Edgar Filing: AMERICAN REALTY INVESTORS INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 2002
REGISTRATION NO. 333-83292

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

FORM S-4/A

AMENDMENT NO. 3

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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
incorporation or organization) Classification Code Number) Identification No.)

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)

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)

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

10% Series G Cumulative Redeemable Convertible
preferred stock, par value $2.00 per share 4,025,344(1) Not applicable $128,174,675.67(2) $11,792.07(3)
Common stock, par value $0.01 per share 10,070,618(4) Not applicable $0(5) $0(6)
10% Series H Cumulative Redeemable 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: $152,996,476.92 $14,075.68

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

---------------
(1) Represents the maximum number of shares of Series G redeemable convertible
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
redeemable convertible 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
$11,792.07, which is equal to 0.000092 multiplied by the proposed maximum
offering price of $128,174,675.67. $11,786.96 has been previously paid.

(4) Represents the maximum number of shares of common stock of ARL estimated to
be issued upon conversion of the shares of Series G redeemable convertible
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 redeemable convertible 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 redeemable convertible
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 redeemable convertible 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) Previously paid.

(10) Represents the maximum number of shares of common stock of ARL estimated to
be issued upon conversion of the shares of Series H redeemable convertible
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 redeemable convertible 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.

SUBJECT TO COMPLETION, DATED JULY 31, 2002.

AMERICAN REALTY TRANSCONTINENTAL REALTY INCOME OPPORTUNITY REALTY
INVESTORS, INC. INVESTORS, INC. 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, with TCI and IOT being the surviving corporations (the mergers and related
transactions are collectively referred to as the business combination). 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. In order to complete the business combination, we must, among other
things, obtain the required approval of the ARL, TCI and IOT stockholders.

When the mergers are completed, holders of TCI's and IOT's common stock
(other than ARL and its affiliates) will receive $17.50 and $19.00,
respectively, 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 or Series H redeemable convertible preferred stock for each
share of TCI or IOT common stock they currently own, respectively. Each share of
TCI and IOT common stock held by certain affiliates of ARL will be converted
into one share of the Series G or Series H redeemable convertible preferred
stock, respectively, and shares held by ARL and its subsidiaries will be
cancelled. The cash prices to be received by TCI and IOT stockholders are less
than the calculated book values per common share at March 31, 2002, which were
$26.78 and $28.00, respectively. See "Comparative per Share Information."

During a 75 day period commencing on the 15th day after ARL publicly
files its first Form 10-Q with the Securities and Exchange Commission following
the consummation of the TCI merger and/or the IOT merger, the Series G and the
Series H redeemable convertible preferred stock may be converted at the option
of the holder into 2.5 and 2.25 shares of ARL common stock, respectively.
Beginning 45 days after ARL files its first Form 10-Q following the consummation
of the TCI and/or IOT mergers, ARL may provide notice of and thereafter redeem
the Series G and Series H redeemable convertible preferred stock upon payment of
the liquidation value of $20.00 and $21.50 per share, respectively. By electing
to receive Series H redeemable convertible preferred stock, stockholders of IOT
will no longer be stockholders in a Real Estate Investment Trust, or REIT, but
will become stockholders in a taxable corporation and, therefore, will not
receive 95% of ARL's income in the form of dividends as they did for IOT.

At March 31, 2002, the total value of TCI assets and liabilities was
$720,198,000 and $498,160,000, respectively. No goodwill is acquired or
generated through the business combination. Likewise, the total value of IOT
assets and liabilities was $91,833,000 and $35,222,000, respectively and no
goodwill is acquired or generated through the business combination. The
unaudited pro forma net earnings per share of the ARL common stock at December
31, 2001 was $1.12, which is less than the historical net earnings per share of
$2.32 of the TCI common stock and more than the loss per share of ($2.32) of the
IOT common stock. This differential in pro forma net income per share was not
considered by the TCI and IOT board of directors, nor was it available at the
time the boards were considering the business combination.

The Series G and H redeemable convertible preferred stock have limited
voting rights and, except as otherwise provided by law, may vote (i) only with
respect to an amendment to ARL's restated articles of incorporation or bylaws
that would materially alter the existing terms of such class of preferred stock
and (ii) at any time or times for the election of two directors when all or any
portion of the dividends on such class for any six quarterly dividends, whether
or not consecutive, shall be in arrears and unpaid.

1,165,699 shares of the Series G redeemable convertible preferred stock
and 106,802 shares of the Series H redeemable convertible 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 redeemable convertible preferred stock or the Series H
redeemable convertible preferred stock, respectively, persons not affiliated
with ARL will hold approximately 2,859,645 shares of Series G redeemable
convertible preferred stock and 576,480 shares of Series H redeemable
convertible preferred stock, representing approximately 71% and 84.4% of all
issued and outstanding shares of the Series G redeemable convertible preferred
stock and the Series H redeemable convertible preferred stock, respectively. In
the event all stockholders of TCI and IOT elect to receive cash in exchange for
their shares of TCI and IOT common stock (other than affiliates of ARL who must
take preferred stock) the maximum cash consideration payable in the aggregate to
the TCI and IOT stockholders would be $50,043,787 and $10,953,120, respectively.

The shares of common stock of ARL and TCI are traded on the New York
Stock Exchange under the symbols "ARL" and "TCI", respectively. The shares of
common stock of IOT are traded on the American Stock Exchange under the symbol
"IOT". On _____, 2002, the average of the high and low price for the common
stock of ARL, TCI and IOT was $____, $_____ and $____, respectively.

SEE THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 28 FOR A DISCUSSION OF
CERTAIN FACTORS YOU SHOULD CONSIDER WHEN DECIDING HOW TO VOTE.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE PREFERRED STOCK OR COMMON STOCK TO BE
ISSUED UNDER THIS JOINT PROXY STATEMENT AND PROSPECTUS; HAS APPROVED OR
DISAPPROVED OF THE TRANSACTIONS UNDER THIS JOINT PROXY STATEMENT AND PROSPECTUS;
PASSED UPON THE MERITS OR FAIRNESS OF THE TRANSACTION; DETERMINED IF THIS JOINT
PROXY STATEMENT AND PROSPECTUS IS TRUTHFUL OR INCOMPLETE; OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS JOINT PROXY STATEMENT AND
PROSPECTUS. 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 __________, 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 75234 on ________, 2002 at 2:00 p.m. local
time. At the special meeting, ARL's stockholders will be asked to consider and
vote upon:

- 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;

- 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

- 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 June 4, 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 by
calling 1-800-PROXIES or over the Internet by accessing www.voteproxy.com. For
stockholders who wish to vote telephonically, after entering your control
number, you will hear the name of the company and will be offered the option to
vote for all of the recommendations or to vote on each proposal individually.
Proposals are referred to by proposal number (as shown on the proxy card). For
stockholders who vote via the Internet, after entering your control number, you
will be offered the option to vote for all of the recommendations or to vote on
each proposal individually. The text of each proposal is displayed exactly as it
appears on the proxy card. After the voting process is completed, you will be
shown how you have voted and given the opportunity to change your vote. Prior to
ending the session, you will be asked if you wish to vote on another proxy. If
yes, the process will be repeated for the next control number entered.

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

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
TRANSCONTINENTAL REALTY INVESTORS, INC.
TO BE HELD ____________, 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 75234 on ____________, 2002 at
3:00 p.m. local time. At the special meeting, TCI's stockholders will be asked
to consider and vote upon:

- 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

- 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 June 4, 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 _____________, 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 75234 on _____________, 2002 at 4:00
p.m. local time. At the special meeting, IOT's stockholders will be asked to
consider and vote upon:

- 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

- 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 June 4, 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
Transcontinental Realty Investors, Inc.

Dallas, Texas
____________, 2002

TABLE OF CONTENTS

PAGE
----

Summary.................................................................................................... 1
Forward Looking Statements................................................................................. 33
Risk Factors............................................................................................... 34
The Special Meetings....................................................................................... 45
Special Factors............................................................................................ 50
Interests of Directors and Officers of ARL, TCI and IOT in the Business Combination........................ 91
The Plans of Merger........................................................................................ 92
Comparison of Ownership of Shares.......................................................................... 97
The Advisor - BCM.......................................................................................... 111
Certain Relationships and Related Transactions of BCM, ARL, TCI and IOT.................................... 119
Certain Information Regarding TCI Common Stock and IOT Common Stock........................................ 130
Information About ARL...................................................................................... 134
Business of ARL......................................................................................... 134
Properties of ARL....................................................................................... 140
Legal Proceedings....................................................................................... 158
Selected Financial Data of ARL.......................................................................... 159
Management's Discussion and Analysis of Financial Condition and Results of Operations of ARL............ 161
Quantitative and Qualitative Disclosures about Market Risks of ARL...................................... 182
Management of ARL....................................................................................... 184
Directors and Executive Officers........................................................................ 184
Security Ownership of Certain Beneficial Owners and Management of ARL................................... 186
Description of the Capital Stock of ARL................................................................. 189
Information About TCI...................................................................................... 205
Business of TCI......................................................................................... 205
Properties of TCI....................................................................................... 209
Legal Proceedings....................................................................................... 225
Selected Financial Data of TCI.......................................................................... 227
Management's Discussion and Analysis of Financial Condition and Results of Operations of TCI............ 228
Quantitative and Qualitative Disclosures Regarding Market Risk of TCI................................... 237
Management of TCI....................................................................................... 239
Directors and Executive Officers of TCI................................................................. 239
Executive Compensation of TCI........................................................................... 240
Security Ownership of Certain Beneficial Owners and Management of TCI................................... 242
Information About IOT...................................................................................... 246
Business of IOT......................................................................................... 246
Properties of IOT....................................................................................... 249
Legal Proceedings of IOT................................................................................ 256
Selected Financial Data of IOT.......................................................................... 258
Management's Discussion and Analysis of Financial Condition and Results of Operations of IOT............ 259
Quantitative and Qualitative Disclosures Regarding Market Risk of IOT................................... 265

PAGE
----

Management of IOT....................................................................................... 267
Directors and Executive Officers........................................................................ 267
Executive Compensation.................................................................................. 268
Security Ownership of Certain Beneficial Owners and Management of IOT................................... 269
Securityholder Proposals................................................................................... 273
Legal Matters.............................................................................................. 273
Experts.................................................................................................... 273
Where You Can Find More Information........................................................................ 273
Glossary of Terms.......................................................................................... 275

Pro Forma Financial Statements............................................................................. P-1
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 redeemable convertible preferred stock ..................... Appendix C
Certificate of Designation of the Series H redeemable convertible 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. This joint proxy statement and prospectus is also being used to
register the shares of ARL Series G and H redeemable convertible preferred stock
and the ARL common stock underlying those shares. "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. as the context requires.

SUMMARY

This summary highlights material 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 United States,
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. As of the
third quarter of 2000, TCI no longer met the requirements for tax
treatment as a real estate investment trust, or REIT, and cannot qualify
for REIT status for at least five years.

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 REIT.
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 has substantial contact with,
and influence over, 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 Out of 8,072,594 shares of TCI Out of 1,438,945 shares of IOT
ARL common stock outstanding common stock outstanding as of common stock outstanding as of
as of July 16, 2002: July 16, 2002: July 16, 2002:
- BCM owns 6,629,744 - ARL indirectly owns 3,994,300 - ARL indirectly owns 409,935
(58.3%) (49.5%) (28.5%)
- TCI owns 746,972 - BCM owns 1,166,947 (14.5%) - BCM owns 106,802 (7.4%)
(6.6%) - Non-affiliates own 2,859,645 - TCI owns 345,728 (24.0%)
- Non-affiliates own (35.4%) - Non-affiliates own 576,480
2,299,150 (20.2%) (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. National Income Realty
Trust, 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 Olive Settlement is a settlement of a federal class and
derivative action lawsuit commenced in 1989. The action alleged that the boards
of directors of TCI and IOT had breached the governing documents of the
companies in 1989 by appointing a new advisor for the companies. It also alleged
a breach of trust and a breach of fiduciary duty owed by the board members to
each company by retaining BCM as the advisor to each company without stockholder
approval. The lawsuit sought the removal of the board members and the
appointment of an interim receiver pending the election of a new board. A
Stipulation of Settlement was entered into in February 1990. The 1990
Stipulation of Settlement required (i) cash distributions to be made to
stockholders over the next twelve months, (ii) the addition of three new
independent board members to the board of each company; and (iii) the
establishment of special board committees to review certain related party
transactions. The original settlement was modified in 1995 and the modification
was amended in 1997. 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. Settlement
Counsel also sought to, from time to time, remove some or all of the directors
of TCI, IOT and other entities.

The most recent disputes arise from Settlement Counsel's allegations
that the boards of TCI and IOT had breached the modification to the Stipulation
of Settlement. In 1999, Settlement Counsel alleged that the boards had failed to
comply with the requirement that a management/compensation consultant be engaged
to review the contracts with BCM and its affiliates. In July 2000, Settlement
Counsel alleged that the board of TCI had breached a settlement provision by
authorizing TCI to make a $3 million loan to BCM and a $9 million loan to ART.
In October 2000, Settlement Counsel alleged that the board of IOT had breached a
settlement provision by authorizing IOT to enter into a stock option agreement
to purchase shares of TCI from a third party. Settlement Counsel requested that
the TCI and IOT advisory contracts with BCM be terminated, that the board
members be removed and that a receiver be appointed to operate TCI and IOT.

The boards of directors of TCI and IOT denied the allegations and
believe there has been no breach of any of the settlement provisions. Although
there have been several status conferences concerning these matters, there has
been no court order or action resolving or affirming the allegations of breaches
of the settlement.

The parties to the Olive Litigation 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. Following notice to all
stockholders of TCI and IOT, the Settlement Agreement obtained final approval of
the Court on February 12, 2002. 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 nonaffiliated 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 nonaffiliated 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 March 31, 2002. The other requirements were:

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

- 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 March 31, 2002, 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
nonaffiliated 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.

Although the SEC review process was not completed by March 31, 2002,
ARL has requested an extension of that date from Settlement Counsel in order to
allow additional time to complete the comment process on the joint proxy
statement and prospectus. Although Settlement Counsel has not provided a written
agreement to extend that date at this time, he has not refused to do so and has
not alleged a default. ARL believes that there will be no problem with the
extension as long as a good faith effort is made to complete this process as
soon as possible.

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 nonaffiliated stockholders in any manner
which would have the effect of causing a nonaffiliated stockholder to accept
preferred stock rather than cash.

QUESTIONS AND ANSWERS ABOUT THE BUSINESS COMBINATION

1.Q: WHAT IS BEING PROPOSED? (SEE PAGES 54 AND 99)

A: Two separate mergers are being proposed as the result of the
Settlement Agreement. In each merger, a newly formed subsidiary of ARL would be
merged with and into TCI or IOT, as the case may be, and TCI and IOT would
become a subsidiary of ARL. The two mergers are not dependent upon each other,
and if the stockholders of one company do not approve their merger, only the
approved merger may be consummated.

2.Q: WHAT WILL I RECEIVE IN THE MERGER? (SEE PAGES 39 TO 41, 62-63 AND 99 TO
100)

A: Each share of TCI and IOT common stock will be converted into $17.50
and $19.00 in cash, respectively, (less the amount of any dividends paid after
January 2, 2002) or, at the affirmative election of the TCI or IOT stockholder,
one share of ARL 10% Series G cumulative convertible preferred stock (the
"Series G redeemable convertible preferred stock") or one share of the ARL 10%
Series H cumulative convertible preferred stock (the "Series H redeemable
convertible preferred stock"), respectively. Outstanding shares of TCI and IOT
common stock held by ARL or its subsidiaries will be cancelled and shares of TCI
and IOT common stock held by BCM and other affiliates of ARL will be exchanged
for shares of Series G and Series H redeemable convertible preferred stock,
respectively. If all of the holders of the TCI and IOT common stock other than
BCM and other affiliates of ARL elect to convert their shares of TCI common
stock to Series G redeemable convertible preferred stock, they will own
approximately 71% of the issued and outstanding shares of the Series G
redeemable convertible preferred stock. BCM and other affiliates of ARL would
own the remaining shares of Series G redeemable convertible 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 redeemable convertible preferred
stock, they would own approximately 84.4% of the issued and outstanding shares
of the Series H redeemable convertible preferred stock. BCM and other affiliates
of ARL would own the remaining shares of Series H redeemable convertible
preferred stock.

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

The cash price per share to be paid by ARL was determined in connection
with the settlement of a derivative lawsuit, the Olive Litigation, which has
been approved by a federal court. The cash prices were negotiated between and
agreed to by ARL and by George Donaldson, the Settlement Counsel representing
the interests of the nonaffiliated stockholders of TCI and IOT. In the course of
considering and negotiating the terms of settlement, Settlement Counsel
considered the net asset values of TCI and IOT, the book value of TCI and IOT on
a per share basis and the historical trading prices of the common stock of TCI
and IOT. The cash prices to be received by TCI and IOT stockholders are less
than the calculated book value per common share at March 31, 2002, which were
$26.78 and $28.00, respectively. See "Comparative per Share Information." The
exchange ratio of one share of ARL preferred stock

for each one share of TCI or IOT common stock was determined in connection with
the settlement of the Olive Litigation. The liquidation value for each series of
ARL preferred stock also was determined in the litigation settlement. The
liquidation value of each series of ARL preferred stock was set at an amount
higher than the respective cash prices being offered for each TCI or IOT share
which will provide a stockholder with a higher cash return upon redemption of
the ARL preferred stock.

The conversion ratio for converting the Series G and Series H
redeemable convertible preferred stock into ARL common stock was determined by
and between ARL and Houlihan Lokey, the independent investment advisor to TCI
and IOT, who has opined that the proposed transaction is fair from a financial
point of view to the nonaffiliated stockholders of TCI and IOT.

3.Q: WHAT ARE THE MATERIAL TERMS OF THE TCI MERGER AND THE IOT MERGER? (SEE
PAGES 99 TO 102)

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.

Although the 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 are met. 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:

- all necessary consents from third parties having been obtained

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

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

- 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

- 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 the following events occur:

- mutual written consent

- the merger is prohibited by law or a court order

- the other party materially breaches any representation, covenant
or agreement in the merger agreement and the breach has not been
remedied within twenty days after written notice

- by the other party if the other board of directors withdraws or
modifies its approval or recommendation of the merger agreement in
any manner materially adverse to the other party

4.Q: WHAT ARE THE TERMS OF THE SERIES G AND SERIES H REDEEMABLE CONVERTIBLE
PREFERRED STOCK? (SEE PAGES 209 TO 212)

A: The Series G and Series H preferred shares are both convertible and
redeemable. 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 and the IOT merger, the Series G and Series H redeemable convertible
preferred stock may be converted at the option of the holder into 2.5 and 2.25
shares of ARL common stock, respectively. Beginning 45 days after ARL files its
first Form 10-Q following the consummation of the TCI and/or IOT mergers, ARL
may provide notice of and thereafter redeem the Series G and Series H redeemable
convertible preferred stock upon payment of the liquidation value of $20.00 and
$21.50 per share, respectively. ARL may redeem any or all of the Series G and
Series H redeemable convertible 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 Series G and Series H redeemable
convertible preferred stock receive a liquidation preference of $20.00 and
$21.50, respectively, less dividends declared and paid after January 2, 2002
upon any liquidation, dissolution or winding up of ARL before any distribution
or payment to the ARL common stock holders. No such preference is available for
the TCI or IOT common stock.

The holders of Series G and Series H redeemable convertible 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 redeemable convertible preferred stock,
respectively, (iii) as to the Series G redeemable convertible 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 redeemable convertible preferred stock for any
six quarterly dividends, whether or not consecutive, shall be in arrears and
unpaid; and (iv) as to the Series H redeemable convertible 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 redeemable convertible 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
redeemable convertible 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 redeemable convertible 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 redeemable convertible 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 redeemable convertible preferred
stock held.

In addition to the conversion and redemption features and the voting
rights set forth above, there are other differences between the Series G and H
redeemable convertible preferred stock and the TCI common stock and IOT common
stock, respectively. For a description of additional differences see "Comparison
of Ownership of Shares."

Each share of Series G redeemable convertible 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, if and when
declared by the board and to the extent permitted under the Nevada Revised
Statutes. Dividends on the Series G redeemable convertible preferred stock are
in preference to and with priority over dividends upon the ARL common stock. The
Series G redeemable convertible preferred stock ranks on a parity as to
dividends and upon liquidation, dissolution or winding up with all other shares
of ARL preferred stock.

Each share of Series H redeemable convertible 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 Nevada Revised
Statutes. Dividends on the Series H redeemable convertible preferred stock are
in preference to and with priority over dividends upon the ARL common stock. The
Series H redeemable convertible preferred stock ranks on a parity as to
dividends and upon liquidation, dissolution or winding up with all other shares
of ARL preferred stock.

The full text of the description of the Series G and Series H
redeemable convertible preferred stock is set forth in Appendix C and D,
respectively.

5.Q: WHAT IS THE INTENDED ACCOUNTING TREATMENT OF THE TCI MERGER AND IOT
MERGER? (SEE PAGE 102)

A: ARL will account for the mergers under the purchase method of
accounting. At March 31, 2001, the total value of TCI assets and liabilities was
$720,198,000 and $498,160,000, respectively. No goodwill is acquired or
generated through the business combination. Likewise, the total value of IOT
assets and liabilities was $91,833,000 and $35,222,000, respectively and no
goodwill is acquired or generated through the business combination.

6.Q: WILL I RECOGNIZE INCOME TAX GAIN OR LOSS IN THE TCI MERGER OR IOT
MERGER? (SEE PAGES 95 TO 97)

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. Each stockholder receiving preferred stock in the mergers will
be responsible for reporting the fair market value of the shares on its tax
return. Assuming that the preferred stock is not listed on the NYSE or another
exchange at the date of the closing of the mergers, it is unlikely that a
stockholder receiving preferred stock could establish that the fair market value
of the shares was less than the cash that the stockholder could have received.
We will not obtain an opinion as to the fair market value of the shares at the
date of closing.

We urge you to carefully read the complete explanation of the tax
consequences of the mergers beginning on page 95.

TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE
MERGERS 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 PAGES 37 TO 47)

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

- Substantial amounts of cash are required for the mergers. If ARL,
TCI and IOT are not able to raise the cash anticipated through the
sale of real estate, obtaining new loans or other forms of
financing, 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 to complete the
mergers. ARL, TCI and IOT 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.

- Lender consents may be necessary to complete the mergers. 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. 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.

- In the Settlement Agreement, it was 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.

RISKS RELATED TO THE ARL PREFERRED STOCK

- The value of the ARL preferred stock is uncertain. There can be no
assurance that an active trading market will exist and holders of
ARL preferred stock may not be able to sell those shares when and
in the amounts they want; even if there is an active trading
market there is no assurance the value of the ARL preferred stock
will rise; and ARL may not have sufficient cash to pay the
dividend contemplated on the ARL preferred stock and those
dividends do not bear interest.

- The Series G and Series H redeemable convertible preferred stock
have very limited voting rights and do not vote for the election
of directors or any other matters except as otherwise provided by
law and in other limited circumstances when the holders' rights
would be materially altered or under certain conditions when
dividends are in arrears.

- Affiliates of ARL may hold a majority of the Series G and Series H
redeemable convertible preferred stock after the mergers are
completed and may be able to control any vote of holders of the
Series G and H redeemable convertible preferred stock, including
any vote to amend the terms of the Series G and H redeemable
convertible preferred stock and amend the rights of the holders of
the Series G and H redeemable convertible preferred stock.

RISKS RELATED TO THE COMBINED BUSINESS

- ARL will need to sell property and borrow money to meet its
liquidity needs. 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.

- ARL will have substantial debt after the mergers 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,
including, the combined businesses may be limited in their ability
to grow by a lack of cash or the availability of loans for new
acquisitions; may be forced to sell properties on disadvantageous
terms if they are unable to refinance maturing debt obligations;
and the interest expense could increase if general interest rates
increase the substantial leverage will increase their
vulnerability to economic downturns; high levels of debt could
limit the ability to react to changing conditions in the real
estate industry or the economy generally; and failure to comply
with financial and other restrictive covenants in loan agreements,
or failure to make debt service payments could result in events of
default that could harm the business or result in the bankruptcy
of one or more subsidiaries of ARL, TCI or IOT or of the combined
business as a whole.

- 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 mergers. 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, BCM and its affiliates can
control the election of all members of the board of directors of
ARL; BCM and its affiliates are able to prevent any transaction
that would result in a change of control of ARL; dealings between
ARL and BCM after the mergers may not be at arms length; and BCM
as the contractual advisor and BCM's officers and directors are
entitled to indemnification from ARL from any action or claims
with respect to liability for debts or obligations of ARL and TCI
and IOT.

- Management of ARL, TCI and IOT are subject to conflicts of
interest because most members of management of BCM and ARL are
also members of management of TCI and IOT.

- Real estate investments are subject to varying degrees of risks
and are relatively illiquid, which could adversely effect ARL's
ability to pay dividends.

- Developing and managing real estate assets is a highly competitive
business. The combined business will compete for tenants and
customers with other developed real estate owned by third parties
many of which are considerably larger, have greater financial
resources and may have management personnel with more experience
than the officers of the combined business.

- 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. 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.

- 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.

8.Q: ARE THERE ADVERSE CONSEQUENCES OR NEGATIVE FACTORS ASSOCIATED WITH THE
MERGERS? (SEE PAGE 64 TO 65 AND 68 TO 69)

A: Yes. In addition to the risks involved in the mergers discussed
above, the mergers involve other adverse consequences and negative factors,
including the following:

- Following the mergers, the nonaffiliated stockholders of IOT and
TCI who receive cash for their shares will cease to participate
in any future earnings and growth of either IOT or TCI.

- The mergers will result in a taxable transaction for the
stockholders of IOT and TCI.

- Based upon the unaudited pro forma consolidated financial
statements, the mergers would have resulted in earnings per share
of ARL common stock ($1.12 at December 31, 2001) that are less
than the historical earnings per share of TCI common stock

($2.32 at December 31, 2001), but more than the loss per share of
IOT common stock (-$2.32 at December 31, 2001).

- The December 31, 2001 book value per share of TCI common stock
($29.95) and IOT common stock ($24.48) exceeds the per share cash
consideration offered to the nonaffiliated stockholders of TCI
($17.50 per share) and IOT ($19.00 per share), respectively,
pursuant to the mergers.

