2001. On March 7, 2001, Donaldson and Adam Markman of Green Street met with
Simon and Waldman in Dallas to review additional information regarding certain
assets. Following that meeting and several other conversations but prior to
April 12, 2001, Messrs. Simon, Donaldson and Mr. Phillips reached a tentative
agreement to propose final cash prices of $16.50 for each of the TCI shares and
$19 for each of the IOT shares.

On March 20, 26, 27, and 30, 2001, Simon held telephone conversations
with Donaldson to complete the data base from which the final agreed prices
might be determined. On April 10, 2001, Mr. Phillips and Simon met with
Donaldson in California and reached an initial agreement on which Donaldson was
authorized to communicate to Judge Patel. In May 2001, Donaldson delivered a
letter to Judge Patel concerning the proposed settlement of the litigation which
included the proposed purchase prices of $16.50 per TCI share and $19.00 per IOT
share. The letter was labeled "CONFIDENTIAL- FILED UNDER SEAL." On May 8, 2001,
Simon appeared before Judge Patel in a conference format and discussed with the
Court the nature of the proposed settlement, the steps necessary to achieve both
a resolution of all open issues between the parties and the subsequent judicial
and regulatory approvals which would be needed to implement the transaction.

In June and July 2001, Donaldson, aided by the Green Street evaluation
team, continued to review data in order to reach an agreement on share price. On
July 26, 2001, Simon met with Mr. Phillips in his Dallas office to review the
summary pages of the Green Street report for TCI. On July 30, 2001, Simon met
with Donaldson in the offices of BCM in Dallas, Texas to discuss the initial
evaluations submitted by Green Street. On the following day, July 31, 2001,
Markman of Green Street joined in meetings with Donaldson, Mr. Phillips, certain
asset managers of BCM, and others in the Dallas offices of BCM. Markman also
viewed some of the more significant TCI properties located in the Dallas area.

Negotiations regarding comparative values and their effect upon
proposed price per share provisions of a joint settlement continued during the
month of August 2001. ARL desired that there be an alternative election offered
to TCI and IOT stockholders whereby a stockholder could (if a clear affirmative
election to do so is made) accept preferred stock in ARL in lieu of the cash
amounts of $16.50 per TCI share and $19 per IOT share. Settlement counsel
negotiated for a penalty if the transaction is not completed by ARL and urged
that the TCI data warranted an increase in the cash price to be paid to TCI
stockholders. Just prior to August 30, 2001, Donaldson, Mr. Phillips, and the
other participants from BCM agreed upon (a) an increase in the price to be
offered TCI stockholders from $16.50 per share to $17.50 per share; (b) a
preferred stock election as to each offeree; (c) a $5.00 per share penalty for
failure to complete the transaction; and (d) a tender offer procedure, providing
the same considerations, in the event that the regulatory process with the SEC
could not be completed satisfactorily or expeditiously.

On August 30, 2001, the TCI and IOT directors held special meetings at
which time they approved the terms of the proposed settlement subject to
completion of due diligence and negotiation of a final agreement. The Settlement
Agreement was drafted by Donaldson and Simon in September 2001. Simon spent
September 4, 2001 in San Francisco and discussed the proposed joint settlement
with Donaldson on an everyday basis during September and the early part of
October. Simon met with Donaldson in San Francisco on October 3 and 4, 2001 to
continue discussions of the Settlement Agreement. Commencing on October 12,
2001, Simon broadened his activities to discuss all aspects of the then "draft"
form of the Settlement Agreement, along with ancillary documents to be filed
therewith, with Jessica Pers and David Goldstein of the Heller Ehrman White &
McAuliffe law firm, counsel to the boards of directors of TCI and IOT in the
Olive Case.

On October 15, 2001, Simon discussed certain new concerns with
Donaldson, Waldman, Eric Redwine, an attorney for BCM, and again with Pers.
Pers, by letter, and in telephone conferences raised a concern regarding whether
or not the language embodied in the draft agreement might be read to indicate
that an appeal, then pending, was being abandoned by the appellants. It was
agreed that a part of the Settlement Agreement would be a voluntary abatement,
assuming the consent of the 9th Circuit Court of Appeals, in the pending appeal
over issues of jurisdiction which arose from an earlier order from Judge Patel
in which the Court declared that it had jurisdiction to continue consideration
of certain activities of the TCI and IOT directors and of BCM and its officers.

On October 18, 2001, the written Settlement Agreement was filed with
Judge Patel. Pers suggested new language which would make it clear that the
appeal, if abated, was not being abandoned or resolved by agreement and would
revive in the event the contemplated settlement failed to come to fruition. On
October 23, 2001, a press release was issued on behalf of ARL, TCI and IOT
announcing the preliminary agreement with Settlement Counsel providing for ARL
to acquire all of the outstanding common stock of TCI and IOT. On the morning of
December 10, 2001, counsel reported to Judge Patel on their progress and
received the Court's comments. That afternoon and evening the parties worked
through the Court's comments, as well as certain comments relayed to the parties
from Stephen Taylor, the Special Master.

On December 11, 2001, Simon and Donaldson had extensive telephone
conversations with all participants in the negotiation process which resulted in
certain changes being made to the documents and, upon accomplishment of such
changes, the documents then believed to be in final form were filed with Judge
Patel. The Court signed the order preliminarily approving the Settlement
Agreement on December 18, 2001.

On February 1 and 4, 2002, the TCI board of directors again met by
telephone conference to review a revised form of opinion from Houlihan Lokey,
which contained proposed revisions to the timing of the conversion period of the
preferred stock available by affirmative election by the TCI stockholders.
During that meeting, discussions ensued concerning the probable timing based
upon potential filings by ARL depending upon the consummation of the TCI merger.
The TCI board of directors concluded that the recommended change in timing of
conversion periods would be beneficial to those TCI stockholders who
affirmatively elect to receive preferred stock. Following these discussions, the
TCI directors reaffirmed their February 1, 2002, determination

that the terms of the Settlement Agreement and contemplated merger are
procedurally and substantively fair to the non-affiliated TCI stockholders as
previously described.

On February 1 and 4, 2002, the IOT board of directors again met by
telephone conference to review a revised form of opinion from Houlihan Lokey,
which contained proposed revisions to the timing of the conversion period of the
preferred stock available by affirmative election by the IOT stockholders.
During that meeting, discussions ensued concerning the probable timing based
upon potential filings by ARL depending upon the consummation of the IOT merger.
The IOT board of directors concluded that the recommended change in timing of
conversion periods would be beneficial to those IOT stockholders who
affirmatively elect to receive preferred stock. Following these discussions, the
IOT directors reaffirmed their February 1, 2002, determination that the terms of
the Settlement Agreement and contemplated merger are procedurally and
substantively fair to the non-affiliated IOT stockholders as previously
described.

On February 4, 2002, the board of directors of ARL had a telephonic
board meeting to begin consideration of the proposed acquisitions of TCI and IOT
by ARL in the manner contemplated by the Settlement Agreement. Present at the
meeting were Earl Cecil, Collene Currie, Richard Humphrey and Joseph Mizrachi.
Karl Blaha was not present. Counsel for ARL and representatives of BCM were
present, telephonically, at this meeting. Following a discussion of the proposed
transaction, the ARL board adjourned until the following afternoon to permit
members of the board to consider information provided by management and to
receive additional information requested by members of the board. The meeting of
the ARL board reconvened on February 5, and the board received presentations
from management regarding the proposed transaction, including detailed
presentations regarding ARL's proposed plan for raising the funds necessary to
pay for shares of TCI and IOT common stock to be purchased from stockholders not
affiliated with ARL or BCM. In addition, the ARL board received representations
from legal counsel to ARL and discussed with management of ARL and ARL's legal
counsel matters relating to the proposed transactions. Mr. Cecil, Ms. Currie and
Mr. Humphrey were present, in person, at the meeting of the ARL board on
February 5. Mr. Blaha and Mr. Mizrachi were not present. Following an extended
discussion regarding the proposed transactions among ARL, TCI and IOT and other
matters related to the current and proposed business operations of ARL, the
board again adjourned its meeting until the following afternoon. Subsequent to
the adjournment of the ARL board's meeting on February 5, Mr. Blaha tendered his
resignation as a member of the ARL board and as an officer of ARL, TCI and IOT.
Mr. Blaha did not communicate the reasons for his resignation to the ARL board
or to the boards of TCI or IOT.

On February 6, 2002, the ARL board reconvened telephonically. Present
for the entire meeting were Ms. Currie, Mr. Humphrey and Mr. Mizrachi. Mr. Cecil
joined the meeting after it was in progress. Following a discussion of the
proposed transaction, the board unanimously approved the proposed transactions
between ARL and each of TCI and IOT and determined to recommend that
stockholders of ARL approve the transactions. Following these actions, the board
adjourned its meeting.

On February 12, 2002 the Court signed the order finally approving the
Settlement Agreement.

TCI'S PURPOSE AND REASONS FOR THE TCI MERGER

In reaching its decision to approve the TCI merger agreement, and to
recommend that TCI stockholders approve the TCI merger agreement, the TCI board
of directors consulted with management and its legal and financial advisors. The
TCI board of directors considered a number of factors including, without
limitation, the following:

o The current and historical market prices of TCI common stock
relative to the merger consideration and the fact that the
$17.50 per share merger consideration represented a 44.6%
premium over the average closing price of TCI common stock
over the thirty trading days prior to October 23, 2001.

o The fact that the merger consideration is all cash, which
provides certainty of value to non-affiliated TCI stockholders
compared to a transaction in which stockholders would only
receive stock.

o The fact that non-affiliated TCI stockholders have the
opportunity to affirmatively elect to receive ARL preferred
stock instead of cash.

o It is the view of the TCI board of directors that the trading
value for shares of TCI common stock was not likely to exceed
the merger price in the near term if TCI remained independent.

o The potential stockholder value that could be expected to be
generated from other strategic options available to TCI,
including (a) remaining independent and continuing to
implement its growth strategy, or (b) pursuing other strategic
alternatives, as well as the risks and uncertainties
associated with those alternatives.

o The financial presentation of Houlihan Lokey and the opinion
of that firm delivered on February 1, 2002 to the TCI board of
directors to the effect that, based upon and subject to the
matters set forth in that opinion, as of February 1, 2002, the
consideration to be offered to the non-affiliated TCI public
stockholders pursuant to the TCI merger agreement was fair
from a financial point of view to those holders.

o The terms of the TCI merger agreement, as reviewed by the TCI
board of directors with TCI legal advisors including:

o the absence of any financing condition.

o no termination fee if the TCI merger agreement is
terminated.

o consummation of the TCI merger agreement resolving
expensive, inconvenient and distracting litigation.

October 23, 2001, that ARL had agreed to acquire the
non-affiliated stockholder interest in TCI and after
discussing with TCI's advisors the potential risks, costs and
benefits of contacting other third parties, that there was
insufficient reason to justify the risk of delay in proceeding
with the favorable transaction with ARL.

o In the view of the TCI board of directors, based upon the
advice of management after consultation with its legal
counsel, the regulatory approvals necessary to consummate the
TCI merger could be obtained.

o TCI will no longer exist as an independent company, and its
stockholders will no longer participate in the growth of TCI
or the pursuit of its standalone business plan and other
factors set forth in the TCI certificate of incorporation.

o Under the terms of the TCI merger agreement, the fact that
gains from an all cash transaction would be taxable to TCI
stockholders for U.S. federal income tax purposes.

During its consideration of the transaction with ARL, the TCI board of
directors were also aware that certain directors and executive officers of TCI
may have interests in the merger that are different from or in addition to those
of non-affiliated TCI stockholders generally, as described under "Interests of
Certain Persons in the Business Combination."

The discussion of the information and factors considered and given and
weighed by the TCI board of directors is not intended to be exhaustive, but it
is believed to address the material information and factors considered by the
TCI board of directors. In view of the number and variety of these factors, the
TCI board of directors did not find it practicable to make specific assessments
of or otherwise assign relative weights to, the specific factors and analyses
considered in reaching its determination. The determination to approve and
recommend the TCI merger agreement was made after consideration of all of the
factors and analyses as a whole. In addition, individual members of the TCI
board of directors may have given different weights to different factors.

IOT'S PURPOSE AND REASONS FOR THE IOT MERGER

In reaching its decision to approve the IOT merger agreement and to
recommend that IOT stockholders approve the IOT merger agreement, the IOT board
of directors consulted with management and its legal and financial advisors. The
IOT board of directors considered a number of factors, including, without
limitation, the following:

o The current and historical market prices of IOT common stock
relative to the merger consideration, and the fact that the
$19 per share merger consideration represented a 28.7% premium
over the average closing price of IOT common stock over the
thirty trading days prior to October 23, 2001.

o The fact that the merger consideration is all cash, which
provides certainty of value to non-affiliated IOT stockholders
compared to a transaction in which stockholders would only
receive stock.

o The fact that non-affiliated IOT stockholders have the
opportunity to affirmatively elect to receive ARL preferred
stock instead of cash.

o It is the view of the IOT board of directors that the trading
value for shares of IOT common stock was not likely to exceed
the merger price in the near term if IOT remained independent.

o The potential stockholder value that can be expected to be
generated from other strategic options available to IOT,
including (a) remaining independent and continuing to
implement its growth strategy, or (b) pursuing other strategic
alternatives, as well as the risk and uncertainties associated
with those alternatives.

o The financial presentation of Houlihan Lokey and the opinion
of that firm delivered on February 1, 2002 to the IOT board of
directors to the effect that, based upon and subject to the
matters set forth in that opinion, as of February 1, 2002, the
consideration to be offered to the non-affiliated IOT public
stockholders pursuant to the IOT merger agreement was fair
from a financial point of view to those holders.

o The terms of the IOT merger agreement, as reviewed by the IOT
board of directors with IOT legal advisors including:

o the absence of any financing condition.

o no termination fee if the IOT merger agreement is
terminated.

o consummation of the IOT merger agreement finally
putting to end an expensive, inconvenient,
distracting litigation.

o The IOT board of directors' determination, based on the fact
that no other offers to acquire IOT common stock have been
made at a level equal to or better than the merger
consideration of $19 per share after initial press reports on
and after October 23, 2001, that ARL had agreed to acquire the
non-affiliated stockholder interest in IOT and after
discussing with IOT's advisors the potential risks, costs and
benefits of contacting other third parties, that there was
insufficient reason to justify the risk of delay in proceeding
with the favorable transaction with ARL.

o In the view of the IOT board of directors, based upon the
advice of management after consultation with its legal
counsel, the regulatory approvals necessary to consummate the
IOT merger could be obtained.

o IOT will no longer exist as an independent company, and its
stockholders will no longer participate in the growth of IOT
or the pursuit of its standalone business plan and other
factors set forth in the IOT certificate of incorporation.

o Under the terms of the IOT merger agreement, the fact that
gains from an all cash transaction would be taxable to IOT
stockholders for U.S. federal income tax purposes.

During its consideration of the transaction with ARL, the IOT board of
directors were also aware that certain directors and executive officers of IOT
may have interests in the merger that are different from or in addition to those
of non-affiliated IOT stockholders generally, as described under "Interests of
Certain Persons in the Business Combination."

The discussion of the information and factors considered and given and
weighted by the IOT board of directors is not intended to be exhaustive, but it
is believed to address the material information and factors considered by the
IOT board of directors. In view of the number and variety of these factors, the
IOT board of directors did not find it practicable to make specific assessments
of or otherwise assign relative weights to, the specific factors and analyses
considered in reaching its determination. The determination to approve and
recommend the IOT merger agreement was made after consideration of all of the
factors and analyses as a whole. In addition, individual members of the IOT
board of directors may have given different weights to different factors.

ARL'S PURPOSE AND REASONS FOR THE MERGER

In reaching its decision to approve and recommend to the ARL
stockholders the TCI merger agreement and the IOT merger agreement, the ARL
board of directors consulted with management and its legal advisors and
considered a number of factors, including, without limitation, the following:

o The current and historical market prices of the TCI and IOT common stock
relative to the historical market prices of the ARL common stock.

o The current and historical market prices of the TCI and IOT common stock
relative to the merger consideration being offered the TCI and IOT
stockholders.

o The view of the ARL board of directors that an increase in the size and
diversity of ARL's portfolio of developed and undeveloped real estate
would benefit the company by increasing the development opportunities
available to it and providing it with increased financial flexibility.

o The view of the ARL board of directors that stockholders of ARL would
benefit from an increase in the size of ARL's asset base and a
diversification of its real estate portfolio.

o The expectation of the ARL board of directors following discussions with
management that the cash to be paid as merger consideration could be
raised in large part from sales of real estate held by TCI and IOT
themselves.

o The fact that stockholders of TCI and IOT affiliated with ARL hold
approximately 14.9% and 7.4% of the issued and outstanding common stock
of TCI and IOT respectively, and that those affiliated stockholders will
accept preferred stock of ARL in lieu of cash as merger consideration.

o The expectation of the ARL board of directors that the TCI and IOT
mergers would not be consummated unless, in each case, sufficient cash
was available to ARL, either from its own resources or from TCI or IOT
immediately after the mergers, to pay the cash merger consideration due
as a result of the mergers.

o The fact that the TCI and IOT mergers are not conditioned upon one
another.

o The ARL board of directors understanding, based upon advice of
management and after consultation with its legal counsel, that any
regulatory approvals necessary to consummate the TCI and IOT mergers
could be obtained.

During its consideration of the proposed transactions with TCI and IOT,
the ARL board of directors were aware that certain executive officers and
directors of ARL may have interests in the proposed transactions that are
different from or in addition to those of ARL's non-affiliated stockholders
generally, as described under "Interests of Certain Persons in the Business
Combination."

The discussion of the information and factors considered and given and
weighted by the ARL board of directors is not intended to be exhaustive, but its
believed to address the material information and factors considered by the ARL
board of directors. In the view of the number and variety of these factors, the
ARL board of directors did not find it practicable to make specific assessment
of or otherwise assign relative weights to the specific factors and analyses
considered in reaching its determination. The determination to approve and
recommend the TCI and IOT merger agreements was made after consideration of all
of the factors and analyses as a whole. In addition, individual members of the
ARL board of directors may have given different weights to different factors.

FINANCING OF THE BUSINESS COMBINATION

ARL estimates that approximately $94,235,586 will be required, if all
non-affiliated TCI and IOT stockholders take cash in exchange for their shares
of TCI common stock and IOT common stock, and to pay the related fees and
expenses of the transactions set forth in this section. The actual amount
required to purchase such shares and pay the related expenses will depend on the
number of stockholders who affirmatively elect to receive Series G and Series H
preferred stock. Consequently, the greater number of stockholders who
affirmatively elect to receive Series G and Series H preferred stock the less
funds will be required to pay the cash merger consideration and certain of the
related expenses. The following table contains an itemized list of funds
applicable to the individual mergers as well as funds that apply to both
mergers. This table assumes that all non-affiliated TCI and IOT stockholders
take the cash merger consideration.

APPLICATION OF FUNDS SPECIFIC AMOUNT OF
TO TCI MERGER FUNDS SOURCE OF FUNDS

Purchase of 2,853,080 shares of TCI common stock at Cash from the sources set forth in the
$17.50 per share from all non-affiliated TCI Source of Funds table below
stockholders................................ $49,928,900

Sunset Management loan secured by 2,601,798 shares of ARL intends to satisfy the loan by
TCI common stock............................ $20,000,000 substituting ARL stock that will be
secured by $40,000,000 of equity from TCI and
IOT income properties for the TCI common
stock now used as collateral, otherwise ARL
must pay off this loan

Dynamic Finance loan secured by 843,311 shares of TCI ARL intends to satisfy the loan by
common stock................................ $ 4,000,000 substituting ARL stock owned by BCM as
collateral for the TCI common stock now
used as collateral, otherwise ARL must
pay off this loan

Preferred Bank loan secured by 249,191 shares of TCI ARL intends to satisfy the loan by
common stock................................ $250,000 substituting ARL stock owned by BCM as
collateral for the TCI common stock now
used as collateral, otherwise ARL must
pay off this loan

Subtotal........................................ $74,178,900

APPLICATION OF FUNDS SPECIFIC AMOUNT OF
TO IOT MERGER FUNDS SOURCE OF FUNDS

Purchase of 576,480 shares of IOT common stock at Cash from the sources set forth in the
$19.00 per share from non-affiliated IOT Source of Funds table below
stockholders................................ $10,953,120

Beal Bank loan secured by 250,000 shares of IOT common ARL intends to satisfy the loan by
stock....................................... $ 3,000,000 substituting ARL stock owned by BCM as
collateral for the IOT common stock now
used as collateral, otherwise ARL must
pay off this loan

Subtotal........................................ $13,953,120

APPLICATION OF FUNDS APPLICABLE TO BOTH THE TCI AMOUNT OF
AND IOT MERGERS FUNDS TYPE OF FUNDS

Payment to George Donaldson, Settlement Counsel, Cash from the sources set forth in the
pursuant to the Olive Settlement............ $ 875,000 Source of Funds table below

Professional fees.................................... $ 590,000 Cash from the sources set forth in the
Source of Funds table below

Advisory fees on property sales...................... $ 3,038,566 Cash from the sources set forth in the
Source of Funds table below

Payment of a margin loan with a brokerage firm ARL will satisfy the margin loan by
secured by 300,000 shares of TCI common substituting stock of ARL owned by
stock and 150,000 shares of IOT common BCM as collateral for the TCI and IOT
stock....................................... $ 1,600,000 common stock now used as collateral
otherwise ARL must pay off this loan

Subtotal........................................ $ 6,103,566

TOTAL........................................... $ 94,235,586

ARL expects the amount of funds needed to complete the business
combination to be funded first through new loans and, if necessary, through
internally generated funds from the sale (or use as collateral for loans) of a
number of assets. The amount of loans, and the sale of assets, if necessary,
will depend on the number of stockholders who accept cash rather than
affirmatively elect to receive Series G and Series H preferred stock. The more
stockholders who elect to receive Series G and Series H preferred stock will
reduce the amount of cash needed to pay the cash merger consideration and in
turn will affect the amount of loans and whether the assets need to be sold. At
the date of this joint proxy statement and prospectus, while preliminary
discussions for new financings have occurred, no written formal commitment has
been issued by any of the lenders. Similarly, no stated or effective interest
rates or other material terms of any financing arrangement have been agreed.
ARL, TCI and IOT have available a number of real property assets which should be
able to be sold (or used as collateral for loans) if such funds are necessary,
however, presently there are no written or oral contracts to sell any of the
assets. The table set forth below summarizes the expected loans and the expected
sales of real property that ARL may use to fund the business combination. Some
or all of the loans and property sales may not be required depending on the
amount of cash needed. The properties listed below are more fully described
under "Properties of ARL," "Properties of TCI" and "Properties of IOT," as
applicable. In the event the cash from loans and any sales of assets is greater
than needed to satisfy the cash merger consideration requirements, ARL and its
subsidiaries will use the excess for working capital purposes.

AMOUNT OF NET
CASH EXPECTED TO
SOURCE OF FUNDS BE GENERATED

ARL expects to enter into new loans that total in the aggregate
$20,000,000 that will be secured by approximately 4,000,000
shares of ARL stock with a market value of $40,000,000........ $20,000,000

ARL expects to obtain new loans that are secured by the following
properties+:.................................................. $ 8,231,543

PROPERTY LOCATION

Williamsburg Hospitality House Williamsburg, VA
Cross County Mall Mattoon, IL
Conradi House Tallahassee, FL
Villager Ft. Walton, FL
One Hickory Center Farmers Branch, TX

TCI expects to obtain new loans that are secured by the following
properties+:.................................................. $14,835,438

PROPERTY LOCATION

The Forum Richmond, VA
Jefferson Office Building Washington, DC
Durham Center Durham, NC
Plaza on Bachman Creek Dallas, TX
Autumn Chase Apartments Midland, TX
Gladstell Forest Curee, TX
Treehouse-Irving Irving, TX
Westwood Square Odessa, TX
Surf Hotel Chicago, IL
Majestic Hotel San Francisco, CA
City Suites Hotel Chicago, IL

ARL, TCI and IOT expect to sell a package of multi-family
properties+................................................... $38,633,439

ARL PROPERTY LOCATION

Bay Anchor Panama City, FL
Governor's Square Tallahassee, FL
Grand Lagoon Cove Panama City, FL
Greenbriar Tallahassee, FL
Lake Chateau Thomasville, GA
Lee Hills Tallahassee, FL
Northside Villas Tallahassee, FL
Oak Hill Tallahassee, FL
Park Avenue Villas Tallahassee, FL
Pine Crest West Tallahassee, FL
Rolling Hills Tallahassee, FL
Seville Tallahassee, FL
Valley Hi Tallahassee, FL

----------

+ Properties available as of February 1, 2002. The available properties are
subject to change depending on interim sales and market conditions.

AMOUNT OF NET
CASH EXPECTED TO
SOURCE OF FUNDS BE GENERATED

ARL PROPERTY LOCATION

Westwood Mary Esther, FL
White Pines Tallahassee, FL
Windsor Tower Ocala, FL
Wood Hollow San Antonio, TX

TCI PROPERTY LOCATION

Apple Lane Lawrence, KS
Arbor Pointe Odessa, TX
Country Club Villas Largo, FL
Country Crossings Tampa, FL
Fairway View El Paso, TX
Fairways Longview, TX
Fountain Lake Texas City, TX
Fountains at Waterford Midland, TX
Harper's Ferry Lafayette, LA
Limestone Canyon Austin, TX
Oak Park IV Clute, TX
Plantation Tulsa, OK
Quail Creek Lawrence, KS
Quail Oaks Balch Springs, TX
Sandstone Mesa, AZ
Somerset Place Texas City, TX
Sunchase Odessa, TX
Timbers on Broadway Tyler, TX
Broadway Dallas, TX
Willow Creek El Paso, TX

IOT PROPERTY LOCATION

Brighton Court Midland, TX
Delmar Valley Midland, TX
Enclave Midland, TX
Meridian Midland, TX
Signature Place Midland, TX
Sinclair Place Midland, TX
Treehouse - SA San Antonio, TX

ARL expects to sell the following properties+:............... $20,175,553

PROPERTY LOCATION

Regency on Kennedy Apts Tampa, FL
Confederate Pointe Jacksonville, FL
Pheasant Ridge Belleview, NE
Oak Tree Square Grandview, MO
Woodsong Smyrna, GA
Whispering Pines Topeka, KS
Centura Towers Farmers Branch, TX

----------

+ Properties available as of February 1, 2002. The available properties are
subject to change depending on interim sales and market conditions.

AMOUNT OF NET
CASH EXPECTED TO
SOURCE OF FUNDS BE GENERATED

TCI expects to sell the following properties+:............... $34,872,293

PROPERTY LOCATION

Primrose Place Bakersfield, CA
In the Pines Gainesville, FL
Heritage on the River Jacksonville, FL
Stone Oak Place San Antonio, TX
Plaza Tower & Courtyard St. Petersburg, FL
Bay Plaza I Tampa, FL
Bay Plaza II Tampa, FL
Summerfield Apts Orlando, FL
4242 Cedar Springs Dallas, TX

Total...................................................... $136,748,266

OPINION OF FINANCIAL ADVISOR

The board of directors of each of TCI and IOT retained Houlihan Lokey,
pursuant to engagement letters dated October 4, 2001 (the "Engagement Letters"),
to render fairness opinions, from a financial point of view, to public TCI
common stockholders and public IOT common stockholders, in each case excluding
those stockholders affiliated with ARL, of the consideration to be received by
the non-affiliated TCI stockholders and the non-affiliated IOT stockholders in
the merger of TCI and IOT with two subsidiaries of ARL pursuant to which (a)
non-affiliated TCI stockholders will receive: (i) $17.50 in cash or (ii) if they
affirmatively elect, one share of newly issued ARL Series G preferred stock for
each share of TCI common stock that they currently own and (b) non-affiliated
IOT stockholders will receive: (i) $19.00 in cash or (ii) if they affirmatively
elect, one share of newly issued ARL Series H preferred stock. Both the Series G
preferred stock and Series H preferred stock are convertible into ARL common
stock based upon the terms, conditions and exchange ratios set forth herein.
Houlihan Lokey and the board of directors of each of TCI and IOT amended the
Engagement Letters on February 1, 2002, to provide for Houlihan Lokey's
performance of certain additional financial advisory services on behalf of the
board of directors of each of TCI and IOT, specifically, conducting negotiations
with ARL regarding the mergers.

Houlihan Lokey is a nationally recognized investment banking firm that
provides financial advisory services in connection with mergers and
acquisitions, leveraged buyouts, business valuations for a variety of regulatory
and planning purposes, recapitalizations, financial restructurings, and private
placements of debt and equity securities. In November of 1999, Houlihan Lokey
acted as financial advisor to an affiliate of ARL, TCI and IOT, National Realty,
L. P. ("NRLP"), and rendered a fairness opinion with respect to the
consideration to be received by unitholders of NRLP in connection with a
business combination. The board of directors of each of TCI and IOT selected
Houlihan Lokey to provide the financial advisory

----------

+ Properties available as of February 1, 2002. The available properties are
subject to change depending on interim sales and market conditions.

services described herein upon a referral from NRLP and because of Houlihan
Lokey's reputation as a nationally recognized valuation and financial consulting
firm that has substantial experience providing valuation and consulting
services. TCI agreed to pay Houlihan Lokey a fee of $340,000 and IOT agreed to
pay Houlihan Lokey a fee of $60,000, in each case for its preparation and
delivery of a fairness opinion plus reasonable out-of-pocket expenses that may
be incurred by Houlihan Lokey in connection herewith, plus a refundable
indemnification deposit of $42,500 from TCI and a refundable indemnification
deposit of $7,500 from IOT. In accordance with the Settlement Agreement in the
Olive Litigation, Mr. Phillips, BCM and ARL are required to reimburse TCI and
IOT for such expenses. Pursuant to the amendment to the Engagement Letters, TCI
and IOT agreed to jointly pay Houlihan Lokey an additional fee of $100,000 for
the additional services described below. No portion of Houlihan Lokey's fee is
contingent upon the successful completion of the mergers or any other related
transaction. Houlihan Lokey has been retained by TCI and IOT to deliver fairness
opinions to the board of directors of TCI and IOT and provide certain additional
financial advisory services on behalf of the board of directors of each of TCI
and IOT, specifically, to conduct negotiations with ARL regarding the terms of
the Series G preferred and the Series H preferred. TCI and IOT agreed to
indemnify Houlihan Lokey and its affiliates against certain liabilities,
including liabilities under federal securities laws that arise out of the
engagement of Houlihan Lokey.

At joint meetings of the TCI and IOT boards of directors on February 1,
2002, Houlihan Lokey rendered its oral opinion regarding the consideration to be
received by the stockholders of TCI and IOT in connection with the mergers.
Thereafter, Houlihan Lokey assisted the TCI and IOT boards of directors with
respect to certain negotiations regarding modifications to the terms of the
Series G preferred stock and Series H preferred stock. On February 4, 2002,
Houlihan Lokey confirmed in writing, that as of February 1, 2002, and subject to
and based upon the various qualifications and assumptions set forth in its
written opinions, the consideration to be received by the stockholders of TCI
and IOT in connection with the mergers was fair, from a financial point of view,
to the non-affiliated TCI stockholders and the non-affiliated IOT stockholders.
The full text of Houlihan Lokey's opinions, which set forth the assumptions
made, general procedures followed, factors considered and limitations on the
review undertaken by Houlihan Lokey in rendering its opinions are attached
hereto as APPENDIX E and APPENDIX F and are incorporated herein by reference.
The discussion of the opinions below is qualified in its entirety by reference
to the opinions. You are urged to read Houlihan Lokey's opinions in their
entirety carefully for a description of the procedures followed, the factors
considered and the assumptions made by Houlihan Lokey.

Houlihan Lokey's opinions to the TCI and IOT boards of directors
address only the fairness from a financial point of view of the consideration to
be received in the mergers. Houlihan Lokey's opinions do not constitute a
recommendation as to how any person should vote with respect to the mergers or a
recommendation as to the form and amount of consideration that any person should
elect in connection with the mergers. Houlihan Lokey is not rendering any
opinion on the current or prospective public share prices of any of TCI, IOT or
ARL (collectively, the "Subject Companies"). Houlihan Lokey's opinions also do
not address TCI's or IOT's underlying business decision to effect the mergers,
the tax consequences of the mergers, the fair market value of any of the Subject
Companies' assets either individually or collectively, or the reasonableness of
any aspect of the mergers not expressly addressed in its fairness opinions.
Houlihan Lokey has not been requested and does not intend to update, revise or
reaffirm its

fairness opinion in connection with the mergers. Events that could affect the
fairness of the mergers, from a financial point of view, include adverse changes
in industry performance or market conditions and changes to the business,
financial condition and results of operations of the Subject Companies.

In arriving at its fairness opinions, among other things, Houlihan
Lokey assumed that: (i) each Series G share will have a liquidation preference
of $20.00 per share and will pay a cash dividend of 10 percent per annum; (ii)
each Series H share will have a liquidation preference of $21.50 per share and
will pay a cash dividend of 10 percent per annum; (iii) at the holders' option,
each Series G share is convertible into 2.5 shares of ARL common stock during a
75 day period commencing on the fifteenth day after the public issuance of ARL's
form 10-Q (the "10-Q Issuance Date") to the public following the close date of
the mergers; (iv) at the holders' option, each Series H share is convertible
into 2.25 shares of ARL common stock during a 75 day period commencing on the
fifteenth day after the 10-Q Issuance Date following the close date of the
mergers; and (v) the Series G and Series H shares will be redeemable by ARL 90
days after the 10-Q Issuance Date following the close date of the mergers at the
liquidation preference plus any accrued and unpaid dividends thereon.

In arriving at its fairness opinions, among other things, Houlihan
Lokey:

1. met with certain members of the senior management of the
Subject Companies and their advisor, BCM, to discuss the
operations, financial condition, future prospects and
projected operations and performance of the Subject Companies;

2. visited certain facilities and business offices of the Subject
Companies;

3. reviewed the Subject Companies' annual reports to stockholders
and on Form 10-K for the fiscal years ended December 31, 2000
and quarterly reports on Form 10-Q for the three quarters
ended September 30, 2001, which Subject Companies' management
have identified as being the most current financial statements
available;

4. reviewed forecasts and projections prepared by the Subject
Companies management with respect to the Subject Companies'
apartment, retail, industrial, hotel and office building
assets for the years ended December, 2002 through 2006;

5. requested the latest appraisals on the Subject Companies'
income producing properties and any and all appraisals for the
Subject Companies' land assets, and reviewed such appraisals
as were provided by management;

6. reviewed ARL's Land Portfolio Book dated September 2001;

7. reviewed certain estimated valuations of TCI and IOT prepared
in connection with the Settlement Agreement;

8. reviewed the historical market prices and trading volume for
the Subject Companies' publicly traded securities;

9. reviewed certain other publicly available financial data for
certain companies that Houlihan Lokey deems comparable to the
Subject Companies; and

10. conducted such other studies, analyses and inquiries as
Houlihan Lokey deemed appropriate.

ANALYSES

In order to determine the fairness, from a financial point of view, of
the consideration to be received by the non-affiliated IOT stockholders and the
non-affiliated TCI stockholders in the mergers, Houlihan Lokey determined an
indicated range per share of equity net asset values for ARL, IOT and TCI and
compared such per share concluded equity net asset values to each other and to
the ARL per share public trading price. This analysis was premised upon a
valuation of each of the Subject Companies' income and non-income producing
properties and other assets and considered their respective liabilities.

In determining the value of the Subject Companies' income producing
properties, Houlihan Lokey conducted several analyses, including the following:
(1) a "Net Asset Value" approach whereby Houlihan Lokey (a) applied
capitalization rates to historical and projected adjusted net operating income
for each of the income producing properties held by the Subject Companies (the
"Income Producing Properties") and (b) estimated the present value of the
projected future cash flows to be generated from the Income Producing Properties
by applying a discount rate to the projected future cash flow, (2) a "Portfolio"
approach whereby Houlihan Lokey determined a level of earnings considered to be
representative of future performance of the Subject Companies, and capitalized
such figure with a risk-adjusted rate, and (3) various other analyses. Houlihan
Lokey used the following valuation methodologies to determine the value of the
land assets: historical sales price per square foot, outstanding offers and
letters of intent, management estimates and book value. In addition, certain
assets, such as Pizza World, Signature Athletic Club and parking lots, were
valued by employing the market multiple approach and other assets, including
notes receivable and oil and gas operations, were valued at book value.

NET ASSET VALUE APPROACH - INCOME PRODUCING PROPERTY

DIRECT CAPITALIZATION

In conducting the direct capitalization net asset value approach,
Houlihan Lokey applied (x) rates from publicly available capitalization rates
estimated in the Second Quarter 2001 Market Monitor and the Fall 2001 Real
Estate Outlook by Cushman & Wakefield, Inc. and The Appraisal Institute to (y)
each of the Income Producing Properties (i) adjusted net operating income for
the twelve months ended September 30, 2001 and (ii) projected adjusted net
operating income for the fiscal year ended December 31, 2002. The capitalization
rates used in the direct capitalization approach ranged from 8.9% to 15.9% for
the twelve-month period ended September 30, 2001 and from 9.3% to 16.4% for the
twelve month period ended December 31, 2002.

DISCOUNTED CASH FLOW

In conducting the discounted cash flow net asset value approach,
Houlihan Lokey applied a discount rate to the projected future cash flows of
each Income Producing Property to arrive at present value of such Income
Producing Property. The applicable Subject Company provided Houlihan Lokey with
the property level historical and projected financial information used to
determine the net operating income of each property. The discount rates used in
the discounted cash flow approach ranged from 11.3% to 18.3% and were intended
to reflect risks of ownership of the relevant Income Producing Property and the
associated risks of realizing the stream of projected future cash flows.
Houlihan Lokey's ability to use the discounted cash flow method of valuation was
limited by the lack of availability of necessary forecasts for certain Income
Producing Properties resulting from changes in tenant occupancy or other factors
that effect projected performance for certain Income Producing Properties.
Accordingly, Houlihan Lokey utilized the discount cash flow method only for
those assets with forecasts considered relevant. Additionally, based upon
Houlihan Lokey's discussions with management, due diligence and analysis of
projections, in some instances the discount rate was adjusted to reflect
additional uncertainty and risk associated with the projections.

SELECTED ASSET VALUES

Based upon the valuation indications of both the direct capitalization
and discounted cash flow analyses, Houlihan Lokey selected a range of values for
each asset. Following the determination of the individual income producing
property asset values, each property's value was allocated to the Subject
Companies based on respective ownership of the assets.

PORTFOLIO (MARKET) APPROACH - INCOME PRODUCING PROPERTY

The Subject Companies own various real estate assets that were
combined, based on asset types, into portfolios. Property level financial data
was provided by the applicable Subject Company based on internally prepared
property operating statements. The market approach consists of determining a
level of earnings and capitalizing this figure by an appropriate risk-adjusted
rate. This approach provides an indication of value for the security, which
corresponds with the particular earnings figure being capitalized. For purposes
of determining the value of the Income Producing Properties owned by the Subject
Companies, net operating income was utilized as a representative level of
earnings for the office, hotel, apartment, retail and industrial assets.

In using the portfolio (market) approach, Houlihan Lokey applied
debt-free market capitalization rates to net operating income of the various
categories of Income Producing Properties of the Subject Companies, in each case
to arrive at the values of the Income Producing Properties.

Houlihan Lokey utilized the Subject Companies' internal financial
statements to determine consolidated net operating income for the twelve months
ended September 30, 2001 and management projections for the twelve months ended
December 31, 2002. In performing the portfolio (market) analysis, Houlihan Lokey
applied capitalization rates ranging from 9.5% to 15.0% to the net operating
income for the twelve months ended September 30, 2001.

ARL VALUATION

Based on the portfolio (market) analysis conducted by Houlihan Lokey,
Houlihan Lokey estimated a range of asset value for ARL's income producing
property as follows: (1) $230.5 million to $254.7 million for the ARL apartment
portfolio, (2) $50.7 million to $55.8 million for the ARL office portfolio, (3)
$70.7 million to $77.1 million for the ARL shopping center portfolio and (4)
$68.8 million to $80.3 million for ARL's hotel portfolio. In utilizing the "Net
Asset Value" approach, Houlihan Lokey estimated a range of asset value for ARL's
income producing property as follows: (1) $237.6 million to $248.8 million for
apartment assets, (2) $59.4 million to $65.0 million for hotel assets, (3)
$120.9 million to $133.0 million for office assets and (4) $84.4 million to
$90.6 million for retail assets. Houlihan Lokey estimated a range of asset
values for ARL's land assets of $290.0 million to $400.0 million. The estimate
asset value for other assets such as investments in joint ventures, Pizza World,
oil & gas operations, notes receivable, accounts receivable, escrows and earnest
money, net other liabilities such as accounts payable, property taxes and
accrued expenses, was $27.6 million to $35.1 million. Houlihan Lokey estimated a
range of value for ARL's investment in real estate securities of $7.8 million to
$10.5 million for ARL's 28.3 percent ownership interest in IOT and $86.3 million
to $122.8 million for ARL's 49.7 percent ownership interest in TCI. These
estimated values were calculated based upon ARL's percentage ownership in TCI
and IOT multiplied by Houlihan Lokey's concluded equity net asset values for TCI
and IOT.

Based on the approaches discussed above, Houlihan Lokey estimated a
range of concluded enterprise values for ARL of $873.1 million to $1,071.0
million, a range of concluded equity net asset values for ARL of $125.7 million
to $262.0 million and a range of per share concluded equity net asset values of
$11.05 to $23.03.

IOT VALUATION

Based on the portfolio (market) analysis conducted by Houlihan Lokey,
Houlihan Lokey estimated a range of asset value for IOT's income producing
property as follows: (1) $23.8 million to $26.3 million for the IOT apartment
portfolio and (2) $38.1 million to $41.9 million for the IOT office portfolio.
In utilizing the "Net Asset Value" approach, Houlihan Lokey estimated a range of
asset value for IOT's income producing property as follows: (1) $21.5 million to
$22.8 million for apartment assets and (2) $41.3 million to $50.2 million for
office assets. The estimated asset value for IOT's land assets was $24.6 million
to $31.6 million. The estimated asset value for other assets such as investments
in joint ventures, notes receivable, accounts receivable and escrow deposits,
net other liabilities such as accounts payable, property taxes and security
deposits was -$0.6 million to $0.5 million.

Based on the approaches discussed above, Houlihan Lokey estimated a
range of concluded enterprise values for IOT of $86.3 million to $102.7 million,
a range of concluded equity net asset values for IOT of $27.4 million to $37.0
million and a range of per share concluded equity net asset values of $19.04 to
$25.71.

TCI VALUATION

Based on the portfolio (market) analysis conducted by Houlihan Lokey,
Houlihan Lokey estimated a range of asset value for TCI's income producing
property as follows: (1) $221.0 million to $244.3 million for the TCI apartment
portfolio, (2) $200.6 million to $220.7 million for the TCI office portfolio,
(3) $25.6 million to $28.0 million for the TCI shopping center portfolio, (4)
$49.7 million to $54.7 million for the TCI industrial portfolio and (5) $13.1
million to $15.1 million for TCI's hotel portfolio. In utilizing the "Net Asset
Value" approach, Houlihan Lokey estimated a range of asset value for TCI's
income producing property as follows: (1) $270.4 million to $296.0 million for
apartment assets (2) $17.6 million to $18.6 million for hotel assets, (3) $51.7
million to $60.7 million for industrial/warehouse assets, (4) $225.9 million to
$261.8 million for office assets and (5) $28.0 million to $32.5 million for
retail assets. Houlihan Lokey estimated a range of asset values for TCI's land
assets from $68.0 million to $97.0 million. The estimated asset value for other
assets such as investments in joint ventures, the Signature Athletic Club, Alamo
and West End parking lots, notes receivable, advances to affiliates, accounts
receivable, pending purchases and escrow deposits, net other liabilities such as
accounts payable, property taxes and security deposits was $10.9 million to
$15.1 million. Houlihan Lokey estimated a range of asset value for TCI's
investment in real estate securities of $6.6 million to $8.9 million for TCI's
24 percent ownership interest in IOT and $7.9 million to $16.5 million for TCI's
6.3 percent ownership interest in ARL. These estimated values were calculated
based upon TCI's percentage ownership in ARL and IOT multiplied by Houlihan
Lokey's concluded equity net asset values for ARL and IOT.

Based on the approaches discussed above, Houlihan Lokey estimated a
range of concluded enterprise values for TCI of $645.2 million to $754.0
million, a range of concluded equity net asset values for TCI of $173.6 million
to $247.1 million and a range of per share concluded equity net asset values of
$20.68 to $29.44.

EXCHANGE RATIO ANALYSIS

Based on the foregoing valuation estimates, Houlihan Lokey notes that
the indicated exchange ratios based on net asset values of IOT and TCI and the
lowest estimated net asset value of ARL was 1.72 to 2.33 for IOT and 1.87 to
2.66 for TCI on an after tax basis and 1.25 to 1.82 for IOT and 1.42 to 2.11 on
a before tax basis.

In conclusion, Houlihan Lokey's analyses indicated that the
consideration being offered to the non-affiliated TCI stockholders and the
non-affiliated IOT stockholders in connection with the mergers is fair from a
financial point of view.

Houlihan Lokey's opinions are based on the business, economic, market
and other conditions as they existed as of February 1, 2002, and on the
projected financial information provided to Houlihan Lokey as of that date. In
rendering its opinions, Houlihan Lokey has relied upon and assumed, without
independent verification, that the historical and projected financial
information (including the future value and estimated sale dates of the land
held for sale) provided to Houlihan Lokey by the Subject Companies has been
reasonably and accurately prepared based upon the best current available
estimates of the financial results and condition of the Subject Companies.
Houlihan Lokey did not independently verify the accuracy or

completeness of the information supplied to it with respect to the Subject
Companies and does not assume responsibility with respect to it. Except as set
forth above, Houlihan Lokey did not make any independent appraisal of the
specific properties or assets of the Subject Companies.

The summary set forth above describes the material points of more
detailed analyses performed by Houlihan Lokey in arriving at its fairness
opinions. The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinions, Houlihan Lokey made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan
Lokey believes that its analyses and summary set forth herein must be considered
as a whole and that selecting portions of its analyses, without considering all
analyses and factors, or portions of this summary, could create an incomplete
view of the processes underlying the analyses set forth in Houlihan Lokey's
fairness opinions. In its analysis, Houlihan Lokey made numerous assumptions
with respect to the Subject Companies, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of the respective entities. The estimates contained in the
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be more or less favorable than suggested by the
analyses. However, there were no specific factors reviewed by Houlihan Lokey
that did not support its opinions. Additionally, analyses relating to the value
of businesses or securities are not appraisals. Accordingly, the analyses and
estimates are inherently subject to substantial uncertainty.

DETERMINATION AND RECOMMENDATION OF THE TCI BOARD OF DIRECTORS

On February 1, 2002, the TCI board of directors met by telephone
conference to consider the recommendation of the TCI merger, to approve the
filing of documents with the SEC and to authorize the executive officers to
finalize this joint proxy statement and prospectus and the related filings. At
that meeting, counsel for TCI reviewed and compared the terms of the TCI merger
agreement to the requirements under the Settlement Agreement. At that meeting,
Houlihan Lokey made a presentation to the TCI board of directors on the
financial analyses performed by Houlihan Lokey in connection with its fairness
analysis. Houlihan Lokey also made a presentation concerning the fairness of the
consideration to be offered to the non-affiliated TCI public stockholders in the
merger and delivered their opinion that the amount of the consideration to be
offered in the TCI merger was fair from a financial point of view to those
non-affiliated TCI stockholders. Following the presentations, all of the TCI
directors determined that the terms of the Settlement Agreement and contemplated
merger were procedurally and substantively fair to the non-affiliated TCI
stockholders and approved the terms of the merger and the TCI merger agreement.
The TCI board of directors believe that the following helped insure the
procedural fairness of the proposed TCI merger to the non-affiliated TCI
stockholders, all as required by the Settlement Agreement:

o That the TCI board of directors obtain an opinion from
Houlihan Lokey that the consideration to be offered to the
non-affiliated TCI public stockholders in the merger is fair
to them from a financial point of view.

o The procedural mechanism for approval of the TCI merger
agreement requires the affirmative vote of a majority of the
votes cast by non-affiliated TCI stockholders.

o The TCI board of directors was aware that all affiliated TCI
stockholders will receive ARL preferred stock in the merger
rather than cash.

o The terms of the proposed TCI merger were dictated principally
from the Settlement Agreement from arm's-length negotiations
between Settlement Counsel and counsel for ARL.

o The TCI merger will afford non-affiliated TCI stockholders
with the opportunity (but no obligation) to make an
affirmative election to receive securities rather than cash.

o The terms of the proposed TCI merger were not determined at a
time when market prices were unusually depressed by virtue of
the occurrence of any extraordinary or unique event.

On February 1 and 4, 2002, the TCI board of directors again met by
telephone conference to review a revised form of opinion from Houlihan Lokey,
which contained proposed revisions to the timing of the conversion period of the
preferred stock available by affirmative election by the TCI stockholders.
During that meeting, discussions ensued concerning the probable timing based
upon potential filings by ARL depending upon the consummation of the TCI Merger.
The TCI board of directors concluded that the recommended change in timing of
conversion periods would be beneficial to those TCI stockholders who
affirmatively elect to receive preferred stock. Following these discussions, the
TCI directors reaffirmed their February 1, 2002 determination that the terms of
the Settlement Agreement and contemplated merger are procedurally and
substantively fair to the non-affiliated TCI stockholders as previously
described.

The Houlihan Lokey opinion was rendered to the TCI board of directors
for its consideration in determining whether to approve the TCI merger agreement
and does not constitute a recommendation to any TCI stockholder as to how such
stockholder should vote.

Based upon all of the information available to the TCI board of
directors, the TCI board of directors unanimously concluded that the terms and
provisions of the TCI merger and TCI merger agreement were fair to and in the
best interests of the non-affiliated TCI stockholders, approved the TCI merger
agreement and recommended that the TCI stockholders approve the TCI merger
agreement and the transactions contemplated thereby.

DETERMINATION AND RECOMMENDATION OF THE IOT BOARD OF DIRECTORS

On February 1, 2002, the IOT board of directors met by telephone
conference to consider the recommendation of the IOT merger, to approve the
filing of documents with the SEC and to authorize the executive officers to
finalize this joint proxy statement and prospectus and the related filings. At
that meeting, counsel for IOT reviewed and compared the terms of the IOT merger
agreement to the requirements under the Settlement Agreement. At that meeting,
Houlihan Lokey made a presentation to the IOT board of directors on the
financial analyses performed by Houlihan Lokey in connection with its fairness
analysis.

Houlihan Lokey also made a presentation concerning the fairness of the
consideration to be offered to the non-affiliated IOT public stockholders in the
IOT merger and delivered their opinion that the amount of the consideration to
be offered in the IOT merger, was fair from a financial point of view to those
non-affiliated IOT stockholders. Following the presentations, all of the IOT
directors determined that the terms of the Settlement Agreement and contemplated
IOT merger were procedurally and substantively fair to the non-affiliated IOT
stockholders and approved the terms of the IOT merger and the IOT merger
agreement. The IOT board of directors believe that the following helped insure
the procedural fairness of the proposed IOT merger to the non-affiliated IOT
stockholders, all as required by the Settlement Agreement:

o That the IOT board of directors obtain an opinion from
Houlihan Lokey that the consideration to be offered to the
non-affiliated IOT public stockholders in the merger is
fair to them from a financial point of view.

o The procedural mechanism for approval of the IOT merger
agreement requires the affirmative vote of a majority of the
votes cast by non-affiliated IOT stockholders.

o The IOT board of directors was aware that all affiliated IOT
stockholders will receive ARL preferred stock in the merger
rather than cash.

o The terms of the proposed IOT merger were dictated principally
from the Settlement Agreement from arm's-length negotiations
between Settlement Counsel and counsel for ARL.

o The IOT merger will afford non-affiliated IOT stockholders
with the opportunity (but no obligation) to make an
affirmative election to receive securities rather than cash.

o The terms of the proposed IOT merger were not determined at a
time when market prices were unusually depressed by virtue of
the occurrence of any extraordinary or unique event.

On February 1 and 4, 2002, the IOT board of directors again met by
telephone conference to review a revised form of opinion from Houlihan Lokey,
which contained proposed revisions to the timing of the conversion period of the
preferred stock available by affirmative election by the IOT stockholders.
During that meeting, discussions ensued concerning the probable timing based
upon potential filings by ARL depending upon the consummation of the IOT merger.
The IOT board of directors concluded that the recommended change in timing of
conversion periods would be beneficial to those IOT stockholders who
affirmatively elect to receive preferred stock. Following these discussions, the
IOT directors reaffirmed their February 1, 2002 determination that the terms of
the Settlement Agreement and contemplated merger are procedurally and
substantively fair to the non-affiliated IOT stockholders as previously
described.

The Houlihan Lokey opinion was rendered to the IOT board of directors
for its consideration in determining whether to approve the IOT merger agreement
and does not constitute a recommendation to any IOT stockholder as to how such
stockholder should vote.

Based upon all of the information available to the IOT board of
directors, the IOT board of directors unanimously concluded that the terms and
provisions of the IOT merger and IOT merger agreement were fair to and in the
best interests of the non-affiliated IOT stockholders, approved the IOT merger
agreement and recommended that the stockholders approve the IOT merger agreement
and the transactions contemplated thereby.

EFFECTS OF THE MERGERS; ARL AFTER THE MERGERS

ARL, TCI and IOT have substantially the same management, and affiliated
ownership. While the three companies operate as a group of related companies,
each is a separate and distinct entity and as such, each has separate SEC
reporting obligations, each files separate tax returns with the Internal Revenue
Service and state tax authorities, and each entity has its own board of
directors, including one or more independent directors. Each entity presently
has the same contractual advisor, BCM, and each entity attempts to operate
efficiently given this three entity structure by, among other things, having the
same contractual advisor which results in a consolidation of the general and
administrative functions of the three companies at the BCM level, and in common
offices located in Dallas, Texas. However, the three entity structure does
necessarily result in certain inefficiencies and higher costs. Among the
detriments of the current structure to each of the three entities and their
respective non-affiliated stockholders are the following:

o the need for and costs of three separate outside audits

o the need for and costs of filing separate SEC reports and
separate tax returns for each of the three entities

o the need for and costs of maintaining three separate boards of
directors, each with at least one or more separate independent
directors, and of holding separate board meetings and annual
stockholder meetings for each of the three entities

o inefficiencies resulting from the need to maintain separate
books and records for three public companies, and to institute
and maintain procedural safeguards to protect the interests of
the separate minority interests in each of the three entities

o a limited number of shares in the hands of the public
available which results in illiquidity of the common equity of
the three entities, when compared to the enhanced liquidity
that should exist if substantially all of the common equity of
the three entities were traded as a single common security

o difficulties in explaining to the capital markets the business
plan and strategy on a company-by-company basis, as opposed to
a consolidated basis and the interrelations between the
ownership, businesses and management of the three entities

o the difficulty of matching the available assets with the
available opportunities of the three companies on a
company-by-company basis, as opposed to a consolidated basis.

If the mergers are consummated, TCI and IOT will each become
subsidiaries of ARL. If both mergers are consummated, the current unaffiliated
TCI and IOT stockholders will no longer own their shares of stock. Therefore,
they will not benefit from any future earnings or growth of TCI or IOT or
benefit from any increase of the value of TCI or IOT and will no longer bear the
risk of any decrease in value of TCI or IOT. Instead, former stockholders will
have the right to receive at consummation of the merger, $17.50 in cash for each
share of TCI common stock held, and $19.00 in cash for each share of IOT common
stock held. The benefit to the holders of the TCI common stock and the IOT
common stock of the transaction is the payment of a premium, in cash, above the
respective market values for such stock prior to the announcement of the merger
agreements. This cash payment assures that all non-affiliated TCI and IOT
stockholders will receive a specific cash amount for their respective shares
rather than taking the risks associated with attempting to sell their shares in
the open market. The detriment to such holders (if any) is their inability to
participate as a continuing stockholder in the possible future growth of either
TCI or IOT.

TCI's and IOT's common stock are each currently registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of
the mergers, the TCI common stock will be delisted from the NYSE, the IOT common
stock will be delisted from the AMEX, the registration of the TCI common stock
and IOT common stock under the Exchange Act will be terminated, and TCI and IOT
will each be relieved of the obligation to comply with the proxy rules of
Regulation 14a under Section 14 of the Exchange Act. Further, TCI and IOT will
no longer be subject to periodic reporting requirements of the Exchange Act and
will cease filing information with the SEC. There will be cost savings
attributable to TCI and IOT no longer being public companies, including legal
and other fees and administrative expenses of personnel relating to the filing
of public documents, and maintenance of boards of directors and committees
required under the federal securities laws and the rules and regulations of the
NYSE and the AMEX.

After consummation of the mergers, ARL will be the only remaining
public entity of the three. The directors of ARL immediately prior to the
effectiveness of the mergers will be the directors of ARL immediately after the
mergers, and the three directors of TCI and IOT will join the board of directors
of ARL following the mergers. The directors of TCI and IOT will not continue to
be the directors of TCI and IOT after the mergers. The officers of ARL, TCI and
IOT immediately prior to the effective time of the mergers will be the officers
of the entities immediately after the mergers. Similarly, no change in the
certificate of incorporation or bylaws of any of the entities is contemplated
prior to the effective time of the mergers or after the consummation of the
mergers.

ARL expects that the business and operations of all three entities will
be continued substantially as they are currently conducted (except that TCI and
IOT will be operated as subsidiaries of ARL) but some adjustments
will be necessitated by the financing of the consideration to be paid to the
non-affiliated TCI stockholders and non-affiliated IOT stockholders in
connection with the mergers. Except as stated in this joint proxy statement and
prospectus, management of ARL does not currently intend to dispose of any
specific assets or operations of ARL, TCI or IOT other than in the ordinary
course of their respective businesses. Management will, from time to time,
continue to evaluate and review the businesses, operations and properties of all
of the entities and make such changes as are deemed appropriate.

Other than by virtue of the mergers (and any possible tender offers
described elsewhere in this joint proxy statement and prospectus), ARL, TCI, IOT
and BCM have no current plans or proposals which relate to or would result in an
extraordinary corporate transaction involving TCI or IOT or any of their
subsidiaries, such a merger, reorganization or liquidation, or a sale or
transfer of a material amount of assets involving TCI or IOT or any of their
subsidiaries, or any material change in the present dividend rate or policy, or
capitalization or indebtedness (except as contemplated by the financing
arrangements described in this joint proxy statement and prospectus) involving
TCI or IOT or any of their subsidiaries, or any change in the present board or
management of TCI or IOT, or any other material change in ARL's or TCI's or
IOT's corporate structure or business. However, management of ARL will review
proposals or may propose the acquisition or disposition of assets or other
changes in ARL and its subsidiaries' business, corporate structure,
capitalization, management or dividend policy that they consider to be in the
best interests of ARL and its stockholders. Neither ARL nor its management has
formulated any specific plans regarding repayment of indebtedness incurred in
connection with the mergers, but it is anticipated that such indebtedness will
be repaid primarily with or by means of cash from operations of the businesses
of ARL and its subsidiaries.

CONDUCT OF THE BUSINESS OF EITHER OR BOTH OF TCI OR IOT IF EITHER MERGER IS NOT
CONSUMMATED

If either of the mergers is not consummated, the board of directors of
TCI or IOT or both and current management will continue to operate each entity's
business substantially as presently operated.

FEDERAL INCOME TAX CONSIDERATIONS

This section summarizes material U.S. federal income tax considerations
relevant to the stockholders of TCI and IOT participating in the mergers. This
discussion is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), applicable Treasury Regulations, judicial decisions and
current administrative rulings and pronouncements, all as of the date of this
document and any of which may be changed at any time with retroactive effect.
There can be no assurance that future legislation, regulations, administrative
rulings or court decisions would not alter the tax consequences set forth below.
The discussion does not address all aspects of federal income taxation that may
be important to particular stockholders in light of their personal investment
circumstances or to stockholders subject to special treatment under the federal
income tax laws (such as dealers in securities, life insurance companies,
foreign persons, broker-dealers, regulated investment companies, tax-exempt
entities, financial institutions, taxpayers subject to the alternative minimum
tax, taxpayers who acquired their TCI or IOT stock as compensation and persons
holding their stock as part of a "straddle," "hedge" or other integrated
investment) and does not address any aspect of state, local or foreign taxation.
For purposes of this discussion, it is assumed that the TCI and IOT stock are
held by the TCI and IOT stockholders respectively, as capital assets at the time
of the consummation of the mergers, within the meaning of Section 1221 of the
Code. THEREFORE, STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGERS AND RELATED TRANSACTIONS,
INCLUDING APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.

No ruling has been or will be obtained from the Internal Revenue
Service in connection with the mergers. TCI and IOT stockholders should be aware
that an opinion of counsel is not binding on the Internal Revenue Service or the
courts, and no assurance can be given that the Internal Revenue Service will not
challenge the tax treatment of the mergers.

The following are the material United States federal income tax
consequences of the mergers. The following discussion is based on and subject to
the Code, the regulations promulgated thereunder, existing administrative
interpretations and court decisions and any related laws, all of which are
subject to change, possibly with retroactive effect. This discussion does not
address all aspects of United States federal income taxation that may be
important to you in light of your particular circumstances or if you are subject
to special rules, such as rules relating to:

o stockholders who are not citizens or residents of the United States

o financial institutions

o tax exempt organizations

o insurance companies

o dealers in securities

Jackson Walker L.L.P. has concluded that the mergers will not qualify
as tax-free reorganizations and accordingly they will be taxable transactions.
The mergers will have the following federal income tax consequences upon the
TCI, IOT and ARL stockholders:

1. The TCI stockholders who receive cash in the TCI merger will
recognize gain or loss equal to the difference between (i) the
cash received by them; and (ii) their tax basis of their
shares of TCI.

2. The TCI stockholders who receive preferred stock in the TCI
merger will recognize gain or loss equal to the difference
between (i) the fair market value of the preferred stock
received by them; and (ii) their tax basis of their shares of
TCI.

3. The IOT stockholders who receive cash in the IOT merger will
recognize gain or loss equal to the difference between (i) the
cash received by them; and (ii) their tax basis of their
shares of IOT.

4. The IOT stockholders who receive preferred stock in the IOT
mergers will recognize gain or loss equal to the difference
between (i) the fair market value of the preferred stock
received by them; and (ii) their tax basis of their shares of
IOT.

5. The tax basis of the preferred stock received by TCI and IOT
stockholders in the merger will equal the fair market value of
the preferred shares at the date the TCI and IOT stockholders
own the shares of preferred stock.

6. The holding period for the shares of our preferred stock
received by TCI and IOT stockholders will not include the
holding period of their TCI or IOT shares.

7. ARL stockholders will not recognize gain or loss as a result
of the mergers.

The foregoing discussion is not based upon an advance ruling by the
United States Treasury Department but upon an opinion of Jackson Walker L.L.P.,
counsel to ARL. The foregoing discussion is not intended to be a complete
analysis or description of all potential United States federal income tax
consequences or any other consequences of the mergers. In addition, the
discussion does not address tax consequences which may vary with, or are
contingent on, your individual circumstances. Moreover, this discussion does not
address any non-income tax or any foreign, state or local tax consequences of
the mergers. Accordingly, we strongly urge you to consult with your tax adviser
to determine the particular United States federal, state, local or foreign
income or other tax consequences to you of the mergers.

The above discussion addresses only the federal income tax
considerations of the proposed transactions to a TCI or an IOT stockholder
generally. The federal, state, local and foreign tax consequences of the
proposed transactions and the ownership and disposition of stock in ARL are
complex and, in some cases, uncertain. These consequences also may vary based
upon the individual circumstances of each stockholder. Accordingly, TCI and IOT
stockholders are urged to consult, and must rely upon, their own tax advisors as
to the tax consequences to them of the acquisition, ownership and disposition of
stock in ARL, including the applicability of any state, local or foreign tax
laws and any pending or proposed legislation.

REGULATORY APPROVALS

At any time before or after the completion of the merger, the Antitrust
Division of the Justice Department, the Federal Trade Commission or another
third party could seek to enjoin or rescind the mergers on antitrust grounds.

INTERESTS OF CERTAIN PERSONS IN THE BUSINESS COMBINATION

Some of the directors and officers of ARL have interests in the
business combination that are different from, or in addition to, the interests
of ARL stockholders generally, and that may present actual or potential
conflicts of interest. Likewise, some of the directors and officers of TCI and
IOT have interests that are different from, or in addition to, the interests of
TCI and IOT stockholders generally. These interests, to the extent material, are
described below. The ARL, TCI and IOT boards of directors were aware of these
interests and considered them, among other matters, in approving the respective
agreements and plans of merger and the business combination.

DIRECTORS AND EXECUTIVE OFFICERS

Messrs. Branigan, Corna, Endendyk, Kimbrough and Starowicz, who serve
as executive officers of ARL, also serve as executive officers of TCI, IOT or
BCM. Each of the individuals, as a result of their position with ARL, owe
fiduciary duties to the stockholders of ARL in addition to the fiduciary duties
owed to the stockholders of TCI and IOT. Additionally, TCI and IOT have the same
officers and directors and, therefore, the directors owe fiduciary duties to
both TCI and IOT. At times, each of these individuals may be confronted by
issues, including the business combination, that present them with potentially
conflicting interests and obligations. Furthermore, in accordance with the
advisory agreements that each of ARL, TCI and IOT have with BCM (as discussed
under the heading "The Advisor"), BCM will receive a fee upon the sale, if any,
of the properties that may be sold to fund the payment of the cash merger
consideration. For the properties available for sale as of February 1, 2002, the
amount of the fee is estimated to be $3,038,815. See "Special Factors -
Financing the Business Combination."

It is currently expected that the directors and officers of ARL, TCI
and IOT will remain the same after the business combination except that the
three directors of TCI and IOT will become directors of ARL. As a result of
these interests as well as those set forth below, the directors and officers of
ARL, TCI and IOT could be more likely to vote to approve the business
combination, the agreements and plans of merger and related matters than if they
did not hold these interests. You should consider whether these interests may
have influenced these directors and officers to support or recommend the
business combination.

STOCK OWNERSHIP

Some of the executive officers and directors of ARL, TCI and IOT own
stock and options of ARL, TCI and IOT. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF ARL," "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF TCI" and "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF IOT." As a result, these executive officers
and directors may benefit from that ownership if the business combination is
approved.

STOCK OPTIONS

Certain members of the ARL and TCI boards of directors and management
have been issued options pursuant to certain option plans of ARL and TCI. As of
the record date, executive officers and directors of ARL held options to
purchase a total of 80,000 shares of ARL common stock at exercise prices of
between $9.87 per share and $18.53 per share. Directors of TCI held options to
purchase a total of 50,000 shares of TCI common stock at exercise prices of
between $8.875 per share and $16.05 per share.

OTHER AGREEMENTS AND BENEFIT PLANS

Neither ARL, TCI or IOT has any employees, employment agreements,
benefit plans or other agreements with stockholders. As a result, the directors
and executive officers of each company may have different interests in the
business combination arising primarily from their ownership of stock in either
ARL, TCI or IOT.

INDEMNIFICATION AND INSURANCE

ARL has agreed to cause TCI and IOT to maintain, for a period of three
years after the completion of the business combination, the current provisions
and policies regarding indemnification of officers and directors, provided that
TCI or IOT may substitute policies having at least the same coverage and
containing terms that are no less advantageous to the insured.

THE PLANS OF MERGER

Provided ARL has sufficient funds available to it, either from its own
resources or from TCI and IOT immediately after the mergers, to pay the cash
merger consideration, ARL and each of TCI and IOT will execute and deliver an
agreement and plan of merger following approval of the mergers by ARL's
stockholders and, in the case of TCI and IOT, approval by their respective
stockholders of the mergers. The mergers will be consummated contemporaneously
with or promptly following the execution and delivery of the agreements and
plans of merger. The following is a discussion of the material provisions of
each plan of merger. The full text of each plan of merger is attached as
Appendix A and Appendix B to this joint proxy statement and prospectus and are
incorporated herein by reference. We encourage you to read the applicable plan
of merger in its entirety.

THE MERGER

According to the terms of the plans of merger, at the effective time of
each merger, two separate recently formed wholly-owned subsidiaries of ARL will
merge with TCI and IOT, respectively. The acquisitions of TCI and IOT are not
dependent upon each other. If the stockholders of one company do not approve
their respective merger, only the approved merger may be consummated. TCI and
IOT will survive the merger.

EFFECTIVE TIME OF THE MERGER

The closing of the transactions contemplated by the merger agreements
will take place contemporaneously with or as soon as practicable following the
execution and delivery of each merger agreement. The closing cannot take place
until after the stockholders of TCI or IOT approve their respective mergers.
Additionally, the ARL board of directors has determined that the TCI and IOT
mergers would not be consummated unless, in each case, sufficient cash was
available to ARL, either from its own resources or from TCI or IOT immediately
after the mergers, to pay the cash merger consideration due as a result of the
mergers.

As soon as practicable after the closings, the articles of mergers in
connection with each respective merger will be filed with the Secretary of State
of the State of Nevada, as provided in the Nevada mergers and Exchanges of
Interest Act. The times at which the articles of merger are filed in Nevada and
the Secretary of State issues a certificate of merger is referred to as the
"effective time" of each respective merger.

CONVERSION OF SHARES - EXCHANGE RATIO

If the TCI stockholders approve their merger, each share of outstanding
TCI common stock will be converted into $17.50 in cash, upon the affirmative
election of the stockholder, one share of Series G preferred stock. The cash
consideration shall be reduced by any dividend TCI pays on the TCI common stock
after January 2, 2002. Each share of outstanding TCI common stock held by BCM
and other affiliates of ARL will be converted into one share of Series G
preferred stock and each outstanding share held by TCI, ARL or its subsidiaries
will be cancelled.

If the IOT stockholders approve their merger, each share of outstanding
IOT common stock will be converted into $19.00 in cash, or upon the affirmative
election of the stockholder,

one share of ARL Series H preferred stock. The cash consideration shall be
reduced by any dividend IOT pays on the IOT common stock after January 2, 2002.
Each share of outstanding IOT common stock held by BCM and other affiliates of
ARL will be converted into one share of Series H preferred stock and each
outstanding share held by IOT, TCI, ARL or its subsidiaries will be cancelled.

CLOSING

Contemporaneously with the execution and delivery of the merger
agreements, or promptly thereafter, a closing will take place at the offices of
Jackson Walker L.L.P., 901 Main Street, Suite 6000, Dallas, Texas or at such
other place as ARL, TCI, IOT and the two newly formed subsidiaries mutually
agree upon.

REPRESENTATIONS AND WARRANTIES

The merger agreements contain representations and warranties by ARL and
its two recently formed subsidiaries relating to:

o organization and qualification;

o capitalization;

o authority;

o the absence of a breach or any violation of ARL and its two recently
formed subsidiaries articles of incorporation, bylaws, or similar
governing documents;

o statutory approvals;

o compliance with laws;

o accuracy of information in the SEC documents;

o accuracy of information in financial statements contained in the SEC
documents;

o absence of certain changes or events;

o absence of litigation;

o absence of undisclosed liabilities;

o accuracy of information in the joint proxy statement and prospectus;

o vote required to approve the merger;

o accuracy of representations, warranties, and statements contained in
any certificate or schedule;

o stock option plans;

o affiliate agreements;

o taxes; and

o brokers and finders.

The respective merger agreements contain representations and warranties
by TCI and IOT relating to:

o organization and qualification;

o capitalization;

o authority;

o the absence of a breach or a violation of TCI or IOT's articles of
incorporation, bylaws, or similar governing documents;

o consents and approvals;

o statutory approvals;

o compliance with laws;

o accuracy of information in the SEC documents;

o accuracy of information in financial statements contained in the SEC
documents;

o absence of certain changes or events;

o absence of litigation;

o absence of undisclosed liabilities;

o accuracy of information in the joint proxy statement and prospectus;

o vote required to approve the merger agreement;

o accuracy of representations, warranties, and statements contained in
any certificate or schedule;

o stock option plans;

o affiliate agreements;

o taxes; and

o brokers and finders.

INDEMNIFICATION

The surviving corporations have agreed to maintain the current
provisions regarding indemnification of officers and directors contained in the
charter and bylaws of TCI and/or IOT and each of their respective subsidiaries
and any directors, officers or employees indemnification agreements of TCI
and/or IOT or their respective subsidiaries.

EXCHANGE OF CERTIFICATES

At the effective time of the mergers, all shares of TCI and IOT common
stock will cease to be outstanding and will automatically be canceled and
retired. Each certificate formerly representing TCI and IOT common stock other
than those held by ARL and its subsidiaries, TCI or IOT, will represent
ownership of the right to receive either cash or ARL preferred stock, as
applicable, issuable in the mergers until those certificates are surrendered to
the exchange agent. The exchange agent for the merger is American Stock Transfer
and Trust Company.

As soon as possible after the completion of the merger, the exchange
agent will mail you a form of letter of transmittal and instructions for your
use in making your election and exchanging your common stock certificates for
cash or ARL preferred stock certificates. When you surrender your certificates,
together with a signed letter of transmittal, you will receive in exchange
either cash or certificate(s) representing whole shares of ARL preferred stock
to which you are entitled.

YOU SHOULD NOT SEND YOUR CERTIFICATES TO THE EXCHANGE AGENT UNTIL YOU
RECEIVE A LETTER OF TRANSMITTAL.

ACCOUNTING TREATMENT

The transaction will be accounted for under the purchase method of
accounting. Accordingly, ARL will record the assets and liabilities of TCI and
IOT and the consideration paid.

CONSEQUENCES UNDER FEDERAL SECURITIES LAWS; RESALE OF ARL STOCK

The sale of shares of Series G and Series H preferred stock issuable in
connection with the mergers has been registered under the Securities Act.
Accordingly, there will be no federal securities law restrictions upon the
resale or transfer of the shares by stockholders, except for those stockholders
who are considered affiliates of ARL, TCI or IOT, as that term is defined in
Rule 144 and Rule 145 adopted under the Securities Act. However, there are
restrictions on the resale of the ARL preferred stock as imposed by ARL's
articles of incorporation. For a full discussion of these restrictions please
see "Description of the Capital Stock of ARL - Description of Preferred Stock."

Series G and Series H stock received by those stockholders who are
considered to be affiliates of ARL, TCI or IOT may be resold without
registration only as provided for by Rule 145 or as otherwise permitted under
the Securities Act. Persons who may be considered to be affiliates of ARL, TCI
or IOT generally include individuals or entities that control, are controlled by
or are under common control with, ARL, TCI or IOT, and may include the executive
officers and directors of ARL, TCI and IOT.

MANAGEMENT AND BOARD OF DIRECTORS AFTER THE MERGERS

Following the completion of the business combination, the board of
directors of ARL will consist of the current four members of the ARL board and
the three current members of the TCI and IOT boards. No other changes in the
directors, executive officers or management of ARL, TCI or IOT are anticipated.

During the past five years, none of ARL, TCI, IOT, BCM,
Transcontinental Realty Acquisition Corporation, Income Opportunity Acquisition
Corporation or any of their respective executive officers or directors was (i)
convicted in a criminal proceeding during the past five years (excluding traffic
violations or other minor offenses, if any), or (ii) a party to any judicial or
administrative proceeding during the past five years (except for matters that
were dismissed without sanction or settlement, if any) that resulted in a
judgment, decree or final order enjoining the person from future violations of,
or prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.

EXPENSES OF THE MERGERS

If the mergers are consummated, all fees and expenses incurred in
connection with the mergers will be paid by the party incurring those fees and
expenses, except for the fees and expenses for the fairness opinions, which ARL
is required to pay pursuant to the Settlement Agreement. Estimated fees and
expenses incurred or to be incurred in connection with the business combination
are approximately as follows:

DESCRIPTION AMOUNT

Legal fees and expenses ................................................... $ 145,000
Accounting fees and expenses .............................................. 64,751
Houlihan Lokey ....................................................... 400,000
Fees to BCM relating to property expected to be sold to finance
the business combination ............................................. 3,038,815
Printing, mailing and distribution expenses ............................... 30,000
Paying agent fees and expenses ............................................ 10,000
SEC filing fees ........................................................... 14,071
Miscellaneous fees and expenses ........................................... 10,000
Total ............................................................ $3,712,637

COMPARISON OF OWNERSHIP OF SHARES

After the effective time of the mergers, IOT and TCI stockholders will
be offered the opportunity to affirmatively elect to become stockholders of ARL.
The following is a comparison of the rights of holders of the TCI common stock
and IOT common stock, on the one hand, and the ARL Series G and Series H
preferred stock they will be offered the opportunity to acquire, on the other.
No holder of TCI or IOT common stock will be required to acquire ARL Series G or
Series H preferred stock. Instead, following the mergers, if they occur, holders
of the TCI and IOT common stock will be offered the opportunity to affirmatively
elect to receive ARL Series G or Series H preferred stock in lieu of the cash
they would otherwise receive.

SERIES G PREFERRED STOCK AND
TCI COMMON STOCK IOT COMMON STOCK SERIES H PREFERRED STOCK
---------------------------------------------------------------------------------------------------------------------
MANAGEMENT
---------------------------------------------------------------------------------------------------------------------

Under the Nevada Revised IOT is subject to the The holders of Series G
Statutes (the "NRS"), the same NRS provisions. preferred stock and
business and affairs of a Series H preferred stock
Nevada corporation are Each share of IOT common are not voting for the
managed by or under the stock entitles its holder election of directors
directors of its board of to cast one vote on except when all or any
directors, whose members matters as to which portion of the dividends
are generally elected by voting is permitted or on such class of
a majority vote. required by Nevada law, preferred stock for any
including the election of six quarterly dividends,
Each share of TCI common directors. whether or not
stock entitles its holder consecutive, shall be in
to cast one vote on The IOT Articles of arrears and unpaid, as
matters as to which Incorporation require a the case may be. During
voting is permitted or board consisting of not the period such dividends
required by Nevada law, fewer than 3 nor more are in arrears, and only
including the election of than 12 directors, the during such period, the
directors. exact number to be number of directors
determined by the board. constituting the board of
The TCI Articles of directors of ARL shall be
Incorporation require a Pursuant to IOT's increased by two and the
minimum of 3 directors Articles of holders of Series G
and a maximum of 12 Incorporation, any preferred stock or Series
directors on its board. director of IOT may be H preferred stock, as the
removed from office at case may be, voting
The Articles of any time, with or without separately as a class,
Incorporation and Bylaws cause, by the affirmative shall be entitled to
of TCI provide that any vote of the holders of elect two directors to
director of TCI may be not less than two-thirds fill the newly created
removed from office at (2/3) of the outstanding directorships with each
any time, for cause, by stock of IOT voting holder being entitled to
the affirmative vote of thereon. one vote in the election
the holders of not less for each share of such
than 80% of the class of preferred stock
outstanding stock of TCI held.
voting thereon.
ARL's Restated Articles
of Incorporation provide
that it shall be managed
by a board consisting of
not fewer than 3 nor more
than 12 directors, the
exact number to be
determined by the board.

According to ARL's
Restated Articles of
Incorporation, any
director of ARL may be
removed from office at
any time, with or without
cause, by the affirmative
vote of the holders of
not less than two-thirds
(2/3) of the outstanding
stock of ARL voting
thereon; provided that
any director elected by a
particular class or
series of shares pursuant
to ARL's Restated
Articles of Incorporation
may be removed only by
the applicable vote of
the holders of such class
or series.
---------------------------------------------------------------------------------------------------------------------
FIDUCIARY DUTIES
---------------------------------------------------------------------------------------------------------------------

Under Nevada law, IOT is subject to the ARL is subject to the
directors are charged same NRS provisions. same NRS provisions.
with the duty to exercise
their powers in good
faith with a view to the
interests of the
corporation. Directors
must use reasonable due
diligence to protect
corporate property.
---------------------------------------------------------------------------------------------------------------------
VOTING RIGHTS
---------------------------------------------------------------------------------------------------------------------
Each share of TCI common Each share of IOT common The holders of Series G
stock entitles its holder stock entitles its holder preferred and Series H
to cast one vote on to cast one vote on preferred stock are not
matters as to which matters as to which voting for the election
voting is permitted or voting is permitted or of directors or on any
required by Nevada law, required by Nevada law, matter except: (i) as
including the election of including the election of otherwise provided by
directors, amendments to directors, amendments to law, (ii) with respect to
TCI's Articles of IOT's articles of an amendment to ARL's
Incorporation, mergers incorporation, mergers Restated Articles of
and other extraordinary and other extraordinary Incorporation or Bylaws
transactions. transactions. that would materially
alter or change the
existing terms of such
class of preferred stock,
as the case may be, and
(iii) at any time or
times for the election of
two directors when all or
any portion of the
dividends on such class
of preferred stock for
any six quarterly
dividends, whether or not
consecutive, shall be in
arrears and unpaid. In
the latter event, and
only during such period
that such dividends are
in arrears, the number of
directors constituting
the board of directors of
ARL shall be increased by
two and the holders

of such class of Series G
preferred stock or Series H
preferred stock, as the case may
by, voting separately as a
class, shall be entitled to
elect two directors to fill
the newly created directorship
with each holder being
entitled to one vote in the
election for each share of such
class of preferred stock held.

In the event that the Series G
preferred stock or Series H
preferred stock are required to
vote on a matter as provided by law,
the approval shall be deemed
to have been obtained
only upon the affirmative
vote of the holders of a
majority of the shares of
such class of preferred
stock outstanding.
---------------------------------------------------------------------------------------------------------------------
VOTING PROCEDURES
ANNUAL/SPECIAL MEETINGS
---------------------------------------------------------------------------------------------------------------------
The NRS provides that a IOT is subject to the The holders of Series G
corporation is entitled same NRS provisions. In preferred stock and H
to make bylaws pertaining addition, IOT's Bylaws preferred stock are not
to the calling and provide that the annual voting for the election
holding of meetings of meeting of stockholders of directors except when
its stockholders. The TCI for the election of all or any portion of the
Bylaws provide that the directors shall be held dividends on such class
annual meeting of within the first eight of preferred stock for
stockholders for the months of each calendar any six quarterly
election of directors and year, or as soon as dividends, whether or not
for such other business practicable thereafter. consecutive, shall be in
as may be stated in the Each meeting of the arrears and unpaid.
notice of the meeting, stockholders shall be During the period such
shall be held at such held at such place within dividends are in arrears,
place, either within or the United States and at and only during such
without the state of such time and date as the period, the number of
Nevada, and within the board of directors shall directors constituting
first eight months of determine. The IOT the board of directors of
each calendar year as Articles of Incorporation ARL shall be increased by
determined by the board and Bylaws provide that two and the holders of
of directors. The TCI special meetings of the Series G preferred stock
Articles of Incorporation stockholders may only be or Series H preferred
and Bylaws provide that called by the president, stock, as the case may
special meetings of the secretary or by be, voting separately as
stockholders may only be resolution of the board a class, shall be
called by the president, of directors. entitled to elect two
secretary or by directors to fill the
resolution of the board No action may be taken by newly created
of directors. written consent except directorships with each
upon the written consent holder being entitled to
in writing by all of the one vote in the election
stockholders of IOT for each share of such
voting thereon. class of preferred stock
held.

Such special meeting for
the election of directors
may be

called by the holders of
10% of such class of
Series G Preferred Stock
or Series H preferred stock
issued and outstanding.
---------------------------------------------------------------------------------------------------------------------
AMENDMENTS TO CHARTER
---------------------------------------------------------------------------------------------------------------------
The NRS requires the IOT is subject to the The ARL Restated Articles
approval of the holders same NRS provisions. of Incorporation contain
of a majority of all a provision which
outstanding shares voting In addition, IOT's requires the approval of
to approve proposed Articles of Incorporation the holders of a majority
amendments to a provide that the of all outstanding shares
corporation's charter. affirmative vote of at voting to approve
The holders of the least 75% of the votes proposed amendments to a
outstanding shares of a cast by such holders of corporation's charter.
particular class are stock voting thereon The holders of Series G
voting as a class on a shall be required to preferred stock and
proposed amendment if the alter, amend or repeal Series H preferred stock
amendment would alter or the provisions of IOT's are not voting on
change the power, Articles of Incorporation amendments to ARL's
preferences or special pertaining to (i) the Restated Articles of
rights of one or more size of the board of Incorporation or on any
series of any class so to directors, (ii) the matter except as
affect them adversely. procedures for amending otherwise provided by law
the corporation's bylaws, or with respect to an
TCI's Articles of (iii) the provisions for amendment to ARL's
Incorporation provide obtaining written Restated Articles of
that the affirmative vote consents of the Incorporation would
of at least 75% of the stockholders and the materially alter or
votes cast by such procedures for calling a change the existing terms
holders of stock voting special meeting of the of such class of
thereon shall be required stockholders, (iv) IOT's preferred stock.
to alter, amend or repeal election not to be
the provisions of TCI's governed by the statutes
Articles of Incorporation contained in NRS 78.411
pertaining to (i) the to 78.444 "Combinations
size of the board of with Interested
directors, (ii) the stockholders" and the
procedures for amending statutes contained in NRS
the corporation's bylaws, 78.378 to 78.3793
(iii) the provisions for "Acquisition of
obtaining written Controlling Interest" or
consents of the (v) IOT's requirement to
stockholders and the obtain the approval of
procedures for calling a two-thirds (2/3) of the
special meeting of the holders of the voting
stockholders, (iv) TCI's stock to approve certain
election not to be mergers or business
governed by the statutes combinations, or to adopt
contained in NRS 78.411 any provision
to 78.444 "Combinations inconsistent therewith;
with Interested provided, however, that
stockholders" and the the requirement for such
statutes contained in NRS a 75% vote shall not be
78.378 to 78.3793 required for any
"Acquisition of alteration, amendment,
Controlling Interest", repeal or adoption of
(v) TCI's requirement to such provision
obtain the approval of recommended by more than
two-thirds (2/3) of the 50% of the entire board
holders of the voting of directors.
stock for certain mergers
or business combinations,
(vi) the procedures
governing the removal of
directors, or (vii) the
procedures governing the
board's consideration of
certain mergers,

acquisitions or business
combinations, or to adopt
any provision
inconsistent therewith;
provided, however, that
the requirement for such
a 75% vote shall not be
required for any
alteration, amendment,
repeal or adoption of
such provision
recommended by more than
50% of the entire board
of directors.
---------------------------------------------------------------------------------------------------------------------
AMENDMENTS TO BYLAWS
---------------------------------------------------------------------------------------------------------------------
The NRS provides that IOT is subject to the ARL's Restated Articles
subject to the same NRS provisions. The of Incorporation and
restrictions set forth in IOT Articles of Bylaws provide that the
a corporation's bylaws, Incorporation provide Bylaws may be amended by
the directors may make that the Bylaws may be the board of directors or
the bylaws of the amended by the board of a majority of the
corporation. The TCI directors or the approval outstanding stock of ARL
Articles of Incorporation of no less than 75% of voting thereon. The
provide that the Bylaws the holders of the voting holders of Series G
may be amended by a stock of IOT voting preferred stock and
majority of the directors thereon. Series H preferred stock
or by the affirmative are not voting for
vote of the holders of amendments to ARL's
not less than 75% of the Bylaws or on any matter
outstanding stock of TCI except as otherwise
voting thereon. provided by law or if
such amendment to ARL's
Bylaws would materially
alter or change the
existing terms of such
class of preferred stock.
---------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
---------------------------------------------------------------------------------------------------------------------
Pursuant to the NRS, IOT is subject to the Each share of Series G
distributions may be made same NRS provisions. preferred stock has a
to stockholders (i) cumulative dividend per
unless TCI would not be share of 10.00% per annum
able to pay its debts as of the $20.00 liquidation
they become due in the preference, payable
usual course of business, quarterly in equal
or (ii) except as installments of $0.5, if
otherwise specifically and when declared by the
allowed by TCI's Articles board and to the extent
of Incorporation, its permitted under the NRS.
total assets would be Dividends on the Series G
less than the sum of its preferred stock are in
total liabilities plus preference to and with
the amount that would be priority over dividends
needed, if the upon the ARL common
corporation were to be stock. The Series G
dissolved at the time of preferred stock ranks on
distribution, to satisfy a parity as to dividends
the preferential rights and upon liquidation,
upon dissolution of dissolution or winding up
stockholders whose with all other shares of
preferential rights are ARL preferred stock.
superior to those
receiving the Each share of Series H
distribution. preferred stock has a
cumulative dividend per
share of 10.00% per annum

of the $21.50 liquidation
preference, payable
quarterly in equal
installments of $0.5375,
if and when declared by
the board and to the
extent permitted under
the NRS. Dividends on the
Series H preferred stock
are in preference to and
with priority over
dividends upon the ARL
common stock. The Series
H preferred stock ranks
on a parity as to
dividends and upon
liquidation, dissolution
or winding up with all
other shares of ARL
preferred stock.
---------------------------------------------------------------------------------------------------------------------
CONVERSION RIGHTS
---------------------------------------------------------------------------------------------------------------------
During a 75 day period
commencing on the 15th
day after ARL publicly
files its first Form 10-Q
with the SEC following
the consummation of the
TCI merger, the Series G
preferred stock may be
None. None. converted at the option
of the holder of Series G
preferred stock into 2.5
shares of ARL common
stock for each share of
Series G preferred stock.

During a 75 day period
commencing on the 15th
day after ARL publicly
files its first Form 10-Q
with the SEC following
the consummation of the
IOT merger, the Series H
preferred stock may be
converted at the option
of the holder of Series H
preferred stock into 2.25
shares of ARL common
stock for each share of
Series H preferred stock.
---------------------------------------------------------------------------------------------------------------------
REDEMPTION RIGHTS
---------------------------------------------------------------------------------------------------------------------
ARL may provide notice of
its intention to redeem
the Series G preferred
None. None. stock no earlier than 45
days after ARL publicly
files its first Form 10-Q
with the SEC following
the consummation of the
TCI merger. After that
time, ARL may redeem any
or all of

the Series G preferred
stock upon payment of
the liquidation value of
$20.00 per share plus all
accrued and unpaid
dividends by giving the
holder thereof not less
than 45 days nor more
than 60 days notice
thereof prior to the date
on which ARL desires such
shares redeemed.

ARL may provide notice of
its intention to redeem
the Series H preferred
stock no earlier than 45
days after ARL publicly
files its first Form 10-Q
with the SEC following
the consummation of the
IOT merger. After that
time, ARL may redeem any
or all of the Series H
preferred stock upon
payment of the
liquidation value of
$21.50 per share plus all
accrued and unpaid
dividends by giving the
holder thereof not less
than 45 days nor more
than 60 days notice
thereof prior to the date
on which the Corporation
desires such shares
redeemed.
---------------------------------------------------------------------------------------------------------------------
LIQUIDATION/DISSOLUTION
---------------------------------------------------------------------------------------------------------------------
Under the NRS, a IOT is subject to the The holders of Series G
dissolution must be same NRS provisions. Upon preferred stock and
initiated by the board of a liquidation, Series H preferred stock
directors and approved by dissolution or winding up are not voting on any
the holders of a majority of IOT, IOT will liquidation or
of the outstanding voting distribute the remaining distribution except as
shares of the assets, if any, to the otherwise provided by
corporation. holders of IOT common law, respectively.
stock after paying or
Upon a liquidation, adequately providing for Upon any liquidation,
dissolution or winding up the payment of all of its dissolution or winding up
of TCI, TCI will liabilities and of ARL, and after paying
distribute the remaining obligations. and providing for the
assets, if any, to the payment of all creditors
holders of TCI common of ARL, the holders of
stock after paying or Series G preferred stock
adequately providing for shall be entitled, before
the payment of all of its any distribution or
liabilities and payment is made to the
obligations. ARL common stock, to
receive a liquidation
preference in an amount
in cash equal to $20.00
per share less any
dividend declared and
paid after January 2,
2002 and prior to the
issuance of shares of
Series G preferred stock
with respect to shares of
TCI common stock plus

an amount equal to accrued
and unpaid dividends and
distributions thereon,
whether or not declared,
to the date of such
payment. Holders of
Series G preferred stock
are not entitled to any
further distributions.

Upon any liquidation,
dissolution or winding up
of ARL, and after paying
and providing for the
payment of all creditors
of ARL, the holders of
Series H preferred stock
shall be entitled, before
any distribution or
payment is made to the
ARL common stock, to
receive a liquidation
preference in an amount
in cash equal to $21.50
per share less any
dividend declared and
paid after January 2,
2002 and prior to the
issuance of shares of
Series H preferred stock
with respect to IOT
common stock plus an
amount equal to accrued
and unpaid dividends and
distributions thereon,
whether or not declared,
to the date of such
payment. Holders of
Series H preferred stock
are not entitled to any
further distributions.
---------------------------------------------------------------------------------------------------------------------
PREEMPTIVE RIGHTS
---------------------------------------------------------------------------------------------------------------------
Under the NRS, the IOT is subject to the No holder of Series G
stockholders of a same NRS provisions. The preferred stock or H
corporation organized IOT Articles of preferred stock shall
after October 1, 1991 do Incorporation do not have preemptive rights to
not have a preemptive contain a provision acquire any securities
right to acquire unissued granting the holders of issued or sold by ARL
shares, treasury shares IOT common stock because of his ownership
or securities convertible preemptive rights. of such class of
into such shares unless preferred stock.
the corporation's
articles of incorporation
provide otherwise. The
TCI Articles of
Incorporation do not
contain a provision
granting the holders of
TCI common stock
preemptive rights.
---------------------------------------------------------------------------------------------------------------------
TRANSFERABILITY
---------------------------------------------------------------------------------------------------------------------
Shares of TCI common Shares of IOT common Shares of Series G
stock are freely stock are freely preferred stock and
transferable except for shares transferable except for Series H preferred stock
issued to affiliates of TCI. shares issued to affiliates will be freely transferable,
Transfers of shares of stock of IOT. Transfers of shares except for shares issued to
held by affiliates are restricted of stock held by affiliates
by federal and state securities are restricted by federal
laws. The shares are listed and state securities laws.
on the NYSE under the symbol The shares are listed on the
"TCI". AMEX under the symbol "IOT".

affiliates of ARL.
Transfers of shares of
stock held by affiliates
are restricted by federal
and state securities
laws.
---------------------------------------------------------------------------------------------------------------------
INSPECTION RIGHT
---------------------------------------------------------------------------------------------------------------------
The NRS provides that any IOT is subject to the In addition to the
person who has been a same NRS provisions. foregoing provisions of
stockholder of record of IOT's Bylaws provide that the NRS, ARL's Bylaws
a corporation for at any stockholder of IOT provide that any person
least 6 months may inspect and copy who has been a
immediately preceding his during usual business stockholder of record of
demand, or any person hours the Bylaws, minutes any corporation and owns
holding, or thereunto of the proceedings of or has been authorized by
authorized in writing by meetings of stockholders, the holders of at least
the holders of, at least annual statements of its 15% of all of its
5% of all of its affairs and voting trust outstanding shares, is
outstanding shares, upon agreements on file at entitled to inspect and
at least 5 days' written IOT's principal office. copy the corporate
demand is entitled to financial records upon at
inspect in person or by least 5 days' written
agent or attorney, during notice.
usual business hours, a
copy certified by the
secretary of state of the
corporation's articles of
incorporation, as
amended, a copy certified
by an officer of the
corporation of its
bylaws, as amended, and
the corporation's stock
ledger and make copies
therefrom.

The TCI Bylaws provide
that any stockholder may
inspect and copy the
bylaws, stockholder
minutes, annual
statements of its affairs
and any voting trust
agreements.
---------------------------------------------------------------------------------------------------------------------
BUSINESS COMBINATIONS/MERGERS
---------------------------------------------------------------------------------------------------------------------
Under the NRS, IOT is subject to the The ARL Restated Articles
stockholders have the same NRS provisions. In of Incorporation do not
right, subject to certain addition, IOT's Articles contain any provision
exceptions, to vote on of Incorporation requires requiring a supermajority
all mergers to which the the affirmative vote of vote with respect to
corporation is a party. not less than two-thirds mergers. The holders of
In certain circumstances, (2/3) of the outstanding Series G preferred stock
different classes of stock of IOT voting or Series H preferred
securities may be voting thereon on certain stock are not voting on
separately as a class mergers or business mergers to which the
with respect to mergers. combinations with, or corporation is a party
Under the NRS, unless the proposed on behalf of any except (i) as otherwise
articles of affiliate of any provided by law and (ii)
incorporation, the board interested stockholder, with respect to an
of directors or the excluding the stock held amendment to ARL's
merger statutes require a by such interested Restated Articles of
greater vote, a plan of stockholder. The Incorporation or Bylaws
merger must be approved requirement is not be in connection with such
by a majority of the applicable in any merger merger that would
voting power of the or business combination materially alter or
stockholders voting if the transaction is change the existing terms
thereon. approved by a majority of of such class of
the board. preferred stock,
respectively.

TCI's Articles of
Incorporation requires
the affirmative vote of
not less than two-thirds
(2/3) of the outstanding
stock of TCI voting
thereon on certain
mergers or business
combinations with, or
proposed on behalf of any
affiliate of any
interested stockholder,
excluding the stock held
by such interested
stockholder. The
requirement is not be
applicable in any merger
or business combination
if the transaction is
approved by a majority of
the board.

The approval of the
surviving corporation in
a merger is not required
under the NRS if: (i) the
articles of incorporation
of the surviving domestic
corporation will not
differ from its articles
before the merger, (ii)
each stockholder holds
the same number of shares
in the surviving
corporation immediately
after the merger as prior
thereto, and such shares
have identical
designations,
preferences, limitations
and relative rights,
(iii) the number of
voting shares in the
surviving corporation
immediately after the
merger, plus the voting
power of the shares
issued in the merger,
does not exceed the
voting power of the
shares prior to the
merger by more than 20%,
and (iv) the number of
shares entitled to
participate without
limitations in
distributions immediately
after the merger, plus
the number of shares
entitled to participate
without limitations in
distributions shares
issued in the merger,
does not exceed the
number of shares entitled
to participate without
limitations in
distributions prior to
the merger by more than
20%.

SERIES G PREFERRED STOCK AND
TCI COMMON STOCK IOT COMMON STOCK SERIES H PREFERRED STOCK
---------------------------------------------------------------------------------------------------------------------
DISSENTERS' OR APPRAISAL RIGHTS
---------------------------------------------------------------------------------------------------------------------

Under the NRS, dissenting IOT is subject to the ARL is subject to the
stockholders of a same NRS provisions. same NRS provisions.
corporation engaged in
certain major corporate
transactions are entitled
to appraisal rights.
Appraisal rights permit a
stockholder to receive
cash equal to the fair
market value of the
stockholders' shares (as
determined by agreement
by the parties or by a
court), in lieu of the
consideration such
stockholder would
otherwise receive in any
such transaction.

Under the NRS, a
stockholder is entitled
to dissent from, and
obtain payment for the
fair value of his shares
in the event of
consummation of, a plan
of merger or plan of
exchange in which the
corporation is a party
and any corporate action
taken pursuant to a vote
of the stockholders to
the extent that the
articles of
incorporation, bylaws or
a resolution of the board
of directors provides
that voting or nonvoting
stockholders are entitled
to dissent and obtain
payment for their shares.

Notwithstanding, the NRS
provides that
stockholders do not have
dissenters' rights of
appraisal in connection
with a merger or plan of
exchange if their shares
are securities listed on
a national securities
exchange or if they are
designated as a national
market system security on
an interdealer quotation
system by the National
Association of Securities
Dealers, Inc. or are
securities held by 2,000
stockholders of record,
unless (1) the articles
of incorporation provide
otherwise or (2) the
stockholders voting
thereon are required to
accept

anything except
(a) cash or owners'
interest in (i) the
surviving corporation or
(ii) an entity whose
securities were listed on
a national securities
exchange, included on the
national market system by
the National Association
of Securities Dealers,
Inc., or held of record
by at least 2,000 holders
or (b) a combination
thereof.

---------------------------------------------------------------------------------------------------------------------
LIMITATION OF LIABILITY OF MANAGEMENT
---------------------------------------------------------------------------------------------------------------------
Under the NRS, a IOT's Articles of The ARL Restated Articles
corporation, through its Incorporation contain of Incorporation contain
articles of such a provision such a provision
incorporation, may limit eliminating the personal eliminating the personal
or eliminate the personal liability of directors to liability of directors to
liability of directors to the corporation and its the corporation and its
the corporation and its stockholders for damages stockholders for damages
stockholders for damages for breach of fiduciary for breach of fiduciary
for breach of fiduciary duty to the fullest duty to the fullest
duty. However, this extent permitted under extent permitted under
provision excludes any the NRS. the NRS.
limitation on liability
for (i) acts or omissions
which involve intentional
misconduct, fraud or a
knowing violation of law
or (ii) the payment of
distributions in
violation of NRS Section
78.300. The TCI Articles
of Incorporation contain
such a provision
eliminating the personal
liability of directors to
the corporation and its
stockholders for damages
for breach of fiduciary
duty to the fullest
extent permitted under
the NRS.

THE ADVISOR - BCM

Although the boards of directors are directly responsible for managing
the affairs of ARL, TCI and IOT and for setting the policies which guide each,
the day-to-day operations of each entity are performed by BCM, a contractual
advisor under the supervision of each 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. BCM also serves as consultant to each entity's board of
directors in connection with the business plan and investment policy decisions
made by the board.