- As a result of the IOT merger, stockholders of IOT electing to
receive shares of the preferred stock of ARL will no longer be
holders of an equity interest in a REIT, which is required to
distribute 95% of its net income in the form of dividends each
year.

9.Q: HOW WILL THE BUSINESS COMBINATION BE FINANCED? (SEE PAGES 74 TO 75)

A: The estimated cash requirements to pay the amounts to the
nonaffiliated TCI and IOT stockholders if all elect to take the cash merger
consideration and to pay all expenses (including prepayments of indebtedness) of
the transactions is approximately $94,350,801. 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 receive Series G and Series H redeemable
convertible preferred stock. Consequently, the greater number of stockholders
who affirmatively elect to receive Series G and Series H redeemable convertible
preferred stock the less funds will be required to pay the cash merger
consideration. ARL and TCI intend to first seek new loans, which they expect to
be able to obtain from several lenders aggregating at least $36,056,464. ARL and
TCI also have available a number of real property assets which, if necessary,
should be able to be sold (or utilized as collateral for loans) to realize at
least $77,666,842, which is based upon ARL's estimate of the sales price of the
properties using the industry formula of net operating income multiplied by a
standard market rate minus the sum of the debt, prepayment penalties, closing
costs and fees payable to BCM. ARL expects to sell 12 properties and TCI expects
to sell 12 properties consisting of land, apartments and office buildings. These
sums total an estimated $77,666,842. If all such loans are entered into and all
available properties are sold any remaining difference (presently estimated at
$29,372,505) 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.

10.Q: WILL I HAVE DISSENTERS' OR APPRAISAL RIGHTS IN THE MERGER? (SEE PAGE
51)

A: No.

11.Q: HAVE TCI AND IOT RECEIVED A FAVORABLE OPINION FROM THEIR FINANCIAL
ADVISORS CONCERNING THE TCI MERGER AND IOT MERGER AS APPLICABLE? (SEE PAGES 79
TO 82)

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 TCI stockholders, 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 IOT stockholders,
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.

12.Q: DO PERSONS INVOLVED IN THE MERGERS HAVE INTERESTS THAT DIFFER FROM
MINE? (SEE PAGES 98)

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 April 15,
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.

None of the individual officers and directors of ARL, TCI, IOT and BCM
will receive individual compensation, shares, forgiveness of debt, options,
severance benefits, earn outs or other amounts that could be considered
compensation related to the successful consummation of the business combination.
Certain officers and directors of ARL, TCI and IOT that own shares of ARL common
stock will be treated as affiliates and will receive shares of the ARL preferred
stock in return for their TCI and IOT common stock.

13.Q: WHAT PERCENTAGE OF OUTSTANDING SHARES OF ARL, TCI AND IOT ARE HELD BY
OFFICERS, DIRECTORS AND THEIR AFFILIATES? (SEE PAGES 50 TO 51)

A: The directors, executive officers and the affiliates of the
directors and executive officers of ARL beneficially own 65.1% of the
outstanding shares of ARL voting with respect to the TCI and IOT mergers. After
completion of the TCI and IOT mergers, the directors, executive officers and the
affiliates of the directors and executive officers of ARL will beneficially own
72.6% of the outstanding shares of ARL, assuming the conversion of all shares of
Series G and Series H redeemable convertible preferred stock, if any, received
in the mergers.

The directors, executive officers and the affiliates of the directors
and executive officers of TCI (including ARL and its affiliates) own 64.6% of
the outstanding shares of TCI voting with respect to the TCI merger. All
outstanding shares of TCI common stock will be cancelled or exchanged upon
completion of the TCI merger. The directors, executive officers and the
affiliates of the directors and executive officers of TCI will, indirectly and
directly, beneficially own 67.3% of the outstanding common stock of ARL after
completion of the TCI mergers, assuming conversion of all shares of Series G
redeemable convertible preferred stock received in the 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.
All outstanding shares of IOT common stock will be cancelled or exchanged upon
completion of the IOT merger. The directors and executive officers and
affiliates of the directors and executive officers of IOT will, indirectly and
directly, beneficially own 67.3% of the outstanding common stock of ARL after
the completion of the IOT merger, assuming conversion of all shares of Series H
redeemable convertible preferred stock received in the merger.

BCM will own 66.9% of the outstanding common stock of ARL after
completion of the TCI and IOT mergers, assuming conversion of all shares of
Series G and Series H redeemable convertible preferred stock received in the
mergers.

14.Q: WHAT VOTE IS REQUIRED TO APPROVE MY MERGER? (SEE PAGE 50 TO 51)

A: Approval of the TCI merger requires:

- The affirmative vote of a majority of the votes cast at the TCI
meeting.

- 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.

- 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:

- The affirmative vote of a majority of the votes cast at the IOT
meeting.

- 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.

- 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 5,212,949 shares of TCI common
stock representing approximately 64.6% of the outstanding TCI shares and 862,465
shares of IOT common stock representing approximately 59.9% of the outstanding
IOT shares. Although ARL and its affiliates and TCI and IOT intend to vote their
shares in favor of the mergers, the affirmative vote of a majority of the
nonaffiliated shares is needed to authorize the merger.

15.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
39)

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

16.Q: WHAT FACTORS (POSITIVE AND NEGATIVE) WERE CONSIDERED BY THE ARL, TCI
AND IOT BOARDS? 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 63 TO 73 AND
87 TO 89)

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, which includes the benefits and detriments considered by
the ARL board:

- The ARL board reviewed 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. In doing so, the board noted that the proposed
merger consideration represented a premium over the average
closing price of the TCI common stock and the IOT common stock.
As a general matter, paying a premium to the market price for
shares of the common stock of TCI and IOT can be seen as negative
to the interests of ARL.

- The history of the negotiations leading to establishment of the
merger consideration and the structure of the proposed
transactions.

- The advice of TCI's and IOT's financial advisor that the
consideration to be offered to the nonaffiliated public
stockholders of TCI and IOT was fair from a financial point of
view. The fact that the proposed transactions were negotiated at
arms length

over an extended period of time and the fact that TCI's and IOT's
financial advisor considered the structure of the proposed
transactions and the merger consideration to be paid to be fair to
the nonaffiliated stockholders of TCI and IOT can be seen as a
favorable aspect of the proposed transactions from ARL's point of
view.

- The fact that the cash merger consideration offered for the TCI
common stock and the IOT common stock was less than the
respective current book value of such stock. The fact that as a
result of the transactions, ARL will acquire TCI and IOT by
paying less than the book value per share of those businesses can
be seen as favorable to ARL's interests.

- The view of the ARL board of directors that an increase in the
size and diversity of ARL's portfolio would increase the
development opportunities available to ARL. The ARL board felt
that this increase in the size and diversity of ARL's portfolio
was a favorable aspect of the proposed transactions from ARL's
point of view.

- The view of the ARL board of directors that an increase in the
size of ARL's business and real estate portfolio would increase
ARL's financial flexibility. The increase in financial flexibility
that may occur as a result of the proposed transactions was seen
as favorable to ARL's interests by ARL's board.

- 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 or refinancing of real estate held by TCI and IOT. The
ability to finance the proposed transactions in large part by
selling or refinancing the assets of TCI and IOT can be seen as a
favorable aspect of the proposed transactions from ARL's point of
view. However, the increased indebtedness that may result from
refinancing the assets of the combined business will increase the
risk associated with the business and can be seen as a potentially
negative factor.

- 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. The ARL board did not believe that
agreeing to consummate either of the proposed transactions before,
in either case, sufficient cash was available to do so would be in
ARL's best interests.

- The terms of the merger agreements, including that there is no
financing condition and each can be terminated without penalty by
either party; which can be seen as favorable to ARL. In addition,
the ARL board noted the merger agreements would not be entered
into until after the requisite stockholder approval had been
obtained; and the possibility that a third party may seek to
acquire TCI or IOT before such approval could be obtained making
it unlikely that a merger with that entity would occur. Since it
is possible that another person might acquire TCI or IOT after
ARL has expended a great deal of money and effort on the proposed
transactions, this provision of the merger agreements can be seen
as negative to ARL's interests.

- The fact that stockholders of TCI and IOT affiliated with ARL will
accept preferred stock of ARL in lieu of cash as merger
consideration. The reduction in the cash necessary to consummate
the proposed transactions made possible by delivering preferred
stock to the ARL affiliates in lieu of cash can be seen a
favorable to ARL's interests.

- The fact that the TCI and IOT mergers are not conditioned upon one
another. ARL's ability to close one, but not the other
transaction, can be seen as favorable to ARL's interests.

- The fact that if either of the mergers was not consummated, ARL
may be required to pay a penalty of $5.00 per outstanding share of
the common stock of the entity not being acquired unless it
commenced a tender offer for such shares for at least the same
cash consideration offered in the failed merger, and that the
consummation of either merger may not occur due to reasons
outside of ARL's control. ARL's ability to avoid the penalty by
initiating a tender offer can be seen as favorable to ARL's
interests, although the existence of the penalty provisions can be
seen as negative.

- The time and management resources necessary to solicit stockholder
approval and consummate the mergers. The risk that consummating
the proposed transactions will divert ARL's management resources
from its existing businesses is a negative aspect of the proposed
transactions from ARL's point of view.

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

- The various risks and uncertainties involved in the mergers,
including the risks described under the heading "Risk Factors".

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 nonaffiliated
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, which includes the potentially positive and
potentially negative factors considered by the IOT board:

Potentially Positive Factors Considered by the TCI Board:

- 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.

- The fact that the merger consideration is all cash.

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

- 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.

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

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

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

- 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 before or after initial press reports on and after
October 23, 2001, that ARL had agreed to acquire the nonaffiliated
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.

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

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

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

Potentially Negative Factors Considered by the TCI Board:

Although all of the factors were simply viewed as a whole and the
individual members of the TCI Board did not rank or list any as positive or
negative, the following potentially negative factors were considered by the TCI
Board:

- Calculated book value per share of TCI common stock ($26.95 at
December 31, 2001) exceeds the offered cash value per share
($17.50), but the market price per share of TCI common Stock has
historically been less than the book value per share of TCI common
stock calculated from a financial standpoint.

- Based upon the unaudited pro forma consolidated financial
statements, the mergers may result in earnings per share of ARL
that are less than the historical earnings per share of TCI ($2.32
per share at December 31, 2001).

- The risk exists that ARL will have to raise capital from another
source, refinance indebtedness or sell assets (including assets of
TCI and IOT) to produce proceeds sufficient to finance the cash
payments to the TCI holders of common stock not affiliated with
ARL. A substantial increase in leverage may be a result of the
merger of TCI into ARL, which increase in leverage is not
presently quantifiable.

- There may not be sufficient ARL cash to pay dividends on ARL
preferred stock as a result of the substantial indebtedness which
may be required to be incurred pursuant to the mergers.

- The likelihood that some significant divestitures will be required
and the risk that the circumstances of any such divestitures may
not fully maximize the value received for the divested assets.

- The risk of diverting management focus and corporate resources
from other strategic opportunities and operational matters for an
extended period of time.

- Gains from an all cash transaction would be taxable to TCI
stockholders for U.S. federal income tax purposes even though some
TCI stockholders may elect to receive Series G redeemable
convertible preferred stock.

- Based upon unaudited pro forma consolidated financial statements
giving effect to the merger of TCI into ARL, resulting earnings
per share would be less than the historical earnings per share of
TCI ($2.32 per share at December 31, 2001).

- See also "Information About ARL -- Security Ownership of Certain
Beneficial Owners and Management of ARL".

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 nonaffiliated
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 which includes the potentially positive and
potentially negative factors considered by the IOT board:

Potentially Positive Factors Considered by the IOT Board:

- 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.

- The fact that the merger consideration is all cash.

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

- 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.

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

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

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

- 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 before or after initial press reports on and after October
23, 2001, that ARL had agreed to acquire the nonaffiliated
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.

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

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

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

Potentially Negative Factors Considered by the IOT Board:

Although all of the factors were simply viewed as a whole and the
individual members of the IOT Board did not rank or list any as positive or
negative, the following potentially negative factors were considered by the IOT
Board:

- Book value per share of IOT common stock exceeds the offered cash
value per share, but the market price per share of IOT common
stock has historically been less than the book value per share of
IOT common stock calculated from a financial standpoint.

- Based upon the unaudited pro forma consolidated financial
statements, the merger may result in earnings per share of ARL
that are less than the historical earnings per share of IOT and
TCI.

- The risk exists that ARL will have to raise capital from another
source, refinance indebtedness or sell assets (including assets of
IOT and TCI) to produce proceeds sufficient to finance the cash
payments to the IOT holders of common stock not affiliated with
ARL. A substantial increase in leverage may be a result of the
merger of IOT into ARL, which increase in leverage is not
presently quantifiable.

- There may not be sufficient ARL cash to pay dividends on ARL
preferred stock as a result of the substantial indebtedness which
may be required to be incurred pursuant to the transactions.

- The likelihood that some significant divestitures will be required
and the risk that the circumstances of any such divestitures may
not fully maximize the value received for the divested assets.

- The risk of diverting management focus and corporate resources
from other strategic opportunities and operational matters for an
extended period of time.

- Gains from an all cash transaction would be taxable to IOT
stockholders for U.S. federal income tax purposes even though some
IOT stockholders may elect to receive Series G redeemable
convertible preferred stock.

- As a result of the merger, IOT stockholders will no longer be
holders of an equity interest in a REIT and therefore, will not
receive 95% of REIT net income in the form of dividends each year.
See "Comparative Per Share Information" for the amount of IOT
distributions during the last two years. During the year ended
December 31, 2000, IOT paid dividends equal to $0.45 per share of
IOT common stock and paid no dividends in 2001.

- See also "Security Ownership of Certain Beneficial Owners and
Management of ARL".

17.Q: HAVE ARL AND BCM MADE A FAIRNESS DETERMINATION PERTAINING TO TCI AND
IOT MERGERS WITH RESPECT TO THE NONAFFILIATED STOCKHOLDERS OF EACH TCI AND IOT?
(SEE PAGES 89 TO 92)

A: ARL. The ARL directors have unanimously determined that each of the
TCI and IOT mergers are procedurally and substantively fair to the nonaffiliated
TCI and IOT stockholders, respectively.

In connection with its determination of the procedural and substantive
fairness of the TCI merger agreement and the transactions contemplated thereby,
ARL relied upon the

determinations of the board of TCI as having been taken in good faith following
the receipt of advice from legal and financial advisors. The ARL board adopted
the conclusions as to the fairness of the TCI merger set forth under the
"Recommendation and Determination of the TCI Board of Directors" and "TCI's
Purpose and Reasons for the TCI Merger", and the analyses underlying such
conclusions of TCI's board, based on ARL's reliance upon the determinations of
the TCI board and its own views as to its reasonableness of such analyses. In
view of the variety of factors considered in reaching its decision, ARL's board
did not quantify or otherwise assign relative weights to the various factors
considered in reaching its belief as to the fairness of the TCI merger.

In connection with its determination of the procedural and substantive
fairness of the IOT merger agreement and the transactions contemplated thereby,
ARL relied upon the determinations of the board of IOT as having been taken in
good faith following the receipt of advice from legal and financial advisors.
The ARL board adopted the conclusions as to the fairness of the IOT merger set
forth under the "Recommendation and Determination of the IOT Board of Directors"
and "IOT's Purpose and Reasons for the IOT Merger", and the analyses underlying
such conclusions of IOT's board, based on ARL's reliance upon the determinations
of the IOT board and its own views as to its reasonableness of such analyses. In
view of the variety of factors considered in reaching its decision, ARL's board
did not quantify or otherwise assign relative weights to the various factors
considered in reaching its belief as to the fairness of the IOT merger.

BCM. BCM has determined that each of the TCI and IOT mergers are
procedurally and substantively fair to the nonaffiliated TCI and IOT
stockholders, respectively.

In connection with its determination of the procedural and substantive
fairness of the TCI merger agreement and the transactions contemplated thereby,
BCM relied upon the determinations of the board of TCI as having been taken in
good faith following the receipt of advice from legal and financial advisors.
BCM adopted the conclusions as to the fairness of the TCI merger set forth under
the "Recommendation and Determination of the TCI Board of Directors" and "TCI's
Purpose and Reasons for the TCI Merger", and the analyses underlying such
conclusions of TCI's board, based on BCM reliance upon the determinations of the
TCI board and its own views as to its reasonableness of such analyses. In view
of the variety of factors considered in reaching its decision, BCM did not
quantify or otherwise assign relative weights to the various factors considered
in reaching its belief as to the fairness of the TCI merger.

In connection with its determination of the procedural and substantive
fairness of the IOT merger agreement and the transactions contemplated thereby,
BCM relied upon the determinations of the board of IOT as having been taken in
good faith following the receipt of advice from legal and financial advisors.
BCM adopted the conclusions as to the fairness of the IOT merger set forth under
the "Recommendation and Determination of the IOT Board of Directors" and "IOT's
Purpose and Reasons for the IOT Merger", and the analyses underlying such
conclusions of IOT's board, based on BCM's reliance upon the determinations of
the IOT board and its own views as to its reasonableness of such analyses. In
view of the variety of factors considered in reaching its decision, BCM's did
not quantify or otherwise assign relative

weights to the various factors considered in reaching its belief as to the
fairness of the IOT merger.

18.Q: WHEN DO THE COMPANIES EXPECT TO COMPLETE THE MERGERS? (SEE PAGE 99)

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.

19.Q: WHEN DO I ELECT WHETHER TO RECEIVE ARL PREFERRED STOCK OR CASH? (SEE
PAGE 99 TO 100)

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

20.Q: WHERE AND AT WHAT TIME WILL THE MEETINGS BE HELD? (SEE PAGE 48)

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

21.Q: WHAT DO I NEED TO DO NOW? (SEE PAGE 48 TO 49)

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.

22.Q: IF MY SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR
ME? (SEE PAGES 49 TO 50)

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.

23.Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD? (SEE
PAGE 48 TO 49)

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.

24.Q: SHOULD I SEND IN MY CERTIFICATES NOW? (SEE PAGE 101 TO 102)

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 redeemable convertible preferred stock or Series H
redeemable convertible preferred stock, respectively.

25.Q: I'VE LOST MY CERTIFICATE. WHAT SHOULD I DO? (SEE PAGES 101 TO 102)

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

26.Q: WHO CAN I CONTACT FOR MORE INFORMATION? (SEE PAGE 50)

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,
------------------------
Three Months Ended
March 31, 2002 2001 2000 1999 1998 1997
-------------- ---- ---- ---- ---- ----

Ratio of earnings to fixed charges and
preferred stock dividends 1.03 1.16 1.00 1.09 ** **

**Earnings were inadequate to cover fixed charges and preferred stock dividends
by $23,982,000, $2,634,000 and $5,667,000 in 1998 and 1997, respectively.

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

Years Ended
Three Months Ended December 31,
March 31, 2002 2001 2000
-------------- ---- ------------

Ratio of earnings to fixed charges and
preferred stock dividends ** 1.48 1.62

**Earnings were inadequate to cover fixed charges and preferred stock dividends
by $1,380,000.

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

Years Ended
Three Months Ended December 31,
March 31, 2002 2001 2000
-------------- ---- --------------

Ratio of earnings to fixed charges and
preferred stock dividends 5.78 ** 4.31

**Earnings were inadequate to cover fixed charges and preferred stock dividends
by $3,462,000 in 2001.

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 of ARL"
and the ARL consolidated financial statements and related notes included
elsewhere in this joint proxy statement and prospectus.

FOR THE THREE MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------- --------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA
Revenue ......... $ 38,688 $ 41,456 $ 166,018 $ 172,750 $ 193,980 $ 87,086 $ 57,031
Expense ......... 55,553 59,276 243,166 272,045 324,789 165,111 90,252
---------- ---------- ---------- ---------- ---------- ---------- ----------

(Loss) from
operations ...... (16,865) (17,820) (77,148) (99,295) (130,809) (78,025) (33,221)
Equity in income
of investees .... (412) (5) 8,803 5,246 11,847 37,966 10,497
Gain on sale of
real estate ..... 18,842 20,215 83,414 96,728 129,260 17,254 20,296
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income
(loss) .......... 1,205 2,390 15,069 2,679 10,298 (22,805) (2,428)
Preferred
dividend
requirement ..... (611) (642) (2,485) (2,327) (2,281) (1,177) (206)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
applicable to
Common shares ... $ 594 $ 1,748 $ 12,584 $ 352 $ 8,017 $ (23,982) $ (2,634)
=========== =========== =========== =========== =========== =========== ===========
PER SHARE
DATA

Net income
(loss) applicable
to Common
shares .......... $ .05 $ .17 $ 1.07 $ .03 $ .75 $ (2.24) $ (.22)
=========== =========== =========== =========== =========== =========== ===========

Dividends per
Common share .... $ -- $ -- $ -- $ -- $ .05 $ .20 $ .20
Weighted average
shares
outstanding ..... 11,375,127 10,104,268 11,714,374 10,399,890 10,759,416 10,695,388 11,710,013

FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------- --------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
(unaudited)

BALANCE SHEET DATA
Real estate, net ............. $580,874 $588,203 653,744 $771,630 $734,907 $302,453
Notes and interest receivable,
net .......................... 28,507 30,382 13,831 38,604 52,053 25,526
Total assets ................. 746,483 758,763 787,015 919,546 918,605 433,799
Notes and interest payable ... 563,840 564,298 616,331 706,196 768,272 261,986
Margin borrowings ............ 27,105 28,040 13,485 33,264 35,773 53,376
Stockholders' equity ......... 86,937 85,884 73,402 46,266 38,272 63,453
Book value per share ......... $ 7.64 $ 7.33 7.06 $ 4.30 $ 3.58 $ 5.42

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 of TCI"
and the TCI consolidated financial statements and related notes included
elsewhere in this joint proxy statement and prospectus.

EARNINGS DATA
Rents ...................... $ 30,869 $ 35,265 $ 134,911 $ 139,357 $ 82,039 $ 69,829 $ 54,462
Property expense ........... 19,468 20,395 80,562 78,061 44,497 38,282 32,424
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income ........... 11,401 14,870 54,349 61,296 37,542 31,547 22,038
Other income ............... (209) (735) (3,002) 1,814 555 739 2,311
Other expense .............. 17,956 20,303 85,806 83,878 48,395 38,320 33,154
Gain on sale of real
estate ..................... 5,429 6,484 54,270 50,550 40,517 12,940 21,404
---------- --- ---------- ---------- ---------- ---------- ----------
Net income (loss) .......... (1,335) 316 19,811 29,782 30,219 6,906 12,599
Preferred dividend
requirement ................ (45) (7) (172) (22) (30) (1) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable
to Common shares ........... $ (1,380) 309 $ 19,639 $ 29,760 $ 30,189 $ 6,905 $ 12,599
========== ========== ========== ========== ========== ========== ==========
Basic and Diluted Earnings
Per Share Net income
(loss) applicable to
Common shares ......... $ (.17) $ .04 $ 2.32 $ 3.45 $ 7.05 $ 1.78 $ 3.22
========== ========== ========== ========== ========== ========== ==========
Dividends per Common
share ...................... -- -- -- $ .54 $ .60 $ .60 $ .28*
Weighted average Common
shares outstanding ......... 8,042,594 8,686,346 8,478,377 8,631,621 4,283,574 3,876,797 3,907,221

FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------- --------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
(unaudited)

BALANCE SHEET DATA
Real estate held for
investment, net .............. $618,784 $622,171 $639,040 $599,746 $347,389 $269,845
Real estate held for sale,
net .......................... 14,831
Foreclosed ............. 516 516 1,824 1,790 1,356 1,356
Other .................. 14,315 -- -- -- -- 3,630
Notes and interest receivable,
net .......................... 26,510 22,049 8,172 11,530 1,493 3,947
Total assets ................. 720,198 709,152 731,885 714,195 382,203 319,135
Notes and interest payable ... 472,486 461,037 501,734 503,406 282,688 222,029
Stockholders' equity ......... 215,365 216,768 200,560 179,112 91,132 86,133
Book value per share ......... $ 26.78 $ 26.95 $ 23.22 $ 20.76 $ 23.35 $ 22.15

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 of IOT"
and the IOT consolidated financial statements and related notes included
elsewhere in this joint proxy statement and prospectus.

FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------- --------------------------------
2002 2001 2001 2000 1999 1998 1997
--------- --------- --------- --------- --------- --------- ---------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA
Rents ................... $ 2,800 $ 3,251 $ 13,001 $ 13,731 $ 15,968 $ 14,326 $ 12,221
Property expense ........ 1,641 1,479 6,591 6,969 6,768 6,462 5,900
--------- --------- --------- --------- --------- --------- ---------
Operating income ........ 1,159 1,772 6,410 6,762 9,200 7,864 6,321

Interest income ......... 37 72 194 319 29 172 266
Income (loss) from equity
partnerships ............ (17) 9 (9) (61) 148 113 52
--------- --------- --------- --------- --------- --------- ---------
Gain on sale of real
estate .................. 7,105 -- -- 20,878 1,525 180 3,953
--------- --------- --------- --------- --------- --------- ---------
185 21,136 1,702 465 4,271

Other expense ........... 3,211 2,570 10,057 11,104 9,580 9,008 7,275
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ....... 5,073 $ (717) (3,462) $ 16,794 $ 1,322 $ (679) $ 3,317
========== ========== ===== ========== ========== ========== ==========
PER SHARE DATA
Net income (loss) ....... $ 3.53 $ (.47) (2.32) $ 11.03 $ .87 $ (.44) $ 2.18
========== ========== ===== ========== ========== ========== ==========
Dividends per ........... $ -- $ .45 $ .60 $ .60 $ .40
share ................... $ -- --
Weighted average Common
shares outstanding ...... 1,438,945 1,514,045 1,493,675 1,522,510 1,527,386 1,521,832 1,519,888

FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------- --------------------------------
2002 2001 2000 1999 1998 1997
------- ------- ------- ------- ------- -------
(unaudited)

BALANCE SHEET DATA
Real estate held for investment,
net .............................. $79,574 $87,315 $86,277 $86,542 $83,691 $81,914
Real estate held for sale, net ... -- -- -- -- -- --
Notes and interest receivable, net 6,847 505 1,500 -- -- 2,010
Total assets ..................... 89,756 91,833 96,519 91,185 88,695 90,309
Notes and interest payable ....... 47,552 54,426 54,206 62,852 60,786 61,323
Stockholders' equity ............. 40,295 35,222 39,998 23,991 23,560 25,131
Book value per share ............. $ 28.00 $ 24.48 $ 26.42 $ 15.69 $ 15.44 $ 16.53

COMPARATIVE PER SHARE INFORMATION

The following tables set forth per share data of the shares of TCI and
IOT common stock on a historical and pro forma combined and equivalent basis
under three scenarios: (i) all nonaffiliated stockholders of TCI and IOT common
stock take all cash for their shares of TCI and IOT common stock, respectively,
(ii) all nonaffiliated stockholders of TCI and IOT take all Series G and H
redeemable convertible preferred stock for their shares of TCI and IOT common
stock, respectively, and (iii) 50% of the nonaffiliated stockholders of TCI and
IOT accept cash and 50% of the nonaffiliated stockholders of TCI and IOT accept
Series G and H redeemable convertible preferred stock for their shares of TCI
and IOT common stock. In each of these scenarios, the affiliated stockholders of
TCI and IOT receive Series G and Series H redeemable convertible preferred stock
for their shares, respectively. Pro forma equivalent information for TCI and IOT
was calculated by multiplying the pro forma per share amounts for ARL by the
exchange ratio of 2.50 for TCI and 2.25 for IOT common stock. These tables
should be read in conjunction with the historical financial statements and notes
thereto and the unaudited pro forma combined financial information included
elsewhere in this joint proxy statement and prospectus.

COMPARATIVE PER SHARE INFORMATION
(ALL CASH TO NONAFFILIATED STOCKHOLDERS OF TCI AND IOT)

ARL COMMON STOCK TCI COMMON STOCK IOT COMMON STOCK
---------------- ---------------- ----------------
PROFORMA
COMBINED PROFORMA PROFORMA
AND COMBINED AND COMBINED AND
HISTORICAL EQUIVALENT HISTORICAL EQUIVALENT HISTORICAL EQUIVALENT

Income (loss) per common
share, diluted
Three months ended March 31,
2002 ......................... $ 0.05 $ 0.21 $ 2.32 $(0.06) $(2.32) $ 0.27
Year ended December 31, 2001 $ 0.04 $ 1.59 $ 3.45 $ 1.74 $11.03 $ 0.74

Cash dividend per common share
Three months ended March 31,
2002 ......................... -- -- -- -- -- --
Year ended December 31, 2001 -- -- -- -- -- --

Book value per common share
Three months ended March 31, . 4
2002 ......................... $ 7.6 $ 9.25 $26.95 $ 8.87 $24.48 $ 8.21
Year ended December 31, 2001 $ 6.45 $ 7.06 $23.22 $ 7.18 $26.42 $ 7.34

COMPARATIVE PER SHARE INFORMATION
(ALL SERIES G AND SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK TO
NONAFFILIATED STOCKHOLDERS OF TCI AND IOT)

Income (loss) per common
share, diluted
Three months ended March 31,
2002 ......................... 0.05 $ 0.05 $(0.17) $(0.04) $ 3.53 $ 0.29
Year ended December 31, 2001 . 1.07 $ 0.74 $ 2.32 $ 0.92 $(2.32) $ 0.70

Cash dividend per common share
Three months ended March 31,
2002 ......................... -- $ -- $ -- $ -- $ -- $--
Year ended December 31, 2001 . -- $ -- $ -- $ -- $ -- $--

Book value per common share
Three months ended March 31, . 7
2002 ......................... 7.64 $ 8.8 $26.78 $ 8.57 $28.00 $ 8.34
Year ended December 31, 2001 . 7.55 $ 8.40 $26.95 $ 8.31 $24.48 $ 7.79

COMPARATIVE PER SHARE INFORMATION
(50% CASH AND 50% SERIES G AND H REDEEMABLE CONVERTIBLE PREFERRED STOCK TO THE
NONAFFILIATED STOCKHOLDERS OF TCI AND IOT)

Income (loss) per common
share, diluted
Three months ended March 31,
2002 ......................... 0.05 0.10 $(0.17) $(0.03) $ 3.53 $ 0.25
Year ended December 31, 2001 . 1.07 1.06 $ 2.32 $ 1.08 $(2.32) $ 1.08

Cash dividend per common share
Three months ended March 31,
2002 ......................... -- -- $ -- $ -- $ -- $ --
Year ended December 31, 2001 . -- -- $ -- $ -- $ -- $ --

Book value per common share
Three months ended March 31,
2002 ......................... 7.64 9.02 $26.78 $ 8.69 $28.00 $ 8.28
Year ended December 31, 2001 . 7.33 8.43 $26.95 $ 8.37 $24.48 $ 7.81

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 1/8 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 1/8 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 --
2002:
First Quarter 9.93 6.48 -- 16.82 15.70 -- 18.30 17.30 --
Second Quarter 11.27 6.7 -- 20.55 16.27 -- 18.4 17.95 --

Although ARL will apply to have the Series G and Series H redeemable
convertible preferred stock, and the shares of ARL common stock issuable upon
conversion of the Series G and Series H redeemable convertible 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

----------
(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.

NYSE is not a condition to the respective obligations of TCI and IOT to
consummate the mergers.

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:

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

- availability, terms and development of capital

- business abilities and judgment of personnel

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

- competition

- success of operating initiatives, advertising and promotional
efforts

- existence of adverse publicity or litigation

- changes in business strategy or plans - quality of management

- general economic, business and financial market conditions

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

- 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. The risk factors described below are the material risk factors faced
by ARL, TCI and IOT and their stockholders.

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.

- Nonaffiliated TCI and IOT stockholders will be entitled to receive
up to an aggregate of $60,996,907 in cash for their shares of the
common stock of TCI and IOT if none affirmatively elect to receive
the preferred stock of ARL

- 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

- as of March 31, 2002, ARL, TCI and IOT have approximately
$385,159,557 in loans coming due in the next twelve months that
must be repaid or refinanced

Approximately $94,350,801 must be raised in order to fund all of the obligations
related to the mergers, and an additional $385,659,557 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. ARL may also consider selling
securities such as shares of preferred stock in privately negotiated
transactions to raise some or all of the cash it will require in connection with
the mergers and its operations. Any such preferred stock might have rights to
dividends and other rights ranking prior to those of the series G and Series H
redeemable convertible preferred stock being offered in connection with the
mergers. 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:

- the buyers' ability to obtain any necessary financing

- the satisfactory completion of any due diligence review made by
the buyers and the buyers' lenders

- 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.

ARL MAY ISSUE SECURITIES. ARL may seek to raise some or all of the cash
necessary to fund its obligations related to the mergers by issuing securities,
such as shares of preferred stock, in privately negotiated transactions. There
can be no assurance that ARL will be able to find a buyer for its securities, or
if it does, on what terms such a sale would be consummated. It is possible that
any securities issued to raise money to fund ARL's obligations related to the
mergers would have rights to dividends and other rights superior to the Series G
and Series H redeemable convertible preferred stock being offered in connection
with the mergers.

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 MADE IN ORDER TO AVOID A PENALTY. 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 allowed 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 redeemable convertible 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:

- although ARL will apply to list the preferred stock 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

- 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

- 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

- the preferred stock to be offered to stockholders of TCI and IOT
will have a annual dividend which will be payable quarterly.
Although the preferred stock has 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

- 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

- 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. As of July 16, 2002, ARL
has 3,374,910 shares of its Series A and E preferred stock
outstanding. Those shares require the payment of a total of
approximately $613,727 in dividends quarterly. If all of the
stockholders of TCI and IOT elect to receive preferred stock
instead of cash, ARL will add approximately 4,731,576 shares of
preferred stock outstanding with a dividend requirement of
approximately $2,391,000 quarterly

- 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 STOCK HAS LIMITED VOTING RIGHTS. The ARL shares of
Series G redeemable convertible preferred stock and Series H redeemable
convertible preferred stock have very limited voting rights. The holders of
Series G redeemable convertible preferred stock and Series H redeemable
convertible 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 redeemable
convertible preferred stock or Series H redeemable convertible 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 redeemable convertible
preferred stock, including any vote to amend the terms of the Series G and H
redeemable convertible preferred stock and the rights of the holders of the
Series G and H redeemable convertible 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.
The pro forma dollar amounts set forth below are based upon the assumption that
all nonaffiliated stockholders receive cash for their shares of TCI or IOT
common stock if the mergers are consummated and that ARL will borrow
approximately $61.0 million in addition to any amounts that may be borrowed to
fund the cash required for the mergers.

- in addition to the substantial amounts of cash that will be needed
to fund the cash payments to the nonaffiliated stockholders, the
combined business of ARL, TCI and IOT will need to raise
approximately $385,659,557 to repay or refinance debts maturing in
the next twelve months. The combined business of ARL, TCI and IOT
will have approximately $385,659,557 of indebtedness coming due in
the next twelve months out of a total debt of $1,138,673,000.

- ARL, TCI and IOT have significant debt service obligations when
compared to their available cash flow. As of December 31, 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 $1,072,397,000 and total
stockholders equity of approximately $128,202,000, if no
stockholders of TCI and IOT elect to receive ARL preferred stock
instead of cash. For the twelve months ended December 31, 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 $130,877,000 as compared to net available cash
flow of approximately $111,419,413.

- 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 period ended December 31, 2001,
the combined business operations of ARL, TCI and IOT, on a pro
forma basis, would have had revenues of approximately $356,772,000
and expenses, exclusive of debt service and non-cash expenses such
as depreciation and amortization of approximately $295,517,000.
Based upon the anticipated sales of properties set forth under
"Special Factors -- Financing of the Business Combination"
management anticipates that the combined business of ARL, TCI and
IOT will generate an additional $29,372,505 during the next twelve
months after paying the costs and expenses related to the mergers
assuming all nonaffiliated stockholders receive cash for the
shares of TCI and IOT common stock, which was derived by
subtracting the total amount of funds related to the mergers
(assuming all nonaffiliated stockholders receive cash) from the
total amount of funds that are expected to be generated from the
sale of properties identified under "Special Factors - Financing
the Business Combination." ARL expects to sell enough properties
to meet the cash requirements needed to pay the nonaffiliated
stockholders that do not elect to receive preferred stock and to
meet the working capital requirements of the combined company.

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:

- 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

- 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

- the interest expense of the combined business of ARL, TCI and IOT
could increase if general interest rates increase, because 30.7%
of their loans are floating rate loans and another 58.7% come due
and must be refinanced within the next three years

- 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

- 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

- 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 AND RELATED CONFLICTS OF INTEREST. ARL, TCI and IOT are
each managed and controlled by BCM. The combined business of ARL, TCI and IOT
will continue to be managed by 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 and ARL
does not expect to employ any full-time personnel. ARL expects to continue to
rely upon BCM and the facilities, personnel and resources of BCM to conduct
ARL's operations, including the sale of ARL property and the borrowing required
to meet ARL's liquidity needs. 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. It is
estimated that pursuant to its advisory agreements with ARL, TCI and IOT, BCM
will receive $3,038,895 in incentive fees and finance fees earned from gains
resulting from property sales and when finance or refinance transactions are
consummated with respect to the potential sale of properties to finance the
expenses of the business combination. 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:

- 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

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

- dealings between ARL and BCM after the mergers may not be at arms
length

- BCM as the contractual advisor and BCM's officers and directors
are entitled to indemnification from ARL from any action or claims
with respect to liability for debts or obligations of ARL and TCI
and IOT

The executive officers of each of ARL, TCI and IOT may have conflicts
of interest because the executive officers of BCM and ARL are also the executive
officers of TCI and IOT. These potential conflicts may arise because:

- BCM's personnel and other resources must be allocated among ARL,
TCI and IOT

- BCM will be subject to conflicts between its obligations as an
advisor to each of TCI and IOT, on the one hand, and its interests
as an affiliate and advisor of ARL on the other

- decisions may have to be made with respect to the extension,
modification, or termination of the advisory agreements with each
of ARL, TCI and IOT

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:

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

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

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

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

- the expense of periodically renovating, repairing and reletting
spaces

- 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

- 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:

- 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.

- 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.

- 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.

- 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.

- 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.

- 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.

- 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.

- INVESTMENTS IN PARTNERSHIPS OR JOINT VENTURES. The combined
business of ARL, TCI and IOT will have investments in one or
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.

- 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.

- 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
_________, 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
________, 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 TCI agreement and plan of merger.

IOT SPECIAL MEETING

The special meeting of holders of IOT common stock will be held on
___________, 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 IOT 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. To vote by telephone, call toll-free 1-800-PROXIES and follow the
instructions using the control number provided to you on the proxy card. To vote
by Internet, access the web page at www.voteproxy.com and follow the
instructions using the control number provided to you on the 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. For stockholders who wish to vote telephonically, after entering your
control number, you will hear the name of the company and will be offered the
option to vote for all of the recommendations or to vote on each proposal
individually. Proposals are referred to by proposal number (as shown on the
proxy card). After voting on each proposal, you will be asked to confirm the
vote. Prior to ending the call, you will be asked if you wish to vote on another
proxy. If yes, the process will be repeated for the next control number entered.

For stockholders who vote via the Internet, after entering your control
number, you will be offered the option to vote for all of the recommendations or
to vote on each proposal individually. The text of each proposal is displayed
exactly as it appears on the proxy card. After the voting process is completed,
you will be shown how you have voted and given the opportunity to change your
vote. You are also given the option of receiving confirmation of the vote via
e-mail. In the future, your e-mail address may be used to distribute material
via the Internet. Prior to ending the session, you will be asked if you wish to
vote on another proxy. If yes, the process will be repeated for the next control
number entered.

Any ARL, TCI or IOT stockholder signing and delivering a proxy (other
than for those shares held in a brokerage account, which are described below)
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:

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

- following the telephone voting instructions to change
your vote by calling toll-free 1-800-PROXIES and
using the control number provided on the proxy card;

- following the Internet voting instructions to change
your vote by accessing the web page at
www.voteproxy.com and using the control number
provided on the proxy card; 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. A "broker non-vote" occurs when a broker or nominee holding
shares for a beneficial owner does not vote because the broker or nominee lacks
the authority to vote on a particular proposal

and has not received any voting instructions from the beneficial owner. Broker
non-votes will be treated as shares that are present for purposes of determining
the presence of a quorum; however, for purposes of determining the outcome of
any matter in which brokers or nominees have no discretionary power to vote,
broker non-votes will be treated as not present and not entitled to vote with
respect to that matter. 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.

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, June 4, 2002, will be entitled to notice of and
to vote at the ARL special meeting. The mergers and merger agreements 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, 7,026,516 shares, which represent approximately 61.7% of the
outstanding shares. After completion of the TCI and IOT mergers, the directors,
executive officers and affiliates of ARL will beneficially own 72.6% of the
outstanding shares of ARL, assuming that none of the TCI and IOT stockholders
take Series G and Series H redeemable convertible preferred stock in the mergers
and the conversion of all shares of Series G and Series H redeemable convertible
preferred stock received in the mergers. The directors, executive officers and
the affiliates of the directors and executive officers of TCI and IOT will,
indirectly and directly, beneficially own 67.3% of the outstanding common stock
of ARL after completion of the TCI and IOT mergers, assuming that none of the
TCI and IOT stockholders take Series G and Series H redeemable convertible
preferred stock in the mergers and the conversion of all shares of Series G and
Series H redeemable convertible preferred stock received in the mergers. BCM
will own 66.9% of the outstanding common stock of ARL after completion of the
TCI and IOT mergers, assuming that none of the TCI and IOT stockholders take
Series G and Series H redeemable convertible preferred stock in the mergers and
the conversion of all shares of Series G and Series H redeemable convertible
preferred stock received in the mergers. 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, however, a majority of the
nonaffiliated shares is needed to approve the mergers. Since the ARL bylaws
require the affirmative vote of a majority of the votes cast at the meeting,
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, June 4, 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 8,042,594
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, 5,217,722 shares, which represent approximately 64.6% 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. Since the TCI bylaws require
the affirmative vote of a majority of the votes cast at the meeting, 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, June 4, 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, the members of the board of directors and the executive
officers of IOT and its affiliates intend to vote their shares in favor of the
IOT merger. Since the IOT bylaws require the affirmative vote of a majority of
the votes cast at the meeting, 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.

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 Stockholder 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 redeemable
convertible 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 cancelled and shares of TCI common stock held by BCM and other
affiliates of ARL will be exchanged for shares of Series G redeemable
convertible 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 redeemable convertible preferred stock.
Outstanding shares of IOT held by ARL, its subsidiaries, TCI or IOT will be
cancelled and each share of IOT common stock held by BCM and other affiliates of
ARL will be exchanged for shares of Series H redeemable convertible 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

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. Settlement Counsel also sought to, from time to time, remove
some or all of the directors of TCI, IOT and other entities.

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 has substantial contact
with, and influence over, the management of BCM and input with respect to BCM's
performance of advisory services for ARL, TCI and IOT. Mr. Rossi serves as an
officer of BCM, ARL, TCI and IOT. 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, ARL entered
into an option to purchase the TCI common stock from the investment fund at a
price of $16.50 per share. Mr. Donaldson, Settlement Counsel under the Olive
Settlement, read about the purchase option agreement and inquired as to whether
or not there was interest in a transaction whereby all of the shares owned by
nonaffiliate stockholders in IOT and TCI might be purchased by ARL 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, Mr. Simon attended a hearing in San Francisco in
the Olive Litigation. After the hearing there was a brief conversation between
Messrs. Simon and Donaldson in which the possibility of finally settling the
disputes in the Olive Settlement by offering cash to nonaffiliated TCI and IOT
stockholders was discussed.

On October 31, 2000, Mr. Simon met with his clients and others about
the status and possibilities of the proposed purchase of stock and settlement.
These parties contacted Settlement Counsel 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 derivative
litigation. Later the same day, Mr. Simon

---------
* 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.

attended a meeting with Ted P. 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, Settlement
Counsel, Mr. Phillips and Mr. 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 nonaffiliated TCI stockholders for
$16 per share and nonaffiliated IOT stockholders for $14 per share.

On November 15, 2000, Mr. 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 Mr.
Waldman.

On November 17, 2000, at meetings of the boards of directors of TCI and
IOT, the members were advised that Settlement Counsel had expressed an initial
interest in a buy out by ARL of all nonaffiliated stockholders at $16 per TCI
share and $14 per IOT share, subject to further information and negotiation as
to price. In attendance at the meetings were directors R. Douglas Leonhard*,
Martin L. White, Edward G. Zampa* and Ted P. Stokely. Also attending the
meetings 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, Settlement Counsel, Mr. Waldman, Mr. Phillips and
Mr. Simon met in Dallas to discuss the proposals made and responses received
between the parties. At that time Settlement Counsel 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. Settlement Counsel
took the position, that under no circumstances would he agree to any settlement
in which the cash price per share to be paid to the nonaffiliated TCI
stockholders was less than the amount ARL would have to pay by April 2001 to
exercise its options for the TCI shares purchased from a private investment
fund. Accordingly, the price of $16.50 cash per share became Settlement
Counsel's absolute floor for the purchase price for the TCI shares.
Additionally, Settlement Counsel advised that in order to go forward he wished
to engage Green Street Advisors, Inc. to review asset values of TCI and IOT.
Settlement Counsel was unwilling to commit to support any specific price until
Green Street completed its review of the value of TCI and IOT. Settlement
Counsel 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. Green Street Advisors, Inc. is a Newport Beach based independent
research and consulting firm concentrating on publicly-traded real estate
securities, principally real estate

----------

* Messrs. Leonhard and Zampa resigned as directors of TCI and IOT on December
14, 2001. Messrs. Leonhard and Zampa were directors of both TCI and IOT, but
held no other position in any of TCI, IOT or ARL. Mr. Leonhard did not provide
any reason for his resignation; Mr. Zampa advised that his workload had
increased and time no longer permitted him to continue; neither individual
advised of any disagreement with any policies or practices or operations of
either TCI or IOT, nor did either individual furnish TCI or IOT with any letter
describing any disagreement and requesting that the matter be disclosed. See
also Current Report on Form 8-K for event occurring December 14, 2001 of TCI and
IOT.

investment trusts ("REITs") and other publicly-traded real estate companies.
Green Street's stated mission is to provide exceptional research products and
consulting services that lead to superior investment performance and insight for
its clients. Green Street was selected by Settlement Counsel without any input
or concurrence by any representative of ARL or its counsel. Except where Green
Street provided information to Settlement Counsel based upon information
obtained from ARL, TCI or IOT and their affiliates, no material relationship
exists between Green Street and ARL, TCI or IOT nor has any existed during the
past two years. To the best knowledge of the representatives of ARL, Green
Street did not provide any opinion or appraisal or recommendation relating to
the fairness of the consideration in either merger transaction. Green Street
apparently provided to Settlement Counsel information with respect to TCI's and
IOT's separate net asset values in the aggregate and on a per share basis,
implied cap rate, multi-family property net operating income, or NOI, office
property NOI, industrial property NOI, retail property NOI, and hotel property
NOI. Net operating income, or NOI, means rental revenues less property operating
expenses and replacements before debt service. Such information was prepared for
and available to Settlement Counsel, but does not include any specific
recommendations, procedures followed, basis for or methods of arriving at any
findings or recommendations. Green Street did not receive any instructions from
ARL, TCI or IOT, nor did ARL, TCI or IOT impose any limitations upon Green
Street in the scope of its investigation or the information it provided to
Settlement Counsel.

The ARL board of directors met on November 22, 2000, to consider the
possible acquisition of the shares of nonaffiliated 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 Mr. Branigan
and Mr. Waldman. The ARL board determined that management should proceed with
negotiations on this matter.

During the month of December 2000, Mr. Simon discussed with Settlement
Counsel the appropriate procedure to advise Judge Patel that the parties were
considering settlement. On December 21, 2000, Mr. Simon approved a form of
Statement of the Case to be submitted by Settlement Counsel, which would
formally advise Judge Patel that the parties were discussing a settlement.
During January 2001, Messrs. Simon and Waldman prepared at the request of
Settlement Counsel 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, Mr. Simon discussed with Settlement Counsel 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, Settlement Counsel and Adam
Markman

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

** Richard D. Morgan resigned as a director of ARL on October 25, 2001. Mr.
Morgan did not provide any reason for his resignation and did not advise of any
disagreement with any policies or practices or operations of ARL nor did he
furnish ARL with any letter describing any disagreement and requesting that the
matter be disclosed.

*** Karl L. Blaha resigned as a director of ARL and from his positions as
President of ARL, TCI and IOT on February 5, 2002. Mr. Blaha did not provide any
reason for his resignation and did not advise of any disagreement with any
policies or practices or operations of either ARL, TCI or IOT, nor did he
furnish ARL, TCI or IOT with any letter describing any disagreement and
requesting that the matter be disclosed. See also Current Report on Form 8-K for
event occurring December 14, 2001 of TCI and IOT.

**** 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.

of Green Street met with Messrs. 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 and
Phillips and Settlement Counsel 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 or about February 1, 2001, Settlement Counsel forwarded to Mr. Simon
and Mr. Phillips an initial report from Green Street which, while not a complete
economic analysis, reflected some of the methodology to be used by Green Street.
Issues arose with Mr. Phillips and Mr. Blaha over the assumptions contained
within the methodology, as follows:

- Mr. Phillips and his advisors disputed the appropriate cap
rate for many of the apartment properties which would depend,
to a great extent, on whether those particular properties
might be classified as "B" or "C" apartment projects. And, as
a function of the cap Mr. Phillips and Mr. Branigan analyzed
the capital budgets, both past and projected for these
properties

- With reference to raw land Mr. Phillips and his advisors
debated the effect on probable value of the sale of parcels
out of a large tract. The questions raised were how indicative
a single or even several separate parcel sales might be toward
fixing the value of a tract of 100 plus acres

- Additionally, issues were raised as to the economic
significance of pending, unclosed contracts

- Mr. Phillips and his advisors debated the proper criteria to
utilize in attempting to determine the economic values to be
obtained if a large number of the properties, particularly
those grouped in the same markets, were to be placed on the
market within a six to twelve month period

On February 14, 2001, Simon discussed with Settlement Counsel 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.

These conversations were critical to the final result. The prospect of
lowered interest rates, as the result of a national recession and possible
action by the Federal Reserve Board, would produce higher values for older
properties because such rates facilitated both sales and refinancing. However,
Mr. Phillips and his advisors disputed the lasting effect of such a monetary
policy. Mr. Phillips pointed out that lowered rates increased new construction,
which, while it generated economic activity, also increased competition. And,
the recession, arguably, affected the collectibility of rent. Generally, it was
Phillips' view that immediate conditions should be seen in a longer context,
leading generally to lower value for these older units. Settlement Counsel
disputed the discounting of current conditions.

On March 7, 2001, Settlement Counsel and Adam Markman of Green Street
met with Messrs. Simon and Waldman in Dallas, Texas to review additional
information regarding certain assets. Following that meeting and several other
conversations but prior to April 12, 2001, Settlement Counsel and Messrs. Simon
and Phillips reached a tentative agreement to propose final cash prices of
$16.50 for each of the TCI common stock and $19 for each of the IOT

common stock. Other criteria and assumptions commonly utilized in the evaluation
of real estate were likewise raised and debated through these discussions.

On March 20, 26, 27, and 30, 2001, Mr. Simon held telephone
conversations with Settlement Counsel to complete the data base from which the
final agreed prices might be determined. On April 10, 2001, Mr. Phillips and Mr.
Simon met with Settlement Counsel in California and reached an initial agreement
that Settlement Counsel was authorized to communicate to Judge Patel. In May
2001, Settlement Counsel 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. On May 8, 2001, Mr.
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, Settlement Counsel, aided by the Green Street
evaluation team, continued to review data in order to reach an agreement on the
share prices. On July 26, 2001, Mr. 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, Mr. Simon met with Settlement Counsel in the offices of BCM in Dallas,
Texas to discuss the initial evaluations submitted by Green Street. On the
following day, July 31, 2001, Mr. Markman of Green Street joined the meetings
with Settlement Counsel, Mr. Phillips, certain asset managers of BCM, and others
in the Dallas offices of BCM. Mr. 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, Settlement Counsel, 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. In attendance
at the meetings were directors Messrs. Leonhard, White, Zampa and Stokely. Also
attending the meetings were Messrs. Blaha, Corna and Waldman. Mr. Waldman
reviewed the terms of the proposed settlement which had been negotiated between
the parties. They discussed the need to obtain approval from the Court and from
the nonaffiliated stockholders of TCI and IOT. The Settlement Agreement was
drafted by Messrs. Donaldson and Simon in September 2001. Mr. Simon discussed
the proposed joint

settlement with Settlement Counsel on a daily basis during September and the
early part of October. Mr. Simon met with Settlement Counsel in San Francisco on
October 3 and 4, 2001 to continue discussions of the Settlement Agreement.
Commencing on October 12, 2001, Mr. 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, special counsel to the boards
of directors of TCI and IOT in the Olive Litigation.