BCM, an affiliate, has served as advisor to ARL since its organization
in July 2000 (and to ART since February 6, 1989) and to TCI and IOT since March
1989 pursuant to separate Advisory Agreements. The Advisory Agreements are
similar with the exception of the compensation provisions, which are discussed
separately below. The business address of BCM is 1800 Valley View Lane, Suite
300, Dallas, Texas 75234; its telephone number of BCM is 469-522-4200.

Messrs. Branigan, Corna, Endendyk, Kimbrough and Starowicz serve as
executive officers of BCM. BCM is a company indirectly owned by a trust for the
benefit of the children of Mr. Phillips. Mr. Phillips serves as a representative
of the trust for the benefit of his children and, in such capacity, had, until
June 2000, substantial contact with the management of BCM and input with respect
to BCM's performance of advisory services for ARL, TCI and IOT.

As of February 11, 2002, BCM directly or indirectly beneficially owned
6,269,344 shares of ARL's common stock, or approximately 55.1% of the shares
outstanding; 1,193,422 shares of TCI's common stock, or approximately 14.8% of
the shares outstanding; and 106,802 shares of IOT's common stock or
approximately 7.4% of the shares outstanding.

ARL COMPENSATION TO BCM

The ARL Advisory Agreement provides for BCM to receive monthly base
compensation at the rate of 0.0625% per month (0.75% on an annualized basis) of
average invested assets, which, as of September 30, 2001, are $912,349,000.

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

o an acquisition fee for locating, leasing or purchasing real
estate for ARL in an amount equal to the lesser of (i) the
amount of compensation customarily charged in similar
arm's-length transactions or (ii) up to 6% of the costs of
acquisition, inclusive of commissions, if any, paid to
non-affiliated brokers

o a disposition fee for the sale of each equity investment in
real estate in an amount equal to the lesser of (i) the amount
of compensation customarily charged in similar arm's-length
transactions or (ii) 3% of the sales price of each property,
exclusive of fees, if any, paid to non-affiliated brokers

o a loan arrangement fee in an amount equal to 1% of the
principal amount of any loan made to ARL arranged by BCM

o 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

o 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 ARL for the fiscal year

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

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

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

Situations may develop in which the interests of ARL are in conflict
with those of one or more directors or officers of BCM in their individual
capacities, or of their respective affiliates. In addition to services performed
for ARL, as described above, BCM 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 IOT and
TCI. The ARL Advisory Agreement provides that BCM may also serve as advisor to
other entities.

As advisor, BCM is a fiduciary of ARL's public investors. In
determining to which entity a particular investment opportunity will be
allocated, BCM 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 "Certain
Relationships and Related Transactions of ARL, TCI and IOT--Certain Business
Relationships."

During the year ended December 31, 2001, ARL paid BCM $20.2 million in
compensation under the ARL Advisory Agreement.

TCI AND IOT COMPENSATION TO BCM

If the TCI and IOT mergers are approved and consummated, it is
contemplated that the Advisory Agreements with TCI and IOT will be terminated.
The Advisory Agreements with each of TCI and IOT provide for BCM to receive an
advisory fee comprised of a gross asset fee of 0.0625% per month (0.75% 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 either TCI's or IOT's net income.

The Advisory Agreements also provide for BCM 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 either TCI or IOT during such
fiscal year exceeds the sum of: (1) the cost of each such property as originally
recorded in TCI's or IOT'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 by either TCI or IOT 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.

Additionally, pursuant to the TCI and IOT Advisory Agreements, BCM or
an affiliate of BCM 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 non-affiliated 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 commissions and all real estate brokerage fees) may not
exceed such property's appraised value at acquisition.

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

The TCI and IOT Advisory Agreements also provide that BCM or an
affiliate of BCM is to receive a mortgage or loan acquisition fee with respect
to the acquisition or purchase of any existing mortgage loan by TCI or IOT equal
to the lesser of (1) 1% of the amount of the loan purchased or (2) a loan
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 or IOT.

Under the TCI and IOT Advisory Agreements, BCM or an affiliate of BCM
is also 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 BCM or an affiliate of BCM without the approval
of the TCI or IOT board of directors, as the case may be. No fee shall be paid
on loan extensions.

Under the TCI and IOT Advisory Agreements, BCM receives reimbursement
of certain expenses incurred by it in the performance of advisory services.
Under the Advisory Agreements, all or a portion of the annual advisory fee must
be refunded by BCM if the operating expenses of TCI or IOT (as defined in the
TCI and IOT Advisory Agreements) exceed certain limits specified in the Advisory
Agreement, based on the book value, net asset value and net income of TCI or IOT
during the fiscal year. No refund of the annual advisory fee was required for
2000.

Additionally, if management were to request that BCM render services to
TCI or IOT other than those required by the TCI and IOT Advisory Agreements, BCM
or an affiliate of BCM is separately compensated for such additional services on
terms to be agreed upon from time to time. TCI and IOT have hired Triad Realty
Services, Ltd. ("Triad"), an affiliate of BCM, to perform property management
for TCI's and IOT's properties. Also, TCI and IOT have engaged, on a
non-exclusive basis, Regis Realty, Inc. ("Regis"), a related party, to perform
brokerage services for TCI and IOT. BCM may only assign the TCI and IOT Advisory
Agreements with the prior consent of TCI and IOT.

During the year ended December 31, 2001, TCI paid BCM $22.9 million
under the TCI Advisory Agreement and IOT paid BCM $1.7 million under the IOT
Advisory Agreement.

DIRECTORS AND PRINCIPAL OFFICERS OF ADVISOR

The directors and principal officers of BCM are set forth below:

Name Position
---- --------

Mickey N. Phillips................. Director*
Ryan T. Phillips................... Director*
Mark W. Branigan................... Executive Vice President -- Residential
Louis J. Corna..................... Executive Vice President -- Tax
Bruce A. Endendyk.................. Executive Vice President
Ronald E. Kimbrough................ Executive Vice President and Chief
Financial Officer
David W. Starowicz................. Executive Vice President--Acquisitions,
Sales and Construction
Robert A. Waldman.................. Senior Vice President, General Counsel and Secretary

----------
* Mickey N. Phillips is the brother of Gene E. Phillips and Ryan T. Phillips
is the son of Gene E. Phillips. Gene E. Phillips serves as a representative
of the trust established for the benefit of his children which indirectly
owns BCM and, in such capacity, had, until June 2000, substantial contact
with the management of BCM and input with respect to its performance of
advisory services for ARL, TCI and IOT.

MARK W. BRANIGAN: Age 47; Director (September 2000 to June 2001),
Executive Vice President and Chief Financial Officer (August 2000 to June 2001)
and Executive Vice President - Residential (since June 2001) of ARL. 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 Management (January 1992 to October 1997) of BCM, ART, IOT and TCI;
and real estate consultant (November 1997 to July 1999).

LOUIS J. CORNA: Age 54; Executive Vice President - Tax (since October
2001), Senior Vice President - Tax Planning and Chief Financial Officer (June
2001 to October 2001) and Senior Vice President - Director of Tax (December 2000
to June 2001) of BCM, IOT, ARL and TCI; Vice President - Tax, Assistant
Treasurer and Senior Tax Officer - Worldwide Operations (March 1998 to January
2000) of IMC Global, Inc., a multi-national mining and agricultural product
producer; and Vice President - Tax and Senior Tax Officer - Worldwide Operations
(July 1991 to February 1998) of Whitman Corporation, a multi-national company
that controlled Hussmann Refrigeration, Pepsi-Cola General Bottlers and Midas
Mufflers International. Mr. Corna is also a lawyer and certified public
accountant.

BRUCE A. ENDENDYK: Age 53; Executive Vice President (since August 2000)
of ARL. Executive Vice President (since January 1995) of BCM, ART, IOT and TCI,
and (since January 1998) of NRLP Management Corp. ("NMC"), a real estate
company, and the general partner of NRLP and National Operating, L. P. ("NOLP"),
a wholly-owned subsidiary of ARL; and Management Consultant (November 1990 to
December 1994).

RONALD E. KIMBROUGH: Age 49; Acting Principal Executive Officer (since
February 2002) and Executive Vice President and Chief Financial Officer (since
January 2002) of ARL. Executive Vice President and Chief Financial Officer
(since January 2002) of BCM, TCI and IOT; Controller (September 2002 to January
2002) of BCM; Vice President and Treasurer (January 1998 to September 2000) of
Syntek West, Inc., a real estate company and One Realco Corporation ("One
Realco"), a real estate company.

DAVID W. STAROWICZ: Age 46; Executive Vice President - Acquisitions,
Sales and Construction (since March 2001) and Executive Vice President -
Commercial Asset Management (August 2000 to March 2001) of ARL. Executive Vice
President - Acquisitions, Sales and Construction (since March 2001), Executive
Vice President - Commercial Asset Management (September 1999 to March 2001), and
Vice President (May 1992 to September 1999) of BCM, ART, IOT and TCI.

ROBERT A. WALDMAN: Age 49; Senior Vice President, Secretary and General
Counsel (since August 2000) of ARL. Senior Vice President and General Counsel
(since January 1995), Vice President (December 1990 to January 1995) and
Secretary (December 1993 to February 1997 and since June 1999) of IOT and TCI;
Senior Vice President and General Counsel (since November 1994), Vice President
and Corporate Counsel (November 1989 to November 1994) and Secretary (since
November 1989) of BCM; Senior Vice President and General Counsel (since January
1995), Vice President (January 1993 to January 1995) and

Secretary (since December 1989) of ART; and Senior Vice President, Secretary and
General Counsel (since January 1998) of NMC.

The business address of each director and executive officer is 1800
Valley View Lane, Suite 300, Dallas, Texas 75234. The business telephone number
of each person is 469-522-4200. Each director and executive officer is a citizen
of the United States.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OF BCM, ARL, TCI AND IOT

CERTAIN BUSINESS RELATIONSHIPS

BCM, ARL's, TCI's and IOT's contractual advisor, is a company of which
Messrs. Branigan, Corna, Endendyk, Kimbrough and Starowicz serve as executive
officers. BCM is a company owned by a trust for the benefit of the children of
Mr. Phillips.

IOT and TCI have the same relationship with BCM as does ARL.

ARL contracts with an affiliate of BCM for property management
services. Currently, Triad, an affiliate, provides such property management
services. The general partner of Triad is BCM. The limited partners of Triad are
Mr. Phillips and GS Realty Services, Inc. ("GS Realty"), a related party. Triad
subcontracts the property-level management of 12 of ARL's commercial properties
(office buildings, shopping centers and a merchandise mart) and eight of its
hotels to Regis, a related party, which is a company owned by GS Realty.

Regis, a related party, also provides real estate brokerage services to
ARL and receives brokerage commissions in accordance with the advisory agreement
between ARL and BCM.

ARL owns, directly or indirectly, an equity interest in each of IOT and
TCI. See "Properties of ARL - Investments in Real Estate Companies and Real
Estate Partnerships."

At February 11, 2002, ARL indirectly owned approximately 49.7% of TCI's
outstanding common stock. At December 31, 2001, TCI owned 345,728 shares of
IOT's common stock, an approximate 24% interest and 746,972 shares of ARL common
stock, an approximate 6.6% interest which were primarily purchased in open
market transactions in 1990 and 1991 at a total cost of $1.6 million. The
officers of TCI and IOT also serve as officers of ARL. The directors and
officers of IOT also serve as directors and officers of TCI. The directors owe
fiduciary duties to TCI as well as to IOT under applicable law.

RELATED PARTY TRANSACTIONS

In 2001, ARL paid BCM and its affiliates and related parties $6.7
million in advisory fees, $1.6 million in incentive fees, $5.9 million in real
estate brokerage commissions, $1.1 million in loan management fees and $2.5
million in property and construction management fees and leasing commissions,
net of property management fees paid to subcontractors, other than Regis. In
addition, as provided in the ARL Advisory Agreement, in 2001 BCM received cost
reimbursements from ARL of $2.4 million.

In 2000, ARL paid BCM, its affiliates and related parties $5.0 million
in advisory fees, $6.9 million in real estate brokerage commissions, $1.2
million in loan arrangement fees and $3.4 million in property and construction
management fees and leasing commissions, net of property management fees paid to
subcontractors, other than Regis. In addition, as provided in the ARL Advisory
Agreement, in 2000 BCM received cost reimbursements from ARL of $5.3 million.

In 2001, IOT paid BCM, its affiliates and related parties $817,000 in
advisory fees, $300,000 in property and construction management and leasing
commissions, net of property management fees paid to subcontractors, other than
affiliates of BCM. In addition, as provided in the IOT Advisory Agreement, BCM
received cost reimbursements of $622,000.

In 2000, IOT paid BCM, its affiliates and related parties $2.0 million
in advisory and net income fees, $1.5 million in property acquisition fees, $1.3
million in real estate brokerage commissions and $602,000 in property and
construction management fees and leasing commissions, net of property management
fees paid to subcontractors, other than Regis.

In 2001, TCI paid BCM, its affiliates and related parties $4.9 million
in advisory fees, $2.9 million in incentive fees, $3.8 million in net income
fees, $45,000 in mortgage brokerage and equity refinancing fees, $2.4 million in
property acquisition fees, $3.7 million in real estate brokerage commissions and
$3.1 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 TCI Advisory Agreement, BCM
received cost reimbursements of $2.1 million.

In 2000, TCI paid BCM, its affiliates and related parties $10.5 million
in advisory and net income fees, $464,000 in mortgage brokerage and equity
refinancing fees, $2.7 million in property acquisition fees, $3.2 million in
real estate brokerage commissions 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
TCI Advisory Agreement, BCM received cost reimbursements of $2.1 million.

In October 1999, ARL funded a $4.7 million loan to Realty Advisors,
Inc., the corporate parent of BCM. The loan is secured by a pledge of 100% of
Realty Advisors, Inc.'s interest in an insurance company. The loan bears
interest at a variable rate, currently 10.25% per annum and matured in November
2001. In January 2000, $100,000 of principal was collected. All remaining
principal and interest were due at maturity. A three year extension of the
maturity date to November 2004 has been agreed upon, pending a change in
collateral.

In April 1999, ARL funded a $2.0 million loan commitment to Lordstown,
L.P. The loan is secured by a second lien on land in Ohio and Florida, by 100%
of the general and limited partner interest in Partners Capital, Ltd., the
limited partner of Lordstown, L.P., and a profits interest in subsequent land
sales. The loan bears interest at 14.0% per annum and matured in March 2000. At
December 31, 2001, the loan and $741,000 of accrued interest remained unpaid.
Settlement terms are being negotiated. A corporation controlled by Richard D.
Morgan is the general partner of Lordstown, L.P. Mr. Morgan served as a director
of ARL until October 2001.

Also in April 1999, ARL funded a $2.4 million loan commitment to 261,
L.P. The loan is secured by 100% of the general and limited partner interest in
Partners Capital, Ltd., the limited partner of 261, L.P. and a profits interest
in subsequent land sales. The loan bore interest at 14.0% per annum and matured
in March 2000. In August 2000, the loan was collected in full, including accrued
but unpaid interest. A corporation controlled by Richard D. Morgan, is the
general partner of 261, L.P. Mr. Morgan served as a director of ARL until
October 2001.

In February 1999, a $5.0 million unsecured line of credit was funded by
ARL to One Realco which owns approximately 14.7% of the outstanding shares of
ARL's common stock. Ronald E. Kimbrough, Acting Principal Executive Officer and
Executive Vice President and Chief Financial Officer of ARL owns 10% of the
outstanding common stock of One Realco. In March 2000, the line was modified and
extended, increasing the loan commitment to $11.0 million, and an additional
$1.2 million was funded. In exchange for the modification, the borrower paid all
accrued interest and pledged collateral consisting of a $10.0 million promissory
note secured by the stock of World Trade Company, Ltd. ("World Trade"), which
owns 80% of an entity that owns a hotel in Sofia, Bulgaria. In July 2000, the
line was again modified, increasing the loan commitment to $15.0 million. In
September 2000, the line of credit with a then principal balance of $14.6
million was paid in full, including accrued but unpaid interest. Subsequently,
ARL acquired 100% of the stock of World Trade for $18.0 million. In March 2001,
ARL funded $13.6 million on the unsecured line of credit to One Realco. The line
of credit bears interest at 12.0% per annum. All principal and interest were due
at maturity in February 2002, and the line of credit is guaranteed by BCM, ARL's
advisor. A two year extension of the maturity date to February 2004 has been
agreed upon and the line of credit is to be secured by 600,000 shares of ARL
common stock.

In 1998, ARL funded a loan commitment of $1.8 million to Warwick of
Summit, Inc. ("Warwick"). The loan was secured by a second lien on a shopping
center in Rhode Island, by 100% of the stock of the borrower and by the personal
guarantee of the principal shareholder of the borrower. The loan bears interest
at 14.0% per annum and had an extended maturity date of December 2000. All
principal and interest were due at maturity. In December 1999, the borrower sold
the collateral property and $810,000 of the net proceeds were paid to ARL, of
which $386,000 was applied to interest and the remaining $424,000 was applied to
principal, reducing the principal balance to $1.7 million. Escrowed monies of
$377,000 were to be received in 2000. However, through December 31, 2001, only
$50,000 had been received. The loan is currently unsecured. At January 2002, the
loan and $472,000 of accrued interest remained unpaid. Settlement terms are
being negotiated. Richard D. Morgan, a Warwick shareholder, served as a director
of ARL until October 2001.

Beginning in 1997 through January 1999, ARL funded a $1.6 million loan
commitment to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured
by (1) a 100% interest in Bordeaux, which owns a shopping center in Oklahoma
City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which
owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the
personal guarantees of the Bordeaux members. The loan bears interest at 14.0%
per annum. In November 1998, the loan was modified to allow payments based on
monthly cash flow of the collateral property and the maturity date was extended
to December 1999. In the second quarter of 1999, the loan was again modified,
increasing the loan commitment to $2.1 million and an additional $33,000 was
funded. In the third quarter of 1999, an additional $213,000 was funded. The
property has had no cash flow, therefore, interest on the loan ceased being
accrued in the second quarter of 1999. In October 1999, a $724,000 paydown was
received, which was applied first to accrued interest due of $261,000 then to
principal, reducing the loan balance to $1.4 million. In June 2000, the note was
further modified, increasing the loan commitment to $1.5 million, extending the
maturity date to December 2000, and payments to net revenues of the shopping
center. The loan was not repaid at maturity. At December 2002, the loan and
$471,000 of accrued interest remained unpaid. At January 2002,

settlement terms are being negotiated. Richard D. Morgan, a Bordeaux member,
served as a director of ARL until October 2001.

In 1998 and 1999, Garden Capital L.P. ("GCLP") funded $124.4 million of
a $125.0 million loan commitment to ART. The loan was secured by second liens on
six properties in Minnesota, Mississippi and Texas, by the stock of ART
Holdings, Inc., a wholly-owned subsidiary that owned 3,349,535 NRLP units of
limited partner interest, the stock of NMC, the general partner of NRLP, 678,475
NRLP units of limited partner interest owned by BCM, and 283,034 NRLP units of
limited partner interest owned by ART. The loan bore interest at 12.0% per
annum, required monthly payments of interest only and would have matured in
November 2003. In February and October 1999, ART made a total of $1.1 million in
paydowns on the loan. Upon the acquisition of ART and NRLP by ARL, this loan was
canceled.

In December 1998, in connection with the settlement of litigation
relating to the original formation of NRLP, NMC, assumed responsibility for
repayment to NRLP of the $12.2 million paid by NRLP to settle the litigation.
The loan bore interest at a variable rate and required annual payments of
accrued interest plus principal payments of $500,000 in each of the first three
years, $750,000 in each of the next three years, $1.0 million in each of the
next three years, with payment in full of the remaining balance in the tenth
year. The note was guaranteed by ART. The note was to mature upon the earlier of
the liquidation or dissolution of NRLP, NMC ceasing to be general partner or
March 31, 2009. Upon the merger of ART and NRLP into ARL, the loan was canceled.

In October 1997, ART 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 lease, effective upon ART obtaining
permanent financing of the building, was 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 ARL 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.

ARL, TCI and IOT contract with an affiliate of BCM for property
management services. Currently, Triad, an affiliate, provides such property
management services. The general partner of Triad is BCM. The limited partners
of Triad are Mr. Phillips and GS Realty, a related party, which is a company not
affiliated with either Mr. Phillips or BCM. Triad subcontracts the
property-level management of 14 of ARL's commercial properties (office
buildings, shopping centers and a merchandise mart) and eight of its hotels to
Regis, a related party, which is a company owned by GS Realty. Triad also
subcontracts the property-level management and leasing of 52 of TCI's commercial
properties, its four hotels and the commercial properties owned by a real estate
partnership in which TCI and IOT are partners to Regis. Additionally, Triad
subcontracts the property-level management and leasing of IOT's seven office
buildings.

From April 1992 to December 31, 1992, Mr. Stokely, the Chairman of the
Board and a director of TCI and IOT, was employed as a paid consultant and since
January 1, 1993 as a part-time unpaid consultant for Eldercare, a nonprofit
corporation engaged in the acquisition of low

income and elderly housing. Eldercare has a revolving loan commitment from
Syntek West, a company owned by Mr. Phillips. The Loan Commitment expired in
1998 and was not renewed. Eldercare filed for bankruptcy protection in May 1995,
and was reorganized in bankruptcy in February 1996, and has since paid all debts
as directed by the Bankruptcy Court.

Regis also provides real estate brokerage services for TCI and IOT, on
a non-exclusive basis, and receives brokerage commissions in accordance with the
brokerage agreement.

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 ARL. 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
limited partner units of Valley Ranch L.P. Such Class A units are convertible
into Series B Cumulative Convertible preferred stock of ARL which is further
convertible into common stock of ARL. The put price for the Class A units is
$1.00 per unit and the put price for either the Series B preferred stock or
ARL's common stock is 80% of the average daily closing price of ARL's common
stock for the prior 20 trading days. In March 1999, ARL reached agreement with
the Class A unitholders of Valley Ranch, L.P. to acquire their eight million
Class A units for $1.00 per unit. In 1999, three million units were purchased,
an additional one million units were purchased in January 2000 and May 2001. ARL
has committed to purchase the remaining two million units in May 2002.

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 ARL. 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 ARL's common stock is 90% of the average daily closing price of ARL's
common stock for the prior 20 trading days. In December 2001, approximately 7.2
million Class A limited partner units of ART Palm, L.P. were redeemed for $5.8
million, including $2.5 million in cash. ARL gave a note payable for the
remaining $3.3 million. The note bears interest at 10.0% per annum, with a
payment of $1.9 million plus accrued but unpaid interest due at maturity in
December 2002. In January 2001, 2.5 million Class A limited partner units of ART
Palm, L.P. were redeemed for $2.5 million in cash. In December 2001, 7.2 million
Class A limited partner units of ART Palm, L. P. 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 bears interest at 10.00% 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. At
December 31, 2001, no Series C Preferred Stock was outstanding.

TCI is a 63.7% limited partner and IOT is a 36.3% general partner in
the Tri-City Limited Partnership ("Tri-City") which owns the Chelsea Square
Shopping Center. In February 2000, the Chelsea Square Shopping Center was
financed in the amount of $2.1 million. Tri-City received net cash of $2.0
million after the payment of various closing costs. The mortgage bore interest
at a fixed rate of 10.24% per annum until February 2001, and a variable rate
thereafter, currently 10% per annum, requires monthly payments of principal and
interest of $20,601 and

matures in February 2005. TCI received a distribution of $1.3 million of the
net financing proceeds. IOT received a distribution of $739,000 of the net
financing proceeds.

In December 2001, TCI purchased 100% of the outstanding common shares
of National Melrose, Inc. ("NM"), a wholly owned subsidiary of ARL, a related
party, for $2.0 million cash. NM owns the 41,840 square foot Executive Court
Office Building in Memphis, Tennessee. ARL has guaranteed that the asset shall
produce at least a 12% return annually of the purchase price for a period of
three years from the purchase date. If the assets fail to produce the 12%
return, ARL shall pay TCI any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar year, TCI may require ARL to repurchase
the shares of NM for the purchase price. Management has classified this related
party transaction as a note receivable from ARL. Accounting has also treated
this transaction as a financing.

In January 2002, TCI purchased 100% of the outstanding common shares of
ART Two Hickory Corporation ("Two Hickory"), a wholly owned subsidiary of ARL, a
related party, for $4.4 million cash. Two Hickory owns the 96,217 square foot
Two Hickory Center Office Building in Farmers Branch, Texas. ARL has guaranteed
that the asset shall produce at least a 12% return annually of the purchase
price for a period of three years from the purchase date. If the assets fail to
produce the 12% return, ARL shall pay TCI any shortfall. In addition, if the
asset fails to produce the 12% return for a calendar year, TCI may require ARL
to repurchase the shares of Two Hickory for the purchase price. Management has
classified this related party transaction as a note receivable from ARL.
Accounting has also treated this transaction as a financing.

In January 2002, IOT purchased 100% of the outstanding common shares of
Rosedale Corporation ("Rosedale"), a wholly owned subsidiary of ARL, a related
party, for $5.1 million cash. Rosedale owns the 83,331 square foot Rosedale
Towers Office Building in Roseville, Minnesota. ARL has guaranteed that the
asset shall produce at least a 12% return annually of the purchase price for a
period of three years from the purchase date. If the assets fail to produce the
12% return, ARL shall pay IOT any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar year, IOT may require ARL to repurchased
the shares of Rosedale for the purchase price. Management has classified this
related party transaction as a note receivable from ARL. Accounting has also
treated this transaction as a financing.

At December 31, 2001, BCM owed TCI $11.3 million.

At December 31, 2001 ARL owed BCM $13.7 million.

The directors and officers of TCI also serve as directors and officers
of IOT. The directors owe fiduciary duties to IOT as well as to TCI under
applicable law. IOT has the same relationship with BCM as TCI. At December 31,
2001, TCI owned approximately 24% of the outstanding common shares of IOT. BCM
also serves as advisor to ARL. Messrs. Branigan, Corna, Endendyk, Kimbrough and
Starowicz serve as executive officers of ARL.

TCI established on April 13, 2000, the Director Stock Option Plan (the
"TCI Director Plan") which became effective upon subsequent approval of the
stockholders of TCI at an Annual Meeting of Stockholders held on October 10,
2000. Under the terms of the TCI Director

Plan, successive options covering 5,000 shares of TCI common stock each were
automatically granted to each director on the date of effectiveness of the TCI
Director Plan, and on each January 1 of each subsequent year in which the
individual served as a director of TCI. Pursuant to the TCI Director Plan, two
former directors of TCI, Edward G. Zampa and R. Douglas Leonhard, each held
options covering 5,000 shares at an exercise price of $8.975 per share, and an
additional 5,000 shares at an exercise price of $14.875 per share. On January
30, 2002, TCI entered into separate agreements with Messrs. Leonhard and Zampa
pursuant to which TCI repurchased all options held by each at a price based upon
a $16 per share sale price of common stock, less the aggregate amount of the
exercise price under each option. As a result of the Purchase Agreements, each
of Messrs. Leonhard and Zampa will receive an aggregate of $41,225 in
settlement, and the outstanding options previously held by each under the TCI
Director Plan have been cancelled.

Options covering an aggregate of 40,000 shares remain outstanding at
exercise prices ranging from $8.875 per share to $16.05 per share, by Ted
Stokely (15,000 shares), Martin L. White (15,000 shares) and the Estate of
Murray Shaw (10,000 shares).

INDEBTEDNESS OF MANAGEMENT

As of the record date, no director or executive officer of ARL, TCI or
IOT has any indebtedness to ARL, TCI or IOT.

100

CERTAIN INFORMATION REGARDING
TCI COMMON STOCK AND IOT COMMON STOCK

PURCHASES OF TCI COMMON STOCK

The following sets forth for each quarter during 2000: (a) the amount
of TCI Common Stock purchased by BCM, (b) the range of prices paid by BCM, and
(c) the average purchase price paid by BCM.

NUMBER OF RANGE OF AVERAGE PURCHASE
QUARTER SHARES PURCHASED PRICES PAID PRICE
------- ---------------- ----------- ----------------

2000
First None
Second 347,400 $ 6.69 to $13.38 $ 9.62
Third 99,300 $11.63 to $14.25 $ 12.51
Fourth 900 $16.00 to $16.63 $ 16.32

On October 3, 2000, pursuant to a Stock Option Agreement dated October
3, 2000, Gotham Partners, LP and Gotham Partners III, LP (both New York limited
partnerships) and Gotham Partners International, Ltd., a Canadian Island company
(all collectively "Gotham") granted to ARL and IOT, jointly, an option to
purchase 1,858,900 shares of TCI common stock (the "Option") at an exercise
price of $12 per share (a total price of $22,306,800). Such Option became
exercisable on January 1, 2001 through 5:00 p.m., central standard time, on
April 4, 2001 (the "Option Period") and was only to be exercised as to the whole
of such Option (not in part). As a fee for the Option, ARL and IOT paid to
Gotham an initial option fee of $5,576,700 ($3 per share) at the time of
execution of the Option and were obligated to pay Gotham on or before December
15, 2000, the remaining portion of the option fee of $2,788,350 ($1.50 per
share), which was not paid but became an obligation payable at the time of
exercise of such Option. On October 19, 2000, IOT assigned all of its right,
title and interest in and to the Option to ARL. On April 4, 2001, ARL gave
notice of exercise of the Option in accordance with the terms of the Option and
paid to Gotham in cash the balance of the option fee of $2,788,350; within three
business days thereafter, Gotham delivered the 1,858,900 shares of TCI common
stock to a brokerage account of EQK Holdings, Inc. ("EQK Holdings") and ARL paid
the full exercise price of $22,306,800 into the brokerage account of EQK
Holdings which was then paid to Gotham. These 1,858,900 shares of TCI common
stock are currently owned by EQK Holdings, an indirect, wholly-owned subsidiary
of ARL.

Neither IOT or TCI purchased any shares of TCI common stock during the
past two years.

101

PURCHASES OF IOT COMMON STOCK

The following sets forth for each quarter during 2000: (a) the amount
of IOT common stock purchased by BCM, (b) the range of prices paid by BCM, and
(c) the average purchase price paid by BCM.

NUMBER OF RANGE OF AVERAGE
QUARTER SHARES PURCHASED PRICES PAID PURCHASE PRICE
------- ---------------- ----------- --------------

First None
Second 6,700 $6.63 to $6.50 $ 6.57
Third None
Fourth None

None of ARL, IOT or TCI purchased any shares of IOT common stock during
the past two years, and BCM has not purchased any shares of IOT common stock
since the end of the second quarter of 2000.

ARRANGEMENTS RELATING TO TCI COMMON STOCK AND IOT COMMON STOCK

Pursuant to the Option discussed above, Gotham agreed to a "standstill"
for a period of two years from the date of the Option and agreed not to purchase
directly or indirectly any security issued by ARL, TCI or IOT, provided,
however, the standstill was to terminate if the additional option fee was not
made or paid on or before December 15, 2000, or if the Option was not exercised
prior to April 4, 2001. Such Option was exercised prior to April 4, 2001, and
the additional option fee was paid. Gotham had also executed a proxy covering
the shares of TCI common stock that was subject to the Option (a total of
1,858,900 shares) in favor of ARL to attend to the Annual Meeting of
Stockholders of TCI on October 10, 2000, to represent, vote, execute consents
and otherwise act for Gotham only in approving the four proposals set forth in
TCI's Proxy Statement for such Annual Meeting dated December 11, 2000.

BCM has pledged 920,507 shares of TCI common stock to Sunset
Management, LLC pursuant to a loan agreement with such lender. BCM has also
pledged 36,689 shares of TCI common stock to Dynamic Finance Corporation as
collateral for a guaranty of indebtedness of an affiliate of BCM under a loan
agreement with such lender. The remaining 209,751 shares of TCI common stock
directly owned by BCM may be deemed to be "collateral" for borrowings pursuant
to margin or other account arrangements with bankers and brokerage firms
relating to accounts of BCM. Such arrangements are standard arrangements
involving margin securities of up to a specified percentage of the market value
of the shares and bear interest at varying rates and contain only standard
default and similar provisions, the operation of any of which should not give
any other person immediate voting power or investment power over such
securities. Such arrangements exist with the shares of TCI common stock and
other securities held in such accounts, and it is impracticable at any given
time to determine the amounts, if any, with respect to the shares of TCI common
stock and interest costs under such arrangements vary with applicable costs and
account balances.

EQK Holdings has pledged 2,601,798 shares of TCI common stock to Sunset
Management, LLC pursuant to a loan agreement with such lender. Holdings has also
pledged 843,111 shares of TCI common stock to Dynamic

102

Finance Corporation as collateral for indebtedness under a loan agreement with
such lender. EQK Holdings has also pledged 249,191 shares of TCI common stock to
Preferred Bank as collateral for a guaranty of indebtedness of ART under a loan
agreement with such lender. The remaining 300,000 shares of TCI common stock
owned directly by EQK Holdings may be deemed to be "collateral" for borrowings
pursuant to margin or other account arrangements with bankers and brokerage
firms relating to accounts of Holdings. Such arrangements are standard
arrangements involving margin securities of up to a specified percentage of
market value of the shares and bear interest at varying rates and contain only
standard default and similar provisions, the operation of any of which should
not give any other person immediate voting power or investment power over such
securities. Such arrangements exist with the shares of TCI common stock and
other securities held in such accounts, and it is impracticable at any given
time to determine the amounts, if any, with respect to the shares of TCI common
stock and interest costs under such arrangements may vary with applicable costs
and account balances.

EQK Holdings has pledged 250,000 shares of IOT common stock to Beal
Bank as additional collateral. An additional 153,400 shares of IOT common stock
owned by EQK Holdings and 106,802 shares of IOT common stock owned by BCM may be
deemed to be "collateral" for borrowings pursuant to margin or other account
arrangements with bankers and brokerage firms relating to accounts of EQK
Holdings and BCM, respectively. Such arrangements are standard arrangements
involving margin securities of up to a specified percentage of the market value
of the shares and bear interest at varying rates and contain only standard
default and similar provisions, the operation of any of which should not give
any person immediate voting power or investment power over such securities. Such
arrangements exist with the shares of IOT common stock and other securities held
in such accounts and it is impracticable at any time to determine the amounts,
if any, with respect to these shares of IOT common stock and interest costs
under such arrangements vary with applicable costs and account balances.

All 345,728 shares of IOT common stock owned by TCI are located at a
brokerage firm in a cash account (not margin account), and do not serve as
"collateral" for any borrowings pursuant to any margin account arrangement or
otherwise.

103

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma combined financial statements have been
prepared assuming that the non-affiliated IOT and TCI stockholders will elect to
receive cash, rather than preferred stock, in exchange for their shares. As
reflected in the unaudited pro forma combined financial statements, should all
such stockholders elect to receive cash, ARL does not currently have the
capability to effect the transaction due to insufficient proceeds. ARL is
currently exploring ways in which it can raise the necessary funds, including
but not limited to, selling selected properties and arranging for financing. ARL
does not currently have a commitment to sell any properties or to obtain any
financing. Accordingly, no assurances can be given that ARL will be able to
complete the proposed transactions with either IOT or TCI.

The accompanying unaudited pro forma consolidated financial statements
of ARL as of September 30, 2001 give effect to the payment of the maximum amount
of cash and the issuance of shares of ARL preferred stock only to the affiliates
in exchange for the TCI common stock and the IOT common stock as described in
this joint proxy statement and prospectus.

The unaudited pro forma combined financial information is presented
under three separate scenarios: (i) the acquisition by ARL of TCI and IOT; (ii)
the acquisition by ARL of TCI; and (iii) the acquisition by ARL of IOT. The
acquisitions of TCI and IOT are not dependent upon each other. Under each of the
scenarios, the Unaudited Pro Forma Combined Financial Information is prepared
using the purchase method of accounting, with ARL treated as the acquirer and as
if the transactions had been completed as of January 1, 2000 for statement of
operations purposes and on September 30, 2001, for balance sheet purposes.

Under the purchase method of accounting, the aggregate purchase price
is allocated to assets acquired and liabilities assumed based on their estimated
fair values.

The historical financial data for ARL, TCI and IOT for the year ended
December 31, 2000 has been derived from the audited financial statements and
notes included in each of those entity's annual reports on Form 10-K for the
year ended December 31, 2000 and unaudited quarterly reports on Form 10-Q for
the nine months ended September 30, 2001.

The pro forma adjustments described in the accompanying notes are based
upon available information and assumptions that management believes are
reasonable. In the opinion of management, all adjustments necessary to present
the pro forma information have been made. The unaudited pro forma consolidated
financial statements are provided for informational purposes only and do not
necessarily indicate the financial results that would have occurred had the
merger actually occurred on the dates specified, nor do they indicate ARL's
future results. The unaudited pro forma consolidated financial information
should be read together with the consolidated financial statements and notes of
ARL, TCI and IOT contained in their annual reports on Form 10-K for the year
ended December 31, 2000 and their quarterly reports on Form 10-Q for the nine
months ended September 30, 2001.

104

UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
ARL ACQUISITION OF TCI AND IOT
September 30, 2001
(dollars in thousands)

Historical Proforma Adjustments
----------------------------------- ----------------------- Proforma
ARL TCI IOT TCI IOT Combined
--------- --------- --------- --------- -------- -----------

Assets
Real estate held for investment, $ 376,113 $ 604,571 $ 85,781 $ (63,010){A} $(15,264){B} $ 989,191
net of accumulated depreciation -- -- -- 879 {C} 121 {C}
--------- --------- --------- --------- -------- -----------
376,113 604,571 85,781 (62,131) (15,143) 989,191

Real estate held for sale 228,476 504 -- -- -- 228,980

Notes and interest receivable 31,799 14,339 505 -- -- 46,643
Less-allowance for estimated
losses (2,577) (537) -- -- -- (3,114)
--------- --------- --------- --------- -------- -----------
29,222 13,802 505 -- -- 43,529

Pizza parlor equipment, net of
accumulated depreciation 7,384 -- -- -- -- 7,384
Leasehold interest - oil and gas
properties, net of accumulated
depreciation 4,718 -- -- -- -- 4,718
Oilfield equipment, net of
accumulated depreciation 344 -- -- -- -- 344
Marketable equity securities, at
market value 108 -- -- -- -- 108

Cash and cash equivalents 5,014 35,320 3,914 (49,929){A} (10,953){B} (16,634)

Investment in equity investees 78,046 23,520 121 (82,617){D} (6,872){B} 12,198
Intangibles, net of accumulated
amortization 15,883 -- -- -- -- 15,883

Other assets 35,070 31,072 2,553 -- -- 68,695
--------- --------- --------- --------- -------- -----------
$ 780,378 $ 708,789 $ 92,874 $(194,677) $(32,968) $ 1,354,396
========= ========= ========= ========= ======== ===========

105

UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
ARL ACQUISITION OF TCI AND IOT
September 30, 2001
(dollars in thousands)

Historical Proforma Adjustments
---------------------------------------- ----------------------- Proforma
ARL TCI IOT TCI IOT Combined
----------- ----------- ----------- --------- --------- -----------

Liabilities and Equity

Liabilities

Notes and interest payable $ 582,139 $ 460,275 $ 54,329 $ -- $ -- $ 1,096,743
Margin borrowings 28,703 -- -- -- -- 28,703
Other liabilities 44,513 25,978 3,059 879{C} 121{C} 74,550
----------- ----------- ----------- -------- ------- -----------
655,355 486,253 57,388 879 121 1,199,996

Commitments and contingencies

Minority Interest 37,634 4,225 -- -- -- 41,859
Series B Redeemable Preferred
Stock; $.01 par value;
authorized, 300,000 shares;
issued and outstanding
300,000 shares (liquidation
preference $1,500) -- 1,350 -- -- -- 1,350
Embedded derivative -- 150 -- -- -- 150
Series F Redeemable Preferred
Stock; $2.00 par value;
authorized, 4,961 shares; issued
and outstanding
3,968.75 shares (liquidation
preference $3,969) 3,969 -- -- -- -- 3,969

Stockholders' Equity

ARL
Preferred Stock, $2.00 par value,
authorized 50,000,000
shares, issued and outstanding
Series A, 2,724,910 shares,
(liquidation preference $27,249) 4,850 -- -- -- -- 4,850
Series E, 50,000 shares,
(liquidation preference $500) 100 -- -- -- -- 100
Series G, 1,168,774 shares,
(liquidation preference $23,375) -- -- -- 2,338{E} -- 2,338
Series H, 106,802 shares,
(liquidation preference $2,296) 214{F} 214
Common Stock, $.01 par value;
authorized 100,000,000 shares,
issued 11,830,127 shares 118 -- -- (7) {D} -- 111
Paid-in capital 112,195 -- -- 21,924 {E} 2,183{F} 136,302
Accumulated distributions in
excess of accumulated earnings (33,827) -- -- -- -- (33,827)

106

UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
ARL ACQUISITION OF TCI AND IOT
September 30, 2001
(dollars in thousands)

Historical Proforma Adjustments
------------------------------------------ --------------------------- Proforma
ARL TCI IOT TCI IOT Combined
---------- ------------ ------------ ------------ ------------ ------------

Treasury Stock at par, 1,637,000
shares (16) -- -- -- -- (16)
TCI
referred Stock
Series A; $.01 par value;
authorized, 6,000 shares; issued
and outstanding 5,829 shares
(liquidation preference $583) -- -- -- -- -- --
Common Stock, $.01 par value;
authorized, 10,000,000
shares; issued and outstanding
8,042,629 shares -- 80 -- (80){A} -- --
Paid-in capital -- 268,761 -- (268,761){A} -- --
Accumulated distributions in excess
of accumulated earnings -- (48,971) -- 48,971{A} -- --
Unrealized Gain -- (3,059) -- 3,059{A} -- --

IOT
Common Stock, $.01 par value;
authorized, 10,000,000 shares;
issued and outstanding 1,438,945
shares -- -- 14 -- (14){B} --
Paid-in capital -- -- 63,459 -- (63,459){B} --
Accumulated distributions in excess of
accumulated earnings -- -- (27,987) -- 27,987{B} --
---------- ------------ ------------ ------------ ------------ -----------
83,420 216,811 35,486 (192,556) (33,089) 110,072

$ 780,378 $ 708,789 $ 92,874 $ (191,677) $ (32,968) $ 1,357,396
========== ============ ============ ============ ============ ===========

107

UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
ARL ACQUISITION OF TCI AND IOT
September 30, 2001
(dollars in thousands)

Note A. To record allocation of purchase price to TCI's assets and liabilities
as follows:

The total purchase price of TCI is calculated as follows:

Previous acquisitions by ARL for TCI $ 68,837
Cash required to purchase 2,853,080 non-affiliated
common shares of TCI at $17.50 per share 49,929
Issuance of 1,168,774 Series G Preferred Stock,
liquidation value $23,375 24,255
--------
Total Consideration $143,021
========

The purchase price allocation, which is preliminary and therefore subject to
change based on a final analysis, is as follows:

Real Estate held for investment $ 544,561
Real Estate held for sale 504
Notes and interest receivable 13,802
Cash and cash equivalents 35,320
Investment in equity investees 9,740
Other assets 31,072
Notes and interest payable (460,275)
Other liabilities (25,978)
Minority Interest (4,225)
Series B Preferred Stock (1,500)
---------
$ 143,021
=========

Note B. To record allocation of purchase price to IOT's assets and liabilities
as follows:

The total purchase price of IOT is calculated as follows:

Previous acquisitions by ARL for IOT $ 6,872
Cash required to purchase 576,480 non-affiliated
common shares of IOT at $19.00 per share 10,953
Issuance of 106,802 Series H Preferred Stock, liquidation
value $2,296 2,397
-------
Total Consideration $20,222
=======

The purchase price allocation, which is preliminary and therefore subject to
change based on a final analysis, is as follows:

Real Estate held for investment $ 70,517
Notes and interest receivable 505
Cash and cash equivalents 3,914
Investment in equity investees 121
Other assets 2,553
Notes and interest payable (54,329)
Other liabilities (3,059)
--------
$ 20,222
========

Note C. To record estimate of additional closing costs.

108

Note D. To record the elimination TCI's investment in ARL and retire 746,972
shares of ARL and to record the elimination of ARL's investment in TCI.

Note E. To record the issuance of the Series G preferred stock to affiliated
parties to purchase TCI.

Note F. To record the issuance of the Series H preferred stock to affiliated
parties to purchase IOT.

109

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI AND IOT
Nine months ended September 30, 2001
(dollars in thousands, except per share)

Historical Proforma Adjustments
----------------------------------------- ---------------------------- Proforma
ARL TCI IOT TCI IOT Combined
----------- ----------- ----------- ----------- ----------- -----------

Property Revenue
Rents $ 98,748 $ 103,464 $ 9,759 $ -- $ -- $ 211,971
Property operations 71,246 60,084 5,292 -- -- 136,622
----------- ----------- ----------- ----------- ----------- -----------
Operating income 27,502 43,380 4,467 -- -- 75,349

Land Operations
Sales 41,806 -- -- -- -- 41,806
Cost of Sales 33,546 -- -- -- -- 33,546
----------- ----------- ----------- ----------- ----------- -----------
Gain on land sales 8,260 -- -- -- -- 8,260

Pizza Parlor operations
Sales 25,282 -- -- -- -- 25,282
Cost of Sales 20,715 -- -- -- -- 20,715
----------- ----------- ----------- ----------- ----------- -----------
Gross margin 4,567 -- -- -- -- 4,567

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

Other Income
Interest and other 2,055 2,275 142 -- -- 4,472
Equity income (loss) in equity
investees 9,157 (4,529) (27) (5,496){A} 867{B} (28)

Gain on sale of real estate 54,600 47,529 -- (3,864){C} -- 98,265
----------- ----------- ----------- ----------- ----------- -----------
65,812 45,275 115 (9,360) 867 102,709

Other expense
Interest 56,242 31,380 4,569 -- -- 92,191

Depreciation 13,169 14,786 1,792 (1,096){D} (382){D} 28,269

Advisory fees to affiliate 4,971 4,208 570 (1,451){E} (226){E} 8,072

Net income fee to affiliate 638 2,075 -- 941{F} (13){F} 3,641
Incentive fees to affiliate 7,477 2,903 -- 757{G} -- 11,137
General and
administrative 9,083 7,531 849 -- -- 17,463
Minority Interest 2,483 9 -- -- -- 2,492
----------- ----------- ----------- ----------- ----------- -----------
94,063 62,892 7,780 (849) (621) 163,265

110

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI AND IOT
Nine months ended September 30, 2001
(dollars in thousands, except per share)

Historical Proforma Adjustments
----------------------------------------- ----------------------- Proforma
ARL TCI IOT TCI IOT Combined
------------ ------------ --------- ---------- -------- ------------

Net income (loss) 11,989 25,763 (3,198) (8,511) 1,488 27,531

Preferred dividend requirement (1,868) (22) -- (1,753) {H} (172){I} (3,815)

------------ ------------ --------- ---------- -------- ------------
Net income (loss) $ 10,121 $ 25,741 $ (3,198) $ (10,264) $ 1,316 $ 23,716

Earnings per share
Net income applicable to Common shares
Basic $ 1.00 2.51
Diluted $ 1.00 $ 2.19

Average Common shares used in
computing earnings per share
Basic 10,193,217 9,446,245
Diluted 10,193,217 10,813,818

111

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI AND IOT
September 30, 2001

Note A. To record the elimination of ARL's equity gains from TCI and TCI's
equity losses from IOT and ARL.

Note B. To record the elimination of ARL's equity losses from IOT

Note C. To record the elimination of TCI's share of gains on sales of real
estate from ARL.

Note D. To record the depreciation adjustment for new real estate basis.

Note E. To record the advisor fee adjustment for new gross asset basis.

Note F. To record the net income fee adjustment for new net income.

Note G. To record the incentive fee adjustment for TCI on ARL basis.

Note H. To record preferred stock dividends of $1.50 per share to affiliated
party on Series G preferred stock.

Note I. To record preferred stock dividends of $1.61 per share to affiliated
party on Series H preferred stock.

112

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ARL ACQUISITION OF TCI
September 30, 2001
(dollars in thousands)

Historical
----------------------------- Proforma Proforma
ARL TCI Adjustments Combined
------------- ------------- --------- -----------

Assets
Real estate held for investment, $ 376,113 $ 604,571 $ (66,657) {A} $ 914,906
net of accumulated depreciation -- -- 879 {B}
------------- ------------- --------- ----------
376,113 604,571 (65,778) 914,906

Real estate held for sale 228,476 504 -- 228,980

Notes and interest receivable 31,799 14,339 -- 46,138
Less-allowance for estimated losses (2,577) (537) -- (3,114)
------------- ------------- --------- -----------
29,222 13,802 -- 43,024

Pizza parlor equipment, net of accumulated
depreciation 7,384 -- -- 7,384
Leasehold interest - oil and gas properties, 4,718 -- -- 4,718
net of accumulated depreciation
Oilfield equipment, net of accumulated
depreciation 344 -- -- 344

Marketable equity securities, at market value 108 -- -- 108
Cash and cash equivalents 5,014 35,320 (49,929) {C} (9,595)
Investment in equity investees 78,046 23,520 (10,133) {D} 22,596
(68,837) {E}
Intangibles, net of accumulated amortization 15,883 -- -- 15,883
Other assets 35,070 31,072 -- 66,142
------------- ------------- ---------- ----------
$ 780,378 $ 708,789 $(194,677) $1,294,490
============= ============= ========== ==========

113

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ARL ACQUISITION OF TCI
September 30, 2001
(dollars in thousands)

Historical
-------------------------- Proforma Proforma
ARL TCI Adjustments Combined
------------- --------- ------------ -------------

Liabilities and Equity

Liabilities
Notes and interest payable $ 582,139 $ 460,275 $ -- $ 1,042,414
Margin borrowings 28,703 -- -- 28,703
Other liabilities 44,513 25,978 879{B} 71,370
------------- --------- --------- -------------
655,355 486,253 879 1,142,487
Commitments and contingencies

Minority Interest 37,634 4,225 -- 41,859
Series B Redeemable Preferred Stock; $.01 par
value; authorized, 300,000 shares; issued and
outstanding, 300,000 shares (liquidation
preference $1,500) -- 1,350 -- 1,350
Embedded Derivative -- 150 -- 150
Series F Redeemable Preferred Stock; $2.00 par
value; authorized, 4,961 shares; issued and
outstanding 3,968.75 shares (liquidation
preference $3,969) 3,969 -- -- 3,969

Stockholders' Equity

ARL
Preferred Stock, $2.00 par value, authorized
50,000,000
shares, issued and outstanding
Series A, 2,724,910 shares, (liquidation
preference $27,249) 4,850 -- -- 4,850
Series E, 50,000 shares, (liquidation
preference $500) 100 -- -- 100
Series G, 1,168,774 shares, (liquidation
preference $23,375) -- -- 2,338 {F} 2,338
Common Stock, $.01 par value; authorized
100,000,000 shares, issued 11,830,127 shares 118 -- (7){D} 111
Paid-in capital 112,195 -- 21,924 {F} 134,119
Accumulated distributions in
excess of accumulated earnings (33,827) -- -- (33,827)
Treasury Stock at par, 1,637,000 shares (16) -- -- (16)

TCI
Preferred Stock
Series A; $.01 par value; authorized, 6,000
shares; issued and outstanding 5,829 shares
(liquidation preference $583) -- -- -- --
Common Stock, $.01 par value; authorized,
10,000,000 shares; issued and outstanding
8,042,629 shares -- 80 (80){A} --

114

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ARL ACQUISITION OF TCI
September 30, 2001
(dollars in thousands)

Historical
----------------------------- Proforma Proforma
ARL TCI Adjustments Combined
---------------- ------------ -------------- --------------

Paid-in capital -- 268,761 (268,761){A} --
Accumulated distributions in
excess of accumulated earnings -- (48,971) 48,971 {A} --
Unrealized Gain -- (3,059) 3,059 {A} --
------------- --------- --------- -------------
83,420 216,811 (192,556) 107,675

$ 780,378 $ 708,789 $(191,677) $ 1,297,490
============= ========= ========= =============

115

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ARL ACQUISITION OF TCI
September 30, 2001
(dollars in thousands)

Note A. To record allocation of purchase price to TCI's assets and liabilities
as follows:

The total purchase price of TCI is calculated as follows:

Previous acquisitions by ARL for TCI $ 68,837
Cash required to purchase 2,853,080 non-affiliated
common shares of TCI at $17.50 per share 49,929
Issuance of 1,168,774 Series G Preferred Stock, liquidation value $23,375 24,255
Total Consideration $ 143,021
=========

The purchase price allocation, which is preliminary and therefore subject to
change based on a final analysis, is as follows:

Real Estate held for investment $ 540,914
Real Estate held for sale 504
Notes and interest receivable 13,802
Cash and cash equivalents 35,320
Investment in equity investees 13,387
Other assets 31,072
Notes and interest payable (460,275)
Other liabilities (25,978)
Minority Interest (4,225)
Series B Preferred Stock (1,500)
---------
$ 143,021
=========

Note B. To record estimate of additional closing costs.

Note C. To record cash required to purchase TCI

Note D. To record the elimination TCI's investment in ARL and retire 746,972
shares of ARL.

Note E. To record the elimination of ARL's investment in TCI.

Note F. To record the issuance of the Series G preferred stock to affiliated
parties to purchase TCI.

116

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI
September 30, 2001
(dollars in thousands, except per share)

Historical
---------------------- Proforma Proforma
ARL TCI Adjustments Combined
--------- --------- ----------- ---------

Property Revenue
Rents $ 98,748 $ 103,464 $ -- $ 202,212
Property operations 71,246 60,084 -- 131,330
--------- --------- -------- ---------
Operating income 27,502 43,380 -- 70,882

Land Operations
Sales 41,806 -- -- 41,806
Cost of Sales 33,546 -- -- 33,546
--------- --------- -------- ---------
Gain on land sales 8,260 -- -- 8,260

Pizza Parlor operations
Sales 25,282 -- -- 25,282
Cost of Sales 20,715 -- -- 20,715
--------- --------- -------- ---------
Gross margin 4,567 -- -- 4,567

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

Other Income
Interest and other 2,055 2,275 -- 4,330
Equity (loss) in equity investees 9,157 (4,529) (10,185){A} (1,552)
4,005 {B}
Gain on sale of real estate 54,600 47,529 (3,864){C} 98,265
--------- --------- -------- ---------
65,812 45,275 (10,044) 101,043

Other expense
Interest 56,242 31,380 -- 87,622
Depreciation 13,169 14,786 (1,096){D} 26,859
Advisory fee to affiliate 4,971 4,208 (1,424){E} 7,755
Net income fee to affiliate 638 2,075 870 {F} 3,583
Incentive fees to affiliate 7,477 2,903 757 {G} 11,137
General and administrative 9,083 7,531 -- 16,614
Minority Interest 2,483 9 -- 2,492
--------- --------- -------- ---------
94,063 62,892 (893) 156,062

Net income (loss) 11,989 25,763 (9,151) 28,601
Preferred dividend requirement (1,868) (22) (1,753){H} (3,643)

117

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI
September 30, 2001
(dollars in thousands, except per share)

Historical
------------------------- Proforma Proforma
ARL TCI Adjustments Combined
----------- ----------- ----------- -----------

Net income (loss) $ 10,121 $ 25,741 $ (10,904) $ 24,958

Earnings per share
Net income applicable to Common shares
Basic $ 1.00 $ 2.64
Diluted $ 1.00 $ 2.34

Average Common shares used in computing earnings per share
Basic 10,193,217 9,446,245
Diluted 10,193,217 10,677,250

118

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI
September 30, 2001

Note A. To record the elimination of ARL's equity gains from TCI.

Note B. To record the elimination of TCI's equity losses from ARL.

Note C. To record the elimination of TCI's share of gains on sales of real
estate from ARL.

Note D. To record the depreciation adjustment for new real estate basis.

Note E. To record the advisor fee adjustment for new gross asset basis.

Note F. To record the net income fee adjustment for new net income.

Note G. To record the incentive fee adjustment for TCI on ARL basis.

Note H. To record preferred stock dividends of $1.50 per share to affiliated
party on Series G preferred stock.

119

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ARL ACQUISITION OF IOT
September 30, 2001
(dollars in thousands)

Historical
-------------------------- Proforma Proforma
ARL IOT Adjustments Combined
--------- --------- ----------- ---------

Assets

Real estate held for investment, $ 376,113 $ 85,781 $(15,264){A} $ 446,751
net of accumulated depreciation 121 {B}
--------- --------- -------- ---------
376,113 85,781 (15,143) 446,751

Real estate held for sale 228,476 -- -- 228,476

Notes and interest receivable 31,799 505 -- 32,304
Less-allowance for estimated losses (2,577) -- -- (2,577)
--------- --------- -------- ---------
29,222 505 -- 29,727

Pizza parlor equipment, net of accumulated
depreciation 7,384 -- -- 7,384
Leasehold interest - oil and gas properties, 4,718 -- -- 4,718
net of accumulated depreciation -- -- -- --
Oilfield equipment, net of accumulated
depreciation 344 -- -- 344
Marketable equity securities, at market value 108 -- -- 108
Cash and cash equivalents 5,014 3,914 (10,953){C} (2,025)
Investment in equity investees 78,046 121 (6,872){D} 71,295
Intangibles, net of accumulated amortization 15,883 -- -- 15,883
Other assets 35,070 2,553 -- 37,623
--------- --------- -------- ---------
$ 780,378 $ 92,874 $(32,968) $ 840,284
========= ========= ======== =========

120

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ARL ACQUISITION OF IOT
September 30, 2001
(dollars in thousands)

Historical
---------------------------------- Proforma Proforma
ARL IOT Adjustments Combined
------------- ------------- ------------- -------------

Liabilities and Equity

Liabilities
Notes and interest payable $ 582,139 $ 54,329 $ -- $ 636,468
Margin borrowings 28,703 -- -- 28,703
Other liabilities 44,513 3,059 121 {B} 47,693
------------- ------------- ------------- -------------
655,355 57,388 121 712,864
Commitments and contingencies

Minority Interest 37,634 -- -- 37,634
Series F Redeemable Preferred Stock; $2.00 par
value; authorized, 4,961 shares; issued and
outstanding 3,968.75 shares (liquidation
preference $3,969) 3,969 -- -- 3,969

Stockholders' Equity

ARL
Preferred Stock, $2.00 par value, authorized
50,000,000 shares, issued and outstanding
Series A, 2,724,910 shares, (liquidation
preference $27,249) 4,850 -- -- 4,850
Series E, 50,000 shares, (liquidation
preference $500) 100 -- -- 100
Series H, 106,802 shares, (liquidation
preference $2,296) -- -- 214 {E} 214
Common Stock, $.01 par value; authorized
100,000,000 shares, issued 11,830,127 shares 118 -- -- 118
Paid-in capital 112,195 -- 2,183 {E} 114,378
Accumulated distributions in
excess of accumulated earnings (33,827) -- -- (33,827)
Treasury Stock at par, 1,637,000 shares (16) -- -- (16)

IOT
Common Stock, $.01 par value; authorized,
10,000,000 shares; issued and outstanding
1,438,945 shares -- 14 (14){A} --
Paid-in capital 63,459 (63,459){A} --
Accumulated distributions in excess of
accumulated earnings -- (27,987) 27,987 {A} --
------------- ------------- ------------- -------------
83,420 35,486 (33,089) 85,817

$ 780,378 $ 92,874 $ (32,968) $ 840,284
============= ============= ============= =============

121

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ARL ACQUISITION OF IOT
September 30, 2001
(dollars in thousands)

Note A. To record allocation of purchase price to IOT's assets and liabilities
as follows:

The total purchase price of IOT is calculated as follows:
Previous acquisitions by ARL for IOT $ 6,872
Cash required to purchase 576,480 non-affiliated
common shares of IOT at $19.00 per share 10,953
Issuance of 106,802 Series H Preferred Stock,
liquidation value $2,296. 2,397
Total Consideration $ 20,222
===========
The purchase price allocation, which is preliminary and
therefore subject to change based on a final analysis,
is as follows:
Real Estate held for investment $ 70,517
Notes and interest receivable 505
Cash and cash equivalents 3,914
Investment in equity investees 121
Other assets 2,553
Notes and interest payable (54,329)
Other liabilities (3,059)
-----------
$ 20,222
===========

Note C. To record cash required to purchase IOT.

Note D. To record the elimination ARL's investment in IOT.

Note E. To record the issuance of the Series H preferred stock to affiliated
parties to purchase IOT.

122

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF IOT
September 30, 2001
(dollars in thousands, except per share)

Historical
-------------------------- Proforma Proforma
ARL IOT Adjustments Combined
--------- --------- ----------- ---------

Property Revenue
Rents $ 98,748 $ 9,759 $ -- $ 108,507
Property operations 71,246 5,292 -- 76,538
--------- --------- --------- ---------
Operating income 27,502 4,467 -- 31,969

Land Operations
Sales 41,806 -- -- 41,806
Cost of Sales 33,546 -- -- 33,546
--------- --------- --------- ---------
Gain on land sales 8,260 -- -- 8,260

Pizza Parlor operations
Sales 25,282 -- -- 25,282
Cost of Sales 20,715 -- -- 20,715
--------- --------- --------- ---------
Gross margin 4,567 -- -- 4,567

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

Other Income
Interest and other 2,055 142 -- 2,197
Equity (loss) in equity investees 9,157 (27) 867 {A} 9,997
Gain on sale of real estate 54,600 -- -- 54,600
--------- --------- --------- ---------
65,812 115 867 66,794

Other expense
Interest 56,242 4,569 -- 60,811
Depreciation 13,169 1,792 (382){B} 14,579
Advisory fee to affiliate 4,971 570 (226){C} 5,315
Net income fee to affiliate 638 -- (13){D} 625
Incentive fees to affiliate 7,477 -- -- 7,477
General and administrative 9,083 849 -- 9,932
Minority Interest 2,483 -- -- 2,483
--------- --------- --------- ---------
94,063 7,780 (621) 101,222

Net income (loss) 11,989 (3,198) 1,488 10,279
Preferred dividend requirement (1,868) -- (172){E} (2,040)

--------- --------- --------- ---------
Net income (loss) $ 10,121 $ (3,198) $ 1,316 $ 8,239

123

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF IOT
September 30, 2001
(dollars in thousands, except per share)

Historical
-------------------------- Proforma Proforma
ARL IOT Adjustments Combined
----------- --------- ----------- -----------

Earnings per share
Net income applicable to Common shares
Basic $ 1.00 $ 0.81
Diluted $ 1.00 0.71

Average Common shares used in computing
earnings per share
Basic 10,193,217 10,193,217
Diluted 10,193,217 11,604,981

124

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF IOT
September 30, 2001

Note A. To record the elimination of ARL's equity losses from IOT.

Note B. To record the depreciation adjustment for new real estate basis.

Note C. To record the advisor fee adjustment for new gross asset basis.

Note D. To record the net income fee adjustment for new net income.

Note E. To record preferred stock dividends of $1.61 per share to affiliated
party on Series H preferred stock.

125

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI AND IOT
December 31, 2000
(dollars in thousands, except per share)

Historical Proforma Adjustments
------------------------------------------- ------------------------- Proforma
ARL TCI IOT TCI IOT Combined
--------- --------- --------- --------- --------- ---------

Property Revenue
Rents $ 138,160 $ 139,357 $ 13,731 $ -- $ -- $ 291,248
Property operations 94,081 78,061 6,969 -- -- 179,111
--------- --------- --------- --------- --------- ---------
Operating income 44,079 61,296 6,762 -- -- 112,137

Land Operations
Sales 119,384 -- -- -- -- 119,384
Cost of Sales 90,383 -- -- -- -- 90,383
--------- --------- --------- --------- --------- ---------
Gain on land sales 29,001 -- -- -- -- 29,001

Pizza Parlor operations
Sales 32,551 -- -- -- -- 32,551
Cost of Sales 26,767 -- -- -- -- 26,767
--------- --------- --------- --------- --------- ---------
Gross margin 5,784 -- -- -- -- 5,784

Other Income
Interest and other 2,039 2,370 319 (358){A} -- 4,370
Equity (loss) in
equity investees 5,246 (556) (61) (6,555){B} (4,871){C} (6,797)
Gain on sale of real
estate 67,727 50,550 20,878 (4,781){D} (475){E} 133,899
--------- --------- --------- --------- --------- ---------
75,012 52,364 21,136 (11,694) (5,346) 131,472

Other expense
Interest 76,702 47,997 5,079 (358){A} -- 129,420
Depreciation 16,879 19,702 2,450 (1,241){F} (349) {F} 37,441
Advisory fee to
affiliate 5,049 5,258 664 (1,175){G} (255) {G} 9,541
Net income fee to
affiliate -- 2,415 1,362 (519){H} 330 {H} 3,588
Incentive fee to
affiliate 1,646 -- -- 2,556 {I} 1,848 {I} 6,050
General and
administrative 17,973 8,506 1,549 -- -- 28,028
Provision for loss 2,248 -- -- -- -- 2,248
Minority Interest 30,700 -- -- -- -- 30,700
--------- --------- --------- --------- --------- ---------
151,197 83,878 11,104 (737) 1,574 247,016

Preferred dividend
requirement (2,327) (22) -- (2,338){J} (230){K} (4,917)
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 352 $ 29,760 $ 16,794 $ (13,295) $ (7,150) $ 26,461

126

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI AND IOT
December 31, 2000
(dollars in thousands, except per share)

Historical Proforma Adjustments
------------------------------------------- ------------------------- Proforma
ARL TCI IOT TCI IOT Combined
--------- --------- --------- ---------- --------- -----------

Earnings per share
Net income applicable to
Common shares
Basic $0.03 $ 2.81
Diluted $0.03 $ 2.16

Average Common shares used
in computing earnings
per share
Basic 10,399,890 9,446,245
Diluted 10,399,890 12,276,212

127

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI AND IOT
December 31, 2000

Note A. To record the elimination of TCI's interest income and ARL's interest
expense from TCI's funding a loan to ARL in 2000.

Note B. To record the elimination of ARL's equity gains from TCI and TCI's
equity losses from IOT.

Note C. To record the elimination of ARL's equity gains from IOT.

Note D. To record increased brokerage commissions to affiliate on sales of real
estate on ARL basis and eliminate TCI's share of gains on sale of real
estate from IOT.

Note E. To record increased brokerage commissions to affiliate on sales of real
estate on ARL basis.

Note F. To record the depreciation adjustment for new real estate basis.

Note G. To record the advisor fee adjustment for new gross asset basis.

Note H. To record the net income fee adjustment for new net income.

Note I. To record the incentive fee adjustment on ARL basis.

Note J. To record preferred stock dividends of $2.00 per share to affiliated
party on Series G preferred stock.

Note K. To record preferred stock dividends of $2.15 per share to affiliated
party on Series H preferred stock.

128

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI
December 31, 2000
(dollars in thousands, except per share)

Historical
-------------------------- Proforma Proforma
ARL TCI Adjustments Combined
--------- --------- ----------- ---------

Property Revenue
Rents $ 138,160 $ 139,357 $ -- $ 277,517
Property operations 94,081 78,061 -- 172,142
--------- --------- ----------- ---------
Operating income 44,079 61,296 -- 105,375

Land Operations
Sales 119,384 -- -- 119,384
Cost of Sales 90,383 -- -- 90,383
--------- --------- ----------- ---------
Gain on land sales 29,001 -- -- 29,001

Pizza Parlor operations
Sales 32,551 -- -- 32,551
Cost of Sales 26,767 -- -- 26,767
--------- --------- ----------- ---------
Gross margin 5,784 -- -- 5,784

Other Income
Interest and other 2,039 2,370 (358){A} 4,051
Equity (loss) in equity investees 5,246 (556) (7,243){B} (2,553)
Gain on sale of real estate 67,727 50,550 (209){C} 118,068
--------- --------- ----------- ---------
75,012 52,364 (7,810) 119,566
Other expense
Interest 76,702 47,997 (358){A} 124,341
Depreciation 16,879 19,702 (1,241){D} 35,340
Advisory fee to affiliate 5,049 5,258 (1,142){E} 9,165
Net income fee to affiliate -- 2,415 (134){F} 2,281
Incentive fee to affiliate 1,646 -- 2,556 {G} 4,202
General and administrative 17,973 8,506 -- 26,479
Provision for loss 2,248 -- -- 2,248
Minority Interest 30,700 -- -- 30,700
--------- --------- ----------- ---------
151,197 83,878 (319) 234,756

Net income (loss) 2,679 29,782 (7,491) 24,970
Preferred dividend requirement (2,327) (22) (2,338){H} (4,687)
--------- --------- ----------- ---------
Net income (loss) $ 352 $ 29,760 $ (9,829) $ 20,283

Earnings per share
Net income applicable to Common shares
Basic $ 0.03 $ 2.11
Diluted $ 0.03 $ 1.78

129

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI
December 31, 2000
(dollars in thousands, except per share)

Historical
-------------------------- Proforma Proforma
ARL TCI Adjustments Combined
---------- --------- ----------- ----------

Average Common shares used in
computing earnings per share
Basic 10,399,890 9,652,918
Diluted 10,399,890 11,441,035

130

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF TCI
December 31, 2000

Note A. To record the elimination of TCI's interest income and ARL's interest
expense from TCI's funding a loan to ARL in 2000.

Note B. To record the elimination of ARL's equity gains from TCI.

Note C. To record increased brokerage commissions to affiliate on sales of real
estate on ARL basis and eliminate TCI's share of gains on sale of real
estate from IOT.

Note D. To record the depreciation adjustment for new real estate basis.

Note E. To record the advisor fee adjustment for new gross asset basis.

Note F. To record the net income fee adjustment for new net income.

Note G. To record the incentive fee adjustment for TCI on ARL basis.

Note H. To record preferred stock dividends of $2.00 per share to affiliated
party on Series G preferred stock.

131

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF IOT
December 31, 2000
(dollars in thousands, except per share)

Historical
-------------------------------- Proforma Proforma
ARL IOT Adjustments Combined
------------ ------------ ----------- ------------

Property Revenue
Rents $ 138,160 $ 13,731 $ -- $ 151,891
Property operations 94,081 6,969 -- 101,050
------------ ------------ ----------- ------------
Operating income 44,079 6,762 -- 50,841

Land Operations
Sales 119,384 -- -- 119,384
Cost of Sales 90,383 -- -- 90,383
------------ ------------ ----------- ------------
Gain on land sales 29,001 -- -- 29,001

Pizza Parlor operations
Sales 32,551 -- -- 32,551
Cost of Sales 26,767 -- -- 26,767
------------ ------------ ----------- ------------
Gross margin 5,784 -- -- 5,784

Other Income
Interest and other 2,039 319 -- 2,358
Equity (loss) in equity investees 5,246 (61) (4,871){A} 314
Gain on sale of real estate 67,727 20,878 (475){B} 88,130
------------ ------------ ----------- ------------
75,012 21,136 (5,346) 90,802

Other expense
Interest 76,702 5,079 -- 81,781
Depreciation 16,879 2,450 (349){C} 18,980
Advisory fee to affiliate 5,049 664 (255){D} 5,458
Net income fee to affiliate -- 1,362 330 {E} 1,692
Incentive fee to affiliate 1,646 -- 1,848 {F} 3,494
General and administrative 17,973 1,549 -- 19,522
Provision for loss 2,248 -- 2,248
Minority Interest 30,700 -- -- 30,700
------------ ------------ ----------- ------------
151,197 11,104 1,574 163,875

Net income (loss) 2,679 16,794 (6,920) 12,553
Preferred dividend requirement (2,327) -- (230){G} (2,557)

------------ ------------ ----------- ------------
Net income (loss) $ 352 $ 16,794 $ (7,150) $ 9,996

Earnings per share
Net income applicable to Common shares
Basic $ 0.03 $ 0.96
Diluted $ 0.03 $ 0.92

132

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF IOT
December 31, 2000
(dollars in thousands, except per share)

Historical
-------------------------------- Proforma Proforma
ARL IOT Adjustments Combined
------------ ------------ ----------- ------------

Average Common shares used in computing
earnings per share
Basic 10,399,890 10,399,890
Diluted 10,399,890 10,847,677

133

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
ARL ACQUISITION OF IOT
December 31, 2000

Note A. To record the elimination of ARL's equity gains from IOT.

Note B. To record increased brokerage commissions to affiliate on sales of real
estate on ARL basis.

Note C. To record the depreciation adjustment for new real estate basis.

Note D. To record the advisor fee adjustment for new gross asset basis.

Note E. To record the net income fee adjustment for new net income.

Note F. To record the incentive fee adjustment for IOT on ARL basis.

Note G. To record preferred stock dividends of $2.15 per share to affiliated
party on Series H preferred stock.

134

BUSINESS OF ARL

American Realty Investors, Inc. ("ARL"), a Nevada corporation, is the
successor through merger to American Realty Trust, Inc. ("ART"), a Georgia
corporation and NRLP, a Delaware partnership.

On November 3, 1999, ART and NRLP jointly announced the agreement of
their respective boards to combine, in a tax-free exchange, under a new company,
ARL. Prior to December 31, 1998, ART accounted for its investment in NRLP under
the equity method. As of December 31, 1998, upon the election of a wholly-owned
subsidiary of ART as general partner of NRLP, ART began consolidation of NRLP's
accounts at that date and consolidation of its operations subsequent to that
date.

The merger transaction was closed on August 2, 2000. NRLP unitholders,
except for ART, received one share of ARL common stock for each unit of NRLP
held. ART stockholders received .91 shares of ARL 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 ARL, having substantially the same rights as ART's
preferred stock. The ART shares of common stock ceased trading on the NYSE on
August 2, 2000. ARL common stock commenced trading on the NYSE on August 3,
2000. For financial reporting purposes, the merger is treated as the purchase of
NRLP by ART; accordingly, the historical information presented for ARL is that
of ART.

BUSINESS PLAN AND INVESTMENT POLICY

ARL'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 ARL is set forth in
"Properties of ARL" and in Schedules III and IV to the ARL Consolidated
Financial Statements.

ARL, through its wholly-owned subsidiary, Pizza World Supreme, Inc.
("PWSI"), operates and franchises pizza parlors featuring pizza delivery,
carry-out and dine-in under the trademarks "Me-N-Ed's" and "Slices" in
California and Texas. The first Me-N-Ed's pizza parlor opened in 1962. At
September 30, 2001, there were 58 Me-N-Ed's pizza parlors in operation,
consisting of 47 owned and 11 franchised pizza parlors. Four of the owned pizza
parlors were in Texas and the remainder were in California.

ARL's businesses are not seasonal. With regard to real estate
investments, ARL is seeking both current income and capital appreciation. ARL'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. ARL
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. ARL 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

135

prices obtainable for such assets justify their disposition. ARL 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
"Properties of ARL" and Schedules III and IV to the ARL Consolidated Financial
Statements.

ARL's board of directors has broad authority under ARL'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 of ARL's real estate portfolio will depend
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.

In addition to its equity investments in real estate, ARL has also
invested in private and open market purchases of the equity securities of IOT
and TCI, both affiliates of ARL. See "Properties of ARL -- Investments in Real
Estate Companies and Real Estate Partnerships."

COMPETITION

REAL ESTATE. The real estate business is highly competitive and ARL
competes with numerous entities engaged in real estate activities (including
certain entities described in "Certain Relationships and Related Transactions of
ARL, TCI and IOT--Related Party Transactions"), some of which have greater
financial resources than ARL. 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 and the ability
to provide a community atmosphere for the tenants. With respect to hotels,
competition is also based upon 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 ARL's properties, in particular its
improved and unimproved land, are also competitive factors.

To the extent that ARL 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 ARL's properties are located, as well as aggressive buyers attempting to
dominate or penetrate a particular market.

136

As described above and in "Certain Relationships and Related
Transactions of ARL, TCI and IOT--Related Party Transactions," the officers of
ARL also serve as officers of IOT and TCI, both of which are also advised by
BCM, and both of which have business objectives similar to ARL's. ARL's officers
and advisor owe fiduciary duties to both IOT and TCI as well as to ARL under
applicable law. In determining whether a particular investment opportunity will
be allocated to ARL, IOT 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 "Certain Relationships and Related
Transactions of ARL, TCI and IOT." ARL also competes with entities which are
affiliates of BCM having similar investment objectives in the purchasing,
selling, leasing and financing real estate and real estate-related investments.
In resolving any potential conflicts of interest which may arise, BCM has
informed ARL 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.

ARL 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, earth
quakes, 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 ARL'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 ARL's real estate, equity security holdings in IOT and
TCI and its trading portfolio of equity securities are held subject to secured
indebtedness. Such borrowings increase the risk of loss because they represent a
prior claim on ARL'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 ARL 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.

137

The quick-service restaurant industry is extremely competitive with
respect to price, service, location and food quality. PWSI 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 PWSI and its franchisees. PWSI
competes for qualified franchisees with many other restaurant concepts,
including national and regional restaurant chains. PWSI'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 PWSI'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 September 30, 2001, PWSI owned and operated 47 and franchised 11
pizza parlors. The results achieved by PWSI'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 PWSI's relatively small pizza
parlor base, an unsuccessful pizza parlor has a more significant effect on
PWSI's results of operations than would be the case in a company owning more
pizza parlors. PWSI's existing pizza parlors, both owned and franchised, are
located in California or Texas. At September 30, 2001, there were 54 pizza
parlors in California and four in Texas. Accordingly, PWSI's results of
operations may be affected by economic or other conditions in those regions.
Also, given PWSI's present geographic concentration, publicity relating to
PWSI's pizza parlors could have a more pronounced effect on PWSI's overall sales
than might be the case if PWSI's pizza parlors were geographically dispersed.

All of PWSI's owned pizza parlors are operated on premises leased from
third parties. Most of the pizza parlor leases provide for a minimum annual rent
and additional rental payments if sales volumes exceed specified amounts. There
can be no assurance that PWSI 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 2000, PWSI added one new franchised store and no company-owned stores,
it sold one company-owned store and closed an additional three company-owned
stores. In 2001, PWSI added three new company-owned stores and sold two
company-owned stores to franchises. In 2002, PWSI plans to expand its franchised
stores to construct and open four new company-owned stores.

PROPERTIES OF ARL

ARL'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 ARL's present operations.

Details of ARL's real estate and mortgage notes receivable portfolios
at December 31, 2000, are set forth in Schedules III and IV, respectively, to
the ARL Consolidated Financial Statements. The discussions set forth below under
the headings "Real Estate" and "Mortgage

138

Loans" provide certain summary information concerning ARL's real estate and
mortgage notes receivable portfolios.

At December 31, 2000, no single asset accounted for 10% or more of
total assets. At December 31, 2000, 83% of ARL's assets consisted of real
estate, 2% consisted of notes and interest receivable, 6% consisted of
investments in equity investees, including IOT and TCI, and 3% consisted of
pizza parlor equipment and related goodwill. The remaining 6% of ARL's assets
were cash, cash equivalents, marketable equity securities 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 ARL's assets in the future will
approximate the percentages listed above.

ARL's real estate is geographically diverse. At December 31, 2000,
ARL'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. ARL also holds mortgage notes receivable
secured by real estate located in the Southeast, Southwest, Northeast and
Midwest regions of the continental United States, as shown more specifically in
the table under "Mortgage Loans" below.

GEOGRAPHIC REGIONS

Northeast region comprised of the states of Connecticut, Delaware,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia. ARL has no properties in
this region.

Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. ARL has 39
apartments, 4 commercial properties and 2 hotels in this region.

Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. ARL has 14 apartments and 7
commercial properties in this region.

Midwest region comprised of the states of Illinois, Indiana, Iowa,
Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, West Virginia and Wisconsin. ARL has 12 apartments, 2 commercial
properties and 1 hotel in this region.

Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. ARL has 1 apartment, 2 commercial properties and 1
hotel in this region.

Pacific region comprised of the states of Alaska, California, Hawaii,
Oregon and Washington. ARL has 2 commercial properties and 4 hotels in this
region.

Excluded from above are 59 parcels of improved and unimproved land, a
hotel in Sofia, Bulgaria and a single family residence, as described below.

139

REAL ESTATE

At December 31, 2000, 89% of ARL's assets were invested in real estate
and the equity securities of IOT and TCI. ARL invests in real estate located
throughout the continental United States, either on a leveraged or nonleveraged
basis.

ARL's real estate portfolio consists of properties held for investment,
investments in partnerships, properties held for sale and investments in equity
securities of IOT and TCI.

TYPES OF REAL ESTATE INVESTMENTS. ARL's real estate consists of
apartments, commercial properties (office buildings, 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, or existing debt may be
assumed and properties may be mortgaged, pledged or otherwise collateralized to
obtain financing. The ARL 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 ARL has typically invested in developed real estate, it may
also invest in new construction or development either directly or in partnership
with non-affiliated parties or affiliates (subject to approval by the ARL board
of directors). To the extent that it invests in construction and development
projects, such as the Lake Shore Villas Apartments, ARL is subject to business
risks, such as cost overruns and construction delays, associated with such
higher risk projects. In 2000, ARL completed construction of Lake Shore Villas,
a 312 unit apartment in Harris County, Texas.

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

The following table sets forth the percentages, by property type and
geographic region, of owned real estate (excluding 59 parcels of improved and
unimproved land, a hotel in Sofia, Bulgaria and a single family residence,
described below) at December 31, 2000.

Commercial
Region Apartments Properties Hotels
------ ---------- ---------- ------

Midwest.......................................................... 21% 35% 14%
Mountain......................................................... 3 2 11
Pacific.......................................................... -- 18 46
Southwest........................................................ 43 20 29
Southwest........................................................ 33 25 --
--- --- ---
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

140

ARL's investment in each region. See Schedule III to the ARL Consolidated
Financial Statements for a detailed description of owned real estate.

Excluded from the table above, are a 145 room hotel in Sofia, Bulgaria,
a single family residence in Dallas, Texas and 59 parcels of improved and
unimproved land consisting of: a 46.1 acre land parcel in Las Colinas, Texas;
seven parcels of land in Dallas County, Texas, totaling 402.2 acres; four
parcels of land in Irving, Texas, totaling 278.5 acres; an 82.4 acre land parcel
in Oceanside, California; five parcels of land in Tarrant County, Texas,
totaling 770.6 acres; two parcels of land in Harris County, Texas, totaling
251.0 acres; five parcels of land in Collin County, Texas, totaling 234.6 acres;
12 parcels of land in Farmers Branch, Texas, totaling 145.3 acres; three parcels
of land in Plano, Texas, totaling 87.8 acres; a 1,070.9 acre land parcel in
Austin, Texas; three parcels of land in Palm Desert, California, totaling 825.6
acres; a 63.3 acre land parcel in Travis County, Texas; a 193.7 acre parcel of
land in Houston, Texas; a 54.2 acre land parcel in Fort Worth, Texas; a 137.0
acre land parcel in Lewisville, Texas; a 7.6 acre land parcel in Carrollton,
Texas; a 19.5 acre land parcel in Santa Clarita, California; a 138.7 acre land
parcel in Nashville, Tennessee; three parcels of land in Riverside, California,
totaling 1,677.8 acres; and five additional land parcels totaling approximately
84.0 acres. See Schedule III to the ARL Consolidated Financial Statements for a
detailed description of ARL's real estate portfolio.

A summary of the activity in the owned real estate portfolio during
2000 is as follows:

Owned properties at January 1, 2000.................................... 171
Properties purchased................................................... 4
Properties constructed................................................. 1
Property obtained in exchange for a portion of a land parcel........... 1
Properties split into two land parcels................................. 1
Properties sold (excluding partial sales).............................. (26)
-----

Owned properties at December 31, 2000.................................. 152
=====

PROPERTIES HELD FOR INVESTMENT. Set forth below are the properties held
for investment 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, 2000, 1999 and 1998 for apartments and commercial properties and average
occupancy during 2000, 1999 and 1998 for hotels:

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/SQUARE ----------------------------- ---------------------------
PROPERTY LOCATION FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- ------------ ----- ----- ----- ---- ---- ----

APARTMENTS
Arlington Place Pasadena, TX 230 $.68 $.65 $.64 93 98 98
Units/205,476
Sq. Ft.
Ashford Tampa FL 56 .77 .76 .74 95 91 98
Units/42,196
Sq. Ft.
Bay Anchor Panama 12 .53 .50 .54 100 97 83
City, FL Units/10,700
Sq. Ft.

141

Bent Tree Addison, TX 292 .74 .71 .73 96 96 93
Units/244,480
Sq. Ft.
Blackhawk Ft. Wayne, 209 .57 .56 .57 94 95 94
IN Units/190,520
Sq. Ft.
Bridgestone Friendswood, 76 .68 .68 .67 99 91 97
TX Units/65,519
Sq. Ft.
Carriage Park Tampa, FL 46 .82 .79 .80 91 98 94
Units/36,750
Sq. Ft.
Chalet I Topeka, KS 162 .66 .64 .65 90 95 97
Units/131,791
Sq. Ft.
Chalet II Topeka, KS 72 .71 .68 .70 92 95 91
Units/49,164
Sq. Ft.
Chateau Bellevue, NE 115 .68 .69 .71 97 96 94
Units/99,220
Sq. Ft.
Chateau Bayou Ocean 122 .65 .64 .71 89 99 98
Springs, MS Units/105,536
Sq. Ft.
Club Mar Sarasota, FL 248 .67 .65 .65 99 92 93
Units/230,180
Sq. Ft.
Confederate Point Jacksonville, 206 .59 .58 .58 96 94 93
FL Units/277,860
Sq. Ft.
Conradi House Tallahassee, 98 .71 .67 .71 98 96 96
FL Units/49,900
Sq. Ft.
Covered Bridge Gainesville, 176 .66 .66 .64 99 96 97
FL Units/171,416
Sq. Ft.
Crossing Church Tampa, FL 52 .83 .73 .73 96 96 98
Units/40,024
Sq. Ft.
Daluce Tallahassee, 112 .61 .59 .59 96 93 94
FL Units/95,432
Sq. Ft.
Falcon House Ft. Walton, 82 .63 .62 .62 95 92 93
FL Units/71,220
Sq. Ft.
Foxwood Memphis, TN 220 .55 .55 .57 90 81 90
Units/212,000
Sq. Ft.
Georgetown Panama 44 .62 .60 .61 100 94 93
City, FL Units/36,160
Sq. Ft.
Governor Square Tallahassee, 168 .63 .61 .60 95 95 92
FL Units/146,550
Sq. Ft.
Grand Lagoon Panama 54 .74 .71 .73 93 94 80
City, FL Units/47,460
Sq. Ft.
Greenbriar Tallahassee, 50 .74 .71 .70 98 100 96
FL Units/36,600
Sq. Ft.
Kimberly Woods Tucson, AZ 279 .59 .57 .59 91 93 92
Units/249,678
Sq. Ft.
La Mirada Jacksonville, 320 .54 .54 .52 88 94 99
FL Units/341,400
Sq. Ft.

142

Lake Chateau Thomasville, 98 .57 .55 .56 95 95 97
GA Units/65,800
Sq. Ft.
Lake Shore Villas Harris 312 .89 * * * * *
County, TX Units/259,176
Sq. Ft.
Landings/marina Pensacola, 52 .69 .68 .67 92 96 87
FL Units/34,464
Sq. Ft.
Lee Hills Tallahassee, 16 .56 .52 .54 94 92 94
FL Units/14,720
Sq. Ft.
Mallard Lake Greensboro, 336 .63 .62 .64 97 93 91
NC Units/295,560
Sq. Ft.
Mediterranean San 140 .50 .50 .49 96 96 93
Villas Antonio, TX Units/158,960
Sq. Ft.
Morning Star Tallahassee, 82 .81 .77 .76 99 95 100
FL Units/41,000
Sq. Ft.
Nora Pines Indianapolis, 254 .61 .60 .60 93 93 95
IN Units/254,676
Sq. Ft.
Northside Villas Tallahassee, 81 .61 .58 .57 97 94 93
FL Units/134,000
Sq. Ft.
Oak Hill Tallahassee, 92 .62 .60 .60 95 96 97
FL Units/81,240
Sq. Ft.
Oak Tree Grandview, 189 .62 .59 .60 89 95 99
MO Units/160,591
Sq. Ft.
Park Avenue Tallahassee, 121 .83 .81 .79 98 97 90
FL Units/78,979
Sq. Ft.
Pheasant Ridge Bellevue, NE 264 .61 .60 .62 94 94 89
Units/243,960
Sq. Ft.
Pinecrest Tallahassee, 48 .59 .57 .57 100 94 90
FL Units/46,400
Sq. Ft.
Place One Tulsa, OK 407 .59 .59 .42 92 94 93
Units/302,263
Sq. Ft.
Quail Point Huntsville, 184 .46 .45 .44 90 90 89
AL Units/202,602
Sq. Ft.
Regency Lincoln, NE 106 .62 .64 .67 93 88 87
Units/111,700
Sq. Ft.
Regency Tampa, FL 78 .87 .82 .81 97 97 96
Units/55,810
Sq. Ft.
Rockborough Denver, CO 345 .91 .82 .80 94 94 94
Units/249,723
Sq. Ft.
Rolling Hills Tallahassee, 134 .63 .61 .61 96 99 92
FL Units/115,730
Sq. Ft.
Seville Tallahassee, 62 .57 .56 .56 97 100 100
FL Units/63,360
Sq. Ft.
Shadowood Addison, TX 184 .79 .76 .76 98 95 94
Units/134,616
Sq. Ft.

143

Stonebridge Florissant, 100 .47 .46 .46 97 94 95
MO Units/140,576
Sq. Ft.
Stonegate Tallahassee, 83 .80 .77 .77 99 95 93
FL Units/34,900
Sq. Ft.
Sun Hollow El Paso, TX 216 .65 .65 .66 97 94 93
Units/156,000
Sq. Ft.
Sunset Odessa, TX 240 .41 .42 .46 85 96 96
Units/160,400
Sq. Ft.
Timber Creek Omaha, NE 180 .66 .70 .70 88 93 97
Units/162,252
Sq. Ft.
Valley Hi Tallahassee, 54 .80 .76 .71 98 92 100
FL Units/27,800
Sq. Ft.
Villa Del Mar Wichita, KS 162 .56 .59 .60 91 85 92
Units/128,004
Sq. Ft.
Villager Ft. Walton, 33 .73 .70 .71 91 94 97
FL Units/22,840
Sq. Ft.
Villas Plano, TX 208 .85 .81 .80 94 96 94
Units/156,632
Sq. Ft.
Waters Edge III Gulfport, MS 238 .62 .61 .59 92 97 96
Units/212,216
Sq. Ft.
Westwood Mary Ester, 120 .63 .67 .67 93 94 91
FL Units/93,000
Sq. Ft.
Westwood Parc Tallahassee, 94 .74 .70 .69 99 99 100
FL Units/55,950
Sq. Ft.
White Pines Tallahassee, 85 .53 .74 .74 93 95 94
FL Units/17,000
Sq. Ft.
Whispering Pines Topeka, KS 320 .79 .52 .51 97 94 95
Units/299,264
Sq. Ft.
Windsor Tower Ocala, FL 64 .50 .46 .45 98 100 96
Units/66,000
Sq. Ft.
Woodhollow San 546 .65 .64 .64 89 76 82
Antonio, TX Units/348,692
Sq. Ft.
Woodlake Carrollton, 256 .78 .77 .77 99 96 97
TX Units/210,208
Sq. Ft.
Woodsong II Smyrna, GA 190 .60 .57 .56 97 96 99
Units/207,460
Sq. Ft.
Woodstock Dallas, TX 320 .68 .65 .63 94 96 95
Units/222,112
Sq. Ft.

OFFICE BUILDINGS
56 Expressway Oklahoma 54,649 Sq. 11.23 7.92 9.53 77 23 91
City, OK Ft.
Centura Farmers 410,901 Sq. 25.01 * * 31 * *
Branch, TX Ft.
Cooley Building Farmers 27,000 Sq. 9.25 9.00 * 100 100 *
Branch, TX Ft.
Encino Executive Encino, CA 177,211 Sq. 25.17 16.85 * 78 90 *
Plaza Ft.

144

Executive Court Memphis, TN 41,840 Sq. 11.04 13.22 10.64 100 100 96
Ft.
Melrose Business Oklahoma 124,200 Sq. 3.22 2.73 3.03 74 86 80
Park City, OK Ft.
One Hickory Farmers 102,615 Sq. 19.90 * * 72 * *
Centre Branch, TX Ft.
Rosedale Towers Minneapolis, 84,798 Sq. 16.84 18.89 15.48 86 92 94
MN Ft.
Two Hickory Farmers 167,981 Sq. 21.07 18.71 * 33 25
Centre Branch, TX Ft.
University Square Anchorage, 22,260 Sq. 14.07 13.26 13.83 97 97 81
AK Ft.

SHOPPING CENTERS
Collection Denver, CO 267,812 Sq. 9.83 11.19 8.92 96 99 94
Ft.
Cross County Mall Mattoon, IL 304,575 Sq. 5.10 6.05 4.99 94 93 90
Ft.
Cullman Cullman, AL 92,466 Sq. 3.27 3.98 3.91 98 98 98
Ft.
Oaktree Village Lubbock, TX 45,623 Sq. 6.64 9.29 8.27 79 76 70
Ft.
Regency Point Jacksonville, 67,410 Sq. 12.58 12.58 12.36 97 99 91
FL Ft.
Westwood Tallahassee, 149,855 Sq. 6.74 6.68 6.77 93 100 93
FL Ft.

MERCHANDISE MART
Denver Mart Denver, CO 509,008 Sq. 10.98 10.34 11.35 90 92 92
Ft.

SINGLE FAMILY RESIDENCE
Tavel Circle Dallas, TX 2,271 Sq. Ft. -- -- -- -- -- --

TOTAL ROOM REVENUE
DIVIDED BY TOTAL
AVERAGE ROOM RATE OCCUPANCY % AVAILABLE ROOMS
-------------------------- ----------------------- -------------------------
PROPERTY LOCATION ROOMS 2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- ----- ------- ------ ------ ---- ---- ---- ------ ------ ------

HOTELS
Best Western Virginia 110 $103.94 $94.15 $92.65 60 62 65 $62.29 $57.96 $60.37
Beach, Rooms
VA
Grand Hotel Sofia, 145 * * * * * * * * *
Sofia Bulgaria Rooms
Holiday Inn Kansas 196 70.67 64.09 65.38 72 81 79 51.18 52.02 51.38
City, MO Rooms
Piccadilly Fresno, 185 70.22 69.52 68.53 61 59 61 42.87 41.02 41.68
Airport CA Rooms
Piccadilly Fresno, 78 56.38 57.09 55.18 58 56 60 32.64 32.17 33.19
Chateau CA Rooms
Piccadilly Fresno, 194 70.96 71.80 70.63 69 63 66 49.07 45.36 46.71
Shaw CA Rooms
Piccadilly Fresno, 190 67.11 68.90 67.42 55 49 59 36.83 34.02 39.42
University CA Rooms
Quality Inn Denver, 161 52.83 55.01 54.07 69 63 61 36.30 34.45 32.95
CO Rooms
Williamsburg
Hospitality
House Williams 296 93.28 88.76 85.87 60 58 64 55.71 51.58 54.85
burg, VA Rooms

----------

* Property was purchased or constructed in 1999 or 2000.

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

145

In 2000, ARL purchased the following properties:

NET
PURCHASE CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS/ACRES PRICE PAID INCURRED RATE DATE
-------- -------- ----------- -------- ------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)

LAND
Clark Farmers 3.25 Acres $ 2,971 $ -- $ --/(1)/ -- % --
Branch, TX
Kelly Collin County, .75 Acres 130 20 100/(2)/ 10.0 03/10
TX
Mastenbrook Collin County, 157.86 Acres 3,200 704 2,400/(2)/ 9.0 09/00/(4)/
TX
Sladek Travis County, 63.3 Acres 712 316 427/(2)/ 10.0 05/04
TX

Hotel
Grand Hotel Sofia/(3)/ Sofia, Bulgaria 145 Rooms 17,975 17,975 -- -- --

----------

(1) Exchanged for 19.74 acres of Frisco Bridges land.

(2) Seller financing.

(3) ARL purchased 100% of the outstanding stock of World Trade, owner of an
80% interest in the hotel, from One Realco, an affiliate, for $18.0
million in cash.

(4) Property sold in September 2000.

In 2000, ARL sold the following properties:

UNITS/ SALES NET CASH GAIN (LOSS)
PROPERTY LOCATION SQ.FT./ACRES PRICE RECEIVED DEBT DISCHARGED ON SALE
-------- -------- ------------ ------- -------- --------------- -----------
(DOLLARS IN THOUSANDS)

APARTMENTS
Candlelight Square Lenexa, KS 119 Units $ 4,800 $1,289 $ 2,832 $ 3,266
Fair Oaks Euless, TX 208 Units 6,850 609 5,711 3,364
Four Seasons Denver, CO 384 Units 16,600 6,543 9,220(1) 8,191
Hidden Valley Grand Rapids, MI 176 Units 10,900 2,271 8,000(1) 8,495
Pines Little Rock, AR 257 Units 4,650 1,281 3,063 2,441
Sherwood Glen Urbandale, IA 180 Units 6,250 1,244 4,626(1) 4,161
Summerwind Reseda, CA 172 Units 9,000 3,082 5,568(1) 6,684
Windtree Reseda, CA 159 Units 8,350 2,911 5,063(1) 6,170
Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437(1) 3,091

SHOPPING CENTER
Harbor Plaza Aurora, CO 45,863 Sq.Ft. 4,132 1,868 1,732 2,240
Katella Plaza Orange, CA 62,290 Sq.Ft. 1,814 283 1,188 194
Preston Square Dallas, TX 35,508 Sq.Ft. 5,820 2,761 2,576 2,036

OFFICE BUILDINGS
Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 6,082 7,766 17,394
Land
Duchesne Duchesne, UT 420 Acres 43 42 -- 16
Frisco Bridges Collin County, 15.00 Acres 2,675 706 2,000 297
TX
Frisco Bridges Collin County, 19.74 Acres 2,971 -- --(2) --
TX
Frisco Bridges Collin County, 24.3 Acres 4,194 (435) 4,000 260
TX
Frisco Bridges Collin County, 127.4 Acres 27,500 7,411 18,570 6,954
TX
Katy Harris County, 0.02 Acres 2 2 -- 1
TX
Keller Tarrant County, 749.1 Acres 10,000 3,892 4,500 3,373
TX
Mason/Goodrich Houston, TX 1.1 Acres 129 -- 116 70
Mason/Goodrich Houston, TX 12.8 Acres 2,536 -- 1,803 1,783
Mason/Goodrich Houston, TX 6.8 Acres 1,198 114 991 807
Mason/Goodrich Houston, TX 20.5 Acres 3,560 497 1,308 957
Mastenbrook Collin County, 157.9 Acres 4,445 1,890 2,275 747
TX
McKinney Corners II Collin County, 14.6 Acres 500 (599) 1,050 (40)
TX
McKinney Corners I,
II, III, IV, V Collin County, 82.0 Acres 9,150 613 8,123 1,638
TX
Monterrey Riverside, CA 20.67 Acres 4,300 189 4,000 2,545
Nashville Nashville, TN 2.6 Acres 405 -- 345 225

146

UNITS/ SALES NET CASH GAIN (LOSS)
PROPERTY LOCATION SQ.FT./ACRES PRICE RECEIVED DEBT DISCHARGED ON SALE
-------- -------- ------------ ------- -------- --------------- -----------

Nashville Nashville, TN 1.31 Acres 250 43 251 152
Nashville Nashville, TN 1.78 Acres 306 21 250 182
Nashville Nashville, TN 3.0 Acres 523 19 450 310
Pantex Collin County, 182.5 Acres 8,160 2,373 4,546(1) 959
TX
Parkfield Denver, CO 2.6 Acres 615 (1) 584 512
Parkfield Denver, CO 326.8 Acres 13,164 7,969 3,279 3,758
Pioneer Crossing Austin, TX 377.15 Acres 5,700 4,983 -- (768)
Plano Parkway Plano, TX 4.79 Acres 543 87 400 (174)
Rasor Plano, TX 43.01 Acres 1,850 -- 1,604 58
Rasor Plano, TX 5.4 Acres 915 -- 915 705
Rasor Plano, TX 41.1 Acres 3,779 3,587 -- 1,902
Rowlett Creek Collin County, 80.4 Acres 2,262 919 1,173 462
TX
Salmon River Salmon River, ID 3.0 Acres 45 44 -- 38
Valley Ranch Irving, TX 22.4 Acres 1,455 -- 1,375 (585)
Vann Cattle Collin County, 126.6 Acres 3,564 1,872 1,471 1,257
TX
Vista Business Travis County, 5.4 Acres 620 14 577 173
TX
Vista Business Travis County, 36.43 Acres 3,015 1,378 1,368 (51)
TX
Wakefield Collin County, 70.3 Acres 1,981 1,239 612 478
TX

----------

(1) Debt assumed by purchaser.

(2) Exchanged for 3.25 acres of Clark land.