On October 15, 2001, Mr. Simon discussed certain new concerns with
Messrs. Donaldson and Waldman, Eric Redwine, an attorney for BCM, and again with
Ms. Pers. Ms. 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. Ms. 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 October 25,
2001, the boards of directors of TCI and IOT held special meetings with the
representatives of Houlihan Lokey. The directors reviewed the settlement
proposal and discussed with Houlihan Lokey the procedures that Houlihan Lokey
would apply in analyzing the fairness of the proposed transaction. It was noted
that Houlihan Lokey would render an opinion as to the fairness from a financial
point of view of the consideration to be received by the TCI and IOT
nonaffiliated public stockholders.

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,
Messrs. 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.
The Court also approved a proposed Notice of Proposed Settlement of Derivative
Action which was then mailed to all stockholders of TCI and IOT. The Notice
described the proposed settlement and advised that a Settlement Hearing would be
held on February 4, 2002.

On February 1 and 4, 2002, the TCI board of directors met by telephone
conference to review a draft of a board presentation prepared by 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 nonaffiliated TCI stockholders as
previously described.

On February 1 and 4, 2002, the IOT board of directors met by telephone
conference to review a draft of the board presentation prepared by 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 nonaffiliated 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 Ms. Currie and Messrs. Cecil, Humphrey and Mizrachi. Also attending
the meeting were Ronald E. Kimbrough, Mr. Waldman, Jeffrey Sone and Tiffany
Marchesoni. 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, 2002. In attendance were directors Ms. Currie and
Messrs. Cecil and Humphrey. Also attending the meeting were Messrs. Kimbrough,
Waldman, Sone and Tiffany Marchesoni. 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.
Messrs. Blaha and 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 and Messrs. Humphrey and Mizrachi. Mr.
Cecil joined the meeting after it was in progress. Also attending the meeting
were Messrs. Kimbrough, Waldman, and Sone and Ms. Marchesoni. Following a
discussion of the proposed transaction, the board unanimously approved the
proposed business combination 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.

Because the business combination arose out of a negotiated settlement
of the Olive litigation, the boards of TCI and IOT were presented with the
settlement terms to either approve or not approve and continue with the Olive
litigation. This was not a typical merger or acquisition situation where the
board of directors had alternatives to consider. Continuation as a going concern
not considered because it would not have settled the litigation. However, the
TCI and IOT stockholders may continue to participate in the future of the
combined companies by opting to receive Series G or H convertible preferred
stock. Liquidation was considered only in the evaluation of the assets of each
company with a discount for the cost of liquidation and the uncertainty of
realizing the asset values over the time required to liquidate.

DETERMINATION OF MERGER CONSIDERATION

The merger consideration was determined through negotiations by and
between representatives of ARL and Settlement Counsel in the Olive Litigation.
The parties desired to reach a settlement which would allow the nonaffiliated
TCI and IOT stockholders to obtain a fair price for their common stock and
resolve the ongoing litigation. Settlement Counsel sought to obtain the highest
cash price possible for the shares. Green Street reviewed the assets of both
companies and advised Settlement Counsel on the underlying net asset values. The
agreed upon cash prices per share were greater than the current or historical
trading prices and less than the estimated net asset value per share.

ARL desired to provide the stockholders with an opportunity to continue
to participate in the ongoing business combination through stock ownership.
Therefore, the proposal to allow stockholders to affirmatively elect to receive
one share of ARL preferred stock for each one share of TCI or IOT common stock
was set forth. Each series of the preferred stock was set with a liquidation
value per share at a premium above the cash price per share. ARL set the annual
dividend on the preferred stock at 10%. The conversion ratio was not determined
by the board of directors of ARL until after Houlihan Lokey completed their
evaluation and calculated a range of conversion ratios based on such evaluation.
Initially, Houlihan Lokey's engagement was limited to rendering an opinion as to
the fairness from a financial point of view of the consideration to be received
by the IOT and TCI nonaffiliated public stockholders. The scope of the
engagement was subsequently expanded and Houlihan Lokey was requested to conduct
negotiations on behalf of the TCI and IOT boards of directors with
representatives of ARL with respect to the terms of the proposed transaction,
including the conversion ratios for each series of preferred stock and the
timing of ARL's right to redeem the preferred stock.

Houlihan Lokey advised the TCI and IOT boards that the conversion
ratios should be such that the stockholders would receive a number of shares of
ARL common stock with a range of underlying net asset values that approximates
the range of the underlying net asset values of the shares of TCI or IOT common
stock they had exchanged for one share of ARL preferred stock. They also
suggested that the ARL preferred shares should not be redeemable until the

nonaffiliated stockholders had an opportunity to evaluate the resulting
business combination and convert to ARL common stock.

TCI'S PURPOSE AND REASONS FOR THE TCI MERGER

Pursuant to the Settlement Agreement, TCI received an offer to its
stockholders at $17.50 cash per share. That offer (in the form of the merger of
TCI into ARL) was at a significant premium over the average closing price of TCI
common stock over the thirty trading days prior to October 23, 2001. The TCI
board of directors received a suggestion of the concept of a cash offer through
advice initially in November 2000 and continued with periodic updates, through
mid-October 2001. Although the actual amount of the offer was not finalized
until October 23, 2001, the concept of the offer at a range reflecting a
significant premium over the then market price was known. Once actually
received, the TCI board of directors began the analysis process by employment of
Houlihan Lokey as an independent financial advisor and reviewing information to
determine the potential fairness of the offer to the TCI stockholders.

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 reviewed various information available to it and provided
by management, financial advisors and counsel and considered a number of
factors, including those described below. During its review, the TCI board of
directors did not address whether any of the various factors, information or
advice should be considered as a positive or negative factor affecting their
respective determinations. In certain instances, one or more of the factors
might be considered to be both positive and negative depending upon the
importance to the reviewer. The factors were simply viewed as a whole, and the
individual members of the TCI board of directors did not find it necessary to
make any list of so-called positive factors or so-called negative factors. The
TCI board of directors considered a number of factors including, without
limitation, the following potentially positive factors:

- 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.

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

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

- 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.

- 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.

- 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
nonaffiliated TCI public stockholders pursuant to the TCI
merger agreement was fair from a financial point of view to
those holders.

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

- the absence of any financing condition

- no termination fee if the TCI merger agreement is
terminated

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

- 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 before or after initial
press reports on and after October 23, 2001, that ARL had
agreed to acquire the nonaffiliated 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.

- 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.

- 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.

- 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.

Although the various factors were simply viewed as a whole, and the
individual members of the TCI board did not make any list of positive or
negative factors, the following potentially negative factors were considered by
the board in its deliberations concerning the merger in relation to both the ARL
and TCI businesses, but the board was not able to quantify any of the following:

- Although the $17.50 per share merger consideration represents
a significant premium over the average closing price of TCI
common stock over the thirty trading days prior to October 23,
2001, the $17.50 per share merger consideration is less than
the calculated book value per share from a financial
standpoint (at December 31, 2001, it was $26.95 per share).

- Based upon unaudited pro forma consolidated financial
statements giving effect to the merger of TCI into ARL,
resulting earnings per share would also be less than the
historical earnings per share of TCI ($2.32 per share at
December 31, 2001).

- ARL will have to raise capital from other sources, refinance
indebtedness, or sell assets (likely including assets owned by
TCI) to produce proceeds sufficient to finance the cash
payments in the merger to TCI stockholders, all of which is
likely to result in a substantial increase in the amount of
leverage as a result of the merger.

- By virtue of a number of factors, it is possible that there
may not be sufficient ARL cash to allow the payment of
dividends on the Series G redeemable convertible preferred
stock as a result of the substantial debt to be incurred and
increase of leverage by ARL.

- The likelihood that some significant divestitures will be
required and the risk that the circumstances of any such
divestitures may not fully maximize the value received for the
divested assets.

- The risk of diverting management focus and corporate resources
from other strategic opportunities and operational matters for
an extended period of time.

- Gains from an all cash transaction would be taxable to TCI
stockholders for U.S. federal income tax purposes even though
some TCI stockholders may elect to receive Series G redeemable
convertible preferred stock.

The TCI board of directors has an awareness of all of the possible
adverse consequences described above, including that the book value per share of
TCI common stock from a financial standpoint exceeds the cash offered of $17.50
per share. Historically, the market value per share of TCI common stock (at
least for the last several years) has been less than the calculated book value
per share from a financial standpoint (at December 31, 2001, $26.95 per share).
The Board of Directors of TCI is also well aware that ARL will have to raise
capital from other sources, which will likely include sales of assets owned by
TCI, to produce proceeds sufficient to finance the cash payments in the merger
to TCI stockholders, all of which is likely to result in a substantial increase
in the amount of leverage as a result of the merger.

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 nonaffiliated TCI stockholders generally, as described under "Interests of
Directors and Officers in the Business Combination." Specifically, the executive
officers of BCM, ARL, TCI and IOT are the same. TCI and IOT have the same
directors and Mr. Earl Cecil is a director of ARL, TCI and IOT. The multiple
positions held by these individuals causes them to owe fiduciary duties to more
than one company 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

Pursuant to the Settlement Agreement, IOT received an offer to its
stockholders at $19 cash per share. That offer (in the form of the merger of IOT
into ARL) was at a significant

premium over the average closing price of IOT common stock over the thirty
trading days prior to October 23, 2001. The IOT board of directors received a
suggestion of the concept of a cash offer through advice initially in November
2000 and continued with periodic updates, through mid-October 2001. Although the
actual amount of the offer was not finalized until October 23, 2001, the concept
of the offer at a range reflecting a significant premium over the then market
price was known. Once actually received, the IOT board of directors began the
analysis process by employment of Houlihan Lokey as an independent financial
advisor and reviewing information to determine the potential fairness of the
offer to the IOT stockholders.

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 reviewed various information available to it and provided
by management, financial advisors and counsel and considered a number of
factors, including those described below. During its review, the IOT board of
directors did not address whether any of the various factors, information or
advice should be considered as a positive or negative factor affecting their
respective determinations. In certain instances, one or more of the factors
might be considered to be both positive and negative depending upon the
importance to the reviewer. The factors were simply viewed as a whole, and the
individual members of the IOT board of directors did not find it necessary to
make any list of so-called positive factors or so-called negative factors. The
IOT board of directors considered a number of factors including, without
limitation, the following potentially positive factors:

- 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.

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

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

- 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.

- 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.

- 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 nonaffiliated IOT public
stockholders pursuant to the IOT merger agreement was fair
from a financial point of view to those holders.

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

- the absence of any financing condition

- no termination fee if the IOT merger agreement is
terminated

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

- 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 before or after initial press
reports on and after October 23, 2001, that ARL had agreed to
acquire the nonaffiliated 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.

- 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.

- 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.

- 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.

Although the various factors were simply viewed as a whole, and the
individual members of the IOT board did not make any list of positive or
negative factors, the board did consider the following potentially negative
factors in its deliberations concerning the merger in relation to both the ARL
and IOT businesses, but the board was not able to quantify any of the following:

- Although the $19.00 per share merger consideration represents
a significant premium over the average closing price of IOT
common stock over the thirty trading days prior to October 23,
2001, the $19 per share merger consolidation is less than the
calculated book value per share from a financial standpoint
(at December 31, 2001, it was $24.48 per share).

- Based upon the unaudited pro forma consolidated financial
statements, the merger may result in earnings per share of ARL
that are less than the historical earnings per share of IOT
and TCI.

- ARL may have to raise capital from other sources, refinance
indebtedness, or sell assets (likely including assets owned by
IOT) to produce proceeds sufficient to finance the cash
payments in the merger to IOT stockholders, all of which is
likely to result in a substantial increase in the amount of
leverage as a result of the merger.

- The likelihood that some significant divestitures will be
required and the risk that the circumstances of any such
divestitures may not fully maximize the value received for the
divested assets.

- The risk of diverting management focus and corporate resources
from other strategic opportunities and operational matters for
an extended period of time.

- Gains from an all cash transaction would be taxable to IOT
stockholders for U.S. federal income tax purposes even though
some IOT stockholders may elect to receive Series G redeemable
convertible preferred stock.

- As a result of the merger, IOT stockholders will no longer be
holders of an equity interest in a REIT and therefore, will
not receive 95% of REIT net income in the form of dividends
each year. See "Comparative Per Share Information" for the
amount of IOT distributions during the last two years. During
the year ended December 31, 2000, IOT paid dividends equal to
$0.45 per share of IOT common stock and paid no dividends in
2001.

- See also "Security Ownership of Certain Beneficial Owners and
Management of ARL".

The IOT Board of Directors has an awareness of all of the possible
adverse consequences described above, including that the book value per share of
IOT common stock from a financial standpoint exceeds the cash offered of $19.00
per share. Historically, the market value per share of IOT common stock (at
least for the last several years) has been less than the calculated book value
per share from a financial standpoint (at December 31, 2001, $24.48 per share).
The board of directors of IOT is well aware that ARL will have to raise capital
from other sources, which will likely include sales of assets owned by IOT, to
produce proceeds sufficient to finance the cash payments in the merger to IOT
stockholders, all of which is likely to result in a substantial increase in the
amount of leverage as a result of the merger.

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 nonaffiliated IOT stockholders generally, as described under "Interests of
Directors and Officers in the Business Combination." Specifically, the executive
officers of BCM, ARL, TCI and IOT are the same. TCI and IOT have the same
directors and Mr. Earl Cecil is a director of ARL, TCI and IOT. The multiple
positions held by these individuals causes them to owe fiduciary duties to more
than one company 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

ARL's purpose in pursuing the merger is to acquire the businesses of
TCI and IOT at what ARL believes to be an attractive price and on what it
believes to be attractive terms. In addition, ARL believes that by combining and
integrating under ARL the businesses and operations of ARL, IOT and TCI, ARL
will be able to enjoy greater financial and operational flexibility, and may
enjoy better access to capital. ARL's opportunity to acquire TCI and IOT arose,
in part, from the court approved settlement of certain litigation against TCI,
IOT and certain of their affiliates known as Jack Olive, et. al. v. National
Income Realty Trust, 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. As described elsewhere in this joint proxy statement and prospectus
under "Summary - The Olive Settlement" the parties to the litigation have
entered into a settlement, after arms length negotiation, providing that if the
stockholders of TCI and IOT so approve, TCI and IOT will become subsidiaries of
ARL through the mechanism of the proposed mergers. As a result of the mergers,
if consummated, stockholders of TCI and IOT (other than Mr. Phillips, BCM, ARL
and ART) will receive $17.50 and $19.00 in cash for each of their shares of the
common stock of TCI or IOT, respectively. Stockholders of TCI and IOT who are
entitled to receive cash for their shares of the common stock of TCI or IOT will
also, under the proposed settlement, have the opportunity to affirmatively elect
to receive shares of the preferred stock of ARL in lieu of cash. BCM and
affiliates of BCM, ART, ARL and Mr. Phillips have agreed to receive shares of
the ARL preferred stock offered hereby for their shares of the common stock of
TCI and IOT, thus reducing the amount of cash necessary to consummate the
proposed transactions. The proposed transactions were negotiated by ARL's
management and presented to the ARL board of directors for approval. After
consideration of the proposals, the ARL board unanimously approved the
transactions and recommended that the stockholders of ARL approve the TCI and
IOT merger agreements.

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, reviewed materials provided to it
by management as part of management's presentation to the board and pursuant to
requests from the board, consulted with its legal advisors and discussed the
proposed transactions among its members. The ARL board of directors considered a
great deal of information, advice and a number of factors in reaching its
decision, including those described below. Some of this information and advice
and some of these factors are favorable with respect to ARL's interests and some
are not. Although individual members of the board may have considered some
information, factors or advice more or less important than others, and some may
have seen particular information, factors or advice as reflecting more or less
favorably or negatively upon the proposed transactions, in view of the number
and variety of this information, factors and advice, the ARL board did not find
it practicable or useful, as a board, to make specific assessments of or to
otherwise assign relative weights to the factors, information and advice
considered in reaching its decisions. Instead, the determination to approve and
recommend the TCI and IOT merger agreements was made after consideration of all
of the factors, information and advice as a whole, whether negative or
favorable, and after discussion thereof by the board. In its discussion, the ARL
board did not specifically address whether any of various factors, information
or advice considered positively

or negatively affected their determination. Among the information, factors and
advice considered by the ARL board were the following:

- The ARL board reviewed information concerning the historical
market prices for the TCI, IOT and ARL common stock. In doing
so, the board noted that the proposed merger consideration
represented a 44.6% premium over the average closing price of
the TCI common stock over the thirty trading days prior to
October 23, 2001 and a 28.7% premium over the average closing
price for the IOT common stock for the same period. The board
also compared the historical relationship between the prices
for shares of ARL's common stock and shares of TCI's and IOT's
common stock. As a general matter, paying a premium to the
market price for shares of the common stock of TCI and IOT can
be seen as negative to the interests of ARL.

- In considering the merger consideration to be offered for the
shares of TCI and IOT common stock, the ARL board was advised
by management of ARL of the history of negotiations among
representatives of ARL, TCI and IOT with respect to the merger
consideration and the structure of the proposed transactions.
In addition, the board was advised of the advice rendered to
the boards of TCI and IOT by their financial advisor to the
effect that based upon and subject to certain matters to be
reflected in an opinion, as of February 1, 2002, the
consideration to be offered to the nonaffiliated public
stockholders of TCI and IOT was fair from a financial point of
view to those stockholders. The ARL board was not provided
with a copy of TCI and IOT's financial advisors opinion or
board presentation at the time it approved the proposed
transactions. The fact that the proposed transactions were
negotiated at arms length over an extended period of time and
the fact that TCI's and IOT's financial advisor considered the
structure of the proposed transactions and the merger
consideration to be paid to be fair to the nonaffiliated
stockholders of TCI and IOT can be seen as a favorable aspect
of the proposed transactions from ARL's point of view.

- In considering the cash merger consideration to be offered for
the TCI common stock and IOT common stock, the ARL board noted
that in each case, the cash consideration was less than the
current book value per share of the common stock of TCI and
IOT. In the case of TCI, the cash merger consideration to be
offered is $17.50 per share, while the book value of the TCI
common stock at December 31, 2001 was $26.95 per share. In the
case of IOT, the cash merger consideration to be offered is
$19.00 per share, while the book value of the IOT common stock
at December 31, 2001 was $24.48 per share. The fact that as a
result of the transactions, ARL will acquire TCI and IOT by
paying less than the book value per share of those businesses
can be seen as favorable to ARL's interests.

- The ARL board reviewed the real estate portfolios of ARL, TCI
and IOT and expressed the view that the proposed combination
of those portfolios would benefit ARL by increasing the size
and diversity of its portfolio and increasing the number of
development opportunities available to it. The board noted, in
coming to this conclusion, that TCI and IOT have the largest
number of their properties in the Southwest region of the
United States, while ARL has its greatest concentration of
properties in the Southeast. The ARL board felt that this
increase in the size and diversity of ARL's portfolio was a
favorable aspect of the proposed transactions from ARL's point
of view.

- The ARL board expected that an increase in the size of the
portfolio of real estate properties under ARL's control, and
an increase in the size of its business generally, would also
increase ARL's financial flexibility. Among other things, the
board felt that an larger portfolio would increase that
likelihood that properties would be available for sale or
mortgage when ARL or its subsidiaries required cash for
development activities. In addition, the board felt that a
larger entity would be more attractive as a borrower to
capital sources. The increase in financial flexibility that
may occur as a result of the proposed transactions was seen as
favorable to ARL's interests by ARL's board.

- The ARL board carefully reviewed with ARL's management the
anticipated cash requirements of ARL's business in the future
if the TCI and IOT mergers, or either of them, were
consummated, and management's expectations regarding steps
necessary to assure that sufficient cash was available to meet
ARL's obligations to pay the cash portion of the merger
consideration. The ARL board understood that the cash to be
paid as merger consideration could be raised in large part
from the sales or refinancing of real estate held by TCI and
IOT. The ability to finance the proposed transactions in large
part by selling or refinancing the assets of TCI and IOT can
be seen as a favorable aspect of the proposed transactions
from ARL's point of view. However, the increased indebtedness
that may result from refinancing the assets of the combined
business will increase the risk associated with the business
and can be seen as a potentially negative factor.

- The ARL board expects that the consummation of each of the TCI
and IOT mergers will be dependent upon the availability of
sufficient cash to consummate those transactions, and that ARL
will not consummate the TCI merger or the IOT merger,
respectively, unless management believes such cash is
available at the time of the merger. The ARL board did not
believe that agreeing to consummate either of the proposed
transactions before, in either case, sufficient cash was
available to do so would be in ARL's best interests.

- The ARL board carefully reviewed the terms of the proposed
merger agreements with TCI and IOT with management and its
legal counsel and noted that neither of the merger agreements
were expected to be entered into until after the stockholders
of ARL and TCI or IOT, as the case may be, had approved the
proposed merger. In connection with its review, the ARL board
noted that the proposed merger agreements did not contain a
financing condition and could be terminated without penalty by
either party. These provisions can be seen as favorable to
ARL. In addition, the ARL board noted that because the merger
agreements would not be executed until stockholder approval is
obtained, it is possible that a third party might seek to
acquire either TCI or IOT before such approval could be
obtained, making it unlikely that a merger with that entity
would occur. Since it is possible that another person might
acquire TCI or IOT after ARL has expended a great deal of
money and effort on the proposed transactions, this provision
of the merger agreements can be seen as negative to ARL's
interests.

- The ARL board noted that ARL affiliates hold approximately
14.9% and 7.4% of the issued and outstanding common stock of
TCI and IOT, respectively, and that those stockholders will
accept preferred stock of ARL in lieu of cash as merger
consideration. The reduction in the cash necessary to
consummate the proposed

transactions made possible by delivering preferred stock to
the ARL affiliates in lieu of cash can be seen a favorable to
ARL's interests.

- The ARL board noted that the TCI and IOT mergers are not
conditioned upon one another, meaning that, subject to
stockholder approval and the availability of necessary cash,
either of the mergers could be consummated, even if the other
was not. ARL's ability to close one, but not the other
transaction, can be seen as favorable to ARL's interests.

- The ARL board noted that if ARL were unable or unwilling to
consummate either of the proposed mergers, it would become
obligated to pay a penalty of $5.00 per outstanding share of
the common stock of the entity not being acquired unless it
initiated a tender offer for such shares for at least the same
consideration proposed in the mergers with respect to the cash
consideration. The ARL board further noted that consummation
of the mergers might not occur for a number of reasons outside
of ARL's control, including failure to obtain the necessary
stockholder approvals of TCI or IOT or the lack of sufficient
cash available to ARL, TCI or IOT, as the case may be, to pay
the cash portion of the merger consideration. ARL's ability to
avoid the penalty by initiating a tender offer can be seen as
favorable to ARL's interests, although the existence of the
penalty provisions can be seen as negative.

- The ARL board considered, based upon the advice of management
and after consultation with legal counsel, the time and
management resources necessary to solicit the requisite
stockholder approval of the mergers and to consummate the
mergers. The risk that consummating the proposed transactions
will divert ARL's management resources from its existing
businesses is a negative aspect of the proposed transactions
from ARL's point of view.

- The ARL board considered the steps necessary to consummate the
mergers, in addition to those required to solicit stockholder
approval, and based upon the advice of management and after
consultation with legal counsel, was of the view that such
steps, including the obtaining of necessary regulatory and
other approvals, could be obtained.

During its consideration of the proposed transactions with TCI and IOT,
the ARL board was 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 nonaffiliated stockholders generally, all as
described under "Interests of Directors and Officers in the Business
Combination." Specifically, the executive officers of BCM, ARL, TCI and IOT are
the same. TCI and IOT have the same directors and Mr. Earl Cecil is a director
of ARL, TCI and IOT. The multiple positions held by these individuals causes
them to owe fiduciary duties to more than one company in the business
combination.

The foregoing discussion of the information, factors and advice
considered by the ARL board of directors is not intended to be exhaustive, but
is believed to address the material information, factors and advice considered
by the ARL board of directors in reaching its determination to approve and
recommend the TCI and IOT merger agreements.

FINANCING OF THE BUSINESS COMBINATION

ARL estimates that approximately $94,350,801 will be required if all
nonaffiliated 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. 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 redeemable convertible preferred stock.
Consequently, the greater number of stockholders who affirmatively elect to
receive Series G and Series H redeemable convertible 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 nonaffiliated 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 nonaffiliated TCI Source of Funds table below
stockholders................................ $50,043,787

Sunset Management loan secured by 2,601,798 shares of ARL intends to renegotiate the loan,
TCI common stock............................ $20,000,000 substituting all of the common stock of
TCI after the merger for the TCI common
stock now used as collateral. ARL may
also increase this loan. If this loan is
not renegotiated, it must be repaid.