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

ACRES/ROOMS . DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQ. FT. DEBT INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ----------- --------------- ---------- ------------ ----------- -----------
(dollars in thousands)

APARTMENTS
Bent Tree Addison, TX 292 Units $ 8,900 $ 6,685 $ 593/(1)/ 9.25%/(2)/ 11/03
Chateau Bayou Ocean Springs, 122 Units 1,007 -- 988 8.36 05/10
MS
Confederate Point Jacksonville, 206 Units 7,440 5,879 1,039 8.12 05/07
FL
Rockborough Denver, CO 345 Units 2,222 -- 1,942 8.37 11/10
Waters Edge Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07
Whispering Pines Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07
OFFICE BUILDINGS
Centura Tower Farmers 410,910 15,000 -- 14,612 16.90 07/02
Branch, TX Sq.Ft.
LAND
Centura, Clark
and Woolley Farmers 10.08 Acres 7,150 -- 6,960 14.00 03/03
Branch, TX
Frisco Bridges Collin County, 127.41 Acres 18,000 11,900 6,190 13.00 03/01/(4)/
TX
Frisco Bridges Collin County, 62.84 Acres 7,800 4,985 2,432 14.00 03/02
TX
Katy Harris County, 130.6 Acres 4,250 4,042 (9) 13.00 05/01
TX
Mason/Goodrich Houston, TX 235.00 Acres 2,250 -- 1,924 14.00 01/02
Nashville Nashville, TN 144.82 Acres 10,000 2,034 7,039 15.50 07/00/(5)/
Pioneer Crossing Austin, TX 599.78 Acres 12,500 12,021 (446) 14.50 10/01
Keller Fort Worth, TX 30.13 Acres 8,000 /(3)/ -- 7,750 14.00 10/01
Lacy Longhorn Farmers 17.12 Acres -- /(3)/ -- -- -- --
Branch, TX
McKinney Corners McKinney, TX 10.98 Acres -- /(3)/ -- -- -- --
Thompson Farmers 3.99 Acres -- /(3)/ -- -- -- --
Branch, TX
Tomlin Farmers 9.00 Acres -- /(3)/ -- -- -- --
Branch, TX
Tree Farm Dallas, TX 10.36 Acres -- /(3)/ -- -- -- --

----------

(1) Net of release and prepayment fees.

(2) Variable interest rate.

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

(4) Property sold in July 2000.

(5) Debt maturity date extended to July 2001.

147

PROPERTIES HELD FOR SALE. Set forth below are the properties held for sale,
consisting of improved and unimproved land:

PROPERTY LOCATION SQUARE FOOTAGE/ACRES
-------- -------- --------------------

Bonneau Dallas County, TX 8.4
Centura Holdings. Farmers Branch, TX 6.4
Chase Oaks. Plano, TX 29.0
Clark Farmers Branch, TX 3.3
Croslin Dallas County, TX .8
Dalho Farmers Branch, TX 3.4
Desert Wells. Palm Desert, CA 420.0
Eldorado Parkway. Collin County, TX 8.5
Frisco Bridges. Collin County, TX 46.8
FRWM Cummings Farmers Branch, TX 6.5
Hollywood Casino. Farmers Branch, TX 51.7
HSM Farmers Branch, TX 6.2
Jeffries Ranch. Oceanside, CA 82.4
JHL Connell Carrollton, TX 7.6
Katrina Palm Desert, CA 333.6
Katy Road Harris County, TX 130.6
Keller. Tarrant County, TX 30.9
Kelly Collin County, TX .8
Lacy Longhorn Farmers Branch, TX 17.1
Las Colinas I Las Colinas, TX 46.1
Leone Irving, TX 8.2
Marine Creek. Fort Worth, TX 54.2
Mason/Goodrich. Houston, TX 193.7
Mastenbrook Collin County, TX 157.9
McKinney Corners II Collin County, TX 20.6
Mendoza Dallas County, TX .4
Messick Palm Desert, CA 72.0
Monterrey Riverside, CA 65.0
Nashville Nashville, TN 138.7
Pioneer Crossing. Austin, TX 1,070.9
Plano Parkway Plano, TX 23.3
Rasor Plano, TX 35.5
Santa Clarita Santa Clarita, CA 19.5
Scoggins. Tarrant County, TX 232.8
Scout Tarrant County, TX 472.5
Sladek. Travis County, TX 63.3
Stagliano Farmers Branch, TX 3.2
Thompson. Farmers Branch, TX 4.0
Thompson II Dallas County, TX 3.5
Tomlin. Farmers Branch, TX 9.2
Tree Farm--LBJ. Dallas County, TX 10.4
Valley Ranch. Irving, TX 245.4
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
Varner Road Riverside, CA 127.8
Vineyards Tarrant County, TX 15.8
Vineyards II. Tarrant County, TX 18.6
Vista Ridge Lewisville, TX 137.0
Walker. Dallas County, TX 132.6
Willow Springs. Riverside, CA 1,485.0
Woolley Farmers Branch, TX .4
Yorktown. Harris County, TX 120.4
Other (5 properties). Various 84.0

148

MORTGAGE LOANS

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

TYPES OF MORTGAGE ACTIVITY. In addition to originating its own mortgage
loans, ARL had previously acquired existing mortgage loans either directly from
builders, developers or property owners, or through mortgage banking firms,
commercial banks or other qualified brokers. BCM, in its capacity as a mortgage
servicer, services ARL's mortgage notes receivable.

TYPES OF PROPERTIES SUBJECT TO MORTGAGES. The types of properties
securing mortgage notes receivable at December 31, 2000, consisted of
apartments, an office building, unimproved land and partnership interests. The
type of properties subject to mortgages in which ARL invests may be altered
without a vote of stockholders.

As of December 31, 2000, the obligors on $11.2 million or 68% of the
mortgage notes receivable portfolio were affiliates of ARL. Also at that date,
$3.1 million or 19% 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, 2000), by geographic region,
of the commercial properties that serve as collateral for ARL's mortgage notes
receivable. Excluded are $10.2 million of mortgage notes secured by unimproved
land and other security. See Schedule IV to the ARL Consolidated Financial
Statements for additional details of ARL's mortgage notes receivable portfolio.

REGION COMMERCIAL PROPERTIES
------ ---------------------

Southwest 100%
===

A summary of the activity in the mortgage notes
receivable portfolio during 2000 is as follows:

Mortgage notes receivable at January 1, 2000 19
Loans funded 6
Loans collected in full. (13)
Loans sold (1)
---
Mortgage notes receivable at December 31, 2000 11
===

149

During 2000, $4.4 million in interest and $39.9 million in principal
was 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 ARL'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 ARL's mortgage
lien over all other obligations, except liens arising from unpaid property taxes
and other exceptions normally allowed by first mortgage lenders.

The following discussion briefly describes first mortgage loans funded
in 2000, as well as events that affected previously funded first mortgage loans
during 2000.

During 1998, a $942,000 loan was funded to Ellis Development Company,
Inc. The loan was secured by a 4.5 acre parcel of land in Abilene, Texas, bore
interest at 14.0% per annum and had an extended maturity date of August 2000.
All principal and interest were due at maturity. In March 2000, the loan was
collected in full, including accrued but unpaid interest.

In June and July 1998, a $4.2 million loan was funded to Cuchara
Partners, Ltd. and Ski Rio Partners, Ltd., affiliates of JNC Enterprises, Inc.
("JNC"). The loan was secured by (1) a first lien on approximately 450 acres of
land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski Resort;
(2) assignment of a $2.0 million promissory note secured by approximately 2,623
acres of land in Taos County, New Mexico, known as Ski Rio Resort; and (3) a
pledge of all related partnership interests. The loan bore interest at 16.0% per
annum and had an extended maturity date of March 2000. All principal and
interest were due at maturity. In the fourth quarter of 1998, $109,000 was
received on the sale of 11 parcels of the collateral property in Taos, New
Mexico. In August and September 1999, paydowns totaling $2.6 million were
received. In April 2000, the remainder of the loan, with a then principal
balance of $1.6 million was collected in full, including accrued but unpaid
interest.

In June 1998, a $365,000 loan was funded to RB Land & Cattle, L.L.C.
The loan was secured by 7,200 acres of unimproved land near Crowell, Texas, and
the personal guarantee of the owner and manager of the borrower. The loan
matured in December 1998. All principal and interest were due at maturity. In
January 2000, the loan was collected in full, including accrued but unpaid
interest.

In July 2000, ARL sold a 749.1 acre tract of its Keller land parcel for
$10.0 million, receiving $8.7 million in cash and providing purchase money
financing of the remaining $1.3 million of the sales price. The loan bears
interest at 12.0% per annum. A payment of $500,000 principal and interest was
collected in September 2000 and all remaining principal and interest was due
July 31, 2001. The loan is secured by 100% of the shares of DM Development, Inc.
and an assignment of land sales proceeds. The loan had a principal balance of
$817,000 at December 31, 2000. In March 2001, $850,000 in principal and interest
was collected.

150

In August 2000, ARL sold a 20.5 acre tract of its Mason Goodrich land
parcel for $3.6 million, receiving $2.1 million in cash and providing purchase
money financing of the remaining $1.5 million of the sales price. The loan bore
interest at 13.5% per annum, and matured in December 2000. All principal and
interest were due at maturity. In February 2001, the loan was collected in full,
including accrued but unpaid interest.

WRAPAROUND MORTGAGE LOANS. A wraparound mortgage loan, sometimes called
an all-inclusive loan, is a mortgage loan having an original principal amount
equal to the outstanding balance under a prior existing mortgage loan plus the
amount actually advanced under the wraparound mortgage loan. Wraparound mortgage
loans may provide for full, partial or no amortization of principal. ARL's
policy is to make wraparound mortgage loans in amounts and on properties on
which it would otherwise make a first mortgage loan.

The following discussion briefly describes wraparound mortgage loans
funded in 2000.

In June 2000, the 124,322 sq. ft. Marina Playa Office Building in Santa
Clara, California, was sold for $25.8 million, ARL received $7.0 million in cash
and provided financing of $18.8 million in the form of a wraparound mortgage
note. Subsequently, ARL sold the note receivable, net of the underlying debt,
for $6.2 million, retaining a $3.9 million participation. In August 2000, the
participation was collected in full, including accrued but unpaid interest.

JUNIOR MORTGAGE LOANS. Junior mortgage loans are loans secured by
mortgages that are subordinate to one or more prior liens either on the fee or a
leasehold interest in real estate. Recourse on the loans ordinarily includes the
real estate which secures the loan, other collateral and personal guarantees of
the borrower.

The following discussion briefly describes junior mortgage loans funded
in 2000, as well as events that affected previously funded junior mortgage loans
during 2000.

In August 1999, a $2.6 million loan was funded to JNC. The loan was
subsequently split into two pieces. The loans were secured by second liens on a
3.5 acre and a 1.2561 acre parcel of land in Dallas, Texas, the guarantee of the
borrower and the personal guarantees of its stockholders. The loans bore
interest at 16.0% per annum and matured in February 2000. All principal and
interest were due at maturity. In March and April 2000, the loans were collected
in full, including accrued but unpaid interest.

In October 1998, a $2.1 million loan was funded to Frisco Panther
Partners, Ltd., a JNC affiliate. The loan was secured by a second lien on 408.23
acres of land in Frisco, Texas, the guarantee of the borrower and the personal
guarantees of its partners. In January 1999, a paydown of $820,000 was received
on this loan. The loan bore interest at 16.0% per annum and had an extended
maturity date of March 2000. All principal and interest were due at maturity. In
April 2000, the loan with a then principal balance of $663,000 was collected in
full, including accrued but unpaid interest.

In December 1998, $3.3 million of a $5.0 million loan commitment was
funded to JNC. In January 1999, a $1.3 million paydown was received on the loan
and subsequently an additional $3.0 million was funded, increasing the loan
balance to $5.0 million. The loan was secured by a second lien on 1,791 acres of
land in Denton County, Texas and a second lien on 91

151

acres of land in Collin County, Texas. The loan bore interest at 16.0% per annum
and had an extended maturity date of March 2000. All principal and interest were
due at maturity. In April 2000, the loan was collected in full, including
accrued but unpaid interest.

OTHER. 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. ARL 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, ARL 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 ARL returned the deeds of trust. The
borrower executed a replacement promissory note for the remaining note balance
of $1.0 million, which is unsecured, non-interest bearing and matures in April
2003. In April 2000, ARL funded a $100,000 loan to the borrower. The loan is
secured by five second lien deeds of trust, is non-interest bearing and matured
in September 2001. Payment was not received at maturity, and ARL began accruing
default interest. In December 2001, the $100,000 was collected in full,
including accrued but unpaid interest.

In December 1999, a note with a principal balance of $1.2 million,
secured by a pledge of a partnership interest in a partnership which owns real
estate in Addison, Texas, matured. 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. At January 2002,
extension terms were being negotiated.

During 1998 and 1999, $2.1 million of a $2.2 million loan commitment
was funded to Varner Road Partners, L.L.C. The loan was secured by a 129.77 acre
parcel of unimproved land in Riverside County, California and a pledge of the
membership interests of the borrower. The loan matured in November 1999.
Principal and accrued interest were not paid at maturity and a deed to the
property was accepted in lieu of foreclosure. No loss was incurred, as the fair
market value of the property, less estimated costs of sale, exceeded the
carrying value of the note.

In August 1998, a $635,000 loan was funded to La Quinta Partners, LLC.
The loan was secured by interest bearing accounts prior to their being used as
escrow deposits toward the purchase of 956 acres of land in La Quinta,
California, and the personal guarantee of the manager of the borrower. The loan
had an extended maturity date of November 1999. All principal and interest were
due at maturity. In November and December 1998, $250,000 in principal paydowns
were received. In the second quarter of 1999, the loan was modified, increasing
the interest rate to 15.0% per annum and extending the maturity to November
1999. Accrued but unpaid interest was added to the principal balance, increasing
it by $42,000 to $402,000. In the fourth quarter of 1999, an additional $2,000
was funded increasing the loan balance to $404,000. In March 2000, $25,000 in
interest was collected and the loan's maturity

152

was extended to April 2000. The borrower did not repay the loan at maturity. In
March 2001, a settlement was reached, whereby ARL collected $410,000 in full
satisfaction of the note.

In 1997 and 1998, a $3.8 million loan was funded to Stratford & Graham
Developers, L.L.C. In 1999, an additional $305,000 was funded, increasing the
loan balance to $4.1 million. The loan was secured by 1,485 acres of unimproved
land in Riverside County, California, and matured in June 1999. The loan was not
paid at maturity. The deed to the collateral property was accepted in December
1999, in lieu of foreclosure. No loss was incurred, as the fair market value of
the collateral property, less estimated costs of sale, exceeded the carrying
value of the note.

RELATED PARTY. In February 1999, ARL funded a $5.0 million unsecured
line of credit to One Realco which owns approximately 14.7% of the outstanding
shares of ARL's Common Stock. All principal and interest are due at maturity in
February 2002, and the line of credit is guaranteed by BCM, ARL's advisor. In
March 2000, the line was modified and extended, increasing the loan commitment
to $11.0 million, and an additional $1.2 million was funded. In exchange for the
modification, the borrower paid all accrued interest and pledged collateral
consisting of a $10.0 million promissory note secured by the stock of World
Trade, which owns 80% of an entity which owns a hotel in Sofia, Bulgaria. In
July 2000, the line was again modified, increasing the loan commitment to $15.0
million. In September 2000, the line of credit with a then principal balance of
$14.6 million was paid in full, including accrued but unpaid interest.
Subsequently, ARL acquired 100% of the stock of World Trade for $18.0 million.
In March 2000, ARL funded $13.6 million on the unsecured line of credit to One
Realco. The line of credit bears interest at 12% per annum. All principal and
interest were due at maturity in February 2002. A two year extension of the
maturity date to February 2004 has been agreed upon and the line of credit is to
be secured by 600,000 shares of ARL common stock.

In 1998, ARL funded a loan commitment of $1.8 million to Warwick. The
loan was secured by a second lien on a shopping center in Rhode Island, by 100%
of the stock of the borrower and by the personal guarantee of the principal
stockholder of the borrower. The loan bears interest at 14.0% per annum and had
an extended maturity date of December 2000. All principal and interest were due
at maturity. In December 1999, the borrower sold the collateral property and
$810,000 of the net proceeds were paid to ARL, of which $386,000 was applied to
interest and the remaining $424,000 was applied to principal, reducing the
principal balance to $1.7 million. Escrowed monies of $377,000 were to be
received in 2000. However, through December 2000, only $50,000 had been
received. The loan is currently unsecured. At January 2002, the loan and
$472,000 of accrued interest remained unpaid and settlement terms were being
negotiated. Richard D. Morgan, a Warwick stockholder, served as a director of
ARL until October 2001.

Beginning in 1997 through January 1999, ARL funded a $1.6 million loan
commitment to Bordeaux. The loan is secured by (1) a 100% interest in Bordeaux,
which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock
of Bordeaux, which owns 6.5 acres of undeveloped land in Oklahoma City,
Oklahoma; and (3) the personal guarantees of the Bordeaux members. The loan
bears interest at 14.0% per annum. In November 1998, the loan was modified to
allow payments based on monthly cash flow of the collateral property and the
maturity date was extended to December 1999. In the second quarter of 1999, the
loan was again modified, increasing the loan commitment to $2.1 million and an
additional $33,000 was funded.

153

In the third quarter of 1999, an additional $213,000 was funded. The property
has had no cash flow, therefore, interest on the loan ceased being accrued in
the second quarter of 1999. In October 1999, a $724,000 paydown was received,
which was applied first to accrued interest due of $261,000 then to principal,
reducing the loan balance to $1.4 million. In June 2000, the note was further
modified, increasing the loan commitment to $1.5 million, extending the maturity
date to December 2000, and payments to net revenues of the shopping center. The
loan was not repaid at maturity. At January 2002, settlement terms were being
negotiated. Richard D. Morgan, a Bordeaux member, served as a director of ARL
until October 2001.

In April 1999, ARL funded a $2.0 million loan commitment to Lordstown,
L.P. The loan is secured by a second lien on land in Ohio and Florida, by 100%
of the general and limited partner interest in Partners Capital, Ltd., the
limited partner of Lordstown, L.P., and a profits interest in subsequent land
sales. The loan bears interest at 14.0% per annum and matured in March 2000. At
December 2001, the loan remained unpaid. At January 2002, settlement terms were
being negotiated. A corporation controlled by Richard D. Morgan, is the general
partner of Lordstown, L.P. Mr. Morgan served as a director of ARL until October
2001.

INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE PARTNERSHIPS

REAL ESTATE ENTITIES. ARL's investment in real estate entities includes
the equity securities of two publicly traded real estate companies, IOT and TCI,
and interests in real estate joint venture partnerships. BCM, ARL's advisor,
also serves as advisor to IOT and TCI.

Since acquiring its initial investments in IOT and TCI in 1989, ARL has
made additional investments in the equity securities of both entities through
private and open market purchases. The cost with respect to shares of IOT and
TCI at December 31, 2000 totaled $23.3 million. The aggregate carrying value
(cost plus or minus equity in income or losses and less distributions received)
of the equity securities of IOT and TCI was $38.5 million at December 31, 2000
and the aggregate market value was $29.6 million. The aggregate investee book
value of IOT and TCI based upon the December 31, 2000 financial statements of
each entity was $60.4 million. See "Certain Relationships and Related
Transactions of ARL, TCI and IOT - Related Party Transactions."

The board of directors has authorized the expenditure of up to an
aggregate of $50.0 million to acquire, in open market purchases, shares of IOT
and TCI, excluding private purchase transactions which are separately
authorized. As of December 31, 2000, ARL had expended an aggregate of $8.6
million to acquire shares of IOT and TCI in open market purchases, in accordance
with these authorizations. ARL expects to make additional investments in the
equity securities of IOT and TCI to the extent its liquidity permits. On October
3, 2000, ARL and IOT entered into a stock option agreement which provided IOT
and ARL with an option to purchase

154

1,858,900 shares of TCI common stock from a third party. On October 19, 2000,
IOT assigned all of its rights to purchase such shares to ARL. ARL exercised the
option on April 5, 2001. The total cost to purchase the TCI shares was $30.7
million. In October 2000, ARL paid $5.6 million of the option price. In April
2001, the remainder of the option price was paid and ARL acquired the TCI
shares.

The equity securities of IOT and TCI were purchased for the purpose of
investment based principally on the opinion of management that the securities of
each were and are currently undervalued. The determination to purchase
additional equity securities of IOT and TCI will be made on an entity-by-entity
basis and will depend on the market price of each entity's equity securities
relative to the value of its assets, the availability of sufficient funds and
the judgment of management regarding the relative attractiveness of alternative
investment opportunities. Substantially all of the equity securities of IOT and
TCI are pledged as collateral for borrowings.

Pertinent information regarding ARL's investment in the equity
securities of IOT and TCI at December 31, 2000, is summarized below (dollars in
thousands):

PERCENTAGE OF ARL'S CARRYING VALUE OF EQUIVALENT INVESTEE MARKET VALUE OF
OWNERSHIP AT INVESTMENT AT BOOK VALUE AT INVESTMENT AT
INVESTEE DECEMBER 31, 2000 DECEMBER 31, 2000 DECEMBER 31, 2000 DECEMBER 31, 2000
-------- ------------------- ----------------- ------------------- -----------------

IOT 27.1% $ 8,052 $10,839 $ 3,510
TCI 24.7 30,473 49,538 26,078

IOT and TCI each own a considerable amount of real estate, much of
which they have held for many years. Because of depreciation, these entities may
earn substantial amounts in periods in which they sell real estate and will
probably incur losses in periods in which they do not. ARL's reported income or
loss attributable to these entities will differ materially from its cash flow
attributable to them.

ARL does not have a controlling equity interest in either of IOT or TCI
and therefore it cannot, acting by itself, determine either the individual
investments or the overall investment policies of either of them. However, due
to ARL's equity investments in, and the existence of common officers with, each
of IOT and TCI and that IOT and TCI have the same advisor as ARL, ARL may be
considered to have the ability to exercise significant influence over the
operating and investing policies of IOT and TCI. ARL accounts for its investment
in IOT and TCI using the equity method. Under the equity method, ARL recognizes
its proportionate share of the income or loss from the operations of IOT and TCI
currently, rather than when realized through dividends or on sale. The carrying
value of ARL's investment in IOT and TCI, as set forth in the table above, is
the original cost of investment in each adjusted for ARL's proportionate share
of IOT's and TCI's income or loss and distributions received.

The following summary description of IOT and TCI is based upon
information publicly reported by each entity.

155

IOT. IOT is a Nevada corporation which was originally organized on
December 14, 1984, as a California business trust and commenced operations on
April 10, 1985. IOT's business is investing in real estate through direct equity
investments and partnerships. IOT holds equity investments in apartments and
commercial properties (office buildings) in the Pacific, Southeast and Southwest
regions of the continental United States with a concentration in the Southwest
region. At December 31, 2000, IOT owned 16 income producing properties located
in three states. These properties consisted of seven apartments comprising 777
units and seven office buildings with an aggregate of 459,549 sq. ft. In
addition, IOT owned two parcels of unimproved land, totaling 205 acres.

IOT reported a net income of $16.8 million in 2000 as compared to $1.3
million in 1999. IOT's net income in 2000 included $20.9 million of gains from
the sale of real estate, whereas its net income in 1999 included gains on sale
of real estate of $1.5 million. IOT's cash flow from property operations was
$6.6 million in 2000. At December 31, 2000, IOT had total assets of $96.5
million, which consisted of $86.3 million in real estate held for investment,
$8.1 million in investments in partnerships and other assets and $2.1 million in
cash and cash equivalents.

ARL received a total of $213,000 in dividends from IOT in 2000.

TCI. TCI is a Nevada corporation which was originally organized on
September 6, 1983, as a California business trust, and commenced operations on
January 31, 1984. On November 30, 1999, TCI acquired, through merger,
Continental Mortgage and Equity Trust ("CMET"), both of which, at the time, were
equity investees of ARL. Pursuant to the merger agreement, TCI acquired all of
the outstanding CMET shares of beneficial interest in a tax-free exchange of
shares, issuing 1.181 shares of its common stock for each outstanding CMET
share.

TCI has investment policies similar to those of IOT. TCI holds equity
investments in apartments, commercial properties (office buildings, industrial
warehouses and shopping centers) and hotels throughout the continental United
States with a concentration in the Southeast and Southwest regions. At December
31, 2000, TCI owned 119 income producing properties located in 18 states. These
properties consisted of 60 apartments comprising 10,759 units, 37 office
buildings with an aggregate of 4.5 million sq. ft., 12 industrial warehouses
with an aggregate of 2.1 million sq. ft., six shopping centers with an aggregate
of 622,661 sq. ft., a fitness club with 56,532 sq. ft. and four hotels with a
total of 209 rooms. In addition, TCI owned 23 parcels of unimproved land,
totaling 793 acres. TCI also holds mortgage notes receivable secured by real
estate located in the Southeast and Southwest regions of the continental United
States.

TCI reported net income of $29.8 million in 2000 and $30.2 million in
1999. TCI's net income in 2000 included gains from the sale of real estate of
$50.6 million, whereas its net income in 1999 included gains from the sale of
real estate of $40.5 million. TCI's cash flow from property operations was $56.6
million in 2000. At December 31, 2000, TCI had total assets of $731.9 million,
which consisted of $639.0 million in real estate held for investment, $1.8
million in real estate held for sale, $5.3 million in investments in real estate
entities, $8.2 million in notes and interest receivable, $55.2 million in
investments in marketable equity securities and other assets and $22.3 million
in cash and cash equivalents. At December 31, 2000, TCI owned 345,728 shares of
IOT's common stock, approximately 22.8% of the shares then outstanding.

156

In 2000, ARL received a total of $1.6 million in dividends from TCI.

ELM FORK, L.P. In September 1997, a limited partnership, of which ARL
was the 1% general partner and 21.5% limited partner, purchased a 422.4 acre
parcel of unimproved land in Denton County, Texas, for $16.0 million in cash.
ARL contributed $3.6 million in cash with the remaining $12.4 million being
contributed by the other limited partners. In September 1997, the partnership
obtained financing of $6.5 million secured by the land. The mortgage bears
interest at 10% per annum, requires quarterly payments of interest only and
matures in September 2001. The net financing proceeds were distributed to the
partners, ARL receiving $2.9 million of its initial capital contribution. The
partnership agreement also provides that the limited partners receive a 12%
preferred cumulative return before any sharing of partnership profits occurs.
One Realco, one of the limited partners in the partnership owns approximately
12.8% of the outstanding shares of ARL's Common Stock. In June 2000, ARL sold
its partnership interests for $2.0 million in cash, retaining an option to
repurchase its interests for $2.0 million plus an amount equal to 20% times the
number of days from the date of the agreement to the exercise date. On January
9, 2001, ARL exercised its repurchase option. ARL recognized neither gain nor
loss on the sale and subsequent repurchase. At December 31, 2000, 267.8 acres
remained unsold.

ART FLORIDA PORTFOLIO II, LTD. In June 2000, Vestavia Lakes Apartments
partnership, in Orlando, Florida, in which ART Florida Portfolio II, Ltd. owned
an interest, was sold. A loss was incurred on the sale, of Investments in Real
Estate Companies and Real Estate Partnerships which ARL's share was $967,000,
which is included in equity income (loss) of investees in the accompanying
Consolidated Statement of Operations.

EQK REALTY INVESTORS I. In October 2000, ARL acquired a 100% interest
in EQK Realty Investors, I ("EQK"), a real estate investment trust for $1.1
million in cash and $1.21 million in Series A preferred stock (121,332 shares).
At the date of acquisition, EQK's assets consisted of $2.0 million in cash.

157

SELECTED FINANCIAL DATA OF ARL

The following is a summary of financial data incorporated by reference
in this joint proxy statement and prospectus. You should read the following data
in conjunction with the more detailed information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the ARL consolidated financial statements and related notes appearing elsewhere
in this joint proxy statement and prospectus.

Nine Months Ended
September 30, For the Years Ended December 31,
--------------------------- ------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ------------ ----------- ----------- ------------ ----------- -----------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA

Revenue ................... $ 126,182 $ 133,313 $ 172,750 $ 193,980 $ 87,086 $ 57,031 $ 41,522
Expense ................... 186,210 213,373 272,045 324,789 165,111 90,252 52,601
----------- ------------ ----------- ----------- ------------ ----------- -----------

(Loss) from operations .... (60,028) (80,060) (99,295) (130,809) (78,025) (33,221) (11,079)
Equity in income of
investees ................. 9,157 2,873 5,246 11,847 37,966 10,497 1,485
Gain on sale of real
estate .................... 62,860 78,828 96,728 129,260 17,254 20,296 3,659
----------- ------------ ----------- ----------- ------------ ----------- -----------

Income (loss) before
extra-ordinary gain ....... 11,989 1,641 2,679 10,298 (22,805) (2,428) (5,935)
Extraordinary gain ........ -- -- -- -- -- -- 381
----------- ------------ ----------- ----------- ------------ ----------- -----------
Net income (loss) ......... 11,989 1,641 2,679 10,298 (22,805) (2,428) (5,554)
Preferred dividend
requirement ............... (1,868) (1,661) (2,327) (2,281) (1,177) (206) (113)
----------- ------------ ----------- ----------- ------------ ----------- -----------
Income (loss)
applicable to Common
shares .................... $ 10,121 $ (20) $ 352 $ 8,017 $ (23,982) $ (2,634) $ (5,667)
=========== ============ =========== =========== ============ =========== ===========

PER SHARE DATA

(Loss) before
extraordinary gain ........ $ 1.00 $ -- $ .03 $ .75 $ (2.24) $ (.22) $ (.46)
Extraordinary gain ........ -- -- -- -- -- -- .03
----------- ------------ ----------- ----------- ------------ ----------- -----------

Net income (loss)
applicable to Common
shares .................... $ 1.00 $ -- $ .03 $ .75 $ (2.24) $ (.22) $ (.43)
=========== ============ =========== =========== ============ =========== ===========
Dividends per Common
share ..................... $ -- $ -- $ -- $ .05 $ .20 $ .20 $ .15
Weighted average shares
outstanding ............... 10,141,840 10,496,364 10,399,890 10,759,416 10,695,388 11,710,013 12,765,082

December 31,
September 30, ------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------------- -------- -------- -------- -------- --------
(unaudited) (dollars in thousands, except per share)

BALANCE SHEET DATA

Real estate, net ........................... $604,589 $653,744 $771,630 $734,907 $302,453 $119,035
Notes and interest
receivable, net ............................ 29,222 13,831 38,604 52,053 25,526 48,485
Total assets ............................... 780,378 787,015 919,546 918,605 433,799 239,783
Notes and interest
payable .................................... 582,139 616,331 706,196 768,272 261,986 127,863
Margin borrowings .......................... 28,703 13,485 33,264 35,773 53,376 40,044
Stockholders' equity ....................... 83,420 73,402 46,266 38,272 63,453 47,786
Book value per share ....................... $ 8.23 $ 7.06 $ 4.30 $ 3.58 $ 5.42 $ 3.74

158

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ARL

INTRODUCTION

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

159

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

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

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

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

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

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

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

In 2001, ARL sold the following properties:

UNITS/ SALES NET CASH GAIN (LOSS)
PROPERTY LOCATION SQ.FT./ACRES PRICE RECEIVED DEBT DISCHARGED ON SALE
-------- -------- ------------ ------- -------- --------------- -------------

FIRST QUARTER
APARTMENTS
Carriage Park Tampa, FL 46 units $ 2,005 $ 757 $ 1,069 $ 663
Rockborough Denver, CO 345 units 16,675 3,654 12,215/(1)/ 13,471

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

LAND
Frisco Bridges Collin County, 27.8 Acres $ 4,500 $4,130 $ -- $ 25
TX
Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 --/(2)/

160

UNITS/ SALES NET CASH GAIN (LOSS)
PROPERTY LOCATION SQ.FT./ACRES PRICE RECEIVED DEBT DISCHARGED ON SALE
-------- -------- ------------ ------- -------- --------------- -------------

Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539
Plano Parkway Plano, TX 11.3 Acres 1,445 312 950 --
Scoggins Tarrant County, 232.8 Acres 2,913 892 1,800 181
TX
Scout Tarrant County, 408.0 Acres 5,087 1,586 3,200 2,969
TX
Tree Farm Dallas County, 10.4 Acres 2,888 (87) 2,644 75
TX

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

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

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

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

FOURTH QUARTER
APARTMENTS
Nora Pines Indianapolis, IN 254 Units 9,850 2,548 5,574 6,631

LAND
Katrina Palm Desert, CA 1.4 Acres 284 (9) 253 117

----------

(1) Debt assumed by purchaser.

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

161

In 2001, ARL purchased the following properties:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS/SQ. FT./ACRES PRICE PAID INCURRED RATE RATE
-------- -------- ------------------- -------- -------- ----------- -------- --------

SECOND QUARTER
APARTMENTS
Glenwood Addison, TX 168 Units $ 6,246 $/(1)/ $2,549/(2)/ 9.25% 10/04

----------

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

(2) Assumed debt of seller. Exchanged with a related party.

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

ACRES/ROOMS DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQ. FT. DEBT INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ----------- ------------- ---------- -------- ---------- --------

FIRST QUARTER
LAND
Mason/Goodrich Houston, TX 235.0 Acres $ 6,750 $ -- $ 6,302 14.00% 01/02
Pioneer Crossing Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05
Pioneer Crossing Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02

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

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

SHOPPING CENTER
Cullman Cullman, AL 92,486 --/(3)/ 129 -- -- --
Sq.Ft.

THIRD QUARTER
APARTMENTS
Woodlake Carrollton, TX 256 Units --/(5)/ -- -- -- --
Sun Hollow El Paso, TX 216 Units --/(5)/ -- -- -- --
Waters Edge III Gulfport, MS 238 Units --/(5)/ -- -- -- --

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

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

----------

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

(2) Variable interest rate.

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

(4) Also secured by 1,846,000 shares of TCI common stock.

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

162

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

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

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

COMMITMENTS AND CONTINGENCIES

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

In April 2001, ARL reached an agreement with the Class A unitholders of
ART Palm, L.P., to acquire 7,236,250 of their Class A units in December 2001 for
$5.8 million. In December 2001, the units were acquired for $2.5 million in cash
and a note payable for the remaining $3.3 million. The note bears 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.

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RECENT ACCOUNTING PRONOUNCEMENTS

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

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

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER
30, 2000. For the nine months ended September 30, 2001, ARL reported net income
of $12.0 million, compared to net income of $1.6 million for the nine months
ended September 30, 2000. The primary factors contributing to ARL's net income
are discussed in the following paragraphs.

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

Property operations expense decreased to $22.2 million in the three
months ended September 30, 2001, from $23.8 million in 2000, and increased to
$71.2 million in the nine months ended September 30, 2001, from $70.5 million in
2000. Property operations expense for commercial properties increased to $15.0
million in the nine months ended September 30, 2001, from $14.8 million in 2000.
For hotels, property operations expense increased to $21.6 million in the nine
months ended September 30, 2001, from $17.8 million in 2000. For land, property
operations expense decreased to $6.8 million in the nine months ended September
30, 2001 from $7.1 million in 2000. For apartments, property operations expense
decreased to $27.8 million in the nine months ended September 30, 2001, from
$30.7 million in 2000. The increase in hotel property operations expense was
primarily due to the opening of Hotel Sofia in 2001. The

164

decrease in land operating expenses was primarily due to the 13 land parcels
sold in 2000. The decrease in property operations expense for apartments was due
to the sale of nine apartments in 2000 and 13 apartments in 2001. Property
operations expense is expected to decrease significantly in the remainder of
2001 as a result of the properties sold in 2000 and 2001.

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

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

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

Other income decreased to a loss of $19,000 and income of $58,000 in
the three and nine months ended September 30, 2001, from $606,000 and $419,000
in 2000. ARL recognized an unrealized decrease in market value of its trading
portfolio securities of $43,000 in the nine months ended September 30, 2001
compared to $267,000 in 2000. See Note 6. "Marketable Equity Securities -
Trading Portfolio."

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

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

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

Advisory fees of $1.4 million for the three months ended September 30,
2001 approximated the $1.5 million for the same period in 2000 and increased to
$5.0 million for the

165

nine months ended September 30, 2001 from $4.1 million in 2000. The increase is
due to the addition of the NRLP assets to the advisory fees basis, after August
2000.

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

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

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

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

2000 COMPARED TO 1999. ARL reported net income of $2.7 million in 2000
compared to $10.3 million in 1999. ARL's net income in 2000 included gains on
the sale of real estate of $96.7 million compared to gains on the sale of real
estate of $129.3 million in 1999. The primary factors contributing to ARL's net
income are discussed in the following paragraphs.

Rents decreased to $138.2 million in 2000 from $157.6 million in 1999.
Rent from commercial properties increased to $31.5 million in 2000 from $30.2
million in 1999, rent from hotels increased to $33.1 million in 2000 from $31.6
million in 1999 and rent from apartments decreased to $69.8 million in 2000 from
$93.9 million in 1999. The increase in rent from commercial properties was
primarily attributable to completion of the Centura and Hickory Centre office
buildings in 2000. The increase in rent from hotels is attributable to increased
occupancy rates. Apartment rents decreased in 2000 as a result of 15 apartments
being sold in 1999 and nine apartments in 2000.

Property operations expense decreased to $94.1 million in 2000 from
$106.6 million in 1999. Property operations expense for commercial properties
increased to $19.8 million in 2000 from $16.5 million in 1999, for hotels such
expense of $24.1 million in 2000 approximated the $24.2 million expense in 1999,
for land the expense of $9.7 million in 2000 approximated the $9.0 million
expense in 1999 and apartments decreased to $40.4 million in 2000 from $56.4
million in 1999. The increase in commercial property operations expense was
primarily due to the completion of the Centura and Hickory Centre office
buildings in 2000. The decrease in apartment property operations expense was
primarily due to 15 apartments being sold in 1999 and nine apartment sales in
2000.

Pizza parlor sales and cost of sales were $32.6 million and $26.8
million in 2000 and $30.8 million and $26.3 million, in 1999. Pizza parlor
operations experienced higher profit

166

margins in 2000 due to lower pizza ingredient costs, (primarily cheese), a price
increase in October 2000, and the closing of underperforming locations.

Interest income decreased to $3.0 million in 2000 from $6.4 million in
1999. The decrease was attributable to the collection of $39.9 million in notes
in 2000, while originating and funding loans of $14.7 million.

Equity in income of investees decreased to $5.2 million in 2000 from
$11.8 million in 1999. The decrease in equity income was primarily due to
reduced ownership by ARL in TCI in 2000, due to sales of ARL-owned securities by
margin debt holders. Equity investees reported gains on the sale of real estate
in 2000 totaling $71.4 million of which ARL's equity share was $18.6 million.
These gains were offset by operating losses totaling $23.8 million, of which
ARL's equity share was $5.3 million. Also, sales of stock of equity investees by
margin debt holders of ARL resulted in losses of $7.9 million. See Note 6 to the
ARL Consolidated Financial Statements -- "Investments In Equity Investees."
Other income was a loss of $926,000 in 2000 approximating the loss of $846,000
in 1999. Interest expense decreased to $76.7 million in 2000 from $91.7 million
in 1999. This decrease is due to 36 land and nine apartment sales in 2000.
Interest expense is expected to decrease in 2001 due to land and apartment sales
in 2000 and anticipated property sales in 2001.

Advisory fees decreased to $5.0 million in 2000 from $5.5 million in
1999. The decrease was attributable to the decrease in ARL's gross assets, the
basis for such fee. Advisory fees are expected to decrease in 2001, as ARL's
gross asset base is expected to continue to decrease through property sales.

Incentive fees in 2000 were $1.6 million. This fee represents 10% of
the excess of net capital gains over net capital losses from sales of operating
properties. The amount of this fee, if any, in 2001 will be dependent on the
number of operating properties sold and net capital gains realized.
General and administrative expenses increased to $18.0 million in 2000
from $17.1 million in 1999. The increase was primarily attributable to an
increase of $900,000 in taxes. General and administrative expenses in 2001 are
expected to approximate 2000.

Depreciation and amortization decreased to $16.9 million in 2000 from
$17.4 million in 1999. The reduction is due to the sale of nine apartments in
2000. Depreciation and amortization expense should continue to decrease in 2001
as a result of continued property sales.

In the fourth quarter of 2000, a provision for loss of $2.2 million was
recognized. Such loss relates to the reduction of the carrying value of an 11.3
acre tract of land in Plano, Texas, sold in the first quarter of 2001, to its
net realizable value and a litigation reserve related to a breach of contract
dispute. In the third and fourth quarter of 1999, provisions for loss of $2.1
million and $1.0 million were recognized, respectively. Such loss relates to the
relinquishment by ARL of its general and Class B limited partner interests in a
controlled partnership that owned two apartments in Indianapolis, Indiana.

In December 1998, upon the election of NMC, a wholly-owned subsidiary
of ARL, as general partner of NRLP, NMC assumed liability for certain legal
settlement payments. Such

167

obligation is included in litigation expense in the accompanying Consolidated
Statement of Operations. See Note 2 to the ARL Consolidated Financial Statements
-- "NRLP Management Corp."

Minority interest decreased to $30.7 million in 2000 from $56.7 million
in 1999. Minority interest is the earnings attributable to limited partners,
other than ARL, of certain controlled limited partnerships. Minority interest in
2000 and 1999 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. and Hawthorne Lakes Associations, L.P.,
ART Florida Portfolio III and ART Palm, L.L.C. In 2000, minority interest
includes, in addition to the preferred returns discussed above, $29.8 million of
earnings attributable to the limited partners in NRLP prior to the merger,
compared to $55.7 million in 1999. Minority interest in 2001 will decline due to
the 2000 merger of NRLP into ARL. See Note 2 to the ARL Consolidated Financial
Statements -- "Nrlp Management Corp."

Gains on sale of real estate decreased to $96.7 million in 2000 from
$129.3 million in 1999. In 2000, gains of $45.9 million were recognized on the
sale of nine apartments: Summerwind, Windtree, The Pines, Whispering Pines, Four
Seasons, Sherwood Glen, Fair Oaks, Hidden Valley and Candlelight Square; $21.9
million on the sale of commercial properties: Katella Plaza, Marina Playa,
Harbor Plaza and Preston Center; and $30.6 million on the sale of land: $16,000
on the sale of 420 acres of Duchesne land, $7.5 million on the sale of three
tracts totaling 166.7 acres of Frisco Bridges land, $3.4 million on the sale of
749.1 acres of Keller land, $1,000 on the sale of 0.02 acres of Katy land, $3.6
million on the sale of four tracts totaling 41.2 acres of Mason/Goodrich land,
$747,000 on the sale of 157.9 acres of Mastenbrook land, $1.6 million on the
sale of 82.0 acres of McKinney Corners I, II, III, IV and V land, $2.5 million
on the sale of 20.67 acres of Monterey land, $868,000 on the sale of 4 tracts
totaling 8.69 acres of Nashville land, $959,000 on the sale of 182.5 acres of
Pantex land, $4.3 million on the sale of two tracts totaling 329.4 acres of
Parkfield land, $2.7 million on the sale of three tracts totaling 89.51 acres of
Rasor land, $462,000 on the sale of 80.4 acres of Rowlett Creek land, $38,000 on
the sale of 3.0 acres of Salmon River land, $1.3 million on the sale of 126.6
acres of Vann Cattle land, $173,000 on the sale of 5.4 acres of Vista Business
Park land, and $478,000 on the sale of 70.3 acres of Wakefield land. In 2000,
losses of $1.6 million were recognized: $40,000 on the sale of 14.6 acres of
McKinney Corners II land; $768,000 on the sale of 377.15 acres of Pioneer
Crossing land; $174,000 on the sale of 4.79 acres of Plano Parkway land;
$585,000 on the sale of 22.4 acres of Valley Ranch land; and $51,000 on the sale
of 36.43 acres of Vista Business Park land.

In 1999, gains of $100.3 million were recognized on the sale of 15
apartments: Olde Town, Sante Fe, Mesa Ridge, Horizon East, Lantern Ridge,
Barcelona, Country Place, Lake Nora, Fox Club, Oak Hollow, Windridge,
Tanglewood, Edgewater Garden, Bavarian Woods, and Manchester Commons, $9.2
million on the sale of the Continental Hotel and Casino; $5.0 million on the
sale of seven tracts totaling 46.9 acres of Plano Parkway land; $432,000 on the
sale of 9.9 acres of Mason/Goodrich land; $4.3 million on the sale of four
tracts totaling 302.4 acres of McKinney Corners II , McKinney Corners IV and
Dowdy land; $979,000 on the sale of 13.0 acres of Rasor land; $2.0 million on
the sale of three tracts totaling 23.0 acres of Vista Ridge land; $4.6 million
on the sale of four tracts totaling 103.6 acres of Frisco Bridges land; $23,000
on the sale of .13 acres of JHL Connell land; $128,000 on the sale of 1.4 acres
of Valley

168

Ranch land; $180,000 on the sale of Sun City lots; $186,000 on the sale of 121.2
acres of Katrina land; $2.0 million on the sale of five tracts totaling 187.7
acres of Keller, Scout and Scoggins land; and $561,000 on the sale of 205.4
acres of Yorktown land. In 1999, losses of $545,000 were recognized, $505,000 on
the sale of Stone Meadows land and $40,000 on the sale of 6.2 acres of Plano
Parkway land.

1999 COMPARED TO 1998. ARL reported net income of $10.3 million in 1999
compared to a net loss of $22.8 million in 1998. ARL's net income in 1999
included gains on the sale of real estate of $129.3 million compared to gains on
the sale of real estate of $17.3 million in 1998. The primary factors
contributing to ARL's net income are discussed in the following paragraphs.

Pizza parlor sales and cost of sales were $30.8 million and $26.3
million in 1999 and $28.9 million and $24.8 million, in 1998. Pizza parlor
operations experienced higher profit margins in 1999 due to lower pizza
ingredient costs, primarily cheese. Cheese prices reached historic highs in
1998.

Rents increased to $157.6 million in 1999 from $63.5 million in 1998.
Rent from commercial properties increased to $30.2 million in 1999 from $16.5
million in 1998, rent from hotels of $31.6 million in 1999 approximated the
$32.2 million in 1998 and rent from apartments increased to $93.9 million in
1999 from $14.2 million in 1998. The increase in rent from commercial properties
was primarily attributable to the consolidation of NRLP's operations subsequent
to December 31, 1998 and the acquisition of the Encino Office Building in May
1999. The increase in apartment rent was due to the 36 apartments acquired in
1998 and the consolidation of NRLP's operations subsequent to December 31, 1998.

Property operations expense increased to $106.6 million in 1999 from
$49.2 million in 1998. Property operations expense for commercial properties
increased to $16.5 million in 1999 from $9.7 million in 1998, for hotels such
expense decreased to $24.2 million in 1999 from $24.4 million in 1998, for land
it increased to $9.0 million in 1999 from $6.3 million in 1998 and for
apartments it increased to $56.4 million in 1999 from $8.8 million in 1998. The
increase in commercial property operations expense was primarily due to the
consolidation of NRLP's operations subsequent to December 31, 1998 and the
acquisition of the Encino Office Building in 1999. The increase in land expense
was primarily due to the acquisitions of 16 land parcels in 1998 and eight land
parcels in 1999. The increase in apartment property operations expense was
primarily due to the acquisition of 36 apartments in 1998 and the consolidation
of NRLP's operations subsequent to December 31, 1998.

Interest income increased to $6.4 million in 1999 from $188,000 in
1998. The increase was attributable to the consolidation of NRLP's operations
subsequent to December 31, 1998. Loans of $41.2 million in 1999 and $47.7
million in 1998 were originated and funded.

Other income improved to a loss of $846,000 in 1999 from a loss of $5.5
million in 1998. This improvement was due to recognizing an unrealized loss on
marketable equity securities of $1.9 million in 1999, compared to an unrealized
loss of $6.1 million recognized in 1998. Also contributing to the improvement
was a decrease in net losses on sales of marketable equity securities of
$67,000.

169

Equity in income of investees decreased to $11.8 million in 1999 from
$38.0 million in 1998. A decrease in equity income of $31.3 million was
attributable to the consolidation of the operations of NRLP subsequent to
December 31, 1998. Equity investees reported gains on sale of real estate in
1999 totaling $41.8 million of which ARL's equity share of such gains was $17.4
million. This decrease was offset by decreased operating losses totaling $7.7
million in IOT, of which ARL's equity share of equity investees' net operating
losses was $5.5 million. See Note 6 to the ARL Consolidated Financial Statements
-- "Investments In Equity Investees."

Interest expense increased to $91.7 million in 1999 from $51.6 million
in 1998. Of this increase, $6.0 million was due to 16 land parcels purchased in
1998, $5.1 million was due to eight land parcels purchased in 1999 and the
remainder was due to the consolidation of NRLP's operations subsequent to
December 31, 1998.

Advisory fees increased to $5.5 million in 1999 from $3.8 million in
1998. The increase was attributable to the increase in ARL's gross assets, the
basis for such fee.

General and administrative expenses increased to $17.1 million in 1999
from $8.5 million in 1998. The increase was primarily attributable to the
general and administrative expenses of NRLP. The operations of NRLP were
consolidated subsequent to December 31, 1998.

Depreciation and amortization increased to $17.4 million in 1999 from
$7.0 million in 1998. The increase was due to the consolidation of NRLP's
operations subsequent to December 31, 1998 and the acquisition of the Encino
Office Building in 1999.

In the third and fourth quarter of 1999, provisions for loss of $2.1
million and $1.0 million, respectively, were recognized. Such losses relate to
the relinquishment by ARL of its general and Class B limited partner interests
in a controlled partnership that owned two apartments in Indianapolis, Indiana.
In the third and fourth quarters of 1998, provisions for loss of $3.0 million
and 916,000 respectively, were recorded to write down the Valley Ranch land to
its estimated realizable value less estimated costs of sale. Such write downs
were necessitated by an increase in the acreage designated as flood plain.

In December 1998, upon the election of NMC, a wholly-owned subsidiary,
as general partner of NRLP, NMC assumed liability for certain legal settlement
payments. Such obligation is included in litigation expense in the accompanying
Consolidated Statement of Operations. See Note 2 to the ARL Consolidated
Financial Statements -- "NRLP Management Corp."

Minority interest increased to $56.7 million in 1999 from $3.2 million
in 1998. Minority interest is the earnings attributable to limited partners,
other than ARL, of certain controlled limited partnerships. Minority interest in
1998 and 1999 was attributable, in part, to the preferred return on limited
partner units of Ocean Beach Partners, L.P., Valley Ranch, L.P., Grapevine
American, L.P., Edina Park Plaza Associates, L.P. and Hawthorne Lakes
Associations, L.P., ART Florida Portfolio III and ART Palm, L.L.C. In 1999,
minority interest includes, in addition to the preferred returns discussed
above, $55.7 million of earnings attributable to the limited partners in NRLP.
The operations of NRLP were consolidated subsequent to December 31, 1998. Prior
to December 31, 1998, the investment in NRLP was accounted for using the equity
method. See Note 2 to the ARL Consolidated Financial Statements -- "NRLP
Management Corp."

170

Gains on sale of real estate increased to $129.3 million in 1999 from
$17.3 million in 1998. In 1999, gains of $100.3 million were recognized on the
sale of 15 apartments: Olde Town, Sante Fe, Mesa Ridge, Horizon East, Lantern
Ridge, Barcelona, Country Place, Lake Nora, Fox Club, Oak Hollow, Windridge,
Tanglewood, Edgewater Garden, Bavarian Woods, and Manchester Commons; $9.2
million on the sale of the Continental Hotel and Casino; $5.0 million on the
sale of seven tracts totaling 46.9 acres of Plano Parkway land; $432,000 on the
sale of 9.9 acres of Mason/Goodrich land; $4.3 million on the sale of four
tracts totaling 302.4 acres of McKinney Corners II , McKinney Corners IV and
Dowdy land; $979,000 on the sale of 13.0 acres of Rasor land; $2.0 million on
the sale of three tracts totaling 23.0 acres of Vista Ridge land; $4.6 million
on the sale of four tracts totaling 103.6 acres of Frisco Bridges land; $23,000
on the sale of .13 acres of JHL Connell land; $128,000 on the sale of 1.4 acres
of Valley Ranch land; $180,000 on the sale of Sun City lots; $186,000 on the
sale of 121.2 acres of Katrina land; $2.0 million on the sale of five tracts
totaling 187.7 acres of Keller, Scout and Scoggins land; and $561,000 on the
sale of 205.4 acres of Yorktown land. In 1999, losses of $545,000 were
recognized, $505,000 on the sale of Stone Meadows land and $40,000 on the sale
of 6.2 acres of Plano Parkway land.

In 1998, ARL recognized gains of $663,000 on the sale of three tracts
totaling 78.5 acres of its Valley Ranch land; $1.9 million on its Lewisville
land; $714,000 on a 21.3 acre tract of its Parkfield land; $848,000 on a 21.6
acre tract of its Chase Oaks land; $789,000 on a 150.0 acre tract of its Rasor
land; $3.9 million on its Palm Desert land; $869,000 on a 2.5 acre tract of its
Las Colinas I land; $898,000 on its Kamperman land; $3.4 million on its final
10.5 acre tract of BP Las Colinas land; $409,000 on a 1.1 acre tract of its
Santa Clarita land; $2.6 million on a 20.8 acre tract of its Mason Goodrich
land; and ARL recognized a $179,000 previously deferred gain on a sale of its
Valley Ranch land in 1997.

TAX MATTERS

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

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances
and regulations, ARL 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.

171

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

INFLATION

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS OF ARL

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

WEIGHTED AVERAGE EFFECT OF 1% INCREASE
BALANCE INTEREST RATE IN BASE RATES
-------- ---------------- ---------------------
(Amounts in thousands, except per share)

Notes payable:
Variable rate $135,845 12.00% $1,358
Total decrease in ARL's
annual net income $1,358
Per share $ .13

172

MANAGEMENT OF ARL

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of February 11,
2002 regarding ARL's executive officers and directors:

Name Age Position
---- --- --------

Mark W. Branigan*.................................... 47 Executive Vice President - Residential
Louis J. Corna*...................................... 54 Executive Vice President - Tax
Earl D. Cecil........................................ 72 Director
Collene C. Currie.................................... 53 Director
Bruce A. Endendyk*................................... 53 Executive Vice President
Richard W. Humphrey*................................. 54 Director
Ronald E. Kimbrough*................................. 49 Acting Principal Executive Officer, Executive Vice
President and Chief Financial Officer
Joseph Mizrachi...................................... 56 Director
David W. Starowicz*.................................. 46 Executive Vice President - Acquisitions, Sales, and
Construction

EARL D. CECIL: Age 72; Director (Independent) (since November 2001) of
ARL. Financial and Business Consulting (since January 1994); and Division Vice
President (February 1987 to December 1993) of James Mitchell & Company, a
financial services marketing organization.

COLLENE C. CURRIE: Age 53; Director (Independent) (since August 2000)
of ARL. Director (February 1999 to August 2000) of ART; CEO (since January 2002)
Acorn Capital Company, CEO (since January 2001) of c3 Solutions; Associate
Director (since June 2000 to December 2001) of Cambridge Technology Partners;
Chief Financial Officer (since June 1998) of Energy Partners Alliance; Vice
President and Senior Relationship Manager (February 1996 to March 2000) of Bank
of America Private Bank (formerly NationsBank Private Client Group of Dallas);
Director (April 1998 to August 2000) of NMC; Director of Marketing and
Communications (October 1993 to January 1999) of the Dallas Opera; and Business
Transformation Consultant (August 1988 to October 1993) for IBM.

RICHARD W. HUMPHREY: Age 54; Director (since November 2001) of ARL.
Real Estate Acquisitions and Dispositions (since December 1999) for Regis, a
property management company and (June 1992 to November 1999) for Carmel Realty,
Inc., a real estate brokerage service company.

JOSEPH MIZRACHI: Age 56; Director (Independent) (since August 2000) of
ARL. Registered Investment Advisor and Principal and President (since 1980) of
PAZ Securities, Inc.;

----------

* See "THE ADVISOR - BCM - Directors and Principal Officers of Advisor" for
background and business experience information.

173

Chairman of the Board (since 1980) of Midwest Properties Management, Inc.;
Director (since June 2001) of Tarrant Apparel Group; and Director (June 2000 to
August 2000) of ART.

EXECUTIVE COMPENSATION OF ARL

ARL has no employees, payroll or benefit plans and pays no compensation
to its executive officers. The directors and executive officers of ARL who are
also officers or employees of BCM are compensated by BCM. Such affiliated
directors and executive officers perform a variety of services for BCM and the
amount of their compensation is determined solely by BCM. BCM does not allocate
the cash compensation of its officers among the various entities for which it
serves as advisor. See "The Advisor" for a more detailed discussion of
compensation payable to BCM by ARL.

The only direct remuneration paid by ARL is to those directors who are
not officers or employees of BCM or its affiliated companies. Until December 31,
2000, each independent director was compensated at the rate of $20,000 per year,
plus $300 per audit committee meeting attended and the chairman of the audit
committee receives an annual fee of $500. Effective January 1, 2001, the annual
fee was increased from $20,000 to $45,000. In addition, each independent
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 2001, $302,318 was paid to independent directors in total
directors' fees for all services including the annual fee for service during the
period January 1, 2001 through December 31, 2001, and 2001 special service fees
as follows: Roy E. Bode*, $59,873; Earl D. Cecil, $7,003; Collene C. Currie,
$79,743; Cliff Harris*, $70,333; Joseph Mizrachi, $50,716; and Richard D.
Morgan*, $34,650.

In January 1998, stockholders approved the 1997 Stock Option Plan (the
"ARL Option Plan") which provides for options to purchase up to 300,000 shares
of common stock. At December 31, 2001, there were 173,750 options outstanding
under the Option Plan. No options were granted under the ARL Option Plan in
2001.

----------

* Former Director

174

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF ARL

The following table sets forth the ownership of ARL's common stock both
beneficially and of record, both individually and in the aggregate, for those
persons or entities known by ARL to be the owner of more than 5% of the shares
of ARL's common stock as of the close of business on February 11, 2002.

Assuming Conversion of all Shares of Series G
and Series H Preferred Stock, if any, Received in the Mergers
---------------------------------------------------------------------------
Shares of Shares of Shares of
ARL ARL ARL
Common Common Common
Stock Stock Stock
Amount and Beneficially Beneficially Beneficially
Nature of Percent Owned After Owned After Owned After
Name and Address of Beneficial of the TCI Percentage the IOT Percentage the TCI and Percentage
Beneficial Owner Ownership Class(1) merger of Class merger of Class IOT merger of Class
------------------- ---------- -------- ------------ ---------- ------------ ---------- ------------ ----------

Basic Capital Management,
Inc.(2) ...................... 6,269,344 55.1% 9,186,712 64.3% 6,509,649 56.0% 9,427,017 64.9%
One Realco Corporation(3) .... 1,671,859 14.7% 1,671,859 14.7% 1,671,859 14.7% 1,671,859 14.7%
Transcontinental Realty
Investors, Inc.(4) ........... 746,972 6.6% 746,972 6.6% 746,972 6.6% 746,972 6.6%
Ryan T. Phillips(2)(5) ....... 6,296,946 55.4% 6,301,514 55.4% 6,296,946 55.4% 6,301,514 43.2%

----------

(1) Percentages are based upon 11,375,127 shares outstanding as of February
11, 2002.

(2) Includes 6,269,344 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. Based
upon 1,166,947 shares of Series G preferred stock and 106,802 shares of
Series H preferred stock to be received in the mergers. The business
address of BCM is 1800 Valley View Lane, Suite 300, Dallas, Texas
75234.

(3) Includes 234,650 shares owned by New Starr Corp., which is a company
owned by One Realco. Each of the directors of One Realco, Ronald F.
Akin and F. Terry Shumate, may be deemed to be the beneficial owners by
virtue of their positions as directors of One Realco. Messrs. Akin and
Shumate disclaim beneficial ownership of such shares. The business
address of One Realco is 555 Republic Drive, Suite 490, Plano, Texas
75074.

(4) Each of the directors of TCI, Henry A. Butler, 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. The business address of TCI is 1800 Valley View
Lane, Suite 300, Dallas, Texas 75234.

(5) Includes 27,602 shares owned by the Gene E. Phillips' Children's Trust.
Ryan T. Phillips is a beneficiary of such trust. Based upon 1,827
shares of Series G preferred stock to be received in the TCI merger.

175

Security Ownership of Management. The following table sets forth the
ownership of shares of ARL's common stock, both beneficially and of record, both
individually and in the aggregate, for the directors and executive officers of
ARL, as of the close of business on February 11, 2002.

Assuming Conversion of all Shares of Series G
and Series H Preferred Stock, if any, Received in the Mergers
----------------------------------------------------------------------------
Shares of Shares of Shares of
ARL ARL ARL
Common Common Common
Stock Stock Stock
Amount and Beneficially Beneficially Beneficially
Nature of Owned After Owned After Owned After
Beneficial Percent of the TCI Percentage the IOT Percentage the TCI and Percentage
Name of Beneficial Owner Ownership Class(1) merger of Class merger of Class IOT merger of Class
------------------------ ---------- ---------- ------------ ---------- ------------ ---------- ------------ ----------

Mark W. Branigan(2)(3) ...... 7,016,316 61.7% 9,933,684 69.5% 7,256,621 62.7% 10,173,989 70.0%
Louis J. Corna(2)(3) ........ 7,016,316 61.7% 9,933,684 69.5% 7,256,621 62.7% 10,173,989 70.0%
Earl D. Cecil ............... -- -- -- -- -- -- -- --
Collene C. Currie ........... -- -- -- -- -- -- -- --
Bruce A. Endendyk(2)(3) ..... 7,031,316 61.8% 9,948,684 69.5% 7,271,621 62.8% 10,188,989(4) 70.0%
Richard W. Humphrey ......... -- -- -- -- -- -- -- --
Ronald E. Kimbrough(2)(3) ... 7,016,316 61.7% 9,933,684 69.5% 7,256,621 62.7% 10,173,989 70.0%
Joseph Mizrachi ............. -- -- -- -- -- -- -- --
David W. Starowicz(2)(3) .... 7,021,316 61.7% 9,938,684 69.5% 7,261,621 62.7% 10,178,989(5) 70.0%
All Directors and
Executive Officers
as a group (9
persons)(2)(3) .......... 7,016,316 61.7% 9,953,684 69.5% 7,256,621 62.7% 10,193,989 70.0%

----------

(1) Percentage is based upon 11,375,127 shares outstanding at February 11,
2002.

(2) Includes 746,972 shares owned by TCI of which Messrs. Branigan, Corna,
Endendyk, Kimbrough and Starowicz may be deemed to beneficially own by
virtue of their positions as executive officers of TCI. The executive
officers of ARL disclaim beneficial ownership of such shares.

(3) Includes 6,269,344 shares owned by BCM of which Messrs. Branigan,
Corna, Endendyk, Kimbrough and Starowicz may be deemed to beneficially
own by virtue of their positions as executive officers of BCM. The
executive officers of ARL disclaim beneficial ownership of such shares.

(4) Includes 15,000 shares of ARL common stock issuable upon the exercise
of options granted to Mr. Endendyk under the ARL 1997 Stock Option
Plan.

(5) Includes 5,000 shares of ARL common stock issuable upon the exercise of
options granted to Mr. Starowicz under the ARL 1997 Stock Option Plan.

176

PERFORMANCE GRAPH

The following graph compares the cumulative total stockholder return on
ARL'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, 1996 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.

[PERFORMANCE GRAPH]

12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01

American Realty Investors, Inc. 100 223 259 270 213 157
Dow Jones US Realty Index 100 118 93 88 112 126
Dow Jones US Total Market Index 100 132 165 202 183 161

177

DESCRIPTION OF THE CAPITAL STOCK OF ARL

The description of ARL's capital stock set forth below is only a
summary and is not intended to be complete. For a complete description of ARL's
capital stock, we urge you to read ARL's articles of incorporation and bylaws
and as appropriate the certificate of designation of the Series G or Series H
preferred stock, which are filed as an exhibit to the joint proxy statement and
prospectus of which this document forms a part.

DESCRIPTION OF COMMON STOCK

There are currently 11,375,127 shares of ARL common stock outstanding.
Assuming all non-affiliated stockholders of TCI and IOT affirmatively elect to
take shares of Series G or Series H preferred stock and assuming conversion of
all of the shares of Series G and Series H preferred stock issuable in
connection with the business combination, there will be 22,974,254 shares of ARL
common stock outstanding after the business combination.

VOTING RIGHTS. Holders of ARL common stock will be entitled to one vote
per share on all matters voted on by stockholders, including the election of
directors. The ARL charter does not provide for cumulative voting in the
election of directors of ARL.

DIVIDENDS. After giving effect to any preferential rights of any series
of preferred stock outstanding, including the ARL preferred stock to be issued
in the TCI merger, the holders of ARL common stock are entitled to participate
in dividends, if any, as may be declared from time to time by the ARL board of
directors and, upon liquidation, are entitled to receive a pro-rata share of all
the assets of ARL that are available for distribution to these holders. All of
the ARL common stock will, when issued, be fully paid and nonassessable. Holders
of ARL common stock will have no preemptive rights with respect to future
issuances of ARL capital stock.

DESCRIPTION OF PREFERRED STOCK

The board of directors is authorized to issue up to 50,000,000 shares
of preferred stock from time to time, in one or more series, without stockholder
approval, and to fix the designation, preferences, conversion or other rights,
voting powers, restriction, limitations as to dividends, qualifications and
terms and conditions of redemption of any series that may be established by the
ARL board. As a result, without stockholder approval, the ARL board could
authorize the issuance of preferred stock with voting, conversion and other
rights that could dilute the voting power and other rights of the holders of ARL
common stock. In addition, shares issued after the business combination may have
the effect, under some circumstances, alone or in combination with other
provisions of the ARL charter of rendering more difficult or discouraging an
acquisition of ARL considered undesirable by the ARL board of directors.

SERIES A PREFERRED STOCK. There are authorized a total of 15,000,000
shares of Series A Cumulative Convertible preferred stock with a par value of
$2.00 per share and an adjusted liquidation value of $10.00 per share plus
payment of accrued and unpaid dividends. The Series A preferred stock is
non-voting except:

(1) as provided by law,

178

(2) with respect to an amendment to ARL's articles of
incorporation or bylaws that would materially alter or change
the existing terms of the Series A preferred stock, and

(3) at any time or times for the election of two directors when
all or any portion of the dividends on the Series A preferred
stock for any six quarterly dividends, whether or not
consecutive, shall be in arrears and unpaid.

In the latter event, the number of directors constituting the board of
directors of ARL shall be increased by two and the holders of Series A preferred
stock, voting separately as a class, shall be entitled to elect two directors to
fill the newly created directorships with each holder being entitled to one vote
in the election for each share of Series A preferred stock held. ARL is not
obligated to maintain a sinking fund with respect to the Series A preferred
stock.

The Series A preferred stock is convertible, at the option of the
holder, into shares of ARL common stock at any time and from time to time, in
whole or in part, after the earliest to occur of

(1) August 15, 2003;

(2) the first business day, if any, occurring after a quarterly
dividend payment date, on which an amount equal to or in
excess of 5% of the $10.00 liquidation value (i.e., $.50 per
share of Series A preferred stock) is accrued and unpaid, or

(3) when ARL becomes obligated to mail a statement, signed by an
officer of ARL, to the holders of record of each of the shares
of Series A preferred stock because of a proposal by ARL at
any time before all of the shares of Series A preferred stock
have been redeemed by or converted into common stock, to merge
or consolidate with or into any other corporation (unless ARL
is the surviving entity and holders of common stock continue
to hold the shares of common stock without modification and
without receipt of any additional consideration), or to sell,
lease, or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up.

The Series A preferred stock is convertible into that number of shares
of ARL common stock obtained by multiplying the number of shares being converted
by $10.00, then adding all accrued and unpaid dividends, then dividing those
sums by the conversion price, which is 90% of the simple average of the trading
price of the common stock for 20 business days ending on the last calendar day
of the week preceding the conversion date. Notwithstanding the foregoing, ARL,
at its option, may elect to redeem any shares of Series A preferred stock sought
to be so converted by paying the holder of the Series A preferred stock cash in
an amount equal to the conversion price for each share of Series A preferred
stock redeemed.

The Series A preferred stock bears a cumulative compounded dividend per
share equal to 10% per annum of the adjusted liquidation value, payable on each
quarterly dividend payment date. The dividend accrues from the date of issuance
to and including the date on which the redemption price of the shares is paid,
whether or not those dividends have been declared and whether or not there are
profits, surplus or other funds of ARL legally available for the payment

179

of those dividends. Dividends on the Series A preferred stock are in preference
to and with priority over dividends payable on the common stock. Except as
provided in the following sentence, the Series A preferred stock ranks on a
parity as to dividends and upon liquidation, dissolution or winding up with all
other preferred stock issued by ARL. ARL will not issue any shares of preferred
stock of any series which are superior to the Series A preferred stock as to
dividends or rights upon liquidation, dissolution or winding up of ARL as long
as any shares of Series A preferred stock are issued and outstanding, without
the prior written consent of the holders of at least 66 2/3% of the shares of
the Series A preferred stock then outstanding voting separately as a class.

In addition to ARL's redemption rights described above upon a
conversion of Series A preferred stock, ARL may redeem any or all of the Series
A preferred stock at any time and from time to time, at its option, for cash
upon no less than 20 days nor more than 30 days prior notice thereof The
redemption price of the Series A preferred stock shall be an amount per share
equal to 103% of the adjusted liquidation value.

There were 2,724,901 shares of Series A preferred stock outstanding at
January 31, 2002. There are reserved 1,998,797 shares of Series A preferred
stock for issuance as future consideration in various business transactions of
ARL.

SERIES B PREFERRED STOCK. There are designated 80,000 shares of Series
B 10% Cumulative Convertible preferred stock with a par value of $2.00 per share
and a preference on liquidation of $100 per share plus payment of all accrued
and unpaid dividends. The Series B preferred stock is non-voting except as
required by law. ARL is not required to maintain a sinking fund for the stock.

Each share of Series B preferred stock is convertible into that number
of shares of ARL common stock obtained by multiplying the number of shares being
converted by $100, then adding all accrued and unpaid dividends on the shares,
then dividing the sum by (in most instances) 80% of the average trading price of
the ARL common stock for the 20 business days ending on the last business day of
the calendar week immediately preceding the date of conversion.

The Series B preferred stock bears a cumulative dividend per share
equal to $11.00 per annum ($2.75 per quarter). Dividends on the Series B
preferred stock are in preference to and with priority over dividends upon the
ARL common shares. The Series B preferred stock ranks on a parity as to
dividends and upon liquidation, dissolution or winding up with all other shares
of preferred stock.

ARL may redeem any or all of the shares of Series B preferred stock
from time to time upon payment of $100.00 per share plus all accrued and unpaid
dividends. There is no restriction on the repurchase or redemption of the Series
B preferred stock by ARL while there is any arrearage in payment of dividends
except that at the time of the repurchase or redemption ARL must pay all accrued
and unpaid dividends on the shares being redeemed.

There were no shares of Series B preferred stock outstanding at January
31, 2002.

180

SERIES C PREFERRED STOCK. There are designated 231,750 shares of Series
C Cumulative Convertible preferred stock with a par value of $2.00 per share and
a preference on liquidation of $100.00 per share plus all accrued and unpaid
dividends. The Series C preferred stock is non-voting except as required by the
law. ARL is not required to maintain a sinking fund for the stock.

Each share of Series C preferred stock is convertible at the option of
the holders thereof in the following amounts at any time on or after the
respective dates:

(1) 25,000 shares on or after December 31, 2000;

(2) 25,000 shares on or after September 30, 2002;

(3) 25,000 shares on or after September 30, 2003;

(4) 25,000 shares on or after December 31, 2005; and

(5) all remaining outstanding shares on or after December 31,
2006.

These shares are convertible into that number of shares of ARL common
stock obtained by multiplying the number of shares of Series C preferred stock
being converted by $100 and then dividing the sum by (in most instances) 90% of
the average of the daily closing price of the ARL common shares for the 20
trading days ending on the last trading day of the calendar week immediately
preceding the conversion on the market where the ARL common stock is then
regularly traded. The right of conversion terminates upon receipt of the notice
of redemption from ARL and on the earlier of (1) the commencement of any
liquidation, dissolution or winding up of ARL or (2) the adoption of any
resolution authorizing the commencement thereof. ARL may elect to redeem the
shares of Series C preferred stock sought to be converted instead of issuing
shares of ARL common stock.

The Series C preferred stock bears a cumulative quarterly dividend per
share in an amount equal to:

(1) 8% per annum during the period from July 1, 1999 to September
30, 2000;

(2) 9% per annum during the period from July 1, 2000 to September
30, 2001; and

(3) 10% per annum from July 1, 2001 and thereafter.

In each case, the dividend per share is calculated on the basis of the
adjusted liquidation value of the Series C preferred stock, payable in arrears
in cash on each quarterly dividend payment date. The dividend accrues from the
date of issuance to and including the date on which the redemption price of the
shares is paid. Dividends on the Series C preferred stock are in preference to
and with priority over dividends upon the ARL common shares. The Series C
preferred stock ranks on a parity as to dividends and upon liquidation,
dissolution or winding up with all other shares of ARL preferred stock.

181

ARL may redeem all or a portion of the shares of the Series C preferred
stock issued and outstanding at any time and from time to time, at its option,
for cash upon no less than 20 days nor more than 30 days prior notice thereof.
The redemption price of the shares of the Series C preferred stock shall be an
amount per share equal to the sum of (1):

104% of liquidation value during the period from January 1,
2000 through December 31, 2000;

103% of liquidation value during the period from January 1,
2001 through December 31, 2001;

102% of liquidation value during the period from January 1,
2002 through December 31, 2002;

101% of liquidation value during the period from January 1,
2003 through December 31, 2003; and

100% of liquidation value from January 1, 2004 and thereafter,

and (2) all accrued and unpaid dividends on the shares through the redemption
date. The right of ARL to redeem shares of Series C preferred stock remains
effective notwithstanding prior receipt by ARL of notice by any holder of Series
C preferred stock of the holder's intent to convert shares of Series C preferred
stock into shares of ARL common stock. There were no shares of Series C
preferred stock issued or outstanding at January 31, 2002.

SERIES D PREFERRED STOCK. There are 91,000 shares of Series D 9.50%
Cumulative preferred stock designated with a par value of $2.00 per share and a
preference on liquidation of $20.00 per share plus payment of accrued and unpaid
dividends. The Series D preferred stock is non-voting except as required by law
and is not convertible. ARL is not required to maintain a sinking fund for the
stock.

Each share of Series D preferred stock has a cumulative dividend per
share of 9.50% per annum of the $20.00 liquidation preference, payable quarterly
in equal installments of $0.475. Dividends on the Series D preferred stock are
in preference to and with priority over dividends upon the shares of ARL common
stock. The Series D preferred stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of ARL preferred
stock.

ARL may from time to time after June 1, 2001 redeem any or all of the
Series D preferred stock upon payment of the liquidation value of $20.00 per
share plus all accrued and unpaid dividends. There is no restriction on the
repurchase or redemption of the Series D preferred stock by ARL while there is
any arrearage in payment of dividends except that at the time of the repurchase
or redemption ARL must pay all accrued and unpaid dividends on the shares being
redeemed. As of January 31, 2002, there were no shares of Series D preferred
stock issued or outstanding.

SERIES E PREFERRED STOCK. There are 500,000 shares of Series E
Cumulative preferred stock designated with a par value of $2.00 per share and a
preference on liquidation of $10.00

182

per share plus payment of accrued and unpaid dividends. The Series E preferred
stock is non-voting except as required by law and is not convertible. ARL is not
required to maintain a sinking fund for the stock.

Each share of Series E preferred stock has a cumulative dividend per
share of 6.0% per annum of the $10.00 liquidation preference, payable quarterly.
Dividends on the Series E preferred stock are in preference to and with priority
over dividends upon the ARL common stock. The Series E preferred stock ranks on
a parity as to dividends and upon liquidation, dissolution or winding up with
all other shares of preferred stock.

ARL may at any time and from time to time redeem any or all of the
Series E preferred stock upon payment of the liquidation value of $10.00 per
share plus all accrued and unpaid dividends. There is no restriction on the
repurchase or redemption of the Series E preferred stock by ARL while there is
any arrearage in payment of dividends except that at the time of the repurchase
or redemption ARL must pay all accrued and unpaid dividends on the shares being
redeemed. As of January 31, 2002, there were 50,000 shares of Series E preferred
stock issued and outstanding.

SERIES F PREFERRED STOCK. There are 4,961 shares of Series F redeemable
preferred stock (the "Series F preferred stock") designated with a par value of
$2.00 per share and a preference on liquidation of $1,000.00 per share. The
Series F preferred stock is non-voting except as required by law. ARL is not
required to maintain a sinking fund for the stock.

The holders of Series F preferred stock are not entitled to receive any
dividends or distributions. The Series F preferred stock ranks on a parity upon
a liquidation, dissolution or winding up with all other shares of preferred
stock.

ARL may redeem at anytime, any or all of the Series F preferred stock
upon payment of the liquidation value of $1,000.00 per share by giving the
holder thereof not less than 20 days nor more than 30 days notice thereof prior
to the date on which ARL desires such shares redeemed. There is no restriction
on the repurchase or redemption of the Series F preferred stock by ARL while
there is any arrearage in payment of dividends, if any.

From and after January 1, 2002, within 10 calendar days of the filing
of ARL's report on Form 10-Q or Form 10-K, ARL shall call for redemption that
number of shares of the Series F preferred stock having an aggregate liquidation
value equal to 20% of the net cash flow generated by the assets acquired from
MJR Oil & Gas 2001, LLC during the preceding fiscal quarter after the payment of
any current payment due under the two promissory notes which ARL issued to MJR
Oil & Gas 2001, LLC in connection with the acquisition of such assets. Such
shares of Series F preferred stock shall be redeemed at the liquidation value of
$1,000.00 per share.

In the event that ARL engages in a transfer of more than 10% the assets
acquired from MJR Oil & Gas 2001, LLC, whether by sale, merger, consolidation or
other similar transaction, ARL shall prior to such transaction call for
redemption each outstanding shares of Series F preferred stock at a price per
share equal to the liquidation price of $1,000.00.

183

As of January 31, 2002 there were 3,968.75 shares of Series F preferred
stock issued and outstanding.

10% SERIES G CUMULATIVE CONVERTIBLE PREFERRED STOCK. There are
4,022,000 shares of the Series G preferred stock designated with a par value of
$2.00 per share and a preference on liquidation of $20.00 per share plus payment
of accrued and unpaid dividends. The Series G preferred stock is non-voting
except:

(1) as provided by law,

(2) with respect to an amendment to ARL's articles of
incorporation or bylaws that would materially alter or change
the existing terms of the Series G preferred stock, and

(3) at any time or times for the election of two directors when
all or any portion of the dividends on the Series G preferred
stock for any six quarterly dividends, whether or not
consecutive, shall be in arrears and unpaid.

In the latter event, the number of directors constituting the board of
directors of ARL shall be increased by two and the holders of Series G preferred
stock, voting separately as a class, shall be entitled to elect two directors to
fill the newly created directorships with each holder being entitled to one vote
in the election for each share of Series G preferred stock held. ARL is not
required to maintain a sinking fund for the stock.

Each share of Series G preferred stock has a cumulative dividend per
share of 10.00% per annum of the $20.00 liquidation preference, payable
quarterly in equal installments of $0.5. Dividends on the Series G preferred
stock are in preference to and with priority over dividends upon the ARL common
stock. The Series G preferred stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of preferred stock.

During a 75 day period commencing on the 15th day after ARL publicly
files its first Form 10-Q with the SEC following the consummation of the TCI
merger, the Series G preferred stock may be converted at the option of the
holder of Series G preferred stock into 2.5 shares of ARL common stock for each
share of Series G preferred stock.

ARL may provide notice of its intention to redeem the Series G
preferred stock no earlier than 45 days after ARL publicly files its first Form
10-Q with the SEC following the consummation of the TCI merger. After that time,
ARL may redeem any or all of the Series G preferred stock upon payment of the
liquidation value of $20.00 per share plus all accrued and unpaid dividends by
giving the holder thereof not less than 45 days nor more than 60 days notice
thereof prior to the date on which ARL desires such shares redeemed.

ARL will make an application with the NYSE to list the Series G
preferred stock provided that there are an adequate number of Series G preferred
stock stockholders and shares of Series G preferred stock outstanding to list
the Series G preferred stock on the NYSE. ARL will also make an application
with the NYSE to list the shares of ARL common stock issuable upon conversion
of the Series G preferred stock.

10% SERIES H CUMULATIVE CONVERTIBLE PREFERRED STOCK. There are
684,000 shares of the Series H preferred stock designated with a par value of
$2.00 per share and a preference

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on liquidation of $21.50 per share plus payment of accrued and unpaid dividends.
The Series H preferred stock is non-voting except:

(1) as provided by law,

(2) with respect to an amendment to ARL's articles of
incorporation or bylaws that would materially alter or change
the existing terms of the Series H preferred stock, and

(3) at any time or times for the election of two directors when
all or any portion of the dividends on the Series H preferred
stock for any six quarterly dividends, whether or not
consecutive, shall be in arrears and unpaid.

In the latter event, the number of directors constituting the board of
directors of ARL shall be increased by two and the holders of Series H preferred
stock, voting separately as a class, shall be entitled to elect two directors to
fill the newly created directorships with each holder being entitled to one vote
in the election for each share of Series H preferred stock held. ARL is not
required to maintain a sinking fund for the stock.

Each share of Series H preferred stock has a cumulative dividend per
share of 10.00% per annum of the $21.50 liquidation preference, payable
quarterly in equal installments of $0.5375. Dividends on the Series H preferred
stock are in preference to and with priority over dividends upon the ARL common
stock. The Series H preferred stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of preferred stock.

ARL will make an application with the NYSE to list the Series H
preferred stock provided that there are an adequate number of Series H preferred
stock stockholders and shares of Series H preferred stock outstanding to list
the Series H preferred stock on the NYSE. ARL will also make an application with
the NYSE to list the shares of ARL common stock issuable upon conversion of the
Series H preferred stock.

The description of the foregoing provisions of each series of the
preferred stock does not purport to be complete and is subject to and qualified
in its entirety by reference to the provisions of ARL's articles of
incorporation relating to the series of preferred stock.

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CHARTER AND BYLAWS OF ARL

The following is a summary of the terms of ARL's articles of
incorporation and bylaws. The summary contains all material terms, but does not
set forth all the provisions of the articles of incorporation or bylaws.

AUTHORIZED STOCK

ARL's charter authorizes it to issue 150,000,000 shares of capital
stock, consisting of 100,000,000 shares of common stock, par value $.01 per
share, and 50,000,000 shares of preferred stock, par value $2.00 per share.
Shares of preferred stock may be issued from time to time, in one or more
series, each having specific voting powers, designations, preferences and
restrictions as approved by the ARL board.

DIRECTORS

The bylaws provide that the number of directors serving on ARL's board
will be not less than three nor more than twelve. The exact number of directors
will be fixed by the board from time to time. The bylaws provide that, unless
otherwise provided by law or the charter, a quorum consists of a majority of the
entire board. The act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board. Cumulative voting is not
authorized in the election of directors to the board. Vacancies and any
newly-created directorships resulting from an increase in the authorized number
of directors may be filled by a majority of the directors then in office, even
if less than a quorum.

STOCKHOLDER MEETINGS AND SPECIAL VOTING REQUIREMENTS

The annual meetings of stockholders are held on a date established by
the board. Special meetings of stockholders may be called by the chairman of the
board, by the president, by a resolution adopted by a majority of the board of
directors or by the holders of 25% or more of the ARL common stock. In general,
the presence of a majority of stockholders in person or by proxy voting
constitutes a quorum at any stockholders' meeting. Amendments to the charter or
the bylaws must be approved by stockholders holding a majority of the shares
outstanding and entitled to be cast thereon.

Directors may be removed with or without cause and by the affirmative
vote of the holders of not less than two-thirds of the outstanding stock of ARL
voting for the election of the director.

AMENDMENT OF THE CHARTER AND BYLAWS

The charter provides that approval of 51% of the stockholders voting is
required to amend the articles. A bylaw may be amended or repealed, or a new
bylaw adopted, by the affirmative vote of 51% of the stock voting or by a
majority of the board.

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TRANSACTIONS WITH INTERESTED OFFICERS OR DIRECTORS

The charter provides that ARL shall not, directly or indirectly,
contract or engage in any transaction with any advisor of ARL, any director,
officer or employee of ARL or any advisor or any affiliate or associate of any
director, officer or employee of ARL or any advisor, unless:

o the material facts as to the relationship or interest are
disclosed or are known to the board and the board authorizes
the contract or transaction in good faith; the contract or
transaction is deemed fair by the board; and

o the board simultaneously authorizes or ratifies the
transaction by the affirmative vote of a majority of
independent directors voting on the matter.

ANTI-TAKEOVER EFFECT OF AUTHORIZED BUT UNDESIGNATED PREFERRED STOCK

The board is authorized to provide for the issuance of shares of
preferred stock, in one or more series, and fix the terms and conditions of each
series. Management believes that the availability of preferred stock will
provide ARL with increased flexibility in structuring financings and
acquisitions and in meeting other corporate needs. Authorized but unissued
shares of preferred stock and common stock will be available for issuance
without further action by stockholders, unless required by applicable law or the
rules of any stock exchange or automated quotation system.

Although the board has no present intention of doing so, it will be
able to issue a series of preferred stock that could either impede or facilitate
the completion of a merger, tender offer or other takeover attempt. For
instance, these new shares might impede a business combination by including
class voting rights which would enable the holder to block the transaction. The
board will make any determination to issue these shares based on its judgment as
to the best interests of ARL and its stockholders. The board will be able to
issue preferred stock having terms which would discourage an acquisition attempt
or other transaction that a majority of the stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock.

LIABILITY FOR MONETARY DAMAGES

No director will be personally liable to ARL or its stockholders for
monetary damages arising out of a breach of fiduciary duty as a director. A
director's liability, however, is not limited (1) for acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law, or (2) for
the payment of dividends in violation of Nevada law. If Nevada law is amended to
permit additional limitation or elimination of a director's personal liability,
the liability of a director will be eliminated or limited to the fullest extent
permitted by the amended Nevada law. Any repeal or modification of the existing
Nevada law provisions will not increase the personal liability of any director
for any act or occurrence taking place prior to the repeal or modification, or
otherwise adversely affect any right or protection of a director existing at the
time of the repeal or modification.

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INDEMNIFICATION AND ADVANCEMENT OF EXPENSES

Present and former directors and officers of ARL and persons serving as
directors, officers, employees or agents of another corporation or entity at the
request of ARL are indemnified to the fullest extent permitted by Nevada law.
The ARL charter and the bylaws specifically indemnify these persons for
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them (1) in connection with a
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director or officer of ARL or is or was serving as a director, officer,
employee or agent of another corporation or entity at the request of ARL, or (2)
in connection with the defense or settlement of a threatened, pending or
completed action or suit by or in the right of ARL, provided that the party is
adjudged to be liable to ARL. To be indemnified a person must have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of ARL and, with respect to any criminal action or proceeding, must
have had no reasonable cause to believe his conduct was unlawful.

Indemnification is only available if the applicable standard of conduct
has been met by the indemnified party. Indemnification is mandatory where a
director or officer is successful in the defense of an action, suit or
proceeding or any claim or matter asserted against the person. A determination
of the availability of indemnification may be made by the majority vote of a
quorum of directors not a party to the suit, action or proceeding, by a written
opinion of independent legal counsel or by the stockholders.

In the event that a determination is made that a director or officer is
not entitled to indemnification, the director or officer may seek a judicial
determination of his right to indemnification. If successful, a director or
officer is entitled to indemnification for all expenses, including attorney's
fees, incurred in any proceeding seeking to collect an indemnity claim under the
indemnification provisions. Other than proceedings to enforce rights to
indemnification, ARL is not obligated to indemnify any person in connection with
a proceeding initiated by that person.

ARL will pay expenses incurred by a director or officer of ARL, or a
former director or officer, in advance of the final disposition of an action,
suit or proceeding, if he undertakes to repay amounts advanced in the event it
is ultimately determined that indemnification is not available.

The indemnification provisions and provisions for advancing expenses in
the ARL charter and bylaws are not exclusive of any other similar rights
pursuant to any agreement, vote of the stockholders or disinterested directors
or pursuant to judicial direction.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrants pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.

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ANTI-TAKEOVER PROVISIONS OF THE
ORGANIZATIONAL DOCUMENTS OF ARL

The ARL articles of incorporation and bylaws contain a number of
provisions that may inhibit or impede the acquisition or attempted acquisition
of control of ARL by means of a tender offer, proxy contest or otherwise. These
provisions are expected to discourage coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of ARL to
negotiate first with the ARL board. These provisions may increase the likelihood
that proposals initially will be on more attractive terms than would be the case
in their absence and increase the likelihood of negotiations. This might
outweigh the potential disadvantages of discouraging these proposals because,
among other things, negotiation of the proposals might result in an improvement
of their terms. The discussion below highlights some of these anti-takeover
provisions in the ARL charter documents. Because it is a summary, it may not
contain all of the information that might be important to you. We urge you to
read the ARL articles of incorporation and bylaws, as well as the Nevada General
Corporation Law for a complete description of these anti-takeover provisions.

NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES

After giving preference to any rights of holders of preferred shares of
ARL to elect additional directors under specified circumstances, the ARL
articles of incorporation and bylaws provide that the number of directors must
not be less than three nor more than 12. In addition, the ARL bylaws provide
that, after giving preference to rights of holders of preferred stock, any
vacancies will be filled by majority of the remaining directors, even though
less than a quorum, or by a sole director, and any vacancies created by an
increase in the total number of directors may be filled only by the ARL board.
Accordingly, the ARL board could temporarily prevent any stockholder from
enlarging the ARL board and then filling the new positions with the
stockholder's own nominees.

The ARL articles of incorporation and bylaws also provide that, after
giving preference to any rights of holders of preferred shares, directors may be
removed only for cause, and only upon the affirmative vote of holders of eighty
percent 80% of the then outstanding shares voting in the election of directors.

ADVANCE NOTICE PROVISIONS FOR DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS

The ARL bylaws provide for an advance notice procedure for stockholders
to make nominations of candidates for director or to bring other business before
the annual meeting of stockholders. According to this procedure (1) only persons
who are nominated by, or at the direction of, the ARL board, or by a stockholder
who has given timely written notice containing specified information to the
secretary of ARL prior to the meeting at which directors are to be elected, will
be eligible to nominate candidates for directors of ARL, and (2) at an annual
meeting, only that business may be conducted as has been brought before the
meeting by, or at the direction of, the ARL board or by a stockholder who has
given timely written notice to the secretary of ARL of his intention to bring
the business before the meeting. In general, for notice of stockholder
nominations or proposed business to be conducted at an annual meeting to be

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timely, the notice must be received by ARL not less than 60 days nor more than
90 days prior to the scheduled date of the meeting.

The purpose of requiring stockholders to give advance notice of
nominations and other business is to afford the ARL board a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business. To the extent necessary or
considered desirable by the ARL board, the advance notice provision will allow
the ARL board to inform stockholders and make recommendations about the nominees
or business, as well as to ensure an orderly procedure for conducting meetings
of stockholders. Although the ARL bylaws do not give the ARL board power to
block stockholder nominations for the election of directors or proposals for
action, the advance notice procedure may have the effect of discouraging a
stockholder from proposing nominees or business, precluding a contest for the
election of directors or the consideration of stockholder proposals if
procedural requirements are not met. This might also deter third parties from
soliciting proxies for a non-management proposal or slate of directors, without
regard to the merits of the proposal or slate.

Any action required or permitted to be taken by the ARL stockholders
must be taken at a properly called annual or special meeting of the ARL
stockholders and may not be taken by written consent. Special meetings of the
ARL stockholders may be called at any time, but only by the chairman of the
board, the president, or by a majority of the directors then in office.

BUSINESS COMBINATIONS UNDER NEVADA LAW

ARL's articles expressly elect not to be governed by the Nevada
"Corporate Combinations Law" contained in Sections 78.411 to 78.444, inclusive,
of the NRS and the Nevada "Control Shares Statute" contained in the NRS Sections
78.378 to 78.3792.

ARL POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of the current policies of ARL with
respect to investments, financing, affiliate transactions and other activities.
These policies may be amended or waived from time to time at the discretion of
the ARL board without a vote of the ARL stockholders. No assurance can be given
that these investment objectives will be attained or that the value of ARL will
not decrease.

ARL intends to purchase or lease properties for long-term investment,
develop or redevelop its properties or sell these properties, in whole or in
part, when circumstances warrant. ARL may participate with other entities in
property ownership, through joint ventures or other types of co-ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness that have priority over ARL's equity interest.

ARL may repurchase or otherwise reacquire shares of ARL common stock,
or other ARL securities and may also invest in securities of other entities
including those engaged in real estate. ARL may invest in the securities of
other issuers in connection with acquisitions of indirect interests in real
estate, consisting generally of general or limited partnership interests in
special purpose partnerships owning one or more properties. ARL may acquire all
or substantially all of the securities or assets of real estate investment
trusts, management companies or similar entities where these investments would
be consistent with its investment

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policies. ARL may also invest in securities of other issuers from time to time
for the purpose of exercising control. It is not intended that ARL's investments
in securities will require it to register as an "investment company" under the
Investment Company Act of 1940, as amended, and it is intended that ARL would
divest securities before any registration would be required.

The ARL board may devote available assets to particular investments or
types of investments, without restriction. ARL's investment objectives and
policies may be changed at any time by the ARL board without the approval of
ARL's stockholders.

Additional capital may be raised through additional equity offerings,
debt financing or retention of cash flow, or a combination of these methods. If
the ARL board determines to raise additional equity capital, it may, without
stockholder approval, issue additional shares of common stock or preferred stock
up to the amount of its authorized capital in any mariner and on whatever terms
and for whatever consideration as it deems appropriate, including in exchange
for property. These securities may be senior to the outstanding ARL common stock
and may include additional series of preferred stock which may be convertible
into ARL common stock. Existing stockholders of ARL will have no preemptive
right to purchase ARL shares in any subsequent securities offering by ARL, and
any offering of this type could cause a dilution of a stockholder's investment
in ARL.

To the extent that the ARL board determines to obtain additional debt
financing, ARL intends to do so generally by mortgaging its existing properties.
These mortgages may be recourse, non-recourse or cross-collateralized. Although
ARL does not have a policy limiting the number or amount of mortgages that may
be placed on any particular property, mortgage financing instruments typically
limit additional indebtedness on these properties. ARL may also borrow funds
through bank borrowings, publicly and privately placed debt instruments or
purchase money obligations, any of which indebtedness may be secured by ARL's
assets or the assets of any entity in which ARL holds an interest.

ARL may seek to obtain unsecured or secured lines of credit or may
determine to issue debt securities, which may be convertible into common stock
or preferred stock or be accompanied by warrants to purchase stock, or to sell
or securitize its receivables. The proceeds from any borrowings may be used for
the following purposes:

o to finance acquisitions

o to develop or redevelop properties

o to refinance existing indebtedness for working capital or
capital improvements

o the payment of distributions

o to refinance existing indebtedness

ARL may make loans to joint ventures or other entities in which it
participates. ARL does not intend to engage in (1) trading, underwriting or
agency distribution or sale of securities of other issuers or (2) the active
trade of loans and investments.

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The specific composition of ARL's real estate and mortgage notes
receivable portfolios following the merger will depend largely on the judgment
of ARL's management as to changing investment opportunities and the level of
risk associated with specific investments. ARL's management intends to maintain
real estate and mortgage notes receivable portfolios diversified by location and
type of property.

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BUSINESS OF TCI

Transcontinental Realty Investors, Inc. ("TCI"), a Nevada corporation,
is the successor to a California business trust, which was organized on
September 6, 1983 and commenced operations on January 31, 1984. On November 30,
1999, TCI acquired all of the outstanding shares of beneficial interest of CMET,
a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of
its common stock for each outstanding CMET share.

Prior to January 1, 2000, TCI elected to be treated as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Code. During the
third quarter of 2000, due to a concentration of ownership TCI no longer met the
requirement for tax treatment as a REIT. Under the Code, TCI can not re-qualify
for REIT tax status for at least five years.

TCI's real estate at December 31, 2000, consisted of 140 properties
held for investment, three partnership properties and four properties held for
sale which were primarily obtained through foreclosure. In 2000, TCI purchased
18 properties held for investment. TCI's mortgage notes receivable portfolio at
December 31, 2000, consisted of six mortgage loans. In addition, TCI has an
interest in a partnership which holds a wraparound mortgage note receivable.
TCI's real estate and mortgage notes receivable portfolios are more fully
discussed in Item 2 in "Properties of TCI" below.

BUSINESS PLAN AND INVESTMENT POLICY OF TCI

TCI's business is investing in real estate through direct equity
ownership and partnerships and financing real estate and real estate related
activities through investments in mortgage loans, including first, wraparound
and junior mortgage loans. TCI's real estate is located throughout the
continental United States. Information regarding TCI's real estate and mortgage
notes receivable portfolios is set forth below and in the TCI Consolidated
Financial Statements.

TCI's business is not seasonal. TCI's management has determined to
continue to pursue a balanced investment policy, seeking both current income and
capital appreciation. With respect to new real estate investments, TCI's
management's plan of operation is to consider all types of real estate with an
emphasis on properties generating current cash flow. TCI's management expects to
invest in and improve these properties to maximize both their immediate and
long-term value. TCI's management will also consider the development of
apartment properties in selected markets primarily in Texas.

TCI's management also expects to consider property sales opportunities
for properties in stabilized real estate markets where TCI's properties have
reached their potential. TCI's management also expects to be an opportunistic
seller of properties in markets that have become overheated, i.e. an abundance
of buyers.

TCI's management's operating strategy with regard to TCI's properties
is to maximize each property's operating income by aggressive property
management through closely monitoring expenses while at the same time making
property renovations and/or improvements where appropriate. While such
expenditures increase the amount of revenue required to cover operating
expenses, TCI's management believes that such expenditures are necessary to
maintain or enhance the value of the properties.

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TCI's management does not expect that TCI will seek to fund or acquire
new mortgage loans in 2002. However, TCI may originate mortgage loans in
conjunction with providing purchase money financing of a property sale. TCI's
management intends to service and hold for investment the mortgage notes in
TCI's portfolio. However, TCI may borrow against its mortgage notes, using the
proceeds from such borrowings for property acquisitions or for general working
capital needs. TCI's management also intends to pursue TCI's rights vigorously
with respect to mortgage notes that are in default. TCI's Articles of
Incorporation impose no limitations on its investment policy with respect to
mortgage loans and does not prohibit it from investing more than a specified
percentage of its assets in any one mortgage loan.

COMPETITION

The real estate business is highly competitive and TCI competes with
numerous entities engaged in real estate activities (including certain entities
described in "Certain Relationships and Related Transactions of ARL, TCI and IOT
- Related Party Transactions", some of which have greater financial resources
than those of TCI. TCI's 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 units and the ability to
provide a community atmosphere for the tenants. TCI's 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 TCI's properties also are competitive factors.

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

As described above and in "Certain Relationships and Related
Transactions of ARL, TCI and IOT - Related Party Transactions" the officers and
directors of TCI also serve as officers or directors of certain other entities,
also advised by BCM, and which have business objectives similar to those of TCI.
TCI's directors, officers and advisor owe fiduciary duties to such other
entities as well as to TCI under applicable law. In determining to which entity
a particular investment opportunity will be allocated, the officers, directors
and advisor consider the respective investment objectives of each such entity
and the appropriateness of a particular investment in light of each such
entity's existing real estate portfolio. 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, as also described in Item 13 "Certain Relationships and
Related Transactions of ARL, TCI and IOT - Related Party Transactions" TCI also
competes with other entities which

194

are affiliates of BCM and which have investment objectives similar to TCI's and
that may compete with it in purchasing, selling, leasing and financing of real
estate and real estate related investments. In resolving any potential conflicts
of interest which may arise, BCM has informed TCI's management 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.

CERTAIN FACTORS ASSOCIATED WITH REAL ESTATE AND RELATED INVESTMENTS

TCI 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 the 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 TCI's management or BCM. The illiquidity of real estate
investments may also impair the ability of TCI's management to respond promptly
to changing circumstances. TCI's management believes that such risks are
partially mitigated by the diversification by geographic region and property
type of TCI's real estate and mortgage notes receivable portfolios. However, to
the extent new property investments or mortgage lending is concentrated in any
particular region or property type, the advantages of diversification may be
mitigated.

PROPERTIES OF TCI

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

Details of TCI's real estate and mortgage notes receivable portfolios
at December 31, 2000, are set forth in Schedules III and IV, respectively, to
the TCI Consolidated Financial Statements included at "Financial Statements and
Supplementary Data". The discussions set forth below under the headings "Real
Estate" and "Mortgage Loans" provide certain summary information concerning
TCI's real estate and mortgage notes receivable portfolios.

TCI's real estate portfolio consists of properties held for investment,
properties held for sale, which were primarily obtained through foreclosure of
the collateral securing mortgage notes receivable and investments in
partnerships. The discussion set forth below under the heading "Real Estate"
provides certain summary information concerning TCI's real estate and further
summary information with respect to its properties held for investment,
properties held for sale and its investment in partnerships.

At December 31, 2000, none of TCI's properties, mortgage notes
receivable or investment in partnerships exceeded 10% of total assets. At
December 31, 2000, 88% of TCI's assets consisted of properties held for
investment, less than 1% consisted of properties held for sale, 1% consisted of
mortgage notes and interest receivable and less than 1% consisted of investments
in partnerships. The remaining 10% of TCI's assets were invested in cash, cash

195

equivalents, marketable equity securities and other assets. The percentage of
TCI's assets invested in any one category is subject to change and no assurance
can be given that the composition of TCI's assets in the future will approximate
the percentages listed above.