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........................................ $74,293,787

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 nonaffiliated 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 AND IOT AMOUNT OF
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...................... $ 3,038,894 Cash from the sources set forth in the
Source of Funds table below

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

Subtotal........................................ $ 6,103,894

TOTAL........................................... $94,350,801

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 or the sale of securities in privately negotiated transactions.
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 redeemable convertible preferred stock. The more
stockholders who elect to receive Series G and Series H redeemable convertible
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 "Information about ARL -- Properties of ARL,"
"Information about TCI -- Properties of TCI" and "Information about IOT --
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
SOURCE OF FUNDS TO BE GENERATED

ARL expects to enter into new loans that total in the
aggregate 4,000,000 shares of ARL stock with a market
value of $36,000,000 $20,000,000

ARL expects to obtain new loans that are secured by the
following properties $7,821,926

PROPERTY LOCATION

Arlington Place Apts Pasadena, TX
Quail Point Apts Huntsville, AL
Regency Apts Lincoln, NB
Sunset Apts Odessa, TX
Northside Villas Apts Tallahassee, FL
Rolling Hills Apts Tallahassee, FL
Melrose Business Park Oklahoma City, OK
Westwood S. C. Apts Mary Ester, FL

TCI expects to obtain new loans that are secured by the following properties

Grove Park Apts Plano, TX $18,234,538
Terrace Hill Apts El Paso, TX
Mountain Plaza Apts El Paso, TX
Plantation Apts Tulsa, OK
Quail Creek Apts Lawerance, KS
Brandeis Building Omaha, NE
Encon Warehouse Fort Worth, TX
Institute Place Chicago, IL
Lexington Center Office Colorado Springs, CO
McLeod Commercial Bldg Orlando, FL
Ogden Industrial Ogden, UT

ARL expects to sell the following properties

Confederate Point Jacksonville, FL $22,946,515
Pheasant Ridge Bellevue, NE
Conradi House Tallahassee, FL
Morning Star Apts Tallahassee, FL
Westwood Parc Apts Tallahassee, FL
Valley Hi Apts Tallahassee, FL
Beaumont Land Beaumont, TX
Park Avenue Villas Apts Tallahassee, FL
Pheasant Ridge Apts Bellevue, NE
Deluce Apts Tallahassee, FL
White Pines Apts Tallahassee, FL
Elm Fork Land Denton County, TX

TCI expects to sell the following properties

Country Crossing Apts Tampa, FL $ 54,720,327
Cedar Springs Apts Dallas, TX
Heritage on the River Apts Jacksonville, FL
Plaza Tower St. Petersburg, FL
Summerfield Apts Orlando, FL
Country Club Apts Tampa, FL
Bonita Plaza Bonita, CA
Allen Land Collin County, TX
Gladstell Apts Conroe, TX
Durham Center Durham, TX
Red Cross Land Dallas, TX
KMart Ctr Cary, NC
TOTAL $123,723,306

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 nonaffiliated TCI stockholders and the nonaffiliated IOT stockholders in the
merger of TCI and IOT with two subsidiaries of ARL pursuant to which (a)
nonaffiliated TCI stockholders will receive: (i) $17.50 in cash or (ii) if they
affirmatively elect, one share of newly issued ARL Series G redeemable
convertible preferred stock for each share of TCI common stock that they
currently own and (b) nonaffiliated IOT stockholders will receive: (i) $19.00 in
cash or (ii) if they affirmatively elect, one share of newly issued ARL Series H
redeemable convertible preferred stock. Both the Series G redeemable convertible
preferred stock and Series H redeemable convertible 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 did not
set the cash offering price in the mergers of $17.50 per share for TCI
stockholders or $19 per share for IOT stockholders. These amounts were
determined by negotiation between Settlement Counsel and representatives of ARL.
Houlihan Lokey advised the TCI and IOT boards of directors as to the range of
exchange ratios for the conversion factors of ARL Series G and H Preferred Stock
implied by the financial analysis conducted by Houlihan Lokey and assisted the
boards of directors in negotiating such exchange ratios. See "Special Factors --
Background of the Business Combination and -- Determination of Merger
Consideration."

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 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 redeemable
convertible preferred and the Series H redeemable convertible preferred. With
respect to the negotiations with ARL, Houlihan Lokey advised the TCI and IOT
boards of directors with respect to the range of exchange ratios implied by
Houlihan Lokey's financial analysis and recommended that the boards of directors
ensure that the stockholders that received the ARL preferred stock would have an
adequate opportunity to evaluate the ARL combined business operation and to
convert the Series G and Series H redeemable convertible preferred stock into
ARL common stock. Houlihan Lokey also negotiated with representatives of ARL at
the direction of the boards of directors of IOT and TCI regarding the timing of
redeeming the preferred stock and converting the preferred stock. The exchange
ratio was determined by the boards of directors of ARL, IOT and TCI following
negotiations conducted by Houlihan Lokey and representatives of ARL. The
limitations on voting rights of the preferred stock were determined by ARL. 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 redeemable convertible preferred stock and Series H redeemable
convertible 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 nonaffiliated
TCI stockholders and the nonaffiliated IOT stockholders. There were no material
limitations to the fairness opinions. 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 to, is not obligated to 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 seventy-five 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 nonaffiliated IOT stockholders and the
nonaffiliated 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. Capitalization rates applied in
individual property valuations were determined with reference to the type of
property being evaluated and adjusted based on historical and/or projected
occupancy rates for such property, as applicable.

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. The
discount rates applied by Houlihan Lokey in its analysis were based on discount
rates for office, industrial and retail properties published by Cushman &
Wakefield, Inc. Discount rates applied in individual property valuations were
determined with reference to the types of property being evaluated and adjusted
based on historical and/or projected occupancy rates for such property, as
applicable. 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

Because of the nature of ARL's assets and the diversity in type of
property, age, rental history and other factors, no single valuation methodology
was likely to produce an accurate indication of the value of ARL. As a result,
Houlihan Lokey engaged in a valuation of each ARL asset individually by applying
one or more valuation methodologies that were most likely to yield a meaningful
indication of value. Houlihan Lokey then aggregated the range of indicated
values for each property to determine the range of concluded enterprise values
and concluded equity net asset values for ARL taken as a whole. 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 $86.9 million
to $123.6 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 $873.7 million to $1,071.8
million, a range of concluded equity net asset values for ARL of $126.3 million
to $262.8 million and a range of per share concluded equity net asset values of
$11.10 to $23.10.

IOT VALUATION

Because of the nature of IOT's assets and the diversity in type of
property, age, rental history and other factors, no single valuation methodology
was likely to produce an accurate indication of the value of IOT. As a result,
Houlihan Lokey engaged in a valuation of each IOT asset individually by applying
one or more valuation methodologies that were most likely to yield a meaningful
indication of value. Houlihan Lokey then aggregated the range of indicated
values for each property to determine the range of concluded enterprise values
and concluded equity net asset values for IOT taken as a whole. 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

Because of the nature of TCI's assets and the diversity in type of
property, age, rental history and other factors, no single valuation methodology
produced an accurate indication of the value of TCI. As a result, Houlihan Lokey
engaged in a valuation of each TCI asset individually by applying one or more
valuation methodologies that were most likely to yield a meaningful indication
of value. Houlihan Lokey then aggregated the range of indicated values for each
property to determine the range of concluded enterprise values and concluded
equity net asset values for TCI taken as a whole. 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 $8.0
million to $16.6 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 $645.3 million to $754.1
million, a range of concluded equity net asset values for TCI of $173.7 million
to $247.2 million and a range of per share concluded equity net asset values of
$20.70 to $29.45.

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 1.71 to 2.32 for IOT and 1.86 to
2.65 for TCI on an after tax basis and 1.24 to 1.81 for IOT and 1.42 to 2.10 on
a before tax basis.

In conclusion, Houlihan Lokey's analyses indicated that the
consideration being offered to the nonaffiliated TCI stockholders and the
nonaffiliated IOT stockholders in connection with the mergers is fair from a
financial point of view. Houlihan Lokey's analysis did not disclose any specific
factors that did not support Houlihan Lokey's opinion.

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 nonaffiliated TCI 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 nonaffiliated
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 nonaffiliated 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 nonaffiliated TCI stockholders, all as required
by the Settlement Agreement:

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

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

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

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

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

- 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 nonaffiliated 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 nonaffiliated TCI stockholders, approved the TCI merger
agreement and recommended that the TCI stockholders approve the TCI merger
agreement and the transactions contemplated thereby. None of the members of the
TCI board of directors are employees of TCI.

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 nonaffiliated 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
nonaffiliated 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 nonaffiliated 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 nonaffiliated IOT
stockholders, all as required by the Settlement Agreement:

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

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

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

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

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

- 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 nonaffiliated 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 nonaffiliated IOT stockholders, approved the IOT merger
agreement and recommended that the stockholders approve the IOT merger agreement
and the transactions contemplated thereby. None of the members of the IOT board
of directors are employees of IOT.

Fairness Determination of the ARL Board of Directors

On July 18, 2002, the ARL board of directors met by telephone
conference to consider the fairness of each of the TCI and IOT mergers to the
nonaffiliated stockholders of each TCI and IOT, respectively. At the meeting,
counsel for ARL described to members of the board certain legal requirements
associated with the solicitation of proxies from stockholders of TCI and IOT,
and members of the board discussed information to be provided by ARL in
connection with the board's deliberations. Thereafter, the meeting was adjourned
until July 23, 2002 to give members of the board time to receive and review such
information.

On July 23, 2002, the ARL board reconvened its meeting telephonically.
At that time, counsel for ARL reviewed the terms of each of the TCI and IOT
merger agreements, the terms of Settlement Agreement, the events leading up to
the proposed mergers, the circumstances of the approvals of the TCI and IOT
merger agreements and the recommendations by the respective boards of directors
of TCI and IOT. In addition, counsel for ARL reviewed certain legal requirements
associated with the consummation of the TCI and IOT mergers, the solicitation of
proxies and the terms of the settlement from the stockholders of TCI and IOT.
Following the presentation, the ARL directors unanimously determined that each
of the TCI and IOT mergers are procedurally and substantively fair to the
nonaffiliated TCI and IOT stockholders, respectively.

The ARL board bases its belief with respect to the procedural fairness
of each of the TCI and IOT mergers on the following:

- Each of the TCI and IOT merger agreements are intended to
implement, if properly approved by the stockholders of TCI and
IOT, a court approved settlement to the Olive Litigation.

- The terms of each of the TCI and IOT merger agreements were
approved by all of the members of the TCI and IOT boards, none
of whom are employed by TCI and IOT, respectively.

- The TCI and IOT board of directors obtained an opinion from
Houlihan Lokey that the consideration to be offered to the
nonaffiliated TCI and IOT public stockholders in the mergers
is fair to them from a financial point of view, respectively.

- The procedural mechanism for approval of each of the TCI and
IOT merger agreements requires the affirmative vote of a
majority of the votes cast by nonaffiliated TCI and IOT
stockholders, respectively.

- Each of the TCI and IOT board of directors was aware that all
affiliated TCI and IOT stockholders will receive ARL preferred
stock in the merger rather than cash.

- The terms of each of the proposed TCI and IOT mergers were
dictated principally from the Settlement Agreement which
itself resulted from arms length negotiations between
Settlement Counsel and counsel for affiliates of BCM and ARL.

- The TCI and IOT mergers will each afford nonaffiliated TCI and
IOT stockholders with the opportunity (but not the obligation)
to make an affirmative election to receive securities rather
than cash.

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

In connection with its determination of the procedural and substantive
fairness of the TCI merger agreement and the transactions contemplated thereby,
ARL relied upon the determinations of the board of TCI as having been taken in
good faith following the receipt of advice from legal and financial advisors.
The ARL board adopted the conclusions as to the fairness of the TCI merger set
forth under the "Recommendation and Determination of the TCI Board of Directors"
and "TCI's Purpose and Reasons for the TCI Merger", and the analyses underlying
such conclusions of TCI's board, based on ARL's reliance upon the determinations
of the TCI board and its own views as to its reasonableness of such analyses. In
view of the variety

of factors considered in reaching its decision, ARL's board did not quantify or
otherwise assign relative weights to the various factors considered in reaching
its belief as to the fairness of the TCI merger.

Fairness Determination of BCM

BCM has determined that each of the TCI and IOT mergers are
procedurally and substantively fair to the nonaffiliated TCI and IOT
stockholders, respectively.

BCM bases its belief with respect to the procedural fairness of each of
the TCI and IOT mergers on the following:

- Each of the TCI and IOT merger agreements are intended to
implement, if properly approved by the stockholders of TCI and
IOT, a court approved settlement to the Olive Litigation.

- The terms of each of the TCI and IOT merger agreements were
approved by all of the members of the TCI and IOT boards, none
of whom are employed by TCI and IOT, respectively.

- Each of the TCI and IOT board of directors was aware that all
affiliated TCI and IOT stockholders will receive ARL preferred
stock in the merger rather than cash.

- The TCI and IOT mergers will each afford nonaffiliated TCI and
IOT stockholders with the opportunity (but not the obligation)
to make an affirmative election to receive securities rather
than cash.

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

INTENT TO VOTE IN MERGER TRANSACTIONS

The approval of the TCI merger requires the affirmative vote of a
majority of the votes cast at the TCI meeting, the affirmative vote of the votes
cast in favor 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 the
affirmative vote of a majority vote of the votes cast in favor of the TCI merger
at the ARL meeting. The approval of the IOT merger requires the affirmative vote
of a majority of the votes cast at the IOT meeting, the affirmative vote of the
votes cast in favor 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 the
affirmative vote of a majority vote of the votes cast in favor of the IOT merger
at the ARL meeting.

ARL, BCM and each of their affiliates has indicated that they intend to
vote in favor of the TCI transaction in accordance with the recommendation of
each of their respective boards of directors. Ted P. Stokely, a director of TCI
and IOT and holder of 9,000 shares of TCI common stock has indicated that he
intends to vote his shares in favor of the TCI merger based on his personal
preference. Martin L. White, a director of TCI and IOT and holder of 14,400
shares of TCI common stock has also indicated that he intends to vote his shares
in favor of the TCI merger based on his personal preference. Except with respect
to the recommendation of Messrs. Stokely and White as members of the board of
directors of each of TCI and IOT, Messrs, Stokely and White have not made any
other recommendation in support of or in opposition to the TCI and IOT merger
transactions.

ARL, BCM, TCI and each of their affiliates has indicated that they
intend to vote in favor of the IOT merger transaction in accordance with the
recommendation of each of their respective boards of directors.

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 nonaffiliated stockholders are the following:

- the need for and costs of three separate outside audits

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

- 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

- 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

- 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

- 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

- 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 nonaffiliated
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
nonaffiliated 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
nonaffiliated TCI stockholders and nonaffiliated 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:

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

- financial institutions

- tax exempt organizations

- insurance companies

- dealers in securities

Each stockholder receiving preferred stock in the mergers will be
responsible for reporting the fair market value of the shares on its tax return.
Assuming that the preferred stock is not listed on the NYSE or another exchange
at the date of the closing of the mergers, it is unlikely that a stockholder
receiving preferred stock could establish that the fair market value of the
shares was less than the cash that the stockholder could have received. We will
not obtain an opinion as to the fair market value of the shares at the date of
closing.

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 DIRECTORS AND OFFICERS OF ARL, TCI AND IOT
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, Kimbrough and Starowicz, who serve as
executive officers of ARL, also serve as executive officers of TCI, IOT and 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. Mr. Earl Cecil is a director of each of ARL,
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 April 1, 2002, the amount of the fee is
estimated to be $3,038,815. See "Special Factors - Financing the Business
Combination."

None of the individual officers and directors of ARL, TCI, IOT or BCM
will receive individual compensation, shares, forgiveness of debt, options, or
severance benefits, or earn outs or any other amounts that could be considered
compensation related to the successful consummation of either the TCI or IOT
merger.

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.

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 agreement and plan of merger. The full text of each agreement and 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 agreement and plan of merger in its entirety.

THE MERGER

According to the terms of each agreement and plan 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 or upon the affirmative
election of the stockholder, one share of Series G redeemable convertible
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 redeemable convertible 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 redeemable convertible
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 redeemable convertible 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:

- organization and qualification
- capitalization
- authority
- the absence of a breach or any violation of ARL's and its two
recently formed subsidiaries' articles of incorporation, bylaws, or
similar governing documents
- statutory approvals
- compliance with laws
- accuracy of information in the documents filed with the SEC
- accuracy of information in financial statements contained in the
documents filed with the SEC
- absence of certain changes or events
- absence of litigation
- absence of undisclosed liabilities
- accuracy of information in the joint proxy statement and prospectus
- vote required to approve the merger
- accuracy of representations, warranties, and statements contained in
any certificate or schedule
- stock option plans
- affiliate agreements
- taxes
- brokers and finders

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

- organization and qualification
- capitalization
- authority
- the absence of a breach or a violation of TCI's or IOT's articles of
incorporation, bylaws, or similar governing documents
- consents and approvals
- statutory approvals
- compliance with laws
- accuracy of information in documents filed with the SEC
- accuracy of information in financial statements contained in
documents filed with the SEC
- absence of certain changes or events
- absence of litigation
- absence of undisclosed liabilities
- accuracy of information in the joint proxy statement and prospectus
- vote required to approve the merger agreement
- accuracy of representations, warranties, and statements contained in
any certificate or schedule
- stock option plans
- affiliate agreements
- taxes
- 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 cancelled 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 mergers, 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 mergers 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 redeemable convertible
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.

Series G and Series H redeemable convertible preferred 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 combined boards of all three entities and
will be seven in number. 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........................................................... $ 500,000
Accounting fees and expenses...................................................... 64,751
Houlihan Lokey............................................................. 500,000
Fees to BCM relating to property expected to be sold and loans to
be obtained to finance the business combination............................ 3,038,894
Printing, mailing and distribution expenses....................................... 30,000
Paying agent fees and expenses.................................................... 10,000
SEC filing fees................................................................... 14,130
Miscellaneous fees and expenses................................................... 10,000
Total................................................................. $ 4,167,775

The fees to BCM ($3,038,894) relate to incentive fees and finance fees
earned when gains result from property sales and finance or refinance
transactions are consummated. These fees will be expensed by ARL, TCI and IOT in
the period when earned by BCM.

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 Series G and Series H redeemable
convertible 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
Series G or Series H redeemable convertible 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 Series G or Series H
redeemable convertible preferred stock in lieu of the cash they would otherwise
receive.

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SERIES G REDEEMABLE
CONVERTIBLE PREFERRED STOCK
AND SERIES H REDEEMABLE
TCI COMMON STOCK IOT COMMON STOCK CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------------------------------------------------

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

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.
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FIDUCIARY DUTIES
------------------------------------------------------------------------------------------------------------
Under Nevada law, directors are IOT is subject to the same NRS ARL is subject to the same NRS
charged with the duty to exercise provisions. provisions.
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 stock Each share of IOT common stock The holders of Series G
entitles its holder to cast one vote entitles its holder to cast one preferred and Series H
on matters as to which voting is vote on matters as to which redeemable convertible preferred
permitted or required by Nevada law, voting is permitted or required stock are not voting for the
including the election of directors, by Nevada law, including the election of directors or on any
amendments to TCI's Articles of election of directors, amendments matter except: (i) as otherwise
Incorporation, mergers and other to IOT's articles of provided by law, (ii) with
extraordinary transactions. incorporation, mergers and other respect to an amendment to ARL's
extraordinary transactions. Restated Articles of
Incorporation or Bylaws 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
redeemable convertible preferred
stock or Series H redeemable
convertible preferred stock, as
the case may be, 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
class of preferred stock held.

In the event that the Series G
redeemable convertible preferred
stock or Series H redeemable
convertible 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 corporation IOT is subject to the same NRS The holders of Series G
is entitled to make bylaws provisions. In addition, IOT's redeemable convertible preferred
pertaining to the calling and Bylaws provide that the annual stock and H redeemable
holding of meetings of its meeting of stockholders for the convertible preferred stock are
stockholders. The TCI Bylaws election of directors shall be not voting for the election of
provide that the annual meeting of held within the first eight directors except when all or any
stockholders for the election of months of each calendar year, or portion of the dividends on such
directors and for such other as soon as practicable class of preferred stock for any
business as may be stated in the thereafter. Each meeting of the six quarterly dividends, whether
stockholders shall

notice of the meeting, shall be held be held at such place within the or not consecutive, shall be in
at such place, either within or United States and at such time and arrears and unpaid. During the
without the state of Nevada, and date as the board of directors period such dividends are in
within the first eight months of shall determine. The IOT Articles arrears, and only during such
each calendar year as determined by of Incorporation and Bylaws period, the number of directors
the board of directors. The TCI provide that special meetings of constituting the board of
Articles of Incorporation and Bylaws the stockholders may only be directors of ARL shall be
provide that special meetings of the called by the president, secretary increased by two and the holders
stockholders may only be called by or by resolution of the board of of Series G redeemable
the president, secretary or by directors. convertible preferred stock or
resolution of the board of directors. Series H redeemable convertible
preferred stock, as the case may
No action may be taken by written be, voting separately as a
consent except upon the written class, shall be entitled to
consent in writing by all of the elect two directors to fill the
stockholders of IOT voting newly created directorships with
thereon. each holder being entitled to
one vote in the election for
each share of such 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
redeemable convertible preferred
stock or Series H redeemable
convertible preferred stock
issued and outstanding.
------------------------------------------------------------------------------------------------------------
AMENDMENTS TO CHARTER
------------------------------------------------------------------------------------------------------------
The NRS requires the approval of the IOT is subject to the same NRS The ARL Restated Articles of
holders of a majority of all provisions. Incorporation contain a
outstanding shares voting to approve provision which requires the
proposed amendments to a In addition, IOT's Articles of approval of the holders of a
corporation's charter. The holders Incorporation provide that the majority of all outstanding
of the outstanding shares of a affirmative vote of at least 75% shares voting to approve
particular class are voting as a of the votes cast by such holders proposed amendments to a
class on a proposed amendment if the of stock voting thereon shall be corporation's charter. The
amendment would alter or change the required to alter, amend or holders of Series G redeemable
power, preferences or special rights repeal the provisions of IOT's convertible preferred stock and
of one or more series of any class Articles of Incorporation Series H redeemable convertible
so to affect them adversely. pertaining to (i) the size of the preferred stock are not voting
board of directors, (ii) the on amendments to ARL's Restated
TCI's Articles of Incorporation procedures for amending the Articles of Incorporation or on
provide that the affirmative vote of corporation's bylaws, (iii) the any matter except as otherwise
at least 75% of the votes cast provisions for obtaining written provided by law or with respect
consents of the stockholders and to an amendment to ARL's Restated
the procedures for calling a

100

by such holders of stock voting special meeting of the Articles of Incorporation would
thereon shall be required to alter, stockholders, (iv) IOT's election materially alter or change the
amend or repeal the provisions of not to be governed by the existing terms of such class of
TCI's Articles of Incorporation statutes contained in NRS 78.411 preferred stock.
pertaining to (i) the size of the to 78.444 "Combinations with
board of directors, (ii) the Interested stockholders" and the
procedures for amending the statutes contained in NRS 78.378
corporation's bylaws, (iii) the to 78.3793 "Acquisition of
provisions for obtaining written Controlling Interest" or (v)
consents of the stockholders and the IOT's requirement to obtain the
procedures for calling a special approval of two-thirds (2/3) of
meeting of the stockholders, (iv) the holders of the voting stock
TCI's election not to be governed by to approve certain mergers or
the statutes contained in NRS 78.411 business combinations, or to
to 78.444 "Combinations with adopt any provision inconsistent
Interested stockholders" and the therewith; provided, however,
statutes contained in NRS 78.378 to that the requirement for such a
78.3793 "Acquisition of Controlling 75% vote shall not be required
Interest", (v) TCI's requirement to for any alteration, amendment,
obtain the approval of two-thirds repeal or adoption of such
(2/3) of the holders of the voting provision recommended by more
stock for certain mergers or than 50% of the entire board of
business combinations, (vi) the directors.
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 subject to the IOT is subject to the same NRS ARL's Restated Articles of
restrictions set forth in a provisions.The IOT Articles of Incorporation and Bylaws provide
corporation's bylaws, the directors Incorporation provide that the that the Bylaws may be amended by
may make the bylaws of the Bylaws may be amended by the the board of directors or a
corporation. The TCI Articles of board of directors or the majority of the outstanding stock
Incorporation provide approval of no less than 75% of ARL voting
of the

101

that the Bylaws may be amended by holders of the voting stock thereon. The holders of Series G
a majority of the directors or of IOT voting thereon. redeemable convertible preferred
by the affirmative vote of the stock and Series H redeemable
holders of not less than 75% convertible preferred stock
of the outstanding stock of are not voting for amendments
TCI voting thereon. to ARL's Bylaws or on any matter
except as otherwise 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, distributions IOT is subject to the same NRS Each share of Series G
may be made to stockholders (i) provisions. redeemable convertible preferred
unless TCI would not be able to pay stock has a cumulative dividend
its debts as they become due in the per share of 10.00% per annum of
usual course of business, or (ii) the $20.00 liquidation
except as otherwise specifically preference, payable quarterly in
allowed by TCI's Articles of equal installments of $0.5, if
Incorporation, its total assets and when declared by the board
would be less than the sum of its and to the extent permitted
total liabilities plus the amount under the NRS. Dividends on the
that would be needed, if the Series G redeemable convertible
corporation were to be dissolved at preferred stock are in
the time of distribution, to satisfy preference to and with priority
the preferential rights upon over dividends upon the ARL
dissolution of stockholders whose common stock. The Series G
preferential rights are superior to redeemable convertible preferred
those receiving the distribution. stock ranks on a parity as to
dividends and upon liquidation,
dissolution or winding up with
all other shares of ARL
preferred stock.