TCI's real estate is geographically diverse. At December 31, 2000, TCI
held investments in apartments and commercial properties in each of the
geographic regions of the continental United States, although its apartments and
commercial properties were concentrated in the Southeast and Southwest regions,
as shown more specifically in the table under "Real Estate" below. At December
31, 2000, TCI held mortgage notes receivable secured by apartments and
commercial properties in the Southwest and Midwest regions of the continental
United States, as shown more specifically in the table under "Mortgage Loans"
below.

GEOGRAPHIC REGIONS

TCI has divided the continental United States into the following
geographic regions:

o Northeast region comprised of the states of Connecticut,
Delaware, Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island and Vermont, and the
District of Columbia. TCI owns a commercial property in this
region.

o Southeast region comprised of the states of Alabama, Florida,
Georgia, Mississippi, North Carolina, South Carolina,
Tennessee and Virginia. TCI owns 7 apartments and 20
commercial properties in this region.

o Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. TCI owns 45
apartments and 22 commercial properties in this region.

o Midwest region comprised of the states of Illinois, Indiana,
Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri,
Nebraska, North Dakota, Ohio, South Dakota, West Virginia and
Wisconsin. TCI owns 4 apartments, 4 commercial properties and
3 hotels in this region.

o Mountain region comprised of the states of Colorado, Idaho,
Montana, Nevada, Utah and Wyoming. TCI owns an apartment and 3
commercial properties in this region.

o Pacific region comprised of the states of California, Oregon
and Washington. TCI owns 4 apartments, a hotel and 6
commercial properties in this region.

Excluded from the above are 23 parcels of unimproved land, as described
below.

REAL ESTATE

At December 31, 2000, approximately 90% of TCI's assets were invested
in real estate. TCI invests in real estate located throughout the continental
United States, either on a leveraged or nonleveraged basis. TCI's real estate
portfolio consists of properties held for investment,

196

investments in partnerships and properties held for sale (which were primarily
obtained through foreclosure of the collateral securing mortgage notes
receivable).

TYPES OF REAL ESTATE INVESTMENTS. TCI's real estate consists of
commercial properties (office buildings, industrial warehouses and shopping
centers), hotels and apartments having established income-producing
capabilities. 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. TCI may acquire properties subject to or
assume existing debt and may mortgage, pledge or otherwise obtain financing for
its properties. 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.

TCI typically invests in developed real estate. However, TCI has
recently invested in apartment development and construction. To the extent that
TCI continues to invest in development and construction projects, it will be
subject to business risks, such as cost overruns and construction delays,
associated with such higher risk projects. At December 31, 2000, TCI had under
construction a 29,000 sq. ft. aircraft hanger in Addison, Texas.

In the opinion of TCI's management, the properties owned by TCI are
adequately covered by insurance.

The following table sets forth the percentages, by property type and
geographic region, of TCI's real estate (other than four hotels in the Pacific
and Midwest regions and 23 parcels of unimproved land, as described below) at
December 31, 2000.

COMMERCIAL
REGION APARTMENTS PROPERTIES
------ ---------- ----------

Pacific ........................................... 3% 4%
Midwest ........................................... 8 10
Northeast ......................................... -- 1
Southwest ......................................... 76 48
Southeast ......................................... 13 31
Mountain .......................................... -- 6
--- ---
100% 100%
=== ===

The foregoing table is based solely on the number of apartment units
and amount of commercial square footage and does not reflect the value of TCI's
investment in each region. TCI owns 23 parcels of unimproved land, 2 parcels of
4.79 acres and 4.66 acres in the Southeast region and 21 parcels of .67 acres,
..68 acres, 14.39 acres, 2.89 acres, 2.14 acres, 4.7 acres, 6.8 acres, 22.99
acres, 36.4 acres, 36.38 acres, 97.97 acres, 55.8 acres, 160.38 acres, 97.0
acres, 101.94 acres, 16.16 acres, 128 acres, 17.07 acres, 9.96 acres, 108.9
acres and 18,000 sq. ft. in the

197

Southwest region. See Schedule III to the Consolidated Financial Statements of
TCI for a detailed description of TCI Real Estate portfolio.

A summary of activity in TCI's owned real estate portfolio during 2000
is as follows:

Owned properties at January 1, 2000 ................................... 144
Properties purchased .................................................. 18
Properties obtained through foreclosure ............................... 1
Property under construction ........................................... 1
Properties sold ....................................................... (20)
---
Owned properties at December 31, 2000 ................................. 144
===

PROPERTIES HELD FOR INVESTMENT. Set forth below are TCI's properties
held for investment and the monthly rental rate for apartments, 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, 2000, 1999 and 1998 for apartments and commercial properties and
average occupancy during 2000, 1999 and 1998 for hotels:

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/SQUARE ---------------------------- ----------------------------
PROPERTY LOCATION FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- ------------ ------ ------ ------ ------ ------ ------

APARTMENTS

4242 Cedar Springs Dallas, TX 76 Units/ $ .87 $ .84 $ .82 92 99 99
60,600 Sq. Ft.

4400 Midland, TX 92 Units/ .49 .49 .49 91 85 98
94,472 Sq. Ft.

Apple Lane Lawrence, KS 75 Units/ 1.00 * * 97 * *
30,000 Sq. Ft.

Arbor Point Odessa, TX 195 Units/ .39 .37 .42 95 95 78
178,920 Sq. Ft.

Ashton Way Midland, TX 178 Units/ .41 .41 .41 95 78 93
138,964 Sq. Ft.

Autumn Chase Midland, TX 64 Units/ .52 * * 97 * *
58,652 Sq. Ft.

Bent Tree Addison, TX 204 Units/ .72 .71 .70 95 93 93
196,300 Sq. Ft.

Camelot Largo, FL 120 Units/ .54 .53 .51 99 92 100
141,024 Sq. Ft.

Carseka Los Angeles, CA 54 Units/ 1.28 1.12 1.01 96 98 97
37,068 Sq. Ft.

Cliffs of McKinney, TX 208 Units/
Eldorado 182,288 Sq. Ft. .84 .84 .92 95 91 80

Country Tampa, FL 227 Units/ .58 .56 .54 94 95 91
Crossing 199,952 Sq. Ft.

Coventry Midland, TX 120 Units/ .42 .42 .42 98 78 91
105,608 Sq. Ft.

198

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/SQUARE ---------------------------- ----------------------------
PROPERTY LOCATION FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- ------------ ------ ------ ------ ------ ------ ------

El Chapparal San Antonio, TX 190 Units/ .69 .67 .66 93 99 91
174,220 Sq. Ft.

Fairway View El Paso, TX 264 Units/ .61 .57 * 83 76 *
Estates 204,000 Sq. Ft.

Fairways Longview, TX 152 Units/ .53 .53 .53 95 78 83
134,176 Sq. Ft.

Fontenelle Bellevue, NE 338 Units/ .65 .63 .60 96 57 99
Hills 380,198 Sq. Ft.

Forest Ridge Denton, TX 56 Units/ .64 .64 .62 95 98 88
65,480 Sq. Ft.

Fountain Lake Texas City, TX 166 Units/ .56 .55 .55 86 85 88
161,220 Sq. Ft.

Fountains of Midland, TX 172 Units/ .53 .53 .35 88 52 2
Waterford 129,200 Sq. Ft.

Gladstell Conroe, TX 168 Units/ .72 .72 .70 90 90 97
Forest 121,536 Sq. Ft.

Glenwood Addison, TX 168 Units/ .80 .78 .74 98 85 96
134,432 Sq. Ft.

Grove Park Plano, TX 188 Units/ .81 .77 .72 95 95 97
143,556 Sq. Ft.

Harper's Ferry Lafayette, LA 122 Units/ .58 .57 .55 94 75 95
112,500 Sq. Ft.

Heritage Tulsa, OK 136 Units/ .72 .71 .69 92 89 94
92,464 Sq. Ft.

Heritage on Jacksonville, FL 301 Units/ .63 .63 .62 98 92 95
the River 289,490 Sq. Ft.

Hunters Glen Midland, TX 212 Units/ .37 .37 .37 91 86 90
174,180 Sq. Ft.

In the Pines Gainesville, FL 242 Units/ .54 .52 .51 97 98 97
294,860 Sq. Ft.

Limestone Canyon Austin, TX 260 Units/ 1.00 .97 * 96 83 *
216,000 Sq. Ft.

Madison at Houston, TX 180 Units/ .68 .66 .63 92 91 96
Bear Creek 138,448 Sq. Ft.

McCallum Dallas, TX 322 Units/ .97 .96 .93 94 92 95
Crossing 172,796 Sq. Ft.

McCallum Glen Dallas, TX 275 Units/ .93 .91 .89 93 92 95
159,850 Sq. Ft.

Mountain Plaza. El Paso, TX 188 Units/ .49 .48 .47 94 94 92
220,710 Sq. Ft.

Oak Park IV Clute, TX 108 Units/ .52 .51 .50 88 84 90
78,708 Sq. Ft.

Oak Run Pasadena, TX 160 Units/ .76 .74 .72 97 89 91
128,016 Sq. Ft.

199

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/SQUARE ---------------------------- ----------------------------
PROPERTY LOCATION FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- ------------ ------ ------ ------ ------ ------ ------

Paramount Amarillo, TX 181 Units/ .55 * * 94 * *
Terrace 123,840 Sq. Ft.

Park at San Antonio, TX 211 Units/ .59 .58 .56 91 86 95
Colonnade 188,000 Sq. Ft.

Park Lane Dallas, TX 97 Units/ .64 .62 .60 93 96 97
87,260 Sq. Ft.

Plantation Tulsa, OK 138 Units/ .56 .54 * 95 91 *
103,500 Sq. Ft.

Primrose Bakersfield, CA 162 Units/ .56 * * 93 * *
144,836 Sq. Ft.

Quail Creek Lawrence, KS 95 Units/ .55 * * 97 * *
113,416 Sq. Ft.

Quail Oaks Balch Springs, TX 131 Units/ .77 .73 .68 97 96 96
72,848 Sq. Ft.

Sandstone Mesa, AZ 238 Units/ .90 .88 .33 91 93 94
363,079 Sq. Ft.

Somerset Texas City, TX 200 Units/ .64 .63 .60 91 85 92
163,368 Sq. Ft.

South Cochran Los Angeles, CA 64 Units/ 1.36 1.22 1.06 98 96 99
43,100 Sq. Ft.

Southgate Odessa, TX 180 Units/ .41 .41 .44 96 86 88
151,656 Sq. Ft.

Southgreen Bakersfield, CA 80 Units/ .77 .70 .57 95 92 95
66,000 Sq. Ft.

Stone Oak San Antonio, TX 252 Units/ .65 .63 .63 94 85 92
187,686 Sq. Ft.

Summerfield Orlando, FL 224 Units/ .70 .67 .66 95 86 91
204,116 Sq. Ft.

Summerstone Houston, TX 242 Units/ .68 .65 .63 93 96 96
188,734 Sq. Ft.

Sunchase Odessa, TX 300 Units/ .43 .43 .44 95 87 92
223,048 Sq. Ft.

Sunset Lake Waukegan, IL 414 Units/ $ .85 $ .83 $ .81 94 93 91
302,640 Sq. Ft.

Terrace Hills El Paso, TX 310 Units/ .66 .63 .63 93 94 97
233,192 Sq. Ft.

Timbers Tyler, TX 180 Units/ .55 .54 .54 98 93 87
101,666 Sq. Ft.

Trails at Houston, TX 240 Units/ .71 .68 .64 97 96 96
Windfern 173,376 Sq. Ft.

Treehouse Irving, TX 160 Units/ .75 .71 .68 94 93 96
153,072 Sq. Ft.

Westwood Odessa, TX 79 Units/ .43 .41 .45 100 91 99
49,001 Sq. Ft.

Willow Creek El Paso, TX 112 Units/ .50 .49 .48 97 77 92
103,140 Sq. Ft.

200

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/SQUARE ---------------------------- ----------------------------
PROPERTY LOCATION FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- ------------ ------ ------ ------ ------ ------ ------

Willo-Wick Pensacola, FL 152 Units/ .56 .53 .52 89 80 87
Gardens 153,360 Sq. Ft.

Willow Wick North Augusta, SC 104 Units/ .56 .55 .52 91 96 99
94,128 Sq. Ft.

Woodview Odessa, TX 232 Units/ .46 .45 .51 96 91 85
165,840 Sq. Ft.

OFFICE
BUILDINGS

1010 Common New Orleans, LA 494,579 Sq. Ft. 10.83 10.45 8.20 32 21 13

225 Baronne New Orleans, LA 416,834 Sq. Ft. 9.61 9.32 7.34 76 77 62

4135 Beltline Road Addison, TX 90,000 Sq. Ft. 10.17 10.00 * 33 * *

9033 Wilshire Los Angeles, CA 44,253 Sq. Ft. 26.08 * * 90 * *

Ambulatory Sterling, VA 33,832 Sq. Ft. 34.26 * * 100 *
Surgery Center

Amoco New Orleans, LA 378,244 Sq. Ft. 11.54 11.23 12.02 80 78 79

Atrium Palm Beach, FL. 74,603 Sq. Ft. 11.55 11.31 8.86 84 96 99

Bay Plaza Tampa, FL 75,780 Sq. Ft. 15.60 15.14 14.48 95 85 87

Bay Plaza II Tampa, FL 78,882 Sq. Ft. 12.80 * * 93 * *

Bonita Plaza Bonita, CA 47,777 Sq. Ft. 18.66 18.78 16.59 92 88 88

Brandeis Omaha, NE 319,234 Sq. Ft. 15.87 * * 100 * *

Chesapeake San Diego, CA 57,493 Sq. Ft. 11.21 12.33 * 100 88 *
Center

Corporate Chantilly, VA 65,918 Sq. Ft. 18.31 16.85 14.92 100 100 100
Pointe

Countryside Sterling, VA 133,422 Sq. Ft. 18.02 * * 89 * *
Retail Center

Daley Plaza San Diego, CA 62,425 Sq. Ft. 15.44 15.05 14.69 97 100 92

Durham Center Durham, NC 207,171 Sq. Ft. 17.79 17.93 17.30 95 78 92

Eton Square Tulsa, OK 222,654 Sq. Ft. 10.52 9.78 * 60 86 *

Forum Richmond, VA 79,791 Sq. Ft. 15.65 15.34 14.82 84 88 81

Harmon Sterling, VA 72,062 Sq. Ft. 19.50 * * 85 * *

Hartford Dallas, TX 174,513 Sq. Ft. 10.78 10.68 9.93 50 57 57

Institute Place Chicago, IL 144,915 Sq. Ft. 14.99 14.47 14.73 100 95 95

Jefferson Washington, DC 71,877 Sq. Ft. 31.94 30.94 30.83 89 100 94

Lexington Colorado 74,603 Sq. Ft. 12.26 11.71 10.93 54 97 80
Center Springs, CO

Mimado Sterling, VA 35,127 Sq. Ft. 19.55 * * 89 * *

NASA Clear Lake, TX 78,159 Sq. Ft. 11.74 11.44 10.81 66 66 78

One Steeplechase Sterling, VA 103,376 Sq. Ft. 16.64 16.26 15.74 100 100 100

Parkway North Dallas, TX 71,041 Sq. Ft. 14.77 7.82 12.62 76 85 78

Plaza Towers St. Petersburg, FL 186,281 Sq. Ft. 14.54 14.03 13.33 95 95 100

201

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/SQUARE ---------------------------- ----------------------------
PROPERTY LOCATION FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- ------------ ------ ------ ------ ------ ------ ------

Remington Tower Tulsa, OK 90,009 Sq. Ft. 11.34 10.89 * 86 76 *

Savings of Houston, TX 68,634 Sq. Ft. 11.68 11.28 9.70 79 71 89
America

Valley Rim San Diego, CA 54,194 Sq. Ft. 15.33 15.35 15.81 93 90 88

Venture Center Atlanta, GA 38,272 Sq. Ft. 17.16 16.62 14.74 100 100 71

View Ridge San Diego, CA 25,062 Sq. Ft. 8.43 8.18 7.20 100 91 87

Waterstreet Boulder, CO 106,257 Sq. Ft. 19.48 18.83 17.56 90 92 98

Westgrove Air Addison, TX 78,326 Sq. Ft. 12.91 12.69 11.04 90 89 85
Plaza

Windsor Plaza Windcrest, TX 80,522 Sq. Ft. 13.70 13.43 12.85 63 62 49

INDUSTRIAL
WAREHOUSES

5360 Tulane Atlanta, GA 30,000 Sq. Ft. 2.60 2.55 2.45 100 100 65

5700 Tulane Atlanta, GA 67,850 Sq. Ft. 2.83 2.63 * 77 9 *

Addison Hanger Addison, TX 23,650 Sq. Ft. 11.08 11.29 * 51 50 *

Addison Hanger II Addison, TX 29,000 Sq. Ft. * * * * * *

Central Storage Dallas, TX 216,035 Sq. Ft. 1.48 1.48 1.48 100 100 100

Encon Fort Worth, TX 256,410 Sq. Ft. 2.00 2.00 2.00 100 100 100

Kelly Dallas, TX 330,334 Sq. Ft. 3.85 3.74 2.90 100 98 100

McLeod Orlando, FL 110,914 Sq. Ft. 7.86 7.62 7.05 88 91 90

Ogden Ogden, UT 107,112 Sq. Ft. 3.32 3.79 4.12 86 100 86
Industrial

Plaza on Dallas, TX 80,278 Sq. Ft. $11.13 $11.70 $10.66 79 65 69
Bachman Creek

Space Center San Antonio, TX 101,500 Sq. Ft. 3.09 2.97 2.96 100 83 65

Technology Sterling, VA 197,659 Sq. Ft. 6.35 6.17 5.76 92 91 87
Trading

Texstar Arlington, TX 97,846 Sq. Ft. 2.11 2.11 2.11 100 100 100

Tricon Atlanta, GA 570,877 Sq. Ft. 3.75 3.21 3.59 91 96 98

SHOPPING
CENTERS

Dunes Plaza Michigan City, IN 223,869 Sq. Ft. 5.61 5.54 4.84 63 64 43

K-Mart Cary, NC 92,033 Sq. Ft. 3.28 3.28 3.28 100 100 100

Parkway Center Dallas, TX 28,374 Sq. Ft. 14.67 13.60 13.86 100 100 94

Promenade Highland Ranch, CO 133,558 Sq. Ft. 10.57 10.34 9.75 73 93 99

Sadler Square Amelia Island, FL 70,295 Sq. Ft. 7.15 6.99 6.90 95 96 95

Sheboygan Sheboygan, WI 74,532 Sq. Ft. 1.99 1.99 1.99 100 100 100

OTHER

Signature Dallas, TX 56,532 Sq. Ft.
Athletic Club

202

TOTAL ROOM REVENUE DIVIDED
AVERAGE ROOM RATE OCCUPANCY % BY TOTAL AVAILABLE ROOMS
--------------------------- -------------------- ---------------------------
PROPERTY LOCATION ROOMS 2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- -------- ------- ------- ------- ---- ---- ---- ------- ------- -------

HOTELS

Brompton Chicago, IL 52 Rooms $131.78 $115.12 $ 98.08 52 60 50 $ 69.10 $ 79.24 $ 67.93

City Suite. Chicago, IL 45 Rooms 125.32 111.45 101.13 74 71 68 92.40 69.23 46.54

Majestic Inn San Francisco, CA 57 Rooms 170.08 162.58 148.96 79 79 71 133.65 128.76 112.54

Surf Chicago, IL 55 Rooms 120.67 105.27 98.85 65 63 57 77.89 66.62 56.12

PROPERTY LOCATION SQUARE FOOTAGE/ACRES
-------- -------- --------------------

LAND
1013 Common New Orleans, LA 18,000 Sq. Ft.
Alamo Springs. Dallas, TX .678 Acres
Dominion Dallas, TX 14.39 Acres
Eagle Crest Farmers Branch, TX 22.99 Acres
Folsom Dallas, TX 36.38 Acres
Lamar/Parmer. Austin, TX 17.07 Acres
Las Colinas Las Colinas, TX 4.7 Acres
Lemmon Carlisle Dallas, TX 2.14 Acres
Limestone Canyon II Austin, TX 9.96 Acres
Manhattan Farmers Branch, TX 108.9 Acres
McKinney 36 Collin County, TX 36.4 Acres
Red Cross Dallas, TX 2.89 Acres
Sandison. Collin County, TX 97.97 Acres
Solco Allen Collin County, TX 55.8 Acres
Stacy Road Allen, TX 160.38 Acres
State Highway 121 Collin County, TX 101.94 Acres
Watters Road Collin County, TX 97.00 Acres
West End Dallas, TX 6.8 Acres
Whisenant Collin County, TX 16.16 Acres

* Property was either purchased or under construction in 1999 or 2000.

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

In 2000, TCI purchased the following properties:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS/SQ.FT./ACRES PRICE PAID INCURRED RATE DATE
-------- --------- ------------------ -------- -------- -------- -------- --------

APARTMENTS

Apple Lane Lawrence, KS 75 Units $ 1,575 $ 595 $ 1,005 8.63% 05/07
Autumn Chase Midland, TX 64 Units 1,338 458 936 9.45(1) 04/05
Paramount Terrace Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01
Primrose Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25(1) 03/07
Quail Creek Lawrence, KS 95 Units 3,250 1,088 2,254 7.44 07/03

OFFICE BUILDING

9033 Wilshire Blvd Los Angeles, CA 44,253 Sq. Ft. 9,225 2,536 6,861 8.07 08/09

Bay Plaza II Tampa, FL 78,882 Sq. Ft. 4,825 4,786 -- -- --

Brandeis Omaha, NE 319,234 Sq. Ft. 14,000 4,052 8,750 9.5 11/03

203

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS/SQ.FT./ACRES PRICE PAID INCURRED RATE DATE
-------- --------- ------------------ -------- -------- -------- -------- --------

Countryside Sterling, VA 265,718 Sq. Ft. 44,940 4,825 36,297 7.75 12/02
Portfolio(2)

LAND

DF Fund Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01(3)

Folsom Dallas, TX 36.38 Acres 1,750 1,738 -- -- --

Lamar/Parmer Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00(4)

Limestone Canyon II Austin, TX 9.96 Acres 504 424 -- -- --

Manhattan Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01(5)

Netzer Collin County, TX 20 Acres 400 418 -- -- --

(1) Variable interest rate.

(2) The Countryside Portfolio consisted of four commercial buildings: the
133,422 sq. ft. Countryside Retail Center, the 72,062 sq. ft. Harmon
Office Building, the 35,127 sq. ft. Mimado Office Building and the
25,107 sq. ft. Ambulatory Surgical Center.

(3) The DF Fund land was sold in September 2000.

(4) The loan was paid off in March 2001.

(5) The loan was paid off in June 2000.

In 2000, TCI sold the following properties:

UNITS/SQ.FT. NET CASH
PROPERTY LOCATION ROOMS/ACRES SALES PRICE RECEIVED DEBT DISCHARGED GAIN ON SALE
-------- -------- ------------------ ----------- -------- --------------- ------------
(DOLLARS IN THOUSANDS)

APARTMENTS

Apple Creek Dallas, TX 216 Units $ 4,300 $2,155 $1,723 $3,240

Ashley Crest Houston, TX 168 Units 3,950 1,102 2,812(1) 706

Country Bend Fort Worth, TX 166 Units 4,700 1,894 2,445 1,097

Crescent Place Houston, TX 120 Units 3,485 1,034 2,151 793

Eagle Rock Los Angeles, CA 99 Units 5,600 1,967 3,246 1,021

Fountain Village Tucson, AZ 410 Units 11,700 3,088 7,569 5,086

Hunters Bend San Antonio, TX 96 Units 1,683 418 1,127(1) 572

Parkwood Knoll San Bernadino, CA 178 Units 9,100 3,007 5,491 2,967

Shadow Run Pinellas Park, FL 276 Units 12,350 2,521 8,653 5,367

Villa Piedra Los Angeles, CA 132 Units 7,400 2,348 4,686 2,588

Villas at Sterling, VA 102 Units 8,100 2,686 5,334(1) 1,520
Countryside

Villas at Los Angeles, CA 49 Units 3,435 792 2,386 1,188
Fairpark

Westgate of Laurel, MD 218 Units 11,290 2,599 7,525(1) 3,575
Laurel

Woodbridge Denver, CO 194 Units 6,856 3,328 2,845 3,796

OFFICE BUILDING

Brookfield Chantilly, VA 63,504 Sq. Ft. 4,850 1,729 2,838 1,455
Corporate Center

INDUSTRIAL
WAREHOUSE

Shady Trail Hotel Dallas, TX 42,900 Sq. Ft. 900 340 521 206

204

NET CASH
PROPERTY LOCATION UNITS/SQ.FT./ROOMS SALES PRICE RECEIVED DEBT DISCHARGED GAIN ON SALE
-------- -------- ------------------ ----------- -------- --------------- ------------
(DOLLARS IN THOUSANDS)

Chateau Charles Lake Charles, LA 245 Rooms 1,000 928 -- 633

LAND

Allen(2) Allen, TX 5.49 Acres 370 86 281 184

McKinney(3) McKinney, TX 255 Acres 8,783 5,035 4,423 2,091

Watters/Hwy. 121(4) McKinney, TX 24.06 Acres 3,620 3,620 -- 3,089

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

(2) The Allen sale consisted of tracts of three land parcels: a 2.62 acre
tract of the Stacy Road land parcel; a 2.23 acre tract of the Sandison
land parcel; and, a .64 acre tract of the Whisenant land parcel.

(3) The McKinney sale included three land parcels: the 20 acre Netzer land
parcel; the 79.54 acre DF Fund land parcel; and the 156.19 acre OPUBCO
land parcel.

(4) The Watters/Highway 121 sale consisted of a six acre tract of the
Watters land parcel and a 18.061 acre tract of the State Highway 121
land parcel.

In 2000, TCI financed/refinanced the following properties:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION UNITS/SQ. FT. INCURRED DISCHARGED RECEIVED RATE DATE
-------- --------- ------------- -------- ---------- -------- -------- --------

(dollars in thousands)
APARTMENTS

Camelot Largo, FL 120 Units $3,800 $ -- $3,100 8.85%(1) 12/05

Crescent Place Houston, TX 120 Units 2,165 1,722 370 7.04(1) 03/30

Country Crossing Tampa, FL 227 Units 3,825 2,645 985 9.65(1) 06/03

Fontenelle Hills(2) Bellevue, NE 338 Units 2,010 -- 1,967 8.51 06/10

Madison @ Bear Houston, TX 180 Units 3,500 2,625 730 7.04(1) 03/30
Creek

OFFICE
BUILDINGS

Bay Plaza II Tampa, FL 78,882 Sq. Ft. 3,600 -- 3,400 8.44(1) 01/06

Jefferson Washington, DC 71,876 Sq. Ft. 9,875 8,955 557 9.50 07/25

Technology Sterling, VA 197,659 Sq. Ft. 6,300 3,881 2,065 8.26(1) 05/05
Trading

Venture Center Atlanta, GA 38,772 Sq. Ft. 2,700 1,113 1,592 8.75 03/10

Westgrove Air Addison, TX 78,326 Sq. Ft. 2,087 1,180 742 9.02(1) 01/05
Plaza

INDUSTRIAL
WAREHOUSES

5360 Tulane Atlanta, GA 67,850 Sq. Ft. 375 208 134 9.65(1) 04/03

Kelly Dallas, TX 330,406 Sq. Ft. 5,000 2,173 2,628 9.50(1) 10/03

Space Center San Antonio, TX 101,500 Sq. Ft. 1,125 691 402 9.65(1) 04/03

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

(2) Second lien financing.

205

PROPERTIES HELD FOR SALE. Set forth below are TCI's properties held for
sale, primarily obtained through foreclosure.

PROPERTY LOCATION ACRES
-------- -------- -----

Fiesta ................................ San Angelo, TX .6657 Acres
Fruitland ............................. Fruitland Park, FL 4.66 Acres
Moss Creek ............................ Greensboro, NC 4.79 Acres
Round Mountain ........................ Austin, TX 128 Acres

PARTNERSHIP PROPERTIES. Set forth below are the properties owned by
partnerships which TCI accounts for using the equity method and the monthly
rental rate for apartments and the average annual rental rate for commercial
properties and occupancy thereof at December 31, 2000, 1999 and 1998:

RENT PER SQUARE FOOT OCCUPANCY %
---------------------------- ----------------------------
PROPERTY LOCATION UNITS/SQ. FT. 2000 1999 1998 2000 1999 1998
-------- -------- ------------ ------ ------ ------ ------ ------ ------

APARTMENT

Lincoln Dallas, TX 55 Units/ $ 1.16 $1.14 $1.08 94 92 95
Court 40,063 Sq. Ft.

OFFICE
BUILDING

Prospect Rancho 40,807 Sq. Ft. 20.42 16.56 17.91 100 100 100
Park #29 Cordova, CA

SHOPPING CENTER

Chelsea Houston, TX 70,275 Sq. Ft. 9.31 8.95 8.61 77 85 81
Square

TCI owns a noncontrolling combined 55% limited and general partnership
interest in Jor-Trans Investors Limited Partnership ("Jor-Trans") which owns the
Lincoln Court Apartments.

TCI is a 30% general partner in Sacramento Nine ("SAC 9"), which owns
the Prospect Park #29 Office Building. In 2000, TCI received $103,000 in
operating distributions from SAC 9.

TCI is a 63.7% limited partner and IOT is a 36.3% general partner in
Tri-City which owns the Chelsea Square Shopping Center. In February 2000, the
Chelsea Square Shopping Center was financed in the amount of $2.1 million.
Tri-City received net cash of $2.0 million after the payment of various closing
costs. The mortgage bore interest at a fixed rate of 10.24% per annum until
February 2001, and a variable rate thereafter, currently 10% per annum, requires
monthly payments of principal and interest of $20,601 and matures in February
2005. TCI received a distribution of $1.3 million of the net financing proceeds.
See "Certain Relationships and Related Transactions of ARL, TCI and IOT -
Related Party Transactions."

206

MORTGAGE LOANS

In addition to investments in real estate, a portion of TCI's assets
are invested in mortgage notes receivable, principally secured by real estate.
TCI may originate mortgage loans in conjunction with providing purchase money
financing of property sales. TCI's management intends to service and hold for
investment the mortgage notes in TCI's portfolio. TCI's mortgage notes
receivable consist of first, wraparound and junior mortgage loans.

TYPES OF MORTGAGE ACTIVITY. TCI has originated its own mortgage loans,
as well as acquired existing mortgage notes either directly from builders,
developers or property owners, or through mortgage banking firms, commercial
banks or other qualified brokers. BCM, in its capacity as a mortgage servicer,
services TCI's mortgage notes. TCI's investment policy is described in "Business
of TCI - Business Plan and Investment Policy of TCI."

TYPES OF PROPERTIES SECURING MORTGAGE NOTES. The properties securing
TCI's mortgage notes receivable portfolio at December 31, 2000, consisted of an
apartment, six office buildings, a mobile home park and unimproved land. The
board of directors may alter the types of properties securing or collateralizing
mortgage loans in which TCI invests without a vote of stockholders. TCI's
Articles of Incorporation impose certain restrictions on transactions with
related parties.

At December 31, 2000, TCI's mortgage notes receivable portfolio
included five mortgage loans with an aggregate principal balance of $6.2 million
secured by income-producing real estate located in the Midwest and Southwest
regions of the continental United States and one loan with a principal balance
of $2.5 million secured by unimproved land. At December 31, 2000, 1% of TCI's
assets were invested in notes and interest receivable.

The following table sets forth the percentages (based on the mortgage
note principal balance) by property type and geographic region, of the income
producing properties that serve as collateral for TCI's mortgage notes
receivable at December 31, 2000. See Schedule IV to the Consolidated Financial
Statements of TCI for further details of TCI's mortgage notes receivable
portfolio.

REGION APARTMENTS COMMERCIAL PROPERTIES TOTAL

Southwest 16% 82% 98%
Midwest -- 2 2
--- --- ---
16% 84% 100%
=== === ===

A summary of the activity in TCI's mortgage notes receivable portfolio
during 2000 is as follows:

Mortgage notes receivable at January 1, 2000 ....................... 9
Loans paid off ..................................................... (5)
Loans funded ....................................................... 4
Loans foreclosed ................................................... 2
---
Mortgage notes receivable at December 31, 2000...................... 6
===

207

During 2000, $20.4 million was collected in full payment of five
mortgage notes and $132,000 in principal payments were received on other
mortgage notes. At December 31, 2000, less than 1% of TCI's assets were invested
in mortgage notes secured by non-income producing real estate, comprised of a
second lien mortgage note secured by unimproved land: 442 acres in Tarrant
County, Texas, 1,130 acres in Denton County, Texas, and 26 acres in Collin
County, Texas.

FIRST MORTGAGE LOANS. TCI invests in first mortgage notes, with short,
medium or long-term maturities. First mortgage loans generally provide for level
periodic payments of principal and interest sufficient to substantially repay
the loan prior to maturity, but may involve interest-only payments or moderate
amortization of principal and a "balloon" principal payment at maturity. With
respect to first mortgage loans, the borrower is required to provide a
mortgagee's title policy or an acceptable legal title opinion as to the validity
and the priority of the mortgage lien over all other obligations, except liens
arising from unpaid property taxes and other exceptions normally allowed by
first mortgage lenders in the relevant area. TCI may grant participating in
first mortgage loans that it originates to other lenders.

The following discussion briefly describes events that affected
previously funded first mortgage loans during 2000.

In February 2000, a mortgage loan acquired in the acquisition of CMET,
with a principal balance of $28,000 was paid off including accrued but unpaid
interest.

In December 1999, TCI provided $8.5 million of purchase money financing
in conjunction with the sale of 253 acres of unimproved land in McKinney and
Collin County, Texas. The note receivable bore interest at 8.5% per annum,
required a $1.0 million principal pay down in February 2000, required payment of
all accrued interest in June 2000 and required payment of all principal and
accrued interest at maturity in September 2000. The loan was repaid in
accordance with the terms. The sale had originally been recorded under the cost
recovery method. In conjunction with the loan payoff, TCI recognized a
previously deferred gain on the sale of $4.8 million.

JUNIOR MORTGAGE LOANS. TCI may invest in junior mortgage loans, which
are secured by mortgages that are subordinate to one or more prior liens either
on the fee or a leasehold interest in real estate. Recourse on such loans
ordinarily includes the real estate on which the loan is made, other collateral
and personal guarantees by the borrower. The board of directors restricts
investment in junior mortgage loans, excluding wraparound mortgage loans, to not
more than 10% of TCI's assets. At December 31, 2000, less than 1% of TCI's
assets were invested in junior and wraparound mortgage loans.

The following discussion briefly describes the junior mortgage loans
that TCI originated as well as events that affected previously funded junior
mortgage loans during 2000.

In August 1998, a mortgage note receivable with a principal balance of
$2.0 million and a carrying value of $207,000 and secured by a second lien on a
shut-down hotel in Lake Chateau, Louisiana became delinquent. To protect its
interest, TCI purchased the first lien for $149,000. Foreclosure proceedings
were commenced and title to the property was received in February 2000.

208

No loss was incurred on foreclosure, as the estimated fair market value of the
property, less estimated costs of sale, exceeded the carrying value of the
mortgage notes receivable. In June 2000, the property was sold for an amount in
excess of its carrying value.

In December 2000, TCI funded a $2.5 million mortgage loan secured by a
second lien on unimproved land: 442 acres in Tarrant County, Texas, 1,130 acres
in Denton County, Texas, and 26 acres in Collin County, Texas. The note
receivable bears interest at 18.0% per annum, requires monthly interest only
payments of $37,500 and matured in June 2001. In June 2001, the loan and all
accrued but unpaid interest was paid in full.

Also in December 2000, TCI funded a $3.0 million mortgage loan secured
by a second lien on four office buildings in San Antonio, Texas. The note
receivable bears interest at 16.0% per annum, requires monthly interest only
payments of $40,000 and matures in June 2001.

RELATED PARTY. In June 2000, a $3.0 million loan was funded to BCM,
TCI's advisor. The loan was secured by 108,802 shares of IOT common stock. IOT
is also advised by BCM. The loan bore interest at 15.0% per annum and matured in
October 2000. All principal and interest were due at maturity. The loan and all
accrued but unpaid interest was paid off in August 2000.

Also in June 2000, a $9.0 million loan was funded to ART, an affiliate
of BCM. The loan was secured by 409,934 shares of IOT common stock. The loan
bore interest at 15.0% per annum and matured in October 2000. All principal and
interest were due at maturity. The loan and all accrued but unpaid interest was
paid off in October 2000.

PARTNERSHIP MORTGAGE LOANS. TCI owns a 60% general partner interest and
IOT owns a 40% general partner interest in Nakash Income Associates ("NIA"),
which owns a wraparound mortgage note receivable secured by a building occupied
by a Wal-Mart in Maulden, Missouri. TCI received distributions of $69,000 from
NIA in 2000 and advanced $19,000 to the partnership.

209

SELECTED FINANCIAL DATA OF TCI

The following is a summary of financial data incorporated by reference
in this joint proxy statement and prospectus. You should read the following data
in conjunction with the more detailed information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the TCI consolidated financial statements and related notes appearing elsewhere
in this joint proxy statement and prospectus.

Nine Months Ended September 30, For the Years Ended December 31,
------------------------------ -------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA

Rents .......................... $ 103,464 $ 103,855 $ 139,357 $ 82,039 $ 69,829 $ 54,462 $ 45,405
Property expense ............... 60,084 56,659 78,061 44,497 38,282 32,424 28,491
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income ............... 43,380 47,196 61,296 37,542 31,547 22,038 16,914
Other income ................... (2,254) 1,451 1,814 555 739 2,311 1,453
Other expense .................. 62,892 61,187 83,878 48,395 38,320 33,154 28,008
Gain on sale of real estate .... 47,529 29,562 50,550 40,517 12,940 21,404 1,579
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .............. 25,763 17,022 29,782 30,219 6,906 12,599 (8,062)

Preferred dividend
requirement .................... (22) (22) (22) (30) (1) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
applicable to Common shares .... $ 25,741 $ 17,000 $ 29,760 $ 30,189 $ 6,905 $ 12,599 $ (8,062)
=========== =========== =========== =========== =========== =========== ===========
Basic and Diluted Earnings
Per Share Net income (loss)
applicable to Common shares .... $ 2.97 $ 1.97 $ 3.45 $ 7.05 $ 1.78 $ 3.22 $ (2.02)
=========== =========== ========== =========== =========== =========== ===========

Dividends per Common share ..... $ -- $ .54 $ .54 $ .60 $ .60 $ .28* $ .28

Weighted average Common
shares outstanding ............. 8,675,230 8,630,029 8,631,621 4,283,574 3,876,797 3,907,221 3,994,687

---------
* Does not include a special dividend of $1.00 per share.

September 30, December 31,
-------------- ----------------------------------------------------
2001 2000 1999 1998 1997 1996
-------------- -------- -------- -------- -------- --------
(unaudited) (dollars in thousands, except per share)
BALANCE SHEET DATA

Real estate held for investment, net ... $604,571 $639,040 $599,746 $347,389 $269,845 $217,010
Real estate held for sale, net
Foreclosed .......................... 504 1,824 1,790 1,356 1,356 910
Other ............................... -- -- -- -- 3,630 2,089
Notes and interest receivable, net ..... 13,802 8,172 11,530 1,493 3,947 8,606

Total assets ........................... 708,789 731,885 714,195 382,203 319,135 244,971
Notes and interest payable ............. 460,275 501,734 503,406 282,688 222,029 158,692
Stockholders' equity ................... 216,811 200,560 179,112 91,132 86,133 78,959
Book value per share ................... $ 24.99 $ 23.22 $ 20.76 $ 23.35 $ 22.15 $ 20.11

210

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF TCI

INTRODUCTION

TCI invests in real estate through acquisitions, leases and
partnerships and in mortgage loans on real estate, including first, wraparound
and junior mortgage loans. TCI is the successor to a California business trust
organized on September 6, 1983, which commenced operations on January 31, 1984.
On November 30, 1999, TCI acquired all of the outstanding shares of beneficial
interest of CMET, a real estate company, in a tax-free exchange of shares,
issuing 1.181 shares of its common stock for each outstanding CMET share. TCI
accounted for the merger as a purchase.

Prior to January 1, 2000, TCI elected to be treated as a REIT under
Sections 856 through 860 of the Code. During the third quarter of 2000, due to a
concentration of ownership TCI no longer met the requirement for tax treatment
as a REIT.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $35.3 million at September 30, 2001,
compared with $22.3 million at December 31, 2000. TCI's principal sources of
cash have been and will continue to be from property operations, proceeds from
property sales, the collection of mortgage notes receivable and borrowings.
TCI's management anticipates that TCI's cash on hand, as well as cash generated
from property operations, the sale of properties and the refinancing of certain
of TCI's mortgage debt will be sufficient to meet TCI's cash requirements,
including debt service obligations and expenditures for property maintenance and
improvements.

Net cash provided by operating activities was $3.1 million for the nine
months ended September 30, 2001, compared to $1.1 million for the nine months
ended September 30, 2000. The primary factors affecting TCI's cash from
operations are discussed in the following paragraphs.

Cash from property operations (rents collected less payments for
expenses applicable to rental income) of $44.4 million in the nine months ended
September 30, 2001, approximated the $44.4 million in 2000.

Interest collected increased to $1.1 million in the nine months ended
September 30, 2001, from $594,000 in 2000. The increase was primarily due to TCI
funding two loans in the fourth quarter of 2000 and three loans funded in 2001.

Interest paid decreased to $30.7 million in the nine months ended
September 30, 2001, from $33.8 million in the nine months ended September 30,
2000. Of the decreases, $5.1 million was from the sale of 33 properties in 2001
and 2000 subject to debt, and $1.2 million was from loan payoffs and principal
paydowns in 2001 and 2000. These decreases were offset by increases of $3.2
million from the purchase of 20 properties in 2001 and 2000 subject to debt.

Advisory, incentive and net income fees paid increased to $7.8 million
in the nine months ended September 30, 2001, from $5.7 million in the nine
months ended September 30, 2000.

211

The increase was primarily due to an increase in incentive fees of $1.6 million.
The incentive fee is equal to 10% of the amount by which the aggregate sales
consideration for all TCI's properties sold during the year exceeds the total
cost of the property plus a simple 8% annual return to TCI's net investment in
such property.

General and administrative expenses paid increased to $7.7 million in
the nine months ended September 30, 2001, from $6.5 million in the nine months
ended September 30, 2000. This increase was mainly due to an increase in legal
fees and consulting fees.

In the first nine months of 2001, TCI sold 12 apartments, two
warehouses, three office buildings and four parcels of unimproved land for a
total of $136.7 million, receiving net cash of $43.8 million after the payoff of
existing debt and the payment of various closing costs. The purchasers assumed
$34.2 million in mortgage debt.

Also in the first nine months of 2001, TCI financed a parcel of
unimproved land for $4.5 million, receiving $4.3 million in cash after the
payment of various closing costs.

Further in the first nine months of 2001, TCI purchased five apartments
and four parcels of unimproved land for a total of $49.3 million, paying $7.1
million in cash, including various closing costs, and assumed existing mortgage
debt of $37.8 million.

In the fourth quarter of 2001, TCI purchased one parcel of unimproved
land for $1.2 million in cash. In September 2001, the board of directors
approved a private block purchase of 593,200 shares of common stock for a total
of $9.5 million.

TCI's management reviews the carrying values of TCI'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. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

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

212

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER
30, 2000. TCI had net income of $11.1 million and $25.7 million in the three and
nine months ended September 30, 2001, including gains on sale of real estate
totaling $18.8 million and $47.5 million, compared to net income of $6.9 million
and $17.0 million in the corresponding periods in 2000, including gains on sale
of real estate totaling $11.8 million and $29.6 million. Fluctuations in this
and other components of revenues and expense between the 2001 and 2000 periods
are discussed below.

Rents in the three months ended September 30, 2001, decreased to $32.4
million compared to $35.2 million in 2000. Of this decrease, $6.1 million was
due to the sale of 26 apartments in 2001 and 2000 and $1.3 million was due to
the sale of six commercial properties in 2001 and 2000. These decreases were
offset by increases of $308,000 due to the purchase of 11 apartments in 2001 and
2000 and $2.5 million was due to the purchase of seven commercial properties in
2001 and 2000. Decreases in rents of $53,000 also was due to decreased parking
revenues for TCI's land properties. Rental rates and occupancies increased by
$63,000 for TCI's apartments and by $752,000 for TCI's commercial properties. In
2000, TCI leased its four hotels to Regis Hotel Corporation, an affiliate of
BCM, at an annual base rent totaling $503,477 per year plus 30% of the hotel's
gross revenues. Beginning January 1, 2001, TCI no longer leased the hotels and
recognized revenues based on the operations of the hotels. From this change,
rents increased at TCI's hotels by $1.1 million.

Rents in the nine months ended September 30, 2001, decreased to $103.5
million compared to $103.9 million in 2000. Of this decrease, $14.6 million was
due to the sale of 26 apartments in 2001 and 2000 and $1.8 million was due to
the sale of six commercial properties in 2001 and 2000. Decreases in rents of
$67,000 also were due to decreased parking revenues for TCI's land properties.
These decreases were offset by increases of $1.1 million due to the purchase of
11 apartments in 2001 and 2000 and $7.8 million was due to the purchase of seven
commercial properties in 2001 and 2000. Rental rates and occupancies increased
by $1.7 million for TCI's apartments, $2.2 million for TCI's commercial
properties and $3.4 million at TCI's hotels.

Property operations expense decreased in the three months ended
September 30, 2001, to $19.6 million from $19.9 million compared to the
corresponding period in 2000. Of this decrease, $3.3 million was due to the sale
of 26 apartments in 2001 and 2000 and $585,000 was due to the sale of six
commercial properties. These decreases were offset by increases of $255,000 due
to the purchase of 11 apartments in 2001 and 2000 and $1.3 million due to the
purchase of seven commercial properties in 2001 and 2000. Apartment operating
expenses increased by $131,000 due to increased leasing costs and utilities and
an increase of $645,000 was due to increased leasing, utility and maintenance
costs at TCI's commercial properties. Hotel operating expenses increased by $1.2
million and an increase of $161,000 was due to increases in maintenance and
taxes for TCI's land properties.

Property operations expenses increased in the nine months ended
September 30, 2001, to $60.1 million from $56.7 million compared to the
corresponding period in 2000. Of this increase, $931,000 was due to the purchase
of 11 apartments in 2001 and 2000 and $3.8 million was due

213

to the purchase of seven commercial properties in 2001 and 2000. An increase of
$2.8 million was due to increased leasing, utility and maintenance costs at
TCI's commercial properties. Hotel operating expenses increased by $3.4 million
and increases of $452,000 were due to increases in maintenance and taxes for
TCI's land parcels. These increases were offset by decreases of $7.1 million due
to the sale of 26 apartments in 2001 and 2000 and $684,000 due to the sale of
six commercial properties in 2001 and 2000. Apartment operating expenses
decreased by $164,000 due to decreased maintenance and tax expenses.

Interest and other income increased to $1.0 million and $2.3 million in
the three and nine months ended September 30, 2001, compared to $936,000 and
$1.9 million in 2000. The increase was primarily due to TCI funding two loans in
the fourth quarter of 2000 and three loans in 2001.

In the three and nine months ended September 30, 2001, gains on sale of
real estate totaling $18.8 million and $47.5 million were recognized. The gains
included $1.6 million on the sale of the Heritage Apartments, $167,000 on the
sale of Zodiac Warehouse, $355,000 on the sale of a tract of the McKinney 36
land parcel, $1.0 million on the sale of Forest Ridge Apartments, $1.6 million
on the sale of Park at Colonade Apartments, $1.0 million on the sale of a tract
of the Round Mountain land parcel, $4.6 million on the sale of Fontenelle
Apartments, $601,000 on the sale of Bent Tree Gardens Apartments, $9.2 million
on the sale of Waterstreet Office Building, $4.2 million on the sale of
Technology Trading Center, $1.4 million on the sale of McCallum Glen Apartments,
$836,000 on the sale of Daley Office Plaza, $204,000 on the sale of Chesapeake
Office Center, $4.5 million on the sale of McCallum Crossing Apartments, $1.4
million on the sale of Carseka Apartments, $7.3 million on the sale of Sunset
Lake Apartments, $2.2 million on the sale of Oak Run Manor Apartments, $1.8
million on the sale of Park Lane Apartments, and $4.0 million in gains on sale
of real estate from an equity investee. These gains were offset by a loss of
$71,000 on the Moss Creek land parcel, and a loss of $215,000 on the sale of a
tract of the Eagle Crest land parcel.

In the three and nine months ended September 30, 2000, gains on sale of
real estate totaling $11.8 million and $29.6 million were recognized, including
$572,000 on the sale of Hunters Bend Apartments, $3.6 million on the sale of
Westgate of Laurel Apartments, $3.2 million on the sale of Apple Creek
Apartments, $1.2 million on the sale of Villas at Fairpark Apartments, $633,000
on the sale of Chateau Charles Hotel, a $4.8 million previously deferred gain on
the sale of McKinney land, TCI's share of gains recognized by an equity
affiliate of $4.6 million, $1.4 million on the sale of Brookfield Corporate
Center, $706,000 on the sale of Ashley Crest Apartments, $184,000 on the partial
sale of Stacy Road land, $1.0 million on the sale of Eagle Rock Apartments,
$206,000 on the sale of Shady Trail Warehouse, $2.1 million on the sale of the
McKinney land, $3.8 million on the sale of the Woodbridge Apartments and $1.5
million on the sale of Villas at Countryside Apartments.

Interest expense decreased to $9.4 million in the three months ended
September 30, 2001, from $12.3 million in 2000. Of this decrease, $1.7 million
was due to the sale of 26 apartments in 2001 and 2000, $592,000 was due to the
sale of six commercial properties in 2001 and 2000 and $60,000 was due to the
sale of two land parcels subject to debt in 2000. Decreases of $182,000 was due
to the refinancing of six commercial properties in 2000, $26,000 was due to the
refinancing of three apartments in 2000 and $409,000 was due to land loan
payoffs and principal

214

paydowns in 2001 and 2000. Of the remaining decreases, $255,000 was due to lower
variable interest rates at TCI's apartments, $600,000 was due to lower variable
interest rates at TCI's commercial properties, and $97,000 was due to lower
variable interest rates at TCI's hotels. The decrease was offset by increases of
$79,000 due to the purchase of 11 apartments in 2001 and 2000, $868,000 due to
the purchase of seven commercial properties in 2001 and 2000 and $148,000 due to
the financing of one land parcel in 2001.

Interest expense decreased to $31.4 million in the nine months ended
September 30, 2001, compared to $35.4 million in 2000. Of this decrease, $4.2
million was due to the sale of 26 apartments in 2001 and 2000, $591,000 was due
to the sale of six commercial properties in 2001 and 2000, and $283,000 was due
to the sale of two land parcels subject to debt in 2000. A decrease of $157,000
was due to the refinancing of six commercial properties in 2000, and an increase
of $136,000 was due to the refinancing of three apartment properties in 2000,
and decreases of $1.5 million were due to land loan payoffs and principal
paydowns in 2001 and 2000. Of the remaining decrease, $132,000 was due to lower
variable interest rates at TCI's apartments, $885,000 was due to lower variable
interest rates at TCI's commercial properties and $172,000 was due to lower
variable interest rates at TCI's hotels. These decreases were offset by
increases of $343,000 due to the purchase of 11 apartments in 2001 and 2000,
$3.1 million due to the purchase of seven commercial properties in 2001 and 2000
and $325,000 due to the refinancing of one land parcel in 2001.

Depreciation expense decreased to $4.7 million and $14.8 million in the
three and nine months ended September 30, 2001, from $5.4 million and $14.9
million in 2000. Of these decreases, $985,000 and $1.9 million were due to the
sale of 26 apartments in 2001 and 2000 and $243,000 and $285,000 were due to the
sale of six commercial properties, and decreases of $44,000 and $105,000 were
due to fully depreciated building and land improvements at TCI's apartments.
These decreases were offset by increases of $14,000 and $91,000 due to the
purchase of 10 apartments in 2001 and 2000 and $323,000 and $1.2 million due to
the purchase of seven commercial properties in 2001 and 2000. Increases of
$227,000 and $885,000 were due to building and tenant improvements at TCI's
commercial properties, and increases of $48,000 and $87,000 were due
improvements at TCI's hotels.

Advisory fee decreased to $1.3 million in the three months ended
September 30, 2001, from $1.4 million in 2000 and increased to $4.2 million in
the nine months ended September 30, 2001, from $3.9 million in 2000. The three
month decrease was due to a decrease in TCI's gross assets from 2000 and the
nine month increase was due to an increase in TCI's gross assets, the basis for
such fee.

Net income fee to affiliate was $946,000 and $2.1 million in the three
and nine months ended September 30, 2001, as compared to $567,000 and $1.3
million in 2000. The net income fee is payable to TCI's advisor based on 7.5% of
TCI's net income.

Incentive fee to affiliate was $1.3 million and $2.9 million in the
three and nine months ended September 30, 2001. The incentive fee is payable to
TCI's advisor based on 10% of aggregate sales consideration less TCI's cost of
all properties sold during the year. Incentive fees are expected to increase as
TCI selectively sells properties.

215

General and administrative expenses increased to $1.6 million and $7.5
million in the three and nine months ended September 30, 2001, from $1.3 million
and $5.7 million in 2000. These increases were mainly due to an increase in
legal fees and other professional fees.

Prior to the first quarter of 2001, TCI accounted for its investment in
ARL, an affiliate, as an available for sale marketable security. In the first
quarter of 2001, TCI began accounting for its investment in ARL using the equity
method. Equity losses of investees increased to $2.2 million and $4.5 million in
the three and nine months ended September 30, 2001, from $185,000 and $477,000
in the three and nine months ended September 30, 2000. The losses from equity
investees are primarily attributed to increased operating losses for IOT and
TCI's accounting for its investment in ARL.

2000 COMPARED TO 1999. TCI had net income of $29.8 million in 2000, as
compared to $30.2 million in 1999. Net income for 2000 included gains on the
sale of real estate of $50.6 million. Net income for 1999 included gains on the
sale of real estate of $40.5 million. Fluctuations in the components of revenue
and expense between 2000 and 1999 are discussed below.

Rents increased to $139.4 million in 2000 from $82.0 million in 1999.
Of the increase, $2.5 million was due to the completion of the Limestone Canyon
Apartments in December 1999; $8.5 million was due to properties purchased or
obtained through foreclosure in 2000 and 1999; $57.4 million was due to the
properties obtained in the acquisition of CMET and the remaining $2.1 million
was primarily due to increased apartment and commercial property occupancy and
rental rates. These increases were partially offset by a decrease of $10.6
million due to properties sold in 2000 and 1999, and a decrease of $2.5 million
from the four hotels.

Property operating expenses increased to $78.1 million in 2000 from
$44.5 million in 1999. Of the increase, $4.3 million was due to properties
purchased in 2000 and 1999 and $32.8 million was due to the properties obtained
in the acquisition of CMET. These increases were partially offset by a decrease
of $3.8 million due to properties sold in 2000 and 1999.

Interest and other income increased to $2.4 million in 2000 from
$453,000 in 1999. The increase in interest income was due to the funding of
notes receivable in 2000. See Note 4 to the TCI Consolidated Financial
Statements -- "Notes and Interest Receivable."

Interest expense increased to $48.0 million in 2000 from $27.7 million
in 1999. Of this increase, $4.5 million was due to properties purchased in 2000
and 1999, $17.5 million was due to the properties obtained in the acquisition of
CMET and $843,000 was due to property financings and refinancings during 2000
and 1999. These increases were partially offset by a decrease of $3.3 million
due to properties sold and mortgages paid off in 2000 and 1999. Interest expense
is expected to remain constant or decrease in 2001 due to anticipated increases
from property refinancings being offset by reductions from property sales.

Depreciation expense increased to $19.7 million in 2000 from $11.7
million in 1999. Of the increase, $1.6 million was due to properties purchased
in 2000 and 1999, $7.4 million was due to properties obtained in the acquisition
of CMET and the remainder from property additions and tenant improvements. These
increases were partially offset by a decrease of $1.7 million due

216

to properties sold in 2000 and 1999. Depreciation expense is expected to remain
constant or decrease in 2001 due to reductions in depreciation from properties
sold, being offset by depreciation from properties acquired in 2001.

Advisory and net income fees increased to $7.7 million in 2000 from
$5.7 million in 1999. The increase was due to an increase in the advisory fee
from an increase in gross assets, the basis for the fee. The increase in gross
assets was due in part to the assets obtained in the acquisition of CMET. Net
income fees of $2.4 million in 2000 approximated $2.5 million in 1999. See Note
13 to the TCI Consolidated Financial Statements -- "Advisory Agreement."

General and administrative expenses increased to $8.5 million in 2000
from $3.3 million in 1999. The increase was primarily due to legal fees incurred
on litigation related matters, taxes and an increase in advisor cost
reimbursements.

Equity losses from investees were $556,000 in 2000 compared to income
of $102,000 in 1999. The decrease was primarily due to increased operating
expenses of IOT, an equity investee. See Note 7 to the TCI Financial Statements
-- "Investment in Equity Method Real Estate Entities."

In 2000, gains on sale of real estate totaling $50.6 million were
realized; $572,000 on the sale of Hunters Bend Apartments, a $4.8 million
previously deferred gain on the sale of McKinney land, TCI's share of gains
recognized by an equity affiliate of $4.6 million, $3.6 million on the sale of
Westgate of Laurel Apartments, $3.2 million on the sale of Apple Creek
Apartments, $1.2 million on the sale of Villas at Fair Park Apartments, $633,000
on the sale of Chateau Charles Hotel, $1.5 million on the sale of Brookfield
Warehouses, $1.5 million on the sale of Villas at Countryside Apartments,
$706,000 on the sale of Ashley Crest Apartments, $206,000 on the sale of Shady
Trail Warehouse, $1.0 million on the sale of Eagle Rock Apartments, $184,000 on
the sale of a portion of the Allen land parcel, $3.8 million on the sale of
Woodbridge Apartments, $2.1 million on the sale of the McKinney land, $3.1
million on the sale of a portion of the Watters Road/Highway 121 land parcel,
$5.4 million on the sale of Shadow Run Apartments, $3.0 million on the sale of
Parkwood Knoll Apartments, $2.6 million on the sale of Villa Piedra Apartments,
$1.1 million on the sale of Country Bend Apartments, $5.1 million on the sale of
Fountain Village Apartments, and $793,000 on the sale of Crescent Place
Apartments. See Note 3 to the TCI Consolidated Financial Statements -- "Real
Estate."

In 1999, gains on sale of real estate totaling $40.5 million were
realized; $1.9 million on the sale of Mariner's Pointe Apartments, $8.3 million
on the sale of 74 New Montgomery Office Building, $675,000 on the sale of
Republic land, $5.2 million on the sale of Parke Long Industrial Warehouse,
$153,000 on the sale of a portion of the Moss Creek land parcel, $5.3 million on
the sale of Corporate Center Industrial Warehouse, $747,000 on the sale of Laws
land, $4.4 million on the sale of Sullyfield Industrial Warehouse, $5.6 million
on the sale of Spa Cove Apartments, $4.7 million on the sale of Woods Edge
Apartments and $3.6 million, TCI's share of the gains realized by three equity
investees on the sale of two shopping centers and two office buildings. See Note
3 to the TCI Consolidated Financial Statements -- "Real Estate" and Note 7 to
the TCI Consolidated Financial Statements -- "Investment in Equity Method Real
Estate Entities."

217

1999 COMPARED TO 1998. TCI had net income of $30.2 million in 1999, as
compared to $6.9 million in 1998. Net income for 1999 included gains on the sale
of real estate of $40.5 million. Net income for 1998 included gains on the sale
of real estate of $12.9 million. Fluctuations in the components of revenue and
expense between 1999 and 1998 are discussed below.

Rents increased to $82.0 million in 1999 from $69.8 million in 1998. An
increase of $8.2 million was due to properties purchased or obtained through
foreclosure in 1998 and 1999; $5.5 million was due to the properties obtained in
the acquisition of CMET and the remaining $3.8 million was due to increased
apartment and commercial property occupancy and rental rates. These increases
were partially offset by a decrease of $5.1 million due to properties sold in
1998 and 1999.

Property operating expenses increased to $44.5 million in 1999 from
$38.3 million in 1998. Of the increase, $5.1 million was due to properties
purchased in 1998 and 1999 and $4.1 million was due to the properties obtained
in the acquisition of CMET. This increase was partially offset by a decrease of
$2.8 million due to properties sold in 1998 and 1999.

Interest and other income decreased to $453,000 in 1999 from $807,000
in 1998. The decrease in interest income was due to eight mortgage notes
receivable being collected in 1998 and 1999 and the foreclosure of the
collateral property securing a note in 1998.

Interest expense increased to $27.7 million in 1999 from $22.8 million
in 1998. Of this increase, $3.9 million was due to properties purchased in 1999
and 1998, $2.1 million was due to the properties obtained in the acquisition of
CMET and $333,000 was due to property financings and refinancings during 1999
and 1998. These increases were partially offset by a decrease of $1.5 million
due to properties sold and mortgages paid off in 1999 and 1998.

Depreciation expense increased to $11.7 million in 1999 from $10.7
million in 1998. An increase of $1.8 million was attributable to property
purchases in 1999 and 1998, $634,000 was due to the completion of construction
of an apartment in 1999, and the remainder from property additions and tenant
improvements. These increases were partially offset by a decrease of $1.5
million due to properties sold in 1999 and 1998.

Advisory and net income fees increased to $5.7 million in 1999 from
$2.5 million in 1998. The increase was due to an increase in the net income fee
in 1999 due to an increase in net income and an increase in the advisory fee due
to an increase in gross assets, the basis for the fee. See Note 13 to the TCI
Consolidated Financial Statements -- "Advisory Agreement."

General and administrative expenses increased to $3.3 million in 1999
from $2.3 million in 1998. The increase was primarily due to legal fees incurred
on litigation related to damage to an office building prior to its sale and an
increase in advisory cost reimbursements. See Note 2 to the TCI Consolidated
Financial Statements -- "Acquisition of Continental Mortgage and Equity Trust."

Equity in income of investees increased to $102,000 in 1999 from a loss
of $68,000 in 1998. The increase was primarily due to increased operating
expenses of IOT, an equity investee.

218

See Note 7 to the TCI Consolidated Financial Statements -- "Investment in Equity
Method Real Estate Entities."

In 1999, gains on sale of real estate totaling $40.5 million were
realized, $1.9 million on the sale of Mariner's Pointe Apartments, $8.3 million
on the sale of 74 New Montgomery Office Building, $675,000 on the sale of
Republic land, $5.2 million on the sale of Parke Long Industrial Warehouse,
$153,000 on the sale of a portion of the Moss Creek land, $5.3 million on the
sale of Corporate Center Industrial Warehouse, $747,000 on the sale of Laws
land, $4.4 million on the sale of Sullyfield Industrial Warehouse, $5.6 million
on the sale of Spa Cove Apartments, $4.7 million on the sale of Woods Edge
Apartments and $3.6 million, TCI's share of the gains realized by three equity
investees on the sale of two shopping centers and two office buildings. See Note
3 to the TCI Consolidated Financial Statements -- "Real Estate" and Note 7 to
the TCI Consolidated Financial Statements -- "Investment in Equity Method Real
Estate Entities."

In 1998, gains on sale of real estate totaling $12.9 million were
realized, a $2.1 million previously deferred gain upon collection of a mortgage
note receivable related to a prior property sale that had been recorded under
the cost recovery method, $671,000 from the collection of a mortgage note
receivable that had been written off in a prior year, $5.9 million on the sale
of Chesapeake Ridge Office Building, $3.4 million on the sale of Northtown Mall,
$219,000 on the sale of Denton Drive Industrial Warehouse, $350,000 on the sale
of a portion of the Moss Creek land, and $356,000, TCI's share of the gain
realized by an equity investee on the sale of its two apartments.

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances
and regulations, TCI 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.

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

INFLATION

The effects of inflation on TCI'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 sales values of properties and the ultimate gain to be
realized from property sales. To the extent that inflation affects interest
rates, TCI's earnings from short-term investments, the cost of new financings as
well as the cost of variable interest rate debt will be affected.

219

TAX MATTERS

For the years 1999 and 1998, TCI elected and in the opinion of TCI's
management, qualified to be taxed as a REIT as defined under Sections 856
through 860 of the Code. During the third quarter of 2000, due to a
concentration in ownership, TCI no longer met the requirements for tax treatment
as a REIT under the Code. Under the Code, TCI is prohibited from re-qualifying
for REIT tax status for at least five years.

Financial statement income varies from taxable income principally due
to the accounting for income and losses of investees, gains and losses from
asset sales, depreciation on owned properties, amortization of discounts on
notes receivable and payable and the difference in the allowance for estimated
losses. TCI had a loss for federal income tax purposes (after utilization of
operating loss carryforwards) in the three and nine months ended September 30,
2001 and 2000; therefore, it recorded no provision for income taxes.

QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING
MARKET RISK OF TCI

TCI'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 effect of the changes on 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, 2000. Anticipation of exposures or risk on positions that could
possibly arise was not considered. TCI'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.

ASSETS
-------

Trading Instruments-Equity $10,177
Price Risk Marketable
securities at market value
Non-trading Instruments-
Equity Price Risk
Notes receivable Variable $ 1,173
interest rate-fair value

2001 2002 2003 2004 2005 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------

Instrument's maturities $ -- $ -- $ -- $1,369 $ -- $ -- $ 1,369
Instrument's amortization -- -- -- -- -- -- --
Interest 130 130 130 65 -- -- 455
Fixed interest rate-fair value 9.5% 9.5% 9.5% 9.5% -- % --

Fixed interest rate-fair value $ 7,491

220

2001 2002 2003 2004 2005 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------

Instrument's maturities $ 6,730 $ 148 $ -- $ -- $ -- $ -- $ 6,878
Instrument's amortization 61 49 45 50 54 162 421
Interest 622 41 30 25 21 22 761
Average rate Liabilities 15.9% 8.5% 10.4% 10.4% 10.4% 10.4%

Non-trading Instruments-
Equity Price Risk
Notes payable $132,621
Variable interest rate-fair
value

Instrument's maturities $ 48,636 $ 5,611 $ 20,145 $ 11,885 $ 27,806 $ 9,660 $123,743
Instrument's amortization 991 745 663 672 501 5,579 9,151
Interest 10,221 7,474 6,120 4,917 3,090 14,557 46,379
Average rate 9.4% 9.3% 9.3% 9.4% 9.3% 8.6%
Fixed interest rate-fair value $351,824

Instrument's maturities $ 54,531 $ 33,570 $ 19,679 $ 51,442 $ 12,296 $144,979 $316,497
Instrument's amortization 5,611 4,805 4,228 5,419 4,593 24,867 49,523
Interest 27,393 23,634 19,207 17,843 13,927 50,404 152,408
Average rate 8.4% 8.2% 8.2% 8.1% 8.0% 8.2%

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

Weighted Effect of 1%
Average Increase In
Balance Interest Rate Base Rates
-------- ------------- ----------

Notes payable:
Variable rate $130,742 7.52% $1,307
======== ======
Total decrease in TCI's
annual net income $1,307
======
Per share $ .15
======

221

MANAGEMENT OF TCI

DIRECTORS AND EXECUTIVE OFFICERS OF TCI

The following table sets forth certain information as of February 11,
2002 regarding TCI's executive officers and directors:

Name Age Position
---- --- --------

Mark W. Branigan* 47 Executive Vice President - Residential
Henry A. Butler 51 Director
Louis J. Corna* 54 Executive Vice President - Tax
Bruce A. Endendyk* 53 Executive Vice President
Ronald E. Kimbrough* 49 Executive Vice President and Chief Financial Officer
David W. Starowicz* 46 Executive Vice President - Acquisitions, Sales and Construction
Ted P. Stokely 68 Director and Chairman of the Board
Martin L. White 62 Director

HENRY A. BUTLER: Age 51; Director (since December 2001) of TCI and IOT.
Land sales (since January 1992) for BCM; and Director (since December 2001) of
IOT.

TED P. STOKELY: Age 68; Director (Independent) (since April 1990) and
Chairman of the Board (since January 1995) of TCI. 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) of
Eldercare Housing Foundation, a nonprofit corporation; and Director (since April
1990) and Chairman of the Board (since January 1995) of IOT.

MARTIN L. WHITE: Age 62; Director (Independent) (since January 1995) of
TCI. 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 (since January 1995) of IOT.

In addition to the foregoing officers, TCI has several vice presidents
and assistant secretaries who are not listed herein. The business address of
each director and executive officer is 1800 Valley View Lane, Suite 300, Dallas,
Texas 75234. The business telephone number of each person is 469-522-4200. Each
director and executive officer is a citizen of the United States.

Although the TCI board of directors is directly responsible for
managing the affairs of TCI and for setting the policies which guide it, its
day-to-day operations are performed by BCM, a contractual advisor under the
supervision of the board. The duties of BCM include, among other things,
locating, investigating, evaluating and recommending real estate and mortgage
note

---------

* See "THE ADVISOR - BCM - Directors and Officers of Advisor" for background and
business experience information.

222

investment and sales opportunities, as well as financing and refinancing
sources. BCM also serves as a consultant in connection with TCI's business plan
and investment decisions made by the TCI board.

BCM has been providing advisory services to TCI since March 28, 1989.
Renewal of BCM's advisory agreement was approved by the board of directors on
August 18, 2000. BCM also serves as advisor to IOT and ARL. The directors of TCI
are also directors of IOT. The officers of TCI also serve as officers of ARL,
IOT, and BCM. As of February 11, 2002, TCI owned approximately 24% of IOT's
outstanding shares of common stock and ARL indirectly owned approximately 49.7%
and BCM directly and indirectly owned approximately 14.8% of the outstanding
shares of TCI's common stock.

Since February 1, 1990, affiliates of BCM have provided property
management services to TCI. Currently, Triad provides such property management
services. Triad subcontracts with other entities for the provision of
property-level management services to TCI. The general partner of Triad is BCM.
The limited partners of Triad are Mr. Phillips and GS Realty, which is a company
not affiliated with Mr. Phillips or BCM. Triad subcontracts the property-level
management and leasing of 52 of TCI's commercial properties and the two
commercial properties owned by real estate partnerships in which TCI and IOT are
partners to Regis, a related party, which is a company owned by GS Realty. Regis
is entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Triad. Regis also is entitled to receive real estate brokerage
commissions in accordance with the terms of a non-exclusive brokerage agreement.
Regis Hotel Corporation, a related party, manages TCI's four hotels.

TCI has no employees. Employees of BCM render services to TCI.

EXECUTIVE COMPENSATION OF TCI

TCI has no employees, payroll or benefit plans and pays no compensation
to its executive officers. The executive officers of TCI, who are also officers
or employees of BCM, TCI's advisor, are compensated by BCM. Such executive
officers perform a variety of services for BCM and the amount of their
compensation is determined solely by BCM. BCM does not allocate the cash
compensation of its officers among the various entities for which it serves as
advisor. See "Directors, Executive Officers and Advisor of ARL" for a more
detailed discussion of the compensation payable to BCM.

The only remuneration paid by TCI is to the directors who are not
officers or directors of BCM or its affiliated companies. The independent
directors (1) review the business plan of TCI to determine that it is in the
best interest of stockholders, (2) review the advisory contract, (3) supervise
the performance of the advisor and review the reasonableness of the compensation
paid to the advisor in terms of the nature and quality of services performed,
(4) review the reasonableness of the total fees and expenses of TCI and (5)
select, when necessary, a qualified independent real estate appraiser to
appraise properties acquired.

Each independent director receives compensation in the amount of
$30,000 per year, plus reimbursement for expenses. The chairman of the board
receives an additional fee of $3,000 per

223

year. In addition, each independent director receives an additional fee of
$1,000 per day for any special services rendered by him to TCI outside of his
ordinary duties as director, plus reimbursement of expenses.

During 2000, $199,000 was paid to the independent directors in total
directors' fees for all services, including the annual fee for service during
the period January 1, 2000 through December 31, 2000, and 2000 special service
fees as follows: Richard W. Douglas, (a director until June 2000) $15,000; Larry
E. Harley, (a director until June 2000) $15,000; R. Douglas Leonhard, (a
director until December 2001) $34,000; Murray Shaw, (a director until March
2001) $34,000; Ted P. Stokely, $36,000; Martin L. White, $34,000; and Edward G.
Zampa, (a director until December 2001) $33,000.

DIRECTOR STOCK OPTION PLAN

TCI has established the TCI Director Plan for the purpose of attracting
and retaining directors who are not officers or employees of TCI or BCM. The TCI
Director Plan provides for the grant of options that are exercisable at fair
market value of TCI's common stock on the date of grant. The TCI Director Plan
was approved by stockholders at their annual meeting on October 10, 2000,
following which each then-serving independent director was granted options to
purchase 5,000 shares of TCI common stock. On January 1 of each year, each
independent director will receive options to purchase 5,000 shares of common
stock. The options 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 10
years from the date of grant.

As of February 14, 2002, TCI had 140,000 shares of common stock
reserved for issuance under the TCI Director Plan of which options for 40,000
shares were outstanding.

224

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF TCI

Security Ownership of Certain Beneficial Owners. The following table
sets forth the ownership of TCI's common stock, both beneficially and of record,
both individually and in the aggregate, for those persons or entities known to
be beneficial owners of more than 5% of the outstanding shares of Common Stock
as of the close of business on February 11, 2002.

Percentage
Amount Shares of of Class Shares of
and Series G Percentage if the Series H
Nature of Preferred of Class Non-Affiliates Preferred
Beneficial Stock if the Non- Elect to Stock
Ownership Beneficially Affiliates Receive Beneficially
of TCI Percent Owned After Elect to Series G Owned After
Common of the TCI Receive Preferred the IOT
Name of Beneficial Owner Stock Class(1) Merger Cash(2) Stock Merger
------------------------ --------- -------- ------------ ---------- ------------- ------------

EQK Holdings, Inc.(5)(6) .............. 3,994,300 49.7% -- -- -- --
American Realty
Investors, Inc.(4)(5)(6) .............. 3,994,300 49.7% -- -- -- --
Basic Capital Management, Inc.(5)(7) .. 1,193,422 14.8% 1,166,947 99.8% 29.0% 106,802

Shares of ARL
Common Stock
Beneficially
Owned After the
TCI and IOT
Percentage Mergers
of Class Assuming
Percentage if the Conversion
of Class Non-Affiliates of all
if the Elect to Series G
Non-Affiliates Receive and
Elect to Series H Series H
Receive Preferred Preferred Percentage
Name of Beneficial Owner Cash(3) Stock Stock of Class
------------------------ -------------- ------------- --------------- ----------

EQK Holdings, Inc.(5)(6) .............. -- -- -- --
American Realty
Investors, Inc.(4)(5)(6)(7) ........... -- -- -- --
Basic Capital Management, Inc.(5) ..... 100% 15.6% 9,427,017 64.9%

---------
(1) Percentage is based upon 8,042,629 shares of TCI common stock
outstanding at February 11, 2002.

(2) Percentage is based upon 1,168,774 shares of Series G Preferred Stock
outstanding after the TCI merger if all persons not affiliated with ARL
elect to receive cash and 4,021,854 shares of Series G Preferred Stock
outstanding after the TCI merger if all persons not affiliated with ARL
elect to receive Series G Preferred Stock.

(3) Percentage is based upon 106,802 shares of Series H preferred stock
outstanding after the IOT merger if all persons not affiliated with ARL
elect to receive cash and 683,282 shares of Series H Preferred Stock
outstanding after the TCI merger if all persons not affiliated with ARL
elect to receive Series H Preferred Stock.

(4) Includes 3,994,300 shares of TCI Common Stock of which ARL may be
deemed to beneficially own due to its sole ownership of EQK Holdings,
Inc.

(5) The business address of each of EQK Holdings, Inc., ARL and BCM is 1800
Valley View Lane, Suite 300, Dallas, Texas 75234.

(6) The shares of TCI common stock owned by EQK Holdings, Inc. and that may
be deemed to be owned by ARL will be canceled as part of the TCI
merger.

(7) Includes 26,475 shares of TCI common stock owned by Syntek Asset
Management L.P., a subsidiary of ARL, that may be deemed to be
indirectly beneficially owned by BCM. Syntek Asset Management, Inc., a
wholly owned subsidiary of BCM, is the general partner of Syntek Asset
Management L.P. The shares of TCI common stock held by Syntek Asset
Management L.P. will be canceled as part of the TCI merger. The
business address of Syntek Asset Management L.P. is 1800 Valley View
Lane, Suite 300, Dallas, Texas 75234

225

Security Ownership of Management. The following table sets forth the
ownership of TCI's common stock, both beneficially and of record, both
individually and in the aggregate, for the directors and executive officers of
TCI as of the close of business on February 11, 2002.

Mark W. Branigan(4)(5)(6) ............. 5,187,722 64.5% 1,166,947 99.8% 29.0% 106,802
Henry A. Butler ....................... -- -- -- -- -- --
Louis J. Corna(5)(6) .................. 5,187,722 64.5% 1,166,947 99.8% 29.0% 106,802
Bruce A. Endendyk(4)(5)(6) ............ 5,187,722 64.5% 1,166,947 99.8% 29.0% 106,802
Ronald E. Kimbrough(5)(6) ............. 5,187,722 64.5% 1,166,947 99.8% 29.0% 106,802
David W. Starowicz(4)(5)(6) ........... 5,187,722 64.5% 1,166,947 99.8% 29.0% 106,802
Ted P. Stokely(7) ..................... 15,000 * 15,000 * * --
Martin L. White(7) .................... 15,000 * 15,000 * * --
All Directors and Executive
Officers as a group
(8 individuals)(10) ................ 5,217,722 64.6% 1,196,947 100% 29.8% 106,802

Mark W. Branigan(4)(5)(6) ............. 100% 15.6% 10,173,989 70.0%
Henry A. Butler ....................... -- -- -- --
Louis J. Corna(5)(6) .................. 100% 15.6% 10,173,989 70.0%
Bruce A. Endendyk(4)(5)(6) ............ 100% 15.6% 10,188,989(8) 70.0%
Ronald E. Kimbrough(5)(6) ............. 100% 15.6% 10,173,989 70.0%
David W. Starowicz(4)(5)(6) ........... 100% 15.6% 10,178,989(9) 70.0%
Ted P. Stokely(7) ..................... -- -- 37,500 *
Martin L. White(7) .................... -- -- 37,500 *
All Directors and Executive
Officers as a group
(8 individuals)(10) ................ 100% 15.6% 10,268,989 70.3%

---------
* Less than 1%

(1) Percentage is based upon 8,042,629 shares of Common Stock outstanding
at February 11, 2002.

(4) Includes 26,475 shares of TCI common stock of which Messrs. Branigan,
Endendyk and Starowicz may be deemed to beneficially own due to their
positions as executive officers of Syntek Asset Management, L.P., which
directly owns such shares.

(5) Includes 1,193,422 shares of TCI common stock of which Messrs.
Branigan, Corna, Endendyk, Kimbrough and Starowicz may be deemed to
indirectly beneficially own due to their positions as executive
officers of BCM, which directly and indirectly owns such shares. Syntek
Asset Management, Inc., a wholly owned subsidiary of BCM, is the
general partner of Syntek Asset Management L.P., which directly owns
26,475 of such shares. Syntek Asset Management L.P. is a subsidiary of
ARL, and the shares held by Syntek Asset Management L.P. will be
canceled as part of the TCI merger. Messrs. Branigan, Endendyk and
Starowicz are also executive officers of Syntek Asset Management, Inc.

(6) Includes 3,994,300 shares of TCI common stock of which Messrs.
Branigan, Corna, Endendyk, Kimbrough and Starowicz may be deemed to
beneficially own due to their positions as directors or executive
officers of ARL, which may be deemed to indirectly beneficially own
such shares due to its sole ownership of EQK Holdings, Inc., which
directly owns such shares.

(7) Includes 15,000 shares of TCI common stock issuable upon the exercise
of options granted under the TCI Director Stock Option Plan.

(8) Includes 15,000 shares of ARL common stock issuable upon the exercise
of options granted to Mr. Endendyk under the ARL 1997 Stock Option
Plan.

(9) Includes 5,000 shares of ARL common stock issuable upon the exercise of
options granted to Mr. Starowicz under the ARL 1997 Stock Option Plan.

(10) The executive officers of TCI disclaim beneficial ownership of such
shares. Each of the directors of BCM may be deemed to be beneficial
owners by virtue of their positions as directors of BCM. The directors
of ARL and BCM disclaim such beneficial ownership. The business address
of each beneficial owner is 1800 Valley View Lane, Suite 300, Dallas,
Texas 75234.

226

PERFORMANCE GRAPH

The following performance graph compares the cumulative total
stockholder return on TCI's shares of common stock with the DJ Equity Index and
the DJ Real Estate Index. The comparison assumes that $100 was invested on
December 31, 1996 in TCI's shares of common stock and in each of the indices and
further assumes the reinvestment of all distributions. Past performance is not
necessarily an indicator of future performance.

[PERFORMANCE GRAPH]

12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- -------- -------- --------

Transcontinental Realty Investors, Inc. 100 159 132 136 101 182
Dow Jones US Realty Index 100 118 93 88 112 126
Dow Jones US Total Market Index 100 132 165 202 183 161

227

BUSINESS OF IOT

Income Opportunity Realty Investors, Inc. ("IOT"), a Nevada
corporation, is the successor to a California business trust organized on
December 14, 1984, which commenced operations on April 15, 1985. IOT has elected
to be treated as a REIT under Sections 856 through 860 of the Code. IOT has, in
the opinion of IOT's management, qualified for federal taxation as a REIT for
all periods since May 1, 1985.

At December 31, 2000, IOT's real estate consisted of 16 properties held
for investment. In addition, IOT owns interests in two partnerships, each of
which owns a property and a third partnership which holds a wraparound mortgage
note receivable. In 2000, IOT purchased nine properties as well as sold seven
properties. One $1.5 million mortgage loan was funded during 2000. IOT's real
estate portfolio is more fully discussed below.
See "Properties of IOT."

BUSINESS PLAN

IOT's business is investing in equity interests in real estate through
direct equity investments and partnerships, and financing real estate and real
estate related activities through investments in mortgage loans. IOT's real
estate is located in the Pacific, Southeast and Southwest regions of the
continental United States. Information regarding IOT's real estate portfolio is
set forth below, and in the IOT Consolidated Financial Statements.

IOT's business is not seasonal. IOT's management has determined to
continue to pursue a balanced investment strategy, seeking both current income
and capital appreciation. With respect to new investments, IOT's management's
plan of operation is to acquire higher class apartment and commercial properties
in keeping with the current class of properties in IOT's real estate portfolio.
In 2000, IOT began making higher risk, higher reward investments in unimproved
land. In 2001, IOT's management intends to focus on income producing property
acquisitions to maintain a balance between income producing and non-income
producing properties. IOT's management does not expect that IOT will seek to
fund or acquire additional mortgage loans. IOT may, however, originate mortgage
loans in conjunction with providing purchase money financing of a property sale.
IOT's management also intends to continue its strategy of maximizing each
property's operating income by aggressive property management through closely
monitoring expenses while at the same time making property renovations and/or
improvements where appropriate. While renovation and/or improvement expenditures
increase the amount of revenue required to cover operating expenses, IOT's
management believes that such expenditures are necessary to maintain or enhance
the value of IOT's properties.

The board of directors currently intends to continue its policy of
prohibiting IOT from incurring aggregate secured and unsecured indebtedness in
excess of 300% of IOT's net asset value (defined as the book value of all assets
of IOT minus all of its liabilities); however, the board may alter such policy
at any time.

COMPETITION

The real estate business is highly competitive and IOT competes with
numerous entities engaged in real estate activities (including certain entities
described in "Certain Relationships and Related Transactions of BCM, ARL, TCI
and IOT - Related Party Transactions") some of which

228

have greater financial resources than those of IOT. IOT's management believes
that success against such competition is dependent upon the geographic location
of the property, the performance of the property-level managers in areas such as
marketing, collection 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
units and IOT's ability to provide a community atmosphere for the tenants. IOT's
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 IOT's properties also are competitive factors.

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

As described above and in "Certain Relationships and Related
Transactions of BCM, ARL, TCI and IOT - Related Party Transactions", the
officers and directors of IOT also serve as officers or directors of certain
other entities, also advised by BCM, and which have business objectives similar
to those of IOT. IOT's directors, officers and advisor owe fiduciary duties to
such other entities as well as to IOT under applicable law. In determining to
which entity a particular investment opportunity will be allocated, the
officers, directors and advisor consider the respective investment objectives of
each entity and the appropriateness of a particular investment in light of each
entity's existing real estate and mortgage notes receivable portfolios. 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 funds available for investment for the longest period of time, or, if
appropriate, the investment may be shared among all or some of such entities.

In addition, as described in "Certain Relationships and Related
Transactions of BCM, ARL, TCI and IOT - Related Party Transactions", IOT also
competes with other entities which are affiliates of BCM, which may have
investment objectives similar to IOT's and that may compete with it in the
acquisition, sale, leasing and financing of real estate. In resolving any
potential conflicts of interest which may arise, BCM has informed IOT's
management 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.

CERTAIN FACTORS ASSOCIATED WITH REAL ESTATE AND RELATED INVESTMENTS

IOT 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 the availability of permanent mortgage financing which may render the
acquisition, 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

229

other factors beyond the control of IOT's management or BCM. The illiquidity of
real estate investments also may impair the ability of IOT's management to
respond promptly to changing circumstances. IOT's management believes that such
risks are partially mitigated by the diversification by geographic region and
property type of IOT's real estate portfolio. However, to the extent property
acquisitions are concentrated in any particular geographic region or property
type, the advantages of diversification may be mitigated.

PROPERTIES OF IOT

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

IOT's real estate portfolio at December 31, 2000, is set forth in
Schedule III to the Consolidated Financial Statements of IOT. The discussions
set forth below under the headings "Real Estate" provide certain summary
information concerning IOT's real estate portfolio.

IOT's real estate portfolio consists of 16 owned properties and an
investment in two partnerships each of which owns a commercial property. IOT
holds a fee simple title to the owned properties. IOT holds one mortgage note
receivable, and a partnership in which it is a 40% general partner holds a
wraparound mortgage note. The discussion set forth below under the heading "Real
Estate" provides certain summary information concerning IOT's real estate and
further summary information with respect to its owned properties and its
partnership investments.

IOT's real estate is geographically diverse. At December 31, 2000, IOT
held equity investments in apartments and office buildings in the Pacific,
Southwest and Southeast regions of the continental United States, as shown more
specifically in the table under "Real Estate" below. The majority of IOT's
properties are, however, located in California and Texas. At December 31, 2000,
IOT held a mortgage note secured by a second lien on 165 acres of unimproved
land in The Colony, Texas, as described more specifically under "Mortgage Loans"
below.

At December 31, 2000, one of IOT's properties, the Travelers land
parcel, exceeded 10% of IOT's total assets. At December 31, 2000, 92% of IOT's
assets consisted of owned properties and less than 1% consisted of investments
in partnerships. The remaining 8% of IOT's assets were cash, cash equivalents
and other assets. The percentage of IOT's assets invested in any one category is
subject to change and no assurance can be given that the composition of IOT's
assets in the future will approximate the percentages listed above. See
"Business of IOT--Business Plan."

To continue to qualify for federal taxation as a REIT under the Code,
IOT is required, among other things, to hold at least 75% of the value of its
total assets in real estate assets, government securities, cash and cash
equivalents at the close of each quarter of each taxable year.

GEOGRAPHIC REGIONS

IOT has divided the continental United States into the following
geographic regions:

230

o Southeast region comprised of the states of Alabama, Florida,
Georgia, Mississippi, North Carolina, South Carolina,
Tennessee and Virginia. IOT has 1 commercial property in this
region.

o Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. IOT has 7
apartments and 2 commercial properties in this region.

o Mountain region comprised of the states of Colorado, Idaho,
Montana, Nevada, Utah and Wyoming. IOT has no properties in
this region.

o Pacific region comprised of the states of California, Oregon
and Washington. IOT has 4 commercial properties in this
region.

Excluded from above are two parcels of unimproved land in the Southwest
Region, as described below.

REAL ESTATE

At December 31, 2000, 92% of IOT's assets were invested in real estate,
on a leveraged basis, in the Pacific, Southeast and Southwest regions of the
continental United States. IOT's real estate portfolio consists of 16 owned
properties and an investment in two partnerships, each of which owns a
commercial property.

TYPES OF REAL ESTATE INVESTMENTS. IOT's real estate consists of
apartments and commercial properties (office buildings) having established
income-producing capabilities. 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 considered. IOT may acquire properties subject to, or
assume, existing debt and may mortgage, pledge or otherwise obtain financing for
its properties. The IOT board may alter the types of and criteria for selecting
new real estate investments and for obtaining financing without a vote of
stockholders.

IOT has typically invested in developed real estate, although it also
may invest in new construction or development either directly or in partnership
with non-affiliated parties or affiliates (subject to approval by the board). To
the extent that IOT invests in construction and development projects, it will be
subject to business risks, such as cost overruns and construction delays,
associated with such higher risk projects.

231

In the opinion of IOT's management, IOT's properties are adequately
covered by insurance.

The following table sets forth the percentages, by property type and
geographic region, (other than two parcels of unimproved land, as described
below) of IOT's owned real estate at December 31, 2000.

Commercial
Region Apartments Properties
------ ---------- ----------

Pacific ............... --% 69%
Southwest ............. 100 18
Southeast ............. -- 13
--- ---
100% 100%
=== ===

The foregoing table is based solely on the number of apartment units
and commercial square footage owned and does not reflect the value of IOT's
investment in each region. IOT owns two parcels of unimproved land, 1.01 acres
and 241 acres, both in the Southwest region. See Schedule III to the IOT
Consolidated Financial Statements for a detailed description of IOT's real
estate.

A summary of the activity in IOT's owned real estate portfolio during
2000 is as follows:

Owned properties at January 1, 2000 ....................... 14
Properties purchased ...................................... 9
Properties sold ........................................... 7
---
Owned properties at December 31, 2000 ..................... 16
===

PROPERTIES HELD FOR INVESTMENT. Set forth below are IOT's owned
properties at December 31, 2000, all of which were held for investment and the
monthly rental rate for apartments and the average annual rental rate for office
buildings and occupancy thereof at December 31, 2000, 1999 and 1998:

RENT PER SQUARE FOOT OCCUPANCY %
------------------------ ---------------------
PROPERTY LOCATION UNITS/SQUARE FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- --------------------- ------ ------ ------ ---- ---- ----

APARTMENTS
Brighton Court....... Midland, TX 60 Units/90,672 Sq. Ft. .53 * * 93 * *
Del Mar.............. Midland, TX 92 Units/105,348 Sq. Ft. .50 * * 98 * *
Enclave.............. Midland, TX 68 Units/89,734 Sq. Ft. .56 * * 93 * *
Meridian............. Midland, TX 280 Units/264,000 Sq. Ft. .41 .46 * 95 69 *
Signature Place...... Midland, TX 57 Units/72,480 Sq. Ft. .56 * * 86 * *
Sinclair Place....... Midland, TX 114 Units/91,529 Sq. Ft .49 * * 96 * *
Treehouse............ San Antonio, TX 106 Units/ 88,957 Sq. Ft. .83 .80 .78 95 96 96

OFFICE BUILDINGS
2010 Valley View..... Farmers Branch, TX 39,568 Sq. Ft. 17.40 16.26 16.50 86 64 19
5600 Mowry........... Newark, CA 56,120 Sq. Ft. 24.64 22.94 19.86 100 100 58
Akard Plaza.......... Dallas, TX 42,895 Sq. Ft. 15.46 15.34 13.47 91 92 92
Chuck Yeager......... Chantilly, VA 60,060 Sq. Ft. 11.21 14.70 13.39 41 41 72
Daley Plaza.......... San Diego, CA 122,795 Sq. Ft. 15.32 14.68 12.53 88 79 74
La Mesa Village...... La Mesa, CA 92,611 Sq. Ft. 16.87 17.29 16.47 77 88 89

232

Westlake Village..... Westlake Village, CA 45,500 Sq. Ft. 18.10 16.96 14.44 52 70 79

LAND
Frankel.............. Midland County, TX 1.01 Acres
Travelers............ Farmers Branch, TX 204 Acres

* Property was purchased in 1999 or 2000.

In 2000, IOT purchased the following properties:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS/ACRES PRICE PAID INCURRED RATE DATE
-------- --------- ------------ -------- -------- -------- -------- --------

(DOLLARS IN THOUSANDS)
APARTMENTS
Frankel Portfolio(1).... Midland, TX 391 Units/123,184 Sq. Ft. $14,034 $3,784 $10,875 9.13% 07/03

LAND
Etheredge.............. Collin County, TX 74.98 Acres 1,875 391 1,406(2) 10.0% 04/01
Fambrough.............. Collin County, TX 75.07 Acres 1,877 592 1,408(2) 10.0% 04/01
Frankel................ Midland County, TX 1.01 Acres 41 43 -- -- --
Travelers.............. Farmers Branch, TX 204 Acres 28,650 13,117 12,000 14.0% 12/01

---------
(1) Frankel portfolio consisted of five apartments: 60 unit Brighton Court,
92 unit Del Mar Villas, 68 unit Enclave, 57 unit Signature Place and
114 unit Sinclair Place.

(2) Seller financing.

233

In 2000, IOT sold the following properties:

NET CASH DEBT GAIN ON
PROPERTY LOCATION UNITS/SQ. FT./ACRES SALES PRICE RECEIVED DISCHARGED SALE
-------- -------- ------------------- ----------- -------- ---------- -------
(DOLLARS IN THOUSANDS)

APARTMENTS
East Point........... Mesquite, TX 126 Units/113,138 Sq. Ft. $ 5,575 $ 1,804 $ 3,242 $2,179
La Monte Park........ Houston, TX 128 Units/123,184 Sq. Ft. 5,000 1,066 3,829(1) 903
Renaissance Parc..... Dallas, TX 294 Units/293,654 Sq. Ft. 17,198 4,536 12,265(1) 1,213

OFFICE BUILDINGS
Olympic.............. Los Angeles, CA 46,685 Sq. Ft. 8,500 3,811 4,443 1,850
Saratoga............. Saratoga, CA 89,825 Sq. Ft. 25,000 17,709 6,968 13,056

LAND
Etheredge............ Collin County, TX 74.98 Acres 2,341 754 1,406 194
Fambrough............ Collin County, TX 75.07 Acres 2,338 754 1,408 194

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

Partnership Properties. Set forth below is the commercial property
owned by each of the two partnerships in which IOT is an equity investee and the
average annual rental rate and occupancy thereof at December 31, 2000, 1999 and
1998:

RENT PER SQUARE FOOT OCCUPANCY %
------------------------ ------------------------
PROPERTY LOCATION SQUARE FOOTAGE 2000 1999 1998 2000 1999 1998
-------- -------- -------------- ------ ------ ------ ------ ------ ------

SHOPPING CENTER
Chelsea Square....... Houston, TX 70,275 Sq. Ft. $ 9.31 $ 8.78 $ 8.58 77 100 100

OFFICE BUILDING
Eton Square.......... Tulsa, OK 222,654 Sq. Ft. 10.52 9.77 * 59 87 *

---------
* Partnership interest was purchased in 1999.

IOT owns a 36.3% general partner interest and TCI owns a 63.7% limited
partner interest in Tri-City which in turn owns Chelsea Square Shopping Center.
In February 2000, Tri-City obtained mortgage financing of $2.1 million secured
by the previously unencumbered shopping center. Tri-City received net cash of
$2.0 million after the funding of required escrows and the payment of various
closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum
until February 2001 and a variable rate thereafter, currently, 10.0% per annum,
requires monthly payments of principal and interest of $20,601 and matures in
February 2005. IOT received a distribution of $739,000 of the net financing
proceeds.

IOT owns a 10% limited partner interest and TCI owns a 90% general
partner interest in TCI Eton Square, L.P., which owns the Eton Square Building
in Tulsa, Oklahoma.

MORTGAGE LOANS

Prior to 1991, a substantial portion of IOT's assets had been invested
in mortgage notes secured by income-producing real estate. IOT's mortgage notes
had included first, wraparound and junior mortgage loans. Prior to the third
quarter of 2000, IOT's management had not been seeking to fund or acquire new
mortgage loans, other than those which may have originated in conjunction with
IOT's providing purchase money financing of a property sale. See "Business of
IOT." BCM, in its capacity as a mortgage servicer, services the mortgage notes.

234

The following discussion briefly describes the junior mortgage loan
funded in 2000.

In September 2000, IOT funded a $1.5 million loan, secured by a second
lien on 165 acres of unimproved land in The Colony, Texas. The loan bears
interest at 18.0% per annum, requires monthly payments of interest only and
matured in January 2002. In May 2001, IOT received a $1,000,000 paydown on the
loan.

PARTNERSHIP MORTGAGE LOANS. IOT owns a 40% general partner interest and
TCI owns a 60% general partner interest in NIA, which holds a wraparound
mortgage note receivable secured by a building occupied by a Wal-Mart in
Maulden, Missouri. IOT received distributions of $25,000 from NIA in 2000, and
advanced the partnership $13,000.

235

SELECTED FINANCIAL DATA OF IOT

The following is a summary of financial data incorporated by reference
in this joint proxy statement and prospectus. You should read the following data
in conjunction with the more detailed information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the IOT consolidated financial statements and related notes appearing elsewhere
in this joint proxy statement and prospectus.

Nine Months Ended
September 30, For the Years Ended December 31,
-------------------------- --------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA
Rents ................... $ 9,759 $ 10,732 $ 13,731 $ 15,968 $ 14,326 $ 12,221 $ 8,666
Property expense ........ 5,292 5,286 6,969 6,768 6,462 5,900 4,358
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income ........ 4,467 5,446 6,762 9,200 7,864 6,321 4,308

Interest income ......... 142 206 319 29 172 266 339
Income (loss) from
equity partnerships ..... (27) (71) (61) 148 113 52 85
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gain on sale of real
estate .................. -- 20,878 20,878 1,525 180 3,953 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
115 21,013 21,136 1,702 465 4,271 424

Other expense ........... 7,780 8,537 11,104 9,580 9,008 7,275 5,300
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ....... $ (3,198) $ 17,922 $ 16,794 $ 1,322 $ (679) $ 3,317 $ (568)
=========== =========== =========== =========== =========== =========== ===========

PER SHARE DATA
Net income (loss) ....... $ (2.11) $ 11.70 $ 11.03 $ .87 $ (.44) $ 2.18 $ (.37)
=========== =========== =========== =========== =========== =========== ===========

Dividends per share ..... $ -- $ .45 $ .45 $ .60 $ .60 $ .40 $ .40

Weighted average Common
shares outstanding ...... 1,512,119 1,531,177 1,522,510 1,527,386 1,521,832 1,519,888 1,530,008

September 30, For the Years Ended December 31,
-------------- --------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (dollars in thousands, except per share)

BALANCE SHEET DATA

Real estate held for
investment, net ......... $ 85,781 $ 86,277 $ 86,542 $ 83,691 $ 81,914 $ 46,693
Real estate held for
sale, net ............... -- -- -- -- -- 6,623
Notes and interest
receivable, net ......... 505 1,500 -- -- 2,010 1,998
Total assets ............ 92,874 96,519 91,185 88,695 90,309 63,593
Notes and interest
payable ................. 54,329 54,206 62,852 60,786 61,323 38,957
Stockholders' equity .... 35,486 39,998 23,991 23,560 25,131 22,381
Book value per share .... $ 24.66 $ 26.42 $ 15.69 $ 15.44 $ 16.53 $ 14.63

236

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF IOT

INTRODUCTION

IOT invests in equity interests in real estate through acquisitions,
leases, partnerships and in mortgage loans. IOT is the successor to a California
business trust organized on December 14, 1984, which commenced operations on
April 10, 1985.

LIABILITY AND CAPITAL RESOURCES

Cash and cash equivalents at September 30, 2001, were $3.9 million,
compared with $2.1 million at December 31, 2000. IOT's principal sources of cash
have been, and will continue to be, from property operations, proceeds from
property sales, financings and refinancings and partnership distributions.
Although IOT's management anticipates that IOT will generate excess cash from
operations in 2001 due to increased rental rates and occupancy at its
properties, such excess, however, will not be sufficient to discharge all of
IOT's debt obligations as they mature. IOT's management intends to selectively
sell income producing real estate, refinance real estate and incur additional
borrowings against real estate to meet its cash requirements.

IOT's cash flow from property operations (rents collected less payments
for expenses applicable to rental income) decreased to $4.6 million in the nine
months ended September 30, 2001, from $5.3 million in 2000. Of this decrease,
$1.0 million was due to the sale of three apartments and $1.0 million was due to
the sale of two commercial properties in 2000. The decrease also was due to an
increase in property expenses of $438,000 at IOT's commercial properties. This
decrease was offset by an increase of $682,000 due to the purchase of five
apartments in 2000 and increased rents collected of $140,000 for IOT's
apartments and $875,000 for IOT's commercial properties.

Interest paid increased to $4.1 million for the nine months ended
September 30, 2001, from $3.7 million paid in 2000. Of this increase, $420,000
was due to the purchase of five apartments in 2000 and $1.2 million was due to
the purchase of one parcel of unimproved land in 2000. The increase also was due
to a $124,000 increase from a loan refinancing for a commercial property in
2001. This increase was offset by a decrease of $755,000 from the sale of three
apartments in 2000, $442,000 from the sale of two commercial properties in 2000,
and $180,000 from the sale of two unimproved land parcels in 2000.