102

dividends upon the ARL common
stock. The Series H redeemable
convertible 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
None. None. merger, the Series G redeemable
convertible preferred stock may
be converted at the option of
the holder of Series G
redeemable convertible preferred
stock into 2.5 shares of ARL
common stock for each share of
Series G redeemable convertible
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 redeemable
convertible preferred stock may
be converted at the option of
the holder of Series H
redeemable convertible preferred
stock into 2.25 shares of ARL
common stock for each share of
Series H redeemable convertible
preferred stock.
------------------------------------------------------------------------------------------------------------
REDEMPTION RIGHTS
------------------------------------------------------------------------------------------------------------
ARL may provide notice of its
intention to redeem the Series G
redeemable convertible preferred
stock no earlier than 45 days
after ARL publicly files its
None. None. first Form 10-Q with the SEC

103

following the consummation of
the TCI merger. After that
time, ARL may redeem any or all
of the Series G redeemable
convertible 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
redeemable convertible 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 redeemable
convertible 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 dissolution must be IOT is subject to the same NRS The holders of Series G
initiated by the board of directors provisions. Upon a liquidation, redeemable convertible preferred
and approved by the holders of a dissolution or winding up of IOT, stock and Series H redeemable
majority of the outstanding voting IOT will distribute the remaining convertible preferred stock are
shares of the corporation. assets, if any, to the holders of not voting on any liquidation or
IOT common stock after paying or distribution except as otherwise
Upon a liquidation, dissolution or adequately providing for the provided by law, respectively.
winding up of TCI, TCI will payment of all of its liabilities
distribute the remaining assets, if and obligations. Upon any liquidation,
any, to the holders of TCI common dissolution or winding up of
stock after paying or ARL, and after paying and
providing for the payment of all
creditors of ARL,

104

adequately providing for the payment the holders of Series G redeemable
of all of its liabilities and convertible preferred stock shall
obligations. 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
$20.00 per share less any
dividend declared and paid after
January 2, 2002 and prior to the
issuance of shares of Series G
redeemable convertible 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
redeemable convertible 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 redeemable convertible
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
redeemable convertible preferred
stock with respect to IOT common
stock plus an amount equal to
accrued and unpaid dividends
thereon, whether or not declared,
to the date of such payment.
Holders of Series H redeemable

105

convertible preferred stock
are not entitled to any
further distributions.
------------------------------------------------------------------------------------------------------------
PREEMPTIVE RIGHTS
------------------------------------------------------------------------------------------------------------
Under the NRS, the stockholders of a IOT is subject to the same NRS No holder of Series G redeemable
corporation organized after October provisions. The IOT Articles of convertible preferred stock or H
1, 1991 do not have a preemptive Incorporation do not contain a redeemable convertible preferred
right to acquire unissued shares, provision granting the holders of stock shall have preemptive
treasury shares or securities IOT common stock preemptive rights to acquire any securities
convertible into such shares unless rights. issued or sold by ARL because of
the corporation's articles of his ownership of such class of
incorporation provide otherwise. preferred stock.
The TCI Articles of Incorporation do
not contain a provision granting the
holders of TCI common stock
preemptive rights.
------------------------------------------------------------------------------------------------------------
TRANSFERABILITY
------------------------------------------------------------------------------------------------------------
Shares of TCI common stock are Shares of IOT common stock are Shares of Series G redeemable
freely transferable except for freely transferable except for convertible preferred stock and
shares issued to affiliates of TCI. shares issued to affiliates of Series H redeemable convertible
Transfers of shares of stock held by IOT. Transfers of shares of preferred stock will be freely
affiliates are restricted by federal stock held by affiliates are transferable, except for shares
and state securities laws. The restricted by federal and state issued to affiliates of ARL.
shares are listed on the NYSE under securities laws. The shares are Transfers of shares of stock
the symbol "TCI". listed on the AMEX under the held by affiliates are
symbol "IOT". restricted by federal and state
securities laws.
------------------------------------------------------------------------------------------------------------
INSPECTION RIGHT
------------------------------------------------------------------------------------------------------------
The NRS provides that any person who IOT is subject to the same NRS In addition to the foregoing
has been a stockholder of record of provisions. IOT's Bylaws provide provisions of the NRS, ARL's
a corporation for at least 6 months that any stockholder of IOT may Bylaws provide that any person
immediately preceding his demand, or inspect and copy during usual who has been a stockholder of
any person holding, or thereunto business hours the Bylaws, record of any corporation and
authorized in writing by the holders minutes of the proceedings of owns or has been authorized by
of, at least 5% of all of its meetings of stockholders, annual the holders of at least 15% of
outstanding shares, upon at least 5 statements of its affairs and all of its outstanding shares,
days' written demand is entitled to voting trust agreements on file is entitled to inspect and copy
inspect in person or by agent or at IOT's principal office. the corporate financial records
attorney, during usual business upon at least 5 days' written
hours, a copy certified by the notice.
secretary of state of the
corporation's articles of
incorporation, as amended, a copy
certified by an officer of the

106

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

107

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%.
------------------------------------------------------------------------------------------------------------
DISSENTERS' OR APPRAISAL RIGHTS
------------------------------------------------------------------------------------------------------------
Under the NRS, dissenting IOT is subject to the same NRS ARL is subject to the same NRS
stockholders of a corporation provisions. provisions.
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

108

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

109

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 corporation, IOT's Articles of Incorporation The ARL Restated Articles of
through its articles of contain such a provision Incorporation contain such a
incorporation, may limit or eliminating the personal provision eliminating the
eliminate the personal liability of liability of directors to the personal liability of directors
directors to the corporation and its corporation and its stockholders to the corporation and its
stockholders for damages for breach for damages for breach of stockholders for damages for
of fiduciary duty. However, this fiduciary duty to the fullest breach of fiduciary duty to the
provision excludes any limitation on extent permitted under the NRS. fullest extent permitted under
liability for (i) acts or omissions the NRS.
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.

110

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 BCM 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 each 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; the telephone number of BCM is 469-522-4200.

BCM is a company of which Messrs. Branigan, Corna, Kimbrough and Starowicz
serve as executive officers. BCM is indirectly 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 indirectly owns BCM and, in such capacity, has
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services to ARL, TCI and IOT.

As of July 16, 2002, BCM owned 6,629,744 shares of ARL's common stock, or
approximately 58.3% of the shares outstanding; 1,166,947 shares of TCI's common
stock, or approximately 14.5% 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. As of December 31, 2001, the compensation paid to BCM
in 2001 under the ARL Advisory Agreement was $6,714,671.

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

- 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 arms length transactions
or (ii) up to 6% of the costs of acquisition, inclusive of
commissions, if any, paid to nonaffiliated brokers

- 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 arms length transactions
or (ii) 3% of the sales price of each property, exclusive of fees,
if any, paid to nonaffiliated brokers

111

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

- 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

- 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.

During the year ended December 31, 2001, ARL paid BCM $11.9 million in
compensation under the ARL Advisory Agreement.

ARL contracts with affiliates of BCM for property management services.
Currently, Triad, an affiliate, and Carmel Realty, Inc. ("Carmel"), provide such
property management services. The general partner of Triad is BCM. The limited
partner of Triad is GS Realty Services, Inc. ("GS Realty"), a related party,
which is not affiliated with BCM. Triad and Carmel subcontract the
property-level management of 13 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 also
provides real estate brokerage services to ARL and receives brokerage
commissions in accordance with the advisory agreement between ARL and BCM.
Carmel is a company owned by First Equity Properties, Inc., which is a company
affiliated with BCM. During 2001, ARL paid Triad, Carmel and Regis $9.8 million
in commissions and fees.

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 may be terminated by BCM for any reason without
penalty upon sixty (60) days' written notice to ARL. Additionally, the directors
or the holders of a majority in interest of the then outstanding shares of ARL
may terminate the ARL Advisory Agreement for any reason without penalty upon
sixty (60) days' written notice to BCM. ARL may also terminate the ARL Advisory
Agreement in the event of an assignment by BCM, except in the event of an
assignment to a corporation, association, trust, or other successor organization
which may take over the property and carry on the affairs of BCM.

The ARL Advisory Agreement may be terminated immediately at the sole
option of the directors of ARL upon written notice of termination provided to
BCM, if BCM (i) violates any provision of the ARL Advisory Agreement, and fails
to cure such default within thirty (30) days

112

after notice of such violation, (ii) is adjudged a bankrupt or insolvent by a
court of competent jurisdiction, or an order is made by a court of competent
jurisdiction for the appointment of a receiver, liquidator or trustee for BCM or
for all or substantially all of its property by reason of the foregoing, or
approving any petition filed against the BCM for its reorganization and such
adjudication or order shall remain in full force for a period of thirty (30)
days and (ii) institutes proceedings for voluntary bankruptcy or files a
petition seeking reorganization under the Federal bankruptcy laws, or for relief
under any law for the relief of debtors, or consents to the appointment of a
receiver for itself or for all or substantially all of its properties, or makes
a general assignment for the benefit of its creditors, or admits in writing its
inability to pay its debts generally as they become due. BCM must give written
notice to the directors of ARL within seven (7) days after the occurrence of any
of the events specified in (ii) and (iii) above.

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 nonaffiliated third parties.

Situations may develop in which the interests of ARL are in conflict with
those of one or more directors or officers in their individual capacities or of
BCM, 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."

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 .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.

Under the Advisory Agreements with TCI and IOT, 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 IOT's performance against the
business plan. In addition, all transactions require prior board approval,

113

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 Agreements with TCI and IOT also require prior approval of
the board for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreements with TCI and IOT provide that
BCM shall be deemed to be in a fiduciary relationship to the stockholders;
contains a broad standard governing BCM's liability for losses by TCI and IOT;
and contain guidelines for BCM's allocation of investment opportunities as among
itself, TCI and IOT and other entities it advises.

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 the
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. 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 nonaffiliated brokers or (2) the compensation customarily charged in arms
length transactions by others rendering similar property acquisition services as
an ongoing public activity in the same geographical location and for comparable
property; provided that the aggregate purchase price of each property (including
acquisition fees and real estate brokerage commissions) may not exceed such
property's appraised value at acquisition.

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
commitment 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
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 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.

114

Under the TCI and IOT Advisory Agreements, BCM or an affiliate of BCM also
is to receive a mortgage brokerage and equity refinancing fee for obtaining
loans or refinancing on properties equal to the lesser of (1) 1% of the amount
of the loan or the amount refinanced or (2) a brokerage or refinancing fee which
is reasonable and fair under the circumstances. However, 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 is to receive 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. BCM was required to refund to IOT $265,000 of the 2001
advisory fee under this provision.

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.

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. Triad provides such 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. TCI paid Triad $2,622,000 during 2001 and
$544,000 during the three months ended March 31, 2002. IOT paid Triad $268,000
during 2001 and $56,000 during the three months ended March 31, 2002. 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. Regis is entitled
to receive a real estate commission for property purchases and sales in
accordance with the following sliding scale of total fees to be paid: (1)
maximum fee of 4.5% on the first $2.0 million of any purchase or sale
transaction of which no more than 3.5% would be paid to Regis or affiliates; (2)
maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of
which no more than 3% would be paid to Regis or affiliates; (3) maximum fee of
2.5% on transaction amounts between $5.0 million-$10.0 million of which no more
than 2% would be paid to Regis or affiliates; and (4) maximum fee of 2% on
transaction amounts in excess of $10.0 million of which no more than 1.5% would
be paid to Regis or affiliates. TCI paid Regis $8,027,000 during 2001 and
$1,216,000 during the three months ended March 31, 2002. IOT paid Regis $312,000
during 2001 and $326,000 during the three months ended March 31, 2002. BCM may
only assign the TCI and IOT Advisory Agreements with the prior consent of TCI
and IOT.

The TCI and IOT Advisory Agreements may be terminated by BCM for any
reason without penalty upon one hundred twenty (120) days' written notice to TCI
or IOT. Additionally, a majority of the directors who are not Affiliates of BCM
or the holders of a majority in interest of the then outstanding shares of TCI
or IOT may terminate the TCI or IOT Advisory Agreement for any reason without
penalty upon sixty (60) days' written notice to

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BCM. Notwithstanding, TCI or IOT may terminate the TCI or IOT Advisory Agreement
without penalty and without notice to BCM in the event of any material change in
the ownership, control or management of BCM. TCI or IOT may also terminate the
TCI or IOT Advisory Agreement in the event of an assignment by BCM without the
prior consent of TCI or IOT.

The TCI and IOT Advisory Agreements may be terminated immediately at the
sole option of the directors of TCI or IOT upon written notice of termination
provided to BCM, if BCM (i) violates any provision of the TCI or IOT Advisory
Agreement, and fails to cure such default within thirty (30) days after notice
of such violation, (ii) is adjudged bankrupt or insolvent by a court of
competent jurisdiction, or an order is made by a court of competent jurisdiction
for the appointment of a receiver, liquidator or trustee for BCM or for all or
substantially all of its property by reason of the foregoing, or approving any
petition filed against the BCM for its reorganization and such adjudication or
order shall remain in full force for a period of thirty (30) days and (iii)
institutes proceedings for voluntary bankruptcy or files a petition seeking
reorganization under the Federal bankruptcy laws, or for relief under any law
for the relief of debtors, or consents to the appointment of a receiver for
itself or for all or substantially all of its properties, or makes a general
assignment for the benefit of its creditors, or admits in writing its inability
to pay its debts generally as they become due. BCM must give written notice to
the directors of TCI or IOT within seven (7) days after the occurrence of any of
the events specified in (ii) and (iii) above.

DIRECTORS AND PRINCIPAL OFFICERS OF ADVISOR

The directors and principal officers of BCM are set forth below as of July
23, 2002:

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

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

MICKEY N. PHILLIPS: Age __, Director (for more than the last five years).
President, Ned Phillips Construction Company (for more than the last five
years).

RYAN T. PHILLIPS: Age 32, Director (for more than the last five years).
President, Signature Asset Management, Inc. (since January 1992); President,
Cascade Properties Company, Inc. (since October 1995); President, 1330 Riverbend
Investment Corp. (since April 1997); President, Signature Capital Funding, Inc.
(since July 1998).

----------
* 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, has substantial contact with the management of BCM and
input with respect to its performance of advisory services for ARL, TCI and IOT.

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MARK W. BRANIGAN: Age 48, Executive Vice President - Residential (since June
2001), Director (September 2000 to June 2001), and Executive Vice President and
Chief Financial Officer (August 2000 to June 2001) 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, TCI and IOT; Vice
President - Director of Construction (August 1999 to August 2000) and Executive
Vice President - Residential Asset Management (January 1992 to October 1997) of
ART; and real estate consultant (November 1997 to July 1999).

LOUIS J. CORNA: Age 54, Executive Vice President - Tax (since October 2001),
Executive Vice President and Chief Financial Officer (June 2001 to October
2001), and Senior Vice President - Tax (December 2000 to June 2001) of ARL.
Executive Vice President - Tax (since October 2001), Executive Vice President
and Chief Financial Officer (June 2001 to October 2001) and Senior Vice
President - Tax (December 2000 to June 2001) of BCM, TCI and IOT; Private
Attorney (January 2000 to December 2000); Vice President - Taxes and Assistant
Treasurer (March 1998 to January 2000) of IMC Global, Inc.; and Vice President -
Taxes (July 1991 to February 1998) of Whitman Corporation.

RONALD E. KIMBROUGH: Age 49, Acting Principal Executive Officer (since February
2002) and Executive Vice President and Chief Financial Officer (since January
2002) of ARL. Acting Principal Executive Officer (since March 2002) and
Executive Vice President and Chief Financial Officer (since January 2002) of
BCM, TCI and IOT; Controller (September 2000 to January 2002) of BCM; Director,
Vice President and Treasurer (since February 2002) of First Equity Properties,
Inc.; Vice President and Treasurer (January 1998 to September 2000) of Syntek
West, Inc. and One Realco Corporation; and Consultant (1997).

DAVID W. STAROWICZ: Age 46, Executive Vice President - Commercial Asset
Management (since April 2002), Executive Vice President -- Acquisitions, Sales
and Construction (March 2001 to April 2002) and Executive Vice President --
Commercial Asset Management (August 2000 to March 2001) of ARL. Executive Vice
President - Commercial Asset Management (since April 2002), Executive Vice
President -- Acquisitions, Sales and Construction (March 2001 to April 2002),
Executive Vice President -- Commercial Asset Management (September 1999 to March
2001), Vice President (May 1992 to September 1999) and Asset Manager (November
1990 to May 1992) of BCM, TCI and IOT; and Executive Vice President - Commercial
Asset Management (September 1999 to August 2000), Vice President (May 1992 to
September 1999) and Asset Manager (November 1990 to May 1992) of ART.

ROBERT A. WALDMAN: Age 50, 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; and Senior Vice President and General Counsel (since January
1995), Vice President (January 1993 to January 1995) and Secretary (since
December 1989) of ART.

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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.

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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, Kimbrough and Starowicz serve as executive officers.
BCM is a company indirectly 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 indirectly owns BCM and, in such capacity, has substantial contact
with the management of BCM and input with respect to BCM's performance of
advisory services.

ARL, TCI and IOT contract with affiliates of BCM for property management
services. Currently, Triad, an affiliate, and Carmel Realty, Inc., provide such
property management services. The general partner of Triad is BCM. The limited
partner of Triad is GS Realty Services, Inc., a related party, which is not
affiliated with BCM. Triad and Carmel subcontract the property-level management
of 13 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 also provides real estate brokerage services
to ARL and receives brokerage commissions in accordance with the advisory
agreement between ARL and BCM. Carmel is a company owned by First Equity
Properties, Inc., which is a company affiliated with BCM.

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

With respect to TCI, Triad also subcontracts the property-level management
and leasing of 51 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. Regis also provides real estate brokerage services for
TCI, on a non-exclusive basis, and receives brokerage commissions in accordance
with the brokerage agreement.

Regarding IOT, Triad also subcontracts the property-level management and
leasing of IOT's seven office buildings and two commercial properties owned by
real estate partnerships in which IOT and TCI are partners to Regis. Prior to
May 1, 2000, affiliates of BCM provided brokerage services for IOT, on a
non-exclusive basis, and received brokerage commissions in accordance with a
brokerage agreement. Currently, Regis performs such brokerage services for IOT.

At July 16, 2002, ARL indirectly owned approximately 49.5% of TCI's
outstanding common stock. At July 16, 2002, 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 executive officers of TCI and IOT also serve as officers of ARL, and
owe fiduciary duties to each of those entities as well as BCM under applicable
law. The directors and officers of IOT also serve as directors and officers of
TCI. Mr. Earl Cecil is a director of ARL, TCI and

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IOT. The directors owe fiduciary duties to TCI as well as to IOT under
applicable law. IOT and TCI have the same relationship with BCM as does ARL.

RELATED PARTY TRANSACTIONS

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

OPERATING RELATIONSHIPS

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

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. The business purpose of the transaction was to draw equity
from the Chelsea Square Shopping Center.

In 2001, TCI received $120,000 in rent from BCM for BCM's lease at Addison
Hanger. BCM owns a corporate jet that is housed at the hanger and TCI had
available space at the hanger.

In 2001, ARL paid BCM, Triad, Carmel and Regis $6.7 million in advisory
fees, $166,000 in net income fees, $3.8 million in incentive fees, $1.2 million
in mortgage brokerage and equity refinancing fees, $92,000 in property
acquisition fees, $5.9 million in real estate brokerage commissions and $3.9
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, BCM received cost
reimbursements of $2.8 million. BCM manages ARL's day-to-day operations pursuant
to the ARL Advisory Agreement. ARL contracts with Triad and Carmel for property
management services. BCM is the general partner of Triad. Carmel, which is owned
by First Equity Properties, Inc., a company

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affiliated with BCM, subcontracts property management construction services and
brokerage services to Regis. Regis is a company owned by GS Realty, the limited
partner of Triad.

In 2001, IOT paid BCM Triad and Regis $817,000 in advisory fees and
$312,000 in property and construction management fees and leasing commissions,
net of property management fees paid to subcontractors other than Regis. In
addition, from time-to-time, IOT has made advances to BCM, which generally have
not had specific repayment terms and have been reflected in IOT's financial
statements as other assets or other liabilities from affiliates. At December 31,
2001, BCM advanced IOT $593,000. As of March 2002, IOT has repaid that amount to
BCM. BCM manages IOT's day-to-day operations pursuant to the IOT Advisory
Agreement. IOT contracts with Triad for property management services.

In 2001, TCI paid BCM, Triad and Regis $10.8 million in advisory incentive
and net income fees, $45,000 in mortgage brokerage and equity refinancing fees,
$2.4 million in property acquisition fees, $3.8 million in real estate brokerage
commissions and $2.6 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 TCI Advisory Agreement, BCM
received cost reimbursements of $2.6 million. BCM manages TCI's day-to-day
operations pursuant to the TCI Advisory Agreement. TCI contracts with Triad for
property management services.

ADVANCES AND LOANS

From time-to-time, ARL and its affiliates have made advances to each
other, which generally have not had specific repayment terms and have been
reflected in ARL's financial statements as other assets or other liabilities.
These affiliate borrowings are used to fund operating shortfalls or
investment/acquisition cash requirements. Similarly, as properties are sold and
operating cash flow is generated, those advances/borrowings may be repaid. Also,
incentive fees and net income fees payable to BCM for 2001 are accrued
throughout the year and are due by March 31, 2002. At December 31, 2001, ARL
owed $10.1 million ($4.0 million for fees owed for 2001), $980,000 and $257,000
to BCM, TCI and GS Realty, respectively. In January 2002, ARL paid the $257,000
due to GS Realty. At December 31, 2001, TCI had receivables of $11.6 million,
$1.9 million and $608,000 from BCM, GS Realty, and ARL, respectively. Also at
December 31, 2001, TCI owed $1.0 million and $39,000 to GS Realty and BCM,
respectively. In January 2002, TCI paid the $1.0 million due to GS Realty and in
March 2002, TCI paid the $39,000 to BCM. At December 31, 2001, BCM advanced IOT
$593,000. As of March 2002, IOT has repaid that amount to BCM.

In October 1999, ARL funded a $4.7 million loan to Realty Advisors, Inc.,
the parent company of BCM. The loan, to provide funds for acquisitions or
working capital needs, was secured by all of the outstanding shares of common
stock of American Reserve Life Insurance Company. The loan bore interest at
10.25% per annum, and matured in November 2001. In January 2000, $100,000 was
collected. In November 2001, the maturity date was extended to November 2004.
The collateral was changed to a subordinate pledge of 850,000 shares of ARL
common stock owned by BCM. The shares are also pledged to a lender on ARL's
behalf. The interest rate was changed to 2% over the prime rate, currently 6.75%
per annum, and the accrued

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but unpaid interest of $984,000 was added to the principal. The new principal
balance is $5.6 million. All principal and accrued interest are due at maturity.

In March 2000, a loan due to ARL with a principal balance of $2.5 million
due from Lordstown, L.P., matured. The loan, to provide funds to purchase for
resale various parcels of land, is secured by a second lien on land in Ohio and
Florida, by 100% of the general and limited partner interest in Partners
Capital, Ltd., the limited partner of Lordstown, L.P., and a profits interest in
subsequent land sales. At June 2002, the loan, and $900,000 of accrued interest,
remained unpaid. At July 2002, settlement terms are being negotiated. Tara
Group, Inc., 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.

In December 2000, an unsecured loan due to ARL with a principal balance of
$1.7 million due from Warwick of Summit, Inc. ("Warwick") matured. The loan was
made to provide funds to purchase and renovate and expand a shopping center
property in Warwick, Rhode Island. All principal and interest were due at
maturity. In February 2002, $275,000 of interest was received. In May 2002,
$33,000 of principal and $267,000 of interest was collected. At June 2002, the
loan, with a current principal balance of $1.7 million and $12,000 of accrued
interest, remained unpaid. At July 2002, settlement terms are being negotiated.
Richard D. Morgan, a Warwick stockholder, served as a director of ARL until
October 2001.

In December 2000, a loan due to ARL with a principal balance of $1.6
million due from Bordeaux Investments Two, L.L.C. ("Bordeaux"), matured. The
loan, to provide funds to purchase and renovate a shopping center property in
Oklahoma City, Oklahoma, 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 June 2002, the loan, and $576,000 of accrued interest, remained
unpaid. At July 2002, settlement terms are being negotiated. Richard D. Morgan,
a Bordeaux member, served as a director of ARL until October 2001.

In March 2001, ARL funded $13.6 million of a $15.0 million unsecured line
of credit to One Realco Corporation ("One Realco"), which owns approximately
14.8% of the outstanding shares of ARL's common stock. One Realco periodically
borrows money to meet its cash obligations. The line of credit bears interest at
12.0% per annum. All principal and interest were due at maturity in February
2002. The line of credit is guaranteed by BCM. In June 2001, $394,000 in
principal and $416,000 in interest was collected. In December 2001, $21,000 in
principal and $804,000 in interest was collected. In February 2002, the line of
credit was increased to $1.8 million, accrued but unpaid interest of $217,000
was added to the principal, and the maturity date was extended to February 2004.
In March 2002, ARL funded an additional $1.8 million, increasing the outstanding
principal balance to $15 million. All principal and interest are due at
maturity. Ronald E. Kimbrough, Executive Vice President and Chief Financial
Officer of ARL, is a 10% stockholder of One Realco. During 2001, Mr. Kimbrough
did not participate in day-to-day operations or management of One Realco.

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PARTNERSHIP TRANSACTIONS

BCM has entered into put agreements with certain holders of the Class A
limited partner units of Ocean Beach Partners, L.P., to increase ARL's
investment in the partnership. From June 1, 1997 through May 31, 2006, the Class
A units are convertible, at the option of the unitholders, into Series D
Cumulative preferred stock of ARL. At any time from June 1, 2001 through May 31,
2006, the Series D shareholders have the option to sell any or all Series D
shares held by them to BCM at the put price. The put price for the Series D
preferred stock is $20 per share, plus all accumulated but unpaid dividends. ARL
subsidiaries own 100% of the general partner and limited partner beneficial
interests in Ocean Beach Partners, L.P.

BCM has entered into put agreements with the holders of the Class A
limited partner units of Valley Ranch L.P., to increase ARL's investment in the
partnership. 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 redeemable convertible 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 two million units in May
2001. One million units were purchased in May 2002. ARL has committed to
purchase the remaining one million units in June 2002. ARL subsidiaries own 100%
of the general partner and Class B limited partner beneficial interests in
Valley Ranch, L.P.

BCM has entered into put agreements with the holders of the Class A units
of ART Palm, L.P., to increase ARL's investment in the partnership. 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. Through
December 31, 2001, ARL has repurchased 9,736,250 Class A units. The put
agreement calls for ARL to repurchase the remaining Class A units as follows:
June 30, 2002, 1,625,000 units; June 30, 2003, 1,625,000 units; December 31,
2005, 1,625,000 units; and December 31, 2006, 8,563,750 units. ARL subsidiaries
own 100% of the general partner and Class B limited partner beneficial interest
in ART Palm, L.P. One Realco, which owns approximately 14.8% of the outstanding
shares of ARL common stock, owns the Class C limited partner interest.

PROPERTY TRANSACTIONS

In May 2001, ARL exchanged with TCI two parcels of land, a 10.5 acre tract
of Vista Ridge land and an 8.88 acre tract of Hollywood Casino land, for the 168
unit Glenwood Apartments. The cost of the Vista Ridge land, the Hollywood Casino
land and the Glenwood Apartments was $1.1 million, $2.1 million, and $3.7
million, respectively. The purchase prices were determined based on the market
values of the properties exchanged, using a market rate multiple of net
operating income. The business purpose of the transaction was for TCI to
construct apartments on the Vista Ridge land and office buildings on the
Hollywood Casino land. No consideration was paid on the transaction. However,
ARL received net cash of $3.2 million on the subsequent sale of the Glenwood
Apartments.