During the nine months ended September 30, 2001, IOT paid $520,000 to
its advisor compared to $1.5 million in the nine months ended September 30,
2000. Fees paid to the advisor are based on gross assets and 7.5% of net income.
The decrease in advisory and net income fees was due to IOT's net loss during
2001.

General and administrative expenses paid increased to $1.5 million in
the nine months ended September 30, 2001, from $697,000 paid in 2000. The
increase was due to increases in professional fees, taxes, and cost
reimbursements to the advisor.

In the fourth quarter of 2000, IOT discontinued the payment of
quarterly dividends. In the nine months ended September 30, 2000, IOT paid
dividends of $.45 per share or a total of

237

$685,000, and it sold 4,112 shares of common stock through the dividend
reinvestment program for a total of $24,000.

In December 1989, the board of directors approved a share repurchase
program, authorizing the repurchase of a total of 200,000 shares of IOT's common
stock. In June 2000, the board increased this authorization to 300,000 shares.
In 2000, 19,500 shares of common stock were repurchased for a total of $134,000.
Through September 30, 2001, a total of 218,804 shares had been repurchased at a
cost of $1.9 million. In September 2001, the board approved separately a private
block purchase of 75,100 shares of IOT common stock for a total of $1.3 million.

IOT's management reviews the carrying values of IOT's properties 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. If impairment is
found to exist, a provision for loss is recorded by a charge against earnings.
The property review generally includes selective property inspections,
discussions with the manager of the property, visits to selected properties in
the area and a review of the following: (1) the property's current rents
compared to market rents, (2) the property's expenses, (3) the property's
maintenance requirements, and (4) the property's cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER
30, 2000. For the three and nine months ended September 30, 2001, IOT had a net
loss of $1.7 million and $3.2 million, as compared to net income of $2.9 million
and $17.9 million for the corresponding periods in 2000, which included gains on
real estate totaling $3.9 million and $20.9 million. Fluctuations in components
of revenue and expense between the 2000 and 2001 periods are discussed below.

Rents for the three months ended September 30, 2001, increased to $3.2
million, as compared to $3.0 million in the corresponding period in 2000. Of
this increase, $410,000 and $42,000 was due to increased rental rates and
occupancies at IOT's commercial properties and apartments, respectively. These
increases were offset by a decrease of $210,000 due to the sale of one apartment
in the third quarter of 2000. Rents for the nine months ended September 30,
2001, decreased to $9.8 million, as compared to $10.7 million in the
corresponding period in 2000. Of this decrease, $1.6 million was due to the sale
of two commercial properties and

238

$2.0 million was due to the sale of three apartments in 2000. This decrease was
offset by increases of $1.4 million due to the purchase of five apartment
properties in 2000 and $1.1 million and $150,000 was due to increased rental
rates and occupancies at IOT's commercial and apartment properties,
respectively.

Property operations expense increased in the three months ended
September 30, 2001, to $2.3 million, as compared to $1.7 million in the
corresponding period in 2000. Of this increase, $27,000 was due to increases in
utility expenses at IOT's apartments, $152,000 was due to increases in leasing,
administrative, and utility expenses at IOT's commercial properties and $557,000
was due to an increase in property tax expense for IOT's land. These increases
were offset by a decrease of $103,500 due to the sale of two commercial
properties in 2000. Property operations expense of $5.3 million in the nine
months ended September 30, 2001, approximated the $5.3 million in the
corresponding period in 2000.

Interest income in the three and nine months ended September 30, 2001,
was $8,000 and $142,000, as compared to $108,000 and $206,000 in the
corresponding periods in 2000. The decrease was due to a $1.0 million paydown
received in May 2001 on IOT's only note receivable.

Equity in income of partnerships in the three and nine months ended
September 30, 2001, were losses of $30,000 and $27,000, as compared to losses of
$2,000 and $71,000 in the corresponding periods in 2000. The nine month decrease
was primarily due to a decrease in operating expenses at Eton Square Office
Building.

Interest expense for the three months ended September 30, 2001,
increased to $1.5 million from $1.3 million in the corresponding period in 2000.
Of this increase $526,000 was due to the purchase of one unimproved land parcel
in 2000 and $56,000 was due to one loan refinanced in 2001. These increases were
offset by decreases of $80,000 and $51,000 due to lower variable interest rates
at IOT's commercial properties and apartments. Decreases of $87,000 were due to
the sale of one apartment and $111,000 was due to the sale of two unimproved
land parcels in the third quarter of 2000. Interest expense for the nine months
ended September 30, 2001, increased to $4.6 million from $4.0 million in the
corresponding period in 2000. Of this increase, $420,000 and $1.5 million was
due to the purchase of five apartments and one unimproved land parcel in 2000,
and $124,000 was due to one loan refinanced in 2001. These increases were offset
by decreases of $412,000 due to the sale of two commercial properties; $755,000
due to the sale of three apartments; and $181,000 due to the sale of two
unimproved land parcels in 2000. The remaining decrease of $96,000 was due to
lower variable interest rates at IOT's commercial properties and decreased
principal balances.

Depreciation expense for the three months ended September 30, 2001,
increased to $614,000 from $566,000 in the corresponding period in 2000. This
increase was due to $76,000 of tenant improvements at IOT's commercial
properties offset by decreases of $28,000 due to the sale of one apartment in
the third quarter of 2000. Depreciation expenses for the nine months ended
September 30, 2001, decreased to $1.8 million from $1.9 million in the
corresponding period in 2000. Of this decrease, $204,000 was due to the sale of
two commercial properties and $232,000 was due to the sale of three apartments
in 2000. These decreases were offset by an

239

increase of $200,000 due to tenant improvements at IOT's commercial properties
and an increase of $140,000 due to the purchase of five apartments in 2000.

Advisory fee expense in the three and nine months ended September 30,
2001, was $179,000 and $570,000, as compared to $170,000 and $505,000 in the
corresponding periods in 2000. The advisory fee is based on IOT's gross assets.

Net income fee was $234,000 and $1.5 million in the three and nine
months ended September 30, 2000. The net income fee is payable to IOT's advisor
based on 7.5% of IOT's net income.

General and administrative expense was $376,000 and $849,000 for the
three and nine months ended September 30, 2001, as compared to $181,000 and
$668,000 in the corresponding periods in 2000. The three and nine month increase
was primarily due to an increase in professional fees, taxes, and advisor cost
reimbursements.

2000 COMPARED TO 1999. IOT reported net income of $16.8 million in
2000, as compared to net income of $1.3 million in 1999. Net income included
gains on sale of real estate of $20.9 million in 2000 and gains on sale of real
estate of $1.5 million in 1999. Fluctuations in these and the other components
of revenue and expense are discussed in the following paragraphs.

Rents decreased to $13.7 million in 2000 from $16.0 million in 1999. A
decrease of $4.9 million was due to the sale of six income producing properties
in 2000 and 1999. The decrease was offset in part by an increase of $1.4 million
from the acquisition of six income producing properties in 2000 and fourth
quarter of 1999 and an additional $1.2 million was from an increase in occupancy
and rental rates at IOT's apartments and office buildings.

Interest income increased to $319,000 in 2000 from the $29,000 in 1999.
This increase was due to an increase in short-term investments, and from the
funding of a note receivable in 2000.

Property operations expense increased to $7.0 million in 2000 from $6.8
million in 1999. An increase in property operations expense of $1.7 million was
due to six income producing properties being purchased in 2000 and the fourth
quarter of 1999, offset by a decrease of $1.6 million from the sale of six
income producing properties in 2000 and 1999.

Interest expense decreased to $5.1 million in 2000 from $5.7 million in
1999. A decrease of $1.6 million was from the sale of eight properties subject
to debt in 2000 and 1999 and offset by $1.0 million from the purchase of nine
properties in 2000 and 1999.

Depreciation expense decreased to $2.5 million in 2000 from $2.7
million in 1999. A decrease of $775,000 is from the sale of six properties in
2000 and 1999, offset by an increase of $297,000 from the purchase of five
properties in 2000 and 1999 and an increase of $205,000 is from tenant
improvements. Depreciation expense in 2001 is expected to approximate 2000.

240

Advisory fee to affiliate increased to $664,000 in 2000 from $371,000
in 1999. The increase was attributable to a decrease in the operating expense
limitation refund. See Note 8 to the IOT Consolidated Financial Statements --
"Advisory Agreement."

The net income fee to affiliate increased to $1.4 million in 2000, from
$81,000 in 1999. The increase was attributable to the increase in IOT's net
income. The net income fee is based on 7.5% of IOT's net income.

General and administrative expense increased to $1.5 million in 2000
from $747,000 in 1999. This increase was primarily due to an increase in legal
fees, consultant fees, taxes and advisor cost reimbursements.

Equity in income of partnerships was a loss of $61,000 in 2000 compared
to income of $148,000. The decrease was due to the sale of two commercial
properties by the Tri-City partnership in 1999.

In 2000, gains on sale of real estate totaling $20.9 million were
realized: $903,000 on the sale of La Monte Park Apartments, $1.2 million on the
sale of Renaissance Parc Apartments, $1.9 million on the sale of Olympic Office
Building, $13.1 million on the sale of Saratoga Office Building, $2.2 million on
the sale of Eastpoint Apartments, $388,000 on the sale of Etheredge and
Fambrough land and $1.3 million recognition of a deferred gain. In 1999, IOT
recognized gains on sale of real estate totaling $1.5 million, $1.0 million
being IOT's equity share of the gain recognized by Tri-City on the sale of two
commercial properties, and $490,000 on IOT's sale of Town Center Plaza Shopping
Center. See Note 2 to the IOT Consolidated Financial Statements -- "Real Estate"
and Note 4 to the IOT Consolidated Financial Statements -- "Investment in Equity
Method Partnerships."

1999 COMPARED TO 1998. IOT reported net income of $1.3 million in 1999,
as compared to a net loss of $679,000 in 1998. Net income in 1999 included gains
on sale of real estate of $1.5 million whereas 1998's net loss included gains on
sale of real estate of $180,000. The primary factors contributing to IOT's 1999
net income a re discussed in the following paragraphs.

Rents increased to $16.0 million in 1999 from $14.3 million in 1998. Of
this increase, $1.6 million was due to higher rents and occupancy rates,
primarily at IOT's office buildings and $251,000 was attributable to a full year
of operations of an office building construction of which was completed in 1998.
This increase was partially offset by a decrease of $182,000 due to one office
building being sold in 1999.

Interest income decreased to $29,000 in 1999 from the $172,000 in 1998.
This decrease was due to a decrease in short-term investment income and the
August 1998 collection of a note receivable.

Property operations expense increased to $6.8 million in 1999 from $6.5
million in 1998. This increase was attributable to a full year of operations of
an office building construction of which was completed in 1998.

Interest expense of $5.7 million in 1999 approximated the $5.8 million
in 1998.

241

Depreciation expense increased to $2.7 million in 1999 from $2.2
million in 1998. This increase was primarily due to an increase in the
completion of office building construction.

Advisory fee increased to $371,000 in 1999 from $329,000 in 1998. Such
increase was attributable to an increase in IOT's gross assets, the basis for
the fee and a decrease in the operating expense limitation refund. See Note 8 to
the IOT Consolidated Financial Statements -- "Advisory Agreement."

A net income fee of $81,000 was earned by the advisor in 1999, the
result of IOT having net income. No fee was incurred in 1998.

General and administrative expense of $747,000 in 1999 approximated the
$755,000 in 1998.

Equity in income of partnerships increased to $148,000 in 1999 from
$113,000 in 1998. The increase was due to an equity partnership acquisition of
Eton Square and to increased rental rates at the partnership's commercial
properties.

In 1999, IOT recognized gains on sale of real estate totaling $1.5
million, $1.0 million being IOT's equity share of the gain recognized by
Tri-City on the sale of two commercial properties, and $490,000 on IOT's sale of
Town Center Plaza in November. See Note 2 to the IOT Consolidated Financial
Statements -- "Real Estate" and Note 4 to the IOT Consolidated Financial
Statements -- "Investment in Equity Method Partnerships." In 1998, IOT
recognized gains on sale of real estate totaling $180,000, its equity share of
the gain recognized by Tri-City on the sale of two apartments.

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances
and regulations, IOT 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.

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

INFLATION

The effects of inflation on IOT'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 gain 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.

242

TAXES

For the years 1998, 1999 and 2000, IOT elected and in the opinion of
IOT's management qualified to be taxed as a REIT as defined under Sections 856
through 860 of the Code. To continue to qualify for federal taxation as a REIT,
IOT is required to hold at least 75% of the value of its total assets in real
estate assets, government securities, cash and cash equivalents at the close of
each quarter of each taxable year. As a REIT, IOT is also required to distribute
at least 95% of its REIT taxable income plus 95% of its net income from
foreclosure property on an annual basis to stockholders.

QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING
MARKET RISK OF IOT

IOT'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 future operations. Market risk is
managed by matching the property's anticipated net operating income to an
appropriate financing.

The following table contains only those exposures that existed at
December 31, 2000. Anticipation of exposures or risk on positions that could
possibly arise was not considered. IOT's ultimate interest rate risk and its
affect on operations will depend on future capital market exposures, which
cannot be anticipated with a probable assurance level. (Dollars in thousands.)

LIABILITIES

Notes Payable
Variable interest rate - fair value .........................$42,344

2001 2002 2003 2004 2005 THEREAFTER TOTAL
------- ------- ------- ------- ------- ---------- -------

Instrument's $14,070 $11,435 $10,433 $ 2,732 $ -- $ 225 $38,895
maturities

Instrument's 303 319 216 82 23 1,510 2,453
amortization

Interest 4,215 2,210 1,402 428 183 2,063 10,501

Average rate 11.2% 9.4% 9.2% 9.5% 10.4% 10.4%

Fixed interest $11,212
rate-fair value
Instrument's $ -- $ -- $ -- $ -- $ -- $11,178 $11,178
maturities

Instrument's 188 199 186 235 257 340 1,405
amortization

Interest 1,119 1,102 1,083 1,063 1,047 1,478 6,892
Average rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.2%

243

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

Weighted Effect of 1%
Average Increase In
Balance Interest Rate Base Rates
------- ------------- ------------

Wholly-owned debt:
Variable rate ................... $25,040 8.56% $250
======= ====
Total increase in IOT's annual
net loss ....................... $250
====
Per share......................... $.17

244

MANAGEMENT OF IOT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of February 11,
2002 regarding IOT's executive officers and directors:

Name Age Position
---- --- --------

Mark W. Branigan* 47 Executive Vice President - Residential
Henry A. Butler** 51 Director
Louis J. Corna* 54 Executive Vice President - Tax
Bruce A. Endendyk* 53 Executive Vice President
Ronald E. Kimbrough* 49 Executive Vice President and Chief Financial Officer
David W. Starowicz* 46 Executive Vice President - Acquisitions, Sales and Construction
Ted P. Stokely** 68 Director and Chairman of the Board
Martin L. White** 62 Director

Although the board of directors is directly responsible for managing
the affairs of IOT and for setting the policies which guide it, the day-to-day
operations of IOT are performed by BCM, a contractual advisor under the
supervision of the board. The duties of BCM 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. BCM also serves as a consultant in connection with IOT's business plan
and investment decisions made by the board.

BCM has been providing advisory services to IOT since March 28, 1989.
Renewal of BCM's advisory agreement was approved by the board of directors on
August 18, 2000. BCM also serves as advisor to TCI and directors of IOT are also
directors of TCI. BCM also serves as advisor to ARL. The officers of IOT also
serve as officers of ARL, TCI and BCM. As of January 31, 2002, ARL and TCI owned
approximately 28.5% and 24%, respectively, of IOT's outstanding shares of common
stock and BCM owned approximately 7.4% of IOT's outstanding shares of common
stock.

Since February 1, 1990, affiliates of BCM have provided property
management services to IOT. Currently Triad provides such property management
services. Triad subcontracts with other entities for the provision of
property-level management services to IOT. The general

---------

* See "THE ADVISOR - BCM - Directors and Officers and Advisor" for background
and business experience information.

** See "MANAGEMENT OF TCI - Directors and Executive Officers of TCI" for
background and business experience information.

245

partner of Triad is BCM. The limited partners of Triad are Gene E. Phillips and
GS Realty, which is a company not affiliated with Mr. Phillips or BCM. Triad
subcontracts the property-level management and leasing of IOT's seven office
buildings and the two commercial properties owned by real estate partnerships in
which IOT and TCI are partners to Regis, a related party, which is a company
also owned by GS Realty. Regis is entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Triad.

Regis also is entitled to receive real estate brokerage commissions in
accordance with the terms of a nonexclusive brokerage agreement.

IOT has no employees. Employees of BCM render services to IOT.

EXECUTIVE COMPENSATION

IOT has no employees, payroll or benefit plans and pays no compensation
to its executive officers. The executive officers of IOT, who are also officers
or employees of BCM, IOT's advisor, are compensated by BCM. Such executive
officers perform a variety of services for BCM and the amount of their
compensation is determined solely by BCM. BCM does not allocate the cash
compensation of its officers among the various entities for which it serves as
advisor. See "The Advisor" for a more detailed discussion of the compensation
payable to BCM.

The only remuneration paid by IOT is to the directors who are not
officers or directors of BCM or its affiliated companies. The Independent
Directors (1) review the business plan of IOT to determine that it is in the
best interest of the stockholders, (2) review the advisory contract, (3)
supervise the performance of IOT's advisor and review the reasonableness of the
compensation paid to the advisor in terms of the nature and quality of services
performed, (4) reviews the reasonableness of the total fees and expenses of IOT
and (5) select, when necessary, a qualified independent real estate appraiser to
appraise properties acquired.

Each independent director receives compensation in the amount of
$15,000 per year, plus reimbursement for expenses. The chairman of the board
receives an additional fee of $1,500 per year. The members of the Audit
Committee receive a fee of $250 for each committee meeting attended. In
addition, each independent director receives an additional fee of $1,000 per day
for any special services rendered by him to IOT outside of his ordinary duties
as director, plus reimbursement of expenses.

During 2000, $104,500 was paid to the independent directors in total
directors' fees for all services including the annual fee for service during the
period January 1, 2000 through December 31, 2000, and 2000 special service fees
as follows: Richard W. Douglas, (a director until June 2000) $7,500; Larry E.
Harley, (a director until June 2000) $7,500; R. Douglas Leonhard (a director
until December 2001), $18,000, Murray Shaw, (a director until March 2001)
$18,000; Ted P. Stokely, $19,000; Martin L. White, $17,250; and Edward G. Zampa
(a director until December 2001), $19,250.

246

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF IOT

Security Ownership of Certain Beneficial Owners. The following table
sets forth the ownership of IOT's shares of Common Stock, both beneficially and
of record, both individually and in the aggregate for those persons or entities
known by IOT to be beneficial owners of more than 5% of its shares of Common
Stock as of the close of business on February 11, 2002.

Percentage
Amount Shares of of Class Shares of
and Series G Percentage if the Series H
Nature of Preferred of Class Non-Affiliates Preferred
Beneficial Stock if the Non- Elect to Stock
Ownership Beneficially Affiliates Receive Beneficially
of IOT Percent Owned After Elect to Series G Owned After
Common of the TCI Receive Preferred the IOT
Name of Beneficial Owner Stock Class(1) Merger Cash(2) Stock Merger
------------------------ --------- -------- ------------ ---------- ------------- ------------

EQK Holdings, Inc.(4) ................. 409,935 28.5% -- -- -- --
American Realty
Investors, Inc.(4)(5) ................. 409,935 28.5% -- -- -- --
Transcontinental Realty
Investors, Inc.(4) .................... 345,728 24.0% -- -- -- --
Basic Capital Management, Inc.(4) ..... 106,802 7.4% 1,166,947 99.8% 29.0% 106,802

EQK Holdings, Inc.(4) ................. -- -- -- --
American Realty
Investors, Inc.(4)(5) ................. -- -- -- --
Transcontinental Realty
Investors, Inc.(4) .................... -- -- -- --
Basic Capital Management, Inc.(4) ..... 100% 15.6% 9,427,017 64.9%

---------

(1) Percentages are based upon 1,438,945 shares of IOT Common Stock
outstanding at February 11, 2002.

(4) The business address of each of EQK Holdings, Inc., ARL, TCI and BCM is
1800 Valley View Lane, Suite 300, Dallas, Texas 75234.

(5) Includes 409,935 shares of IOT common stock which ARL may be deemed to
beneficially own due to its sole ownership of EQK Holdings, Inc., which
directly owns such shares.

Security Ownership of Management. The following table sets forth the
ownership of IOT's shares of common stock, both beneficially and of record, both
individually and in the aggregate, for the directors and executive officers of
IOT as of the close of business on February 11, 2002.

247

Mark W. Branigan(4)(5)(6) ............. 862,465 59.9% 1,166,947 99.8% 29.5% 106,802
Henry A. Butler(4) .................... 345,728 24.0% -- -- -- --
Louis J. Corna(4)(5)(6) ............... 862,465 59.9% 1,166,947 99.8% 29.5% 106,802
Bruce A. Endendyk(4)(5)(6) ............ 862,465 59.9% 1,166,947 99.8% 29.5% 106,802
Ronald E. Kimbrough(4)(5)(6) .......... 862,465 59.9% 1,166,947 99.8% 29.5% 106,802
David W. Starowicz(4)(5)(6) ........... 862,465 59.9% 1,166,947 99.8% 29.5% 106,802
Ted P. Stokely(4) ..................... 345,728 24.0% -- -- -- --
Martin L. White(4)..................... 345,728 24.0% -- -- -- --
All Directors and Executive
Officers as a group
(8 individuals)(9) ................. 862,465 59.9% 1,193,422 99.8% 29.5% 106,802

Mark W. Branigan(4)(5)(6) ............. 100% 15.6% 10,173,989 70.0%
Henry A. Butler(4) .................... -- 15.6% -- --
Louis J. Corna(4)(5)(6) ............... 100% 15.6% 10,173,989 70.0%
Bruce A. Endendyk(4)(5)(6) ............ 100% 15.6% 10,188,989(7) 70.0%
Ronald E. Kimbrough(4)(5)(6) .......... 100% 15.6% 10,173,989 70.0%
David W. Starowicz(4)(5)(6) ........... 100% 15.6% 10,178,989(8) 70.0%
Ted P. Stokely(4) ..................... -- -- 37,500 *
Martin L. White(4)..................... -- -- 37,500 *
All Directors and Executive
Officers as a group
(8 individuals)(9) ................. 100% 15.6% 10,268,989 70.3%

---------
* Less than 1%.

(1) Percentage is based upon 1,438,945 shares of Common Stock outstanding
at February 11, 2002.

(4) Includes 345,728 shares of IOT common stock of which the directors of
TCI may be deemed to beneficially own.

(5) Includes 409,935 shares of IOT common stock of which Messrs. Branigan,
Corna, Endendyk, Kimbrough and Starowicz may be deemed to beneficially
own due to their positions as executive officers or directors of ARL,
which directly owns such shares.

(6) Includes 106,802 shares of IOT common stock over which Messrs.
Branigan, Corna, Endendyk, Kimbrough and Starowicz may be deemed to
beneficially own due to their positions as executive officers of BCM,
which directly owns such shares.

(7) Includes 15,000 shares of ARL common stock issued upon the exercise of
options granted to Mr. Endendyk under the ARL Option Plan.

(8) Includes 5,000 shares of ARL common stock issued upon the exercise of
options granted to Mr. Starowicz under the ARL Option Plan.

(9) The directors and executive officers of IOT disclaim beneficial
ownership of such shares. Each of the directors of ARL may be deemed to
be beneficial owners of the shares owned by ARL by virtue of their
positions as directors of ARL. Each of the directors of BCM may be
deemed to be beneficial owners of the shares owned by BCM by virtue of
their positions as directors of BCM. The directors of ARL and BCM
disclaim such beneficial ownership.

248

PERFORMANCE GRAPH

The following performance graph compares the cumulative total
stockholder return on IOT's shares of common stock with the DJ Equity Index and
the DJ Real Estate Index. The comparison assumes that $100 was invested on
December 31, 1996, in IOT's shares of common stock and in each of the indices
and further assumes the reinvestment of all distributions. Past performance is
not necessarily an indicator of future performance.

[PERFORMANCE GRAPH]

12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- -------- -------- --------

Income Opportunity Realty Investors, Inc. 100 108 63 60 96 213
Dow Jones US Realty Index 100 118 93 88 112 126
Dow Jones US Total Market Index 100 132 165 202 183 161

249

SECURITYHOLDER PROPOSALS

Stockholders may submit proposals on matters appropriate for
stockholder action at the special meetings consistent with Rule 14a-8
promulgated under the Exchange Act. Any proposal which a stockholder intends to
present at the 2002 annual meeting must be received at the principal executive
offices of ARL by April 1, 2002; of TCI by April 1, 2002; and of IOT by April 1,
2002 in order to be included in the proxy material for the meeting. If the one
or both mergers are approved and completed, TCI and IOT, as the case may be,
will not have a 2002 annual meeting.

LEGAL MATTERS

The validity of ARL preferred stock to be issued in connection with the
business combination will be passed upon by Jackson Walker L.L.P.

EXPERTS

The financial statements and schedules included in this joint proxy
statement and prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the joint proxy statement and
prospectus, and are included in reliance upon such reports given upon the
authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

ARL, TCI and IOT file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
document filed by ARL, TCI or IOT at the SEC's public reference room in
Washington, D.C. The public reference room at the SEC's office in Washington,
D.C. is located at 450 Fifth Street, N.W. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. The companies' SEC
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at "http:\\www.sec.gov." In
addition, because the common stock of ARL and TCI are each listed on the NYSE,
reports and other information concerning ARL (symbol: "ARL") and TCI (symbol:
"TCI") can also be inspected at the office of the NYSE, Inc., 20 Broad Street,
New York, New York 10005. Because IOT's common stock is listed on the AMEX
(symbol: "IOT"), reports and other information concerning IOT can also be
inspected at the office of the AMEX, 86 Trinity Place, New York, New York 10006.

ARL has filed a registration statement on Form S-4 to register with the
SEC the Series G and Series H preferred stock to be delivered to the TCI and IOT
stockholders in the business combination, and the shares of ARL common stock
issuable upon conversion of the Series G and Series H preferred stock. This
joint proxy statement and prospectus is a part of that registration statement
and constitutes a prospectus of ARL in addition to being a proxy statement of
ARL, TCI and IOT for the special meetings. As allowed by SEC rules, this joint
proxy statement and prospectus does not contain all the information you can find
in the registration statement or the exhibits to the registration statement.

You should rely only on the information contained or incorporated by
reference in this joint proxy statement and prospectus to vote on the approval
of the business combination.

250

Neither ARL, TCI nor IOT has authorized anyone to provide you with information
that is different from what is contained in this joint proxy statement and
prospectus. This joint proxy statement and prospectus is dated _______________,
2002. You should not assume that the information contained in the joint proxy
statement and prospectus is accurate as of any date other than that date, and
neither the mailing of this joint proxy statement and prospectus to stockholders
nor the delivery of ARL preferred stock in the business combinations shall
create any implication to the contrary.

WE HAVE AUTHORIZED NO ONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATION ABOUT EITHER OF THE PROPOSED MERGERS OR THE COMPANIES THAT
DIFFERS FROM OR ADDS TO THE INFORMATION CONTAINED IN THIS DOCUMENT OR IN THE
DOCUMENTS ARL, TCI AND IOT HAVE PUBLICLY FILED WITH THE SEC. THEREFORE, IF
ANYONE SHOULD GIVE YOU ANY DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT
RELY ON IT.

IF YOU LIVE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO EXCHANGE
OR SELL, OR TO ASK FOR OFFERS TO EXCHANGE OR BUY, THE SECURITIES OFFERED BY THIS
DOCUMENT, OR TO ASK FOR PROXIES, OR, IF YOU ARE A PERSON TO WHOM IT IS UNLAWFUL
TO DIRECT THESE ACTIVITIES, THEN THE OFFER PRESENTED BY THIS DOCUMENT DOES NOT
EXTEND TO YOU.

251

GLOSSARY OF TERMS

"10-Q Issuance Date" means the fifteenth day after the public issuance of ARL's
form 10-Q.

"ADA" means the Americans with Disabilities Act.

"Affiliated Entities" means Mr. Phillips, BCM, ARL and ART.

"AMEX" means the American Stock Exchange.

"ARL" means American Realty Investors, Inc.

"ARL Option Plan" means the 1997 ARL Stock Option Plan.

"ART" means American Realty Trust, Inc., a wholly-owned subsidiary of ARL.

"BCM" means Basic Capital Management, Inc.

"Bordeaux" means Bordeaux Investments Two, LLC.

"CMET" means Continental Mortgage and Equity Trust.

"Code" means the Internal Revenue Code of 1986 as amended.

"DJ Equity Index" means Dow Jones Equity Market Index.

"DJ Real Estate Index" means Dow Jones Real Estate Investment Index.

"Engagement Letters" means the engagement letters of TCI and IOT retaining
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. dated October 4, 2001.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"EQK" means EQK Realty Investors, I.

"EQK Holdings" means EQK Holdings, Inc.

"FASB" means Financial Accounting Standards Board.

"GCLP" means Garden Capital L.P.

"Green Street" means Green Street Advisors, Inc.

"GS Realty" means GS Realty Services, Inc.

"Houlihan Lokey" means Houlihan Lokey Howard & Zukin Financial Advisors, Inc.

"Income Producing Properties" means the income producing properties held by the
Subject Companies.

"IOT" means Income Opportunity Realty Investors, Inc.

"Jor-Trans" means Jor-Trans Investors Limited Partnership.

"JNC" means JNC Enterprises, Inc.

"LTM Capitalization Rate Approach" means the adjusted net operating income for
the twelve months ended September 30, 2001.

"Mr. Phillips" means Gene E. Phillips, a representative of a trust for the
benefit of his children that directly owns BCM.

"NFY Capitalization Rate Approach" means the projected adjusted net operating
income.

"NIA" means Nakash Income Associates.

"NM" means National Melrose, Inc.

"NMC" means NRLP Management Corp.

"NOLP" means National Operating, L.P.

"NRLP" means National Realty, L.P.

"NRS" means the Nevada Revised Statutes.

"NYSE" means the New York Stock Exchange.

"Olive Litigation" means the case styled Jack Olive, et. al. v. Gene E.
Phillips, et. al., Case No. C89-4331-MHP pending in the United States District
Court for the Northern District of California.

"One Realco" means One Realco Corporation.

"PWSI" means Pizza World Supreme, Inc.

"REIT" means Real Estate Investment Trust.

"Regis" means Regis Realty, Inc.

"Rosedale" means Rosedale Corporation

"SAC 9" means Sacramento Nine.

"SEC" means the Securities and Exchange Commission.

"Series F preferred stock" means the Series F redeemable preferred stock.

"Series G preferred stock" means the 10% Series G cumulative convertible
preferred stock.

"Series H preferred stock" means the 10% Series H cumulative convertible
preferred stock.

"Settlement Agreement" means the Second Amendment to the Modification of
Stipulation of Settlement dated October 17, 2001 in the Olive Litigation.

"Subject Companies" means TCI, IOT or ARL.

"TCI" means Transcontinental Realty Investors, Inc.

"TCI Director Plan" means the TCI director stock option plan.

252

"Two Hickory" means ART Two Hickory Corporation

"Triad" means Triad Realty Services, Ltd.

"Tri-City" means Tri-City Limited Partnership.

"Warwick" means Warwick of Summit, Inc.

"World Trade" means World Trade Company, Ltd.

253

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements of American Realty Investors, Inc.
Consolidated Balance Sheets at September 30, 2001
(Unaudited) and December 31, 2000..................... F-3
Consolidated Statements of Operations for each of the
three month periods ended September 30, 2001, and 2000
(Unaudited) and for each of the nine month periods
ended September 30, 2001 and 2000 (Unaudited)......... F-4
Consolidated Statement of Stockholders' Equity for the
nine month period ended September 30, 2001
(Unaudited)........................................... F-5
Consolidated Statements of Cash Flows for each of the
nine month periods ended September 30, 2001 and 2000
(Unaudited)........................................... F-6
Notes to Consolidated Financial Statements............. F-8
Report of Independent Certified Public Accountants..... F-21
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................. F-22
Consolidated Statements of Operations for each of the
Years ended December 31, 2000, 1999 and 1998.......... F-23
Consolidated Statements of Stockholders' Equity for
each of the Years ended December 31, 2000, 1999 and
1998.................................................. F-24
Consolidated Statements of Cash Flows for each of the
Years ended December 31, 2000, 1999 and 1998.......... F-25
Notes to Consolidated Financial Statements............. F-28
Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-53
Schedule IV -- Mortgage Loans on Real Estate........... F-61
Financial Statements of Income Opportunity Realty Investors,
Inc.
Consolidated Balance Sheets at September 30, 2001
(Unaudited) and December 31, 2000..................... F-63
Consolidated Statements of Operations for each of the
three month periods ended September 30, 2001 and 2000
(Unaudited) and for each of the nine month periods
ended September 30, 2001 and 2000..................... F-64
Consolidated Statement of Stockholders' Equity for the
nine month period ended September 30, 2001
(Unaudited)........................................... F-65
Consolidated Statements of Cash Flows for each of the
nine month periods ended September 30, 2001 and 2000
(Unaudited)........................................... F-66
Notes to Consolidated Financial Statements............. F-68
Report of Independent Certified Public Accountants..... F-72
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................. F-73
Consolidated Statements of Operations for each of the
Years ended December 31, 2000, 1999 and 1998.......... F-74
Consolidated Statements of Stockholders' Equity for
each of the Years ended December 31, 2000, 1999 and
1998.................................................. F-75
Consolidated Statements of Cash Flows for each of the
Years ended December 31, 2000, 1999 and 1998.......... F-76
Notes to Consolidated Financial Statements............. F-77
Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-89
Schedule IV -- Mortgage Loans on Real Estate........... F-91
Financial Statements of Transcontinental Realty Investors,
Inc.
Consolidated Balance Sheets at September 30, 2001
(Unaudited) and December 31, 2000..................... F-93

F-1

Consolidated Statements of Operations for each of the
three month periods ended September 30, 2001 and 2000
(Unaudited) and for each of the nine month periods
ended September 30, 2001 and 2000 (Unaudited)......... F-94
Consolidated Statement of Stockholders' Equity for the
nine month period ended September 30, 2001
(Unaudited)........................................... F-95
Consolidated Statements of Cash Flows for each of the
nine month periods ended September 30, 2001 and 2000
(Unaudited)........................................... F-96
Notes to Consolidated Financial Statements............. F-98
Report of Independent Certified Public Accountants..... F-108
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................. F-109
Consolidated Statements of Operations for the each of
the Years ended December 31, 2000, 1999 and 1998...... F-110
Consolidated Statements of Stockholders' Equity for
each of the Years ended December 31, 2000, 1999 and
1998.................................................. F-111
Consolidated Statements of Cash Flows for each of the
Years Ended December 31, 2000, 1999 and 1998.......... F-112
Notes to Consolidated Financial Statements............. F-114
Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-134
Schedule IV -- Mortgage Loans on Real Estate........... F-141

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.

F-2

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS

Real estate held for investment............................. $ 506,680 $ 559,461
Less -- accumulated depreciation............................ (130,567) (148,690)
--------- ---------
376,113 410,771
Real estate held for sale................................... 228,476 242,973
Notes and interest receivable
Performing ($20,019 in 2001 and $9,684 in 2000 from
affiliates)............................................ 23,914 13,346
Nonperforming ($6,768 in 2001 and $1,540 in 2000 from
affiliates)............................................ 7,885 3,062
--------- ---------
31,799 16,408
Less -- allowance for estimated losses...................... (2,577) (2,577)
--------- ---------
29,222 13,831
Pizza parlor equipment...................................... 11,207 10,191
Less -- accumulated depreciation............................ (3,823) (3,164)
--------- ---------
7,384 7,027
Leasehold interest -- oil and gas properties................ 4,719 --
Less -- accumulated depletion............................... (1) --
--------- ---------
4,718 --
Oilfield equipment.......................................... 361 --
Less -- accumulated depreciation............................ (17) --
--------- ---------
344 --
Marketable equity securities, at market value............... 108 153
Cash and cash equivalents................................... 5,014 4,177
Investments in equity investees............................. 78,046 44,777
Intangibles, net of accumulated amortization ($2,566 in 2001
and $2,233 in 2000)....................................... 15,883 16,075
Other assets................................................ 35,070 47,231
--------- ---------
$ 780,378 $ 787,015
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Notes and interest payable.................................. $ 582,139 $ 616,331
Margin borrowings........................................... 28,703 13,485
Accounts payable and other liabilities ($13,251 in 2001 and
$3,030 in 2000 to affiliate).............................. 44,513 41,221
--------- ---------
655,355 671,037
Minority interest........................................... 37,634 42,576
Series F, 3,968.75 shares in 2001 (liquidation preference
$3,969)................................................... 3,969 --
Stockholders' equity
Preferred Stock, $2.00 par value, authorized 50,000,000
shares, issued and outstanding
Series A, 2,724,910 shares in 2001 and 2,721,332 2000
(liquidation preference $27,249)....................... 4,850 4,843
Series E, 50,000 shares in 2001 and 2000 (liquidation
preference $500)....................................... 100 100
Common Stock, $.01 par value; authorized 100,000,000 shares,
issued 11,830,127 shares in 2001 and 11,829,217 in 2000... 118 118
Paid-in capital............................................. 112,195 112,301
Accumulated (deficit)....................................... (33,827) (43,943)
Treasury stock at par, 1,637,000 shares in 2001 and
1,718,749 shares in 2000.................................. (16) (17)
--------- ---------
83,420 73,402
--------- ---------
$ 780,378 $ 787,015
========= =========

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

F-3

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Property revenue
Rents..................................... $ 32,712 $ 34,708 $ 98,748 $ 105,211
Property operations expenses.............. 22,152 23,776 71,246 70,451
----------- ----------- ----------- -----------
Operating income.................. 10,560 10,932 27,502 34,760
Land operations
Sales..................................... 8,229 89,285 41,806 108,238
Cost of sales............................. 4,682 65,674 33,546 81,116
----------- ----------- ----------- -----------
Gain on land sales................ 3,547 23,611 8,260 27,122
Pizza parlor operations
Sales..................................... 8,723 8,124 25,282 24,388
Cost of sales............................. 7,164 6,798 20,715 20,138
----------- ----------- ----------- -----------
Gross margin...................... 1,559 1,326 4,567 4,250
Oil and gas operations
Sales..................................... 97 -- 97 --
Operating expenses........................ 186 -- 186 --
----------- ----------- ----------- -----------
Gross margin...................... (89) -- (89) --
Income from operations...................... 15,577 35,869 40,240 66,132
Other income
Interest income........................... 837 283 1,997 3,295
Equity in income of investees............. 3,452 2,577 9,157 2,873
Gain on sale of real estate............... 12,334 3,474 54,600 51,706
Other..................................... (19) 606 58 419
----------- ----------- ----------- -----------
16,604 6,940 65,812 58,293
Other expenses
Interest.................................. 19,061 19,580 56,242 60,153
Depreciation, depletion and
amortization........................... 4,490 4,001 13,169 12,909
General and administrative................ 4,610 2,873 9,083 11,705
Advisory fee to affiliate................. 1,437 1,522 4,971 4,146
Net income fee to affiliate............... (1,128) -- 638 --
Incentive fee to affiliate................ 1,642 -- 7,477 --
Minority interest......................... 1,003 4,953 2,483 32,219
----------- ----------- ----------- -----------
31,115 32,929 94,063 121,132
----------- ----------- ----------- -----------
Income before income taxes.................. 1,066 9,880 11,989 3,293
Provision for income taxes.................. -- (1,652) -- (1,652)
----------- ----------- ----------- -----------
Net income.................................. 1,066 8,228 11,989 1,641
Preferred dividend requirement.............. (620) (590) (1,868) (1,661)
----------- ----------- ----------- -----------
Net income (loss) applicable to Common
shares.................................... $ 446 $ 7,638 $ 10,121 $ (20)
=========== =========== =========== ===========
Earnings per share
Net income................................ $ .04 $ .76 $ 1.00 $ --
=========== =========== =========== ===========
Weighted average Common shares used in
computing earnings per share.............. 10,193,217 10,013,087 10,141,840 10,496,364
=========== =========== =========== ===========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001

SERIES A SERIES E
PREFERRED PREFERRED COMMON TREASURY PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) EQUITY
--------- --------- ------ -------- -------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Balance, January 1, 2001........ $4,843 $100 $118 $(17) $112,301 $(43,943) $73,402
Preferred dividends
Series A Preferred Stock ($.75
per share)................. -- -- -- -- -- (1,846) (1,846)
Series E Preferred Stock ($.45
per share)................. -- -- -- -- -- (22) (22)
Common Stock dividends (pre-
merger)....................... -- -- -- -- -- (5) (5)
Retirement of Treasury Stock.... -- -- -- 1 (1) -- --
Repurchase of Common Stock...... -- -- -- -- (133) -- (133)
Series A Preferred Stock
issued........................ 7 -- -- -- 28 -- 35
Net income...................... -- -- -- -- -- 11,989 11,989
------ ---- ---- ---- -------- -------- -------
Balance, September 30, 2001..... $4,850 $100 $118 $(16) $112,195 $(33,827) $83,420
====== ==== ==== ==== ======== ======== =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)

Cash Flows From Operating Activities
Rents collected........................................... $ 98,787 $ 105,131
Pizza parlor sales collected.............................. 25,075 24,422
Interest collected........................................ 397 4,553
Distributions received from equity investees' operating
cash flow.............................................. 53 1,869
Payments for property operations.......................... (79,693) (81,625)
Payments for pizza parlor operations...................... (20,804) (20,030)
Payments for oil and gas operations....................... (175) --
Interest paid............................................. (45,691) (55,855)
Advisory fee paid to affiliate............................ (4,971) (4,146)
Incentive fees paid to affiliate.......................... (1,646) --
Distributions to minority interest holders................ (2,697) (6,159)
General and administrative expenses paid.................. (9,079) (11,705)
Other..................................................... 1,239 10,110
--------- ---------
Net cash (used in) operating activities........... (39,205) (33,435)
Cash Flows From Investing Activities
Collections on notes receivable........................... 4,929 39,930
Pizza parlor equipment purchased.......................... (1,066) (1,120)
Proceeds from sale of real estate......................... 102,415 125,218
Purchase of marketable equity securities.................. -- (5,307)
Proceeds from sale of marketable equity securities........ -- 5,170
Notes receivable funded................................... (13,959) (17,260)
Earnest money/escrow deposits............................. (696) (5,424)
Investment in real estate entities........................ (36,975) 3,828
Acquisition of real estate................................ -- (19,015)
Construction and development.............................. (3,771) (9,415)
Real estate improvements.................................. (9,518) (8,587)
Acquisition of leasehold interests........................ (350) --
Purchase of oil field equipment........................... (361) --
--------- ---------
Net cash provided by investing activities......... 40,648 108,018
Cash Flows from Financing Activities
Proceeds from notes payable............................... 136,832 136,321
Payments on notes payable................................. (144,314) (152,871)
Deferred borrowing costs.................................. (7,633) (6,690)
Net (payments) to/advances from affiliates................ 1,028 (34,208)
Issuance of Series E Preferred Stock...................... -- 500
Margin borrowings, net.................................... 15,073 (10,953)
Preferred dividends paid.................................. (1,454) (1,661)
Repurchase of Common Stock................................ (133) (746)

F-6

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)

Common dividends paid..................................... (5) --
--------- ---------
Net cash (used in) financing activities........... (606) (70,308)
Net increase in cash and cash equivalents......... 837 4,275
Cash and cash equivalents, beginning of period.............. 4,177 2,479
--------- ---------
Cash and cash equivalents, end of period.................... $ 5,014 $ 6,754
========= =========
Reconciliation of net income to net cash (used in) operating
activities
Net income................................................ $ 11,989 $ 1,641
Adjustments to reconcile net income to net cash (used in)
operating activities
Depreciation, depletion and amortization.................. 13,169 12,909
Gain on sale of real estate............................ (62,860) (78,828)
Distributions from equity investees' operating cash
flow.................................................. 53 1,869
Increase (decrease) in minority interest............... (214) 26,060
Equity in (income) of investees........................ (9,157) (2,873)
(Increase) decrease in accrued interest receivable..... (1,600) 1,258
Decrease in other assets............................... 11,294 17,666
Increase/(decrease) in accrued interest payable........ 28 (3,723)
(Decrease) in accounts payable and other liabilities... (1,907) (9,414)
--------- ---------
Net cash (used in) operating activities........... $ (39,205) $ (33,435)
========= =========
Schedule of noncash investing and financing activities
Notes payable from acquisition of real estate............. $ 2,549 $ 6,262
Notes payable assumed by buyer on sale of properties...... 30,263 32,460
Notes receivable from sale of real estate................. 4,329 2,790
Exchange of real estate at carrying value................. 3,726 2,989
Common Stock issued in exchange for NRLP units............ -- 25,817
Issuance of Series A Preferred Stock...................... 35 1,213
Issuance of Series F Preferred Stock...................... 3,969 --
Purchase accounting writedown............................. -- (35,846)

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-7

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

NOTE 2. NOTES RECEIVABLE

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

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

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

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

In August 2000, ARI sold a 20.5 acre tract of its Mason Goodrich land
parcel for $3.6 million, receiving $2.1 million in cash and providing purchase
money financing of the remaining $1.5 million of the sales price. The loan
matured in December 2000. In February 2001, the loan was collected in full,
including accrued but unpaid interest.
F-8

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

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

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

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

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

F-9

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. REAL ESTATE

In 2001, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

First Quarter
APARTMENTS
Carriage Park........ Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 663
Rockborough.......... Denver, CO 345 Units 16,675 3,654 12,215(1) 13,471
SHOPPING CENTER
Regency Pointe....... Jacksonville, FL 67,063 Sq. Ft. 7,350 5,126 1,500 2,292
LAND
Frisco Bridges....... Collin County, TX 27.8 Acres 4,500 4,130 -- 25
Katrina.............. Palm Desert, CA 20.0 Acres 2,831 (124) 596 --(2)
Las Colinas.......... Las Colinas, TX 1.7 Acres 825 233 400 539
Plano Parkway........ Plano, TX 11.3 Acres 1,445 312 950 --
Scoggins............. Tarrant County, TX 232.8 Acres 2,913 892 1,800 181
Scout................ Tarrant County, TX 408.0 Acres 5,087 1,586 3,200 2,969
Tree Farm............ Dallas County, TX 10.4 Acres 2,888 (87) 2,644 75
Second Quarter
APARTMENTS
Kimberly Woods....... Tucson, AZ 279 Units 8,450 1,667 6,191(1) 6,052
Place One............ Tulsa, OK 407 Units 12,935 3,310 7,539 8,623
Shadowood............ Addison, TX 184 Units 7,125 1,980 4,320 4,644
Glenwood............. Addison, TX 168 Units 6,650 3,166 2,549 (560)
Bent Tree............ Addison, TX 292 Units 12,050 2,480 8,867 7,081
LAND
Katrina.............. Palm Desert, CA 20.0 Acres 2,940 78 -- 516
Mason/Goodrich....... Houston, TX 22.1 Acres 4,168 (34) 3,750 2,896
Plano Parkway........ Plano, TX 12.0 Acres 740 672 -- (991)
Yorktown............. Harris County, TX 120.4 Acres 5,239 (160) 4,991 (1,497)
Third Quarter
APARTMENTS
Club Mar............. Sarasota, FL 248 Units 8,500 1,905 6,199(1) 2,328
Covered Bridge....... Gainesville, FL 176 Units 7,900 2,463 4,339 5,982
Crossing at Church... Tampa, FL 52 Units 1,880 750 948 623
Ashford.............. Tampa, FL 56 Units 2,145 593 1,182 (985)
Chalet I............. Topeka, KS 162 Units 5,650 1,288 4,108(1) 3,952
Chalet II............ Topeka, KS 72 Units 2,100 485 1,550(1) 434

F-10

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

LAND
Elm Fork............. Denton County, TX 10.0 Acres 1,002 (30) 958 284
Katrina.............. Palm Desert, CA 6.1 Acres 1,196 1,108 -- 570
Chase Oaks........... Plano, TX 22.3 Acres 2,874 663 2,027 870
Nashville............ Nashville, TN 2.0 Acres 26 (1) 24 (82)
Nashville............ Nashville, TN 1.2 Acres 8 -- 4 (959)
Rasor................ Plano, TX 6.6 Acres 350 267 -- 34
Katrina.............. Palm Desert, CA 2.2 Acres 800 (24) 737 514
Chase Oaks........... Plano, TX 4.9 Acres 1,973 1,832 -- 1,416
FOURTH QUARTER
APARTMENTS
Nora Pines........... Indianapolis, IN 254 Units 9,850 2,548 5,574 6,631
LAND
Katrina.............. Palm Desert, CA 1.4 Acres 284 (9) 253 117

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

(1) Debt assumed by purchaser.

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

In 2000, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

First Quarter
APARTMENTS
Summerwind........... Reseda, CA 172 Units $ 9,000 $3,082 $ 5,568(1) $ 6,684
Windtree............. Reseda, CA 159 Units 8,350 2,911 5,063(1) 6,170
Whispering Pines..... Canoga Park, CA 102 Units 5,300 1,597 3,437(1) 3,106
SHOPPING CENTER
Katella Plaza........ Orange, CA 62,290 Sq. Ft. 1,814 283 1,188 194
LAND
Duchense............. Duchense, UT 420 Acres 43 42 -- 16
Frisco Bridges....... Collin County, TX 15.00 Acres 2,675 706 2,000 297
Frisco Bridges....... Collin County, TX 19.74 Acres 2,971 -- --(2) --
Mason/Goodrich....... Houston, TX 1.1 Acres 129 -- 116 70
Mason/Goodrich....... Houston, TX 12.8 Acres 2,536 -- 1,803 1,783
Nashville............ Nashville, TN 2.6 Acres 405 -- 345 225
Rasor................ Plano, TX 43.01 Acres 1,850 -- 1,604 58
SECOND QUARTER
APARTMENTS
Pines................ Little Rock, AR 257 Units 4,650 1,281 3,063 2,441
Four Seasons......... Denver, CO 384 Units 16,600 6,543 9,220(1) 8,191
Sherwood Glen........ Urbandale, IA 180 Units 6,250 1,244 4,626(1) 4,161

F-11

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

OFFICE BUILDING
Marina Playa......... Santa Clara, CA 124,205 Sq. Ft. 25,750 7,737 7,766 17,285
LAND
Rasor................ Plano, TX 5.4 Acres 915 -- 915 705
Salmon River......... Salmon River, ID 3.0 Acres 45 44 -- 38
Valley Ranch......... Irving, TX 22.4 Acres 1,455 -- 1,375 (585)
Parkfield............ Denver, CO 2.6 Acres 615 (1) 584 512
Frisco Bridges....... Collin County, TX 24.3 Acres 4,194 (435) 4,000 259
Vista Business
Park............... Travis County, TX 5.4 Acres 620 14 577 173
McKinney Corners II.. Collin County, TX 14.6 Acres 500 (599) 1,050 (40)
THIRD QUARTER
APARTMENTS
Fair Oaks............ Euless, TX 208 Units 6,850 609 5,711 3,474
LAND
Mason/Goodrich....... Houston, TX 6.8 Acres 1,198 114 991 807
McKinney Corners
I,II,III,IV,V...... Collin County, TX 82.0 Acres 9,150 613 8,123 1,638
Parkfield............ Denver, CO 326.8 Acres 13,164 7,969 3,279 3,768
Rasor................ Plano, TX 41.1 Acres 3,779 3,587 -- 1,902
Pantex............... Collin County, TX 182.5 Acres 8,160 -- 4,546(1) 959
Rowlett Creek........ Collin County, TX 80.4 Acres 2,262 919 1,173 462
Vann Cattle.......... Collin County, TX 126.6 Acres 3,564 1,872 1,471 1,257
Mastenbrook.......... Collin County, TX 157.9 Acres 4,445 1,890 2,275 747
Wakefield............ Collin County, TX 70.3 Acres 1,981 1,239 612 478
Nashville............ Nashville, TN 3.0 Acres 523 19 450 310
Keller............... Tarrant County, TX 749.1 Acres 10,000 3,892 4,500 3,373
Frisco Bridges....... Collin County, TX 127.4 Acres 27,500 7,411 18,570 6,954
Mason/Goodrich....... Houston, TX 20.5 Acres 3,560 497 1,308 956

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

(1) Debt assumed by purchaser.

(2) Exchanged for 3.25 acres of Clark land.

In 2001, ARI purchased the following properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET/ACRES PRICE PAID INCURRED RATE DATE
-------- -------- ----------------- -------- -------- -------- -------- --------

First Quarter
APARTMENTS
Glenwood............. Addison, TX 168 Units $ 6,246 $ --(1) $2,549(2) 9.25% 10/04

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

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

(2) Assumed debt of seller. Exchanged with a related party.

F-12

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2000, ARI purchased the following properties:

UNITS/
SQUARE FEET/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION ACRES/ROOMS PRICE PAID INCURRED RATE DATE
-------- -------- -------------- -------- -------- -------- -------- --------

FIRST QUARTER
LAND
Clark................ Farmers Branch, TX 3.25 Acres $2,989 $ -- $ --(2) --% --
Kelly lots........... Collin County, TX .75 Acres 130 20 100(1) 10.0 03/10
Mastenbrook.......... Collin County, TX 157.86 Acres 3,200 704 2,400(1) 9.0 09/00
SECOND QUARTER
LAND
Sladek............... Travis County, TX 63.3 Acres 712 316 427(1) 10.0 05/04
THIRD QUARTER
HOTEL
Grand Hotel Sofia, Bulgaria
Sofia(3)........... 145 Rooms 17,975 17,975 -- -- --

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

(1) Seller financing.

(2) Exchanged for 19.74 acres of Frisco Bridges land.

(3) Related Party. ARI purchased 100% of the outstanding stock of World Trade
Company, Ltd., owner of an 80% interest in the hotel, from One Realco
Corporation, an affiliate, for $18.0 million in cash.

NOTE 4. OIL AND GAS OPERATIONS

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

NOTE 5. INVESTMENTS IN EQUITY INVESTEES

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

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

F-13

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

PERCENTAGE CARRYING EQUIVALENT
OF ARI'S VALUE OF INVESTEE BOOK MARKET VALUE
OWNERSHIP AT INVESTMENT AT VALUE AT OF INVESTMENT AT
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
INVESTEE 2001 2001 2001 2001
-------- ------------- ------------- -------------- ----------------

IORI............................ 28.49% $ 6,872 $ 10,109 $ 5,329
TCI............................. 49.99% 68,837 108,777 53,275
------- -------
75,709 $58,604
=======
Other........................... 2,337
-------
$78,046
=======

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

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

Revenues.................................................... $115,641
Equity in income of partnerships............................ (2,886)
Property operating expenses................................. 83,562
Depreciation................................................ 16,578
Interest expense............................................ 35,949
--------
(Loss) before gains on sale of real estate.................. (23,334)
Gain on sale of real estate................................. 46,485
--------
Net income.................................................. $ 23,151
========

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

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

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

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

F-14

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

NOTE 6. MARKETABLE EQUITY SECURITIES -- TRADING PORTFOLIO

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

NOTE 7. NOTES PAYABLE

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

ACRES/ROOMS/ DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- --------------- -------- ---------- -------- -------- --------

First Quarter
LAND
Mason/Goodrich........ Houston, TX 235.0 Acres $6,750 $ -- $6,302 14.00% 01/02
Pioneer Crossing...... Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05
Pioneer Crossing...... Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02
Second Quarter
LAND
Hollywood Casino...... Farmers Branch, TX 51.7 Acres 2,500(1) -- 1,916 9.00 04/03
Valwood............... Dallas County, TX 19.4 Acres --(1) -- -- -- --
Katrina............... Palm Desert, CA 300.5 Acres 22,000 15,584 4,417 12.50(2) 10/02
Jeffries Ranch........ Oceanside, CA 82.4 Acres 5,250(3) 750 3,944 14.50 06/02
Willow Springs........ Riverside, CA 1,485.7 Acres --(3) -- -- -- --
HOTEL
Williamsburg
Hospitality House... Williamsburg, VA(4) 296 Rooms 10,309 -- 9,851 36.00 01/02
SHOPPING CENTER
Cullman............... Cullman, AL 92,486 Sq. Ft. --(3) 129 -- -- --
Third Quarter
APARTMENTS
Woodlake.............. Carrollton, TX 256 Units --(5) -- -- -- --
Sun Hollow............ El Paso, TX 216 Units --(5) -- -- -- --
Waters Edge III....... Gulfport, MS 238 Units --(5) -- -- -- --
OFFICE BUILDING
Centura Tower......... Farmers Branch, TX 410,910 Sq. Ft. 28,739 28,384 (526) 10.50 07/02
Rosedale Towers....... Minneapolis, MN 84,798 Sq. Ft. 7,500(5) -- 7,500 5.00 07/02
LAND
Marine Creek.......... Fort Worth, TX 54.2 Acres 1,500 750 701 9.00 01/03
Mercer Crossing....... Carrollton, TX 31.3 Acres 2,937 1,986 16 13.00 03/03
Chase Oaks............ Plano, TX 6.9 Acres 1,633 1,000 425 13.00 03/03

F-15

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACRES/ROOMS/ DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- --------------- -------- ---------- -------- -------- --------

Vista Ridge LI........ Lewisville, TX 90.3 Acres 9,085 9,119 (101) 13.00 03/03
Vista Ridge MF........ Lewisville, TX 23.0 Acres 1,345 1,000 228 13.00 03/03

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

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

(2) Variable interest rate.

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

(4) Also secured by 1,846,000 shares of TCI common stock.

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

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

ACRES/UNITS/ DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- --------------- -------- ---------- -------- -------- --------

First Quarter
LAND
Centura, Clark and
Woolley............ Farmers Branch, TX 10.1 Acres $ 7,150 $ -- $ 6,960 14.00% 03/03
Frisco Bridges....... Collin County, TX 127.4 Acres 18,000 11,900 6,190 13.00 03/01
Frisco Bridges....... Collin County, TX 62.8 Acres 7,800 4,985 2,432 14.00 03/02
Nashville............ Nashville, TN 144.8 Acres 10,000 2,034 7,039 15.50 07/00
Second Quarter
APARTMENTS
Rockborough.......... Denver, CO 345 Units $ 2,222 $ -- $ 1,942 8.37% 11/10
Confederate Point.... Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07
Whispering Pines..... Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07
Chateau Bayou........ Ocean Springs, MS 122 Units 1,007 -- 988 8.36 05/10
Waters Edge.......... Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07
LAND
Katy................. Harris County, TX 130.6 Acres 4,250 4,042 (9) 13.00 05/01
Third Quarter
OFFICE BUILDINGS
Centura Tower........ Farmers Branch, TX 410,910 Sq. Ft. 15,000 -- 14,612 16.90 07/02
Fourth Quarter
LAND
Tree Farm............ Dallas, TX 10.4 Acres 8,000(1) -- 7,750 14.00 10/01
Thompson............. Farmers Branch, TX 4.0 Acres (1)
Tomlin............... Farmers Branch, TX 9.0 Acres (1)
Lacy Longhorn........ Farmers Branch, TX 17.1 Acres (1)
Keller............... Fort Worth, TX 30.1 Acres (1)
McKinney Corners..... McKinney, TX 11.0 Acres (1)

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

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

F-16

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. MARGIN BORROWINGS

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

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

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

In September 2001, ARI obtained a security loan in the amount of $20.0
million from a financial institution. ARI received net cash of $16.1 million
after the payment of various closing costs and $3.4 million repayment of
principal and accrued interest on an existing loan with the same lender. Of the
total loan amount, $19.5 million bears interest at 24% per annum, while the
remaining $500,000 bears interest at 20% per annum. The loan requires monthly
payments of interest only and matures in September 2002. The loan is secured by
2,602,608 shares of TCI common stock held by ARI and 920,507 shares of TCI
common stock held by BCM, ARI's advisor.

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

NOTE 9. INCOME TAXES

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

NOTE 10. OPERATING SEGMENTS

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

September 30, 2001 and $9.3 million and $48.1 million for the three and nine
months ended September 30, 2000. Excluded from operating segment assets are
assets of $119.9 million in 2001 and $92.1 million in 2000, which are not
identifiable with an operating segment. There are no intersegment revenues and
expenses and ARI conducted all of its business within the United States, with
the exception of Hotel Sofia (Bulgaria).

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

INTER-
THREE MONTHS ENDED COMMERCIAL U.S. NATIONAL PIZZA OIL & RECEIVABLES/
SEPTEMBER 30, 2001 PROPERTIES APARTMENTS HOTELS HOTELS LAND PARLORS GAS OTHER TOTAL
------------------ ---------- ---------- ------- -------- -------- ------- ------ ------------ --------

Operating revenue.... $ 8,866 $ 13,580 $ 8,750 $ 1,283 $ 40 $ 8,723 $ 97 $ 193 $ 41,532
Interest income...... -- -- -- -- -- -- -- 837 837
Operating expenses... 4,951 9,308 4,283 1,396 2,206 7,164 186 8 29,502
-------- -------- ------- ------- -------- ------- ------ ------- --------
$ 3,915 $ 4,272 $ 4,467 $ (113) $ (2,166) $ 1,559 $ (89) $ 1,022 $ 12,867
======== ======== ======= ======= ======== ======= ====== ======= ========
Depreciation......... $ 1,842 $ 1,101 $ 629 $ 554 $ -- $ 345 $ 18 $ 1 $ 4,490
Interest............. 3,834 3,466 1,102 325 7,940 932 -- 1,462 19,061
Capital
expenditures....... 5,700 -- 116 -- 1,006 303 -- -- 7,125
Assets............... 166,811 115,326 68,024 25,952 228,476 21,626 5,062 29,222 660,499

PROPERTY SALE APARTMENTS LAND TOTAL
------------- ---------- -------- --------

Sales price.......... $ 28,175 $ 8,229 $ 36,404
Cost of sale......... 15,841 4,682 20,523
-------- -------- --------
Gain on sale......... $ 12,334 $ 3,547 $ 15,881
======== ======== ========

INTER-
NINE MONTHS ENDED COMMERCIAL U.S. NATIONAL PIZZA OIL & RECEIVABLES/
SEPTEMBER 30, 2001 PROPERTIES APARTMENTS HOTELS HOTELS LAND PARLORS GAS OTHER TOTAL
------------------ ---------- ---------- ------- -------- -------- ------- ------ ------------ --------

Operating revenue.... $ 25,599 $ 44,822 $24,688 $ 3,009 $ 145 $25,282 $ 97 $ 485 $124,127
Interest income...... -- -- -- -- -- -- -- 1,997 1,997
Operating expenses... 14,981 27,827 18,781 2,821 6,750 20,715 186 86 92,147
-------- -------- ------- ------- -------- ------- ------ ------- --------
$ 10,618 $ 16,995 $ 5,907 $ 188 $ (6,605) $ 4,567 $ (89) $ 2,396 $ 33,977
======== ======== ======= ======= ======== ======= ====== ======= ========
Depreciation......... $ 5,428 $ 3,644 $ 1,938 $ 1,204 $ -- $ 931 $ 18 $ 6 $ 13,169
Interest............. 12,412 14,086 3,375 519 21,308 741 -- 3,801 56,242
Capital
expenditures....... 10,511 20 436 1,000 1,322 1,066 361 -- 14,716
Assets............... 166,811 115,326 68,024 25,952 228,476 21,626 5,062 29,222 660,499

COMMERCIAL
PROPERTY SALE PROPERTIES APARTMENTS LAND TOTAL
------------- ---------- ---------- -------- --------

Sales price.......... $ 7,350 $ 94,065 $ 41,806 $143,221
Cost of sale......... 5,058 41,757 33,546 80,361
-------- -------- -------- --------
Gain on sale......... $ 2,292 $ 52,308 $ 8,260 $ 62,860
======== ======== ======== ========

F-18

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THREE MONTHS ENDED COMMERCIAL PIZZA RECEIVABLES/
SEPTEMBER 30, 2000 PROPERTIES APARTMENTS HOTELS LAND PARLORS OTHER TOTAL
------------------ ---------- ---------- ------- -------- ------- ------------ --------

Operating revenue........... $ 7,353 $ 16,694 $ 9,033 $ 1,628 $ 8,124 $ -- $ 42,832
Interest income............. -- -- -- -- -- 283 283
Operating expenses.......... 4,899 10,354 6,298 2,225 6,798 -- 30,574
-------- -------- ------- -------- ------- ------- --------
$ 2,454 $ 6,340 $ 2,735 $ (597) $ 1,326 $ 283 $ 12,541
======== ======== ======= ======== ======= ======= ========
Depreciation................ $ 1,733 $ 1,303 $ 703 $ -- $ 262 $ -- $ 4,001
Interest.................... 4,605 4,899 1,252 6,740 285 1,799 19,580
Capital expenditures........ 2,875 1,339 178 516 959 -- 5,867
Assets...................... 171,490 148,560 87,966 253,562 22,108 13,824 697,510

PROPERTY SALE APARTMENTS LAND TOTAL
------------- ---------- -------- --------

Sales price................. $ 6,850 $ 89,285 $ 96,135
Cost of sale................ 3,376 65,674 69,050
-------- -------- --------
Gain on sale................ $ 3,474 $ 23,611 $ 27,085
======== ======== ========

NINE MONTHS ENDED COMMERCIAL PIZZA RECEIVABLES/
SEPTEMBER 30, 2000 PROPERTIES APARTMENTS HOTELS LAND PARLORS OTHER TOTAL
------------------ ---------- ---------- ------- -------- ------- ------------ --------

Operating revenue........... $ 23,831 $ 53,003 $25,501 $ 2,876 $24,388 $ -- $129,599
Interest income............. -- -- -- -- -- 3,295 3,295
Operating expenses.......... 14,838 30,743 17,758 7,112 20,138 -- 90,589
-------- -------- ------- -------- ------- ------- --------
$ 8,993 $ 22,260 $ 7,743 $ (4,236) $ 4,250 $ 3,295 $ 42,305
======== ======== ======= ======== ======= ======= ========
Depreciation................ $ 5,234 $ 4,752 $ 1,941 $ -- $ 982 $ -- $ 12,909
Interest.................... 12,869 15,716 3,704 20,917 854 6,093 60,153
Capital expenditures........ 4,404 10,827 495 2,276 1,120 -- 19,122
Assets...................... 171,490 148,560 87,966 253,562 22,108 13,824 697,510

COMMERCIAL
PROPERTY SALE PROPERTIES APARTMENTS LAND TOTAL
------------- ---------- ---------- -------- --------

Sales price................. $ 27,564 $ 57,000 $108,238 $192,802
Cost of sale................ 10,085 22,773 81,116 113,974
-------- -------- -------- --------
Gain on sale................ $ 17,479 $ 34,227 $ 27,122 $ 78,828
======== ======== ======== ========

NOTE 11. COMMITMENTS AND CONTINGENCIES

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

F-19

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

F-20

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, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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 generally accepted auditing
standards. 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.

As described in Note 20, 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.

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, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with generally accepted accounting principles.

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

BDO SEIDMAN, LLP

Dallas, Texas
March 26, 2001

F-21

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS

Real estate held for investment............................. $ 559,461 $ 616,577
Less -- accumulated depreciation............................ (148,690) (164,583)
--------- ---------
410,771 451,994
Real estate held for sale................................... 242,973 319,636
Notes and interest receivable
Performing ($9,684 in 2000 and $11,992 in 1999 from
affiliates)............................................ 13,346 38,272
Nonperforming ($1,540 in 2000 and $1,353 in 1999 from
affiliates)............................................ 3,062 2,909
--------- ---------
16,408 41,181
Less -- allowance for estimated losses...................... (2,577) (2,577)
--------- ---------
13,831 38,604
Pizza parlor equipment...................................... 10,191 9,241
Less -- accumulated depreciation............................ (3,164) (2,369)
--------- ---------
7,027 6,872
Marketable equity securities, at market value............... 153 394
Cash and cash equivalents................................... 4,177 2,479
Investments in equity investees............................. 44,777 47,686
Intangibles, net of accumulated amortization ($2,233 in 2000
and $1,770 in 1999)....................................... 16,075 14,305
Other assets................................................ 47,231 37,576
--------- ---------
$ 787,015 $ 919,546
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and interest payable ($13,900 in 1999 to
affiliates)............................................... $ 616,331 $ 706,196
Margin borrowings........................................... 13,485 33,264
Accounts payable and other liabilities ($3,030 in 2000 and
$18,917 in 1999 to affiliate)............................. 41,221 45,983
--------- ---------
671,037 785,443
Minority interest........................................... 42,576 87,837
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized 50,000,000
shares, issued and outstanding
Series A, 2,721,332 shares in 2000 and 2,600,000 shares in
1999 (liquidation preference $26,000).................. 4,843 4,600
Series E, 50,000 shares in 2000 (liquidation preference
$500).................................................. 100 --
Common Stock, $.01 par value, authorized 100,000,000 shares;
issued 11,829,217 shares in 2000 and 13,496,688 shares in
1999...................................................... 118 135
Paid-in capital............................................. 112,301 85,854
Accumulated (deficit)....................................... (43,943) (44,295)
Treasury stock at cost, 1,718,749 shares in 2000 and
2,737,216 shares in 1999.................................. (17) (28)
--------- ---------
73,402 46,266
--------- ---------
$ 787,015 $ 919,546
========= =========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-22

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

PROPERTY REVENUE
Rents............................................... $ 138,160 $ 157,631 $ 63,491
Property operations expenses ($5,356 in 2000, $6,822
in 1999 and $1,752 in 1998 to affiliates)........ 94,081 106,554 49,193
----------- ----------- -----------
Operating income............................... 44,079 51,077 14,298
LAND OPERATIONS
Sales............................................... 119,384 69,618 51,602
Cost of sales....................................... 90,383 46,066 34,348
----------- ----------- -----------
Gain on land sales............................. 29,001 23,552 17,254
PIZZA PARLOR OPERATIONS
Sales............................................... 32,551 30,781 28,883
Cost of sales....................................... 26,767 26,278 24,839
----------- ----------- -----------
Gross margin................................... 5,784 4,503 4,044
Income from operations................................ 78,864 79,132 35,596
OTHER INCOME
Interest income ($1,843 in 2000, $187 in 1999 and
$39 in 1998 from affiliates)..................... 2,965 6,414 188
Equity in income of investees....................... 5,246 11,847 37,966
Gain on sale of real estate......................... 67,727 105,708 --
Other............................................... (926) (846) (5,476)
----------- ----------- -----------
75,012 123,123 32,678
OTHER EXPENSES
Interest ($358 in 2000, $2,393 in 1999 and $1,082 in
1998 to affiliates).............................. 76,702 91,736 51,624
Depreciation and amortization....................... 16,879 17,376 6,990
General and administrative ($5,335 in 2000, $5,824
in 1999 and $1,832 in 1998 to affiliate)......... 17,973 17,111 8,521
Advisory fee to affiliate........................... 5,049 5,538 3,845
Incentive fee to affiliate.......................... 1,646 -- --
Litigation settlement............................... -- 425 13,026
Provision for loss.................................. 2,248 3,109 3,916
Minority interest................................... 30,700 56,662 3,157
----------- ----------- -----------
151,197 191,957 91,079
----------- ----------- -----------
Net income (loss)..................................... 2,679 10,298 (22,805)
Preferred dividend requirement........................ (2,327) (2,281) (1,177)
----------- ----------- -----------
Net income (loss) applicable to Common shares......... $ 352 $ 8,017 $ (23,982)
=========== =========== ===========
EARNINGS PER SHARE
Net income (loss)..................................... $ .03 $ .75 $ (2.24)
=========== =========== ===========
Weighted average Common shares used in computing
earnings per share.................................. 10,399,890 10,759,416 10,695,388
=========== =========== ===========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-23

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

SERIES A SERIES E OTHER
PREFERRED PREFERRED PREFERRED COMMON TREASURY PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) EQUITY
--------- --------- --------- ------ -------- -------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

BALANCE, JANUARY 1, 1998..... $ 4,000 $ -- $ 41 $135 $(28) $ 84,943 $(25,638) $ 63,453
Repurchase of Common Stock... -- -- -- (2) -- (267) -- (269)
Other Preferred Stock
issued..................... -- -- 2 -- -- 98 -- 100
Series A Preferred Stock
issued..................... 2,100 -- -- -- -- 529 -- 2,629
Common Stock cash dividend
($.20 per share)........... -- -- -- -- -- -- (2,261) (2,261)
Series A Preferred Stock cash
dividend ($.625 per
share)..................... -- -- -- -- -- -- (966) (966)
Other Preferred Stock cash
dividends.................. -- -- -- -- -- -- (210) (210)
Sale of Common Stock under
dividend reinvestment
plan....................... -- -- -- -- -- 224 -- 224
Conversion of Preferred Stock
to Common Stock............ -- -- (8) -- -- 53 -- 45
Redemption of Preferred
Stock...................... -- -- (33) -- -- (1,635) -- (1,668)
Net (loss)................... -- -- -- -- -- -- (22,805) (22,805)
------- ---- ---- ---- ---- -------- -------- --------
BALANCE, DECEMBER 31, 1998... 6,100 -- 2 133 (28) 83,945 (51,880) 38,272
Sale of Series A Preferred
Stock...................... 100 -- -- -- -- 400 -- 500
Common Stock cash dividend
($.05 per share)........... -- -- -- -- -- -- (532) (532)
Series A Preferred Stock cash
dividend ($1.00 per
share)..................... -- -- -- -- -- -- (2,271) (2,271)
Other Preferred Stock cash
dividend................... -- -- -- -- -- -- (10) (10)
Series A Preferred Stock
retired.................... (1,600) -- -- -- -- 1,600 -- --
Redemption of Other Preferred
Stock...................... -- -- (2) -- -- (98) 100 --
Sale of Common Stock under
dividend reinvestment
plan....................... -- -- -- 2 -- 7 -- 9
Net income................... -- -- -- -- -- -- 10,298 10,298
------- ---- ---- ---- ---- -------- -------- --------
BALANCE, DECEMBER 31, 1999... 4,600 -- -- 135 (28) 85,854 (44,295) 46,266
Sale of Series E Preferred
Stock...................... -- 100 -- -- -- 400 -- 500
Series A Preferred Stock cash
dividend ($1.00 per
share)..................... -- -- -- -- -- -- (2,298) (2,298)
Series A Preferred Stock
issued..................... 243 -- -- -- -- 970 -- 1,213
Series E Preferred Stock cash
dividend ($0.60 per
share)..................... -- -- -- -- -- -- (29) (29)
Retirement of Treasury
Stock...................... -- -- -- (26) 46 (20) -- --
Repurchase of Common Stock... -- -- -- -- -- (746) -- (746)
Common Stock issued in
exchange for partnership
units...................... -- -- -- 9 (35) 25,843 -- 25,817
Net income................... -- -- -- -- -- -- 2,679 2,679
------- ---- ---- ---- ---- -------- -------- --------
BALANCE, DECEMBER 31, 2000... $ 4,843 $100 $ -- $118 $(17) $112,301 $(43,943) $ 73,402
======= ==== ==== ==== ==== ======== ======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-24

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Rents collected........................................... $ 138,212 $ 156,473 $ 64,029
Pizza parlor sales collected.............................. 32,526 31,361 28,173
Interest collected ($1,490 in 2000 and $261 in 1999 from
affiliates)............................................ 4,393 4,221 188
Distributions from equity investees' operating
activities............................................. 1,823 3,533 10,274
Interest paid............................................. (66,955) (72,957) (34,139)
Payments for property operations ($1,792 in 2000, $6,822
in 1999 and $1,752 in 1998 to affiliates).............. (105,523) (101,275) (42,551)
Payments for pizza parlor operations...................... (26,646) (27,044) (25,765)
Advisory fee paid to affiliate............................ (5,050) (5,538) (3,845)
Distributions to minority interest holders................ (4,941) (6,792) (3,157)
Purchase of marketable equity securities.................. (5,316) (3,709) (7,670)
Proceeds from sale of marketable equity securities........ 5,252 5,388 5,502
General and administrative expenses paid ($5,335 in 2000,
$5,824 in 1999 and $1,832 in 1998 to affiliate)........ (18,139) (16,634) (8,489)
Other..................................................... (4,278) 13,376 (5,538)
--------- --------- ---------
Net cash (used in) operating activities........... (54,642) (19,597) (22,988)
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable ($17,324 in 2000 and $918
in 1999 from affiliates)............................... 36,039 39,978 3,121
Proceeds from sale of notes receivable.................... 3,893 -- 599
Notes receivable funded................................... (14,674) (63,728) (594)
Proceeds from sale of real estate......................... 148,141 253,506 51,602
Distributions from equity investees investing
activities............................................. -- -- 14,429
Acquisitions of real estate............................... (24,547) (77,918) (106,884)
Real estate improvements.................................. (15,882) (12,252) (4,070)
Acquisition of EQK Realty Investors, I.................... (1,125) -- --
Pizza parlor equipment purchased.......................... (1,087) (895) (166)
Earnest money deposits.................................... (7,703) 6,725 (577)
Investment in real estate entities........................ 4,602 (3,570) (6,116)
--------- --------- ---------
Net cash provided by (used in) investing
activities...................................... 127,657 141,846 (48,656)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable............................... $ 177,144 $ 133,039 $ 237,895
Margin borrowings payments, net........................... (21,624) (7,362) (21,908)
Payments on notes payable................................. (197,849) (256,307) (120,394)
Deferred borrowing costs.................................. (10,528) (8,256) (10,156)
Net advances (payments) to/from affiliates................ (15,887) 9,997 (2,913)
Redemption of Preferred Stock............................. -- (100) (1,668)
Sale of Preferred Stock................................... 500 500 --
Sale of Common Stock under dividend reinvestment plan..... -- 9 224
Dividends................................................. (2,327) (2,813) (3,260)
Repurchase of Common Stock................................ (746) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities...................................... (71,317) (131,293) 77,820
--------- --------- ---------

F-25

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)

Net increase (decrease) in cash and cash equivalents........ 1,698 (9,044) 6,176
Cash and cash equivalents, beginning of year................ 2,479 11,523 5,347
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 4,177 $ 2,479 $ 11,523
========= ========= =========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH (USED
IN)OPERATING ACTIVITIES
Net income (loss)......................................... $ 2,679 $ 10,298 $ (22,805)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities
Gain on sale of real estate............................ (96,728) (129,260) (17,254)
Depreciation and amortization.......................... 16,879 17,376 6,990
Amortization of deferred borrowing costs............... 10,382 11,054 8,916
Provision for loss..................................... 2,248 3,110 3,916
Litigation settlement.................................. -- 425 13,076
Equity in (income) of investees........................ (5,246) (11,847) (37,966)
Distributions from equity investees' operating
activities........................................... 1,823 3,533 10,274
(Increase) decrease in marketable equity securities.... 862 2,524 (3,306)
(Increase) decrease in accrued interest receivable..... 1,428 (746) (2,269)
(Increase) decrease in other assets.................... (4,251) 6,223 20,201
Increase (decrease) in accrued interest payable........ (2,441) 5,450 2,537
Increase (decrease) in accounts payable and other
liabilities.......................................... (8,036) 12,393 (10,247)
Increase in minority interest.......................... 25,759 49,870 4,531
Other.................................................. -- -- 418
--------- --------- ---------
Net cash (used in) operating activities........... $ (54,642) $ (19,597) $ (22,988)
========= ========= =========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Notes payable from acquisition of real estate............. $ 6,262 $ 69,159 $ 45,632
Notes payable assumed by buyer upon sale of real estate... 40,460 6,776 --
Conversion of notes receivable to property interest....... -- 30,138 --
Issuance of Other Preferred Stock......................... -- -- 100
Series A Preferred Stock issued in conjunction with the
acquisition of EQK Realty Investors, I................. 1,213 -- 2,100
Dividend obligation on conversion of Series A Preferred
Stock.................................................. -- -- 134
Current value of property obtained through foreclosure of
note receivable........................................ -- 7,638 20,985
Note receivable canceled on acquisition of property....... -- -- 1,300
Issuance of partnership units............................. -- -- 24,474
Carrying value of real estate exchanged for other real
estate................................................. 2,971 -- --
Conversion of Preferred Stock into Common Stock........... -- -- 45
Retirement of Series A Preferred Stock.................... -- (1,600) --
Common Stock issued for minority interest in National
Realty, L.P............................................ 25,817 -- --
Purchase accounting write down............................ (35,846) -- --
Notes receivable from sale of real estate................. 2,790

F-26

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)

CONSOLIDATION OF NATIONAL REALTY, L.P.
Carrying value of notes receivable........................ $ -- $ -- $ 52,168
Carrying value of real estate............................. -- -- 228,042
Carrying value of investment in equity investee
eliminated............................................. -- -- 41,182
Carrying value of other assets............................ -- -- 32,571
Carrying value of minority interest....................... -- -- 15,600
Carrying value of the Company Common Stock eliminated..... -- -- 269
Carrying value of notes and interest payable.............. -- -- 295,743
Carrying value of accounts payable and other
liabilities............................................ -- -- 751
ACQUISITION OF IGI PROPERTIES
Carrying value of real estate............................. -- -- 51,820
Issuance of partnership units............................. -- -- 6,568
Carrying value of other assets............................ -- -- (1,122)
Carrying value of notes payable and other liabilities..... -- -- 43,713
Investment in partnerships................................ -- -- 1,980

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-27

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 generally accepted accounting principles, 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 1998 and 1999 have been reclassified to conform to the
2000 presentation.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and company business. American Realty Investors, Inc.
("ARI"), a Nevada corporation, is the successor through merger to 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 merger of ART and NRLP into 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. ARI Common Stock
commenced trading on the New York Stock Exchange on August 3, 2000. Prior to
December 31, 1998, ART accounted for its investment in NRLP under the equity
method, as of December 31, 1998, upon the election of a wholly-owned subsidiary
of ART as general partner of NRLP, ART began consolidation of NRLP's accounts on
December 31, 1998 and consolidation of its operations subsequent to that date.
For reporting purposes, the merger is treated as the purchase of NRLP by ART;
accordingly, the historical information presented for ARI is that of ART.

Basis of consolidation. The Consolidated Financial Statements include the
accounts of ARI, and all controlled subsidiaries and partnerships. The equity
method was used to account for ART's investment in NRLP prior to December 31,
1998. See Note 2. "NRLP Management Corp." All significant intercompany
transactions and balances have been eliminated.

Accounting estimates. In the preparation of these Consolidated Financial
Statements, in conformity with generally accepted accounting principles it was
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 from these estimates.

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.

F-28

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized by a charge against earnings, equal to the amount by which the
carrying amount of the property exceeds the fair value of 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 5 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. 121 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 shall be 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 is 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 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.

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"). 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 debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents.

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

Employee stock option plans. Employee stock options are presented in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees." Compensation cost is limited to the excess of the quoted
market price. No compensation cost is recorded if the quoted market price is
below the exercise price.
F-29

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2. NRLP MANAGEMENT CORP.

Effective December 18, 1998, NRLP Management Corp. ("NMC"), a wholly-owned
subsidiary, was elected general partner of NRLP. NMC, as general partner, has
sole discretion in determining methods of obtaining funds for NRLP's operations,
and the acquisition and disposition of its assets. Upon the election of NMC as
general partner of NRLP, consolidation of NRLP's accounts and operations was
begun.

NOTE 3. NOTES AND INTEREST RECEIVABLE

2000 1999
------------------- -------------------
ESTIMATED ESTIMATED
FAIR BOOK FAIR BOOK
VALUE VALUE VALUE VALUE
--------- ------- --------- -------

Notes receivable
Performing (including $9,684 in 2000 and $11,992 in
1999 from affiliates)............................ $11,543 $11,965 $26,591 $36,011
Nonperforming (including $1,540 in 2000 and $1,353
in 1999 from affiliates)......................... 3,017 3,062 15,418 2,909
------- ------- ------- -------
$14,560 15,027 $42,009 38,920
======= =======
Interest receivable................................. 1,381 2,356
Unamortized (discounts)............................. -- (70)
Deferred gains...................................... -- (25)
------- -------
$16,408 $41,181
======= =======

Interest income is recognized on nonperforming notes receivable on a cash
basis. For the years 2000, 1999 and 1998 unrecognized interest income on such
nonperforming notes receivable totaled $316,000, $1.0 million and $716,000,
respectively.

Notes receivable at December 31, 2000, mature from 2001 to 2003 with
interest rates ranging from 10.25% to 15.0% per annum and a weighted average
rate of 12.0% 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 interest to be paid at maturity.
Scheduled principal maturities of $14.0 million are due in 2001.

In July 2000, ARI sold a 749.1 acre tract of its Keller land parcel for
$10.0 million, receiving $8.7 million in cash and providing purchase money
financing of the remaining $1.3 million of the sales price. The loan bears
interest at 12.0% per annum. A payment of $500,000 principal and interest was
collected in September 2000 and all remaining principal and interest is due July
31, 2001. The loan is secured by 100% of the shares of DM Development, Inc. and
an assignment of proceeds. The loan had a principal balance of $817,000 at
December 31, 2000. In March 2001, $850,000 in principal and interest was
collected.

In August 2000, ARI sold 20.5 acres of its Mason Goodrich land parcel for
$3.6 million, receiving $2.1 million in cash and providing purchase money
financing of the remaining $1.5 million of the sales price. The loan bore
interest at 13.5% per annum, and matured in December 2000. All principal and
interest were due at maturity. In February 2001, the loan was collected in full,
including accrued but unpaid interest.

In June 2000, the 124,322 sq.ft. Marina Playa Office Building in Santa
Clara, California, was sold for $25.8 million, ARI received $7.0 million in cash
and provided financing of $18.8 million in the form of a wraparound mortgage
note. Subsequently, ARI sold the note receivable, net of the underlying debt,
for $6.2 million, retaining a $3.9 million participation. In August 2000, the
participation was collected in full, including accrued but unpaid interest.

In August 1999, a $2.6 million loan was funded to JNC Enterprises, Inc.
("JNC"). The loan was subsequently split into two pieces. The loans were secured
by second liens on a 3.5 acre and a 1.2561 acre

F-30

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

parcel of land in Dallas, Texas, the guarantee of the borrower and the personal
guarantees of its shareholders. The loans bore interest at 16.0% per annum and
matured in February 2000. All principal and interest were due at maturity. In
March and April 2000, the loans were 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 is unsecured, non-interest bearing and matures in April 2003. In April
2000, ARI funded a $100,000 loan to the borrower. The loan is secured by five
second lien deeds of trust, is non-interest bearing and matures in September
2001.

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.

During 1998 and 1999, $2.1 million of a $2.2 million loan commitment was
funded to Varner Road Partners, L.L.C. The loan was secured by a 129.77 acre
parcel of unimproved land in Riverside County, California and a pledge of the
membership interests of the borrower. The loan matured in November 1999.
Principal and accrued interest were not paid at maturity and a deed to the
property was accepted in lieu of foreclosure. No loss was incurred, as the fair
market value of the property, less estimated costs of sale, exceeded the
carrying value of the note.

During 1998, a $942,000 loan was funded to Ellis Development Company, Inc.
The loan was secured by 4.5 acres of land in Abilene, Texas, bore interest at
14.0% per annum and had an extended maturity date of August 2000. In March 2000,
the loan was collected in full including accrued but unpaid interest.

In June 1998, a $365,000 loan was funded to RB Land & Cattle, L.L.C. The
loan was secured by 7,200 acres of unimproved land near Crowell, Texas, and the
personal guarantee of the owner and manager of the borrower. The loan matured in
December 1998. All principal and interest were due at maturity. In January 2000,
the loan was collected in full, including accrued but unpaid interest.

In June and July 1998, a $4.2 million loan was funded to Cuchara Partners,
Ltd. and Ski Rio Partners, Ltd., affiliates of JNC. The loan was secured by (1)
a first lien on approximately 450 acres of land in Huerfano County, Colorado,
known as Cuchara Valley Mountain Ski Resort; (2) an assignment of a $2.0 million
promissory note secured by approximately 2,623 acres of land in Taos County, New
Mexico, known as Ski Rio Resort; and (3) a pledge of all related partnership
interests. The loan bore interest at 16.0% per annum and had an extended
maturity date of March 2000. All principal and interest were due at maturity. In
the fourth quarter of 1998, $109,000 was received on the sale of 11 parcels of
the collateral property in Taos, New Mexico. In August and September 1999,
paydowns totaling $2.6 million were received. In April 2000, the loan with a
then principal balance of $1.6 million was collected in full, including accrued
but unpaid interest.

F-31

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

land in La Quinta, California, and the personal guarantee of the manager of the
borrower. The loan had an extended maturity date of November 1999. All principal
and interest were due at maturity. In November and December 1998, $250,000 in
principal paydowns were received. In the second quarter of 1999, the loan was
modified, increasing the interest rate to 15.0% per annum and extending the
maturity to November 1999. Accrued but unpaid interest was added to the
principal balance, increasing it by $42,000 to $402,000. In the fourth quarter
of 1999, an additional $2,000 was funded, increasing the loan balance to
$404,000. In March 2000, $25,000 in interest was collected and the loan's
maturity date was further extended to April 2000. The borrower did not repay the
loan at maturity. In March 2001, a settlement was reached, whereby ARI collected
$410,000 in full satisfaction of the note.

In October 1998, a $2.1 million loan was funded to Frisco Panther Partners,
Ltd., a JNC affiliate. The loan was secured by a second lien on 408.23 acres of
land in Frisco, Texas, the guarantee of the borrower and the personal guarantees
of its partners. In January 1999, a paydown of $820,000 was received on this
loan. The loan bore interest at 16.0% per annum and had an extended maturity
date of March 2000. All principal and interest were due at maturity. In April
2000, the loan with a then principal balance of $663,000 was collected in full
including accrued but unpaid interest.

In December 1998, $3.3 million of a $5.0 million loan commitment was funded
to JNC. In January 1999, a $1.3 million paydown was received, and subsequently
an additional $3.0 million was funded, increasing the loan balance to $5.0
million. The loan was secured by a second lien on 1,791 acres of land in Denton
County, Texas, a second lien on 91 acres of land in Collin County, Texas. The
loan bore interest at 16.0% per annum and had an extended maturity date of March
2000. All principal and interest were due at maturity. In April 2000, the loan
was collected in full, including accrued but unpaid interest.

Related Party. In February 1999, a $5.0 million unsecured line of credit
was funded to One Realco Corporation ("One Realco"), which owns approximately
12.8% of the outstanding shares of ARI's Common Stock. All principal and
interest are due at maturity in February 2002 and the line of credit is
guaranteed by Basic Capital Management, Inc, ("BCM"), ARI's advisor. In March
2000, the line was modified and extended, increasing the loan commitment to
$11.0 million, and an additional $1.2 million was funded. In exchange for the
modification, the borrower paid all accrued interest and pledged collateral
consisting of a $10.0 million promissory note secured by the stock of World
Trade Company, Ltd. ("World Trade"), which owns 80% of an entity which owns a
hotel in Sofia, Bulgaria. In July 2000, the line was again modified, increasing
the loan commitment to $15.0 million. In September 2000, the line of credit with
a then principal balance of $14.6 million was paid in full, including accrued
but unpaid interest. Subsequently, ARI acquired 100% of the stock of World Trade
for $18.0 million in cash. The unsecured line of credit remains available to be
drawn upon by One Realco.

In April 1999, ARI funded a $2.0 million loan commitment to Lordstown, L.P.
The loan is secured by a second lien on land in Ohio and Florida, by 100% of the
general and limited partner interest in Partners Capital, Ltd., the limited
partner of Lordstown, L.P., and a profits interest in subsequent land sales. The
loan bears interest at 14.0% per annum and matured in March 2000. At December
2000, the loan remains unpaid. A corporation controlled by Richard D. Morgan, is
the general partner of Lordstown, L.P. Mr. Morgan serves as a director of ARI.

Also in April 1999, ARI funded a $2.4 million loan commitment to 261, L.P.
The loan is secured by 100% of the general and limited partner interest in
Partners Capital, Ltd., the limited partner of 261, L.P., and a profits interest
in subsequent land sales. The loan bore interest at 14.0% per annum and matured
in

F-32

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

March 2000. In August 2000, the loan was collected in full, including accrued
but unpaid interest. A corporation controlled by Richard D. Morgan, is the
general partner of 261, L.P. Mr. Morgan serves as a director of ARI.

In 1998, a $1.8 million loan commitment was funded to Warwick of Summit,
Inc. ("Warwick"). The loan was secured by a second lien on a shopping center in
Rhode Island, by 100% of the stock of the borrower and by the personal guarantee
of the principal shareholder of the borrower. The loan bears interest at 14.0%
per annum and had an extended maturity date of December 2000. All principal and
interest were due at maturity. In December 1999, the borrower sold the
collateral property, and $810,000 of the net proceeds were paid to ARI, of which
$386,000 was applied to interest and the remaining $424,000 was applied to
principal, reducing the principal balance to $1.7 million. Escrowed monies of
$377,000 were to be received in 2000. However, through December 31, 2000, only
$50,000 had been received. The loan is currently unsecured. Richard D. Morgan, a
Warwick shareholder, serves as a director ARI.

Beginning in 1997 through January 1999, a $1.6 million loan commitment was
funded to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by
(1) a 100% interest in Bordeaux, which owns a shopping center in Oklahoma City,
Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns
6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal
guarantees of the Bordeaux members. The loan bears interest at 14.0% per annum.
In November 1998, the loan was modified to allow payments based on monthly cash
flow of the collateral property and the maturity date was extended to December
1999. In the second quarter of 1999, the loan was again modified, increasing the
loan commitment to $2.1 million and an additional $33,000 was funded. In the
third quarter of 1999, an additional $213,000 was funded. The property has had
no cash flow, therefore, interest ceased being accrued on the loan in the second
quarter of 1999. In October 1999, a $724,000 paydown was received, which was
applied first to accrued but unpaid interest due of $261,000 then to principal,
reducing the loan balance to $1.4 million. In June 2000, the note was further
modified increasing the loan commitment to $1.5 million, extending the maturity
date to December 2000, and payments to net revenues of the shopping center. The
loan was not repaid at maturity. Richard D. Morgan, a Bordeaux member, serves as
a director ARI.

F-33

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:

2000 1999 1998
------ ------- -------

BALANCE JANUARY 1,....................................... $2,577 $ 2,398 $ 3,926
NRLP allowance........................................... -- 1,910 --
Amounts charged off...................................... -- -- (1,528)
Write down of property................................... -- (1,731) --
------ ------- -------
BALANCE DECEMBER 31,..................................... $2,577 $ 2,577 $ 2,398
====== ======= =======

NOTE 5. REAL ESTATE

In 2000, ARI purchased the following properties:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION ACRES/ROOMS PRICE PAID INCURRED RATE DATE
-------- -------- ------------ -------- -------- -------- -------- --------

LAND
Clark.................... Farmers Branch, TX 3.25 Acres $ 2,971 $ -- $ --(1) --% --
Kelly.................... Collin County, TX .75 Acres 130 20 100(2) 10.0 03/10
Mastenbrook.............. Collin County, TX 157.86 Acres 3,200 704 2,400(2) 9.0 09/00(4)
Sladek................... Travis County, TX 63.30 Acres 712 316 427(2) 10.0 05/04
HOTEL
Grand Hotel Sofia(3)..... Sofia, Bulgaria 145 Rooms 17,975 17,975 -- -- --

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

(1) Exchanged for 19.74 acres of Frisco Bridges land.

(2) Seller financing.

(3) ARI purchased 100% of the outstanding stock of World Trade Corporation,
owner of an 80% interest in the hotel, from One Realco Corporation, an
affiliate, for $18.0 million in cash. See Note 3. "Notes and Interest
Receivable."

(4) Property sold in September 2000.

In 2000, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

APARTMENTS
Candlelight Square....... Lenexa, KS 119 Units $ 4,800 $1,289 $ 2,832 $ 3,266
Fair Oaks................ Euless, TX 208 Units 6,850 609 5,711 3,364
Four Seasons............. Denver, CO 384 Units 16,600 6,543 9,220(1) 8,191
Hidden Valley............ Grand Rapids, MI 176 Units 10,900 2,271 8,000(1) 8,495
Pines.................... Little Rock, AR 257 Units 4,650 1,281 3,063 2,441
Sherwood Glen............ Urbandale, IA 180 Units 6,250 1,244 4,626(1) 4,161
Summerwind............... Reseda, CA 172 Units 9,000 3,082 5,568(1) 6,684
Windtree................. Reseda, CA 159 Units 8,350 2,911 5,063(1) 6,170
Whispering Pines......... Canoga Park, CA 102 Units 5,300 1,597 3,437(1) 3,091

F-34

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

SHOPPING CENTERS
Harbor Plaza............. Aurora, CO 45,863 Sq. Ft. 4,132 1,868 1,732 2,240
Katella Plaza............ Orange, CA 62,290 Sq. Ft. 1,814 283 1,188 194
Preston Square........... Dallas, TX 35,508 Sq. Ft. 5,820 2,761 2,576 2,036
OFFICE BUILDING
Marina Playa............. Santa Clara, CA 124,205 Sq. Ft. 25,750 6,082 7,766 17,394
LAND
Duchesne................. Duchesne, UT 420 Acres 43 42 -- 16
Frisco Bridges........... Collin County, TX 15.00 Acres 2,675 706 2,000 297
Frisco Bridges........... Collin County, TX 19.74 Acres 2,971 -- --(2) --
Frisco Bridges........... Collin County, TX 24.3 Acres 4,194 (435) 4,000 260
Frisco Bridges........... Collin County, TX 127.4 Acres 27,500 7,411 18,570 6,954
Katy..................... Harris County, TX 0.02 Acres 2 2 -- 1
Keller................... Tarrant County, TX 749.1 Acres 10,000 3,892 4,500 3,373
Mason/Goodrich........... Houston, TX 1.1 Acres 129 -- 116 70
Mason/Goodrich........... Houston, TX 12.8 Acres 2,536 -- 1,803 1,783
Mason/Goodrich........... Houston, TX 6.8 Acres 1,198 114 991 807
Mason/Goodrich........... Houston, TX 20.5 Acres 3,560 497 1,308 957
Mastenbrook.............. Collin County, TX 157.9 Acres 4,445 1,890 2,275 747
McKinney Corners II...... Collin County, TX 14.6 Acres 500 (599) 1,050 (40)
McKinney Corners I, II, Collin County, TX 82.0 Acres 9,150 613 8,123 1,638
III, IV, V.............
Monterrey................ Riverside, CA 20.67 Acres 4,300 189 4,000 2,545
Nashville................ Nashville, TN 2.6 Acres 405 -- 345 225
Nashville................ Nashville, TN 1.31 Acres 250 43 251 152
Nashville................ Nashville, TN 1.78 Acres $ 306 $ 21 $ 250 $ 182
Nashville................ Nashville, TN 3.0 Acres 523 19 450 310
Pantex................... Collin County, TX 182.5 Acres 8,160 2,373 4,546(1) 959
Parkfield................ Denver, CO 2.6 Acres 615 (1) 584 512
Parkfield................ Denver, CO 326.8 Acres 13,164 7,969 3,279 3,758
Pioneer Crossing......... Austin, TX 377.15 Acres 5,700 4,983 -- (768)
Plano Parkway............ Plano, TX 4.79 Acres 543 87 400 (174)
Rasor.................... Plano, TX 43.01 Acres 1,850 -- 1,604 58
Rasor.................... Plano, TX 5.4 Acres 915 -- 915 705
Rasor.................... Plano, TX 41.1 Acres 3,779 3,587 -- 1,902
Rowlett Creek............ Collin County, TX 80.4 Acres 2,262 919 1,173 462
Salmon River............. Salmon River, ID 3.0 Acres 45 44 -- 38
Valley Ranch............. Irving, TX 22.4 Acres 1,455 -- 1,375 (585)
Vann Cattle.............. Collin County, TX 126.6 Acres 3,564 1,872 1,471 1,257
Vista Business........... Travis County, TX 5.4 Acres 620 14 577 173

F-35

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

Vista Business........... Travis County, TX 36.43 Acres 3,015 1,378 1,368 (51)
Wakefield................ Collin County, TX 70.3 Acres 1,981 1,239 612 478

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

(1) Debt assumed by purchaser.

(2) Exchanged for 3.25 acres of Clark land.

In 1999, ARI purchased the following properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET/ACRES PRICE PAID INCURRED RATE DATE
-------- -------- ----------------- -------- -------- -------- -------- --------

LAND
Frisco Bridges......... Collin County, TX 336.8 Acres $46,800 $7,800 $39,000 10.25% 01/00
Lake Houston........... Harris County, TX 33.58 Acres 2,500 2,500 -- -- --
Leone.................. Irving, TX 8.2 Acres 1,500 300 1,200 8.00 05/03
Monterey............... Riverside County, CA 85.0 Acres 5,600 1,100 4,500 9.00 06/02
Rowlett Creek.......... Collin County, TX 80.4 Acres 1,600 400 1,200 8.75 05/04
Vineyards II........... Tarrant County, TX 18.6 Acres 6,300 2,300 4,000 14.50 06/02
Wakefield.............. Allen, TX 70.0 Acres 1,300 688 612 8.50 07/04
Woolley................ Farmers Branch, TX .42 Acres 205 205 -- -- --
OFFICE BUILDINGS
Encino Executive
Plaza................ Los Angeles, CA 177,211 Sq. Ft. 40,100 2,800 34,600 7.74 05/08
Cooley................. Farmers Branch, TX 27,000 Sq. Ft. 3,500 1,500 2,000 9.00 05/19

In 1999, ARI sold the following properties:

UNITS SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION ROOMS/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------- ------- -------- ---------- -----------

APARTMENTS
Barcelona.................. Tampa, FL 368 Units $ 9,800 $2,242 $ 6,953 $ 2,211
Bavarian Woods............. Middletown, OH 259 Units 9,000 1,467 6,162 3,511
Country Place.............. Round Rock, TX 152 Units $ 5,950 $1,335 $ 4,348 $ 3,334
Edgewater Gardens.......... Biloxi, MS 140 Units 5,700 2,529 2,864 2,155
Fox Club................... Indianapolis, IN 336 Units 10,000 1,843 6,527 3,450
Horizon East............... Dallas, TX 166 Units 3,970 1,173 2,588 1,771
Lake Nora.................. Indianapolis, IN 588 Units 19,100 886 17,000 11,614
Lantern Ridge.............. Richmond, VA 120 Units 3,425 880 2,428 2,323
Manchester Commons......... Manchester, MO 280 Units 13,350 1,985 8,991 8,853
Mesa Ridge................. Mesa, AZ 480 Units 19,500 8,593 9,400 10,242
Oak Hollow................. Austin, TX 409 Units 35,500(1) 7,827 22,200 24,154
Windridge.................. Austin, TX 408 Units --(1) -- -- --
Old Towns.................. Middletown, Ohio 199 Units 4,550 4,251 -- 2,207
Santa Fe................... Kansas City, MO 225 Units 4,555 4,260 -- 706
Tanglewood................. Arlington Heights, IL 838 Units 41,000 8,433 28,148 22,433
HOTEL
Continental................ Las Vegas, NV 400 Rooms 28,000 10,400 16,950 9,164
LAND
Dowdy...................... McKinney, TX 165.0 Acres 2,448 (143) 238 401

F-36

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION ROOMS/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------- ------- -------- ---------- -----------

Frisco Bridges............. Collin County, TX 77.6 Acres 16,912 2,699 12,100 4,205
Frisco Bridges............. Collin County, TX 13.6 Acres 2,600 (61) 2,137 403
Frisco Bridges............. Collin County, TX 12.4 Acres 2,033 (875) 1,950 15
JHL Connell................ Carrollton, TX .13 Acres 53 (2) 49 23
Katrina.................... Palm Desert, CA 121.2 Acres 6,600 5,253 -- 187
Keller..................... Tarrant County, TX 2.1 Acres 185 86 90 158
Keller, Scout and
Scoggins................. Tarrant County, TX 185.6 Acres 3,500 653 2,500 1,799
Mason/Goodrich............. Houston, TX 9.9 Acres 956 4 860 432
McKinney Corners........... McKinney, TX 33.7 Acres 7,701 (396) 5,538 2,890
McKinney Corners........... McKinney, TX 103.7 Acres 4,752 (278) 462 1,035
McKinney Corners........... McKinney, TX 6.23 Acres 1,648 1,599 -- 1,387
Plano Parkway.............. Collin County, TX 4.6 Acres 1,207 1,126 -- 473
Plano Parkway.............. Collin County, TX 24.5 Acres 4,912 (147) 4,698 1,100
Plano Parkway.............. Collin County, TX 6.0 Acres 1,568 (47) 1,510 615
Plano Parkway.............. Collin County, TX 11.8 Acres 3,754 1,577 1,950 1,877
Plano Parkway.............. Collin County, TX 6.2 Acres 900 181 650 (40)
Rasor...................... Plano, TX 13.0 Acres 1,600 (48) 1,531 979
Rasor...................... Plano, TX 3.65 Acres 522 (16) 522 --
Sun City................... Sun City, TX 26.5 Acres 260 232 -- 180
Valley Ranch............... Irving, TX 1.4 Acres 163 154 -- 128
Vista Ridge................ Lewisville, TX 15.0 Acres 2,617 474 1,814 913
Vista Ridge................ Lewisville, TX 6.7 Acres 1,444 286 975 584
Vista Ridge................ Lewisville, TX 1.3 Acres 715 665 -- 538
Yorktown................... Harris County, TX 205.4 Acres 2,689 (80) 2,490 561

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

(1) Sold in a single transaction.

NOTE 6. INVESTMENTS IN EQUITY INVESTEES

Investments in equity investees at December 31, 2000, consisted of two
publicly traded real estate companies, Income Opportunity Realty Investors, Inc.
("IORI") and Transcontinental Realty Investors, Inc. ("TCI") and interests in
real estate joint venture partnerships. BCM, ARI's advisor, serves as advisor to
IORI and TCI.

The investments in IORI, TCI 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." Prior to December 31, 1998, ARI accounted for its investment in NRLP
using the equity method. See Note 2. "NRLP Management Corp."

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."

F-37

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Investments in equity investees consisted of the following:

CARRYING EQUIVALENT
PERCENTAGE OF VALUE OF INVESTEE MARKET VALUE
OWNERSHIP AT INVESTMENT AT BOOK VALUE AT OF INVESTMENT AT
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
INVESTEE 2000 2000 2000 2000
-------- ------------- ------------- ------------- ----------------

IORI............................. 27.1% $ 8,052 $10,839 $ 3,510
TCI.............................. 24.7 30,473 49,538 26,078
------- ------- -------
38,525 $60,377 $29,588
======= =======
Other............................ 6,252
-------
$44,777
=======

CARRYING EQUIVALENT
PERCENTAGE OF VALUE OF INVESTEE MARKET VALUE
OWNERSHIP AT INVESTMENT AT BOOK VALUE AT OF INVESTMENT AT
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
INVESTEE 1999 1999 1999 1999
-------- ------------- ------------- ------------- ----------------

IORI............................. 30.4% $ 3,434 $ 7,293 $ 2,614
TCI.............................. 39.2 36,364 70,560 41,988
------- ------- -------
39,798 $77,853 $44,602
======= =======
Other............................ 7,888
-------
$47,686
=======

Management continues to believe that the market value of each of IORI and
TCI undervalues their assets and therefore, ARI may continue to increase its
ownership in these entities in 2001, as its liquidity permits. On October 3,
2000, ARI and IORI entered into a stock option agreement which provided IORI and
ARI with an option to purchase 1,858,900 shares of common stock of TCI from a
third party. On October 19, 2000, IORI assigned all of its rights to purchase
such shares to ARI. ARI may exercise the option at any time prior to April 5,
2001. The total cost to purchase the TCI shares is $30.7 million. In October
2000, ARI paid $5.6 million of the option price.

Elm Fork Ranch, L.P. In September 1997, a limited partnership, of which
ARI was a 1% general partner and 21.5% limited partner, purchased a 422.4 acre
parcel of unimproved land in Denton County, Texas, for $16.0 million in cash.
ARI contributed $3.6 million in cash with the remaining $12.4 million being
contributed by the other limited partners. In September 1997, the partnership
obtained financing of $6.5 million secured by the 422.4 acres of land. The
mortgage bears interest at 10% per annum, requires quarterly payments of
interest only and matures in September 2001. The net financing proceeds were
distributed to the partners, ARI receiving $2.9 million of its initial
investment. The partnership agreement also provides that the limited partners
receive a 12% preferred cumulative return before any sharing of partnership
profits occurs. One Realco, one of the limited partners in the partnership, owns
approximately 12.8% of the outstanding shares of ARI's Common Stock. In June
2000, ARI sold its partnership interests for $2.0 million in cash, retaining an
option to repurchase its interests for $2.0 million plus an amount equal to 20%
times the number of days from the date of agreement to the exercise date. In
January 2001,

F-38

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ARI exercised its option and reacquired the property. ARI recognized neither
gain nor loss on the June 2000 sale and subsequent repurchase. At December 31,
2000, 267.8 acres remained unsold.

EQK Realty Investors I. In October 2000, ARI acquired a 100% interest in
EQK Realty Investors, I ("EQK"), a real estate investment trust, for $1.1
million in cash and $1.21 million in Series A Preferred Stock (121,332 shares).
At the date of acquisition, EQK's assets consisted of $2.0 million in cash.

Set forth below are summary financial data for NRLP, an equity investee,
prior to December 31, 1998. See Note 2. "NRLP Management Corp."

1998
---------

Revenues.................................................... $ 113,834
Depreciation................................................ (9,691)
Interest.................................................... (26,722)
Operating expenses.......................................... (82,519)
---------
(Loss) before gains on sale of real estate.................. (5,098)
Gains on sale of real estate................................ 52,589
---------
Net income.................................................. $ 47,491
=========

ARI's equity share of:

1998
---------

(Loss) before gains on sale of real estate.................. $ (2,794)
Gains on sale of real estate................................ 34,055
---------
Net income.................................................. $ 31,261
=========

Set forth below are summary financial data for equity investees other than
NRLP:

2000 1999
--------- ---------

Property and notes receivable, net.......................... $ 748,935 $ 734,857
Other assets................................................ 74,462 69,829
Notes payable............................................... (550,280) (577,167)
Other liabilities........................................... (31,551) (25,474)
--------- ---------
Equity...................................................... $ 241,566 $ 202,045
========= =========

2000 1999 1998
--------- --------- ---------

Revenues.......................................... $ 155,160 $ 99,077 $ 150,163
Depreciation...................................... (22,152) (14,417) (20,954)
Provision for losses.............................. -- -- 506
Interest.......................................... (53,065) (33,355) (49,915)
Operating expenses................................ (103,787) (60,578) (91,868)
--------- --------- ---------
(Loss) before gains on sale of real estate........ (23,844) (9,273) (12,068)
Gains on sale of real estate...................... 71,428 41,804 18,642
--------- --------- ---------
Net income........................................ $ 47,584 $ 32,531 $ 6,574
========= ========= =========

F-39

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ARI's equity share of:

2000 1999 1998
--------- -------- --------

(Loss) before gains on sale of real estate.......... $ (5,260) $ (5,512) $ (686)
Gains on sale of real estate........................ 18,571 17,359 7,391
--------- -------- --------
Net income.......................................... $ 13,311 $ 11,847 $ 6,705
========= ======== ========

The difference between the carrying value of ARI's investment and the
equivalent investee book value is amortized over the life of the properties held
by each investee.

The cash flow from IORI and TCI is dependent on the ability of each of them
to make distributions. IORI and TCI ceased making quarterly distributions in the
fourth quarter of 2000. In 2000 ARI received distributions totaling $1.8 million
from IORI and TCI. In 1999, ARI received distributions totaling $1.9 million
from IORI and TCI.

ARI initially acquired its investment in IORI and TCI in 1989. In 2000, ARI
purchased an additional $642,000 of equity securities of IORI and TCI.

NOTE 7. MARKETABLE EQUITY SECURITIES -- TRADING PORTFOLIO

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. In 2000, ARI purchased $5.3 million and sold
$5.3 million of trading portfolio securities. Trading portfolio securities are
considered available for sale and are carried at market value. In 1999, ARI
purchased $3.7 million and sold $4.4 million of trading portfolio securities. At
December 31, 2000, ARI recognized an unrealized decline in the market value of
trading portfolio securities of $305,000. In 2000, ARI realized a net loss of
$747,000 from the sale of trading portfolio securities and received $3,000 in
dividends. At December 31, 1999, ARI recognized an unrealized decline in the
market value of trading portfolio securities of $1.8 million. In 1999, ARI
realized a net gain of $45,000 from the sale of trading portfolio securities and
received $5,000 in dividends. At December 31, 1998, ARI recognized an unrealized
decline in the market value of trading portfolio securities of $6.1 million. In
1998, ARI realized a net loss of $112,000 from the sale of trading portfolio
securities and received $79,000 in dividends. Unrealized and realized gains and
losses in trading portfolio securities are included in other income in the
accompanying Consolidated Statements of Operations.

F-40

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

2000 1999
--------------------- ---------------------
ESTIMATED BOOK ESTIMATED BOOK
FAIR VALUE VALUE FAIR VALUE VALUE
---------- -------- ---------- --------

Notes payable
Mortgage loans............................. $600,395 $604,858 $706,121 $680,084
Borrowings from financial institutions..... 9,029 8,451 15,742 9,157
Notes payable to affiliates................ -- -- 9,577 5,049
-------- -------- -------- --------
$609,424 613,309 $731,440 694,290
======== ========
Interest payable ($7,761 in 1999 to
affiliates).............................. 3,022 11,906
-------- --------
$616,331 $706,196
======== ========

Scheduled principal payments on notes payable are due as follows:

2001........................................................ $193,429
2002........................................................ 90,470
2003........................................................ 48,474
2004........................................................ 7,357
2005........................................................ 59,297
Thereafter.................................................. 214,282
--------
$613,309
========

Stated interest rates on notes payable ranged from 6.19% to 18.0% per annum
at December 31, 2000, and matured in varying installments between 2001 and 2017.
At December 31, 2000, notes payable were collateralized by deeds of trust on
real estate with a net carrying value of $760.5 million.

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

ACRES/UNITS/ DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- --------------- -------- ---------- -------- -------- --------

APARTMENTS
Bent Tree............ Addison, TX 292 Units $8,900 $ 6,685 $ 593(1) 9.25%(2) 11/03
Chateau Bayou........ Ocean Springs, MS 122 Units 1,007 -- 988 8.36 05/10
Confederate Point.... Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07
Rockborough.......... Denver, CO 345 Units 2,222 -- 1,942 8.37 11/10
Waters Edge.......... Gulfport, MS 238 Units 7,532 3,993 3,447 8.08 05/07
Whispering Pines..... Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07
OFFICE BUILDINGS
Centura Tower........ Farmers Branch, TX 410,910 Sq. Ft. 15,000 -- 14,612 16.90 07/02

F-41

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACRES/UNITS/ DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- --------------- -------- ---------- -------- -------- --------

LAND
Centura, Clark and
Woolley............ Farmers Branch, TX 10.08 Acres 7,150 -- 6,960 14.00 03/03
Frisco Bridges....... Collin County, TX 127.41 Acres 18,000 11,900 6,190 13.00 03/01(4)
Frisco Bridges....... Collin County, TX 62.84 Acres 7,800 4,985 2,432 14.00 03/02
Katy................. Harris County, TX 130.6 Acres 4,250 4,042 (9) 13.00 05/01
Mason/Goodrich....... Houston, TX 235.00 Acres 2,250 -- 1,924 14.00 01/02
Nashville............ Nashville, TN 144.82 Acres 10,000 2,034 7,039 15.50 07/00(5)
Pioneer Crossing..... Austin, TX 599.78 Acres 12,500 12,021 (446) 14.50 10/01
Keller............... Fort Worth, TX 30.13 Acres 8,000(3) -- 7,750 14.00 10/01
Lacy Longhorn........ Farmers Branch, TX 17.12 Acres --(3) -- -- -- --
McKinney Corners..... McKinney, TX 10.98 Acres --(3) -- -- -- --
Thompson............. Farmers Branch, TX 3.99 Acres --(3) -- -- -- --
Tomlin............... Farmers Branch, TX 9.00 Acres --(3) -- -- -- --
Tree Farm............ Dallas, TX 10.36 Acres --(3) -- -- -- --

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

(1) Net of release and prepayment fees.

(2) Variable interest rate.

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

(4) Property sold in July 2000.

(5) Debt maturity date extended to July 2001.

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 7.0% to 9.0% per annum. Margin
borrowings were $13.5 million at December 31, 2000, and $33.3 million at
December 31, 1999, 46.1% and 31.5%, respectively, of the market values of the
equity securities at those dates.

In June 2000, 1.6 million shares of TCI stock and 54,000 shares of IORI
stock held as collateral on margin loans were sold to satisfy margin calls
resulting in losses totaling $7.9 million. These losses are included in equity
income of investees in the Consolidated Statements of Operations. See Note 6.
"Investments in Equity Investees."

In April 2000, ARI obtained a security loan in the amount of $5.0 million
from a financial institution. ARI received net cash of $4.6 million after
payment of various closing costs. The loan bears interest at 1% over the prime
rate (currently 9.0% per annum), requires monthly payments of interest only and
matures April 2001. The loan is secured by 1,050,000 shares of ARI Common Stock
held by BCM, ARI's advisor.

In June 2000, TCI funded a $9.0 million loan to ARI. The loan was secured
by 409,934 shares of IORI common stock. The loan bore interest at 15% per annum
and matured in October 2000. All principal and interest were due at maturity. A
paydown of $3.2 million plus accrued interest was made in September 2000 with
the remainder of the loan plus accrued interest being paid in October 2000.

F-42

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10. DIVIDENDS

During the second quarter of 1999, ARI's Board of Directors established a
policy that dividend declarations on Common Stock would be determined on an
annual basis following the end of each year. No dividends on Common Stock were
declared for 2000. Future distributions to Common stockholders will be dependent
upon ARI's income, financial condition, capital requirements and other factors
deemed relevant by the Board.

Dividends on Common Stock totaling $532,000 or $.05 per share were declared
in 1999 and $2.3 million or $.20 per share in 1998. ARI reported to the Internal
Revenue Service that 100% of the dividends paid on Common Stock in 1999 and 1998
represented a return of capital.

NOTE 11. 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. The Series A Preferred
Stock may be converted after August 15, 2003, 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, 2000, 2,721,332 shares of Series A Preferred Stock were
outstanding and 1,877,465 shares were reserved for issuance as future
consideration in various business transactions.

There are 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 bears 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 is 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, 2000, four
million of the Class A units remained to be purchased with two million units to
be purchased in each of May 2001 and 2002. At December 31, 2000, no Series B
Preferred Stock was outstanding.

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.L.C. 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 December 31, 2000, shares of Series C Preferred Stock could
be converted into 25,000 shares of ARI Common Stock. On or after June 30, 2002
and 2003, additional shares of Series C Preferred Stock may be converted into
25,000 shares of ARI Common Stock in each year. On or after December 31, 2005,
additional shares of Series C Preferred Stock may be converted into 25,000
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 in ARI Common Stock will be
at 90% of the average daily closing price of ARI's Common Stock for the prior 20
trading days. At December 31, 2000, no Series C Preferred Stock was outstanding.
In January 2001, 2.5 million Class A limited partner units of ART Palm, L.L.C.
were redeemed for $2.5 million in cash.

F-43

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 may 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, 2000, no shares of
Series D Preferred Stock were 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, 2000, 50,000 shares of Series E Preferred Stock were outstanding.

NOTE 12. 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.

2000 1999 1998
------------------------ ------------------------ --------------------
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ------------ --------- ------------ --------- --------

Outstanding at January 1,... 297,250 $16.35-18.53 276,750 $ 16.35 -- $ --
Granted..................... -- -- 37,500 18.53 293,750 16.35
Canceled.................... (91,500) 16.35 (17,000) 16.35 (17,000) 16.35
------- ------- -------
Outstanding at December
31,....................... 205,750 297,250 16.35-18.53 276,750 16.35
======= ======= =======

At December 31, 2000, 61,500 options were exercisable at an exercise price
of $16.35 per Common share and 7,500 shares were exercisable at an exercise
price of $18.53 per 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 share on January 11, 1999, the
date stockholders approved the plan. On January 1, 2000 and 2001, each
Independent Director was granted an option to purchase 1,000 Common shares at
exercise prices of $18.53 and $13.625 per Common 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, 2000, 5,000 options were
exercisable at prices ranging from $17.71 to $18.53 per Common share.

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

F-44

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

2000 1999 1998
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------

Net income (loss) applicable to
common shares................. $352 $21 $8,017 $7,673 $(23,982) $(24,374)
Net income (loss) applicable to
common shares, per share...... .03 -- .75 .71 (2.24) (2.38)

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:

2000 1999 1998
---- ---- ----

Dividend yield.............................................. -- .29% 1.25%
Expected volatility......................................... 43% 18% 30%
Risk-free interest rate..................................... 5.75% 5.75% 5.35%
Expected lives (in years)................................... 10 9 7
Forfeitures................................................. 10% 10% 10%

The weighted average fair value per share of options in 2000 was $4.79.

NOTE 13. ADVISORY AGREEMENT

Although the Board of Directors is directly responsible for managing the
affairs of ARI and for setting the policies which guide it, the day-to-day
operations of ARI are performed by BCM, 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. BCM 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.

BCM, an affiliate, has been providing advisory services to ARI or ART since
February 6, 1989. BCM is a company owned by a trust for the benefit of the
children of Gene E. Phillips. Mr. Phillips serves as a representative of the
trust for the benefit of his children that owns BCM and, in such capacity, had,
until June 2000, substantial contact with the management of BCM and input with
respect to BCM's performance of advisory services for ARI. Karl L. Blaha,
President and a Director of ARI, serves as President of BCM and Mark W.
Branigan, Executive Vice President and Chief Financial Officer and a Director of
ARI, serves as Executive Vice President and Chief Financial Officer of BCM.

The Advisory Agreement provides that BCM 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 BCM,
or an affiliate of BCM, 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.

F-45

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

NOTE 14. PROPERTY MANAGEMENT

Affiliates of BCM provided property management services to ARI. Currently,
Triad Realty Services, Ltd. ("Triad") provides 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
subcontracts with other entities for property-level management services at
various rates. The general partner of Triad is BCM. The limited partners of
Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), a related
party. Triad subcontracts the property-level management of 14 of ARI's
commercial properties (office buildings, shopping centers and a merchandise
mart) and eight of its hotels to Regis Realty, Inc. ("Regis"), a related party,
which is a company owned by GS Realty. Regis is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Triad.

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

Fees and cost reimbursements to BCM and its affiliates were as follows:

2000 1999 1998
------- ------- -------

Fees
Advisory fee.......................................... $ 5,049 $ 5,538 $ 3,845
Incentive fee......................................... 1,646 -- --
Loan arrangement...................................... 1,186 941 804
Brokerage commissions................................. 1,152 10,706 7,450
Property and construction management and leasing
commissions*....................................... 1,385 3,688 1,752
------- ------- -------
$10,418 $20,873 $13,851
======= ======= =======
Cost reimbursements..................................... $ 5,335 $ 5,824 $ 1,832
======= ======= =======

F-46

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fees paid to GS Realty, a related party:

2000
------

Fees
Real estate brokerage..................................... $5,777
Property and construction management and leasing
commissions*........................................... 2,011
------
$7,788
======

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

* Net of property management fees paid to subcontractors, other than affiliates
of BCM.

NOTE 16. INCOME TAXES

ARI had a loss for federal income tax purposes, after utilization of
operating loss carryforwards in 2000 and 1998, and a taxable loss in 1999, as
amended; 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, 2000, ARI's financial statement basis in its
net assets exceeded their basis for tax purposes by $109.2 million. As a result,
aggregate future income for income tax purposes will be greater than such amount
for financial statement purposes. Additionally, at December 31, 2000, ARI had
tax net operating loss carryforwards of $112.9 million expiring through the year
2018. The net operating loss carryforwards are primarily attributable to EQK
($99.7 million), a wholly-owned subsidiary.

At December 31, 2000, ARI had a deferred tax benefit of $41.5 million due
to tax deductions available to it in future years. However, due to other
factors, such deferred tax benefit has been offset by the recording of a
deferred tax liability and valuation allowance of an equal amount.

NOTE 17. 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 2013. The following is a schedule of minimum future
rents under non-cancelable operating leases as of December 31, 2000:

2001........................................................ $14,560
2002........................................................ 11,719
2003........................................................ 9,800
2004........................................................ 7,543
2005........................................................ 6,071
Thereafter.................................................. 31,536
-------
$81,229
=======

Pizza World Supreme, Inc. ("PWSI") conducts its operations from leased
facilities which include office space, a warehouse, and 57 pizza parlor
locations for which a lease was signed and the pizza parlor was either open at
December 31, 2000 or scheduled to open thereafter. The leases expire over the
next 13 years. PWSI also leases vehicles under operating leases.

F-47

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a schedule of minimum future rent commitments under
operating leases as of December 31, 2000:

2001........................................................ $ 2,064
2002........................................................ 2,019
2003........................................................ 1,928
2004........................................................ 1,836
2005........................................................ 1,624
Thereafter.................................................. 5,327
-------
$14,798
=======

Total facilities and automobile rent expense relating to these leases was
$2.5 million in 2000, $2.9 million in 1999 and $2.7 million in 1998.

NOTE 18. OPERATING SEGMENTS

Presented below is the operating income of each operating segment and each
segment's assets for 2000 and 1999.

COMMERCIAL
PROPERTIES APARTMENTS HOTELS LAND PWSI RECEIVABLES OTHER TOTAL
---------- ---------- ------- -------- ------- ----------- ------- --------

2000
Operating revenue.... $ 31,470 $ 69,754 $33,134 $ 296 $32,551 $ -- $ 3,506 $170,711
Interest income...... -- -- -- -- -- 2,965 -- 2,965
Operating expenses... 19,779 40,426 24,127 9,727 26,767 -- 22 120,848
-------- -------- ------- -------- ------- ------- ------- --------
Operating income
(loss)............. 11,691 29,328 9,007 (9,431) 5,784 2,965 3,484 52,828
Depreciation......... 6,493 6,344 2,707 -- 1,330 -- 5 16,879
Interest............. 17,453 19,731 4,837 26,389 1,135 -- 7,157 76,702
Capital
expenditures....... 5,309 7,518 979 2,076 1,087 -- -- 16,969
Assets............... 165,777 147,070 97,682 242,973 21,679 13,831 242 689,254

COMMERCIAL
PROPERTIES APARTMENTS LAND TOTAL
---------- ---------- -------- --------

Sales price.......... $ 37,516 $ 72,700 $119,384 $229,600
Cost of sales........ 15,652 26,837 90,383 132,872
-------- -------- -------- --------
Gains on sale........ $ 21,864 $ 45,863 $ 29,001 $ 96,728
======== ======== ======== ========

F-48

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL
PROPERTIES APARTMENTS HOTELS LAND PWSI RECEIVABLES OTHER TOTAL
---------- ---------- ------- -------- ------- ----------- ------- --------

1999
Operating revenue.... $ 30,176 $ 93,933 $31,583 $ 364 $30,781 $ -- $ 1,575 $188,412
Interest income...... -- -- -- -- -- 6,414 -- 6,414
Operating expenses... 16,460 56,392 24,237 9,017 26,278 -- 448 132,832
-------- -------- ------- -------- ------- ------- ------- --------
Operating income
(loss)............. 13,716 37,541 7,346 (8,653) 4,503 6,414 1,127 61,994
Depreciation......... 4,464 9,119 2,354 -- 1,288 -- 151 17,376
Interest............. 10,244 28,775 4,926 35,968 1,241 -- 10,582 91,736
Capital
expenditures....... 2,064 8,694 1,120 374 895 -- -- 13,147
Assets............... 192,742 189,438 71,357 317,846 21,177 38,604 247 831,411

APARTMENTS HOTELS LAND TOTAL
---------- ------- -------- --------

Sales price...................... $185,400 $28,000 $ 69,618 $283,018
Cost of sales.................... 88,856 18,836 46,066 153,758
-------- ------- -------- --------
Gains on sale.................... $ 96,544 $ 9,164 $ 23,552 $129,260
======== ======= ======== ========

COMMERCIAL
PROPERTIES APARTMENTS HOTELS LAND PWSI RECEIVABLES OTHER TOTAL
---------- ---------- ------- -------- ------- ----------- ------- --------

1998
Operating revenue.... $ 16,539 $ 14,230 $32,221 $ 501 $28,883 $ -- $ -- $ 92,374
Interest income...... -- -- -- -- -- 188 -- 188
Operating expenses... 9,727 8,755 24,361 6,349 24,840 -- -- 74,032
-------- -------- ------- -------- ------- ------- ------- --------
Operating income
(loss)............. 6,812 5,475 7,860 (5,848) 4,043 188 -- 18,530
Depreciation......... 1,574 1,412 2,320 -- 1,273 -- 411 6,990
Interest............. 3,803 4,396 7,560 29,058 579 -- 6,228 51,624
Capital
expenditures....... 110 -- 1,383 2,577 166 -- -- 4,236
Assets............... 87,581 286,317 78,455 282,300 24,449 52,053 253 811,408

LAND
--------

Sales price............................................. $ 51,602
Cost of sales........................................... 34,348
--------
Gains on sale........................................... $ 17,254
========

F-49

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 19. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of quarterly results of operations for the
years 2000 and 1999 (unaudited):

THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------

2000
Operating income................................ $11,114 $12,714 $10,932 $ 9,319
Gain on land sales.............................. 2,449 1,062 23,611 1,879
Pizza parlor gross margin....................... 1,384 1,540 1,326 1,534
------- ------- ------- -------
Income from operations........................ 14,947 15,316 35,869 12,732
Equity in income (loss) of investees............ 202 94 2,577 2,373
Gains on sale of real estate.................... 16,154 32,078 3,474 16,021
Interest and other income....................... 2,341 484 889 (1,675)
------- ------- ------- -------
Total other income............................ 18,697 32,656 6,940 16,719
Total other expenses.......................... 39,367 48,836 32,929 30,065
------- ------- ------- -------
Net income (loss) before income taxes........... (5,723) (864) 9,880 (614)
Provision for income taxes...................... -- -- (1,652) 1,652
------- ------- ------- -------
Net income (loss)............................... (5,723) (864) 8,228 1,038
Preferred dividend requirement.................. (508) (563) (590) (666)
------- ------- ------- -------
Net income (loss) attributable to Common
share......................................... $(6,231) $(1,427) $ 7,638 $ 372
======= ======= ======= =======
EARNINGS PER SHARE
Net income (loss)............................... $ (.58) $ (.13) $ .76 $ .03
======= ======= ======= =======

THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------

1999
Operating income................................ $12,364 $16,100 $12,883 $ 9,730
Gain on land sales.............................. 5,023 6,356 6,038 6,135
Pizza parlor gross margin....................... 950 1,205 1,089 1,259
------- ------- ------- -------
Income from operations........................ 18,337 23,661 20,010 17,124
Equity in income (loss) of investees............ (725) 4,121 1,874 6,577
Gains on sale of real estate.................... 12,493 14,845 42,552 35,818
Interest and other income....................... 142 2,516 1,631 1,279
------- ------- ------- -------
Total other income............................ 11,910 21,482 46,057 43,674
Total other expenses.......................... 39,374 44,194 56,011 52,378
------- ------- ------- -------
Net income (loss)............................... (9,127) 949 10,056 8,420
Preferred dividend requirement.................. (566) (568) (570) (577)
------- ------- ------- -------
Net income (loss) attributable to Common
share......................................... $(9,693) $ 381 $ 9,486 $ 7,843
======= ======= ======= =======
EARNINGS PER SHARE
Net income (loss)............................... $ (.90) $ .04 $ .88 $ .73
======= ======= ======= =======

F-50

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 20. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

Liquidity. Although management anticipated that ARI would generate excess
cash from operations in 2000, 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 2001, management expects
that ARI will generate excess cash from operations, due to increased rental
rates and occupancy at its properties; however, such excess will not be
sufficient to discharge all of ARI's debt obligations as they mature. ARI will
rely on aggressive land sales, selected income producing property sales and, to
the extent necessary, additional borrowings to meet its cash requirements.

Commitments. In March 1999, 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, and an
additional one million units were purchased in January 2000. ARI has committed
to purchase an additional two million units in each of May 2001 and May 2002.
See Note 11. "Preferred Stock."

On October 3, 2000, ARI and IORI entered into a stock option agreement
which provided IORI and ARI with an option to purchase 1,858,900 shares of
common stock of TCI from a third party. On October 19, 2000, IORI assigned all
of its rights to purchase such shares to ARI. ARI may exercise the option at any
time prior to April 5, 2001. The total cost to purchase the TCI shares is $30.7
million. In October 2000, ARI paid $5.6 million of the option price.

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

A litigation reserve has been established for the estimated exposure in a
breach of contract dispute.

NOTE 21. SUBSEQUENT EVENTS

In 2001, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED SALE
-------- -------- ----------------- ------- -------- ---------- -------

APARTMENTS
Carriage Park......... Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 659
Rockborough........... Denver, CO 345 Units 17,170 3,654 12,215(1) 13,982
SHOPPING CENTER
Regency Pointe........ Jacksonville, FL 67,063 Sq. Ft. 7,350 5,126 1,500 2,012
LAND
Katrina............... Palm Desert, CA 20.0 Acres 2,831 (85) 621 830
Las Colinas........... Las Colinas, TX 1.7 Acres 860 333 400 539
Plano Parkway......... Plano, TX 11.3 Acres 1,445 312 950 --
Scoggins.............. Tarrant County, TX 232.8 Acres 8,000(2) 2,477 5,000 3,147
Scout................. Tarrant County, TX 408.0 Acres --(2) -- -- --

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

(1) Debt assumed by purchaser.

(2) Sold in a single transaction.

F-51

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2001, ARI obtained mortgage financing on the following:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ACRES INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ----- -------- ---------- -------- -------- --------

LAND
Mason/Goodrich................ Houston, TX 235.0 Acres $6,750 $ -- $6,302 14.00% 01/02
Pioneer Crossing.............. Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05
Pioneer Crossing.............. Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02

In January 2001, 2.5 million Class A limited partner units of ART Palm,
L.L.C. were redeemed for $2.5 million in cash.

F-52

SCHEDULE III

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000

COST CAPITALIZED
INITIAL COST SUBSEQUENT TO ACQUISITION
----------------------- --------------------------
BUILDING AND
PROPERTY/LOCATION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS OTHER
----------------- ------------ -------- ------------ ------------- ----------
(DOLLARS IN THOUSANDS)

PROPERTIES HELD FOR
INVESTMENT
APARTMENTS
Arlington Place, Pasadena,
TX........................ $ 4,301 $ 330 $ 3,275 $ 752 $ 214(4)
Ashford, Tampa, FL......... 1,191 306 2,754 -- --
Bay Anchor, Panama City,
FL........................ -- 13 117 -- --
Bent Tree, Addison, TX..... 8,900 1,047 7,036 783 552(4)
Blackhawk, Ft. Wayne, IN... 4,080 253 4,081 292 174(4)
Bridgestone, Friendswood,
TX........................ 2,099 169 1,780 192 100(4)
Carriage Park, Tampa, FL... 1,071 127 1,155 -- --
Chalet I, Topeka, KS....... 4,145 260 2,994 64 129(4)
Chalet II, Topeka, KS...... 1,564 440 1,322 -- 61(4)
Chateau, Bellevue, NE...... 3,385 130 1,723 141 152(4)
Chateau Bayou, Ocean
Springs, MS............... 3,970 591 2,364 -- --
Club Mar, Sarasota, FL..... 6,249 1,248 4,993 273 430(4)
Confederate Point,
Jacksonville, FL.......... 7,412 246 3,736 717 257(4)
Conradi House, Tallahassee,
FL........................ 1,072 128 1,151 -- --
Covered Bridge,
Gainesville, FL........... 4,348 219 3,425 129 194(4)
Crossing Church, Tampa,
FL........................ 956 123 1,111 -- --
Daluce, Tallahassee, FL.... 2,553 221 2,619 4 --
Falcon House, Ft. Walton,
FL........................ 2,030 219 1,967 -- --
Foxwood, Memphis, TN....... 5,948 218 3,188 951 486(4)
Georgetown, Panama City,
FL........................ 824 114 1,025 -- --
Governor Square,
Tallahassee, FL........... 3,234 519 4,724 28 --
Grand Lagoon, Panama City,
FL........................ 1,224 165 1,498 2 --
Greenbriar, Tallahassee,
FL........................ 1,000 122 1,094 -- --

LIFE ON WHICH
GROSS AMOUNTS OF WHICH DEPRECIATION
CARRIED AT END OF YEAR IN LATEST
---------------------------------- STATEMENT
BUILDING AND (1) ACCUMULATED DATE OF DATE OF OPERATION
PROPERTY/LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------------- -------- ------------ -------- ------------ ------------ -------- -------------
(DOLLARS IN THOUSANDS)

PROPERTIES HELD FOR
INVESTMENT
APARTMENTS
Arlington Place, Pasadena,
TX........................ $ 330 $ 4,241 $ 4,571 $ 3,114 1973 11/76 10-40 years
Ashford, Tampa, FL......... 306 2,754 3,060 189 1967 1998 10-40 years
Bay Anchor, Panama City,
FL........................ 13 117 130 9 1979 1998 7-40 years
Bent Tree, Addison, TX..... 1,047 8,371 9,418 5,015 1980 06/80 10-40 years
Blackhawk, Ft. Wayne, IN... 253 4,547 4,800 3,191 1972 12/78 10-40 years
Bridgestone, Friendswood,
TX........................ 169 2,072 2,241 1,243 1979 06/82 5-40 years
Carriage Park, Tampa, FL... 127 1,155 1,282 87 1966 1998 10-40 years
Chalet I, Topeka, KS....... 260 3,187 3,447 1,925 1964 04/82 7-40 years
Chalet II, Topeka, KS...... 440 1,383 1,823 219 1986 03/95 10-40 years
Chateau, Bellevue, NE...... 130 2,016 2,146 1,213 1968 02/81 5-40 years
Chateau Bayou, Ocean
Springs, MS............... 591 2,364 2,955 167 1973 1998 10-40 years
Club Mar, Sarasota, FL..... 1,248 5,696 6,944 1,116 1977 07/93 7-40 years
Confederate Point,
Jacksonville, FL.......... 246 4,710 4,956 3,234 1969 05/79 7-40 years
Conradi House, Tallahassee,
FL........................ 128 1,151 1,279 86 1968 1998 7-40 years
Covered Bridge,
Gainesville, FL........... 219 3,748 3,967 3,032 1972 10/79 7-40 years
Crossing Church, Tampa,
FL........................ 123 1,111 1,234 83 1967 1998 10-40 years
Daluce, Tallahassee, FL.... 221 2,623 2,844 197 1974 1998 7-40 years
Falcon House, Ft. Walton,
FL........................ 219 1,967 2,186 148 1969 1998 10-40 years
Foxwood, Memphis, TN....... 218 4,625 4,843 2,776 1974 08/79 7-40 years
Georgetown, Panama City,
FL........................ 114 1,025 1,139 77 1974 1998 7-40 years
Governor Square,
Tallahassee, FL........... 519 4,752 5,271 356 1974 1998 10-40 years
Grand Lagoon, Panama City,
FL........................ 165 1,500 1,665 112 1979 1998 7-40 years
Greenbriar, Tallahassee,
FL........................ 122 1,094 1,216 82 1985 1998 7-40 years

F-53

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Kimberly Woods, Tucson,
AZ........................ $ 6,209 $ 571 $ 3,802 $ 1,278 $ 197(4)
La Mirada, Jacksonville,
FL........................ 7,499 392 5,454 1,675 343(4)
Lake Chateau, Thomasville,
GA........................ 1,110 153 1,380 -- --
Lakeshore Villas, Harris
County, TX................ 12,663 2,554 -- 14,463 (3,249)(4)
Landings/Marina, Pensacola,
FL........................ 1,196 139 1,256 -- --
Lee Hills, Tallahassee,
FL........................ 135 26 236 -- --
Mallard Lake, Greensboro,
NC........................ 7,557 534 7,099 858 416(4)
Med Villas, San Antonio,
TX........................ 2,863 712 2,848 -- --
Morning Star, Tallahassee,
FL........................ 1,221 149 1,346 2 --
Nora Pines, Indianapolis,
IN........................ 5,672 221 3,872 440 343(4)
Northside Villas,
Tallahassee, FL........... 2,880 414 3,758 1 --
Oak Hill, Tallahassee,
FL........................ 1,902 233 2,101 6 --
Oak Tree, Grandview, MO.... 4,144 304 3,543 245 151(4)
Park Avenue, Tallahassee,
FL........................ 2,806 369 3,347 5 (16)(4)
Pheasant Ridge, Bellevue,
NE........................ 6,370 231 4,682 1,099 455(4)
Pinecrest, Tallahassee,
FL........................ 962 99 891 1 --
Place One, Tulsa, OK....... 6,361 784 5,186 1,008 412(4)
Quail Point, Huntsville,
AL........................ 3,749 184 2,716 267 217(4)
Regency, Lincoln, NE....... 3,276 304 1,865 412 328(4)
Regency, Tampa, FL......... 1,740 450 4,052 1 --
Rockborough, Denver, CO.... 12,234 702 4,495 1,112 359(4)
Rolling Hills, Tallahassee,
FL........................ 2,905 335 3,012 45 --
Seville, Tallahassee, FL... 1,293 187 1,687 -- --
Shadowood, Addison, TX..... 4,152 477 3,208 207 317(4)
Stonebridge, Florissant,
MO........................ 2,949 193 2,076 261 143(4)
Stonegate, Tallahassee,
FL........................ 1,051 188 1,693 5 --
Sun Hollow, El Paso, TX.... 4,618 385 4,159 75 243(4)
Sunset, Odessa, TX......... 1,814 345 1,382 -- --
Timber Creek, Omaha, NE.... 4,608 154 2,327 765 337(4)

AMERICAN REALTY INVESTORS, INC.
REAL ES REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
LIFE ON WHICH
GROSS AMOUNTS OF WHICH DEPRECIATION
CARRIED AT END OF YEAR IN LATEST
---------------------------------- STATEMENT
BUILDING AND (1) ACCUMULATED DATE OF DATE OF OPERATION
PROPERTY/LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------------- -------- ------------ -------- ------------ ------------ -------- -------------
(DOLLARS IN THOUSANDS)

Kimberly Woods, Tucson,
AZ........................ $ 571 $ 5,277 $ 5,848 $ 3,792 1973 12/77 5-40 years
La Mirada, Jacksonville,
FL........................ 392 7,472 7,864 5,046 1971 01/79 10-40 years
Lake Chateau, Thomasville,
GA........................ 153 1,380 1,533 103 1972 1998 7-40 years
Lakeshore Villas, Harris
County, TX................ 2,554 11,214 13,768 115 2000 1999 10-40 years
Landings/Marina, Pensacola,
FL........................ 139 1,256 1,395 94 1979 1998 7-40 years
Lee Hills, Tallahassee,
FL........................ 26 236 262 18 1974 1998 10-40 years
Mallard Lake, Greensboro,
NC........................ 534 8,373 8,907 5,546 1974 05/79 10-40 years
Med Villas, San Antonio,
TX........................ 712 2,848 3,560 202 1967 1998 10-40 years
Morning Star, Tallahassee,
FL........................ 149 1,348 1,497 101 1970 1998 7-40 years
Nora Pines, Indianapolis,
IN........................ 221 4,655 4,876 3,189 1970 05/78 7-40 years
Northside Villas,
Tallahassee, FL........... 414 3,759 4,173 258 1973 1998 10-40 years
Oak Hill, Tallahassee,
FL........................ 233 2,107 2,340 158 1974 1998 10-40 years
Oak Tree, Grandview, MO.... 304 3,939 4,243 2,166 1968 03/82 7-40 years
Park Avenue, Tallahassee,
FL........................ 369 3,336 3,705 251 1985 1998 10-40 years
Pheasant Ridge, Bellevue,
NE........................ 231 6,236 6,467 3,995 1974 10/78 7-40 years
Pinecrest, Tallahassee,
FL........................ 99 892 991 67 1978 1998 7-40 years
Place One, Tulsa, OK....... 784 6,606 7,390 4,879 1970 04/77 7-40 years
Quail Point, Huntsville,
AL........................ 184 3,200 3,384 2,348 1960 08/75 7-40 years
Regency, Lincoln, NE....... 304 2,605 2,909 1,355 1973 05/82 7-40 years
Regency, Tampa, FL......... 450 4,053 4,503 279 1967 1998 10-40 years
Rockborough, Denver, CO.... 702 5,966 6,668 4,086 1973 01/78 7-40 years
Rolling Hills, Tallahassee,
FL........................ 335 3,057 3,392 234 1972 1998 10-40 years
Seville, Tallahassee, FL... 187 1,687 1,874 126 1972 1998 10-40 years
Shadowood, Addison, TX..... 477 3,732 4,209 2,396 1976 02/79 5-40 years
Stonebridge, Florissant,
MO........................ 193 2,480 2,673 1,696 1975 10/77 5-40 years
Stonegate, Tallahassee,
FL........................ 188 1,698 1,886 117 1972 1998 10-40 years
Sun Hollow, El Paso, TX.... 385 4,477 4,862 2,835 1977 09/79 7-40 years
Sunset, Odessa, TX......... 345 1,382 1,727 98 1981 1998 10-40 years
Timber Creek, Omaha, NE.... 154 3,429 3,583 2,338 1974 10/78 5-40 years

F-54

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Valley Hi, Tallahassee,
FL........................ $ 893 $ 92 $ 834 $ -- $ --
Villa Del Mar, Wichita,
KS........................ 3,714 387 3,134 116 303(4)
Villager, Ft. Walton, FL... 539 125 1,123 3 --
Villas, Plano, TX.......... 4,816 516 3,948 607 426(4)
Waters Edge III, Gulfport,
MS........................ 7,503 331 1,324 -- --
Westwood, Mary Ester, FL... 2,462 318 2,876 1 --
Westwood Parc, Tallahassee,
FL........................ 1,396 165 1,483 -- --
Whispering Pines, Topeka,
KS........................ 7,502 228 4,330 1,054 366(4)
White Pines, Tallahassee,
FL........................ -- 75 671 2 --
Windsor Tower, Ocala, FL... 1,145 225 2,031 -- --
Wood Hollow, San Antonio,
TX........................ 5,449 888 7,261 1,795 (100)
641(4)
Woodlake, Carrollton, TX... 8,649 585 5,848 1,041 362(4)
Woodsong II, Smyrna, GA.... 5,764 322 3,705 340 186(4)
Woodstock, Dallas, TX...... 4,835 888 5,193 417 382(4)
OFFICE BUILDING
56 Expressway, Oklahoma
City, OK.................. 1,657 406 3,976 629 (2,386)(2)
(252)(4)
Centura Tower, Farmers
Branch, TX................ 43,565 3,900 29,285 24,171 (11,200)(4)
Cooley Building, Farmers
Branch, TX................ 1,959 729 2,918 3 (699)(4)
Encino, Encino, CA......... 34,802 4,072 36,651 391 --
Executive Court, Memphis,
TN........................ -- 271 2,099 749 (99)(4)
Melrose Business Park,
Oklahoma City, OK......... 877 367 2,674 356 (1,000)(2)
(373)(4)
One Hickory Centre, Farmers
Branch, TX................ 14,263 335 16,385 4,211 --
Rosedale Towers, Roseville,
MN........................ 2,647 665 3,769 1,260 --

Valley Hi, Tallahassee,
FL........................ $ 92 $ 834 $ 926 $ 63 1980 1998 10-40 years
Villa Del Mar, Wichita,
KS........................ 387 3,553 3,940 2,065 1971 10/81 7-40 years
Villager, Ft. Walton, FL... 125 1,126 1,251 77 1972 1998 10-40 years
Villas, Plano, TX.......... 516 4,981 5,497 3,171 1977 04/79 7-40 years
Waters Edge III, Gulfport,
MS........................ 331 1,324 1,655 83 1968 1998 10-40 years
Westwood, Mary Ester, FL... 318 2,877 3,195 216 1972 1998 10-40 years
Westwood Parc, Tallahassee,
FL........................ 165 1,483 1,648 111 1974 1998 10-40 years
Whispering Pines, Topeka,
KS........................ 228 5,750 5,978 3,714 1972 02/78 7-40 years
White Pines, Tallahassee,
FL........................ 75 673 748 46 1974 1998 10-40 years
Windsor Tower, Ocala, FL... 225 2,031 2,256 140 1982 1998 10-40 years
Wood Hollow, San Antonio,
TX........................ 888 9,597 10,485 6,653 1974 11/78 5-40 years

Woodlake, Carrollton, TX... 585 7,251 7,836 4,519 1979 08/78 7-40 years
Woodsong II, Smyrna, GA.... 322 4,231 4,553 3,377 1975 08/80 7-40 years
Woodstock, Dallas, TX...... 888 5,992 6,880 3,890 1977 12/78 7-40 years
OFFICE BUILDING
56 Expressway, Oklahoma
City, OK.................. 406 1,967 2,373 2,001 1981 03/82 7-40 years

Centura Tower, Farmers
Branch, TX................ 3,900 42,256 46,156 1,756 1999 1999 7-40 years
Cooley Building, Farmers
Branch, TX................ 729 2,222 2,951 159 1996 1999 7-40 years
Encino, Encino, CA......... 4,072 37,042 41,114 1,534 1986 05/99 7-40 years
Executive Court, Memphis,
TN........................ 271 2,749 3,020 1,800 1980 09/82 5-40 years
Melrose Business Park,
Oklahoma City, OK......... 367 1,657 2,024 1,488 1980 03/82 5-40 years

One Hickory Centre, Farmers
Branch, TX................ 335 20,596 20,931 615 1998 -- 10-40 years
Rosedale Towers, Roseville,
MN........................ 665 5,029 5,694 1,851 1974 1990 10-40 years

F-55

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

University Square,
Anchorage, AK............. $ -- $ 562 $ 3,276 $ 223 $ (1,875)(2)
(52)(4)
SHOPPING CENTERS
Collection, Denver, CO..... 14,762 -- 20,210 158 --
Cross County Mall, Mattoon,
IL........................ 6,613 608 6,468 6,407 (810)(4)
Cullman, Cullman, AL....... 235 400 1,830 179 (320)(4)
Oaktree Shopping Village,
Lubbock, TX............... 1,436 192 1,431 14 --
Regency Point,
Jacksonville, FL.......... 1,567 647 5,156 2,410 (477)(4)
Westwood, Tallahassee,
FL........................ 4,017 -- 5,424 1,620 522(5)
(1,902)(4)
MERCHANDISE MART
Denver Mart, Denver, CO.... 29,053 4,824 5,184 15,026 --
HOTELS
Best Western Hotel,
Virginia Beach, VA........ 4,378 1,521 5,754 940 --
AKC Holiday Inn, Kansas
City, MO.................. 5,260 1,110 4,535 2,574 --
Piccadilly Airport, Fresno,
CA........................ 5,107 -- 7,834 490 --
Piccadilly Chateau, Fresno,
CA........................ 2,149 -- 3,906 74 (33)
Piccadilly Shaws, Fresno,
CA........................ 5,930 2,392 9,567 958 --
Piccadilly University,
Fresno, CA................ 5,768 -- 12,011 297 (163)
Quality Inn, Denver, CO.... 3,831 -- 302 2,351 --
Grand Hotel, Sofia,
Bulgaria.................. 6,006 -- 17,975 10,214 --
Williamsburg Hospitality
House, Williamsburg, VA... 13,867 4,049 16,195 1,989 --
SINGLE FAMILY RESIDENCE
Tavel Circle, Dallas, TX... 111 53 214 -- --
-------- -------- -------- -------- ---------
452,022 51,245 411,395 111,629 (14,808)

University Square,
Anchorage, AK............. $ 562 $ 1,572 $ 2,134 $ 1,469 1981 12/81 5-40 years

SHOPPING CENTERS
Collection, Denver, CO..... -- 20,368 20,368 1,727 1955 1997 10-40 years
Cross County Mall, Mattoon,
IL........................ 608 12,065 12,673 8,724 1971 08/79 5-40 years
Cullman, Cullman, AL....... 400 1,689 2,089 1,329 1979 02/79 7-40 years
Oaktree Shopping Village,
Lubbock, TX............... 192 1,445 1,637 189 1981 1995 10-40 years
Regency Point,
Jacksonville, FL.......... 647 7,089 7,736 3,257 1982 06/84 5-40 years
Westwood, Tallahassee,
FL........................ 522 5,142 5,664 3,572 1980 10/83 5-40 years

MERCHANDISE MART
Denver Mart, Denver, CO.... 4,824 20,210 25,034 4,347 1965/ 1992 10-40 years
1986
HOTELS
Best Western Hotel,
Virginia Beach, VA........ 1,521 6,694 8,215 1,020 1983 1996 10-40 years
AKC Holiday Inn, Kansas
City, MO.................. 1,110 7,109 8,219 2,815 1974 1993 10-40 years
Piccadilly Airport, Fresno,
CA........................ -- 8,324 8,324 737 1970 1997 10-40 years
Piccadilly Chateau, Fresno,
CA........................ -- 3,947 3,947 338 1989 1997 10-40 years
Piccadilly Shaws, Fresno,
CA........................ 2,392 10,525 12,917 920 1973 1997 10-40 years
Piccadilly University,
Fresno, CA................ -- 12,145 12,145 1,005 1984 1997 10-40 years
Quality Inn, Denver, CO.... -- 2,653 2,653 380 1974 1994 10-40 years
Grand Hotel, Sofia,
Bulgaria.................. -- 28,189 28,189 -- 1969 09/00 --
Williamsburg Hospitality
House, Williamsburg, VA... 4,049 18,184 22,233 1,944 1973 1997 10-40 years
SINGLE FAMILY RESIDENCE
Tavel Circle, Dallas, TX... 53 214 267 25
-------- -------- -------- --------
51,767 507,694 559,461 148,686

F-56

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

PROPERTIES HELD FOR SALE
LAND
Bonneau, Dallas County,
TX........................ $ 12,810 $ 1,102 $ -- $ -- $ --
Centura Holdings, Farmers
Branch, TX................ -- 7,054 -- 3,343 (1,702)(4)
Chase Oaks, Plano, TX...... 2,000 4,511 -- 377 (1,607)(4)
Croslin, Dallas, TX........ 260 327 -- 6 --
Dalho, Farmers Branch,
TX........................ --(6) 331 -- -- --
Desert Wells, Palm Desert,
CA........................ 9,500 12,846 -- 549 --
Eldorado Parkway, Collin
County, TX................ 454 1,015 -- 7 --
Frisco Bridges, Collin
County, TX................ 7,800 50,361 -- -- (44,340)(3)
FRWM Cummings, Farmers
Branch, TX................ -- 1,284 -- -- --
Hollywood Casino, Farmers
Branch, TX................ 6,224 11,582 -- -- --
HSM, Farmers Branch, TX.... --(6) 2,361 -- -- --
Jeffries Ranch, Oceanside,
CA........................ --(6) 1,178 -- -- --
JHL Connell, Carrollton,
TX........................ -- 1,451 -- -- (25)(3)
Katrina, Palm Desert, CA... 13,599 40,211 -- -- (6,057)(3)
Katy Road, Harris County,
TX........................ 4,250 5,919 -- -- --
Keller, Tarrant County,
TX........................ --(6) 6,847 -- 364 (6,593)(3)
Kelly Lots, Collin County,
TX........................ 96 131 -- -- --
Lacy Longhorn, Farmers
Branch, TX................ -- 1,908 -- -- --
Las Colinas I, Las Colinas,
TX........................ 5,045 14,076 -- 28 (4,156)(3)
Leone, Irving TX........... 1,210 1,625 -- -- --
Marine Creek, Fort Worth,
TX........................ -- 2,366 -- 50 --
McKinney Corners II, Collin
County, TX................ --(6) 5,911 -- -- (4,743)(3)
Mason/Goodrich, Houston,
TX........................ 2,250 10,983 -- 119 (2,289)(3)

PROPERTIES HELD FOR SALE
LAND
Bonneau, Dallas County,
TX........................ $ 1,102 $ -- $ 1,102 $ -- N/A 1998 --
Centura Holdings, Farmers
Branch, TX................ 8,338 357 8,695 4 N/A 1999 --
Chase Oaks, Plano, TX...... 3,281 -- 3,281 -- N/A 1997 --
Croslin, Dallas, TX........ 333 -- 333 -- N/A 1998 --
Dalho, Farmers Branch,
TX........................ 331 -- 331 -- N/A 1997 --
Desert Wells, Palm Desert,
CA........................ 12,846 549 13,395 -- N/A 1998 --
Eldorado Parkway, Collin
County, TX................ 1,022 -- 1,022 -- N/A 1998 --
Frisco Bridges, Collin
County, TX................ 6,021 -- 6,021 -- N/A 1999 --
FRWM Cummings, Farmers
Branch, TX................ 1,284 -- 1,284 -- N/A 1998 --
Hollywood Casino, Farmers
Branch, TX................ 11,582 -- 11,582 -- N/A 1997 --
HSM, Farmers Branch, TX.... 2,361 -- 2,361 -- N/A 1998 --
Jeffries Ranch, Oceanside,
CA........................ 1,178 -- 1,178 -- N/A 1996 --
JHL Connell, Carrollton,
TX........................ 1,426 -- 1,426 -- N/A 1998 --
Katrina, Palm Desert, CA... 34,154 -- 34,154 -- N/A 1998 --
Katy Road, Harris County,
TX........................ 5,919 -- 5,919 -- N/A 1997 --
Keller, Tarrant County,
TX........................ 254 364 618 -- N/A 1997 --
Kelly Lots, Collin County,
TX........................ 131 -- 131 -- N/A 2000 --
Lacy Longhorn, Farmers
Branch, TX................ 1,908 -- 1,908 -- N/A 1997 --
Las Colinas I, Las Colinas,
TX........................ 9,948 -- 9,948 -- N/A 1995 --
Leone, Irving TX........... 1,625 -- 1,625 -- N/A 1996 --
Marine Creek, Fort Worth,
TX........................ 2,416 -- 2,416 -- N/A 1998 --
McKinney Corners II, Collin
County, TX................ 1,168 -- 1,168 -- N/A 1997 --
Mason/Goodrich, Houston,
TX........................ 8,813 -- 8,813 -- N/A 1998 --

F-57

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Mendoza, Dallas, TX........ $ 153 $ 192 $ -- $ -- $ --
Messick, Palm Springs,
CA........................ 1,900 3,610 -- -- --
Monterrey, Riverside, CA... -- 5,969 -- -- (1,405)(3)
Nashville, Nashville, TN... 7,488 7,774 -- -- (459)(3)
Pioneer Crossing, Austin,
TX........................ 12,500 23,255 -- 297 (6,134)(3)
Plano Parkway, Plano, TX... --(6) 11,493 -- -- (8,196)(3)
(248)(2)
Rasor, Plano, TX........... -- 15,316 -- 320 (13,811)(3)
Santa Clarita, Santa
Clarita, CA............... --(6) 1,487 -- 11 (80)(3)
Scoggins, Tarrant County,
TX........................ --(6) 3,439 -- -- (894)
Scout, Tarrant County,
TX........................ --(6) 2,388 -- -- (321)
Sladek, Travis County,
TX........................ 427 764 -- -- --
Stagliano, Farmers Branch,
TX........................ --(6) 566 -- -- --
Thompson, Farmers Branch,
TX........................ 8,000 948 -- -- --
Thompson II, Dallas County,
TX........................ -- 505 -- -- --
Tomlin, Farmers Branch,
TX........................ --(6) 1,878 -- -- --
Treefarm -- LBJ, Dallas
County, TX................ --(6) 2,568 -- -- --
Valley Ranch, Irving, TX... 125 16,592 -- -- (12,092)(3)
(3,916)(2)
Valley Ranch III, Irving,
TX........................ -- 2,248 -- -- --
Valley Ranch IV, Irving,
TX........................ 1,378 2,187 -- -- --
Valley View 34, Farmers
Branch, TX................ -- 1,652 -- 1,035 --
Valwood, Dallas, TX........ 12,000 13,969 -- 227 (1,987)(3)
Varner Road, Riverside,
CA........................ -- 2,550 -- -- (508)(4)
Vineyards, Grapevine, TX... 2,744 4,982 -- -- --
Vineyards II, Grapevine,
TX........................ 4,000 6,934 -- -- --
Vista Ridge, Lewisville,
TX........................ 9,276 16,322 -- 440 (2,345)(3)
Walker, Dallas County,
TX........................ 11,680 13,534 -- -- --

Mendoza, Dallas, TX........ $ 192 $ -- $ 192 $ -- N/A 1998 --
Messick, Palm Springs,
CA........................ 3,610 -- 3,610 -- N/A 1998 --
Monterrey, Riverside, CA... 4,564 -- 4,564 -- N/A 1999 --
Nashville, Nashville, TN... 7,315 -- 7,315 -- N/A 1999 --
Pioneer Crossing, Austin,
TX........................ 17,121 297 17,418 -- N/A 1997 --
Plano Parkway, Plano, TX... 3,049 -- 3,049 -- N/A 1999 --

Rasor, Plano, TX........... 1,505 320 1,825 -- N/A 1997 --
Santa Clarita, Santa
Clarita, CA............... 1,407 11 1,418 -- N/A 1997 --
Scoggins, Tarrant County,
TX........................ 2,545 -- 2,545 -- N/A 1998 --
Scout, Tarrant County,
TX........................ 2,067 -- 2,067 -- N/A 1997 --
Sladek, Travis County,
TX........................ 764 -- 764 -- N/A 2000 --
Stagliano, Farmers Branch,
TX........................ 566 -- 566 -- N/A 1997 --
Thompson, Farmers Branch,
TX........................ 948 -- 948 -- N/A 1997 --
Thompson II, Dallas County,
TX........................ 505 -- 505 -- N/A 1998 --
Tomlin, Farmers Branch,
TX........................ 1,878 -- 1,878 -- N/A 1997 --
Treefarm -- LBJ, Dallas
County, TX................ 2,568 -- 2,568 -- N/A 1997 --
Valley Ranch, Irving, TX... 584 -- 584 -- N/A 1996 --

Valley Ranch III, Irving,
TX........................ 2,248 -- 2,248 -- N/A 1997 --
Valley Ranch IV, Irving,
TX........................ 2,187 -- 2,187 -- N/A 1998 --
Valley View 34, Farmers
Branch, TX................ 1,652 1,035 2,687 -- N/A 1996 --
Valwood, Dallas, TX........ 11,982 227 12,209 -- N/A 1996 --
Varner Road, Riverside,
CA........................ 2,042 -- 2,042 -- N/A 1999 --
Vineyards, Grapevine, TX... 4,982 -- 4,982 -- N/A 1997 --
Vineyards II, Grapevine,
TX........................ 6,934 -- 6,934 -- N/A 1999 --
Vista Ridge, Lewisville,
TX........................ 13,977 440 14,417 -- N/A 1998 --
Walker, Dallas County,
TX........................ 13,534 -- 13,534 -- N/A 1998 --

F-58

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Willow Springs, Riverside,
CA........................ $ -- $ 5,082 $ -- $ -- $ (1,012)(4)
Woolley, Farmers Branch,
TX........................ -- 214 -- -- (208)(4)
Yorktown, Harris County,
TX........................ 1,962 8,381 -- -- (2,001)(3)
Other (5 properties)....... -- 753 -- -- (3)(3)
-------- -------- -------- -------- ---------
139,131 362,932 -- 7,173 (127,132)
-------- -------- -------- -------- ---------
$591,153 $414,177 $411,395 $118,802 $(141,940)
======== ======== ======== ======== =========

Willow Springs, Riverside,
CA........................ $ 4,070 $ -- $ 4,070 $ -- N/A 1999 --
Woolley, Farmers Branch,
TX........................ 6 -- 6 -- N/A 1999 --
Yorktown, Harris County,
TX........................ 6,380 -- 6,380 -- N/A 1998 --
Other (5 properties)....... 750 -- 750 -- N/A Various --
-------- -------- -------- --------
239,373 3,600 242,973 4
-------- -------- -------- --------
$291,140 $511,294 $802,434 $148,690
======== ======== ======== ========

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

(1) The aggregate cost for federal income tax purposes is $627.0 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 to Partnership properties.

(5) Acquisition of ground lease.

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

F-59

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

2000 1999 1998
--------- --------- --------
(DOLLARS IN THOUSANDS)

Reconciliation of Real Estate
Balance at January 1,...................................... $ 936,213 $ 943,303 $307,833
Additions
NRLP properties....................................... -- -- 425,813
Acquisitions and improvements......................... 46,691 194,605 230,549
Foreclosures.......................................... -- 6,389 17,019
Deductions
Sales of real estate.................................. (144,376) (208,084) (37,911)
Purchase accounting write down........................ (35,846) -- --
Property write down................................... (248) -- --
--------- --------- --------
Balance at December 31,.................................... $ 802,434 $ 936,213 $943,303
========= ========= ========
Reconciliation of Accumulated Depreciation
Balance at January 1,...................................... $ 164,583 $ 208,396 $ 5,380
Additions
Depreciation.......................................... 15,878 15,130 5,246
NRLP properties....................................... -- -- 197,770
Deductions
Sales of real estate.................................. (31,771) (58,943) --
--------- --------- --------
Balance at December 31,.................................... $ 148,690 $ 164,583 $208,396
========= ========= ========

F-60

SCHEDULE IV

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2000

PRINCIPAL AMOUNT
OF LOANS SUBJECT
FINAL CARRYING TO DELINQUENT
INTEREST MATURITY PRIOR FACE AMOUNT AMOUNTS OF PRINCIPAL OR
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS OF MORTGAGE MORTGAGE(1) INTEREST
----------- -------- -------- ---------------------- ----- ----------- ----------- ----------------
(DOLLARS IN THOUSANDS)

FIRST MORTGAGE
DM DEVELOPMENT, INC. .......... 12.0% 07/01 Payment of 12% of $ -- $ 1,300 $ 817 $ --
Secured by pledge and gross sales price of
security agreement and all property sold.
assignment of proceeds
VISTA EQUITIES GROUP, INC. .... 13.5% 12/00 Principal and -- 1,490 1,490 --
Secured by deed in trust, interest due at
pledge and security maturity.
agreement, and assignment of
proceeds
OTHER
14875 LANDMARK, L.L.C. ........ 14.00% 06/01 Monthly interest -- 1,175 1,175 --
Secured by a pledge of only.
partnership interest in
Landmark which owns
commercial real estate in
Addison, TX
BORDEAUX INVESTMENTS........... 14.00% 12/00 All principal and -- 1,591 1,540 --
Secured by (i) a 100% interest are due at
membership interest in maturity.
Bordeaux, which owns a
shopping center in Oklahoma
City, OK; (ii) 100% of the
stock of Bordeaux Investments
One, Inc., which owns 6.5
acres of undeveloped land in
Oklahoma City, OK; and (iii)
the personal guarantees of
the Bordeaux members
LA QUINTA LAND PARTNERS, LLC... 15.00% 04/00 All principal and -- 635 404 404
Secured by personal guarantee interest are due at
of the manager of the maturity.
borrower
LORDSTOWN, L.P. ............... 14.00% 03/00 All principal and -- 2,138 2,138 --
Secured by 100% partnership interest due at
interest in Partner Capital, maturity.
Ltd.
REALTY ADVISORS................ 10.25% 11/01 All principal and -- 4,749 4,649 --
Secured by 100% of its interest are due at
interest in an insurance maturity.
company

F-61

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE -- (CONTINUED)

TRACY SUTTLES.................. -- 09/01 All principal due at -- 100 100 --
Secured by two promissory maturity. No interest
notes executed by Capital accrued until
Associates, L.L.C. and maturity.
Regency Partners, L.L.C.
TRINITY FOUNDATION, INC. ...... 12.0% 12/01 Principal and -- 50 50 --
Security Agreement, 2 Prom. interest due at
Notes totaling 268,475 maturity.
UNSECURED
TREETOPS/COLONY MEADOWS........ -- 04/03 All principal and $ -- $ 1,018 $ 1,018 $ --
interest are due at
maturity.
WARWICK SUMMIT, INC............ 14.00% 12/99 All principal and -- 1,886 1,646 --
interest are due at ----- ----------- ----------- ----------------
maturity.
$ -- $16,132 15,027 $404
===== ======= ======= ====
Interest receivable............ 1,381
Allowance for estimated (2,577)
losses.......................
-------
$13,831
=======

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

(1) Interest rates and maturity dates shown are as stipulated in the loan
documents at December 31, 2000. Where applicable, these rates have been
adjusted at issuance to yield between 8% and 12%.

2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)

Balance at January 1,....................................... $ 41,181 $ 54,630 $ 32,552
Additions
New mortgage loans........................................ 3,440 62,741 594
Funding of existing loans................................. 11,719 315 --
NRLP mortgage loans....................................... -- -- 53,899
Deductions
Collections of principal.................................. (36,039) (39,978) (7,803)
Note canceled on repurchase of property................... -- -- (1,300)
Conversion to property interest........................... -- (30,138) --
Sale of note receivable................................... (3,893) -- (599)
Foreclosures.............................................. -- (6,389) (22,713)
-------- -------- --------
Balance at December 31,..................................... $ 16,408 $ 41,181 $ 54,630
======== ======== ========

F-62

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS

Real estate held for investment............................. $ 93,040 $ 91,837
Less -- accumulated depreciation............................ (7,259) (5,560)
-------- --------
85,781 86,277
Notes and interest receivable............................... 505 1,500
Investment in real estate partnerships...................... 121 141
Cash and cash equivalents................................... 3,914 2,087
Other assets (including $2,718 in 2000 from affiliates)..... 2,553 6,514
-------- --------
$ 92,874 $ 96,519
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Notes and interest payable.................................. $ 54,329 $ 54,206
Other liabilities (including $842 in 2001 to affiliates).... 3,059 2,315
-------- --------
57,388 56,521
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,438,945 shares in 2001 and
1,514,045 in 2000......................................... 14 15
Paid-in capital............................................. 63,459 64,772
Accumulated distributions in excess of accumulated
earnings.................................................. (27,987) (24,789)
-------- --------
35,486 39,998
-------- --------
$ 92,874 $ 96,519
======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-63

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Property revenue
Rents....................................... $ 3,219 $ 2,994 $ 9,759 $ 10,732
Property expense
Property operations (including $243 in 2001
and $372 in 2000 to affiliates and
related parties)......................... 2,272 1,667 5,292 5,286
---------- ---------- ---------- ----------
Operating income....................... 947 1,327 4,467 5,446
Other income
Interest.................................... 8 108 142 206
Equity in income/(loss) of equity
partnerships............................. (30) (2) (27) (71)
Gain on sale of real estate................. -- 3,856 -- 20,878
---------- ---------- ---------- ----------
(22) 3,962 115 21,013
Other expense
Interest.................................... 1,505 1,250 4,569 4,021
Depreciation................................ 614 566 1,792 1,890
Advisory fee to affiliate................... 179 170 570 505
Net income fee to affiliate................. -- 234 -- 1,453
General and administrative (including $234
in 2001 and $210 in 2000 to affiliates
and related parties)..................... 376 181 849 668
---------- ---------- ---------- ----------
2,674 2,401 7,780 8,537
---------- ---------- ---------- ----------
Net income (loss)............................. $ (1,749) $ 2,888 $ (3,198) $ 17,922
========== ========== ========== ==========
Earnings (loss) per share
Net income (loss)........................... $ (1.16) $ 1.88 $ (2.11) $ 11.70
========== ========== ========== ==========
Weighted average Common shares used in
computing earnings per share................ 1,508,331 1,532,602 1,512,119 1,531,177
========== ========== ========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-64

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001

ACCUMULATED
DISTRIBUTIONS
COMMON STOCK IN EXCESS OF
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ------- ------------- -------------
(DOLLARS IN THOUSANDS)

BALANCE, JANUARY 1, 2001............... 1,514,045 $15 $64,772 $(24,789) $39,998
Repurchase of Common Stock............. (75,100) (1) (1,313) -- (1,314)
Net (loss)............................. -- -- -- (3,198) (3,198)
--------- --- ------- -------- -------
BALANCE, SEPTEMBER 30, 2001............ 1,438,945 $14 $63,459 $(27,987) $35,486
========= === ======= ======== =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-65

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
--------- ----------
(DOLLARS IN THOUSANDS)

Cash flows from Operating Activities
Rents collected........................................... $ 9,578 $ 10,798
Payments for property operations (including $243 in 2001
and $372 in 2000 to affiliates and related parties).... (4,969) (5,456)
Interest collected........................................ 126 251
Interest paid............................................. (4,112) (3,660)
Advisory and net income fee to affiliate.................. (520) (1,471)
General and administrative expenses paid (including $234
in 2001 and $210 in 2000 to affiliates)................ (1,479) (697)
Distributions from equity partnerships' operating cash
flow................................................... 18 25
Other..................................................... 17 (321)
------- --------
Net cash used in operating activities............. (1,341) (531)
Cash Flows from Investing Activities
Funding of notes receivable............................... -- (1,500)
Collections on notes receivable........................... 1,000 --
Acquisition of real estate................................ -- (15,767)
Funding of equity partnerships............................ (25) (52)
Real estate improvements.................................. (1,316) (927)
Proceeds from sale of real estate......................... -- 46,613
------- --------
Net cash (used in) provided by investing
activities...................................... (341) 28,367
Cash Flows from Financing Activities
Payments on notes payable................................. (5,010) (17,968)
Proceeds from notes payable............................... 5,000 10,875
Deferred financing costs.................................. (124) --
Distributions from equity partnerships' financing cash
flow................................................... -- 739
Sale of Common Stock under dividend reinvestment plan..... -- 24
Purchase of Common stock.................................. (1,314) (134)
Dividends to stockholders................................. -- (685)
Advances from/payments (to) advisor....................... 4,957 (3,254)
------- --------
Net cash provided by (used in) financing
activities...................................... 3,509 (10,403)
Net increase in cash and cash equivalents................... 1,827 17,433
Cash and cash equivalents, beginning of period.............. 2,087 722
------- --------
Cash and cash equivalents, end of period.................... $ 3,914 $ 18,155
======= ========
Reconciliation of net income (loss) to net cash used in
operating activities
Net income (loss)........................................... $(3,198) $ 17,922

F-66

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
--------- ----------
(DOLLARS IN THOUSANDS)

Adjustments to reconcile net income (loss) to net cash used
in operating activities
Depreciation and amortization............................. 1,792 1,988
Gain on sale of real estate............................... -- (20,878)
Loss of equity partnerships............................... 27 71
Distributions from equity partnerships' operating cash
flow................................................... 18 25
(Increase) decrease in other assets....................... (856) 392
Increase in interest payable.............................. 132 263
Increase (decrease) in other liabilities.................. 744 (314)
------- --------
Net cash used in operating activities............. $(1,341) $ (531)
======= ========
Schedule of noncash investing and financing activities
Notes payable from acquisition of real estate............. $ -- $ 2,814
Notes payable assumed by buyer on sale of real estate..... -- (16,094)

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-67

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
Operating results for the nine month period ended September 30, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the Consolidated Financial
Statements and notes thereto included in IORI's Annual Report on Form 10-K for
the year ended December 31, 2000 (the "2000 Form 10-K").

Certain balances for 2000 have been reclassified to conform to the 2001
presentation.

NOTE 2. REAL ESTATE

In the nine months ended September 30, 2000, IORI sold the following
properties:

SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION UNITS/ SQUARE FEET PRICE RECEIVED DISCHARGED SALE
-------- -------- ------------------ ------- -------- ---------- -------

First Quarter
APARTMENTS
La Monte Park............. Houston, TX 128 Units $ 5,000 $ 1,066 $ 3,829(1) $ 903
SECOND QUARTER
APARTMENTS
Renaissance Parc.......... Dallas, TX 294 Units 17,198 4,536 12,265(1) 1,213
OFFICE BUILDINGS
Olympic................... Los Angeles, CA 46,685 Sq. Ft... 8,500 3,811 4,443 1,850
Saratoga.................. Saratoga, CA 89,825 Sq. Ft... 25,000 17,709 6,968 13,056
Third Quarter
APARTMENTS
East Point................ Mesquite, TX 126 Units 5,575 1,804 3,242 2,179
LAND
Etheredge................. Collin County, TX 74.98 Acres 2,341 754 1,406 194
Fambrough................. Collin County, TX 75.07 Acres 2,338 754 1,408 194

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

(1) Debt assumed by purchaser.

In the nine months ended September 30, 2000, IORI purchased the following
properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET/ACRES PRICE PAID INCURRED RATE DATE
-------- -------- ----------------- -------- -------- -------- -------- --------

SECOND QUARTER
APARTMENTS
Frankel Portfolio(1)... Midland, TX 391 Units(1) $14,034 $3,784 $10,875 9.13% 07/03
LAND
Etheredge.............. Collin County, TX 74.98 Acres 1,875 391 1,406(2) 10.0% 04/01(3)
Fambrough.............. Collin County, TX 75.07 Acres 1,877 592 1,408(2) 10.0% 04/01(3)
Frankel................ Midland County, TX 1.01 Acres 41 43 -- -- --

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

(1) Frankel portfolio consists of five apartments: 60 unit Brighton Court, 92
units Del Mar Villas, 68 unit Enclave, 57 unit Signature Place and 114 unit
Sinclair Place.

F-68

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) Seller financing.

(3) Property was sold September 2000.

NOTE 3. NOTES RECEIVABLE

In September 2000, IORI funded a $1.5 million loan secured by a second lien
on 165 acres of unimproved land in The Colony, Texas. In May 2001, IORI received
$1.0 million as a partial principal paydown.

NOTE 4. NOTES AND INTEREST PAYABLE

In the first quarter of 2001, IORI refinanced the mortgage secured by the
60,060 sq. ft. Chuck Yeager Office Building in Chantilly, Virginia, in the
amount of $5.0 million. IORI received net cash of $2.9 million after paying
various lending fees and the payoff of $2.0 million in existing mortgage debt.
The new mortgage bears interest at 9.5% per annum until February 2002, and at a
variable rate thereafter, requires monthly payments of principal and interest of
$22,126 and matures in January 2004.

NOTE 5. 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 general and administrative expenses.
Management evaluates the performance of each of the operating segments and
allocates resources to each of them based on their net operating income and cash
flow. Items of income that are not reflected in the segments are interest,
income (loss) of equity partnerships and gains on sale of real estate which
totaled a loss of $22,000 and income of $115,000 for the three and nine months
ended September 30, 2001, and income of $4.0 million and $21.0 million in the
three and nine months ended September 30, 2000. Expenses that are not reflected
in the segments are general and administrative expenses, advisory fees and net
income fees which totaled $555,000 and $1.4 million for the three and nine
months ended September 30, 2001, and $585,000 and $2.6 million for the three and
nine months ended September 30, 2000. Excluded from operating segment assets are
assets of $6.1 million at September 30, 2001, and $24.5 million at September 30,
2000, which are not identifiable with an operating segment. There are no
intersegment revenues and expenses and all business is conducted in the United
States.

Presented below is the operating income of each operating segment for the
three and nine months ended September 30, and each segment's assets at September
30.

THREE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2001 PROPERTIES APARTMENTS LAND TOTAL
------------------ ---------- ---------- ------- -------

Rents....................................... $ 2,013 $ 1,206 $ -- $ 3,219
Property operating expenses................. 997 718 557 2,272
------- ------- ------- -------
Operating income............................ $ 1,016 $ 488 $ (557) $ 947
======= ======= ======= =======
Depreciation................................ $ 485 $ 129 $ -- $ 614
Interest.................................... 659 321 525 1,505
Real estate improvements.................... 168 -- 329 497
Assets...................................... 41,626 21,738 22,417 85,781

F-69

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NINE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2001 PROPERTIES APARTMENTS LAND TOTAL
------------------ ---------- ---------- ------- -------

Rents....................................... $ 5,895 $ 3,721 $ 143 $ 9,759
Property operating expenses................. 2,729 1,994 569 5,292
------- ------- ------- -------
Operating income............................ $ 3,166 $ 1,727 $ (426) $ 4,467
======= ======= ======= =======
Depreciation................................ $ 1,407 $ 385 $ -- $ 1,792
Interest.................................... 2,023 1,066 1,480 4,569
Real estate improvements.................... 987 -- 329 1,316
Assets...................................... 41,626 21,738 22,417 85,781

THREE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2000 PROPERTIES APARTMENTS LAND TOTAL
------------------ ---------- ---------- ------- -------

Rents....................................... $ 1,569 $ 1,425 $ -- $ 2,994
Property operating expenses................. 873 794 -- 1,667
------- ------- ------- -------
Operating income............................ $ 696 $ 631 $ -- $ 1,327
======= ======= ======= =======
Depreciation................................ $ 409 $ 157 $ -- $ 566
Interest.................................... 682 457 111 1,250
Real estate improvements.................... 432 -- -- 432
Assets...................................... 38,682 22,242 44 60,968

PROPERTY SALES APARTMENTS LAND TOTAL
-------------- ---------- ------- -------

Sales price............................................ $ 5,575 $ 4,679 $10,254
Cost of sale........................................... 3,396 4,291 7,687
------- ------- -------
Gain on sale........................................... $ 2,179 $ 388 $ 2,567*
======= ======= =======

NINE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2000 PROPERTIES APARTMENTS LAND TOTAL
------------------ ---------- ---------- ------- -------

Rents....................................... $ 6,435 $ 4,297 $ -- $10,732
Property operating expenses................. 2,857 2,429 -- 5,286
------- ------- ------- -------
Operating income............................ $ 3,578 $ 1,868 $ -- $ 5,446
======= ======= ======= =======
Depreciation................................ $ 1,410 $ 480 $ -- $ 1,890
Interest.................................... 2,449 1,391 181 4,021
Real estate improvements.................... 915 12 -- 927
Assets...................................... 38,682 22,242 44 60,968

COMMERCIAL
PROPERTY SALES PROPERTIES APARTMENTS LAND TOTAL
-------------- ---------- ---------- ------- -------

Sales price................................. $33,500 $27,773 $ 4,679 $65,952
Cost of sale................................ 18,594 23,478 4,291 46,363
------- ------- ------- -------
Gain on sale................................ $14,906 $ 4,295 $ 388 $19,589*
======= ======= ======= =======

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

* Excludes recognition of a $1.3 million deferred gain on the sale of a property
by an affiliate that had purchased the property from IORI.

F-70

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. COMMITMENTS AND CONTINGENCIES

Liquidity. Although management anticipates that IORI will generate excess
cash from operations in 2001 due to increased rental rates and occupancy at its
properties, such excess, however, will not be sufficient to discharge all of
IORI's debt obligations as they mature. Management intends to selectively sell
income producing real estate, refinance real estate and incur additional
borrowings against real estate to meet its cash requirements.

Litigation. IORI is involved in various lawsuits arising in the ordinary
course of business. Except for the Olive litigation, management is of the
opinion that the outcome of these lawsuits will have no material impact on
IORI's financial condition, results of operations or liquidity. See Part
II. Other Information, Item 1. "Legal Proceedings."

F-71

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
Income Opportunity Realty Investors, Inc.

We have audited the accompanying consolidated balance sheets of Income
Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. We have also audited the schedules listed in the accompanying index.
These financial statements and the schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

As described in Note 15, Income Opportunity Realty Investors, Inc.'s
management has indicated its intent to both sell income producing properties and
refinance or extend debt secured by real estate, to meet its liquidity needs.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Income Opportunity Realty Investors, Inc. and Subsidiaries as of December 31,
2000 and 1999, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with generally accepted accounting principles.

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

BDO SEIDMAN, LLP

Dallas, Texas
March 15, 2001

F-72

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS

Real estate held for investment............................. $ 91,837 $ 96,051
Less -- accumulated depreciation............................ (5,560) (9,509)
-------- --------
86,277 86,542
Notes receivable............................................ 1,500 --
Investment in real estate partnerships...................... 141 907
Cash and cash equivalents................................... 2,087 722
Other assets (including $3,862 in 2000 and $107 in 1999 from
affiliates)............................................... 6,514 3,014
-------- --------
$ 96,519 $ 91,185
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Notes and interest payable.................................. $ 54,206 $ 62,852
Other liabilities (including $721 in 1999 to affiliates).... 2,315 4,342
-------- --------
56,521 67,194
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,514,045 shares in 2000 and
1,528,908 shares in 1999.................................. 15 15
Paid-in capital............................................. 64,772 64,874
Accumulated distributions in excess of accumulated
earnings.................................................. (24,789) (40,898)
-------- --------
39,998 23,991
-------- --------
$ 96,519 $ 91,185
======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-73

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Property revenue
Rents.................................................. $ 13,731 $ 15,968 $ 14,326
Property expense
Property operations (including $602 in 2000, $618 in
1999 and $634 in 1998 to affiliates and related
parties)............................................ 6,969 6,768 6,462
---------- ---------- ----------
Operating income......................................... 6,762 9,200 7,864
Other income
Interest............................................... 319 29 172
Income (loss) from equity partnerships................. (61) 148 113
Gain on sale of real estate............................ 20,878 1,525 180
---------- ---------- ----------
21,136 1,702 465
Other expense
Interest............................................... 5,079 5,658 5,756
Depreciation........................................... 2,450 2,723 2,168
Advisory fee to affiliate.............................. 664 371 329
Net income fee to affiliate............................ 1,362 81 --
General and administrative (including $287 in 2000,
$260 in 1999 and $228 in 1998 to affiliate)......... 1,549 747 755
---------- ---------- ----------
11,104 9,580 9,008
---------- ---------- ----------
Net income (loss)........................................ $ 16,794 $ 1,322 $ (679)
========== ========== ==========
Earnings per share
Net income (loss)...................................... $ 11.03 $ .87 $ (.44)
========== ========== ==========
Weighted average shares of Common Stock used in computing
earnings per share..................................... 1,522,510 1,527,386 1,521,832
========== ========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-74

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

BALANCE, JANUARY 1, 1998............... 1,519,888 $15 $64,804 $(39,688) $25,131
Sale of Common Stock under dividend
reinvestment plan.................... 6,155 -- 53 -- 53
Dividends ($.60 per share)............. -- -- -- (945) (945)
Net (loss)............................. -- -- -- (679) (679)
--------- --- ------- -------- -------
BALANCE, DECEMBER 31, 1998............. 1,526,043 15 64,857 (41,312) 23,560
Sale of Common Stock under dividend
reinvestment plan.................... 2,865 -- 17 -- 17
Dividends ($.60 per share)............. -- -- -- (908) (908)
Net income............................. -- -- -- 1,322 1,322
--------- --- ------- -------- -------
BALANCE, DECEMBER 31, 1999............. 1,528,908 15 64,874 (40,898) 23,991
Sale of Common Stock under dividend
reinvestment plan.................... 5,037 -- 32 -- 32
Repurchase of Common Stock............. (19,900) -- (134) -- (134)
Dividends ($.45 per share)............. -- -- -- (685) (685)
Net income............................. -- -- -- 16,794 16,794
--------- --- ------- -------- -------
BALANCE, DECEMBER 31, 2000............. 1,514,045 $15 $64,772 $(24,789) $39,998
========= === ======= ======== =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-75

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Rents collected........................................... $ 13,638 $16,065 $14,326
Interest collected........................................ 310 29 182
Interest paid............................................. (5,036) (5,458) (5,540)
Payments for property operations (including $602 in 2000,
$618 in 1999 and $634 in 1998 to affiliate and related
party).................................................. (7,068) (6,325) (6,427)
Advisory and net income fee paid to affiliate............. (2,576) (388) (534)
General and administrative expenses paid (including $287
in 2000, $260 in 1999 and $228 in 1998 to affiliate).... (1,185) (793) (798)
Distributions from equity partnerships' operating cash
flow.................................................... 25 155 181
Escrow funding............................................ -- -- (135)
Other..................................................... -- 34 (259)
-------- ------- -------
Net cash provided by (used in) operating
activities....................................... (1,892) 3,319 996
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of interest in equity partnership............. -- (384) --
Funding of equity partnerships............................ (58) (39) (8)
Real estate improvements.................................. (1,947) (2,199) (3,945)
Acquisition of real estate (including $1,514 in 2000 and
$337 in 1999 to affiliate and related party)............ (37,334) (5,287) --
Proceeds from sale of real estate......................... 43,393 2,673 --
Distributions from equity partnership's investing cash
flow.................................................... -- 2,027 399
Funding of note receivable................................ (1,500)
Collection of note receivable............................. -- -- 2,000
-------- ------- -------
Net cash provided by (used in) investing
activities....................................... 2,554 (3,209) (1,554)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable............................... $ 22,875 $10,778 $ 800
Payments on notes payable................................. (18,153) (8,681) (1,422)
Deferred financing costs.................................. 172 (258) (25)
Distributions from equity partnership's financing cash
flow.................................................... 739 -- --
Sale of Common Stock under dividend reinvestment plan..... 32 17 53
Dividends to stockholders................................. (685) (908) (945)
Repurchase of Common Stock................................ (134) -- --
Payments (to) from advisor................................ (4,143) (439) 1,055
-------- ------- -------
Net cash provided by (used in) financing
activities....................................... 703 509 (484)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 1,365 619 (1,042)
Cash and cash equivalents, beginning of year................ 722 103 1,145
-------- ------- -------
Cash and cash equivalents, end of year...................... $ 2,087 $ 722 $ 103
======== ======= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES
Net income (loss)......................................... $ 16,794 $ 1,322 $ (679)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization........................... 2,450 2,967 2,297
Gain on sale of real estate............................. (20,878) (1,525) (180)
Equity in (income) loss of partnerships................. 61 (148) (113)
Distributions from equity partnerships' operating cash
flow.................................................. 25 155 181
Decrease in interest receivable......................... -- -- 17
(Increase) decrease in other assets..................... 338 127 (102)
Increase (decrease) in interest payable................. (87) (44) 80
Increase (decrease) in other liabilities................ (595) 465 (505)
-------- ------- -------
Net cash provided by (used in) operating
activities....................................... $ (1,892) $ 3,319 $ 996
======== ======= =======
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Notes payable from purchase of real estate................ $ 2,814 $ -- $ --
Notes payable assumed by buyer on sale of real estate..... 16,094 -- --

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-76

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of Income Opportunity
Realty Investors, Inc. and consolidated entities were prepared in conformity
with generally accepted accounting principles, 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 these 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 1999 and 1998 have been reclassified to conform to the
2000 presentation.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and business. Income Opportunity Realty Investors, Inc.
("IORI") is the successor to a California business trust organized on December
14, 1984, which commenced operations on April 10, 1985. IORI invests in real
estate through direct ownership, leases and partnerships and it also may invest
in mortgage loans on real estate.

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

Accounting estimates. In the preparation of the Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
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 expenses for the year then ended. Actual
results could differ from those estimates.

Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") 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 of 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 2 to 40 years.

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"). Until
the requirements of SFAS No. 66 for full profit recognition have been met,
transactions are accounted for using either the deposit, the installment sale,
the cost recovery or the financing method, whichever is appropriate.

Investment in noncontrolled partnerships. The equity method is used to
account for investments in partnerships which IORI does not control. Under the
equity method, an initial investment, recorded at cost, is increased by a
proportionate share of the partnership's operating income and any additional
advances and decreased by a proportionate share of the partnership's operating
losses and distributions received.

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 notes receivable and payable. For notes
receivable the fair value was estimated by discounting future

F-77

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cash flows using current interest rates for similar loans. For notes payable the
fair value was estimated using year end interest rates for mortgages with
similar terms and maturities.

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

NOTE 2. REAL ESTATE

In 2000, the following properties were purchased:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS PRICE PAID INCURRED RATE DATE
-------- -------- ----- -------- -------- -------- -------- --------

APARTMENTS
Frankel
Portfolio(1)........ Midland, TX 391 Units $14,034 $3,784 $10,875 9.13% 07/03
LAND
Etheredge............. Collin County, TX 74.98 Acres 1,875 391 1,406(2) 10.0 04/01
Fambrough............. Collin County, TX 75.07 Acres 1,877 592 1,408(2) 10.0 04/01
Frankel............... Midland County, TX 1.01 Acres 41 43 -- -- --
Travelers............. Farmers Branch, TX 204 Acres 28,650 13,117 12,000 14.0 12/01

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

(1) The Frankel portfolio consisted of five apartments: 60 unit Brighton Court,
92 unit Del Mar Villas, 68 unit Enclave, 57 unit Signature Place and 114
unit Sinclair Place.

(2) Seller financing.

In 2000, the following properties were sold:

UNITS/
SQUARE FEET/ SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION ACRES PRICE RECEIVED DISCHARGED SALE
-------- -------- -------------- ------- -------- ---------- -------

APARTMENTS
East Point................. Mesquite, TX 126 Units $ 5,575 $ 1,804 $ 3,242 $ 2,179
La Monte Park.............. Houston, TX 128 Units 5,000 1,066 3,829(1) 903
Renaissance Parc........... Dallas, TX 294 Units 17,198 4,536 12,265(1) 1,213
OFFICE BUILDINGS
Olympic.................... Los Angeles, CA 46,685 Sq. Ft. 8,500 3,811 4,443 1,850
Saratoga................... Saratoga, CA 89,825 Sq. Ft. 25,000 17,709 6,968 13,056
LAND
Etheredge.................. Collin County, TX 74.98 Acres 2,341 754 1,406 194
Fambrough.................. Collin County, TX 75.07 Acres 2,338 754 1,408 194

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

(1) Debt assumed by purchaser.

In 1999, the following property was purchased:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS PRICE PAID INCURRED RATE DATE
-------- -------- ----- -------- -------- -------- -------- --------

APARTMENT
Meridian...................... Midland, TX 280 Units $5,375 $2,401 $2,992 8.85% 12/04

F-78

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1999, the following property was sold:

SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION SQUARE FEET PRICE RECEIVED DISCHARGED SALE
-------- -------- ----------- ------ -------- ---------- -------

SHOPPING CENTER
Town Center...................... Boca Raton, FL 23,518 Sq. Ft. $3,200 $1,505 $1,168 $490

Concentration of investment risk. IORI has a high concentration of
investment risk on properties in the Southwest region of the United States. This
risk includes, but is not limited to changes in local economic conditions,
changes in real estate and zoning laws, increases in real estate taxes, floods,
tornados and other acts of God and other factors beyond the control of
management. In the opinion of management, this investment risk is partially
mitigated by the diversification of property types in other geographical regions
of the United States, management's review of additional investments,
acquisitions in other areas and by insurance.

NOTE 3. NOTES AND INTEREST RECEIVABLE

In September 2000, IORI funded a $1.5 million loan secured by a second lien
on 165 acres of unimproved land in The Colony, Texas. The loan bears interest at
18.0% per annum, requires monthly payments of interest only and matures in
January 2002. The loan had an estimated fair value at December 31, 2000, equal
to its principal balance of $1.5 million.

NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS

Investments in equity method partnerships consisted of the following:

2000 1999
----- ----

Tri-City Limited Partnership ("Tri-City")................... $(572) $194
Nakash Income Associates ("NIA")............................ 343 316
TCI Eton Square, L.P. ("Eton Square")....................... 370 397
----- ----
$ 141 $907
===== ====

IORI owns a 36.3% general partner interest in Tri-City, which at December
31, 2000, owned a shopping center in Houston, Texas. Transcontinental Realty
Investors, Inc. ("TCI") owns a 63.7% limited partner interest in Tri-City. In
February 2000, Tri-City obtained mortgage financing of $2.1 million secured by
the previously unencumbered shopping center. Tri-City received net cash of $2.0
million after the funding of required escrows and the payment of various closing
costs. The mortgage bore interest at a fixed rate of 10.24% per annum until
February 2001 and currently, 10.0% per annum thereafter, requires monthly
payments of principal and interest of $20,601 and matures in February 2005. IORI
received a distribution of $739,000 of the net financing proceeds. In 1999,
Tri-City sold a shopping center in Ft. Worth, Texas, and an office building in
Carrollton, Texas, for a total of $7.2 million, receiving net cash of $5.4
million after paying off $1.3 million in mortgage debt and the payment of
various closing costs. IORI received a distribution of $2.1 million of the net
cash. Tri-City recognized gains of $2.9 million on the sales of which IORI's
equity share was $1.0 million.

IORI also owns a 40% general partner interest in NIA. NIA's only asset is a
wraparound mortgage note receivable secured by a shopping center in Maulden,
Missouri. TCI owns the remaining 60% general partner interest in NIA.

In September 1999, IORI invested $384,000 for a 10% limited partner
interest in Eton Square, which purchased the 222,654 sq. ft. Eton Square
Building in Tulsa, Oklahoma, for $14.0 million, paying

F-79

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$3.6 million in cash and obtaining mortgage financing of $10.5 million. TCI owns
a 90% general partner interest in Eton Square.

Set forth below are summarized financial data for the partnerships
accounted for using the equity method:

2000 1999
-------- --------

Notes receivable............................................ $ 902 $ 902
Real estate, net of accumulated depreciation ($3,342 in 2000
and $1,600 in 1999)....................................... 17,788 17,936
Other assets................................................ 190 526
Notes payable............................................... (12,945) (11,134)
Other liabilities........................................... (652) (734)
-------- --------
Partners' capital........................................... $ 5,283 $ 7,496
======== ========

IORI's share of the equity partnerships' capital was $892,000 in 2000 and
$1.7 million in 1999.

2000 1999 1998
------- ------ -------

Rents.................................................... $ 2,561 $1,873 $ 2,116
Interest income.......................................... 156 156 156
Interest expense......................................... (1,165) (375) (260)
Property operations expense.............................. (1,197) (781) (1,077)
Depreciation............................................. (570) (371) (483)
------- ------ -------
Income (loss) before gains on sale of real estate........ (215) 502 452
Gain on sale............................................. -- 2,851 496
------- ------ -------
Net income (loss)........................................ $ (215) $3,353 $ 948
======= ====== =======

IORI's equity share of:

2000 1999 1998
---- ------ ----

Income (loss) before gains on sale of real estate........... $(61) $ 148 $113
Gain on sale of real estate................................. -- 1,035 180
---- ------ ----
Net income (loss)........................................... $(61) $1,183 $293
==== ====== ====

NOTE 5. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

2000 1999
------------------- -------------------
ESTIMATED ESTIMATED
FAIR BOOK FAIR BOOK
VALUE VALUE VALUE VALUE
--------- ------- --------- -------

Notes payable................................. $53,556 $53,931 $62,548 $62,490
======= =======
Interest payable.............................. 275 362
------- -------
$54,206 $62,852
======= =======

F-80

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled notes payable principal payments are due as follows:

2001........................................................ $14,561
2002........................................................ 11,953
2003........................................................ 10,835
2004........................................................ 3,049
2005........................................................ 280
Thereafter.................................................. 13,253
-------
$53,931
=======

Notes payable at December 31, 2000, bear interest at rates ranging from
7.75% to 14.0% and mature between 2001 and 2025. The mortgages are
collateralized by deeds of trust on real estate with a net carrying value of
$86.3 million.

In 1999, mortgage debt totaling $7.8 million, secured by an apartment and
two office buildings was refinanced. Net cash of $440,000 was received from the
refinancings, after the payoff of $6.6 million in existing mortgage debt, the
funding of escrows and the payment of various closing costs. The mortgages bear
interest rates ranging from 7.95% to 10.39% per annum, require monthly payments
of principal and interest totaling $61,622 and mature between August 2002 and
January 2025.

NOTE 6. DIVIDENDS

Dividends were paid of $685,000 ($.45 per share) in 2000, $908,000 ($.60
per share) in 1999 and $945,000 ($.60 per share) in 1998.

It was reported to the Internal Revenue Service that 100% of the dividends
paid in 2000 represented capital gains and that 100% of the dividends paid in
1999 and 1998 represented a return of capital.

In December 2000, the Board of Directors determined not to pay a fourth
quarter dividend to holders of IORI's Common Stock. The non-payment decision was
based on the Board determining that IORI needed to retain cash for acquisitions
that are anticipated in 2001 and that IORI had no REIT taxable income that
required a distribution.

NOTE 7. RENTS UNDER OPERATING LEASES

Operations include the leasing of office buildings. The leases thereon
expire at various dates through 2009. The following is a schedule of minimum
future rents on non-cancelable operating leases as of December 31, 2000:

2001........................................................ $ 6,196
2002........................................................ 5,025
2003........................................................ 4,434
2004........................................................ 3,251
2005........................................................ 2,682
Thereafter.................................................. 1,252
-------
$22,840
=======

F-81

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. ADVISORY AGREEMENT

Basic Capital Management, Inc. ("BCM"), an affiliate, has served as advisor
to IORI since March 28, 1989. BCM is a company owned by a trust for the benefit
of the children of Gene E. Phillips. Mr. Phillips serves as a representative of
his children's trust which owns BCM and, in such capacity, had, until June 2000,
substantial contact with the management of BCM and input with respect to its
performance of advisory services to IORI.

Renewal of the Advisory Agreement with BCM, was approved by the Board of
Directors on August 18, 2000. Subsequent renewals of the Advisory Agreement with
BCM do not require the approval of stockholders, but do require approval of the
Board of Directors.

Under the Advisory Agreement, BCM is required to annually formulate and
submit for Board approval a budget and business plan containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales and
purchases, borrowing activity and other investments. BCM is required to report
quarterly to the Board on IORI's performance against the business plan. In
addition, all transactions require prior Board approval, unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to BCM by the Board.

The Advisory Agreement also requires prior Board approval for the retention
of all consultants and third party professionals other than legal counsel. The
Advisory Agreement provides that BCM shall be deemed to be in a fiduciary
relationship to the stockholders and contains a broad standard governing BCM's
liability for losses incurred by IORI.

The Advisory Agreement provides for BCM to be responsible for IORI's
day-to-day operations 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% per annum of net
income.

The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is to receive an acquisition commission
for supervising the purchase or long-term lease of real estate. BCM or an
affiliate of BCM is to receive a mortgage or loan acquisition fee with respect
to the purchase of any existing mortgage loan. BCM or an affiliate of BCM also
is to receive a mortgage brokerage and equity refinancing fee for obtaining
loans or refinancing of IORI's properties. In addition, BCM receives
reimbursement of certain expenses incurred by it, in the performance of advisory
services for IORI.

The Advisory Agreement requires BCM or any affiliate of BCM to pay to IORI
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by IORI.

Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by BCM if the Operating Expenses of IORI (as defined in the
Advisory Agreement) exceed certain limits specified in the Advisory Agreement.
The effect of this limitation was to require BCM to refund $289,000 and
$336,000, of the 1999 and 1998 annual advisory fee, respectively. BCM was not
required to refund any of its 2000 advisory fees.