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In December 2001, TCI, purchased 100% of the outstanding common shares of
National Melrose, Inc. ("NM"), a wholly-owned subsidiary of ARL, for $2.0
million. The purchase price was determined based upon the market value of the
property exchanged, using a market rate multiple of net operating income. NM
owns the Executive Court Office Building. ARL has guaranteed that the asset will
produce at least a 12% annual return on the purchase price for a period of three
years from the purchase date. If the asset fails to produce the annual return,
ARL will 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. The business purpose of the transaction was for TCI
to make an equity investment in NM anticipating a profitable return and ARL to
receive cash for its equity investment. Management has classified this related
party transaction as a note payable to TCI. The consideration paid for the
outstanding shares was $2.0 million.

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

In January 2002, TCI purchased 100% of the outstanding common shares of
ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARL,
for $4.4 million. The purchase price was determined based upon the market value
of the property exchanged, using a market rate multiple of net operating income.
Two Hickory owns the Two Hickory Centre Office Building. ARL has guaranteed that
the asset will produce at least a 12% annual return on the purchase price for a
period of three years from the purchase date. If the asset fails to produce the
12% return, ARL will 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. The business purpose of the
transaction was for TCI to make an equity investment in Two Hickory anticipating
a profitable return and ARL to receive cash for its equity investment.
Management has classified this related party transaction as a note payable to
TCI. The consideration paid for the outstanding shares was $4.4 million. In June
2002, the first lien on the property was refinanced. TCI received $1.3 million
of the proceeds as a principal reduction on its loan to ARL.

In February 2002, TCI sold a $2.0 million senior participation interest in
a loan to IOT. The board of directors of IOT and TCI determined that the 16%
interest rate was a good return for IOT's investment and TCI could benefit from
the increase in cash and decrease its notes receivable outstanding portfolio.
TCI received consideration of $2.0 million. In February 2002, the loan was
extended until April 2002. In April 2002, IOT extended the loan until July 2002,
receiving $8,500 as an extension fee. IOT and TCI will receive 57% and 43%,
respectively, on

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the remaining principal and interest payments. In July 2002, the note was
extended until August 2002. IOT and TCI will receive 57% and 43% respectively,
on the remaining principal and interest payments.

In March 2002, ARL received consideration of $600,000 and exchanged with
TCI two parcels of land, a 24.5 acre tract of Rasor land, a 16.89 acre tract of
Lakeshore Villas land, and the 45,623 sq. ft. Oaktree Village Shopping Center
for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The cost of the
Rasor land, the Lakeshore Villas land, the Oaktree Shopping Center, and the
Plaza on Bachman Shopping Center was $1.0 million, $1.3 million, $1.6 million,
and $4.1 million, respectively. The purchase prices were determined based on the
market values of the properties exchanged, using a market rate multiple of net
operating income. The business purpose of the transaction was for TCI to
construct apartments on the Rasor and Lakeshore Villas land and to give ample
value for the property TCI is exchanging, the Oaktree Shopping center was added
to the transaction. The Plaza on Bachman Creek Shopping Center was subsequently
financed with ARL receiving net cash of $4.4 million.

In April 2002, TCI purchased all of the general and limited partnership
interests in Garden Confederate Point, L.P. ("Confederate Point") from ARL for
$1.9 million. The purchase price was determined based on the market value of the
property exchanged using a market rate multiple of net operating income.
Confederate Point owns the Confederate Point Apartments. ARL has guaranteed that
the asset will produce at least a 12% annual return on the purchase price for a
period of three years from the purchase date. If the asset fails to produce the
12% return, ARL will 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 interests in Confederate Point for the purchase price. The business purpose
of the transaction was for TCI to make an equity investment in Confederate Point
anticipating a profitable return and ARL is to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI.

In April 2002, TCI purchased all of the general and limited partnership
interests in Garden Foxwood, L.P. ("Foxwood") from ARL for $1.1 million. The
purchase price was determined based on the market values of the property
exchanged, using a market rate multiple of net operating income. Foxwood owns
the Foxwood Apartments. ARL has guaranteed that the asset will produce at least
a 12% annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARL will 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 interests in Foxwood for
the purchase price. The business purpose of the transaction was for TCI to make
an equity investment in Foxwood anticipating a profitable return and ARL to
receive cash for its equity investment. Management has classified this related
party transaction as a note payable to TCI.

In April 2002, TCI purchased all of the general and limited partnership
interests in Garden Woodsong, L.P. ("Woodsong") from ARL for $2.5 million. The
purchase price was determined based on the market values of the property
exchanged, using a market rate multiple of net operating income. Woodsong owns
the Woodsong Apartments. ARL has guaranteed that the asset will produce at least
a 12% annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARL will pay TCI
any

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shortfall. In addition, if the asset fails to produce the 12% return for a
calendar year, TCI may require ARL to repurchase the interests in Woodsong for
the purchase price. The business purpose of the transaction was for TCI to make
an equity investment in Woodsong anticipating a profitable return and ARL to
receive cash for its equity investment. Management has classified this related
party transaction as a note payable to TCI. In July 2002, the Woodsong
Apartments was sold for $9.1 million. TCI received $2.6 million from the
proceeds of $2.8 million as payment of principal and accrued but unpaid interest
on the loan.

In April 2002, TCI, a related party, purchased 100% of the common shares
of ART One Hickory Corporation ("One Hickory"), a wholly-owned subsidiary of
ARL, for $4.5 million. The purchase price was determined based on the market
values of the property exchanged, using a market rate multiple of net operating
income. One Hickory owns the One Hickory Centre Office Building. ARL has
guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARL will 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 in One Hickory for the purchase price. The business
purpose of the transaction was for TCI to make an equity investment in One
Hickory anticipating a profitable return and ARL to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI.

In April 2002, ARL sold nine residential properties to Metra Capital, LLC
("Metra"), for a total sales price of $34.2 million. These properties include:
the 12 unit Bay Anchor Apartments in Panama City, Florida; the 168 unit Governor
Square Apartments in Tallahassee, Florida; the 54 unit Grand Lagoon Cove
Apartments in Panama City, Florida; the 92 unit Oak Hill Apartments in
Tallahassee, Florida; the 121 unit Park Avenue Villas Apartments in Tallahassee,
Florida; the 62 unit Seville Apartments in Tallahassee, Florida; the 120 unit
Westwood Apartments in Mary Ester, Florida; the 64 unit Windsor Tower Apartments
in Ocala, Florida and the 546 unit Woodhollow Apartments in San Antonio, Texas.
Innovo Realty, Inc., a subsidiary of Innovo Group, Inc. ("Innovo") is a limited
partner in the partnerships that purchased the properties. Joseph Mizrachi, a
director of ARL, controls approximately 11.67% of the outstanding common stock
of Innovo. ARL's relationship with Mr. Mizrachi, management has determined to
treat this sale as a refinancing transaction. ARL will continue to report the
assets and the new debt incurred by Metra on its financial statements. ARL
received net cash of $8.3 million after paying off the existing debt of $19.3
million and various closing costs. Of the total new debt of $29.2 million, $8.8
million bears interest at 5.00% per annum and matures in May 2003, $17.0 million
bears interest at 7.12% per annum and matures in May 2007 and $3.4 million bears
interest at 7.57% per annum and matures in May 2012. ARL also received $6.3
million of 8% non-recourse, non-convertible Series A preferred stock of Innovo.
The dividend on the Innovo preferred shares will be funded entirely and solely
through member distributions from cash flows generated by the operation and
subsequent sale of the sold properties. In the event the cash flows for the
properties are insufficient to cover the 8% annual dividend, Innovo will have no
obligation to cover any shortfall. The Innovo preferred shares have a mandatory
redemption feature, and are redeemable from the cash proceeds received by Innovo
from the operation and sale of the properties. All member distributions that are
in excess of current and accrued 8% dividends must be used by Innovo to redeem
the Innovo preferred shares.

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In April 2002, TCI sold 12 residential properties to Metra. These
properties include: the 75 unit Apple Lane Apartments in Lawrence, Kansas, the
195 unit Arbor Point Apartments in Odessa, Texas, the 264 unit Fairway View
Estates Apartments in El Paso, Texas, the 152 unit Fairways Apartments in
Longview, Texas, the 166 unit Fountain Lake Apartments in Texas City, Texas, the
172 unit Fountains of Waterford Apartments in Midland, Texas, the 122 unit
Harper's Ferry Apartments in Lafayette, Louisiana, the 108 unit Oak Park IV
Apartments in Clute, Texas, the 131 unit Quail Oaks Apartments in Balch Springs,
Texas, the 300 unit Sunchase Apartments in Odessa, Texas, the 180 unit Timbers
Apartments in Tyler, Texas, and the 112 unit Willow Creek Apartments in El Paso,
Texas. Innovo is a limited partner in the partnerships that purchased the
properties. Joseph Mizrachi, a director of ARL, controls approximately 11.67% of
the outstanding common stock of Innovo. Due to TCI's relationship with ARI and
Mr. Mizrachi, management has determined to treat this sale as a refinancing
transaction. TCI will continue to report the assets and the new debt incurred by
Metra on its financial statements. The sales price for the properties totaled
$37.6 million. TCI received net cash of $10.5 million after paying off the
existing debt of $18.0 million and various closing costs. The new debt of $30.3
million bears interest at 7.57% per annum, requires monthly interest only
payments of $212,000 and matures in May 2012. TCI also received $5.7 million of
8% non-recourse, non-convertible Series A preferred stock of Innovo. The Innovo
preferred shares have the terms described above in the paragraph setting forth
ARI's sale of residential properties to Metra.

In April 2002, IOT sold all of its residential properties to partnerships
controlled by Metra. These properties include: the 60 unit Brighton Court, the
92 unit Del Mar, the 68 unit Enclave, the 280 unit Meridian, the 57 unit
Signature, the 114 unit Sinclair, located in Midland, Texas, and the 106 unit
Treehouse, located in San Antonio, Texas. Innovo is a limited partner in the
partnerships that purchased the properties. Joseph Mizrachi, a director of ARL,
controls approximately 11.67% of the outstanding common stock of Innovo. The
sale constituted 23.39% of the total assets of IOT as of December 31, 2001. The
sales price for the properties totaled $26.2 million. IOT received $5.4 million
in cash after the payoff of $16.1 million in debt and various closing costs. Due
to IOT's relationship with ARL and Mr. Mizrachi, management has determined to
treat this sale as a refinancing transaction. The new debt, funded by Bank of
America, on the properties totals $21.4 million, bears interest at 7.57% per
annum, requires monthly interest only payments of $135,000 and matures in May
2012. IOT also received $2.9 million of 8% non-recourse, non-convertible Series
A preferred stock of Innovo. The Innovo preferred shares have the terms
described above in the paragraph setting forth ARL's sale of residential
properties to Metra.

STOCK-RELATED ITEMS

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 July 16, 2002,
TCI owned 746,972 shares of ARL common stock 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. BCM also serves as
advisor to ARL and at July 16, 2002, ARL owned approximately 49.5% of TCI's
outstanding common stock. At July 24, 2002, the market value of the ARL common
shares was approximately $6.3 million.

127

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 received an aggregate of $41,225 in settlement, and the outstanding
options previously held by each under the TCI Director Plan have been cancelled.

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.

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

ARL. Article ELEVENTH of ARL's Articles of Incorporation provides that ARL
shall not, directly or indirectly, contract or engage in any transaction with
(1) any director, officer or employee of ARL, (2) any director, officer or
employee of the advisor, (3) the advisor or (4) any affiliate or associate (as
such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended) of any of the aforementioned persons, unless (a) the material facts
as to the relationship among or financial interest of the relevant individuals
or persons and as to the contract or transaction are disclosed to or are known
by ARL's board of directors or the appropriate committee thereof and (b) ARL's
board of directors or committee thereof determines that such contract or
transaction is fair to ARL and simultaneously authorizes or ratifies such
contract or transaction by the affirmative vote of a majority of independent
directors of ARL entitled to vote thereon.

Article ELEVENTH defines an "independent director" as one who is neither
an officer or employee of ARL, nor a director, officer or employee of ARL's
advisor.

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

128

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

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

TCI. Article FOURTEENTH of TCI's Articles of Incorporation provides that
TCI shall not, directly or indirectly, contract or engage in any transaction
with (1) any director, officer or employee of TCI, (2) any director, officer or
employee of the advisor, (3) the advisor or (4) any affiliate or associate (as
such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended) of any of the aforementioned persons, unless (a) the material facts
as to the relationship among or financial interest of the relevant individuals
or persons and as to the contract or transaction are disclosed to or are known
by the board of directors or the appropriate committee thereof and (b) the board
of directors or committee thereof determines that such contract or transaction
is fair to TCI and simultaneously authorizes or ratifies such contract or
transaction by the affirmative vote of a majority of independent directors of
TCI entitled to vote thereon.

Article FOURTEENTH defines an "independent director" as one who is neither
an officer or employee of TCI nor a director, officer or employee of TCI's
advisor.

IOT. Article FOURTEENTH of IOT's Articles of Incorporation provides that
IOT shall not, directly or indirectly, contract or engage in any transaction
with (1) any director, officer or employee of IOT, (2) any director, officer or
employee of the advisor, (3) the advisor or (4) any affiliate or associate (as
such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended) of any of the aforementioned persons, unless (a) the material facts
as to the relationship among or financial interest of the relevant individuals
or persons and as to the contract or transaction are disclosed to or are known
by IOT's board of directors or the appropriate committee thereof and (b) IOT's
board of directors or committee thereof determines that such contract or
transaction is fair to IOT and simultaneously authorizes or ratifies such
contract or transaction by the affirmative vote of a majority of independent
directors of IOT entitled to vote thereon.

Article FOURTEENTH defines an "independent director" as one who is neither
an officer or employee of IOT, nor a director, officer or employee of IOT's
advisor.

129

CERTAIN INFORMATION REGARDING
TCI COMMON STOCK AND IOT COMMON STOCK

PURCHASES OF TCI COMMON STOCK

The following table sets forth for each quarter during 2000: (a) the
amount of TCI common stock purchased by BCM and ART, (b) the range of prices
paid by BCM and ART, and (c) the average purchase price paid by BCM and ART,
based on documents filed with the SEC.

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

BCM 2000 Q1 None -- --
2000 Q2 15,500 $11.38 to $11.63 $11.62
2000 Q3 431,200 $6.13 to $14.25 $9.18
2000 Q4 900 $16.00 to $16.30 $16.14

ART 2000 Q1 None -- --
2000 Q2 None -- --
2000 Q3 14,400 $11.00 to $11.875 $11.37
2000 Q4 12,400 $10.75 to $11.00 10.88

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.

The following table describes all transactions of TCI common stock
effected by ARL, BCM, TCI, IOT, and any associate or majority owned subsidiary
thereof, any executive officer, director or any affiliate thereof, and any
pension, profit-sharing or similar plan of TCI or IOT or any affiliate thereof
within the past 60 days:

130

AMOUNT OF
NAME DATE SECURITIES INVOLVED TYPE OF TRANSACTION PRICE PER SHARE
---- ---- ------------------- ------------------- ---------------

Ted P. Stokely,
TCI & IOT Director 7/5/2002 5,000 Shares Purchase - Exercise of Option $8.75
7/9/2002 5,000 Shares Purchase - Exercise of Option $14.88
7/9/2002 5,000 Shares Purchase - Exercise of Option $16.05
7/12/2002 300 Shares Open Market Sale $19,56
7/12/2002 1,700 Shares Open Market Sale $19.40
7/15/2002 500 Shares Open Market Sale $19.26
7/12/2002 3,500 Shares Open Market Sale $19.23 - $19.42

Martin L. White,
TCI & IOT Director 7/3/2002 5,000 Shares Purchase - Exercise of Option $8.75
7/3/2002 5,000 Shares Purchase - Exercise of Option $14.88
7/3/2002 5,000 Shares Purchase - Exercise of Option $16.05
7/13/2002 600 Shares Open Market Sale $20.02

Except as set forth above, there were no other purchases of TCI common
stock by ARL, IOT, TCI, BCM or any executive officer, director or any affiliate
thereof, during the past two years that were reported in documents filed with
the SEC.

PURCHASES OF IOT COMMON STOCK

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

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

BCM 2000 Q1 None -- --
2000 Q2 6,700 $6.50 to $6.63 $6.58
2000 Q3 None -- --
2000 Q4 None -- --

ART 2000 Q1 None -- --
2000 Q2 None -- --
2000 Q3 400 $7.13 to $6.75 6.83
2000 Q4 None -- --

Except as set forth above, there were no other purchases of IOT common
stock by ARL, IOT, TCI, BCM or any executive officer, director or any affiliate
thereof, during the past two years that were reported in documents filed with
the SEC.

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

131

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. EQK Holdings has
also pledged 843,111 shares of TCI common stock to Dynamic 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 EQK 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

132

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.

133

INFORMATION ABOUT ARL

BUSINESS OF ARL

ARL, 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.

ARL files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document filed by ARL
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. ARL's 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 is listed
on the NYSE, reports and other information concerning ARL (symbol: "ARL") can
also be inspected at the office of the NYSE, Inc., 20 Broad Street, New York,
New York 10005.

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 New York
Stock Exchange on August 2, 2000. ARL common stock commenced trading on the New
York Stock Exchange 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.

On October 23, 2001, ARL, TCI, and IOT jointly announced a preliminary
agreement with Settlement Counsel of the derivative action entitled Olive et al.
v. National Income Realty Trust, et al. for complete settlement of all disputes
in the lawsuit. In February 2002, the court granted final approval of the
proposed settlement. Under the proposal, ARL would acquire all of the
outstanding shares of IOT and TCI not currently owned by ARL for a cash payment
or shares of ARL preferred stock. ARL will pay $17.50 cash per TCI share and
$19.00 cash per IOT share for the stock held by nonaffiliated stockholders. ARL
will issue one share of Series G redeemable convertible preferred stock with a
liquidation value of $20.00 per share for each share of TCI common stock for
stockholders who affirmatively elect to receive ARL Preferred Stock in lieu of
cash. ARL will issue one share of Series H redeemable convertible preferred
stock with a liquidation value of $21.50 per share for each share of IOT common
stock for stockholders who affirmatively elect to receive ARL preferred stock in
lieu of cash. All

134

affiliated stockholders will receive ARL preferred stock. Each share of Series G
redeemable convertible preferred stock will be convertible into 2.5 shares of
ARL common stock, and each share of Series H redeemable convertible preferred
stock will be convertible into 2.25 shares of ARL common stock during a 75-day
period that commences fifteen days after the date of the first ARL Form 10-Q
filing that occurs after the closing of the merger transaction. Upon the
acquisition of IOT and TCI shares, TCI and IOT would become wholly-owned
subsidiaries of ARL. The transaction is subject to the execution of a definitive
merger agreement and a vote of the stockholders of all three entities. ARL has
the same advisor as TCI and IOT, and TCI and IOT have the same board of
directors.

RECENT DEVELOPMENTS

On April 26, 2002, ARL sent a letter to the board of trustees of Prime
Group Realty Trust ("Prime Group") proposing that ARL and Prime Group explore a
business combination. On May 1, 2002, Prime Group issued a press release
indicating that it had referred ARL's letter to its board of trustees and to its
financial advisors for consideration. Thereafter, on May 14, 2002, ARL received
a letter from Prime Group declining the proposal to explore a business
combination with ARL.

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" and in Schedules III and IV to the ARL consolidated financial
statements included elsewhere in this joint proxy statement and prospectus.

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," "Slices" and "Angelo &
Vito's" in California and Texas. The first Me-N-Ed's pizza parlor opened in
1962. At December 31, 2001, there were 59 pizza parlors in operation, consisting
of 47 owned and 12 franchised pizza parlors. One of the owned pizza parlors was
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 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

135

property sale. See "-- Properties of ARL" and Schedules III and IV to the ARL
consolidated financial statements included elsewhere in this joint proxy
statement and prospectus.

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."

MANAGEMENT OF THE COMPANY

Although the board of directors is directly responsible for managing the
affairs of ARL 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
investment and sales opportunities, as well as financing and refinancing
sources. BCM also serves as a consultant in connection with ARL's business plan
and investment policy decisions made by the board. BCM is a company indirectly
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 indirectly
owns BCM and, in such capacity, has substantial contact with the management of
BCM and input with respect to its performance of advisory services to ARL. As of
July 16, 2002, BCM owned 6,629,744 shares of ARL's common stock, approximately
58.3% of the shares then outstanding. BCM is more fully described in "The
Advisor -- BCM." BCM has been providing advisory services to ARL since February
6, 1989. BCM also serves as advisor to IOT and TCI. The officers of ARL are also
officers of IOT, TCI and BCM.

Affiliates of BCM have provided property management services to ARL.
Currently, Triad Realty Services, Ltd. ("Triad"), an affiliate, and Carmel
Realty, Inc. ("Carmel") provide such property management services. Triad and
Carmel subcontract with other entities for property-level management services.
The general partner of Triad is BCM. The limited partner of Triad is also a
related party. Triad subcontracts the property-level management and leasing of
13 of ARL's commercial properties (shopping centers, office buildings and a
merchandise mart) and eight of its hotels to Regis Realty, Inc. ("Regis"), also
a related party. 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. Carmel is a company owned by
First Equity Properties, Inc., which is a company affiliated with BCM.

136

Regis is also entitled to receive real estate brokerage commissions in
accordance with the terms of the Advisory Agreement as discussed in "The Advisor
-- BCM."

ARL has no employees itself, but PWSI has 921 employees. Employees of BCM
render services to ARL. See "The Advisor -- BCM."

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 the market served, i.e., transient, commercial or
group users. Management believes that beyond general economic circumstances and
trends, the rate at which properties are renovated or the rate new properties
are developed in the vicinity of each of 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.

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 BCM 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 - Related Party Transactions," ARL also
competes with entities which are affiliates of BCM having similar investment
objectives in the purchasing, selling, leasing and financing of real estate and
real estate-related investments. In resolving any potential conflicts of
interest which may arise, BCM has informed ARL that it intends to continue to
exercise its best

137

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,
earthquakes, hurricanes and other acts of God and other factors beyond the
control of management or BCM. 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.

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.

138

The typical PWSI franchise agreement establishes the rights and
relationship between the franchisor and franchisee, and outlines the standards,
specifications and operating procedures that franchisees are expected to follow.
The term of the franchise agreement is typically limited; however, the typical
franchise agreement provides that the agreement can be renewed at the option of
the franchisee. Assignment or transfer of a franchise agreement is generally
permitted only in limited circumstances.

Franchisees enjoy protected territories under typical franchise
agreements, in which no other related pizza franchise can be maintained by the
franchisor. The typical franchise agreement also contains non-competition
clauses, or covenants not to compete, which prevent a franchisee or its owners
from owning or operating a similar business within a specific geographical area
of the pizza parlor. A franchisee who wishes to sell a pizza parlor, or its
interest in a pizza parlor, must, under the typical franchise agreement, give
the franchisor the right of first refusal.

The typical franchise agreement terminates at the sole discretion of the
franchisor if, for example, the franchisee fails to obtain an on-sale beer and
wine license for the pizza parlor, the franchisee fails to open the pizza parlor
within a specified period of time, or the franchisee fails to complete or
achieve a passing grade in the customary training course concerning operation of
a pizza parlor. The franchisor also has the right to terminate the typical
franchise agreement and the franchise, effective upon delivery of notice of
termination to the franchisee, in certain circumstances. Such circumstances
include, but are not limited to (i) making material misrepresentations or untrue
or inaccurate representations of information, (ii) the bankruptcy or insolvency
of the franchisee or any of its owners, (iii) felony conviction or other crime
or misconduct by the franchisee or any of its owners, which substantially
impairs the goodwill associated with the proprietary nature of the franchisor's
business and (iv) generally, the failure of the franchisee to comply with the
provisions of the franchise agreement.

The typical franchise agreement provides for the payment of certain fees
and expenses by a franchisee to the franchisor, including, but not limited to
(i) an initial franchise fee for opening a new pizza parlor, payable upon the
execution of the franchise agreement, (ii) an initial advertising fee, payable
upon execution of the franchise agreement, (iii) royalty fees consisting of a
percentage of the adjusted gross sales generated monthly by the pizza parlor,
(iv) periodic advertising fees consisting of a percentage of the adjusted gross
sales generated monthly by the pizza parlor, (v) expenses incurred by the
franchisor in connection with the renewal of the franchise agreement, and (vi)
charges incurred by late payment of any fees, expenses or charges owed by the
franchisee to the franchisor.

At December 31, 2001, PWSI owned and operated 47 and franchised 12 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 December 31, 2001, there were 54 pizza parlors in
California and five in Texas.

139

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 2001, PWSI added three new company-owned stores and sold two
company-owned stores to franchisees. In 2002, PWSI plans to construct and open
four new company-owned stores.

No franchise fee income was recorded in 2001.

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, 2001, are set forth in Schedules III and IV, respectively, to the
ARL consolidated financial statements included elsewhere in this joint proxy
statement and prospectus. The discussions set forth below under the headings "--
Real Estate" and "-- Mortgage Loans" provide certain summary information
concerning ARL's real estate and mortgage notes receivable portfolios.

At December 31, 2001, no single asset accounted for 10% or more of total
assets. At December 31, 2001, 78% of ARL's assets consisted of real estate, 4%
consisted of notes and interest receivable, 10% consisted of investments in
equity investees, including IOT and TCI, and 3% consisted of pizza parlor
equipment and related goodwill. The remaining 5% of ARL's assets were leasehold
interests in oil and gas properties, 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, 2001, 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, Pacific and Midwest regions
of the continental United States. See Schedule IV to the ARL consolidated
financial statements included elsewhere in this joint proxy statement and
prospectus for a detailed description of ARL's notes receivable portfolio.

140

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 34
apartments, 3 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 11 apartments and 8 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 7 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 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 the above are 54 parcels of improved and unimproved land, a
hotel in Sofia, Bulgaria and a single family residence, as described below.

REAL ESTATE

At December 31, 2001, 88% 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 debt, or existing debt may be
assumed and properties may be mortgaged, pledged or otherwise collateralized to
obtain financing. The board of directors may alter the types of and criteria for
selecting new real estate investments and for obtaining financing without a vote
of stockholders.