Additionally, if management was to request that BCM render services other
than those required by the Advisory Agreement, BCM or an affiliate of BCM would
be separately compensated for such additional services on terms to be agreed
upon from time to time. As discussed in Note 9. "Property Management," Triad
Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property
management services and, as discussed in Note 10. "Real Estate Brokerage," Regis
Realty, Inc. ("Regis"), a related party, provides, on a non-exclusive basis,
brokerage services.

F-82

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

BCM may assign the Advisory Agreement only with the prior consent of IORI.

NOTE 9. PROPERTY MANAGEMENT

Triad provides property management services for a fee of 5% or less of the
monthly gross rents collected on the residential properties and 3% or less of
the monthly gross rents collected on commercial properties under its management.
Triad subcontracts with other entities for the property-level management
services at various rates. The general partner of Triad is BCM. The limited
partners of Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS
Realty"), a related party, which is a company not affiliated with Mr. Phillips
or BCM. Triad subcontracts the property-level management and leasing of IORI's
seven office buildings and the commercial property owned by each of Tri-City and
Eton Square, to Regis, a related party, which is a company owned by GS Realty.
Regis is entitled to receive property and construction management fees and
leasing commissions in accordance with the terms of its property-level
management agreement with Triad.

NOTE 10. REAL ESTATE BROKERAGE

Regis also provides brokerage services on a non-exclusive basis. Regis is
entitled to receive a commission for property purchases and sales in accordance
with a sliding scale of total brokerage fees to be paid.

NOTE 11. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

Fees and cost reimbursements to BCM and its affiliates:

2000 1999 1998
------ ------ ----

Fees Advisory............................................... $ 664 $ 371 $329
Net income................................................ 1,362 81 --
Real estate brokerage..................................... -- 337 --
Property acquisition...................................... 417 -- --
Mortgage brokerage and equity refinancing................. -- 78 8
Property and construction management and leasing
commissions*........................................... -- 618 634
------ ------ ----
$2,443 $1,485 $971
====== ====== ====
Cost reimbursements......................................... $ 287 $ 260 $228
====== ====== ====

Fees paid to GS Realty, a related party to IORI.

2000
------

Fees Property acquisition................................... $ 925
Real estate brokerage..................................... 1,514
Property and construction management and leasing
commissions*........................................... 602
------
$3,041
======

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

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

NOTE 12. INCOME TAXES

For the years 2000, 1999 and 1998, IORI has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of

F-83

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1986, as amended (the "Code"), and as such, will not be taxed for federal income
tax purposes on that portion of its taxable income which is distributed to
stockholders, provided that at least 95% of its REIT taxable income, plus 95% of
its taxable income from foreclosure property as defined in Section 857 of the
Code, is distributed.

IORI had net income for federal income tax purposes before the application
of operating loss carryforwards in 2000 and net losses for federal income tax
purposes in 1999 and 1998. Therefore, IORI recorded no provision for income
taxes. IORI'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, 2000,
IORI's tax basis in its net assets exceeded their basis for financial statement
purposes by $1.9 million. As a result, aggregate future income for income tax
purposes will be less than such amount for financial statement purposes and IORI
would be able to maintain its REIT status without distributing 95% of its
financial statement income. Additionally, at December 31, 2000, IORI had tax net
operating loss carryforwards of $1.7 million expiring through the year 2019.

As a result of IORI's election to be treated as a REIT for income tax
purposes and its intention to distribute its REIT taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.

NOTE 13. 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 general and administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow. Items
of income that are not reflected in the segments are interest, equity in
partnerships and previous deferred gains on sale of real estate totaling $1.5
million and $1.7 million for 2000 and 1999, respectively. Expenses that are not
reflected in the segments are general and administrative expenses, non-segment
interest expense and advisory incentive sales and net income fees totaling $3.6
million and $1.2 million for 2000 and 1999, respectively. Excluded from
operating segment assets are assets of $10.2 million at December 31, 2000, and
$4.6 million at December 31, 1999, which are not identifiable with an operating
segment. There are no intersegment revenues and expenses and all business is
conducted in the United States.

Presented below is the operating income of each operating segment.

COMMERCIAL
2000 LAND PROPERTIES APARTMENTS TOTAL
---- ------- ---------- ---------- -------

Rents....................................... $ -- $ 8,200 $ 5,531 $13,731
Property operating expenses................. 9 3,786 3,174 6,969
------- ------- ------- -------
Operating income (loss)..................... $ (9) $ 4,414 $ 2,357 $ 6,762
======= ======= ======= =======
Depreciation................................ $ -- $ 1,851 $ 599 $ 2,450
Interest.................................... 186 3,131 1,762 5,079
Real estate improvements.................... -- 1,935 12 1,947
Assets...................................... 24,892 39,262 22,122 86,276

F-84

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS TOTAL
-------------- ------- ---------- ---------- -------

Sales price................................. $ 4,679 $33,500 $27,773 $65,952
Cost of sale................................ 4,291 18,594 23,477 46,362
------- ------- ------- -------
Gain on sale................................ $ 388 $14,906 $ 4,296 $19,590*
======= ======= ======= =======

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

* Excludes a $1.3 million deferred gain on the sale of a property to an
affiliate, on the affiliate's subsequent resale of the property.

COMMERCIAL
1999 PROPERTIES APARTMENTS TOTAL
---- ---------- ---------- -------

Rents................................................ $10,639 $ 5,329 $15,968
Property operating expenses.......................... 4,394 2,374 6,768
------- ------- -------
Operating income..................................... $ 6,245 $ 2,955 $ 9,200
======= ======= =======
Depreciation......................................... $ 2,111 $ 612 $ 2,723
Interest............................................. 3,802 1,856 5,658
Real estate improvements............................. 2,199 -- 2,199
Assets............................................... 56,566 29,976 86,542

COMMERCIAL
PROPERTY SALES PROPERTIES TOTAL
-------------- ---------- -------

Sales price.......................................... $ 3,200 $ 3,200
Cost of sale......................................... 2,710 2,710
------- -------
Gain on sale......................................... $ 490 $ 490
======= =======

COMMERCIAL
1998 PROPERTIES APARTMENTS TOTAL
---- ---------- ---------- -------

Rents................................................ $ 9,058 $ 5,268 $14,326
Property operating expenses.......................... 3,852 2,610 6,462
------- ------- -------
Operating income..................................... $ 5,206 $ 2,658 $ 7,864
======= ======= =======
Depreciation......................................... $ 1,573 $ 595 $ 2,168
Interest............................................. 3,898 1,858 5,756
Real estate improvements............................. 3,907 38 3,945
Assets............................................... 58,793 24,898 83,691

F-85

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14. QUARTERLY DATA

The following is a tabulation of quarterly results of operations for the
years 2000 and 1999 (unaudited).

THREE MONTHS ENDED
-----------------------------------------------
2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------

Rents.................................... $4,115 $ 3,623 $2,994 $ 2,999
Property expense......................... 1,848 1,771 1,667 1,683
------ ------- ------ -------
Operating income....................... 2,267 1,852 1,327 1,316
Interest income.......................... 7 91 108 113
Income (loss) in equity partnerships..... (46) (23) (2) 10
Gain on sale of real estate.............. 903 16,119 3,856 --
------ ------- ------ -------
864 16,187 3,962 123
Other expense............................ 2,539 3,597 2,401 2,567
------ ------- ------ -------
Net income (loss)........................ $ 592 $14,442 $2,888 $(1,128)
====== ======= ====== =======
EARNINGS PER SHARE
Net income (loss)........................ $ .39 $ 9.43 $ 1.88 $ (.67)
====== ======= ====== =======

In the first quarter of 2000, the La Monte Park Apartments were sold, a
gain on sale of real estate of $903,000 was recognized. In the second quarter of
2000, gains on sale of real estate totaling $16.1 million were recognized on the
sale of Renaissance Parc Apartments, Olympic Office Building and Saratoga Office
Building. In the third quarter of 2000, gains on sale of real estate totaling
$2.6 million were recognized on the sale of the Fambrough and Etheredge land,
Eastpoint Apartments and a $1.3 million deferred gain also was recognized on the
sale of a property by an affiliate, which it had previously purchased from IORI.

THREE MONTHS ENDED
-----------------------------------------------
1999 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------

Rents..................................... $3,728 $4,089 $4,199 $3,952
Property expense.......................... 1,672 1,622 1,783 1,691
------ ------ ------ ------
Operating income........................ 2,056 2,467 2,416 2,261
Interest income........................... 7 6 10 6
Income (loss) in equity partnerships...... 52 39 28 29
Gain on sale of real estate............... -- 213 822 490
------ ------ ------ ------
59 258 860 525
Other expense............................. 2,336 2,480 2,497 2,267
------ ------ ------ ------
Net income (loss)......................... $ (221) $ 245 $ 779 $ 519
====== ====== ====== ======
EARNINGS PER SHARE
Net income (loss)......................... $ (.14) $ .16 $ .51 $ .34
====== ====== ====== ======

In the second quarter of 1999, a gain on sale of real estate of $213,000
was recognized, IORI's share of the gain recognized by Tri-City, an equity
partnership. In the third quarter of 1999, a gain on sale of real estate of
$822,000 was recognized, IORI's share of the gain recognized by Tri-City. In the
fourth

F-86

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

quarter of 1999, a gain on sale of real estate of $490,000 was recognized from
the sale of the Town Center Shopping Center. See Note 2. "Real Estate" and Note
4. "Investment in Equity Method Partnerships."

NOTE 15. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

Olive Litigation. In February 1990, IORI, together with National Income
Realty Trust, Continental Mortgage and Equity Trust ("CMET") and TCI, three real
estate entities with, at the time, the same officers, directors or trustees and
advisor as IORI, entered into a settlement (the "Settlement") of a class and
derivative action entitled Olive et al. v. National Income Realty Trust et al.,
relating to the operation and management of each of the entities. On April 23,
1990, the Court granted final approval of the terms of the Settlement. The
Settlement was modified in 1994 (the "Modification").

On January 27, 1997, the parties entered into an Amendment to the
Modification effective January 9, 1997 (the "Olive Amendment"). The Olive
Amendment provided for the settlement of additional matters raised by
plaintiffs' counsel in 1996. The Court issued an order approving the Olive
Amendment on July 3,1997.

The Olive Amendment provided that IORI's Board retain a
management/compensation consultant or consultants to evaluate the fairness of
the BCM advisory contract and any contract of its affiliates with IORI, CMET and
TCI, including, but not limited to, the fairness to IORI, CMET and TCI of such
contracts relative to other means of administration. In 1998, the Board engaged
a management/compensation consultant to perform the evaluation which was
completed in September 1998.

In 1999, plaintiffs' counsel asserted that the Board did not comply with
the provision requiring such engagement and requested that the Court exercise
its retained jurisdiction to determine whether there was a breach of this
provision of the Olive Amendment. In January 2000, the Board engaged another
management/compensation consultant to perform the required evaluation again.
This evaluation was completed in April 2000 and was provided to plaintiffs'
counsel. The Board believes that any alleged breach of the Olive Amendment has
been fully remedied by the Board's engagement of the second consultant. Although
several status conferences have been held on this matter, there has been no
Court order resolving whether there was any breach of the Olive Amendment.

In October 2000, plaintiffs' counsel asserted that the stock option
agreement to purchase TCI shares, which was entered into by IORI and an
affiliate of IORI, American Realty Investors, Inc. ("ARI"), in October 2000 with
Gotham Partners, breached a provision of the Modification. As a result of this
assertion, IORI assigned all of its rights to purchase the TCI shares under this
stock option agreement to ARI.

The Board believes that all provisions of the Settlement, the Modification
and Olive Amendment terminated on April 28, 1999. However, in September 2000,
the Court ruled that certain provisions of the Modification continue to be
effective after the termination date. This ruling has been appealed to the
United States Court of Appeals for the Ninth Circuit by IORI and TCI.

Liquidity. Although management anticipates that IORI will generate excess
cash from operations in 2001, due to increased rental rates and occupancy at its
properties, such excess, however, will not be sufficient to discharge all of
IORI's debt obligations as they mature. Management intends to selectively sell
income producing real estate, refinance real estate and incur additional
borrowings against real estate to meet its cash requirements.

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

F-87

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16. SUBSEQUENT EVENTS

In the first quarter of 2001, IORI increased its mortgage obligation
secured by the 60,060 sq. ft., Chuck Yeager Office Building in Chantilly,
Virginia, to $5.0 million from $2.0 million. IORI received $2.9 million in net
proceeds after paying various lending fees. The new mortgage bears interest at
9.5% per annum, until February 2002, and at a variable rate thereafter, requires
monthly payments of principal and interest of $22,126 and matures January 2004.

F-88

SCHEDULE III

INCOME OPPORTUNITY REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000

GROSS AMOUNT
INITIAL COST COST CARRIED AT END OF YEAR(1)
---------------------- CAPITALIZED --------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
PROPERTY/LOCATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
----------------- ------------ ------- ------------ ------------- ------- ------------ -------
(DOLLARS IN THOUSANDS)

PROPERTIES HELD FOR INVESTMENT
APARTMENTS
Brighton Court, Midland, TX....... $ 2,490 $ 339 $ 3,051 $ -- $ 339 $ 3,051 $ 3,390
Del Mar, Midland, TX.............. 2,382 324 2,919 -- 324 2,919 3,243
Enclave, Midland, TX.............. 2,382 324 2,919 -- 324 2,919 3,243
Meridian, Midland, TX............. 2,949 1,138 4,552 -- 1,138 4,552 5,691
Signature Place, Midland, TX...... 1,949 265 2,388 -- 265 2,388 2,654
Sinclair Place, Midland, TX....... 1,624 221 1,990 -- 221 1,990 2,211
Treehouse, San Antonio, TX........ 2,673 375 2,124 258 375 2,382 2,757
OFFICE BUILDINGS
2010 Valley View, Farmers Branch,
TX............................... 1,832 120 479 2,981 120 3,460 3,580
5600 Mowry, Newark, CA............ 4,165 1,263 5,054 653 1,263 5,707 6,970
Akard Plaza, Dallas, TX........... 2,068 734 2,936 420 734 3,356 4,089
Chuck Yeager, Chantilly, VA....... 2,070 1,080 4,321 1,342 1,080 5,663 6,743
Daley Plaza, San Diego, CA........ 6,766 1,502 6,008 1,427 1,502 7,435 8,938
La Mesa Village, La Mesa, CA...... 5,744 1,709 6,836 549 1,709 7,385 9,094
Westlake Village, Westlake
Village, CA...................... 2,837 831 3,324 185 831 3,509 4,342
LAND
Frankel, Midland County, TX....... -- 44 -- -- 44 -- 44
Travelers, Farmers Branch, TX..... 12,000 24,848 -- -- 24,848 -- 24,848
------- ------- ------- ------ ------- ------- -------
$53,931 $35,117 $48,901 $7,815 $35,117 $56,716 $91,837
======= ======= ======= ====== ======= ======= =======

LIFE ON
WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATION
PROPERTY/LOCATION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------------- ------------ ------------ -------- ------------
(DOLLARS IN THOUSANDS)

PROPERTIES HELD FOR INVESTMENT
APARTMENTS
Brighton Court, Midland, TX....... $ 44 $1983 06/00 40 years
Del Mar, Midland, TX.............. 42 1983 06/00 40 years
Enclave, Midland, TX.............. 42 1983 06/00 40 years
Meridian, Midland, TX............. 124 1983 12/99 40 years
Signature Place, Midland, TX...... 35 1983 06/00 40 years
Sinclair Place, Midland, TX....... 29 1983 06/00 40 years
Treehouse, San Antonio, TX........ 749 1975 09/89 5-40 years
OFFICE BUILDINGS
2010 Valley View, Farmers Branch,
TX............................... 460 1998 09/97 5-40 years
5600 Mowry, Newark, CA............ 714 1987 12/97 3-40 years
Akard Plaza, Dallas, TX........... 306 1984 12/97 5-40 years
Chuck Yeager, Chantilly, VA....... 672 1991 01/97 5-40 years
Daley Plaza, San Diego, CA........ 1,259 1987 09/96 2-40 years
La Mesa Village, La Mesa, CA...... 784 1991 05/97 5-40 years
Westlake Village, Westlake
Village, CA...................... 300 1982 11/97 5-40 years
LAND
Frankel, Midland County, TX....... -- -- 06/00 40 years
Travelers, Farmers Branch, TX..... -- -- 06/00 40 years
------
$5,560
======

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

(1) The aggregate cost for Federal income tax purposes is $92.0 million.

F-89

INCOME OPPORTUNITY REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

2000 1999 1998
-------- ------- -------
(DOLLARS IN THOUSANDS)

Reconciliation of Real Estate
Balance at January 1,....................................... $ 96,051 $91,070 $87,125
Additions
Acquisitions and Improvements.......................... 45,577 7,890 3,945
Deductions
Sale of real estate.................................... (49,791) (2,909) --
-------- ------- -------
Balance at December 31,..................................... $ 91,837 $96,051 $91,070
======== ======= =======
Reconciliation of Accumulated Depreciation
Balance at January 1,....................................... $ 9,509 $ 7,379 $ 5,211
Additions
Depreciation........................................... 2,450 2,723 2,168
Deductions
Sale of real estate.................................... (6,399) (593) --
-------- ------- -------
Balance at December 31,..................................... $ 5,560 $ 9,509 $ 7,379
======== ======= =======

F-90

SCHEDULE IV

INCOME OPPORTUNITY REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2000

FINAL FACE
INTEREST MATURITY PRIOR AMOUNT OF CARRYING AMOUNTS OF
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS MORTGAGE MORTGAGE(1)
----------- -------- -------- ---------------------- ------ --------- ----------------------
(DOLLARS IN THOUSANDS)

JUNIOR MORTGAGE LOANS
JNC ENTERPRISES, LTD. ..... 18.0% 03/01 Interest only payments of $9,000 $1,500 $1,500
Secured by 165 acres of $22,500 due monthly. ------ ------ ------
land in The Colony, TX
$9,000 $1,500 $1,500
====== ====== ======

PRINCIPAL AMOUNT
OF LOANS SUBJECT
TO DELINQUENT
PRINCIPAL OR
DESCRIPTION INTEREST
----------- ----------------

JUNIOR MORTGAGE LOANS
JNC ENTERPRISES, LTD. ..... $ --
Secured by 165 acres of ------
land in The Colony, TX
$1,500
======

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

(1) The aggregate cost for federal income tax purposes is $1.5 million.

F-91

INCOME OPPORTUNITY REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE

2000 1999 1998
------ ---- -------
(DOLLARS IN THOUSANDS)

Balance at January 1,....................................... $ -- $-- $ 2,010
Additions
New mortgage loans........................................ 1,500 -- --
Deductions
Collections of principal.................................. -- -- (2,010)
------ --- -------
Balance at December 31,..................................... $1,500 $-- $ --
====== === =======

F-92

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)

ASSETS
Real estate held for investment............................. $693,082 $727,227
Less -- accumulated depreciation............................ (88,511) (88,187)
-------- --------
604,571 639,040
Foreclosed real estate held for sale........................ 504 1,824
Notes and interest receivable............................... 14,339 8,709
Less -- allowance for estimated losses...................... (537) (537)
-------- --------
13,802 8,172
Investment in real estate entities.......................... 23,520 15,464
Cash and cash equivalents................................... 35,320 22,323
Other assets (including $4,193 in 2001 and $10,243 in 2000
from affiliates and related parties)...................... 31,072 45,062
-------- --------
$708,789 $731,885
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and interest payable.................................. $460,275 $501,734
Other liabilities (including $2,628 in 2001 and $491 in 2000
to affiliates and related parties)........................ 25,978 23,722
-------- --------
486,253 525,456
Commitments and contingencies
Minority interest........................................... 4,225 4,369
Redeemable Preferred Stock
Series B; $.01 par value; authorized, 300,000 shares;
issued and outstanding 300,000 shares (liquidation
preference $1,500)..................................... 1,350 1,350
Embedded derivative......................................... 150 150
Stockholders' equity
Preferred Stock
Series A; $.01 par value; authorized, 6,000 shares; issued
and outstanding 5,829 shares (liquidation preference
$583).................................................. -- --
Common Stock, $.01 par value; authorized, 10,000,000 shares;
issued and outstanding 8,042,629 shares in 2001 and
8,636,354 in 2000......................................... 80 86
Paid-in capital............................................. 268,761 278,245
Accumulated distributions in excess of accumulated
earnings.................................................. (48,971) (74,712)
Unrealized (loss) on marketable equity securities of
affiliates................................................ (3,059) (3,059)
-------- --------
216,811 200,560
-------- --------
$708,789 $731,885
======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-93

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Property revenue
Rents................................................ $ 32,423 $ 35,164 $ 103,464 $ 103,855
Property expense
Property operations (including $1,910 in 2001 and
$2,896 in 2000 to affiliates and related parties).... 19,643 19,896 60,084 56,659
---------- ---------- ---------- ----------
Operating income.............................. 12,780 15,268 43,380 47,196
Other income
Interest and other................................... 1,017 936 2,275 1,928
Equity (loss) of equity investees.................... (2,164) (185) (4,529) (477)
Gain on sale of real estate.......................... 18,780 11,755 47,529 29,562
---------- ---------- ---------- ----------
17,633 12,506 45,275 31,013
Other expense
Interest............................................. 9,428 12,254 31,380 35,405
Depreciation......................................... 4,737 5,397 14,786 14,865
Advisory fee to affiliate............................ 1,267 1,353 4,208 3,915
Net income fee to affiliate.......................... 946 567 2,075 1,319
Incentive fee to affiliate........................... 1,326 -- 2,903 --
General and administrative (including $2,064 in 2001
and $1,595 in 2000 to affiliates and related
parties)........................................... 1,607 1,325 7,531 5,713
Minority interest.................................... (14) (13) 9 (30)
---------- ---------- ---------- ----------
19,297 20,883 62,892 61,187
Net income............................................. 11,116 6,891 25,763 17,022
Preferred dividend requirement......................... (7) (7) (22) (22)
---------- ---------- ---------- ----------
Net income applicable to Common shares................. $ 11,109 $ 6,884 $ 25,741 $ 17,000
========== ========== ========== ==========
Earnings per share
Net income applicable to Common shares
Basic.............................................. $ 1.29 $ .80 $ 2.98 $ 1.97
Diluted............................................ $ 1.28 $ .80 $ 2.97 $ 1.97
========== ========== ========== ==========
Average Common shares used in computing earnings per
share
Basic.............................................. 8,603,614 8,633,211 8,625,230 8,630,029
Diluted............................................ 8,653,614 8,633,211 8,675,230 8,630,029
========== ========== ========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-94

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

ACCUMULATED
DISTRIBUTIONS ACCUMULATED
COMMON STOCK IN EXCESS OF OTHER
------------------ PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- ------ -------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

BALANCE, JANUARY 1, 2001...... 8,636,354 $86 $278,245 $(74,712) $(3,059) $200,560
Net income.................. -- -- -- 25,763 -- 25,763
Fractional shares............. (525) -- -- -- -- --
Repurchase of Common Stock.... (593,200) (6) (9,484) -- -- (9,490)
Preferred dividends ($3.75 per
share)...................... -- -- -- (22) -- (22)
--------- --- -------- -------- ------- --------
BALANCE, SEPTEMBER 30, 2001... 8,042,629 $80 $268,761 $(48,971) $(3,059) $216,811
========= === ======== ======== ======= ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-95

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)

Cash Flows from Operating Activities
Rents collected........................................... $103,804 $102,445
Interest collected........................................ 1,142 594
Interest paid............................................. (30,659) (33,798)
Payments for property operations (including $1,910 in 2001
and $2,896 in 2000 to affiliates and related
parties)............................................... (59,420) (58,081)
Advisory and net income fee paid to affiliate............. (6,191) (5,741)
Incentive fee paid to affiliate........................... (1,577) --
General and administrative expenses paid (including $2,064
in 2001 and $1,595 in 2000 to affiliates and related
parties)............................................... (7,746) (6,486)
Distributions from operating cash flow of equity
investees.............................................. 1,134 236
Other..................................................... 2,571 1,917
-------- --------
Net cash provided by operating activities......... 3,058 1,086
Cash Flows from Investing Activities
Collections on notes receivable (including $6.5 million
from affiliate in 2000)................................ 2,546 15,017
Funding of notes receivable (including $12.0 million to
affiliate in 2000)..................................... (7,980) (12,000)
Acquisition of real estate (including $1,470 in 2001 and
$1,800 in 2000 to affiliates and related parties)...... (8,969) (30,531)
Real estate improvements.................................. (9,504) (9,986)
Proceeds from sale of real estate......................... 88,160 33,528
Refunds of (deposits on) pending purchases and
financings............................................. (1,078) 1,840
Contributions (to)/from equity investees.................. (8,218) 1,296
-------- --------
Net cash provided by (used in) investing
activities....................................... 54,957 (836)
Cash Flows from Financing Activities Payments on notes
payable................................................... (55,614) (89,156)
Proceeds from notes payable............................... 7,696 67,981
Deferred financing costs (including $45 in 2001 and $339
in 2000 to affiliates and related parties)............. (430) (914)
Payments from advisor..................................... 12,786 5,465
(Advance to)/from affiliate............................... 56 (3,300)
Dividends to stockholders................................. (22) (4,683)
Repurchase of Common Stock................................ (9,490) --
Sale of Common Stock under dividend reinvestment plan..... -- 90
-------- --------
Net cash used in financing activities............. (45,018) (24,517)
Net increase (decrease) in cash and cash equivalents........ 12,997 (24,267)
Cash and cash equivalents, beginning of period.............. 22,323 41,266
-------- --------
Cash and cash equivalents, end of period.................... $ 35,320 $ 16,999
======== ========
Reconciliation of net income to net cash used in operating
activities
Net income.................................................. $ 25,763 $ 17,022

F-96

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)

Adjustments to reconcile net income to net cash used in
operating activities
Depreciation and amortization............................. 14,786 14,865
Gain on sale of real estate............................... (47,529) (29,562)
Equity loss of equity investees........................... 4,529 477
Distributions from operating cash flow of equity
investees.............................................. 1,134 236
Increase in interest receivable........................... (197) (403)
Decrease in other assets.................................. 2,161 1,311
Increase (decrease) in interest payable................... 155 (482)
Increase (decrease) in other liabilities.................. 2,256 (2,378)
-------- --------
Net cash provided by operating activities......... $ 3,058 $ 1,086
======== ========
Schedule of noncash investing and financing activities Notes
payable assumed on purchase of real estate................ $ 40,776 $ 50,294
Notes payable assumed by buyer on sale of real estate....... (34,161) (16,798)
Unrealized loss on marketable equity securities of
affiliate................................................. -- (1,256)
Limited partnership interest received on sale of real
estate.................................................... 1,500 --

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-97

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

TCI is a Nevada corporation and successor to a California business trust
which was organized on September 6, 1983. TCI invests in real estate through
direct ownership, leases and partnerships. TCI also invests in mortgage loans on
real estate.

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

Certain balances for 2000 have been reclassified to conform to the 2001
presentation.

NOTE 2. REAL ESTATE

In 2001, TCI purchased the following properties:

UNITS/
ACRES/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET PRICE PAID INCURRED RATE DATE
-------- -------- ----------- -------- -------- -------- -------- --------

Second Quarter
APARTMENTS
Courtyard............ Midland, TX 133 Units $ 1,425 $ 425 $ 1,051(1) 9.25% 04/06
LAND
Solco-Valley Ranch... Dallas, TX 6.07 Acres 1,454 1,525 -- -- --
Limestone Ranch...... Lewisville, TX 10.5 Acres 505(2) -- -- -- --
Mira Lago............ Farmers Branch, TX 8.88 Acres 541(2) -- -- -- --
Third Quarter
APARTMENTS
By the Sea........... Corpus Christi, TX 153 Units 6,175 862 5,538(3) 7.07 05/09
Baywalk.............. Galveston, TX 192 Units 6,590 390 5,856(4) 7.45 02/11
Island Bay........... Galveston, TX 458 Units 20,360 3,225 16,232(4) 7.40 07/11
Marina Landing....... Galveston, TX 256 Units 12,050 518 10,912(4) 5.30(5) 01/02
LAND
Seminary West........ Fort Worth, TX 5.36 Acres 222 232 -- -- --
Fourth Quarter
LAND
Pac Trust............ Farmers Branch, TX 7.11 Acres 1,175 1,231 -- -- --

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

(1) Assumed debt.

(2) Land was received from a related party in exchange for the Glenwood
Apartments.

(3) Assumed debt of $5.4 million and financed the remaining $100,000 from the
seller.

(4) The Island Bay, Marina Landing and Baywalk Apartments were purchased in a
single transaction. TCI assumed the existing debt of $31.3 million on the
apartments, financed the remaining

F-98

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$1.7 million from the seller, and issued 30,000 shares of Series C Preferred
Stock. See Note 7. "Preferred Stock."

(5) Variable rate.

In the nine months ended September 30, 2000, TCI purchased the following
properties:

UNITS/
ACRES/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET PRICE PAID INCURRED RATE DATE
-------- -------- --------------- -------- -------- -------- -------- --------

First Quarter
APARTMENTS
Quail Creek........... Lawrence, KS 95 Units $ 3,250 $1,088 $ 2,254 7.44% 07/03
Apple Lane............ Lawrence, KS 75 Units 1,575 595 1,005 8.63 05/07
LAND
Netzer................ Collin County, TX 20 Acres 400 418 -- -- --
Lamar/Parmer.......... Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00(1)
Manhattan............. Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01(2)
DF Fund............... Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01(3)
Second Quarter
APARTMENTS
Autumn Chase.......... Midland, TX 64 Units 1,338 458 936 9.45(4) 04/05
Primrose.............. Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25(4) 03/07
Paramount Terrace..... Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01
OFFICE BUILDING
9033 Wilshire Blvd.... Los Angeles, CA 44,253 Sq. Ft. 9,225 2,536 6,861 8.07 08/09
Bay Plaza II.......... Tampa, FL 78,882 Sq. Ft. 4,825 4,786 -- -- --
LAND
Limestone Canyon II... Austin, TX 9.96 Acres 504 424 -- -- --
Third Quarter
OFFICE CENTER AND
RETAIL
Countryside
Portfolio(5)........ Sterling, VA 265,718 Sq. Ft. 44,940 4,825 36,297 7.75 12/02

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

(1) The loan was paid off in March 2001.

(2) The loan was paid off in June 2000.

(3) The property was sold in September 2000.

(4) Variable interest rate.

(5) Countryside Portfolio consists of four commercial buildings: the 133,422 sq.
ft. Countryside Retail Center, the 72,062 sq. ft. Harmon Office Building,
the 35,127 sq. ft. Mimado Office Building and the 25,107 sq. ft. Ambulatory
Surgical Center.

In 2001, TCI sold the following properties:

UNITS/ NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES SALES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ----------- -------- ---------- -----------

First Quarter
APARTMENTS
Forest Ridge............ Denton, TX 56 Units $ 2,000 $ 682 $ 1,151 $1,014
Heritage................ Tulsa, OK 136 Units 2,286 206 1,948 1,575
Park at Colonade........ San Antonio, TX 211 Units 5,800 927 4,066 1,592

F-99

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS/ NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES SALES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ----------- -------- ---------- -----------

INDUSTRIAL WAREHOUSE
Zodiac.................. Dallas, TX 35,435 Sq. Ft. 762 183 564 167
LAND
McKinney 36............. McKinney, TX 1.822 Acres 476 476 -- 355
Round Mountain.......... Austin, TX 110.0 Acres 2,560 2,455 -- 1,047
SECOND QUARTER
APARTMENTS
Bent Tree Gardens....... Addison, TX 204 Units 9,000 2,669 6,065(2) 601
Fontenelle Hills........ Bellevue, NE 338 Units 16,500 3,680 12,454(2) 4,565
Glenwood................ Addison, TX 168 Units 3,659(1) -- 2,537(2) --
McCallum Glen........... Dallas, TX 275 Units 8,450 2,633 5,004(2) 1,375(3)
OFFICE BUILDINGS
Daley................... San Diego, CA 64,425 Sq. Ft. 6,211 2,412 3,346 836
Waterstreet............. Boulder, CO 106,257 Sq. Ft. 22,250 7,126 12,949 9,154
INDUSTRIAL WAREHOUSE
Technology Trading...... Sterling, VA 197,659 Sq. Ft. 10,775 4,120 6,214 4,163
LAND
Moss Creek.............. Greensboro, NC 4.79 Acres 15 13 -- (71)
Third Quarter
APARTMENTS
McCallum Crossing....... Dallas, TX 322 Units 11,500 1,841 8,101(2) 4,485
Park Lane............... Dallas, TX 97 Units 2,750 1,526 1,103 1,827
Carseka................. Los Angeles, CA 54 Units 4,000 2,138 1,466 1,352
Sunset Lakes............ Waukegan, IL 414 Units 15,000 6,089 7,243 7,316
Oak Run................. Pasadena, TX 160 Units 5,800 1,203 4,364 2,227
OFFICE BUILDINGS
Chesapeake Center....... San Diego, CA 57,493 Sq. Ft. 6,575 3,111 2,844 204
LAND
Eagle Crest............. Farmers Branch, TX 4.41 Acres 300 291 -- (215)

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

(1) The Glenwood Apartments were exchanged with a related party for two parcels
of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago.

(2) Debt assumed by purchaser.

(3) Excludes a $1.5 million deferred gain from a limited partnership interest in
the sold property.

F-100

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the nine months ended September 30, 2000, TCI sold the following
properties:

UNITS/ROOMS/ SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION SQUARE FEET PRICE RECEIVED DISCHARGED SALE
-------- -------- -------------- ------- -------- ---------- -------

First Quarter
APARTMENTS
Hunters Bend....................... San Antonio, TX 96 Units $ 1,683 $ 418 $1,127(1) $ 572
Westgate of Laurel................. Laurel, MD 218 Units 11,290 2,599 7,525(1) 3,575
Second Quarter
APARTMENTS
Apple Creek........................ Dallas, TX 216 Units 4,300 2,155 1,723 3,240
Villas at Fairpark................. Los Angeles, CA 49 Units 3,435 792 2,386 1,188
HOTEL
Chateau Charles.................... Lake Charles, LA 245 Rooms 1,000 928 -- 633
Third Quarter
APARTMENTS
Villas at Countryside.............. Sterling, VA 102 Units 8,100 2,686 5,334(1) 1,520
Eagle Rock......................... Los Angeles, CA 99 Units 5,600 1,967 3,246 1,021
Woodbridge......................... Denver, CO 194 Units 6,856 3,328 2,845 3,796
Ashley Crest....................... Houston, TX 168 Units 3,950 1,102 2,812(1) 706
OFFICE BUILDING/WAREHOUSE
Brookfield Corporate Center........ Chantilly, VA 63,504 Sq. Ft. 4,850 1,729 2,838 1,369
Shady Trail........................ Dallas, TX 42,900 Sq. Ft. 900 340 521 206
LAND
McKinney(2)........................ McKinney, TX 255 Acres 8,783 5,035 4,423 2,091
Allen(3)........................... Allen, TX 5.49 Acres 370 86 281 184

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

(1) Debt assumed by purchaser.

(2) The McKinney land sale included three parcels of land: the 20 acre Netzer
land; the 79.54 acre DF Fund land; and the 156.19 acre OPUBCO land.

(3) The Allen land consisted of a partial sale of three parcels of land: a 2.62
acre tract of the Stacy Road land; a 2.23 acre tract of the Sandison land;
and a .64 acre tract of the Whisenant land.

Construction Projects. In August 2001, TCI obtained a financing commitment
of $13.0 million and commenced construction of a 252 unit apartment complex on
the Limestone Ranch land parcel in Lewisville, Texas. The mortgage bears
interest at a variable rate, currently 4.7% per annum, requires monthly payments
of interest only and matures December 2003. The development is expected to cost
$16.3 million and is expected to be completed by May 2002. As of October 2001,
$3.3 million has been funded.

In July 2001, TCI commenced construction of an 80 unit apartment complex on
the Watersedge land parcel in Gulfport, Mississippi. The development is expected
to cost a total of $5.0 million and is expected to be completed by April 2002.
As of October 2001, TCI has paid a total of $640,000.

NOTE 3. NOTES AND INTEREST RECEIVABLE

In March 2001, TCI funded a $3.5 million mortgage loan secured by a second
lien on a retail center in Montgomery County, Texas. In June 2001, an additional
$1.5 million was funded. The note receivable bears interest at 16.0% per annum,
requires monthly interest only payments of $67,000 and matured in

F-101

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

September 2001. In October 2001, TCI extended the loan until February 2002,
receiving $100,000 as an extension fee.

In June 2001, a mortgage loan with a principal balance of $2.5 million was
paid off including accrued but unpaid interest.

In July 2001, TCI funded a $1.7 million mortgage loan secured by a second
lien on 44.6 acres of unimproved land in Fort Worth, Texas. The note receivable
bears interest at 16.0% per annum, requires monthly payments of accrued interest
beginning September 2001 and each month thereafter and matures January 2002.

In August 2001, TCI agreed to fund up to $5.6 million secured by 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
matures in January 2003. As of October 2001, TCI has funded a total of $1.3
million.

In September 2001, a mortgage loan in the amount of $3.0 million matured.
TCI agreed to extend the loan until November 2001 accepting a $750,000 loan
principal paydown.

In October 2001, TCI funded a $4.0 million loan secured by a second lien on
a 375,752 sq. ft. office building in St. Louis, Missouri. The note receivable
bears interest at 9.0% per annum, requires monthly interest only payments of
$30,000 and matures in February 2002.

NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES

In February 2001, TCI entered into a joint venture with UBM
Liegenschaftsverwertung GmbH ("UBM"), an Austrian limited liability company, to
invest in the construction and ownership of a 165 room hotel in Wroclaw, Poland.
UBM invested 2.0 million Euro dollars ($1.8 million) and TCI invested 4.0
million Euro dollars ($3.6 million) and guaranteed a 16 million Euro dollars
($15.0 million) mortgage loan for the project. TCI holds a 66.7% interest.
Construction for the project began in the fall of 2000 and completion of the
hotel is scheduled for December 2001.

In March 2001, in conjunction with the sale of the 211 unit Park at
Colonade Apartments in San Antonio, Texas, TCI received a 23% limited partner
interest in the acquiring partnership. TCI is to receive payments of $5,000
monthly from the partnership, a $50,000 distribution in June 2001 which was
received and its remaining investment of $500,000 in March 2002. In July 2001,
TCI assigned its limited partnership interest to the general partner, receiving
a discounted payoff of $490,000. In conjunction with this assignment and receipt
of the distribution in July, TCI recognized a previously deferred gain on the
sale of the apartments of $540,000.

In June 2001, in conjunction with the sale of the 275 unit McCallum Glen
Apartments in Dallas, Texas, TCI received a 30% limited partner interest in the
acquiring partnership. TCI is to receive payments of $12,500 monthly from the
partnership and its remaining investment of $1.5 million in June 2003.

In July 2001, TCI entered into a partnership to construct a 392 lot, single
family subdivision in Tarrant County, Texas. TCI will invest $4.4 million cash
in the partnership and the partnership shall obtain a $7.0 million mortgage loan
for the project. TCI will hold a 24% interest. As of October 2001, TCI has
invested $3.3 million in the partnership.

In October 2001, TCI entered into a partnership agreement to construct a
248 unit apartment complex in Arlington, Texas, with Capstone American
Properties. TCI will invest $2.1 million cash in the partnership and the
partnership shall obtain a $13.5 million mortgage loan for the project. TCI will
hold a 24% interest. As of October 2001, TCI has invested $1.7 million in the
partnership.

F-102

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Prior to the first quarter of 2001, TCI accounted for its investment in
American Realty Investors, Inc. ("ARI"), an affiliate, as an available for sale
marketable security. In the first quarter of 2001, TCI began accounting for its
investment in ARI using the equity method.

NOTE 5. INVESTMENTS IN EQUITY INVESTEES

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

TCI accounts for its investment in IORI and ARI and the joint venture
partnerships using the equity method.

TCI's investment in real estate entities, accounted for using the equity
method, at September 30, 2001 was as follows:

PERCENTAGE OF CARRYING VALUE OF EQUIVALENT INVESTEE MARKET VALUE
TCI'S OWNERSHIP AT INVESTMENT AT BOOK VALUE AT OF INVESTMENT AT
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
INVESTEE 2001 2001 2001 2001
-------- ------------------ ----------------- ------------------- ----------------

IORI.................. 24.0% $ 3,648 $ 8,564 $ 4,494
ARI................... 6.3% 10,132 5,149 8,276
------- ------- -------
13,780 $13,713 $12,770
======= =======
Other................. 9,740
-------
$23,520
=======

The difference between the carrying value of TCI's investment and the
equivalent investee book value is being amortized over the life of the
properties held by each investee.

Management continues to believe that the market value of each of IORI and
ARI undervalues their assets and, therefore, TCI may continue to increase its
ownership in these entities.

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

Revenues.................................................... $136,366
Equity in income of partnerships............................ 9,184
Property operating expenses................................. 126,118
Depreciation................................................ 14,103
Interest expense............................................ 60,698
--------
(Loss) before gains on sale of real estate.................. (55,369)
Gain on sale of real estate................................. 62,860
--------
Net income.................................................. $ 7,491
========

TCI's share of equity investees' loss before gains on the sale of real
estate was $4.5 million for the nine months ended September 30, 2001, and its
share of equity investees' gains on sale of real estate was $4.0 million for the
nine months ended September 30, 2001.

F-103

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. NOTES AND INTEREST PAYABLE

In 2001, TCI financed the following property:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ACRES INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ---------- -------- ---------- -------- -------- --------

Second Quarter
LAND
Red Cross................... Dallas, TX 2.89 Acres $4,500 $-- $4,328 12.5%(1) 10/02

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

(1) Variable rate.

In the first nine months of 2000, TCI financed/refinanced the following
properties:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION UNITS/SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ----------------- -------- ---------- -------- -------- --------

First Quarter
APARTMENTS
Crescent Place............. Houston, TX 120 Units $2,165 $1,722 $ 370 7.04%(1) 03/30
Madison @ Bear Creek....... Houston, TX 180 Units 3,500 2,625 730 7.04(1) 03/30
OFFICE BUILDINGS
Westgrove Air Plaza........ Addison, TX 78,326 Sq. Ft. 2,087 1,180 742 9.02(1) 01/05
Venture Center............. Atlanta, GA 38,772 Sq. Ft. 2,700 1,113 1,592 8.75 03/10
Second Quarter
APARTMENTS
Country Crossing........... Tampa, FL 227 Units 3,825 2,645 985 9.65(1) 06/03
Fontenelle Hills(2)........ Bellevue, NE 338 Units 2,010 -- 1,967 8.51 06/10
OFFICE BUILDING
Technology Trading......... Sterling, VA 197,659 Sq. Ft. 6,300 3,881 2,065 8.26(1) 05/05
WAREHOUSES
5360 Tulane................ Atlanta, GA 67,850 Sq. Ft. 375 208 134 9.65(1) 04/03
Space Center............... San Antonio, TX 101,500 Sq. Ft. 1,125 691 402 9.65(1) 04/03
THIRD QUARTER
OFFICE BUILDING
Jefferson.................. Washington, DC 71,876 Sq. Ft. 9,875 8,955 557 9.50 07/25

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

(1) Variable interest rate.

(2) Second lien on property.

NOTE 7. PREFERRED STOCK

In conjunction with the purchase of the Baywalk, Island Bay and Marina
Landing Apartments, TCI issued 30,000 share of Series C Preferred Stock. TCI's
Series C Cumulative Convertible Preferred Stock consists of a maximum of 30,000
shares with a liquidation preference of $100.00 per share. Dividends are payable
at the rate of $5.00 per share or $1.25 per quarter through September 2002, then
$6.00 per share or $1.50 per quarter through September 2003, then $7.00 per
share or $1.75 per quarter thereafter. After September 30, 2006, the Series C
Preferred Stock may be converted into Common Stock at 90% of the daily average
closing price of the Common Stock for the prior five trading days. The Series C
Preferred Stock is redeemable for cash at any time at the option of TCI.

F-104

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. 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 each based on its operating income and cash flow. Items of income
not reflected in the segments are interest, equity in partnerships and gains on
sales of real estate which totaled $17.6 million and $45.3 million for the three
and nine months ended September 30, 2001, and $12.5 million and $31.0 million
for the three and nine months ended September 30, 2000. Expenses not reflected
in the segments are general and administrative expenses, minority interest,
incentive fees, advisory fees, and net income fees which totaled $5.1 million
and $16.7 million for the three and nine months ended September 30, 2001, and
$3.2 million and $10.9 million for the three and nine months ended September 30,
2000. Also excluded from segment assets are assets of $100.8 million at
September 30, 2001, and $83.5 million at September 30, 2000, which are not
identifiable with an operating segment. There are no intersegment revenues and
expenses.

Presented below is the operating income of each operating segment for the
three and nine months ended September 30, 2001 and 2000, and each segment's
assets at September 30.

THREE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2001 LAND PROPERTIES APARTMENTS HOTELS TOTAL
------------------ ------- ---------- ---------- ------- --------

Rents............................ $ 141 $ 17,097 $ 13,440 $ 1,745 $ 32,423
Property operating expenses...... 355 9,469 8,636 1,183 19,643
------- -------- -------- ------- --------
Operating income................. $ (214) $ 7,628 $ 4,804 $ 562 $ 12,780
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 3,126 $ 1,313 $ 298 $ 4,737
Interest......................... 516 5,049 3,562 301 9,428
Real estate improvements......... 239 2,632 2,932 26 5,829
Assets........................... 60,902 312,100 212,729 19,342 605,073

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS TOTAL
-------------- ------- ---------- ---------- --------

Sales price...................... $ 300 $ 6,575 $ 39,050 $ 45,925
Cost of sales.................... (515) (6,371) (21,843) (28,729)
------- -------- -------- --------
Gain on sale..................... $ (215) $ 204 $ 17,207 $ 17,196(1)
======= ======== ======== ========

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

(1) Excludes TCI's share of gains on sale of real estate recognized by an equity
investee of $1.0 million and a previously deferred gain on the sale of the
Park at Colonnade Apartments of $540,000.

NINE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2001 LAND PROPERTIES APARTMENTS HOTELS TOTAL
------------------ ------- ---------- ---------- ------- --------

Rents............................ $ 465 $ 52,701 $ 45,274 $ 5,024 $103,464
Property operating expenses...... 920 28,621 27,011 3,532 60,084
------- -------- -------- ------- --------
Operating income................. $ (455) $ 24,080 $ 18,263 $ 1,492 $ 43,380
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 9,666 $ 4,289 $ 831 $ 14,786
Interest......................... 1,345 16,877 12,159 999 31,380
Real estate improvements......... 1,332 4,917 3,013 242 9,504
Assets........................... 60,902 312,100 212,729 19,342 605,073

F-105

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS TOTAL
-------------- ------- ---------- ---------- --------

Sales price...................... $ 3,351 $ 46,573 $ 86,745 $136,669
Cost of sales.................... (2,235) (32,049) (58,816) (93,100)
------- -------- -------- --------
Gain on sale..................... $ 1,116 $ 14,524 $ 27,929 $ 43,569(1)
======= ======== ======== ========

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

(1) Excludes TCI's share of gains on sale of real estate recognized by an equity
investee of $4.0 million.

THREE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2000 LAND PROPERTIES APARTMENTS HOTELS TOTAL
------------------ ------- ---------- ---------- ------- --------

Rents............................ $ 194 $ 15,136 $ 19,178 $ 656 $ 35,164
Property operating expenses...... 194 8,133 11,562 7 19,896
------- -------- -------- ------- --------
Operating income................. $ -- $ 7,003 $ 7,616 $ 649 $ 15,268
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 2,819 $ 2,328 $ 250 $ 5,397
Interest......................... 837 5,555 5,464 398 12,254
Real estate improvements......... 94 3,358 172 113 3,737
Assets........................... 57,879 329,676 245,486 19,504 652,545

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS TOTAL
-------------- ------- ---------- ---------- --------

Sales price...................... $ 9,153 $ 5,750 $ 24,506 $ 39,409
Cost of sales.................... (6,878) (4,175) (17,463) (28,516)
------- -------- -------- --------
Gain on sale..................... $ 2,275 $ 1,575 $ 7,043 $ 10,893(1)
======= ======== ======== ========

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

(1) Excludes TCI's share of gains recognized by an equity affiliate of $862,000.

NINE MONTHS ENDED COMMERCIAL
SEPTEMBER 30, 2000 LAND PROPERTIES APARTMENTS HOTELS TOTAL
------------------ ------- ---------- ---------- ------- --------

Rents............................ $ 532 $ 44,534 $ 57,137 $ 1,652 $103,855
Property operating expenses...... 468 22,690 33,356 145 56,659
------- -------- -------- ------- --------
Segment operating income......... $ 64 $ 21,844 $ 23,781 $ 1,507 $ 47,196
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 7,895 $ 6,226 $ 744 $ 14,865
Interest......................... 2,812 15,410 16,012 1,171 35,405
Real estate improvements......... 84 7,768 1,270 864 9,986
Assets........................... 57,879 329,676 245,486 19,504 652,545

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS HOTELS TOTAL
-------------- ------- ---------- ---------- ------- --------

Sales price...................... $ 9,153 $ 5,750 $ 45,214 $ 1,000 $ 61,117
Cost of sales.................... (6,878) (4,175) (29,596) (367) (41,016)
------- -------- -------- ------- --------
Gain on sale..................... $ 2,275 $ 1,575 $ 15,618 $ 633 $ 20,101(1)
======= ======== ======== ======= ========

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

(1) Excludes a $4.8 million previously deferred gain on the sale of land and
TCI's share of gains recognized by an equity affiliate of $4.6 million.

F-106

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9. COMMITMENTS AND CONTINGENCIES

Liquidity. Although management anticipates that TCI will generate excess
cash from operations in 2001, due to increased rental rates and occupancy at its
properties, such excess, however, will not be sufficient to discharge all of
TCI's debt obligations as they mature. Management intends to selectively sell
income producing real estate, refinance real estate and incur additional
borrowings against real estate to meet its cash requirements.

Commitments. In January 2001, TCI exercised its option under the loan
documents to extend the maturity date of three loans with a principal balance of
$30.6 million secured by three office buildings in New Orleans, Louisiana. The
lender has disputed TCI's right to extend the loans. This dispute is subject to
litigation pending in the United States District Court for the Eastern District
of Louisiana.

Litigation. TCI is involved in various lawsuits arising in the ordinary
course of business. Except for the Olive Litigation (see Part II. Other
Information, Item 1. "Legal Proceedings"), management is of the opinion that the
outcome of these lawsuits will have no material impact on TCI's financial
condition, results of operations or liquidity.

NOTE 10. INCOME TAXES

Financial statement income varies from taxable income principally due to
the accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
TCI had a loss for federal income tax purposes (after utilization of operating
loss carryforwards) in the three and nine months ended September 30, 2001 and
2000; therefore, it recorded no provision for income taxes.

F-107

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
Transcontinental Realty Investors, Inc.

We have audited the accompanying consolidated balance sheets of
Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2000
and 1999 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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.

As described in Note 20, Transcontinental Realty Investors, Inc.'s
management has indicated its intent to both sell income producing properties and
refinance or extend debt secured by real estate, to meet its liquidity needs.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2000
and 1999, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with generally accepted accounting principles.

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

BDO SEIDMAN, LLP

Dallas, Texas
March 20, 2001

F-108

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS
Real estate held for investment............................. $727,227 $684,732
Less -- accumulated depreciation............................ (88,187) (84,986)
-------- --------
639,040 599,746
Foreclosed real estate held for sale........................ 1,824 1,790
Notes and interest receivable
Performing................................................ 8,709 11,691
Nonperforming, nonaccruing................................ -- 382
-------- --------
8,709 12,073
Less -- allowance for estimated losses...................... (537) (543)
-------- --------
8,172 11,530
Investment in real estate entities.......................... 5,287 2,310
Investment in marketable equity securities of affiliate, at
market.................................................... 10,177 13,954
Cash and cash equivalents................................... 22,323 41,266
Other assets (including $14,058 in 2000 and $10,585 in 1999
from affiliates and related parties)...................... 45,062 43,599
-------- --------
$731,885 $714,195
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and interest payable.................................. $501,734 $503,406
Other liabilities (including $1,580 in 2000 and $2,356 in
1999 to affiliates and related parties)................... 23,722 31,280
-------- --------
525,456 534,686
Commitments and contingencies
Minority interest........................................... 4,369 397
Series B; $.01 par value; authorized, 300,000 shares;
issued and outstanding 300,000 shares (liquidation
preference $1,500)..................................... 1,500 --
Stockholders' equity
Preferred Stock
Series A; $.01 par value; authorized, 6,000 shares; issued
and outstanding 5,829 shares (liquidation preference
$583).................................................. -- --
Common Stock, $.01 par value; authorized, 10,000,000 shares;
issued and outstanding 8,636,354 shares in 2000 and
8,626,611 shares in 1999.................................. 86 86
Paid-in capital............................................. 278,245 278,119
Accumulated distributions in excess of accumulated
earnings.................................................. (74,712) (99,811)
Unrealized (loss) gain on marketable equity securities of
affiliate................................................. (3,059) 718
-------- --------
200,560 179,112
-------- --------
$731,885 $714,195
======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-109

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Property revenue
Rents (including $2,263 in 2000 and $1,653 in 1999 from
affiliates and related parties)..................... $ 139,357 $ 82,039 $ 69,829
Property expense
Property operations (including $4,321 in 2000, $2,864
in 1999 and $2,753 in 1998 to affiliates and related
parties)............................................ 78,061 44,497 38,282
---------- ---------- ----------
Operating income............................... 61,296 37,542 31,547
Other income
Interest and other income.............................. 2,370 453 807
Income (loss) from equity investees.................... (556) 102 (68)
Gain on sale of real estate............................ 50,550 40,517 12,940
---------- ---------- ----------
52,364 41,072 13,679
Other expense
Interest............................................... 47,997 27,697 22,797
Depreciation........................................... 19,702 11,694 10,691
Advisory fee to affiliate.............................. 5,258 3,219 1,962
Net income fee to affiliate............................ 2,415 2,450 558
General and administrative (including $2,146 in 2000,
$1,367 in 1999 and $1,121 in 1998 to affiliates).... 8,506 3,335 2,312
---------- ---------- ----------
83,878 48,395 38,320
---------- ---------- ----------
Net income............................................... 29,782 30,219 6,906
Preferred dividend requirement........................... (22) (30) (1)
---------- ---------- ----------
Net income applicable to Common shares................... $ 29,760 $ 30,189 $ 6,905
========== ========== ==========
Basic and diluted earnings per share
Net income applicable to Common shares................... $ 3.45 $ 7.05 $ 1.78
========== ========== ==========
Weighted average Common shares used in computing earnings
per share.............................................. 8,631,621 4,283,574 3,876,797
========== ========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-110

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

BALANCE, JANUARY 1, 1998............. 3,889,200 $39 $217,688 $(131,594) $ -- $ 86,133
Issuance of Series A Preferred Stock
5,829 shares....................... -- -- 583 -- -- 583
Repurchase of Common Stock........... (21,950) -- (336) -- -- (336)
Sale of Common Stock under dividend
reinvestment plan.................. 11,213 -- 152 -- -- 152
Common dividends ($.60 per share).... -- -- -- (2,306) -- (2,306)
Net income........................... -- -- -- 6,906 -- 6,906
--------- --- -------- --------- ------- --------
BALANCE, DECEMBER 31, 1998........... 3,878,463 39 218,087 (126,994) -- 91,132
Comprehensive income
Unrealized gain on market-able
equity securities of
affiliate....................... -- -- -- -- 718 718
Net income......................... -- -- -- 30,219 -- 30,219
--------
30,937
Sale of Common Stock under dividend
reinvestment plan.................. 4,578 -- 53 -- -- 53
Shares issued in conjunction with
acquisition of Continental Mortgage
and Equity Trust................... 4,743,570 47 59,979 -- -- 60,026
Common dividends ($.60 per share).... -- -- -- (3,006) -- (3,006)
Preferred dividends ($5.00 per
share)............................. -- -- -- (30) -- (30)
--------- --- -------- --------- ------- --------
BALANCE, DECEMBER 31, 1999........... 8,626,611 86 278,119 (99,811) 718 179,112
Comprehensive income
Unrealized (loss) on market-able
equity securities of
affiliate....................... -- -- -- -- (3,777) (3,777)
Net income......................... -- -- -- 29,782 -- 29,782
--------
26,005
Sale of Common Stock under dividend
reinvestment plan.................. 9,743 -- 126 -- -- 126
Common dividends ($.54 per share).... -- -- -- (4,661) -- (4,661)
Preferred dividends ($3.77 per
share)............................. -- -- -- (22) -- (22)
--------- --- -------- --------- ------- --------
BALANCE, DECEMBER 31, 2000........... 8,636,354 $86 $278,245 $ (74,712) $(3,059) $200,560
========= === ======== ========= ======= ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-111

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---------- --------- ---------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Rents collected (including $1,040 in 1999 from
affiliates)............................................ $ 136,767 $ 81,244 $ 69,307
Interest collected (including $411 in 2000 from
affiliates)............................................ 1,008 449 807
Interest paid............................................. (45,142) (25,543) (21,179)
Payments for property operations (including $4,321 in
2000, $2,864 in 1999 and $2,753 in 1998 to affiliates
and related parties)................................... (80,148) (44,039) (39,474)
Advisory and net income fee paid to affiliate............. (10,486) (3,958) (4,125)
General and administrative expenses paid (including $2,146
in 2000, $1,367 in 1999 and $1,121 in 1998 to
affiliates)............................................ (7,936) (3,488) (2,705)
Distributions from operating cash flow of equity
investees.............................................. 172 331 482
Other..................................................... 4,676 (905) 306
--------- -------- --------
Net cash provided by (used in) operating activities.... (1,089) 4,091 3,419
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable (including $12,000 in 2000
from affiliates)....................................... 20,532 37 2,892
Funding of notes receivable (including $12,000 in 2000
from affiliates)....................................... (17,500) -- (149)
Real estate improvements and construction................. (14,664) (21,826) (9,595)
Proceeds from sale of real estate......................... 79,869 104,210 31,807
Refunds/(deposits) on pending purchase.................... 1,887 (2,912) (3,796)
Deferred merger costs..................................... -- -- (519)
Acquisitions of real estate (including $2,741 in 2000,
$1,815 in 1999 and $3,468 in 1998 to affiliates and
related parties)....................................... (32,450) (45,510) (77,395)
Distributions from investing cash flow of equity
investees.............................................. 1,296 4,709 701
Contributions to equity investees......................... (3,974) (111) (21)
--------- -------- --------
Net cash provided by (used in) investing activities.... 34,996 38,597 (56,075)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable................................. $(107,547) $(99,163) $(34,555)
Proceeds from notes payable............................... 63,009 91,959 81,058
Reimbursements to advisor................................. (2,634) -- (61)
Dividends paid............................................ (4,683) (3,036) (6,196)
Shares of Common Stock repurchased........................ -- -- (336)
Deferred financing costs (including ($464 in 2000, $422 in
1999 and $341 in 1998 to affiliates)................... (1,121) (1,740) (1,634)
Sale of Common Stock under dividend reinvestment plan..... 126 53 152
--------- -------- --------
Net cash provided by (used in) financing activities.... (52,850) (11,927) 38,428
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (18,943) 30,761 (14,228)
Cash and cash equivalents, beginning of year................ 41,266 10,505 24,733
--------- -------- --------
Cash and cash equivalents, end of year...................... $ 22,323 $ 41,266 $ 10,505
========= ======== ========

F-112

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---------- --------- ---------
(DOLLARS IN THOUSANDS)

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES
Net income................................................ $ 29,782 $ 30,219 $ 6,906
Adjustments to reconcile net income to net cash provided
by (used in) operating activities Depreciation and
amortization........................................... 19,702 13,470 11,488
Equity in (income) loss of equity investees............... 556 (102) 68
Gain on sale of real estate............................... (50,550) (40,517) (12,940)
Distributions from operating cash flow of equity.......... 172 331 482
(Increase) in interest receivable......................... (28) (1) --
(Increase) decrease in other assets....................... (1,463) (7,093) (2,036)
Increase in interest payable.............................. 299 375 821
Increase (decrease) in other liabilities.................. 441 7,409 (1,370)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.... $ (1,089) $ 4,091 $ 3,419
========= ======== ========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Carrying value of real estate acquired through foreclosure
in satisfaction of notes receivable.................... $ 318 $ -- $ 2,514
Notes payable from purchase of real estate................ 58,949 6,848 --
Series A Preferred Stock issued in conjunction with
purchase of real estate................................ -- -- 583
Series B Preferred Stock issued in conjunction with
purchase of real estate................................ 1,500 -- --
Debt assumed from sales of real estate.................... 16,798 9,680 --
ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST
Carrying value of notes and interest receivable........... $ -- $ 390 $ --
Carrying value of real estate............................. -- 258,787 --
Carrying value of equity investees........................ -- 267 --
Carrying value of investment in marketable equity
securities of affiliate................................ -- 13,236 --
Carrying value of other assets............................ -- 20,640 --
Carrying value of notes and interest payable.............. -- (220,860) --
Carrying value of other liabilities....................... -- (13,242) --

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-113

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of Transcontinental
Realty Investors, Inc. and consolidated entities have been prepared in
conformity with generally accepted accounting principles, 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 1999 and 1998 have been reclassified to conform to the
2000 presentation.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and company business. Transcontinental Realty Investors, Inc.
("TCI"), a Nevada corporation, is successor to a California business trust which
was organized on September 6, 1983, and commenced operations on January 31,
1984. TCI invests in real estate through direct ownership, leases and
partnerships and it also invests in mortgage loans on real estate.

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

Accounting estimates. In the preparation of Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
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 from those estimates.

Interest recognition on notes receivable. It is TCI's policy to cease
recognizing interest income 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. Valuation allowances are 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 Company's investment in the
note exceeds the estimated fair value of the collateral securing such note.

Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") 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 of 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. 121 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 is recorded as an adjustment
to the property's carrying

F-114

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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"). 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.

Investment in noncontrolled equity investees. The equity method is used to
account for investments in partnerships which TCI does not control and for its
investment in the shares of common stock of Income Opportunity Realty Investors,
Inc., ("IORI"). 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 advances and decreased by a proportionate share of the
investee's operating losses and distributions received.

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 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 TCI's interest
in the collateral property was used. For marketable equity securities, fair
value was based on the year end closing market price of the 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 debt instruments purchased with an original maturity of
three months or less were considered to be cash equivalents.

Earnings per share. Income per share is presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Income per share is computed based upon the weighted average number of shares of
Common Stock outstanding during each year. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the year. Dilutive common equivalent shares
consist of stock options.

NOTE 2. ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST

On November 30, 1999, TCI acquired all of the outstanding shares of
beneficial interest of Continental Mortgage and Equity Trust ("CMET") in a tax
free exchange of shares. TCI issued 1.181 shares of its Common Stock for each
outstanding CMET share. The acquisition was accounted for as a purchase.

The consolidation of TCI's accounts with those of CMET resulted in an
increase in TCI's net real estate of $258.8 million. This amount was allocated
to the individual real estate assets based on their relative individual fair
market values.

F-115

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pro forma operating results for 1999 and 1998, as if CMET had been acquired
on January 1, of each year would have been:

1999 1998
-------- --------

Revenues.................................................... $143,579 $134,879
Property operating expenses................................. (79,295) (75,650)
Interest.................................................... (47,273) (44,159)
Depreciation................................................ (19,150) (17,954)
Advisory fee................................................ (4,952) (3,282)
Net income fee.............................................. (3,083) (662)
General and administrative expenses......................... (5,442) (4,617)
Provision for losses........................................ -- 506
-------- --------
(Loss) from operations...................................... (15,616) (10,939)
Equity in income of investees............................... 302 445
Gains on sale of real estate................................ 47,117 18,642
-------- --------
Net income.................................................. $ 31,803 $ 8,148
======== ========

NOTE 3. REAL ESTATE

In 2000, TCI purchased the following properties:

UNITS/
SQUARE FEET/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION ACRES PRICE PAID INCURRED RATE DATE
-------- -------- --------------- -------- -------- -------- -------- --------

APARTMENTS
Apple Lane............. Lawrence, KS 75 Units $ 1,575 $ 595 $ 1,005 8.63% 05/07
Autumn Chase........... Midland, TX 64 Units 1,338 458 936 9.45(1) 04/05
Paramount Terrace...... Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01
Primrose............... Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25(1) 03/07
Quail Creek............ Lawrence, KS 95 Units 3,250 1,088 2,254 7.44 07/03
OFFICE BUILDING
9033 Wilshire.......... Los Angeles, CA 44,253 Sq. Ft. 9,225 2,536 6,861 8.07 08/09
Bay Plaza II........... Tampa, FL 78,882 Sq. Ft. 4,825 4,786 -- -- --
Brandeis............... Omaha, NE 319,234 Sq. Ft. 14,000 4,052 8,750 9.5 11/03
Countryside
Portfolio(2)......... Sterling, VA 265,718 Sq. Ft. 44,940 4,825 36,297 7.75 12/02
LAND
DF Fund................ Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01(3)
Folsom................. Dallas, TX 36.38 Acres 1,750 1,738 -- -- --
Lamar/Parmer........... Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00(4)
Limestone Canyon II.... Austin, TX 9.96 Acres 504 424 -- -- --
Manhattan.............. Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01(5)
Netzer................. Collin County, TX 20 Acres 400 418 -- -- --

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

(1) Variable interest rate.

(2) The Countryside Portfolio consisted of four commercial buildings: the
133,422 sq. ft. Countryside Retail Center, the 72,062 sq. ft. Harmon Office
Building, the 35,127 sq. ft. Mimado Office Building and the 25,107 sq. ft.
Ambulatory Surgical Center.

F-116

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) The DF Fund land was sold in September 2000.

(4) The mortgage loan was paid off in March 2001.

(5) The mortgage loan was paid off in June 2000.

In 2000, TCI sold the following properties:

UNITS/
SQUARE FEET/ SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION ROOMS/ACRES PRICE RECEIVED DISCHARGED SALE
-------- -------- -------------- ------- -------- ---------- -------

APARTMENTS
Apple Creek...................... Dallas, TX 216 Units $ 4,300 $2,155 $1,723 $3,240
Ashley Crest..................... Houston, TX 168 Units 3,950 1,102 2,812(1) 706
Country Bend..................... Fort Worth, TX 166 Units 4,700 1,894 2,445 1,097
Crescent Place................... Houston, TX 120 Units 3,485 1,034 2,151 793
Eagle Rock....................... Los Angeles, CA 99 Units 5,600 1,967 3,246 1,021
Fountain Village................. Tucson, AZ 410 Units 11,700 3,088 7,569 5,086
Hunters Bend..................... San Antonio, TX 96 Units 1,683 418 1,127(1) 572
San Bernardino,
Parkwood Knoll................... CA 178 Units 9,100 3,007 5,491 2,967
Shadow Run....................... Pinellas Park, FL 276 Units 12,350 2,521 8,653 5,367
Villa Piedra..................... Los Angeles, CA 132 Units 7,400 2,348 4,686 2,588
Villas at Countryside............ Sterling, VA 102 Units 8,100 2,686 5,334(1) 1,520
Villas at Fairpark............... Los Angeles, CA 49 Units 3,435 792 2,386 1,188
Westgate of Laurel............... Laurel, MD 218 Units 11,290 2,599 7,525(1) 3,575
Woodbridge....................... Denver, CO 194 Units 6,856 3,328 2,845 3,796
OFFICE BUILDING
Brookfield Corporate Center...... Chantilly, VA 63,504 Sq. Ft. 4,850 1,729 2,838 1,455
INDUSTRIAL WAREHOUSE
Shady Trail...................... Dallas, TX 42,900 Sq. Ft. 900 340 521 206
HOTEL
Chateau Charles.................. Lake Charles, LA 245 Rooms 1,000 928 -- 633
LAND
Allen(2)......................... Allen, TX 5.49 Acres 370 86 281 184
McKinney(3)...................... McKinney, TX 255 Acres 8,783 5,035 4,423 2,091
Watters/Hwy. 121(4).............. McKinney, TX 24.06 Acres 3,620 3,620 -- 3,089

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

(1) Debt assumed by purchaser.

(2) The Allen sale consisted of tracts of three land parcels: a 2.62 acre tract
of the Stacy Road land parcel; a 2.23 acre tract of the Sandison land
parcel; and, a .64 acre tract of the Whisenant land parcel.

(3) The McKinney sale included three land parcels: the 20 acre Netzer land
parcel; the 79.54 acre DF Fund land parcel; and the 156.19 acre OPUBCO land
parcel.

(4) The Watters/Highway 121 sale consisted of a six acre tract of the Watters
land parcel and an 18.061 acre tract of the State Highway 121 land parcel.

F-117

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1999, TCI purchased the following properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQUARE FEET PRICE PAID INCURRED RATE DATE
-------- -------- --------------- -------- -------- -------- -------- --------

APARTMENTS
Fairway View Estates....... El Paso, TX 264 Units $ 5,150 $1,550 $ 3,600 7.63% 04/04
Plantation................. Tulsa, OK 138 Units 3,225 1,200 2,000 8.82(2) 01/03
OFFICE BUILDINGS
4135 Belt Line............. Addison, TX 90,000 Sq. Ft. 4,450 950 3,500 9.50 06/01
Chesapeake Center.......... San Diego, CA 57,493 Sq. Ft. 5,188 2,200 3,000(1) 8.88 07/02
Eton Square................ Tulsa, OK 222,654 Sq. Ft. 14,000 3,500 10,500 8.50 10/04
Remington Tower............ Tulsa, OK 90,009 Sq. Ft. 4,550 938 3,612(1) 7.38 05/05
INDUSTRIAL WAREHOUSE
Addison Hangar............. Addison, TX 23,650 Sq. Ft. 2,200 550 1,650 8.61% 12/04
LAND
Alamo Springs.............. Dallas, TX .68 Acres 1,272 521(1) 750 16.50 09/01
Dominion................... Dallas, TX 14.39 Acres 3,557 1,157 2,400 15.00 09/00(3)
Red Cross.................. Dallas, TX 2.89 Acres 7,600 3,340 4,260 13.25 10/00(4)

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

(1) Debt assumed by purchaser.

(2) Variable interest rate.

(3) The Dominion mortgage loan was paid off in August 2000.

(4) The Red Cross mortgage loan was paid off in October 2000.

In 1999, TCI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION SQUARE FEET PRICE RECEIVED DISCHARGED SALE
-------- -------- --------------- ------- -------- ---------- -------

APARTMENTS
St. Petersburg,
Mariner's Pointe........... FL 368 Units $ 6,700 $ 2,628 $ 3,856 $1,868
Spa Cove................... Annapolis, MD 303 Units 19,910 7,617 11,884 5,600
Woods Edge................. Rockville, MD 162 Units 11,130 4,808 6,046 4,670
OFFICE BUILDINGS
74 New Montgomery.......... San Francisco, CA 109,497 Sq. Ft. 19,300 12,397 6,494 8,284
Town and Country........... Houston, TX 64,089 Sq. Ft. 1,480 198 1,230 800(1)
INDUSTRIAL WAREHOUSES
Corporate Center........... Ashburn, VA 177,563 Sq. Ft. 12,325 5,201 6,830 5,339
Parke Long................. Chantilly, VA 216,131 Sq. Ft. 15,100 22,347 7,593 5,174
Sulleyfield................ Chantilly, VA 243,813 Sq. Ft. 16,500 7,416 8,727 4,437
LAND
Laws....................... Dallas, TX 1.41 Acres $ 2,950 $ 2,930 $ -- $ 747
McKinney Corners........... McKinney, TX 251.68 Acres 10,067 8,306 1,500 4,800(1)
Moss Creek................. Guillford, NC 42.0 Acres 160 159 -- 153
Republic................... Dallas, TX 0.93 Acres 1,826 506 1,245 675

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

(1) Sale recorded on cost recovery method with gain deferred, until TCI provided
purchase money financing collected. See Note 4. "Notes and Interest
Receivable."

F-118

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. NOTES AND INTEREST RECEIVABLE

Notes and interest receivable consisted of the following:

2000 1999
------------------ -------------------
ESTIMATED ESTIMATED
FAIR BOOK FAIR BOOK
VALUE VALUE VALUE VALUE
--------- ------ --------- -------

Notes receivable
Performing................................... $8,664 $8,668 $11,712 $11,676
Nonperforming, nonaccruing................... -- -- 1,723 385
------ ------ ------- -------
$8,664 8,668 $13,435 12,061
====== =======
Interest receivable.......................... 41 12
------ -------
$8,709 $12,073
====== =======

Interest income is not recognized on nonperforming notes receivable. For
the years 1999 and 1998, unrecognized interest income on nonperforming notes
totaled $26,000 and $175,000, respectively.

Notes receivable at December 31, 2000, mature from 2001 through 2008 with
interest rates ranging from 8.0% to 18.0% per annum, with a weighted average
rate of 14.1%. Notes receivable are generally nonrecourse and are generally
collateralized by real estate. Scheduled principal maturities of $6.7 million
are due in 2001.

In February 2000, a mortgage loan with a principal balance of $28,000 was
paid off, including accrued but unpaid interest.

In December 2000, TCI funded a $2.5 million mortgage loan secured by a
second lien on unimproved land, 442 acres in Tarrant County, Texas, 1,130 acres
in Denton County, Texas, and 26 acres in Collin County, Texas. The note
receivable bears interest at 18.0% per annum, requires monthly payments interest
only and matures in June 2001.

Also in December 2000, TCI funded a $3.0 million mortgage loan secured by a
second lien on four office buildings in San Antonio, Texas. The note receivable
bears interest at 16.0% per annum, requires monthly payments of interest only
and matures in June 2001.

In March 1999, TCI accepted $33,000 as early discounted payoffs of four
mortgage notes receivable with a combined principal balance of $55,000. TCI
incurred no loss on the discounted payoffs in excess of the reserve previously
established.

In June 1999, eight notes receivable with a combined principal balance of
$571,000 were written off as uncollectible. No loss was incurred in excess of
the reserve previously established.

At December 31, 1999, mortgage notes receivable with a combined principal
balance of $4.6 million and a carrying value of $356,000, secured by first and
second liens on a closed hotel in Lake Charles, Louisiana were in default. Title
to the collateral property was obtained in February 2000 through foreclosure. No
loss was incurred on foreclosure as the estimated fair value of the property,
less estimated costs of sale, exceeded the carrying value of the mortgage notes
receivable. In June 2000, the property was sold for an amount in excess of its
carrying value.

In December 1999, TCI provided $1.2 million of purchase money financing in
conjunction with the sale of the Town and Country Office Building in Houston,
Texas. The note receivable bears interest at 8.5% per annum, requires monthly
payments of interest only, matures in December 2001 and is secured by a first
lien on the property sold.

F-119

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Also in December 1999, TCI provided $8.5 million of purchase money
financing in conjunction with the sale of 253 acres of unimproved land in
McKinney and Collin County, Texas. The note receivable bore interest at 8.5% per
annum, required a $1.0 million principal paydown in February 2000, required
payment of all accrued interest in June 2000 and required payment of all
principal and accrued interest at maturity in September 2000. The loan was
repaid in accordance with its terms. The sale had originally been recorded under
the cost recovery method with the gain being deferred until the note receivable
was collected. In conjunction with the loan payoff, TCI recognized a previously
deferred gain on the sale of $4.8 million.

In 1998, TCI collected $2.1 million in full settlement of a note receivable
and accrued but unpaid interest. The note receivable originated from a 1995 sale
that had been recorded under the cost recovery method with the gain being
deferred until the note receivable was collected. In conjunction with the loan
payoff, TCI recognized the previously deferred gain of $2.1 million was
recognized on collection of the note.

Related Party. In June 2000, TCI funded a $3.0 million loan to Basic
Capital Management, Inc. ("BCM"), TCI's advisor. The loan was secured by 108,802
shares of IORI common stock. IORI is also advised by BCM. The loan bore interest
at 15.0% per annum and matured in October 2000. All principal and interest were
due at maturity. The loan and all accrued but unpaid interest was paid off in
August 2000.

Also in June 2000, TCI funded a $9.0 million loan to American Realty Trust,
Inc. ("ART"), an affiliate of BCM. The loan was secured by 409,934 shares of
IORI. The loan bore interest at 15.0% per annum and matured in October 2000. All
principal and interest were due at maturity. The loan and all accrued but unpaid
interest was paid off in October 2000.

NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

2000 1999 1998
---- ----- ----

Balance January 1,.......................................... $543 $ 886 $891
Amounts charged off....................................... (6) (593) (5)
CMET allowance............................................ -- 250 --
---- ----- ----
Balance December 31,........................................ $537 $ 543 $886
==== ===== ====

NOTE 6. INVESTMENT IN MARKETABLE EQUITY SECURITIES

Marketable equity securities consist of 746,972 shares of common stock of
American Realty Investors, Inc. ("ARI"), approximately 5.3% of ARI's outstanding
shares. ARI is a publicly held real estate company.

2000 1999
------- -------

American Realty Investors, Inc. ("ARI")..................... $10,177 $13,954
======= =======

The ARI Common Stock is considered available-for-sale and is carried at
fair value, year end market price. The ARI Common Stock is an acquired CMET
asset. The officers of TCI are also officers of ARI. TCI's advisor also serves
as advisor to ARI and IORI. At December 31, 2000, ARI owned approximately 24.7%
of TCI's outstanding shares of Common Stock.

F-120

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES

Investment in equity method real estate entities consisted of the
following:

2000 1999
------ ------

Income Opportunity Realty Investors, Inc. ("IORI").......... $4,326 $ 606
Tri-City Limited Partnership ("Tri-City")................... 524 1,799
Nakash Income Associates ("NIA")............................ (650) (659)
Sacramento Nine ("SAC 9")................................... 490 489
Other....................................................... 597 75
------ ------
$5,287 $2,310
====== ======

TCI owns an approximate 22.8% interest in IORI, a publicly held Real Estate
Investment Trust ("REIT"), having a market value of $12.3 million at December
31, 2000. At December 31, 2000, IORI had total assets of $96.2 million and owned
seven apartments in Texas, seven office buildings (four in California, two in
Texas and one in Virginia) and two parcels of unimproved land in Texas. In 2000,
IORI sold three apartments, two office buildings and two parcels of unimproved
land for a total of $66.0 million, receiving net cash of $30.4 million after
paying off $33.6 million in mortgage debt and the payment of various closing
costs. IORI recognized gains of $19.6 million on the sales of which TCI's equity
share was $4.3 million. IORI also recognized a previously deferred gain on a
prior year's sale of $1.2 million of which TCI's equity share was $225,000. In
1999, IORI sold a shopping center in Boca Raton, Florida, for $3.2 million,
receiving net cash of $1.5 million after paying off $1.3 million in mortgage
debt and the payment of various closing costs. IORI recognized a gain of
$490,000 on the sale of which TCI's equity share was $111,000. In 1998, IORI
recognized a gain on sale of real estate of $180,000, its share of gains
recognized by an equity investee, of which TCI's equity share was $40,000.

TCI owns a 63.7% limited partner interest and IORI owns a 36.3% general
partner interest in Tri-City which, at December 31, 2000, owned a shopping
center in Houston, Texas. In February 2000, the Chelsea Square Shopping Center
was financed in the amount of $2.1 million. Tri-City received net cash of $2.0
million after the payment of various closing costs. The mortgage bore interest
at a fixed rate of 10.24% per annum until February 2001, and a variable rate
thereafter, currently 10% per annum, requires monthly payments of principal and
interest of $20,601 and matures in February 2005. TCI received a distribution of
$1.3 million of the net financing proceeds. In 1999, Tri-City sold a shopping
center in Ft. Worth, Texas, and an office building in Carrollton, Texas, for a
total of $7.2 million, receiving net cash of $5.4 million after paying off $1.3
million in mortgage debt and the payment of various closing costs. TCI received
a distribution of $3.5 million of the net cash. Tri-City recognized gains of
$2.9 million on the sales of which TCI's equity share was $1.8 million. In 1998,
Tri-City sold two apartments for a total of $3.3 million, receiving net cash of
$1.4 million after paying off $1.9 million in mortgage debt and the payment of
various closing costs. TCI received a distribution of $701,000 of the net cash.
Tri-City recognized a gain of $496,000 on the sales, of which TCI's equity share
was $316,000.

TCI owns a non-controlling 60% general partner interest and IORI owns a 40%
general partner interest in NIA, which owns a wraparound mortgage note
receivable. The NIA partnership agreement requires the consent of both partners
for any material changes in the operations of NIA.

TCI is a non-controlling 30% general partner in SAC 9, which, at December
31, 2000, owned an office building in Rancho Cordova, California. In 1999, SAC 9
sold an office building in Rancho Cordova, California, for $7.4 million,
receiving net cash of $4.0 million after paying off $3.2 million in mortgage
debt and the payment of various closing costs. TCI received a distribution of
$1.2 million of the net cash. SAC 9 recognized a gain of $4.7 million on the
sale of which TCI's equity share was $1.4 million.

F-121

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below are summarized financial data for the entities accounted
for using the equity method:

2000 1999
-------- --------

Real estate, net of accumulated depreciation ($9,540 in 2000
and $12,216 in 1999)...................................... $ 93,170 $ 92,745
Notes receivable............................................ 2,402 902
Other assets................................................ 8,973 5,605
Notes payable............................................... (59,485) (65,876)
Other liabilities........................................... (1,815) (4,691)
-------- --------
Shareholders/partners' capital.............................. $ 43,245 $ 28,685
======== ========

TCI's share of the above equity investee capital accounts was $10.3 million
in 2000 and $8.0 million in 1999.

2000 1999 1998
-------- ------- -------

Rents and interest income.............................. $ 16,245 $20,675 $17,566
Depreciation........................................... (2,917) (3,152) (2,703)
Operating expenses..................................... (10,835) (8,123) (9,202)
Interest expense....................................... (5,559) (7,609) (6,274)
-------- ------- -------
Income (loss) before gain on sale of real estate....... (3,066) 1,791 (613)
Gain on sale of real estate............................ 20,878 8,020 496
-------- ------- -------
Net income (loss)...................................... $ 17,812 $ 9,811 $ (117)
======== ======= =======

TCI's equity share of:

2000 1999 1998
------ ------ ----

Income (loss) before gain on sale of real estate............ $ (556) $ 102 $(68)
Gain on sale of real estate................................. 4,572 3,569 356
------ ------ ----
Net income.................................................. $4,016 $3,671 $288
====== ====== ====

NOTE 8. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

2000 1999
--------------------- ---------------------
ESTIMATED BOOK ESTIMATED BOOK
FAIR VALUE VALUE FAIR VALUE VALUE
---------- -------- ---------- --------

Notes payable.............................. $484,445 $498,914 $482,770 $500,884
======== ========
Interest payable........................... 2,820 2,522
-------- --------
$501,734 $503,406
======== ========

F-122

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled principal payments are due as follows:

2001........................................................ $109,769
2002........................................................ 44,731
2003........................................................ 44,715
2004........................................................ 69,418
2005........................................................ 45,196
Thereafter.................................................. 185,085
--------
$498,914
========

Notes payable at December 31, 2000, bore interest at rates ranging from
7.2% to 16.5% per annum, and mature between 2001 and 2037. The mortgages were
collateralized by deeds of trust on real estate having a net carrying value of
$593.1 million.

In 2000, TCI financed/refinanced the following properties:

NET
DEBT DEBT CASH INTEREST MATURITY
PROPERTY LOCATION UNITS/SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ----------------- -------- ---------- -------- -------- --------

APARTMENTS
Camelot............... Largo, FL 120 Units $3,800 $ -- $3,100 8.85%(1) 12/05
Crescent Place........ Houston, TX 120 Units 2,165 1,722 370 7.04(1) 03/30
Country Crossing...... Tampa, FL 227 Units 3,825 2,645 985 9.65(1) 06/03
Fontenelle Hills...... Bellevue, NE 338 Units 2,010(2) -- 1,967 8.51 06/10
Madison @ Bear Creek.. Houston, TX 180 Units 3,500 2,625 730 7.04(1) 03/30
OFFICE BUILDINGS
Bay Plaza II.......... Tampa, FL 78,882 Sq. Ft. 3,600 -- 3,400 8.44(1) 01/06
Jefferson............. Washington, DC 71,876 Sq. Ft. 9,875 8,955 557 9.50 07/25
Technology Trading.... Sterling, VA 197,659 Sq. Ft. 6,300 3,881 2,065 8.26(1) 05/05
Venture Center........ Atlanta, GA 38,772 Sq. Ft. 2,700 1,113 1,592 8.75 03/10
Westgrove Air Plaza... Addison, TX 78,326 Sq. Ft. 2,087 1,180 742 9.02(1) 01/05
INDUSTRIAL WAREHOUSES
5360 Tulane........... Atlanta, GA 67,850 Sq. Ft. 375 208 134 9.65(1) 04/03
Kelly................. Dallas, TX 330,406 Sq. Ft. 5,000 2,173 2,628 9.50(1) 10/03
Space Center.......... San Antonio, TX 101,500 Sq. Ft. 1,125 691 402 9.65(1) 04/03

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

(1) Variable interest rate.

(2) Second lien on property.

F-123

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1999, TCI financed/refinanced the following properties:

NET
DEBT DEBT CASH INTEREST MATURITY
PROPERTY LOCATION UNITS/SQUARE FEET INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ----------------- -------- ---------- -------- -------- --------

APARTMENTS
Arbor Pointe......... Midland, TX 195 Units $1,580 $1,085 $ 583 6.95%(1) 12/29
Coventry Pointe...... Midland, TX 120 Units 1,250 443 238 6.95(1) 12/29
Southgate............ Midland, TX 180 Units 1,820 1,336 717 6.95(1) 12/29
Summerstone.......... Houston, TX 242 Units 5,280 4,887 258 7.67 08/09
Villa Piedra......... Los Angeles, CA 132 Units 4,722 3,460 1,083 8.63(1) 10/02
Villas at Fairpark... Los Angeles, CA 49 Units 2,400 1,499 847 9.00(1) 09/06
OFFICE BUILDINGS
Lexington Center..... Colorado Springs, CO 74,603 Sq. Ft. 4,300 4,000 136 7.75(1) 04/04
Waterstreet.......... Boulder, CO 106,257 Sq. Ft. 13,300 7,881 5,110 7.76 04/09
INDUSTRIAL WAREHOUSE
Texstar.............. Arlington, TX 97,846 Sq. Ft. 1,300 1,150 33 8.50 04/09
SHOPPING CENTER
Sadler Square........ Amelia Island, FL 70,295 Sq. Ft. 2,910 1,976 401 7.96 04/09

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

(1) Variable interest rate.

NOTE 9. PREFERRED STOCK

TCI's Series A Cumulative Convertible Preferred Stock consists of a maximum
of 6,000 shares with a par value of $.01 per share and a liquidation preference
of $100.00 per share. Dividends are payable at the rate of $5.00 per year or
$1.25 per quarter to stockholders of record on the 15th 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, after November 1, 2003, into Common
Stock at the daily average closing price of the Common Stock for the prior five
trading days. At December 31, 2000 and 1999, 5,829 shares of Series A Preferred
Stock were issued and outstanding.

TCI's Series B Cumulative Convertible Preferred Stock consists of a maximum
300,000 shares with a par value of $.01 per share and a liquidation preference
of $5.00 per share. Dividends are payable at the rate of $.38 per share or $.095
per quarter to stockholders of record on the tenth day of each March, June,
September and December when and as declared by the Board of Directors. After
October 25, 2001, the Series B Preferred Stock may be converted into Common
Stock at the daily average closing price of the Common Stock for the prior five
trading days or is redeemable for cash at the option of the holder. At December
31, 2000, 300,000 shares of Series B Preferred Stock were issued and
outstanding.

NOTE 10. DIVIDENDS

TCI paid dividends on its Common Stock of $4.7 million ($.54 per share) in
2000, $3.0 million ($.60 per share) in 1999 and $2.3 million ($.60 per share) in
1998.

TCI reported to the Internal Revenue Service that 100% of the dividends
paid in 2000 represented ordinary income and that 100% of the dividends paid in
1998 and 1999 represented capital gains.

F-124

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11. STOCK OPTIONS

In October 2000, TCI's stockholders approved the 2000 Stock Option Plan
("2000 Plan"). The 2000 Plan is administered by the Stock Option Committee,
which currently consists of three Independent Directors of TCI. The exercise
price per share of an option will not be less than 100% of the fair market value
per share on the date of grant thereof. As of December 31, 2000, TCI had 300,000
shares of Common Stock reserved for issuance under the 2000 Plan. No options
have been granted under the 2000 Plan.

In October 2000, TCI's stockholders approved the Director's Stock Option
Plan (the "Director's Plan") which provides for options to purchase up to
140,000 shares of TCI's 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 10 years
from the date of grant. Each Independent Director was granted an option to
purchase 5,000 Common shares at an exercise price of $14.875 per share on
October 10, 2000, the date stockholders approved the plan. On January 1, 2001,
each Independent Director was granted an option to purchase 5,000 Common shares
at an exercise price of $8.875 per Common share. Each Independent Director will
be awarded an option to purchase an additional 5,000 shares on January 1 of each
year.

2000
--------------------
NUMBER EXERCISE
OF SHARES PRICE
--------- --------

Outstanding at January 1,................................... -- $ --
Granted..................................................... 25,000 14.875
Canceled.................................................... -- --
------
Outstanding at December 31,................................. 25,000 $14.875
======

At December 31, 2000, 25,000 options were exercisable at an exercise price
of $14.875 per Common share.

TCI applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
option plans. All share options issued by TCI have exercise prices equal to the
market price of the shares at the dates of grant. Accordingly, no compensation
cost has been recognized for its option plans. Had compensation cost for TCI's
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," TCI's net income (loss) and net
income (loss) per share would have been the pro forma amounts indicated below.

2000
-----------------------
AS REPORTED PRO FORMA
----------- ---------

Net income applicable to Common shares...................... $29,760 $29,537
Net income applicable to Common shares, per share........... 3.45 3.42

F-125

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

2000
----

Dividend yield.............................................. 6.08%
Expected volatility......................................... 65%
Risk-free interest rate..................................... 5.75%
Expected lives (in years)................................... 9
Forfeitures................................................. 10%

The weighted average fair value per share of options granted in 2000 was
$8.93.

NOTE 12. RENTS UNDER OPERATING LEASES

Operations include the leasing of commercial properties (office buildings,
industrial warehouses and shopping centers). The leases thereon expire at
various dates through 2020. The following is a schedule of minimum future rents
on non-cancelable operating leases at December 31, 2000:

2001........................................................ $ 53,001
2002........................................................ 43,124
2003........................................................ 32,729
2004........................................................ 23,995
2005........................................................ 16,623
Thereafter.................................................. 32,233
--------
$201,705
========

NOTE 13. ADVISORY AGREEMENT

Basic Capital Management, Inc. ("BCM"), an affiliate, has served as TCI's
advisor since March 28, 1989. BCM is a company owned by a trust for the benefit
of the children of Gene E. Phillips. Mr. Phillips serves as a representative of
his children's trust which owns BCM and, in such capacity, had, until June 2000,
substantial contact with the management of BCM and input with respect to its
performance of advisory services to TCI.

On August 18, 2000, the Board of Directors approved the renewal of the
Advisory Agreement with BCM. Renewals of the Advisory Agreement with BCM do not
require the approval of stockholders but do require the approval of the Board of
Directors.

Under the Advisory Agreement, BCM is required to annually formulate and
submit for Board approval a budget and business plan containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales and
purchases, lending, foreclosure and borrowing activity and other investments.
BCM is required to report quarterly to the Board on TCI's performance against
the business plan. In addition, all transactions require prior Board approval
unless they are explicitly provided for in the approved business plan or are
made pursuant to authority expressly delegated to BCM by the Board.

The Advisory Agreement also requires prior Board approval for the retention
of all consultants and third party professionals, other than legal counsel. The
Advisory Agreement provides that BCM shall be deemed to be in a fiduciary
relationship to the stockholders and contains a broad standard governing BCM's
liability for losses incurred by TCI.

F-126

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Advisory Agreement provides for BCM to be responsible for the
day-to-day operations 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 net income.

The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is to receive an acquisition commission
for supervising the purchase or long-term lease of real estate. BCM or an
affiliate of BCM is to receive a mortgage or loan acquisition fee with respect
to the purchase of any existing mortgage loan. BCM or an affiliate of BCM is
also to receive a mortgage brokerage and equity refinancing fee for obtaining
loans to or refinancing of TCI's properties. In addition, BCM receives
reimbursement of certain expenses incurred by it in the performance of advisory
services for TCI.

The Advisory Agreement requires BCM or any affiliate of BCM 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.

Under the Advisory Agreement, all or a portion of the annual advisory fee
must be refunded if the Operating Expenses of TCI (as defined in the Advisory
Agreement) exceed certain limits specified in the Advisory Agreement. The effect
of this limitation was to require that BCM refund $664,000 of the annual
advisory fee for 1998. BCM was not required to refund any of its 1999 or 2000
advisory fee.

Additionally, if management were to request that BCM render services other
than those required by the Advisory Agreement, BCM or an affiliate of BCM would
be separately compensated for such additional services on terms to be agreed
upon from time to time. As discussed in Note 14. "Property Management," Triad
Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property
management services and as discussed in Note 15. "Real Estate Brokerage," Regis
Realty, Inc. ("Regis"), a related party, provides, on a non-exclusive basis,
brokerage services.

NOTE 14. PROPERTY MANAGEMENT

Triad provides property management services for a fee of 5% or less of the
monthly gross rents collected on residential properties and 3% or less of the
monthly gross rents collected on commercial properties under its management.
Triad subcontracts with other entities for property-level management services at
various rates. The general partner of Triad is BCM. The limited partners of
Triad are Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), a related
party, which is a company not affiliated with either Mr. Phillips or BCM. Triad
subcontracts to Regis, a related party, which is a company owned by GS Realty,
the property-level management and leasing of 52 of TCI's commercial properties,
its four hotels and the commercial property owned by Tri-City. Regis is entitled
to receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with Triad.

NOTE 15. REAL ESTATE BROKERAGE

Regis also provides brokerage services on a non-exclusive basis. Regis is
entitled to receive a commission for property purchases and sales, in accordance
with a sliding scale of total brokerage fees to be paid by TCI.

F-127

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Revenue, fees and cost reimbursements to BCM and its affiliates:

2000 1999 1998
------ ------- ------

Fees Advisory............................................. $5,258 $ 3,219 $1,962
Net income.............................................. 2,415 2,450 558
Property acquisition.................................... 1,024 1,815 3,468
Real estate brokerage................................... 331 2,727 767
Mortgage brokerage and equity refinancing............... 464 422 341
Property and construction management and leasing
commissions*......................................... -- 3,608 2,753
------ ------- ------
$9,492 $14,241 $9,849
====== ======= ======
Cost reimbursements....................................... $2,146 $ 1,367 $1,121
====== ======= ======
Hotel lease revenue....................................... $2,237 $ 1,653 $ --
====== ======= ======

Fees paid to GS Realty, a related party:

2000
------

Fees
Property acquisition...................................... $2,326
Real estate brokerage..................................... 3,250
Property and construction management and leasing
commissions............................................ 4,321
------
$9,897
======

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

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

NOTE 17. INCOME TAXES

For the years 1999 and 1998, TCI had elected and qualified to be treated as
a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), and as such, it
was not taxed for federal income tax purposes on that portion of its taxable
income which was distributed to stockholders. During the third quarter of 2000,
due to a concentration of ownership, TCI no longer met the requirements for tax
treatment as a REIT under the Code, and is prohibited for re-qualifying for REIT
tax status for at least five years.

TCI had a loss for federal income tax purposes (after utilization of
operating loss carryforwards) in 2000, 1999 and 1998; therefore, it 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, the
difference in the allowance for estimated losses, depreciation on owned
properties and investments in equity method real estate entities. At December
31, 2000, TCI's tax basis in its net assets exceeded their basis for financial
statement purposes by $59.4 million. As a result, aggregate future income for
income tax purposes will be less than such amount for financial statement
purposes. Additionally, at December 31, 2000, TCI had tax net operating loss
carryforwards of $64.1 million expiring through the year 2018.

At December 31, 2000, TCI had a deferred tax benefit of $45.6 million due
to tax deductions available to it in future years. However, due to, among other
factors, the lack of consistent deferred tax

F-128

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

liability estimates, such deferred tax benefit has been offset by the recording
of a deferred tax liability of an equal amount.

NOTE 18. OPERATING SEGMENTS

Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of general and administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow. Items
of income that are not reflected in the segments are interest, equity in
partnerships and gains on sale of real estate totaling $11.2 million and
$555,000 for 2000 and 1999, respectively. Expenses that are not reflected in the
segments are general and administrative expenses, non-segment interest expense
and advisory incentive sales and net income fees totaling $16.2 million and $9.0
million for 2000 and 1999, respectively. Excluded from operating segment assets
are assets of $91.0 million at December 31, 2000, and $112.7 million at December
31, 1999, which are not identifiable with an operating segment. There are no
intersegment revenues and expenses and all business is conducted in the United
States. See Note 3. "Real Estate" and Note 4. "Notes and Interest Receivable."

Presented below is the operating income of each operating segment and each
segments' assets for the years 2000 and 1999.

COMMERCIAL
2000 LAND PROPERTIES APARTMENTS HOTELS TOTAL
---- ------- ---------- ---------- ------- --------

Rents............................ $ 723 $ 61,191 $ 74,700 $ 2,743 $139,357
Property operating expenses...... 1,097 31,853 44,898 213 78,061
------- -------- -------- ------- --------
Segment operating income......... $ (374) $ 29,338 $ 29,802 $ 2,530 $ 61,296
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 11,311 $ 7,395 $ 996 $ 19,702
Interest......................... 3,342 21,790 21,284 1,581 47,997
Real estate improvements......... 117 11,700 1,302 1,545 14,664
Assets........................... 59,281 344,657 216,995 19,931 640,864

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS HOTELS TOTAL
-------------- ------- ---------- ---------- ------- --------

Sales price...................... $12,775 $ 5,750 $ 93,949 $ 1,000 $113,474
Cost of sales.................... (7,411) (4,089) (60,433) (367) (72,300)
------- -------- -------- ------- --------
Gain on sale..................... $ 5,364 $ 1,661 $ 33,516 $ 633 $ 41,174(1)
======= ======== ======== ======= ========

F-129

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(1) Excludes a previously deferred gain of $4.8 million on the sale of land as
well as TCI's share of gains recognized by IORI, an equity affiliate, of
$4.6 million.

COMMERCIAL
1999 LAND PROPERTIES APARTMENTS HOTELS TOTAL
---- ------- ---------- ---------- ------- --------

Rents.......................... $ 855 $33,909 $ 42,162 $ 5,113 $ 82,039
Property operating expenses.... 917 14,583 26,374 2,623 44,497
------- ------- -------- ------- --------
Operating income (loss)........ $ (62) $19,326 $ 15,788 $ 2,490 $ 37,542
======= ======= ======== ======= ========
Depreciation................... $ -- $ 6,086 $ 4,872 $ 736 $ 11,694
Interest....................... 1,891 11,332 13,032 1,442 27,697
Real estate improvements....... 52 6,303 1,758 2,243 10,356
Construction expenditures...... -- -- 11,470 -- 11,470
Assets......................... 48,253 272,648 261,252 19,383 601,536

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS TOTAL
-------------- ------- ---------- ---------- --------

Sales price.................... $14,544 $64,305 $ 37,910 $116,759
Cost of sales.................. 8,179 40,251 25,773 74,203
------- ------- -------- --------
Gains on sales................. $ 6,365(1) $24,054(1) $ 12,137 $ 42,556
======= ======= ======== ========

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

(1) Includes deferred gains from a land sale and from a commercial property sale
accounted for using the cost recovery method. See Note 3. "Real Estate."

COMMERCIAL
1998 PROPERTIES APARTMENTS HOTELS TOTAL
---- ---------- ---------- ------- --------

Rents...................................... $ 31,282 $ 35,400 $ 3,147 $ 69,829
Property operating expenses................ 14,291 21,987 2,004 38,282
-------- -------- ------- --------
Operating income........................... $ 16,991 $ 13,413 $ 1,143 $ 31,547
======== ======== ======= ========
Depreciation and amortization.............. $ 6,268 $ 4,115 $ 308 $ 10,691
Interest................................... 11,753 10,415 629 22,797
Real estate improvements................... 5,287 4,130 178 9,595
Assets..................................... 173,936 156,933 17,876 348,745

COMMERCIAL
PROPERTY SALES LAND PROPERTIES TOTAL
-------------- ---- ---------- --------

Sales price......................... $375 $ 33,665 $ 34,040
Cost of sales....................... 25 24,234 24,259
---- -------- --------
Gains on sales...................... $350 $ 9,431 $ 9,781
==== ======== ========

F-130

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 19. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of TCI's quarterly results of operations for
the years 2000 and 1999 (unaudited):

THREE MONTHS ENDED
---------------------------------------------------
2000 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---- --------- -------- ------------- ------------

Rents................................... $34,041 $34,559 $35,121 $35,636
Property expense........................ 18,396 18,321 19,872 21,472
------- ------- ------- -------
Operating income...................... 15,645 16,238 15,249 14,164
Interest income......................... 404 588 936 442
Income (loss) in equity partnerships.... 7 (299) (185) (79)
Gain on sale of real estate............. 8,951 8,856 11,755 20,988
------- ------- ------- -------
9,362 9,145 12,506 21,351
Other expense........................... 20,651 19,608 20,864 22,755
------- ------- ------- -------
Net income (loss)....................... 4,356 5,775 6,891 12,760
Preferred dividend requirement.......... (7) (7) (8) --
------- ------- ------- -------
Net income applicable to Common
shares................................ $ 4,349 $ 5,768 $ 6,883 $12,760
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE
Net income applicable to Common
shares................................ $ .50 $ .67 $ .80 $ 1.48
======= ======= ======= =======

In the first quarter of 2000, gains on sale of real estate totaling $9.0
million were recognized on the sale of Hunters Bend Apartments, Westgate of
Laurel Apartments and a previous deferred gain on the sale of McKinney land. In
the second quarter of 2000, gains on sale of real estate totaling $8.9 million
were recognized on the sale of Apple Creek Apartments, Villas at Fairpark
Apartments, Chateau Charles Hotel, and TCI's share of gain recognized by IORI,
an equity investee. In the third quarter of 2000, gains on sale of real estate
totaling $11.8 million were recognized on the sale of Brookfield Corporate
Center, Ashley Crest Apartments, a portion of the Allen land, Eagle Rock
Apartments, Shady Trail Warehouse, McKinney land, Woodbridge Apartments and
Villas at Countryside Apartments. In the fourth quarter of 2000, gains on sale
of real estate totaling $21.0 million were recognized on the sale of Shadow Run
Apartments, a portion of the Watters Road/Highway 121 land, Parkwood Knoll
Apartments, Villa Piedra

F-131

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Apartments, Country Bend Apartments, Fountain Village Apartments and Crescent
Place Apartments. See Note 3. "Real Estate" and Note 7. "Investment in Equity
Method Real Estate Entities."

THREE MONTHS ENDED
---------------------------------------------------
1999 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---- --------- -------- ------------- ------------

Rents................................... $19,093 $20,073 $18,445 $24,428
Property expense........................ 10,320 10,158 9,676 14,343
------- ------- ------- -------
Operating income...................... 8,773 9,915 8,769 10,085
Interest income......................... 102 38 174 139
Income (loss) in equity partnerships.... 25 57 (1) 21
Gain on sale of real estate............. 1,868 8,705 7,482 22,462
------- ------- ------- -------
1,995 8,800 7,655 22,622
Other expense........................... 10,479 11,117 11,303 15,496
------- ------- ------- -------
Net income (loss)....................... 289 7,598 5,121 17,211
Preferred dividend requirement.......... (7) (7) (9) (7)
------- ------- ------- -------
Net income applicable to Common
shares................................ $ 282 $ 7,591 $ 5,112 $17,204
======= ======= ======= =======
EARNINGS PER SHARE
Net income applicable to Common
shares................................ $ .07 $ 1.96 $ 1.32 $ 3.70
======= ======= ======= =======

In the first quarter of 1999, a gain on sale of real estate of $1.9 million
was recognized on the sale of Mariner's Pointe Apartments. In the second
quarter, a gain on sale of real estate of $8.7 million was recognized on the
sale of the 74 New Montgomery Office Building and TCI's share of a gain
recognized by an equity investee on the sale of a shopping center. In the third
quarter, gains on sale of real estate totaling $7.5 million were recognized on
the sale of Parke Long Industrial Warehouse, Republic land and TCI's share of a
gain recognized by an equity investee on the sale of a shopping center. In the
fourth quarter, gains on sale of real estate totaling $22.5 million were
recognized on the sale of the Corporate Center Industrial Warehouse, Laws land,
Moss Creek land, Spa Cove Apartments, Woods Edge Apartments, Sullyfield
Industrial Warehouse and TCI's share of a gain recognized by an equity investee
on the sale of an office building. See Note 3. "Real Estate" and Note 7.
"Investment in Equity Method Real Estate Entities."

NOTE 20. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

Olive Litigation. In February 1990, TCI, together with CMET, IORI and
National Income Realty Trust, three real estate entities with, at the time, the
same officers, directors or trustees and advisor as TCI, entered into a
settlement (the "Settlement") of a class and derivative action entitled Olive et
al. v. National Income Realty Trust et al., relating to the operation and
management of each of the entities. On April 23, 1990, the Court granted final
approval of the terms of the Settlement. The Settlement was modified in 1994
(the "Modification").

The Olive Amendment provided that TCI's Board retain a
management/compensation consultant or consultants to evaluate the fairness of
the BCM advisory contract and any contract of its affiliates with TCI, CMET and
IORI, including, but not limited to, the fairness to TCI, CMET and IORI of such

F-132

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contracts relative to other means of administration. In 1998, the Board engaged
a management/ compensation consultant to perform the evaluation which was
completed in September 1998.

The Board believes that the provisions of the Settlement, the Modification
and Olive Amendment terminated on April 28, 1999. However, the Court has ruled
that certain provisions continue to be effective after the termination date.
This ruling has been appealed by TCI and IORI.

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

NOTE 21. SUBSEQUENT EVENTS

In February 2001, TCI entered into a joint venture to invest in the
construction and part ownership of a 165 room hotel in Wroclaw, Poland. TCI will
invest 4.0 million Euro dollars ($3.7 million) and guarantee a 16 million Euro
dollars ($15.0 million) mortgage loan for the project. TCI will hold a 66.7%
interest. Completion of the hotel is scheduled for December 2001.

In the first quarter of 2001, TCI sold the following properties:

NET
UNITS/ SALES CASH DEBT GAIN ON
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED SALE
-------- -------- ----------------- ------ -------- ---------- -------

APARTMENTS
Heritage..................... Tulsa, OK 136 Units $3,100 $206 $1,948 $1,575
Forest Ridge................. Denton, TX 56 Units 2,000 682 1,151 1,014
Park at Colonnade............ San Antonio, TX 211 Units 5,800 927 4,066 1,603
INDUSTRIAL WAREHOUSE
Zodiac(1).................... Dallas, TX 35,935 Sq. Ft. 762 183 564 167
LAND
McKinney 36.................. McKinney, TX 1.82 Acres 476 476 -- 355

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

(1) Part of the Kelly Portfolio of warehouses.

F-133

SCHEDULE III

TRANSCONTINENTAL REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000

COST CAPITALIZED
INITIAL COST SUBSEQUENT TO ACQUISITION
----------------------- -------------------------
BUILDING AND
PROPERTY/LOCATION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS OTHER
----------------- ------------ -------- ------------ ------------- ---------
(DOLLARS IN THOUSANDS)

HELD FOR INVESTMENT:
APARTMENTS
4242 Cedar Springs, Dallas, TX........ $ 1,329 $ 372 $ 1,117 $ 51 $ (200)(2)
4400, Midland, TX..................... 1,090 349 1,396 -- --
Apple Lane, Lawrence, KS.............. 981 168 1,510 -- --
Arbor Point, Odessa, TX............... 1,565 321 1,285 526 --
Ashton Way, Midland, TX............... 1,090 384 1,536 52 --
Autumn Chase, Midland, TX............. 928 141 1,265 -- --
Bent Tree, Addison, TX................ 6,112 1,702 6,808 85 --
Camelot, Largo, FL.................... 3,800 1,230 2,870 235 (281)(2)
Carseka, Los Angeles, CA.............. 1,478 460 1,840 119 --
Cliffs of Eldorado, McKinney, TX...... 10,547 2,647 10,589 -- --
Country Crossings, Tampa, FL.......... 3,807 772 2,444 196 (358)(2)
Coventry, Midland, TX................. 1,238 236 369 184 --
El Chapparal, San Antonio, TX......... 4,238 279 2,821 574 (330)(2)
Fairway View Estates, El Paso, TX..... 3,510 548 4,935 260 --
Fairways, Longview, TX................ 1,928 657 1,532 119 (266)(2)
Fontenelle Hills, Bellevue, NE........ 12,513 1,320 11,883 394 (1,360)(2)
Forest Ridge, Denton, TX.............. 1,155 212 849 85 (137)(2)
Fountain Lake, Texas City, TX......... 2,508 861 2,585 19 (254)(2)
Fountains of Waterford, Midland, TX... 482 311 1,243 1,538 --
Gladstell Forest, Conroe, TX.......... 2,455 504 2,015 190 --
Glenwood, Addison, TX................. 2,576 877 3,506 37 (370)(2)
Grove Park, Plano, TX................. 4,610 942 3,767 54 (447)(2)
Harper's Ferry, Lafayette, LA......... 1,768 349 1,398 223 --
Heritage, Tulsa, OK................... 1,948 148 839 83 (300)(4)

HELD FOR INVESTMENT:
APARTMENTS
4242 Cedar Springs, Dallas, TX........ $ 372 $ 968 $ 1,340 $ 268 1984 06/92 5-40 years
4400, Midland, TX..................... 349 1,396 1,745 93 1981 04/98 40 years
Apple Lane, Lawrence, KS.............. 168 1,510 1,678 38 1989 01/00 40 years
Arbor Point, Odessa, TX............... 321 1,811 2,132 518 1975 08/96 5-40 years
Ashton Way, Midland, TX............... 384 1,588 1,972 125 1978 04/98 5-40 years
Autumn Chase, Midland, TX............. 141 1,265 1,406 24 1985 04/00 40 years
Bent Tree, Addison, TX................ 1,702 6,893 8,595 555 1979 01/98 5-40 years
Camelot, Largo, FL.................... 1,230 2,824 4,055 647 1975 08/93 5-40 years
Carseka, Los Angeles, CA.............. 460 1,959 2,419 263 1971 11/96 5-40 years
Cliffs of Eldorado, McKinney, TX...... 2,647 10,589 13,236 596 1997 10/98 40 years
Country Crossings, Tampa, FL.......... 772 2,282 3,054 625 1973 04/93 5-40 years
Coventry, Midland, TX................. 236 553 789 174 1977 08/96 5-40 years
El Chapparal, San Antonio, TX......... 279 3,065 3,344 1,439 1963 01/88 5-40 years
Fairway View Estates, El Paso, TX..... 548 5,195 2,042 283 1977 03/99 40 years
Fairways, Longview, TX................ 657 1,385 5,744 397 1980 03/93 5-40 years
Fontenelle Hills, Bellevue, NE........ 1,320 10,917 12,327 910 1971/1975 04/98 5-40 years
Forest Ridge, Denton, TX.............. 212 797 1,009 259 1975 11/91 5-40 years
Fountain Lake, Texas City, TX......... 861 2,350 3,211 445 1975 12/94 5-40 years
Fountains of Waterford, Midland, TX... 311 2,781 3,092 662 1977 05/98 5-40 years
Gladstell Forest, Conroe, TX.......... 504 2,205 2,709 393 1985 06/95 5-40 years
Glenwood, Addison, TX................. 877 3,173 4,050 363 1975 11/96 5-40 years
Grove Park, Plano, TX................. 942 3,374 4,316 439 1979 06/96 5-40 years
Harper's Ferry, Lafayette, LA......... 349 1,621 1,970 472 1972 02/92 5-40 years
Heritage, Tulsa, OK................... 88 682 771 183 1966 05/90 5-40 years

F-134

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Heritage on the River, Jacksonville,
FL................................... $ 7,761 $ 2,070 $ 6,211 $ 296 $ (719)(2)
Hunters Glen, Midland, TX............. 1,895 519 2,075 321 --
In the Pines, Gainesville, FL......... 5,619 1,288 5,154 496 (573)(2)
Limestone Canyon, Austin, TX.......... 13,000 1,998 -- 11,470 1,895(5)
Madison at Bear Creek, Houston, TX.... 3,475 738 2,950 86 (286)(2)
McCallum Crossing, Dallas, TX......... 8,167 2,005 6,017 95 (653)(2)
McCallum Glen, Dallas, TX............. 5,031 1,257 5,027 96 (488)(2)
Mountain Plaza, El Paso, TX........... 4,363 837 3,347 139 --
Oak Park IV, Clute, TX................ -- 224 674 27 (95)(2)
Oak Run, Pasadena, TX................. 4,408 788 3,152 78 (370)(2)
Paramount Terrace, Amarillo, TX....... 2,846 340 3,061 -- --
Park at Colonnade, San Antonio, TX.... 4,074 887 3,546 384 (329)(2)
Park Lane, Dallas, TX................. 1,119 175 978 112 (187)(2)
Plantation, Tulsa, OK................. 1,993 344 3,096 -- --
Primrose, Bakersfield, CA............. 2,983 428 3,852 -- --
Quail Creek, Lawrence, KS............. 2,223 343 3,090 -- --
Quail Oaks, Balch Springs, TX......... 1,220 90 2,160 152 (187)(2)
Sandstone, Mesa, AZ................... 5,701 1,656 6,625 95 --
Somerset, Texas City, TX.............. 3,056 936 2,811 158 (452)(2)
South Cochran, Los Angeles, CA........ 1,891 540 2,162 56 --
Southgate, Odessa, TX................. 1,803 335 1,338 318 --
Southgreen, Bakersfield, CA........... 2,452 755 3,021 -- --
Stone Oak, San Antonio, TX............ 2,930 649 2,598 263 (409)(2)
Summerfield, Orlando, FL.............. 4,590 1,175 4,698 136 --
Summerstone, Houston, TX.............. 5,230 1,155 4,618 272 --
Sunchase, Odessa, TX.................. 2,064 742 2,967 458 --
Sunset Lake, Waukegan, IL............. 7,363 1,626 6,544 593 (1,060)(2)
Terrace Hills, El Paso, TX............ 6,300 1,286 5,145 167 --
Timbers, Tyler, TX.................... 1,707 497 1,988 -- --
Trails at Windfern, Houston, TX....... 3,737 870 3,479 63 (436)(2)

TRANS TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE A REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
LIFE ON WHICH
GROSS AMOUNTS OF WHICH DEPRECIATION
CARRIED AT END OF YEAR IN LATEST
---------------------------------- STATEMENT
BUILDING AND (1) ACCUMULATED DATE OF DATE OF OPERATION
PROPERTY/LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------------- -------- ------------ -------- ------------ ------------ -------- -------------
(DOLLARS IN THOUSANDS)

Heritage on the River, Jacksonville,
FL................................... $ 2,070 $ 5,788 $ 7,858 $ 972 1973 12/95 5-40 years
Hunters Glen, Midland, TX............. 519 2,396 2,915 297 1982 01/98 5-40 years
In the Pines, Gainesville, FL......... 1,288 5,077 6,365 1,212 1972 12/94 5-40 years
Limestone Canyon, Austin, TX.......... 1,998 13,365 16,140 354 1997 07/98 40 years
Madison at Bear Creek, Houston, TX.... 738 2,750 3,488 328 1975 01/97 5-40 years
McCallum Crossing, Dallas, TX......... 2,005 5,459 7,464 1,064 1985 03/94 5-40 years
McCallum Glen, Dallas, TX............. 1,257 4,635 5,892 727 1986 07/95 5-40 years
Mountain Plaza, El Paso, TX........... 837 3,486 4,323 310 1972 01/98 5-40 years
Oak Park IV, Clute, TX................ 224 606 830 134 1981 06/94 5-40 years
Oak Run, Pasadena, TX................. 788 2,860 3,647 352 1982 12/96 5-40 years
Paramount Terrace, Amarillo, TX....... 340 3,061 3,402 51 1983 05/00 40 years
Park at Colonnade, San Antonio, TX.... 887 3,601 4,488 653 1975 07/96 5-40 years
Park Lane, Dallas, TX................. 175 903 1,078 334 1972 12/90 5-40 years
Plantation, Tulsa, OK................. 344 3,096 3,440 84 1968 12/99 40 years
Primrose, Bakersfield, CA............. 428 3,852 4,280 72 1979 04/00 40 years
Quail Creek, Lawrence, KS............. 343 3,090 3,434 90 1969 01/00 40 years
Quail Oaks, Balch Springs, TX......... 90 2,125 2,215 954 1982 02/87 5-40 years
Sandstone, Mesa, AZ................... 1,656 6,720 8,376 586 1986 10/97 5-40 years
Somerset, Texas City, TX.............. 936 2,517 3,452 583 1985 12/93 5-40 years
South Cochran, Los Angeles, CA........ 540 2,218 2,759 534 1928 05/91 5-40 years
Southgate, Odessa, TX................. 335 1,656 1,991 372 1976 08/96 5-40 years
Southgreen, Bakersfield, CA........... 755 3,021 3,776 158 1985 12/98 40 years
Stone Oak, San Antonio, TX............ 649 2,452 3,101 892 1978 03/90 5-40 years
Summerfield, Orlando, FL.............. 1,175 4,834 6,009 841 1971 11/94 5-40 years
Summerstone, Houston, TX.............. 1,155 4,890 6,045 955 1984 12/93 5-40 years
Sunchase, Odessa, TX.................. 742 3,425 4,167 480 1981 10/97 5-40 years
Sunset Lake, Waukegan, IL............. 1,626 6,077 7,703 1,465 1969 09/94 5-40 years
Terrace Hills, El Paso, TX............ 1,310 5,288 6,598 531 1985 03/97 5-40 years
Timbers, Tyler, TX.................... 497 1,988 2,485 153 1973 12/97 40 years
Trails at Windfern, Houston, TX....... 870 3,106 3,976 339 1975 05/97 5-40 years

F-135

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Treehouse, Irving, TX................. $ 2,651 $ 716 $ 2,865 $ 260 $ --
Westwood, Odessa, TX.................. -- 85 341 108 --
Willow Creek, El Paso, TX............. 1,720 608 1,832 76 (156)(2)
Will-O-Wick, Pensacola, FL............ 3,154 747 2,990 174 (281)(2)
Willow Wick, North Augusta, SC........ 2,007 324 1,305 39 (170)(2)
Woodview, Odessa, TX.................. 2,119 716 2,864 102 --
OFFICE BUILDINGS
1010 Commons, New Orleans, LA......... 8,425 143 15,011 14,701 (1,218)(2)
225 Baronne, New Orleans, LA.......... 7,400 1,162 10,457 5,655 (1,293)(2)
4135 Beltline, Addison, TX............ 3,500 476 4,280 -- --
9033 Wilshire Blvd., Los Angeles,
CA................................... 6,819 956 8,609 -- --
Ambulatory Surgery Center, Sterling,
VA................................... 6,802 908 8170 -- --
AMOCO, New Orleans, LA................ 15,000 895 3,582 6,082 (1,149)(2)
Atrium, Palm Beach, FL................ 3,959 1,147 4,590 141 --
Bay Plaza, Tampa, FL.................. 2,661 895 3,582 213 (384)(2)
Bay Plaza II, Tampa, FL............... 3,600 506 4,550 -- --
Bonita Plaza, Bonita, CA.............. 4,999 1,168 4,670 984 --
Brandeis, Omaha, NE................... 8,750 1,451 13,061 -- --
Chesapeake Center, San Diego, CA...... 2,389 546 5,013 438 --
Corporate Point, Chantilly, VA........ 3,862 830 3,321 871 --
Countryside Retail Center, Sterling,
VA................................... 21,307 2,088 18,791 -- (11)
Daley Plaza, San Diego, CA............ 3,378 973 3,889 678 --
Durham Center, Durham, NC............. 14,419 4,233 16,932 1,496 (1,362)(2)
Eton Square, Tulsa, OK................ 10,351 1,469 13,219 183 --
Forum, Richmond, VA................... 5,266 1,360 5,439 1,043 --
Harmon, Sterling, VA.................. 8,132 1,054 9,487 -- --
Hartford, Dallas, TX.................. -- 630 2,520 845 --
Institute Place Lofts, Chicago, IL.... 5,819 665 7,057 560 --
Jefferson, Washington, DC............. 9,846 2,774 11,096 1,009 (883)(2)
Lexington Center, Colorado Springs,
CO................................... 4,223 1,103 4,413 471 --

Treehouse, Irving, TX................. $ 716 $ 3,125 $ 3,841 $ 419 1974 05/97 5-40 years
Westwood, Odessa, TX.................. 85 449 534 117 1977 08/96 5-40 years
Willow Creek, El Paso, TX............. 608 1,752 2,359 337 1972 05/94 5-40 years
Will-O-Wick, Pensacola, FL............ 747 2,883 1,499 519 1974 05/95 5-40 years
Willow Wick, North Augusta, SC........ 324 1,174 3,630 190 1968 09/94 5-40 years
Woodview, Odessa, TX.................. 716 2,966 3,682 230 1974 05/98 5-40 years
OFFICE BUILDINGS
1010 Commons, New Orleans, LA......... 2,113 26,524 28,637 1,334 1971 03/98 5-40 years
225 Baronne, New Orleans, LA.......... 1,162 14,820 15,982 1,648 1960 03/98 5-40 years
4135 Beltline, Addison, TX............ 476 4,280 4,756 229 1981/1982 06/99 40 years
9033 Wilshire Blvd., Los Angeles,
CA................................... 956 8,608 9,564 161 1957 04/00 5-40 years
Ambulatory Surgery Center, Sterling,
VA................................... 908 8,170 9,078 51 07/00 40 years
AMOCO, New Orleans, LA................ 1,233 8,177 9,410 2,872 1974 06/97 5-40 years
Atrium, Palm Beach, FL................ 1,147 4,731 5,878 321 1985 06/98 40 years
Bay Plaza, Tampa, FL.................. 895 3,410 4,305 388 1988 07/97 5-40 years
Bay Plaza II, Tampa, FL............... 506 4,550 5,055 66 1985 06/00 40 years
Bonita Plaza, Bonita, CA.............. 1,168 5,654 6,822 681 1991 09/97 5-40 years
Brandeis, Omaha, NE................... 1,451 13,061 14,512 49 1921 11/00 40 years
Chesapeake Center, San Diego, CA...... 546 5,451 5,997 192 1984 07/99 40 years
Corporate Point, Chantilly, VA........ 830 4,193 5,022 958 1992 10/94 5-40 years
Countryside Retail Center, Sterling,
VA................................... 2,088 18,791 20,879 117 09/00 40 years
Daley Plaza, San Diego, CA............ 973 4,567 5,540 476 1981 05/98 5-40 years
Durham Center, Durham, NC............. 4,233 17,066 21,299 1,699 1988 07/97 5-40 years
Eton Square, Tulsa, OK................ 1,469 13,403 14,872 423 1985 09/99 40 years
Forum, Richmond, VA................... 1,360 6,482 7,842 1,910 1987 10/92 2-40 years
Harmon, Sterling, VA.................. 1,054 9,487 10,541 59 09/00 40 years
Hartford, Dallas, TX.................. 630 3,365 3,995 820 1980 11/94 2-40 years
Institute Place Lofts, Chicago, IL.... 665 7,617 8,282 4,102 1910 01/93 2-40 years
Jefferson, Washington, DC............. 2,774 11,222 13,996 1,419 1979 02/97 5-40 years
Lexington Center, Colorado Springs,
CO................................... 1,103 4,884 5,987 573 1986 12/97 3-40 years

F-136

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Mimado, Sterling, VA.................. $ -- $ 582 $ 5,236 $ -- $ --
NASA, Houston, TX..................... -- 410 3,319 (745) (272)(2)
One Steeplechase, Sterling, VA........ 7,993 1,380 5,520 2,807 72(5)
Parkway North, Dallas, TX............. 3,900 1,173 4,692 833 --
Plaza Towers, St. Petersburg, FL...... 7,149 1,760 12,617 7,299 (4,379)(3)
Remington Tower, Tulsa, OK............ 3,541 480 4,351 126 --
Savings of America, Houston, TX....... 1,222 338 1,353 617 --
Signature Athletic Club, Dallas, TX... 2,633 1,075 2,921 849 (439)(2)
Valley Rim, San Diego, CA............. 3,586 1,078 4,311 38 --
Venture Center, Atlanta, GA........... 2,677 411 2,746 421 --
View Ridge, San Diego, CA............. 1,294 393 1,572 147 --
Waterstreet, Boulder, CO.............. 13,131 2,605 10,420 1,059 --
Westgrove Air Plaza, Addison, TX...... 4,000 501 2,004 290 (945)(2)
Windsor Plaza, Windcrest, TX.......... -- 1,429 4,441 (458) (257)(2)
INDUSTRIAL WAREHOUSES
5360 Tulane, Atlanta, GA.............. 372 95 514 50 (44)(2)
5700 Tulane, Atlanta, GA.............. -- -- -- 720 (101)(2)
Addison Hangar, Addison, TX........... 1,620 928 1,481 23 --
Addison Hanger II, Addison, TX........ -- -- 1,150 -- --
Central Storage, Dallas, TX........... 1,147 464 1,856 426 (138)(2)
Encon, Fort Worth, TX................. 3,500 984 3,934 -- --
Kelly, Dallas, TX..................... 4,995 1,136 4,856 473 (486)(2)
McLeod, Orlando, FL................... 2,047 673 2,693 485 (511)(2)
Ogden, Ogden, UT...................... -- 52 1,568 218 (70)(2)
Space Center, San Antonio, TX......... 1,116 247 1,332 135 (131)(2)
Technology Trading, Sterling, VA...... 6,255 1,199 4,796 1,226 --
Texstar, Arlington, TX................ 1,255 333 1,331 216 --
Tricon, Atlanta, GA................... 9,826 2,761 6,442 1,723 --
SHOPPING CENTERS
Dunes Plaza, Michigan City, IN........ 3,197 1,230 5,430 2,083 (482)(6)

Mimado, Sterling, VA.................. $ 582 $ 5,236 $ 5,818 $ 33 09/00 40 years
NASA, Houston, TX..................... 172 2,540 2,712 1,518 1979 10/85 5-40 years
One Steeplechase, Sterling, VA........ 1,380 8,399 9,778 3,032 1987 12/92 5-40 years
Parkway North, Dallas, TX............. 1,173 5,524 6,697 537 1980 02/98 2-40 years
Plaza Towers, St. Petersburg, FL...... 1,241 16,056 17,297 9,930 1979 11/85 1-40 years
Remington Tower, Tulsa, OK............ 480 4,477 4,957 156 1982 09/99 40 years
Savings of America, Houston, TX....... 338 1,971 2,309 409 1979 03/97 3-40 years
Signature Athletic Club, Dallas, TX... 1,075 3,331 4,406 320 1985 02/99 5-40 years
Valley Rim, San Diego, CA............. 1,078 4,349 5,427 287 1988 07/98 3-40 years
Venture Center, Atlanta, GA........... 411 3,167 3,578 1,066 1981 07/89 1-40 years
View Ridge, San Diego, CA............. 393 1,719 2,112 138 1979 05/98 40 years
Waterstreet, Boulder, CO.............. 2,605 11,479 14,084 3,362 1988 09/91 2-40 years
Westgrove Air Plaza, Addison, TX...... 211 1,961 2,107 66 1982 10/97 5-40 years
Windsor Plaza, Windcrest, TX.......... 1,672 3,483 5,155 2,199 1984 11/86 5-40 years
INDUSTRIAL WAREHOUSES
5360 Tulane, Atlanta, GA.............. 95 520 616 264 1970 11/97 5-40 years
5700 Tulane, Atlanta, GA.............. -- 619 619 62 1998 11/97 40 years
Addison Hangar, Addison, TX........... 928 1,504 2,432 47 1992 12/99 40 years
Addison Hanger II, Addison, TX........ -- 1,150 1,150 5 2000 12/99 40 years
Central Storage, Dallas, TX........... 464 2,144 2,608 463 1966 04/96 5-40 years
Encon, Fort Worth, TX................. 984 3,935 4,919 320 1958 10/97 40 years
Kelly, Dallas, TX..................... 1,136 4,843 5,979 1,232 1966/1973 03/95 5-40 years
McLeod, Orlando, FL................... 673 2,667 3,340 669 1985 09/94 5-40 years
Ogden, Ogden, UT...................... 52 1,716 1,768 639 1979 01/86 5-40 years
Space Center, San Antonio, TX......... 247 1,337 1,584 659 1970 11/97 5-40 years
Technology Trading, Sterling, VA...... 1,199 6,022 7,221 1,245 1987 12/93 3-40 years
Texstar, Arlington, TX................ 333 1,547 1,880 345 1967 12/93 5-40 years
Tricon, Atlanta, GA................... 2,761 8,165 10,926 2,438 1971 02/93 2-40 years
SHOPPING CENTERS
Dunes Plaza, Michigan City, IN........ 1,343 6,919 8,262 2,082 1978 03/92 5-40 years

F-137

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

K-Mart, Cary, NC...................... $ 1,852 $ 1,358 $ 1,157 $ 162 $ --
Parkway Center, Dallas, TX............ 1,725 273 1,876 444 --
Plaza on Bachman Creek, Dallas, TX.... 2,312 734 2,935 1.031 --
Promenade, Highlands Ranch, CO........ 7,388 1,749 6,995 82 (679)(2)
Sadler Square, Amelia Island, FL...... 2,851 679 2,715 134 --
Sheboygan, Sheboygan, WI.............. 599 242 1,371 45 --
HOTELS
Brompton, Chicago, IL................. 2,345 572 2,365 1,419 --
City Suites, Chicago, IL.............. 3,913 950 3,847 1,028 --
Majestic Inn, San Francisco, CA....... 5,449 1,139 4,555 1,149 --
Surf, Chicago, IL..................... 3,886 945 3,851 1,179 --
LAND
1013 Commons, New Orleans, LA......... -- 615 -- 46 (36)(2)
Alamo Springs, Dallas, TX............. 750 1,385 -- -- --
Dominion, Dallas, TX.................. -- 3,931 -- -- --
Eagle Crest, Farmers Branch, TX....... -- 2,500 -- 134 --
Folsom................................ -- 1,781 -- -- --
Lamar Parmer, Austin, TX.............. 1,030 1,571 -- 94 --
Las Colinas, Las Colinas, TX.......... -- 995 -- 5 --
Lemon Carlisle, Dallas, TX............ 1,749 3,576 -- 30 --
Limestone Canyon II................... -- 428 -- 266 --
Manhattan, Farmers Branch, TX......... -- 11,186 -- -- --
McKinney 36, Collin County, TX........ 957 2,203 -- -- (126)(2)
Red Cross, Dallas, TX................. -- 8,383 -- -- --
Sandison, Collin County, TX........... 1,041 5,021 -- -- (392)(2)(10)
Solco Allen, Collin County, TX........ 305 1,388 -- -- (80)(2)
Stacy Road, Allen, TX................. 1,347 2,665 -- -- (193)(2)
State Highway 121, Collin County,
TX................................... -- 4,354 -- -- (2,581)(2)(10)
Watters Road, Collin County, TX....... -- 1,787 -- -- (200)(2)
West End, Dallas, TX.................. 5,944 11,405 -- 77 (4,013)(9)

K-Mart, Cary, NC...................... $ 1,358 $ 1,319 $ 2,677 $ 88 1981 08/98 40 years
Parkway Center, Dallas, TX............ 273 2,319 2,592 933 1979 11/91 1-40 years
Plaza on Bachman Creek, Dallas, TX.... 731 3,969 4,700 385 1986 03/98 5-40 years
Promenade, Highlands Ranch, CO........ 1,749 6,398 8,147 932 1985 07/96 5-40 years
Sadler Square, Amelia Island, FL...... 679 2,849 3,528 619 1987 11/93 3-40 years
Sheboygan, Sheboygan, WI.............. 242 1,416 1,657 298 1977 05/92 40 years
HOTELS
Brompton, Chicago, IL................. 572 3,786 4,357 262 1995 12/98 5-40 years
City Suites, Chicago, IL.............. 950 4,875 5,825 449 1995 12/98 5-40 years
Majestic Inn, San Francisco, CA....... 1,139 5,703 6,842 1,860 1902 12/90 2-40 years
Surf, Chicago, IL..................... 945 5,030 5,975 496 1995 12/98 5-40 years
LAND
1013 Commons, New Orleans, LA......... 625 -- 625 -- -- 08/98 --
Alamo Springs, Dallas, TX............. 1,385 -- 1,385 -- -- 09/99 --
Dominion, Dallas, TX.................. 3,931 -- 3,931 -- -- 03/99 --
Eagle Crest, Farmers Branch, TX....... 2,634 -- 2,634 -- -- 05/98 --
Folsom................................ 1,781 -- 1,781 -- -- 10/00 --
Lamar Parmer, Austin, TX.............. 1,665 -- 1,665 -- -- 01/00 --
Las Colinas, Las Colinas, TX.......... 1,000 -- 1,000 -- -- 01/96 --
Lemon Carlisle, Dallas, TX............ 3,606 -- 3,606 -- -- 02/98 --
Limestone Canyon II................... 694 -- 694 -- -- 06/00 --
Manhattan, Farmers Branch, TX......... 11,186 -- 11,186 -- -- 02/00 --
McKinney 36, Collin County, TX........ 2,077 -- 2,077 -- -- 01/98 --
Red Cross, Dallas, TX................. 8,383 -- 8,383 -- -- 05/99 --
Sandison, Collin County, TX........... 4,629 -- 4,629 -- -- 05/98 --
Solco Allen, Collin County, TX........ 1,308 -- 1,308 -- -- 05/98 --
Stacy Road, Allen, TX................. 2,472 -- 2,472 -- -- 04/97 --
State Highway 121, Collin County,
TX................................... 1,773 -- 1,773 -- -- 02/97 --
Watters Road, Collin County, TX....... 1,587 -- 1,587 -- -- 02/97 --
West End, Dallas, TX.................. 7,469 7,469 -- -- 08/97 --

F-138

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Whisenant, Collin County, TX.......... $ 133 $ 631 $ -- $ -- $ (59)(2)(10)
-------- -------- -------- ------- --------
INVESTMENT PROPERTIES................. 497,705 171,134 501,275 85,870 (31,380)
-------- -------- -------- ------- --------
PROPERTIES HELD FOR SALE
LAND
Fiesta, San Angelo, TX................ -- 44 -- -- --
Fruitland, Fruitland Park, FL......... -- 253 -- -- (100)(7)
Moss Creek, Greensboro, NC............ -- 85 -- -- --
Round Mt, Austin, TX.................. -- 5,740 -- -- (4,232)(2)(3)
-------- -------- -------- ------- --------
Properties Held for Sale.............. -- 6,122 -- -- (4,332)
-------- -------- -------- ------- --------
$497,705 $177,256 $501,275 $85,870 $(35,640)
======== ======== ======== ======= ========

Whisenant, Collin County, TX.......... $ 572 $ -- $ 572 $ -- -- 05/98 --
-------- -------- -------- -------
INVESTMENT PROPERTIES................. 165,684 561,611 727,227 88,187
-------- -------- -------- -------
PROPERTIES HELD FOR SALE
LAND
Fiesta, San Angelo, TX................ 44 -- 44 -- -- 12/91 --
Fruitland, Fruitland Park, FL......... 153 -- 153 -- -- 05/92 --
Moss Creek, Greensboro, NC............ 85 -- 85 -- -- 12/96 --
Round Mt, Austin, TX.................. 1,542 -- 1,542 -- -- 12/86 --
-------- -------- -------- -------
Properties Held for Sale.............. 1,824 -- 1,824 --
-------- -------- -------- -------
$167,508 $561,611 $729,051 $88,187
======== ======== ======== =======

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

(1) The aggregate cost for federal income tax purposes is $777.5 million.

(2) Purchase accounting basis adjustment.

(3) Writedown of property to estimated net realizable value.

(4) Escrow deposits deducted from the basis of the property.

(5) Construction period interest and taxes.

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

(7) Cash received for easement deducted from the basis of the property.

(8) The Sandison land is collateralized with the Solco Allen and Whisenant
land. All of the land in McKinney and Collin County, Texas is cross-
collateralized and cross defaulted.

(9) Cash received for condemnation of part of property.

(10) Sale of portion of property.

(11) The Countryside Retail Center is collateralized with the Mimado Building.

F-139

TRANSCONTINENTAL REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)

RECONCILIATION OF REAL ESTATE
Balance at January 1,....................................... $686,522 $409,986 $331,668
Additions
Purchases, improvements and construction............... 122,683 76,659 101,510
Foreclosures........................................... 352 -- 2,514
CMET merger............................................ -- 290,415 --
Deductions
Sale of real estate.................................... (80,188) (89,463) (25,706)
Sale of foreclosed properties.......................... (318) (1,075) --
-------- -------- --------
Balance at December 31,..................................... $729,051 $686,522 $409,986
======== ======== ========
RECONCILIATION OF ACCUMULATED DEPRECIATION
Balance at January 1,....................................... $ 84,986 $ 61,241 $ 56,837
Additions
Depreciation........................................... 19,702 11,702 10,691
CMET merger............................................ -- 31,628 --
Deductions
Sale of real estate.................................... (16,501) (19,585) (6,287)
-------- -------- --------
Balance at December 31,..................................... $ 88,187 $ 84,986 $ 61,241
======== ======== ========

F-140

SCHEDULE IV

TRANSCONTINENTAL REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2000

FINAL
INTEREST MATURITY PRIOR FACE AMOUNT
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS OF MORTGAGE
----------- -------- -------- ---------------------- ------- -----------
(DOLLARS IN THOUSANDS)

FIRST MORTGAGE LOANS
TOWN AND COUNTRY BUSINESS
PARK........................ 8.5% 12/01 Interest only payments $ -- $1,230
Secured by an office of $8,307 due monthly.
building in Houston, TX.
WRAPAROUND MORTGAGE LOANS
PINEMONT...................... 10.40% 07/08 Monthly principal and 367 467
Secured by an office interest payments of
building in Houston, TX. $6,281.
JUNIOR MORTGAGE LOANS
COUNTRY ELMS.................. 8.00% 05/02 Monthly principal and -- 380
Secured by mobile home park interest payments of
in Galesburg, IL. $3,154.
JNC ENTERPRISES............... 18.0% 06/01 Interest only payments 8,200 2,500
Secured by 442 acres of of $37,500 due monthly.
unimproved land in Tarrant
County, TX and 1,130 acres
of unimproved land in Denton
County, TX and 26 acres of
unimproved land in Collin
County, TX.
ACLP PARK TEN................. 16.0% 06/01 Interest only payments 31,900 3,000
Secured by 4 office of $40,000 due monthly.
buildings in San Antonio,
TX.
LINCOLN COURT APARTMENTS...... Varies 06/2004 Two notes bearing -- 1,369
Secured by apartment interest at prime plus ------- ------
building in Dallas, TX. 1%. Interest only
payments of $4,683 due
monthly.
$40,467 $8,946
======= ======
Interest......................
Allowance for estimated
losses......................

PRINCIPAL AMOUNT
OF LOANS SUBJECT
CARRYING TO DELINQUENT
AMOUNTS OF PRINCIPAL OR
DESCRIPTION MORTGAGE(1) INTEREST
----------- ----------- ----------------
(DOLLARS IN THOUSANDS)

FIRST MORTGAGE LOANS
TOWN AND COUNTRY BUSINESS
PARK........................ $1,230 $ --
Secured by an office
building in Houston, TX.
WRAPAROUND MORTGAGE LOANS
PINEMONT...................... 389 --
Secured by an office
building in Houston, TX.
JUNIOR MORTGAGE LOANS
COUNTRY ELMS.................. 180 --
Secured by mobile home park
in Galesburg, IL.
JNC ENTERPRISES............... 2,500 --
Secured by 442 acres of
unimproved land in Tarrant
County, TX and 1,130 acres
of unimproved land in Denton
County, TX and 26 acres of
unimproved land in Collin
County, TX.
ACLP PARK TEN................. 3,000 --
Secured by 4 office
buildings in San Antonio,
TX.
LINCOLN COURT APARTMENTS...... 1,369 --
Secured by apartment ------ -----
building in Dallas, TX.
8,668 $ --
=====
Interest...................... 41
Allowance for estimated (537)
losses......................
------
$8,172
======

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

(1) The aggregate cost for federal income tax purposes is $8.7 million.

F-141

TRANSCONTINENTAL REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE -- (CONTINUED)

2000 1999 1998
-------- ------- -------
(DOLLARS IN THOUSANDS)

Balance at January 1,....................................... $ 12,061 $ 2,379 $ 4,838
Additions
New mortgage loans........................................ 17,500 9,680 149
CMET merger............................................... -- 631 --
Deductions
Collections of principal.................................. (20,531) (37) (94)
Foreclosed properties and deeds-in-lieu of foreclosure.... (356) -- (2,514)
Write off of uncollectible mortgage loans................. -- (575) --
Write off of principal due to discount for early payoff... (6) (17) --
-------- ------- -------
Balance at December 31,..................................... $ 8,668 $12,061 $ 2,379
======== ======= =======

F-142

APPENDIX A

AGREEMENT AND PLAN OF MERGER
AMONG
AMERICAN REALTY INVESTORS, INC.,
TRANSCONTINENTAL REALTY ACQUISITION CORPORATION,
AND
TRANSCONTINENTAL REALTY INVESTORS, INC.

TABLE OF CONTENTS

PAGE
----

ARTICLE I CERTAIN DEFINITIONS......................................... A-1

ARTICLE II THE MERGER.................................................. A-3
SECTION 2.1. The Merger.................................................. A-3
SECTION 2.2. Effective Time of the Merger................................ A-3
SECTION 2.3. Articles of Incorporation................................... A-3
SECTION 2.4. Bylaws...................................................... A-3
SECTION 2.5. Effects of Merger........................................... A-3

ARTICLE III EXCHANGE OF SHARES.......................................... A-4
SECTION 3.1. Effect of Merger on Capital Stock........................... A-4
SECTION 3.2. Method of Election.......................................... A-4
SECTION 3.3. Delivery and Exchange of Certificates....................... A-5

ARTICLE IV THE CLOSING................................................. A-6
SECTION 4.1. Closing..................................................... A-6

ARTICLE V REPRESENTATIONS AND WARRANTIES OF ARI AND NEWCO............. A-6
SECTION 5.1. Organization and Qualification.............................. A-6
SECTION 5.2. Capitalization.............................................. A-6
SECTION 5.3. Authority; Non-Contravention; Statutory Approvals;
Compliance.................................................. A-7
SECTION 5.4. Financial Statements; SEC Documents......................... A-8
SECTION 5.5. Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities................................................. A-8
SECTION 5.6. Litigation.................................................. A-9
SECTION 5.7. Registration Statement and Proxy Statement; SEC Documents... A-9
SECTION 5.8. Vote Required............................................... A-9
SECTION 5.9. Disclosure.................................................. A-9
SECTION 5.10. Stock Option Plans.......................................... A-9
SECTION 5.11. Affiliate Agreements........................................ A-9
SECTION 5.12. Taxes....................................................... A-9
SECTION 5.13. Brokers and Finders......................................... A-10

ARTICLE VI REPRESENTATIONS AND WARRANTIES OF TCI....................... A-10
SECTION 6.1. Organization and Qualification.............................. A-10
SECTION 6.2. Capitalization.............................................. A-10
SECTION 6.3. Authority; Non-Contravention; Statutory Approvals;
Compliance.................................................. A-10
SECTION 6.4. Financial Statements; SEC Documents......................... A-11
SECTION 6.5. Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities................................................. A-12
SECTION 6.6. Litigation.................................................. A-12
SECTION 6.7. Registration Statement and Proxy Statement.................. A-12
SECTION 6.8. Vote Required............................................... A-12
SECTION 6.9. Disclosure.................................................. A-12
SECTION 6.10. Stock Option Plans.......................................... A-12
SECTION 6.11. Affiliate Agreements........................................ A-13
SECTION 6.12. Taxes....................................................... A-13
SECTION 6.13. Brokers and Finders......................................... A-13

A-i

PAGE
----

ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER...................... A-13
SECTION 7.1. Ordinary Course of Business................................. A-13

ARTICLE VIII Additional Agreements....................................... A-13
SECTION 8.1. Public Announcements........................................ A-13
SECTION 8.2. Rule 145 Affiliates......................................... A-13
SECTION 8.3. Covenant to Satisfy Conditions.............................. A-14
SECTION 8.4. Expenses.................................................... A-14
SECTION 8.5. Newco Activities............................................ A-14
SECTION 8.6. Indemnification, Directors and Officers' Insurance.......... A-14

ARTICLE IX CONDITIONS.................................................. A-15
SECTION 9.1. Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-15
SECTION 9.2. Conditions to Obligation of ARI to Effect the Merger........ A-15
SECTION 9.3. Conditions to Obligation of TCI to Effect the Merger........ A-16

ARTICLE X TERMINATION, AMENDMENT AND WAIVER........................... A-16
SECTION 10.1. Termination................................................. A-16
SECTION 10.2. Effect of Abandonment....................................... A-17
SECTION 10.3. Amendment................................................... A-17
SECTION 10.4. Waiver...................................................... A-17

ARTICLE XI GENERAL PROVISIONS.......................................... A-17
SECTION 11.1. Survival of Representations, Warranties, Covenants and
Agreements.................................................. A-17
SECTION 11.2. Notices..................................................... A-17
SECTION 11.3. Miscellaneous............................................... A-18
SECTION 11.4. Interpretation.............................................. A-18
SECTION 11.5. Counterparts; Effect........................................ A-18
SECTION 11.6. Parties in Interest......................................... A-18
SECTION 11.7. Specific Performance........................................ A-18
SECTION 11.8. Further Assurances.......................................... A-19

A-ii

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER, dated as of , 2002 (this
"Agreement"), is by and among American Realty Investors, Inc., a Nevada
corporation ("ARI"), Transcontinental Realty Acquisition Corporation, a Nevada
corporation, ("Newco") and Transcontinental Realty Investors, Inc., a Nevada
corporation ("TCI").

WHEREAS, TCI and certain affiliates of ARI are parties to that certain
Second Amendment to the Modification of Stipulation of Settlement (the "Second
Amendment") entered into in connection with certain proceedings know as Jack
Olive, et al, as plaintiffs, v. Gene E. Phillips, et al, as defendants, and
National Income Realty Trust, Continental Mortgage and Equity Trust,
Transcontinental Realty Investors and Income Opportunity Realty Investors, Inc.,
as nominal defendants (Case No. C 89-4331-MHP) in the United States District
Court for the Northern District of California; and

Whereas ARI and TCI have entered into this Agreement to give effect to the
transactions contemplated in the Second Amendment; and

WHEREAS, boards of directors of each of ARI and TCI have determined that it
is in the best interests of each company and their stockholders that Newco be
merged with and into TCI, with TCI being the survivor, as more specifically
described herein (the "Merger"); and

WHEREAS, the Second Amendment also contemplates that another subsidiary of
ARI be merged with and into Income Opportunity Realty Investors, Inc., a Nevada
corporation("IOT") (the "IOT Merger") contemporaneously with the Merger; and

WHEREAS, ARI and IOT have contemporaneously herewith entered into an
agreement substantially similar to this Agreement to give effect to the IOT
Merger;

NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

As used in this Agreement, the following terms shall have the following
meanings:

"Act" shall mean the Nevada Mergers and Exchanges of Interest Act, as
amended.

"Affiliate" shall have the meaning assigned that term in Rule 12b-2
promulgated under the Exchange Act.

"ARI Common Stock" shall mean the common stock, par value $0.01 per share,
of ARI.

"ARI Preferred Stock" shall mean the Series G Preferred Stock, par value
$2.00 per share, of ARI.

"ARI Required Statutory Approvals" shall have the meaning set forth in
Section 5.3(c).

"ARI SEC Documents" shall mean each form, report, schedule, registration
statement and definitive proxy statement filed by ARI with the SEC since January
1, 2001.

"ARI Stockholders' Approval" shall mean the approval of the Merger, at a
duly held meeting or by consent, of holders of at least a majority of the
outstanding ARI Common Stock at the time of the meeting.

"Articles of Merger" shall have the meaning set forth in Section 2.2.

"Certificates" shall have the meaning set forth in Section 3.2.

"Closing" and "Closing Date" shall have the meaning set forth in Section
3.1.

A-1

"Common Stock of the Surviving Corporation" shall mean the Common Stock,
$0.01 par value per share, of the Surviving Corporation outstanding immediately
following, and as a result of, the Merger.

"Effective Time" shall have the meaning set forth in Section 2.2.

"Electing Shareholders" shall have the meaning set forth in Section 3.3(a).

"Election Form" shall have the meaning set forth in Section 3.2(a).

"Escrow Agent" shall have the meaning set forth in Section 3.2(b).

"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Exchange Agent" shall have the meaning set forth in Section 3.3(a).

"GAAP" shall mean generally accepted accounting principles.

"Governmental Authority" shall mean any court, governmental or regulatory
body (including a stock exchange or other self-regulatory body) or authority,
domestic or foreign.

"Letter of Transmittal" shall have the meaning set forth in Section 3.3(b).

"Material Adverse Effect" shall mean a material adverse effect on the
business, operations, properties, assets, condition (financial or otherwise),
prospects or results of operations of a given company or on the consummation of
the transactions contemplated by this Agreement.

"Merger Consideration" shall have the meaning set forth in Section 3.1(c).

"Merger" shall have the meaning set forth in Section 2.1.

"Nevada Law" shall mean the Nevada Corporation Code, Nevada Revised
Statutes sec. 78.010 et. seq.

"Newco Common Stock" shall mean the Common Stock, $0.01 par value per
share, of Newco.

"Nonelecting Shareholder" shall have the meaning set forth in Section
3.3(a).

"Registration Statement" shall have the meaning set forth in Section
5.7(a).

"SEC" shall mean the Securities and Exchange Commission.

"Second Amendment" shall have the meaning set forth in the recitals to this
Agreement.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"Series A Preferred Stock" shall mean shares of the Series A Preferred
Stock, $0.01 par value per share of TCI, having a liquidation preference of $100
per share.

"Series A Preferred Stock of the Surviving Corporation" shall mean shares
of the TCI Series A Preferred Stock issued and outstanding following the
Effective Time.

"Series C Preferred Stock" shall mean shares of the Series C Preferred
Stock, $0.01 par value per share of TCI, having a liquidation preference of
$100.00 per share.

"Series C Preferred Stock of the Surviving Corporation" shall mean shares
of the TCI Series C Preferred Stock issued and outstanding following the
Effective Time.

"Subsidiary" shall mean, with respect to any person, any corporation or
other entity (including partnerships and other business associations) other than
TCI in which a person, directly or indirectly owns through a Subsidiary at least
a majority of the outstanding voting securities or other equity interests having
the power, under ordinary circumstances, to elect a majority of the directors or
other governing body, or otherwise to direct the management and policies, of
such corporation or other entity.

"Surviving Corporation" shall have the meaning set forth in Section 2.1
hereof.

A-2

excise, franchise, real and personal property, gross receipts, capital stock,
production, business and occupation, disability, employment, payroll, license,
estimated, stamp, custom duties, severance or withholding taxes or charges
imposed by any governmental entity, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes, charges, fees, levies or
other assessments, and any expenses incurred in connection with the
determination, settlement or litigation of any liability for any of the
foregoing.

"TCI Common Stock" shall mean the common stock, par value $.01 per share,
of TCI.

"TCI Disclosure Schedule" means the Disclosure Schedule of TCI, attached
hereto and made a part of this Agreement.

"TCI Financial Statements" shall have the meaning set forth in Section 6.4.

"TCI Required Statutory Approvals" shall have the meaning set forth in
Section 6.3(c).

"TCI SEC Documents" shall mean each form, report, schedule, registration
statement and definitive proxy statement filed by TCI with the SEC since January
1, 2001.

"TCI Stockholders' Approval" shall mean the approval of the Merger, at a
duly held meeting, of holders of (i) the majority of the outstanding TCI Common
Stock at the time of the meeting and (ii) at least a majority of the TCI Common
Stock not owned by ARI or its Affiliates casting votes with respect to the
Merger at the meeting.

"Violation" shall have the meaning set forth in Section 5.3(b).

ARTICLE II

THE MERGER

SECTION 2.1. The Merger. Upon the terms and subject to the conditions of
this Agreement, Newco shall be merged with and into TCI in accordance with the
provisions of the Act (the "Merger"). The separate corporate existence of Newco
shall thereupon cease, and TCI shall be the surviving corporation in the Merger
(the "Surviving Corporation") and shall continue its existence under the laws of
the State of Nevada.

SECTION 2.2. Effective Time of the Merger. The parties acknowledge that
it is their mutual desire and intent to consummate the Merger as soon as
practicable after the date hereof. Accordingly, the parties shall use all
reasonable efforts to bring about the satisfaction as soon as practicable of all
the conditions specified in Article IX and otherwise to effect the consummation
of the Merger as soon as practicable. Subject to the terms hereof, as soon as
practicable after all of the conditions set forth in Article IX shall have been
satisfied or waived, the parties hereto will cause the Merger to be consummated
by the filing with the Secretary of State of the State of Nevada, in accordance
with the Act, of articles of merger (the "Articles of Merger") in such form as
is required by, and executed in accordance with, the relevant provisions of the
Act. The Merger shall become effective at such time (the "Effective Time") as
the Secretary of State of the State of Nevada shall, upon such filing of the
Articles of Merger, issue a certificate of merger in respect of the Merger.

SECTION 2.3. Articles of Incorporation. The Articles of Incorporation of
TCI as in effect at the Effective Time shall be the Articles of Incorporation of
the Surviving Corporation, until duly amended.

SECTION 2.4. Bylaws. The Bylaws of TCI as in effect at the Effective Time
shall be the Bylaws of the Surviving Corporation, until duly amended.

SECTION 2.5. Effects of Merger. The Merger shall have the effects set
forth in the Act.

A-3

ARTICLE III

EXCHANGE OF SHARES

SECTION 3.1. Effect of Merger on Capital Stock. The parties agree that in
furtherance of the transactions contemplated in the Second Amendment, as a
result of the Merger, common stockholders of TCI will receive $17.50 in cash for
each share of TCI Common Stock, or at the affirmative election of such
stockholders, one share of the ARI Preferred Stock, all as set forth in the
remainder of this Subsection 3.1 . At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any capital stock of
TCI or Newco:

(a) Cancellation of Certain TCI Common Stock. Each share of TCI
Common Stock that is held in treasury by TCI shall be canceled and cease to
exist.

(b) Conversion of Certain TCI Common Stock Held by ARI its
Affiliates. Each issued and outstanding share of TCI Common Stock that is
held by ARI or its subsidiaries shall be canceled and cease to exist. Each
issued and outstanding share of TCI Common Stock that is held by an
Affiliate of ARI shall be converted into one share of ARI Preferred Stock.

(c) Conversion of Certain TCI Common Stock. Each issued and
outstanding share of TCI Common Stock (other than shares of TCI Common
Stock cancelled or converted pursuant to Section 3.1(a) or 3.1(b) above),
shall be converted into and exchanged for the right to receive (i) cash
equal to $17.50 or (ii) upon the affirmative election of the holder thereof
in accordance with this ARTICLE III, one share of the ARI Preferred Stock
(the cash or ARI Preferred Stock to be received by holders of the TCI
Common Stock as a result of the Merger being hereinafter referred to as the
"Merger Consideration").

(d) Conversion of Newco Common Stock. Each issued and outstanding
share of Newco Common Stock as of the Effective Time shall be converted
into and exchanged for one share of the Common Stock of the Surviving
Corporation, with the effect that all of the issued and outstanding shares
of the Newco Common Stock as of the Effective Time shall be converted into
and exchanged for all of the issued and outstanding shares of the Common
Stock of the Surviving Corporation immediately following the Merger.

(e) TCI Preferred Stock. The outstanding (including shares held in
the treasury of TCI or any Subsidiary) shares of the TCI Series A Preferred
Stock, and the TCI Series C Preferred Stock shall not be affected by the
Merger and from and after the Effective Time shall remain outstanding,
without modification to their respective rights and preferences as shares
of the Series A Preferred Stock of the Surviving Corporation or the Series
C Preferred Stock of the Surviving Corporation, as the case may be.

SECTION 3.2. Method of Election.

(a) Record holders of the TCI Common Stock entitled to elect pursuant to
Section 3.1(c) to become Electing Shareholders, shall do so by properly
completing a Form of Election satisfactory to ARI and constituting a part of the
Letter of Transmittal.

(b) To be effective, an Election Form must be properly completed and the
Letter of Transmittal of which it constitutes a part must be signed and received
by the Escrow Agent, accompanied by the Certificates as to which the election is
being made in compliance with the requirements set forth above. ARI shall have
the discretion, which it may delegate in whole or in part to the Escrow Agent,
to determine whether Election Forms have been properly completed, signed,
submitted or revoked and to disregard immaterial defects in any Election Form.
The decision of ARI (or the Exchange Agent) in such matters shall be conclusive
and binding. ARI and the Escrow Agent shall make reasonable efforts to notify
any Electing Shareholder of any defect in an Election Form submitted to the
Escrow Agent. If ARI or the Exchange Agent shall determine that a purported
election to receive ARI Preferred Stock as Merger Consideration was not properly
made, such holder shall be treated as a Nonelecting Shareholder. A record

A-4

holder of TCI Common Stock need not make the same election with respect to all
shares of TCI Common Stock held of record by such holder or represented by a
single Certificate.

SECTION 3.3. Delivery and Exchange of Certificates.

(a) Appointment of Exchange Agent. Promptly following the execution and
delivery of this Agreement, ARI shall designate American Stock Transfer and
Trust Company, or if they are unable or unwilling to serve, a bank or trust
company reasonably acceptable to TCI to act as Exchange Agent (the "Exchange
Agent") to receive certificates (the "Certificates") representing the right to
receive Merger Consideration, to receive cash to which holders of Certificates
not electing to receive shares of the ARI Preferred Stock as Merger
Consideration ("Nonelecting Shareholders"), shares of the TCI Common Stock held
by shareholders electing to receive ARI Preferred Stock as Merger Consideration
("Electing Shareholders") and to disburse the Merger Consideration to
Nonelecting Shareholders and Electing Shareholders.

(b) Promptly after the Effective Time, ARI will send, or will cause the
Exchange Agent to send, to each holder of record as of the Effective Time of the
TCI Common Stock converted into the right to receive Merger Consideration
pursuant to Section 3.1(c) above, a letter of transmittal which shall specify
that the delivery of Certificates shall be effected, and risk of loss and title
shall pass, only upon proper delivery of the Certificates to the Exchange Agent,
and instructions for use in effecting the surrender to the Exchange Agent of
Certificates in exchange for the Merger Consideration (the "Letter of
Transmittal"). The Letter of Transmittal shall contain such other terms and
conditions as ARI may reasonably specify.

(c) Each record holder of TCI Common Stock converted into the right to
receive the Merger Consideration shall, upon surrender to the Exchange Agent of
a Certificate or Certificates, together with a properly completed Letter of
Transmittal covering such shares, without further action, be entitled to
receive, and the Escrow Agent shall deliver (i) cash equal to $17.50 per share
represented by Certificates tendered by Nonelecting Shareholders and (ii) one
share of ARI Preferred Stock for each share of TCI Common Stock represented by a
Certificate tendered by an Electing Shareholder, subject, in each such case, to
the provisions of Sections 3.3(d) and (e) below. Until so surrendered, each
Certificate shall, after the Effective Time, represent for all purposes only the
right to receive $17.50 for each share of TCI Common Stock held by a Nonelecting
Shareholder or one share of the ARI Preferred Stock for each share represented
by a Certificate held by an Electing Shareholder. To the extent that following
the Effective Time and prior to the issuance of certificates representing shares
of the ARI Preferred Stock to Electing Shareholders dividends shall be declared
with respect to the ARI Preferred Stock, the Electing Shareholder shall look
solely to ARI with respect thereto.

(d) If any cash or certificates representing shares of the ARI Preferred
Stock constituting Merger Consideration are to be delivered to a person or
entity other than the registered holder of a Certificate, it shall be a
condition to such payment or delivery, as the case may be, that the Certificate
or Certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the person or entity requesting such payment
or delivery shall pay to the Exchange Agent any transfer or other taxes required
as a result of the delivery of Merger Consideration to a person other than the
registered holder of the Certificate or Certificates in question or establish to
the satisfaction of the Escrow Agent that such tax has been paid or is not
payable.

(e) Any shares of the ARI Preferred Stock or cash representing Merger
Consideration that remains unclaimed by any record holder of TCI Common Stock
six months after the Effective Time shall be held by the Escrow Agent (or a
successor agent appointed by the Surviving Corporation) or shall be delivered to
or at the instruction of the Surviving Corporation and the duties of the
Exchange Agent shall terminate. Commencing with such redelivery to the Surviving
Corporation, or its designee, Nonelecting Shareholders and Electing Shareholders
shall look solely to the Surviving Corporation for delivery of the Merger
Consideration, and the Surviving Corporation shall be entitled to receive all of
the Letters of Transmittal and other instruments and procedures contemplated
above. Notwithstanding the foregoing, neither the Exchange Agent nor any party
to this Agreement will be liable to a holder of Certificates, or to any record

A-5

or beneficial holder of shares of the TCI Common Stock for any Merger
Consideration delivered to a public official pursuant to applicable abandoned
property, escheat, or similar laws and any right to exchange Certificates for
ARI Preferred Stock shall terminate upon such delivery. If Certificates are not
surrendered prior to midnight on the fourth anniversary of the Effective Time,
any unclaimed Merger Consideration, to the extent permitted under applicable
law, will become property of the Surviving Corporation. Notwithstanding any
provision set forth above, ARI shall be entitled to receive, from time to time,
all interest or other amounts earned with respect to any cash held by the
Exchange Agent with respect to Merger Consideration or otherwise, as such
amounts accrue or become available.

(f) After the Effective Time, there will be no registration of transfers on
the stock transfer books of the Surviving Corporation with respect to shares of
the TCI Common Stock that were outstanding immediately prior to the Effective
Time.

ARTICLE IV

THE CLOSING

SECTION 4.1. Closing. The closing of the Merger (the "Closing") shall
take place at the offices of Jackson Walker L.L.P., 901 Main Street, Suite 6000,
Dallas, Texas at 10:00 a.m., local time, on the date on which the last of the
conditions set forth in Article IX is fulfilled or waived, or at such other
time, date and place as ARI, TCI and Newco shall mutually agree (the "Closing
Date").

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF ARI AND NEWCO

ARI and Newco jointly and severally represent and warrant to TCI as
follows:

SECTION 5.1. Organization and Qualification. Each of ARI and Newco is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada. Newco has no Subsidiaries. The Subsidiaries of ARI are
as set forth in the exhibits to the ARI SEC Documents. Each of ARI and each ARI
Subsidiary has all requisite corporate power and authority, and is duly
authorized by all necessary regulatory approvals and orders, to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its assets and properties makes such qualification necessary, other
than such failures which, when taken together with all other such failures, will
not have a Material Adverse Effect on ARI and its Subsidiaries taken as a whole.

SECTION 5.2. Capitalization.

(a) As of the date hereof, the authorized capital stock of Newco consists
of 1,000 shares of common stock, par value $.01 per share.

(b) As of the date hereof, 100 shares of Newco Common Stock were issued and
outstanding and owned by ARI.

(c) All of the issued and outstanding shares of capital stock of Newco are
validly issued, fully paid and nonassessable and none of such stock was issued
in violation of preemptive rights.

(d) There are no outstanding subscriptions, options, calls, contracts,
voting trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement, obligating Newco
to issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of Newco or obligating Newco to grant, extend or
enter into any such agreement or commitment.

A-6

(e) As of the date hereof, the authorized capital stock of ARI consists of
100,000,000 shares of common stock, par value $0.01 per share and 50,000,000
shares of preferred stock, par value $2.00 per share.

(f) As of the date hereof, [11,375,127] shares of ARI Common Stock were
issued and outstanding and shares of Preferred Stock, consisting of
2,724,901 shares of Series A Preferred Stock, $2.00 par value per share, 50,000
shares of Series E Preferred Stock, $2.00 par value per share and 3,968.75
shares of the Series F Preferred Stock, $2.00 par value per share, were issued
and outstanding.

(g) All of the issued and outstanding shares of capital stock of ARI are
validly issued, fully paid and nonassessable and none of such stock was issued
in violation of preemptive rights.

(h) Except for this Agreement and except as described in the ARI SEC
Documents, there are no outstanding subscriptions, options, calls, contracts,
voting trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement, obligating ARI to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of ARI or obligating ARI to grant, extend or enter
into any such agreement or commitment.

SECTION 5.3. Authority; Non-Contravention; Statutory Approvals;
Compliance.

(a) Authority.

(i) Each of ARI and Newco has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby.

(ii) The execution and delivery of this Agreement and the consummation
by ARI and Newco of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of each of ARI and
Newco.

(iii) The ARI Stockholders' Approval has been obtained.

(iv) This Agreement has been duly and validly executed and delivered
by each of ARI and Newco and, assuming the due authorization, execution and
delivery hereof by TCI, constitutes a valid and binding obligation of ARI
and Newco, enforceable against each of them in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally, and except that the
availability of equitable remedies, including specific performance, may be
subject to the discretion of any court before which any proceedings may be
brought.

(b) Non-Contravention. The execution and delivery of this Agreement by ARI
and Newco do not, and the consummation of the transactions contemplated hereby
will not, violate, conflict with or result in a breach of any provision of, or
constitute a default (with or without notice or lapse of time or both) under, or
result in the termination of, or accelerate the performance required by, or
result in a right of termination, cancellation or acceleration of any obligation
or the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets
(any such violation, conflict, breach, default, right of termination,
cancellation or acceleration, loss or creation, a "Violation") of, ARI, Newco or
any other ARI Subsidiary, under any provisions of

(i) the articles of incorporation, bylaws or similar governing
documents of ARI or Newco, or

(ii) any statute, law, ordinance, rule, regulation, judgment, decree,
order, injunction, writ, permit or license of any Governmental Authority
applicable to ARI, Newco or any other Subsidiary, or any of their
respective properties or assets, or

(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which ARI, Newco or any other
Subsidiary, is now a party or by which it or any of their respective
properties or assets may be bound or affected, excluding from the foregoing
clauses (ii) and (iii) such Violations as would not, in

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the aggregate, reasonably be expected to have a Material Adverse Effect on
ARI and its Subsidiaries taken as a whole.

(c) Statutory Approvals. No declaration, filing or registration with, or
notice to or authorization, consent or approval of any Governmental Authority
which has not been obtained (the "ARI Required Statutory Approvals") is
necessary for the execution and delivery of this Agreement by ARI or Newco or
the consummation by either of them of the transactions contemplated hereby, the
failure to obtain, make or give which could reasonably be expected to have a
Material Adverse Effect on ARI and its Subsidiaries, taken as a whole, it being
understood that references in this Agreement to "obtaining" such ARI Required
Statutory Approvals shall mean making such declarations, filings or
registrations; giving such notice; obtaining such consents or approvals; and
having such waiting periods expire as are necessary to avoid a violation of law.

(d) Compliance.

(i) Except as previously disclosed to TCI, neither ARI nor Newco is in
violation of or under investigation with respect to, or has been given
notice or been charged with any violation of, any law, statute, order,
rule, regulation, ordinance or judgment (including any applicable
environmental law, ordinance or regulation) of any Governmental Authority,
except for violations that do not have, and, could not reasonably be
expected to have, a Material Adverse Effect on ARI and its Subsidiaries,
taken as a whole.

(ii) Except as previously disclosed to TCI, ARI and each of its
Subsidiaries has all permits, licenses, franchises and other governmental
authorizations, consents and approvals necessary to conduct its business as
currently conducted, except those the failure of which to obtain could
reasonably be expected to have a Material Adverse Effect on ARI and its
Subsidiaries, taken as a whole.

SECTION 5.4. Financial Statements; SEC Documents. The ARI SEC Documents,
which include all the documents (other than preliminary material) that ARI was
required to file with the SEC since such date, as of their respective dates,
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, applicable to such ARI SEC Documents. None
of the ARI SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except for such statements, if any, as have been modified
by subsequent filings prior to the date hereof. The financial statements of ARI
contained in the ARI SEC Documents (collectively, the "ARI Financial
Statements") and the notes thereto comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and fairly present the financial
condition and the results of operations, changes in stockholders' equity, and
cash flow of ARI as at the respective dates of and for the periods referred to
in such financial statements, all in accordance with GAAP, subject, in the case
of interim financial statements, to normal recurring year-end adjustments (the
effect of which will not, individually or in the aggregate, have a Material
Adverse Effect on ARI) and the absence of notes (that, if presented, would not
differ materially from those included in the ARI Financial Statements).

SECTION 5.5. Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities.

(a) Except as set forth in the ARI SEC Documents, from January 1, 2001
through the date hereof ARI has conducted its business only in the ordinary
course of business consistent with past practice and there has not been, and no
fact or condition exists that could reasonably be expected to have, a Material
Adverse Effect on ARI and its Subsidiaries taken as a whole.

(b) ARI has no liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of a nature required by GAAP to be reflected in a
corporate balance sheet, except liabilities, obligations or contingencies (i)
that are accrued or reserved against in the most recent ARI Financial Statements
or reflected in the notes thereto, or (ii) that were incurred after the date of
such ARI Financial Statements

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in the ordinary course of business and could reasonably be expected to have a
Material Adverse Effect on ARI and its Subsidiaries taken as a whole.

SECTION 5.6. Litigation. Except as set forth in the ARI SEC Documents,
there are no claims, suits, actions or proceedings, pending or, to the knowledge
of ARI, threatened, nor are there, to the knowledge of ARI, any investigations
or reviews pending or threatened against, relating to or affecting ARI or its
Subsidiaries, or judgments, decrees, injunctions, rules or orders of any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator applicable to ARI or any of its Subsidiaries, that could reasonably
be expected to have a Material Adverse Effect on ARI and its Subsidiaries taken
as a whole.

SECTION 5.7. Registration Statement and Proxy Statement; SEC Documents.

(a) None of the information supplied by or on behalf of ARI for inclusion
or incorporation by reference in the registration statement on Form S-4
previously filed with the SEC by ARI in connection with the issuance of shares
of capital stock of ARI in the Merger (the "Registration Statement") or the
proxy statement constituting a part thereof, at the time the Registration
Statement became effective under the Securities Act, or with respect to the
proxy statement at all times prior to the obtaining of the ARI Stockholders'
Approval, contained any untrue statement of a material fact or omitted to state
any material fact with respect to ARI required to be stated therein or necessary
to make the statements therein with respect to ARI not misleading.

(b) The Registration Statement and the proxy statement constituting a part
thereof complied as to form in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.

SECTION 5.8. Vote Required. The ARI Stockholders' Approval is the only
vote of the holders of any class or series of the capital stock of ARI required
to approve this Agreement, the Merger and the other transactions contemplated
hereby.

SECTION 5.9. Disclosure. No representation or warranty of ARI or Newco
contained in this Agreement and no statement contained in any certificate or
document furnished or to be furnished by or on behalf of ARI or Newco or any of
their representatives pursuant thereto contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was or will be made, in
order to make the statements herein or therein not misleading or necessary in
order to fully and fairly provide the information required to be provided in any
such document, certificate or schedule.

SECTION 5.10. Stock Option Plans. Except as disclosed in the ARI SEC
Documents, ARI and its Subsidiaries have no stock option, stock appreciation
right, restricted stock, phantom stock, equity incentive, performance stock or
similar plan or arrangement pursuant to which any employee, advisor or Affiliate
of TCI is or may become entitled to purchase, directly or indirectly, any record
or beneficial interest in any equity security of TCI or any of its Subsidiaries.

SECTION 5.11. Affiliate Agreements. Except as disclosed in the ARI SEC
Documents and except for this Agreement, as of the date of this Agreement
neither ARI nor any of its Subsidiaries is a party to any oral or written
agreement with any of its Affiliates other than agreements terminable on not
more than 31 days notice entered into in the ordinary course of business.

SECTION 5.12. Taxes. Except as previously disclosed to TCI, ARI and each
of its Subsidiaries have duly filed all material tax returns required to be
filed (or such returns have been properly extended) other than those tax returns
the failure to file would not have a Material Adverse Effect on ARI and have
paid all taxes and other charges shown to be due on such returns, and there are
no tax liens upon any property or assets of ARI or any of its subsidiaries.
There are no outstanding agreements or waivers extending the statutory period of
limitations applicable to any Federal income tax return for any period. There
does not exist any issue that, if raised by any taxing authority with respect to
any fiscal period, would, singly or in the aggregate, be expected to result in
an assessment against ARI that would have, or

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could reasonably be expected to have, a Material Adverse Effect on ARI and its
Subsidiaries taken as a whole.

SECTION 5.13. Brokers and Finders. None of ARI or any of its subsidiaries
nor any of their respective partners, directors, officers or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or similar payments in connection
with the transactions contemplated by this Agreement.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF TCI

TCI represents and warrants to ARI and Newco as follows:

SECTION 6.1. Organization and Qualification. TCI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada. The Subsidiaries of TCI are as set forth in the TCI SEC Documents. TCI
has requisite corporate power and authority, and is duly authorized by all
necessary regulatory approvals and orders, to own, lease and operate its assets
and properties and to carry on its business as it is now being conducted, and is
duly qualified and in good standing to do business in each jurisdiction in which
the nature of its business or the ownership or leasing of its assets and
properties makes such qualification necessary, other than such failures which,
when taken together with all other such failures, will not have a Material
Adverse Effect on TCI.

SECTION 6.2. Capitalization.

(a) As of the date hereof, the authorized capital stock of TCI consists of
25,000,000 shares of TCI Common Stock and 10,000,000 shares of preferred stock,
of $0.01 par value.

(b) As of the date hereof, [8,042,629] shares of TCI Common Stock and
35,829 shares of Preferred Stock, consisting of 5,829 shares of Series A
Cumulative Convertible Preferred Stock and 30,000 shares of the Series C
Cumulative Convertible Preferred Stock were issued and outstanding. No shares of
the equity securities of TCI are held in the treasury of TCI.

(c) All of the issued and outstanding shares of the capital stock of TCI
are validly issued, fully paid and nonassessable and none of such stock was
issued in violation of preemptive rights.

(d) Except for this Agreement and except as described in the TCI SEC
Documents, there are no outstanding subscriptions, options, calls, contracts,
voting trusts, proxies or other understandings, restrictions, arrangements,
rights or warrants, including any right of conversion or exchange under any
outstanding security, instrument or other agreement, obligating TCI to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
the capital stock of TCI or obligating TCI to grant, extend or enter into any
such agreement or commitment.

SECTION 6.3. Authority; Non-Contravention; Statutory Approvals;
Compliance.

(a) Authority.

(i) TCI has all requisite power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby.

(ii) The execution and delivery of this Agreement and the consummation
by TCI of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of TCI.

(iii) The TCI Stockholders' Approval has been obtained.

(iv) This Agreement has been duly and validly executed and delivered
by TCI and, assuming the due authorization, execution and delivery hereof
by ARI and Newco, constitutes the valid and binding obligation of TCI,
enforceable against TCI in accordance with its terms, except as would be
limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or other similar

A-10

laws affecting the enforcement of creditors' rights generally and except
that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.

(b) Non-Contravention. The execution and delivery of this Agreement by TCI
do not, and the consummation of the transactions contemplated hereby will not,
result in any Violation by TCI or any of its Subsidiaries under any provisions
of

(i) the articles of incorporation, bylaws or similar governing
documents of TCI or any such Subsidiary,

(ii) any statute, law, ordinance, rule, regulation, judgment, decree,
order, injunction, writ, permit or license of any Governmental Authority
applicable to TCI or any of its Subsidiaries or any of their respective
properties or assets, or

(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which TCI or any of its Subsidiaries
is now a party or by which it or any of their respective properties or
assets may be bound or affected, excluding from the foregoing clauses (ii)
and (iii) such Violations as would not, in the aggregate, reasonably be
expected to have a Material Adverse Effect on TCI and its Subsidiaries,
taken as a whole.

(c) Statutory Approvals. No declaration, filing or registration with, or
notice to or authorization, consent or approval of any Governmental Authority
which has not been obtained (the "TCI Required Statutory Approvals") is
necessary for the execution and delivery of this Agreement by TCI or the
consummation by TCI of the transactions contemplated hereby, the failure to
obtain, make or give which would reasonably likely have a Material Adverse
Effect on TCI and its Subsidiaries taken as a whole, it being understood that
references in this Agreement to "obtaining" such TCI Required Statutory
Approvals shall mean making such declarations, filings or registrations; giving
such notice; obtaining such consents or approvals; and having such waiting
periods expire as are necessary to avoid a violation of law.

(d) Compliance.

(i) Except as previously disclosed to ARI, neither TCI nor any of its
Subsidiaries is in violation of or under investigation with respect to, or
has been given notice or been charged with any violation of, any law,
statute, order, rule, regulation, ordinance or judgment (including any
applicable environmental law, ordinance or regulation) of any Governmental
Authority, except for violations that do not have, and, could not
reasonably be expected to have, a Material Adverse Effect on TCI and its
Subsidiaries taken as a whole.

(ii) Except as set forth in Section 6.3(d) of the TCI Disclosure
Schedule, TCI and each of its Subsidiaries has all permits, licenses,
franchises and other governmental authorizations, consents and approvals
necessary to conduct its business as currently conducted, except those the
failure to obtain which could not reasonably be expected to have a Material
Adverse Effect on TCI and its Subsidiaries taken as a whole.

SECTION 6.4. Financial Statements; SEC Documents. The TCI SEC Documents,
which include all the documents (other than preliminary material) that TCI was
required to file with the SEC since such date, as of their respective dates,
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, applicable to such TCI SEC Documents. None
of the TCI SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except for such statements, if any, as have been modified
by subsequent filings prior to the date hereof. The financial statements of TCI
contained in the TCI SEC Documents (collectively, the "TCI Financial
Statements") and the notes thereto comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and fairly present the financial
condition and the results of operations,

A-11

changes in Stockholders' equity, and cash flow of TCI as at the respective dates
of and for the periods referred to in such financial statements, all in
accordance with GAAP, subject, in the case of interim financial statements, to
normal recurring year-end adjustments (the effect of which will not,
individually or in the aggregate, have a Material Adverse Effect on TCI) and the
absence of notes (that, if presented, would not differ materially from those
included in the TCI Financial Statements).

SECTION 6.5. Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities.

(a) Except as set forth in the TCI SEC Documents, from January 1, 2000
through the date hereof TCI has conducted its business only in the ordinary
course of business consistent with past practice and there has not been, and no
fact or condition exists that could reasonably be expected to have, a Material
Adverse Effect on TCI and its Subsidiaries taken as a whole.

(b) TCI has no liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of a nature required by GAAP to be reflected in a
corporate balance sheet, except liabilities, obligations or contingencies (i)
that are accrued or reserved against in the most recent TCI Financial Statements
or reflected in the notes thereto, or (ii) that were incurred after the date of
such TCI Financial Statements in the ordinary course of business and could
reasonably be expected to have a Material Adverse Effect on TCI and its
Subsidiaries taken as a whole.

SECTION 6.6. Litigation. Except as set forth in the TCI SEC Documents,
there are no claims, suits, actions or proceedings, pending or, to the knowledge
of TCI, threatened, nor are there, to the knowledge of TCI, any investigations
or reviews pending or threatened against, relating to or affecting TCI or its
Subsidiaries, or judgments, decrees, injunctions, rules or orders of any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator applicable to TCI or any of its Subsidiaries, that could reasonably
be expected to have a Material Adverse Effect on TCI and its Subsidiaries taken
as a whole.

SECTION 6.7. Registration Statement and Proxy Statement.

(a) None of the information supplied by or on behalf of TCI for inclusion
or incorporation by reference in the registration statement on Form S-4
previously filed with the SEC by ARI in connection with the issuance of shares
of capital stock of ARI in the Merger (the "Registration Statement") or the
joint proxy statement constituting a part thereof, at the time the Registration
Statement became effective under the Securities Act, or with respect to the
joint proxy statement at all times prior to the obtaining of the TCI
Stockholders' Approval, contained any untrue statement of a material fact or
omitted to state any material fact with respect to TCI required to be stated
therein or necessary to make the statements therein with respect to TCI not
misleading.

(b) The Registration Statement and the joint proxy statement constituting a
part thereof complied as to form in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.

SECTION 6.8. Vote Required. The "TCI Stockholders' Approval" is the only
vote of the holders of any class or series of the capital stock of TCI required
to approve this Agreement, the Merger and the other transactions contemplated
hereby.

SECTION 6.9. Disclosure. No representation or warranty of TCI contained
in this Agreement and no statement contained in any certificate or document
furnished or to be furnished by or on behalf of TCI or any of its
representatives pursuant thereto contains or will contain any untrue statement
of a material fact, or omits or will omit to state any material fact necessary,
in light of the circumstances under which it was or will be made, in order to
make the statements herein or therein not misleading or necessary in order to
fully and fairly provide the information required to be provided in any such
document, certificate or schedule.

SECTION 6.10. Stock Option Plans. Except as disclosed in the TCI SEC
Documents, TCI and its Subsidiaries have no stock option, stock appreciation
right, restricted stock, phantom stock, equity incentive, performance stock or
similar plans or arrangement pursuant to which any employee, advisor or

A-12

Affiliate of TCI is or may become entitled to purchase, directly or indirectly,
any record or beneficial interest in any equity security TCI or any of its
Subsidiaries.

SECTION 6.11. Affiliate Agreements. Except as disclosed in the TCI SEC
Documents and except for this Agreement, as of the date of this Agreement TCI is
not a party to any oral or written agreement with any of its Affiliates other
than agreements terminable on not more than 31 days notice entered into in the
ordinary course of business.

SECTION 6.12. Taxes. Except as previously disclosed to ARI, TCI and each
of its Subsidiaries have duly filed all material tax returns required to be
filed (or such returns have been properly extended) other than those tax returns
the failure to file would not have a Material Adverse Effect on TCI and have
paid all taxes and other charges shown to be due on such returns, and there are
no tax liens upon any property or assets of TCI or any of its subsidiaries.
There are no outstanding agreements or waivers extending the statutory period of
limitations applicable to any Federal income tax return for any period. There
does not exist any issue that, if raised by any taxing authority with respect to
any fiscal period, would, singly or in the aggregate, be expected to result in
an assessment against TCI that would have, or is reasonably likely to have, a
Material Adverse Effect on TCI.

SECTION 6.13. Brokers and Finders. Except for fees of Houlihan, Lokey,
Howard and Zukin, none of TCI or any of its subsidiaries nor any of their
respective partners, directors, officers or employees has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or similar payments in connection with the transactions
contemplated by this Agreement.

ARTICLE VII

CONDUCT OF BUSINESS PENDING THE MERGER

SECTION 7.1. Ordinary Course of Business. The parties shall conduct their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and use all commercially reasonable
efforts to preserve their respective business organizations and goodwill,
preserve the goodwill and relationships with customers, suppliers, distributors
and others having business dealings with them and, subject to prudent management
of workforce needs and ongoing programs currently in force, keep available the
services of their present officers and employees.

ARTICLE VIII

ADDITIONAL AGREEMENTS

SECTION 8.1. Public Announcements. ARI and TCI shall cooperate with each
other in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and shall not issue any public announcement or
statement prior to consultation with the other party; provided that each party
recognizes the other party's obligations imposed by law or any applicable
national securities exchange, and will endeavor to accommodate such obligations.

SECTION 8.2. Rule 145 Affiliates. TCI shall identify in a letter to ARI
all persons who are, at the Closing Date, "affiliates" of TCI as such term is
used in Rule 145 under the Securities Act. TCI shall use its reasonable efforts
to cause its affiliates to deliver to ARI on or prior to the Closing Date a
written agreement to the effect that:

(i) any future disposition by such person of any ARI Preferred Stock
such person receives as the result of the Merger will be accomplished in
accordance with Rule 145(d) under the Securities Act; and

(ii) such person agrees that appropriate legends shall be placed upon
the certificates evidencing ownership of ARI Preferred Stock that such
person receives as a result of the Merger.

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SECTION 8.3. Covenant to Satisfy Conditions.

(a) Each of ARI, TCI and Newco shall take all reasonable actions necessary
to comply promptly with all legal requirements that may be imposed on it with
respect to this Agreement.

(b) Subject to the terms and conditions hereof, and taking into account the
circumstances and giving due weight to the materiality of the matter involved or
the action required, ARI, TCI and Newco shall each use all reasonable efforts to
take or cause to be taken all actions, and to do or cause to be done all things,
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger and the other transactions contemplated
hereby.

SECTION 8.4. Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby and thereby shall be
paid by the party incurring such expenses, except that those expenses incurred
in connection with printing and mailing the Proxy Statement, as well as the
filing fee relating thereto, shall be shared equally by ARI, on the one hand,
and TCI, on the other hand.

SECTION 8.5. Newco Activities. Until the Effective Time, except in
connection with or furtherance of the transactions contemplated by this
Agreement, Newco will incur no obligations or liabilities nor engage in any
business or activities of any type or kind whatsoever or enter into any
agreements or arrangements with any person or entity.

SECTION 8.6. Indemnification, Directors and Officers' Insurance.

(a) For a period of three (3) years after the Effective Time, the Surviving
Corporation (i) shall maintain in effect the current provisions regarding
indemnification of officers and directors contained in the charter and bylaws of
TCI and each of its Subsidiaries and any directors, officers or employees
indemnification agreements of TCI or its Subsidiaries; (ii) shall maintain in
effect the current policies of directors and officers liability insurance and
fiduciary liability insurance maintained by TCI, if any, ("D&O Insurance")
(provided that the Surviving Corporation or ARI may substitute therefore
policies of at least the same coverage and amounts containing terms and
conditions which are, in the aggregate, no less advantageous to the insured),
with respect to claims arising from facts or events which occurred on or before
the Effective Time, provided, however, if the existing D&O Insurance expires, is
terminated or cancelled, or if the annual premium therefore is increased to an
amount in excess of 150% of the last annual premium paid prior to the date
hereof, in each case during such six year period, the Surviving Corporation will
use commercially reasonable efforts to obtain D&O Insurance in an amount and
scope as great as can be obtained for the remainder of such period, or from year
to year thereafter, for a premium not in excess (on an annualized basis) of 150%
of the current premiums therefore, and (iii) shall indemnify the directors and
officers of TCI and its Subsidiaries to the fullest extent to which TCI is
permitted to indemnify such officers and directors under their respective
articles of incorporation and bylaws and applicable law. Notwithstanding the
foregoing provisions, TCI's obligations under this Section 8.6 shall be deemed
satisfied if ARI shall perform, or agree to perform, such obligations, and in
such event, ARI shall not be obligated to obtain insurance in excess of that
which would be required of TCI hereunder.

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action, suit, proceeding or investigation, (i) ARI and the Surviving
Corporation, as the case may be, shall pay the reasonable fees and out of pocket
expenses of counsel selected by the Indemnified Parties, which counsel shall be
reasonably satisfactory to ARI and the Surviving Corporation, promptly after
statements therefore are received and shall pay all other reasonable out of
pocket expenses in advance of the final disposition of such action, (ii) ARI and
the Surviving Corporation will corporate and use all reasonable efforts to
assist in the vigorous defense of any such matter, and (iii) to the extent any
determination is required to be made with respect to whether an Indemnified
Party's conduct complies with the standard set forth under Nevada Law and ARI's
or the Surviving Corporation's respective articles of incorporation or bylaws,
such determination shall be made by independent legal counsel acceptable to ARI
or the Surviving Corporation, as the case may be, and the Indemnified Party;
provided, however, that neither ARI nor the Surviving Corporation shall be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld). The Indemnified Parties as a group may not
retain more than one law firm to represent them with respect to each matter
indemnified hereunder unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties, whereupon the Indemnified Parties right
to representation shall be limited to the smallest number of law firms who,
consistent with applicable standards of professional conduct, may represent such
Indemnified Parties without conflict of interest reasonably likely to require
disqualification thereof.

ARTICLE IX

CONDITIONS

SECTION 9.1. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing Date of the following
conditions, except, to the extent permitted by applicable law, that such
conditions may be waived in writing;

(a) Approval of Second Amendment. An final order shall have been
issued approving the Second Amendment in the form granted preliminary
approval by the United States District Court for the Northern District of
California on December 18, 2001.

(b) Stockholder Approval. The TCI Stockholders' Approval and the ARI
Stockholders' Approval shall have been obtained.

(c) No Injunction. No temporary restraining order or preliminary or
permanent injunction or other order by any federal or state court
preventing consummation of the Merger shall have been issued and continue
in effect, and the Merger and the other transactions contemplated hereby
shall not have been prohibited under any applicable federal or state law or
regulation.

(d) Statutory Approvals. The ARI Required Statutory Approvals and the
TCI Required Statutory Approvals shall have been obtained at or prior to
the Effective Time.

SECTION 9.2. Conditions to Obligation of ARI to Effect the Merger. The
obligation of ARI to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by ARI in writing;

(a) Satisfaction of Conditions. The conditions to the parties
respective obligations set forth in Section 9.1 above shall have been
satisfied or waived.

(b) Performance of Obligations of TCI. TCI shall have performed in
all material respects its agreements and covenants contained in or
contemplated by this Agreement required to be performed by it at or prior
to the Effective Time.

(c) Representations and Warranties. The representations and
warranties of TCI set forth in this Agreement shall be true and correct in
all material respects as of the date hereof and as of the

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Closing Date as if made on and as of the Closing Date, except as otherwise
contemplated by this Agreement.

(d) Material Adverse Effect. No Material Adverse Effect with respect
to TCI shall have occurred and there shall exist no fact or circumstance
that would have, or would be reasonably likely to have, a Material Adverse
Effect on TCI.

SECTION 9.3. Conditions to Obligation of TCI to Effect the Merger. The
obligation of TCI to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by TCI in writing:

(a) Satisfaction of Conditions. The conditions to the parties
respective obligations set forth in Section 9.1 above shall have been
satisfied or waived.

(b) Performance of Obligations of ARI. ARI shall have performed in
all material respects its agreements and covenants contained in or
contemplated by this Agreement required to be performed by it at or prior
to the Effective Time.

(c) Representations and Warranties. The representations and
warranties of ARI set forth in this Agreement shall be true and correct in
all material respects as of the date hereof and as of the Closing Date as
if made on and as of the Closing Date, except as otherwise contemplated by
this Agreement.

(d) ARI Material Adverse Effect. No Material Adverse Effect with
respect to ARI shall have occurred and there shall exist no fact or
circumstance that would have, or would be reasonably likely to have a
Material Adverse Effect on ARI.

ARTICLE X

TERMINATION, AMENDMENT AND WAIVER

SECTION 10.1. Termination. The Merger may be abandoned at anytime prior
to the Closing Date, whether before or after approval by the stockholders of the
respective parties hereto contemplated by this Agreement:

(a) by mutual written consent of the Boards of Directors of ARI, TCI
and Newco;

(b) by ARI, TCI or Newco, if any state or federal law, order, rule or
regulation is adopted or issued, that has the effect of prohibiting the
Merger, or by ARI, TCI or Newco, if any court of competent jurisdiction in
the United States or any State shall have issued an order, judgment or
decree permanently restraining, enjoining or otherwise prohibiting the
Merger.

(i) there shall have been any material breach of any representation
or warranty, or any material breach of any covenant or agreement, of ARI
hereunder, and such breach shall not have been remedied within twenty
(20) days after receipt by ARI of notice in writing from TCI, specifying
the nature of such breach and requesting that it be remedied;

(ii) the Board of Directors of ARI shall withdraw or modify in any
manner materially adverse to TCI its approval or recommendation of this
Agreement or the Merger or resolve to take such action; or

(d) by ARI, by written notice to TCI, if

(i) there shall have been any material breach of any representation
or warranty, or any material breach of any covenant or agreement, of TCI
hereunder, and such breach shall not have been remedied within twenty
(20) days after receipt by TCI of notice in writing from ARI, specifying
the nature of such breach and requesting that it be remedied, or

A-16

(ii) the Board of Directors of TCI shall withdraw or modify in any
manner materially adverse to ARI its approval or recommendation of this
Agreement or the Merger or resolve to take such action.

SECTION 10.2. Effect of Abandonment. In the event that the Merger shall
be abandoned by ARI, TCI or Newco, or by their agreement, pursuant to Section
10.1, this Agreement shall terminate except as specifically provided herein and
there shall be no liability hereunder on the part of either ARI, TCI or Newco or
their respective directors or officers, except that no such termination shall
relieve any party from liability by reason of any willful breach of any
agreement, representation, warranty or covenant contained in this Agreement.

SECTION 10.3. Amendment.

(a) This Agreement may be amended by the parties hereto pursuant to action
of their respective Boards of Directors, at any time before or after approval
hereof by the stockholders of TCI and ARI and prior to the Effective Time, but
after such stockholder approvals, no such amendment shall

(i) alter or change the amount or kind of shares to be received or
exchanged for or on conversion of any class or series of capital stock of
either corporation as provided under Article II, or

(ii) alter or change any of the terms and conditions of this Agreement
if any of the alterations or changes, alone or in the aggregate, would
materially and adversely affect the rights of holders of TCI Common Stock
or the ARI Common Stock, in each case without the further approval of such
stockholders.

(b) This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.

SECTION 10.4. Waiver. At any time prior to the Effective Time, the
parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by a duly authorized officer of such party.

ARTICLE XI

GENERAL PROVISIONS

SECTION 11.1. Survival of Representations, Warranties, Covenants and
Agreements. All representations, warranties, covenants and agreements in this
Agreement shall survive the Merger indefinitely.

SECTION 11.2. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) if delivered personally, or
(b) if sent by overnight courier service (receipt confirmed in writing), or (c)
if delivered by facsimile transmission (with receipt confirmed), or (d) five (5)
days after being mailed by registered or certified mail (return receipt
requested) to the parties, in each case to the following addresses (or at such
other address for a party as shall be specified by like notice):

If to ARI or Newco:

One Hickory Centre
1800 Valley View Lane
Suite 300
Dallas, Texas 75234
Attn: President

A-17

with a copy to:
Jeffrey M. Sone
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202

If to TCI:
One Hickory Centre
1800 Valley View Lane
Suite 300
Dallas, Texas 75234
Attn: President

with a copy to:
Steven C. Metzger
Prager, Metzger & Kroemer, PLLC
2626 Cole Avenue, Suite 900
Dallas, Texas 75204

SECTION 11.3. Miscellaneous.

(a) This Agreement, including the documents and instruments referred to
herein, (i) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof, (ii) shall not be assigned
by operation of law or otherwise, and (iii) shall be governed by and construed
in accordance with the laws of the State of Nevada applicable to contracts
executed in and to be fully performed in such State, without giving effect to
its conflicts of laws statutes, rules or principles.

(b) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect. The parties hereto shall
negotiate in good faith to replace any provision of this Agreement so held
invalid or unenforceable with a valid provision that is as similar as possible
in substance to the invalid or unenforceable provision.

SECTION 11.4. Interpretation. When reference is made in this Agreement to
Articles, Sections or Exhibits, such reference shall be to an Article, Section
or Exhibit of this Agreement, as the case may be, unless otherwise indicated.
The table of contents and headings contained in this Agreement are for reference
purposes and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes", or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." Whenever "or" is used in this Agreement it shall be construed in
the nonexclusive sense.

SECTION 11.5. Counterparts; Effect. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which shall constitute one and the same agreement.

SECTION 11.6. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and, nothing in this
Agreement, express or implied, is intended to confer upon any person any rights
or remedies of any nature whatsoever under or by reason of this Agreement.

SECTION 11.7. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.

A-18

SECTION 11.8. Further Assurances. Each party hereto shall execute such
further documents and instruments and take such further actions as may
reasonably be requested by any other party hereto in order to consummate the
Merger in accordance with the terms hereof.

[remainder of page intentionally left blank]

A-19

IN WITNESS WHEREOF, ARI, TCI and Newco have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.

AMERICAN REALTY INVESTORS, INC.

By:
------------------------------------
Name:
Title:

TRANSCONTINENTAL REALTY ACQUISITION
CORPORATION

By:
------------------------------------
Name:
Title:

TRANSCONTINENTAL REALTY INVESTORS,
INC.

By:
------------------------------------
Name:
Title:

A-20

APPENDIX B

AGREEMENT AND PLAN OF MERGER
AMONG
AMERICAN REALTY INVESTORS, INC.,
INCOME OPPORTUNITY ACQUISITION CORPORATION,
AND
INCOME OPPORTUNITY REALTY INVESTORS, INC.

TABLE OF CONTENTS

PAGE
----

ARTICLE I CERTAIN DEFINITIONS......................................... B-1
ARTICLE II THE MERGER.................................................. B-3
Section 2.1. The Merger.................................................. B-3
Section 2.2. Effective Time of the Merger................................ B-3
Section 2.3. Articles of Incorporation................................... B-3
Section 2.4. Bylaws...................................................... B-3
Section 2.5. Effects of Merger........................................... B-3
ARTICLE III EXCHANGE OF SHARES.......................................... B-3
Section 3.1. Effect of Merger on Capital Stock........................... B-3
Section 3.2. Method of Election.......................................... B-4
Section 3.3. Delivery and Exchange of Certificates....................... B-4
ARTICLE IV THE CLOSING................................................. B-5
Section 4.1. Closing..................................................... B-5
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ARI AND NEWCO............. B-5
Section 5.1. Organization and Qualification.............................. B-5
Section 5.2. Capitalization.............................................. B-6
Section 5.3. Authority; Non-Contravention; Statutory Approvals;
Compliance.................................................. B-6
Section 5.4. Financial Statements; SEC Documents......................... B-7
Section 5.5. Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities................................................. B-8
Section 5.6. Litigation.................................................. B-8
Section 5.7. Registration Statement and Proxy Statement; SEC Documents... B-8
Section 5.8. Vote Required............................................... B-8
Section 5.9. Disclosure.................................................. B-9
Section 5.10. Stock Option Plans.......................................... B-9
Section 5.11. Affiliate Agreements........................................ B-9
Section 5.12. Taxes....................................................... B-9
Section 5.13. Brokers and Finders......................................... B-9
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF IOT....................... B-9
Section 6.1. Organization and Qualification.............................. B-9
Section 6.2. Capitalization.............................................. B-9
Section 6.3. Authority; Non-Contravention; Statutory Approvals;
Compliance.................................................. B-10
Section 6.4. Financial Statements; SEC Documents......................... B-11
Section 6.5. Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities................................................. B-11
Section 6.6. Litigation.................................................. B-11
Section 6.7. Registration Statement and Proxy Statement.................. B-12
Section 6.8. Vote Required............................................... B-12
Section 6.9. Disclosure.................................................. B-12
Section 6.10. Stock Option Plans.......................................... B-12
Section 6.11. Affiliate Agreements........................................ B-12
Section 6.12. Taxes....................................................... B-12
Section 6.13. Brokers and Finders......................................... B-12
ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER...................... B-13
Section 7.1. Ordinary Course of Business................................. B-13

B-i

PAGE
----

ARTICLE VIII ADDITIONAL AGREEMENTS....................................... B-13
Section 8.1. Public Announcements........................................ B-13
Section 8.2. Rule 145 Affiliates......................................... B-13
Section 8.3. Covenant to Satisfy Conditions.............................. B-13
Section 8.4. Expenses.................................................... B-13
Section 8.5. Newco Activities............................................ B-13
Section 8.6. Indemnification, Directors and Officers' Insurance.......... B-14
ARTICLE IX CONDITIONS.................................................. B-15
Section 9.1. Conditions to Each Party's Obligation to Effect the
Merger...................................................... B-15
Section 9.2. Conditions to Obligation of ARI to Effect the Merger........ B-15
Section 9.3. Conditions to Obligation of IOT to Effect the Merger........ B-15
ARTICLE X TERMINATION, AMENDMENT AND WAIVER........................... B-16
Section 10.1. Termination................................................. B-16
Section 10.2. Effect of Abandonment....................................... B-16
Section 10.3. Amendment................................................... B-16
Section 10.4. Waiver...................................................... B-17
ARTICLE XI GENERAL PROVISIONS.......................................... B-17
Section 11.1. Survival of Representations, Warranties, Covenants and
Agreements.................................................. B-17
Section 11.2. Notices..................................................... B-17
Section 11.3. Miscellaneous............................................... B-17
Section 11.4. Interpretation.............................................. B-18
Section 11.5. Counterparts; Effect........................................ B-18
Section 11.6. Parties in Interest......................................... B-18
Section 11.7. Specific Performance........................................ B-18
Section 11.8. Further Assurances.......................................... B-18

B-ii

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER, dated as of , 2002 (this
"Agreement"), is by and among American Realty Investors, Inc., a Nevada
corporation ("ARI"), Income Opportunity Acquisition Corporation, a Nevada
corporation, ("Newco") and Income Opportunity Realty Investors, Inc., a Nevada
corporation ("IOT").

WHEREAS, IOT and certain affiliates of ARI are parties to that certain
Second Amendment to the Modification of Stipulation of Settlement (the "Second
Amendment") entered into in connection with certain proceedings know as Jack
Olive, et al, as plaintiffs, v. Gene E. Phillips, et al, as defendants, and
National Income Realty Trust, Continental Mortgage and Equity Trust,
Transcontinental Realty Investors and IOT, as nominal defendants (Case No. C
89-4331-MHP) in the United States District Court for the Northern District of
California; and

Whereas ARI and IOT have entered into this Agreement to give effect to the
transactions contemplated in the Second Amendment; and

WHEREAS, boards of directors of each of ARI and IOT have determined that it
is in the best interests of each company and their stockholders that Newco be
merged with and into IOT, with IOT being the survivor, as more specifically
described herein (the "Merger"); and

ARTICLE I

CERTAIN DEFINITIONS

As used in this Agreement, the following terms shall have the following
meanings:

"Act" shall mean the Nevada Mergers and Exchanges of Interest Act, as
amended.

"Affiliate" shall have the meaning assigned that term in Rule 12b-2
promulgated under the Exchange Act.

"ARI Common Stock" shall mean the common stock, par value $0.01 per share,
of ARI.

"ARI Preferred Stock" shall mean the Series H Preferred Stock, par value
$2.00 per share, of ARI.