Although ARL has typically invested in developed real estate, it may also
invest in new construction or development either directly or in partnership with
nonaffiliated parties or affiliates (subject to approval by the board of
directors). To the extent that it invests in construction and development
projects, such as Four Hickory Centre described below, ARL is

141

subject to business risks, such as cost overruns and construction delays,
associated with such higher risk projects. Also at December 31, 2001, ARL had
under construction Oaks of Vista Ridge, a 288 unit apartment complex in
Lewisville, Texas and Vista Lago, a 206 unit apartment complex in Farmers
Branch, 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 54 parcels of improved and
unimproved land, a hotel in Sofia, Bulgaria and a single family residence,
described below) at December 31, 2001.

Commercial
Region Apartments Properties Hotels
---------- ---------- ------

Midwest.................................. 17% 16% 14%
Mountain................................. -- 30 11
Pacific.................................. -- 8 46
Southeast................................ 53 11 29
Southwest................................ 30 35 --
------- ------- -------
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 ARL's investment in each region. See Schedule III to the
ARL consolidated financial statements included elsewhere in this joint proxy
statement and prospectus for a detailed description of owned real estate.

Excluded from the table above are a 136 room hotel in Sofia, Bulgaria, a
single family residence in Dallas, Texas and 54 parcels of improved and
unimproved land consisting of: a 44.4 acre land parcel in Las Colinas, Texas;
six parcels of land in Dallas County, Texas, totaling 391.8 acres; four parcels
of land in Irving, Texas, totaling 278.5 acres; an 82.4 acre land parcel in
Oceanside, California; four parcels of land in Tarrant County, Texas, totaling
129.8 acres; a 130.6 acre land parcel in Harris County, Texas; four parcels of
land in Collin County, Texas, totaling 42.1 acres; 12 parcels of land in Farmers
Branch, Texas, totaling 136.4 acres; two parcels of land in Plano, Texas,
totaling 40.7 acres; a 1,070.9 acre land parcel in Austin, Texas; three parcels
of land in Palm Desert, California, totaling 775.8 acres; a 63.3 acre land
parcel in Travis County, Texas; a 171.7 acre parcel of land in Houston, Texas; a
54.2 acre land parcel in Fort Worth, Texas; a 99.1 acre land parcel in
Lewisville, Texas; a 7.6 acre land parcel in Carrollton, Texas; a 131.3 acre
land parcel in Nashville, Tennessee; three parcels of land in Riverside,
California, totaling 1,677.8 acres; a 150.8 acre parcel of land in Denton
County, Texas; and five additional land parcels totaling approximately 84.0
acres. See Schedule III to the ARL consolidated financial statements included
elsewhere in this joint proxy statement and prospectus for a detailed
description of ARL's real estate portfolio.

142

A summary of the activity in the owned real estate portfolio during 2001
is as follows:

Owned properties at January 1, 2001....................... 152
Property obtained in exchange for land.................... 1
Properties under construction............................. 3
Properties sold (excluding partial sales)................. (23)
---
Owned properties at December 31, 2001..................... 133
===

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, 2001, 2000 and 1999 for apartments and commercial properties and average
occupancy during 2001, 2000 and 1999 for hotels:

RENT PER SQUARE FOOT OCCUPANCY %
---------------------- --------------------
PROPERTY LOCATION UNITS/SQUARE FOOTAGE 2001 2000 1999 2001 2000 1999
-------- -------- -------------------- ---- ---- ---- ---- ---- ----

APARTMENTS

Arlington Place Pasadena, TX 230 Units/205,476 Sq. Ft. $ .73 $ .68 $ .65 97 93 98
Bay Anchor Panama City, FL 12 Units/10,700 Sq. Ft. .55 .53 .50 100 100 97
Bridgestone Friendswood, TX 76 Units/65,519 Sq. Ft. .71 .68 .68 93 99 91
Chateau Bellevue, NE 115 Units/99,220 Sq. Ft. .71 .68 .69 94 97 96
Chateau Bayou Ocean Springs, MS 122 Units/105,536 Sq. Ft. .67 .65 .64 97 89 99
Confederate Point Jacksonville, FL 206 Units/277,860 Sq. Ft. .61 .59 .58 98 96 94
Conradi House Tallahassee, FL 98 Units/49,900 Sq. Ft. .79 .71 .67 100 98 96
Daluce Tallahassee, FL 112 Units/95,432 Sq. Ft. .63 .61 .59 95 96 93
Falcon House Ft. Walton, FL 82 Units/71,220 Sq. Ft. .64 .63 .62 100 95 92
Foxwood Memphis, TN 220 Units/212,000 Sq. Ft. .58 .55 .55 91 90 81
Georgetown Panama City, FL 44 Units/36,160 Sq. Ft. .65 .62 .60 93 100 94
Governor Square Tallahassee, FL 168 Units/146,550 Sq. Ft. .65 .63 .61 95 95 95
Grand Lagoon Panama City, FL 54 Units/47,460 Sq. Ft. .76 .74 .71 96 93 94
Greenbriar Tallahassee, FL 50 Units/36,600 Sq. Ft. .77 .74 .71 90 98 100
La Mirada Jacksonville, FL 320 Units/341,400 Sq. Ft. .56 .54 .54 87 88 94
Lake Chateau Thomasville, GA 98 Units/65,800 Sq. Ft. .59 .57 .55 81 95 95
Lake Shore Villas Harris County, TX 312 Units/259,176 Sq. Ft. .89 .89 * 96 * *
Landings/Marina Pensacola, FL 52 Units/34,464 Sq. Ft. .72 .69 .68 94 92 96
Lee Hills Tallahassee, FL 16 Units/14,720 Sq. Ft. .57 .56 .52 81 94 92
Mallard Lake Greensboro, NC 336 Units/295,560 Sq. Ft. .65 .63 .62 90 97 93
Mediterranean Villas San Antonio, TX 140 Units/158,960 Sq. Ft. .55 .50 .50 89 96 96
Morning Star Tallahassee, FL 82 Units/41,000 Sq. Ft. .85 .81 .77 100 99 95
Northside Villas Tallahassee, FL 81 Units/134,000 Sq. Ft. .63 .61 .58 93 97 94
Oak Hill Tallahassee, FL 92 Units/81,240 Sq. Ft. .64 .62 .60 98 95 96
Oak Tree Grandview, MO 189 Units/160,591 Sq. Ft. .65 .62 .59 91 89 95
Oaks of Vista Ridge Lewisville, TX 288 Units/238,176 Sq. Ft. ** ** ** ** ** **
Park Avenue Tallahassee, FL 121 Units/78,979 Sq. Ft. .87 .83 .81 94 98 97
Pheasant Ridge Bellevue, NE 264 Units/243,960 Sq. Ft. .67 .61 .60 90 94 94
Pinecrest Tallahassee, FL 48 Units/46,400 Sq. Ft. .61 .59 .57 100 100 94
Quail Point Huntsville, AL 184 Units/202,602 Sq. Ft. .47 .46 .45 89 90 90
Regency Lincoln, NE 106 Units/111,700 Sq. Ft. .63 .62 .64 96 93 88
Regency Tampa, FL 78 Units/55,810 Sq. Ft. .91 .87 .82 89 97 97
Rolling Hills Tallahassee, FL 134 Units/115,730 Sq. Ft. .66 .63 .61 97 96 99
Seville Tallahassee, FL 62 Units/63,360 Sq. Ft. .59 .57 .56 95 97 100
Stonebridge Florissant, MO 100 Units/140,576 Sq. Ft. .50 .47 .46 99 97 94
Stonegate Tallahassee, FL 83 Units/34,900 Sq. Ft. .83 .80 .77 100 99 95
Sun Hollow El Paso, TX 216 Units/156,000 Sq. Ft. .71 .65 .65 84 97 94
Sunset Odessa, TX 240 Units/160,400 Sq. Ft. .45 .41 .42 88 85 96
Valley Hi Tallahassee, FL 54 Units/27,800 Sq. Ft. .82 .80 .76 98 98 92
Villa Del Mar Wichita, KS 162 Units/128,004 Sq. Ft. .62 .56 .59 91 91 85
Villager Ft. Walton, FL 33 Units/22,840 Sq. Ft. .76 .73 .70 94 91 94
Villas Plano, TX 208 Units/156,632 Sq. Ft. .91 .85 .81 94 94 96
Vista Lago Farmers Branch, TX 206 Units/175,100 Sq. Ft. ** ** ** ** ** **
Waters Edge III Gulfport, MS 238 Units/212,216 Sq. Ft. .63 .62 .61 90 92 97
Westwood Mary Ester, FL 120 Units/93,000 Sq. Ft. .71 .63 .67 88 93 94

143

Westwood Parc Tallahassee, FL 94 Units/55,950 Sq. Ft. .77 .74 .70 93 99 99
White Pines Tallahassee, FL 85 Units/17,000 Sq. Ft. .54 .53 .74 90 93 95
Whispering Pines Topeka, KS 320 Units/299,264 Sq. Ft. .83 .79 .52 94 97 94
Windsor Tower Ocala, FL 64 Units/66,000 Sq. Ft. .54 .50 .46 94 98 100
Woodhollow San Antonio, TX 546 Units/348,692 Sq. Ft. .67 .65 .64 96 89 76
Woodlake Carrollton, TX 256 Units/210,208 Sq. Ft. .84 .78 .77 94 99 96
Woodsong II Smyrna, GA 190 Units/207,460 Sq. Ft. .64 .60 .57 93 97 96

OFFICE BUILDINGS

56 Expressway Oklahoma City, OK 54,649 Sq. Ft. 11.47 11.23 7.92 66 77 23
Centura Farmers Branch, TX 410,901 Sq. Ft. 24.91 25.01 * 48 31 *
Cooley Building Farmers Branch, TX 27,000 Sq. Ft. 11.69 9.25 9.00 69 100 100
Encino Executive Plaza Encino, CA 177,211 Sq. Ft. 26.98 25.17 16.85 65 78 90
Executive Court Memphis, TN 41,840 Sq. Ft. 11.06 11.04 13.22 73 100 100
Four Hickory Centre Farmers Branch, TX 221,000 Sq. Ft. ** ** ** ** ** **
Melrose Business Park Oklahoma City, OK 124,200 Sq. Ft. 3.57 3.22 2.73 78 74 86
One Hickory Centre Farmers Branch, TX 102,615 Sq. Ft. 18.95 19.90 * 99 72 *
Rosedale Towers Minneapolis, MN 84,798 Sq. Ft. 17.37 16.84 18.89 95 86 92
Two Hickory Centre Farmers Branch, TX 96,127 Sq. Ft. 20.89 21.07 18.71 75 33 25
University Square Anchorage, AK 22,260 Sq. Ft. 14.73 14.07 13.26 100 97 97

SHOPPING CENTERS

Collection Denver, CO 267,812 Sq. Ft. 10.43 9.83 11.19 88 96 99
Cross County Mall Mattoon, IL 304,575 Sq. Ft. 5.24 5.10 6.05 93 94 93
Cullman Cullman, AL 92,466 Sq. Ft. 3.38 3.27 3.98 98 98 98
Oaktree Village Lubbock, TX 45,623 Sq. Ft. 9.23 6.64 9.29 89 79 76
Westwood Tallahassee, FL 149,855 Sq. Ft. 6.87 6.74 6.68 97 93 100

MERCHANDISE MART

Denver Mart Denver, CO 509,008 Sq. Ft. 11.20 10.98 10.34 92 90 92

SINGLE FAMILY RESIDENCE

Tavel Circle Dallas, TX 2,271 Sq. Ft. -- -- -- -- -- --

PROPERTY AVERAGE ROOM RATE OCCUPANCY %
-------- ----------------- -----------

HOTELS LOCATION ROOMS 2001 2000 1999 2001 2000 1999
------ -------- ----- ---- ---- ---- ---- ---- ----

Best Western Virginia Beach, VA 110 Rooms $ 108.20 $ 103.94 $ 94.15 53 60 62
Grand Hotel Sofia Sofia, Bulgaria 136 Rooms 106.97 * * 60 * *
Holiday Inn Kansas City, MO 196 Rooms 73.58 70.67 64.09 65 72 81
Piccadilly Airport Fresno, CA 185 Rooms 70.87 70.22 69.52 59 61 59
Piccadilly Chateau Fresno, CA 78 Rooms 57.29 56.38 57.09 59 58 56
Piccadilly Shaw Fresno, CA 194 Rooms 73.12 70.96 71.80 70 69 63
Piccadilly University Fresno, CA 190 Rooms 65.18 67.11 68.90 62 55 49
Quality Inn Denver, CO 161 Rooms 53.75 52.83 55.01 67 69 63
Williamsburg Hospitality House Williamsburg, VA 296 Rooms 99.04 93.28 88.76 52 60 58

TOTAL ROOM REVENUE
DIVIDED BY
PROPERTY TOTAL AVAILABLE ROOMS
-------- ---------------------

HOTELS 2001 2000 1999
------ ---- ---- ----

Best Western $ 57.83 $ 62.29 $ 57.96
Grand Hotel Sofia 60.85 * *
Holiday Inn 48.01 51.18 52.02
Piccadilly Airport 42.04 42.87 41.02
Piccadilly Chateau 34.07 32.64 32.17
Piccadilly Shaw 50.84 49.07 45.36
Piccadilly University 40.38 36.83 34.02
Quality Inn 35.75 36.30 34.45
Williamsburg Hospitality House 51.88 55.71 51.58

* Property was purchased or constructed in 2000 or 2001.

** Property was under construction in 2001.

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

In 2001, ARL purchased the following property:

PURCHASE NET CASH DEBT INTEREST
PROPERTY LOCATION UNITS PRICE PAID INCURRED RATE MATURITY DATE
-------- -------- ----- ----- ---- -------- ---- -------------

APARTMENTS

Glenwood Addison, TX 168 Units $ 6,246 $ -- (1) $ 2,549 (2) 9.25% 10/04

144

(1) 8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land
given as consideration. Exchanged with TCI, a related party.

(2) Assumed debt of seller. Exchanged with TCI, a related party.

145

In 2001, ARL sold the following properties:

NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION UNITS/SQ.FT./ACRES SALES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ------------------ ----------- -------- ---------- -------

APARTMENTS

Ashford Tampa, FL 56 Units $ 2,145 $ 593 $ 1,182 $ (985)
Bent Tree Addison, TX 292 Units 12,050 2,480 8,867 7,081
Blackhawk Ft. Wayne, IN 209 Units 7,100 904 4,030 5,110
Carriage Park Tampa, FL 46 Units 2,005 757 1,069 663
Chalet I Topeka, KS 162 Units 5,650 1,288 4,109 (1) 3,952
Chalet II Topeka, KS 72 Units 2,100 485 1,550 (1) 434
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 6,042
Crossing at Church Tampa, FL 52 Units 1,880 750 948 623
Glenwood Addison, TX 168 Units 6,650 3,166 2,549 (581)
Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191 (1) 6,053
Nora Pines Indianapolis, IN 254 Units 9,850 2,548 5,574 6,957
Place One Tulsa, OK 407 Units 12,935 3,310 7,539 8,623
Rockborough Denver, CO 345 Units 16,675 3,654 12,215 (1) 13,471
Shadowood Addison, TX 184 Units 7,125 1,980 4,320 4,644
Timbercreek Omaha, NE 180 Units 7,500 1,871 4,517 5,219
Woodstock Dallas, TX 320 Units 9,600 3,877 4,542 5,951

SHOPPING CENTER

Regency Pointe Jacksonville, FL 67,410 Sq.Ft. 7,350 5,126 1,500 2,232

LAND

Chase Oaks Plano, TX 22.3 Acres 2,875 663 2,027 871
Chase Oaks Plano, TX 4.9 Acres 1,973 1,832 -- 1,416
Elm Fork Denton County, TX 10.0 Acres 1,002 (30) 958 283
Elm Fork Denton County, TX 107.0 Acres 5,600 (168) 5,316 (1,616)
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)
Katrina Palm Desert, CA 20.0 Acres 2,940 78 -- 616
Katrina Palm Desert, CA 6.1 Acres 1,196 1,108 -- 570
Katrina Palm Desert, CA 2.2 Acres 800 (24) 737 514
Katrina Palm Desert, CA 1.4 Acres 284 (9) 253 93
Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539
Mason/Goodrich Houston, TX 22.1 Acres 4,168 (34) 3,750 2,896
Nashville Nashville, TN 2.0 Acres 26 (1) 24 (82)
Nashville Nashville, TN 1.2 Acres 8 -- 4 (59)
Nashville Nashville, TN 4.2 Acres 600 (53) 561 302
Plano Parkway Plano, TX 11.3 Acres 1,445 312 950 --
Plano Parkway Plano, TX 12.0 Acres 740 672 -- (991)
Rasor Plano, TX 6.6 Acres 350 267 -- 34
Santa Clarita Santa Clarita, CA 12.7 Acres 2,100 1,791 -- 952
Santa Clarita Santa Clarita, CA 6.7 Acres 500 608 -- (501)
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
Vista Ridge Denton County, TX 27.4 Acres 871 (26) 812 (1,993)
Watersedge Gulfport, MS .4 Acres 80 78 -- -- (3)
Yorktown Harris County, TX 120.4 Acres 5,239 (160) 4,991 (1,497)

(1) Debt assumed by purchaser.
(2) Gain of $830 deferred until ARL-provided financing is collected.
(3) Sold to TCI. Gain of $65 deferred until sale to unrelated party.

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

UNITS/SQ.FT. NET CASH INTEREST MATURITY
PROPERTY LOCATION ROOMS/ACRES DEBT INCURRED DEBT DISCHARGED RECEIVED RATE DATE
-------- -------- ----------- ------------- --------------- -------- ---- ----

APARTMENTS

Sun Hollow El Paso, TX 216 Units $ -- (1) $ -- $ -- -- --
Waters Edge III Gulfport, MS 238 Units -- (1) -- -- -- --

146

UNITS/SQ.FT. NET CASH INTEREST MATURITY
PROPERTY LOCATION ROOMS/ACRES DEBT INCURRED DEBT DISCHARGED RECEIVED RATE DATE
-------- -------- ----------- ------------- --------------- -------- ---- ----

Woodlake Carrollton, TX 256 Units -- (1) -- -- -- --

OFFICE BUILDING

Centura Tower Farmers Branch, TX 410,910 Sq.Ft. 28,739 28,384 (526) 10.50% 07/02
Executive Court Memphis, TN 41,840 Sq.Ft. 1,970 -- 1,598 12.00 12/04 (9)
Four Hickory Centre Farmers Branch, TX 221,000 Sq.Ft. 5,000 -- 5,000 6.75 (5) 10/02
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. 7,500 (1) -- 7,500 5.00 07/02

SHOPPING CENTER

Cross County Mattoon, IL 307,174 Sq.Ft. 3,200 700 2,436 15.00 06/02
Cullman Cullman, AL 92,486 Sq.Ft. -- (2) 129 -- -- --
Sesame Square Anchorage, AK 27,651 Sq.Ft. 800 -- 777 15.00 06/02
Westwood Tallahassee, FL 149,244 Sq.Ft. 3,000 700 2,221 15.00 06/02

HOTEL

Williamsburg
Hospitality House Williamsburg, VA(3) 296 Rooms 10,309 -- 9,851 36.00 01/02 (6)

LAND

Chase Oaks Plano, TX 6.9 Acres 1,633 1,000 425 13.00 03/03
Hollywood Casino Farmers Branch, TX 51.7 Acres 2,500 (4) -- 1,916 9.00 04/03
Jeffries Ranch Oceanside, CA 82.4 Acres 5,250 (2) 750 3,944 14.50 06/02
Katrina Palm Desert, CA 300.5 Acres 22,000 15,584 4,417 12.50 (5) 10/02
Marine Creek Fort Worth, TX 54.2 Acres 1,500 750 701 9.00 01/03
Mason/Goodrich Houston, TX 235.0 Acres 6,750 -- 6,302 14.00 01/02 (7)
Mercer Crossing Carrollton, TX 31.3 Acres 2,937 1,986 16 13.00 03/03
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 (8)
Valwood Dallas County, TX 19.4 Acres -- (4) -- -- -- --
Varner Road Riverside, CA 127.8 Acres 2,450 -- 2,333 9.00 10/02
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
Willow Springs Riverside, CA 1,485.7 Acres -- (2) -- -- -- --

(1) Single note, with all properties as collateral.
(2) Single note, with all properties as collateral.
(3) Also secured by 1,846,000 shares of TCI Common Stock.
(4) Single note, with all properties as collateral.
(5) Variable interest rate.
(6) Paid off in September 2001.
(7) Extended to April 2003.
(8) Extended to July 2002.
(9) In December 2001, TCI, purchased 100% of the outstanding common shares of
NM, a wholly-owned subsidiary of ARL, for $2.0 million. The purchase price was
determined based upon the market value of the property exchanged, using a market
rate multiple of net operating income. NM owns the Executive Court Office
Building. ARL has guaranteed that the asset will produce at least a 12% annual
return on the purchase price for a period of three years from the purchase date.
If the asset fails to produce the annual return, ARL will 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. The
business purpose of the transaction was for TCI to make an equity investment in
NM anticipating a profitable return and ARL to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI. The consideration paid for the outstanding shares was $2.0
million.

PROPERTIES HELD FOR SALE. Set forth below are the properties held for
sale, consisting of improved and unimproved land:

PROPERTY LOCATION ACRES
-------- -------- -----

147

PROPERTY LOCATION ACRES
-------- -------- -----

Bonneau Dallas County, TX 8.4
Centura Holdings Farmers Branch, TX 6.4
Chase Oaks Plano, TX 11.8
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
Elm Fork Denton County, TX 150.8
Frisco Bridges Collin County, TX 12.2
FRWM Cummings Farmers Branch, TX 6.5
Hollywood Casino Farmers Branch, TX 42.8
HSM Farmers Branch, TX 6.2
Jeffries Ranch Oceanside, CA 82.4
JHL Connell Carrollton, TX 7.6
Katrina Palm Desert, CA 283.8
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 44.4
Leone Irving, TX 8.2
Marine Creek Fort Worth, TX 54.2
Mason/Goodrich Houston, TX 171.7
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 131.3
Pioneer Crossing Austin, TX 1,070.9
Rasor Plano, TX 28.9
Scout Tarrant County, TX 64.5
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
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 99.1
Walker Dallas County, TX 132.6
Willow Springs Riverside, CA 1,485.0
Woolley Farmers Branch, TX .4
Other (5 properties) Various 84.0

ARL FEDERAL TAX BASIS OF DEPRECIABLE PROPERTY AS OF DECEMBER 31, 2001

For each ARL property upon which depreciation is taken, the table set
forth below includes (i) the Federal tax basis; (ii) rate, (iii) method and (iv)
life claimed as of December 31, 2001.

GROSS FEDERAL ACCUMULATED TAX NET FEDERAL
PROPERTY TAX BASIS DEPRECIATION TAX BASIS RATE METHOD(1) LIFE
-------- --------- ------------ --------- ---- --------- ----

APARTMENTS

Arlington Place $ 5,136,331 $ 865,067 $ 4,271,264 100 % ADS 12-40 years
Bay Anchor 117,306 15,808 101,498 100 MACRS 27.5 years

148

GROSS FEDERAL ACCUMULATED TAX NET FEDERAL
PROPERTY TAX BASIS DEPRECIATION TAX BASIS RATE METHOD(1) LIFE
-------- --------- ------------ --------- ---- --------- ----

Bridgestone 1,970,565 331,652 1,638,913 100 ADS 40 years
Chateau 2,844,370 337,786 2,506,584 100 ADS 20-40 years
Chateau Bayou 2,364,187 229,042 2,135,145 100 ADS 40 years
Confederate Point 6,697,547 1,086,080 5,611,467 100 ADS 12-40 years
Conradi House 1,151,649 155,230 996,419 100 MACRS 27.5 years
Daluce 2,622,734 353,506 2,269,228 100 MACRS 27.5 years
Falcon House 1,967,301 259,304 1,707,997 100 MACRS 27.5 years
Foxwood 4,950,375 853,921 4,096,454 100 ADS 12-40 years
Georgetown 1,025,485 156,543 868,942 100 MACRS 27.5 years
Governor Square 830,752 147,295 683,457 100 ADS 40 years
Grand Lagoon 659,190 99,141 560,049 100 ADS 40 years
Greenbriar 923,602 206,950 716,652 100 ADS 40 years
La Mirada 8,857,528 1,576,027 7,281,501 100 ADS 12-40 years
Lake Chateau 1,379,424 200,620 1,178,804 100 MACRS 27.5 years
Lakeshore Villas 14,129,956 619,488 13,510,468 100 ADS 12-40 years
Landings/Marina 1,255,751 185,117 1,070,634 100 MACRS 7-27.5 years
Lee Hills 236,046 31,813 204,233 100 MACRS 27.5 years
Mallard Lake 13,485,915 2,133,760 11,352,155 100 ADS 12-40 years
Med Villas 2,847,706 275,886 2,571,820 100 ADS 40 years
Morning Star 1,348,597 177,692 1,170,905 100 MACRS 27.5 years
Northside Villas 3,758,551 506,795 3,251,756 100 MACRS 27.5 years
Oak Hill 2,107,213 283,890 1,823,323 100 MACRS 27.5 years
Oak Tree 4,490,117 760,612 3,729,505 100 ADS 12-40 years
Oaks at Vista Ridge** - - - 100 ADS 40 years
Park Avenue 774,877 169,779 605,098 100 ADS 40 years
Pheasant Ridge 7,525,733 1,217,629 6,308,104 100 ADS 12-40 years
Pinecrest West 891,750 120,195 771,555 100 MACRS 27.5 years
Quail Point 4,304,220 819,277 3,484,943 100 ADS 12-40 years
Regency - NE 2,885,626 427,367 2,458,259 100 ADS 12-40 years
Regency - FL 1,784,436 496,641 1,287,795 100 ADS 40 years
Rolling Hills 3,057,516 493,268 2,564,248 100 MACRS 5-27.5 years
Seville 1,686,356 277,678 1,408,678 100 MACRS 5-27.5 years
Stonebridge 3,277,158 573,381 2,703,777 100 ADS 12-40 years
Stonegate 1,663,558 241,364 1,422,194 100 MACRS 27.5 years
Sun Hollow 5,152,743 997,072 4,155,671 100 ADS 40 years
Sunset 1,381,980 133,886 1,248,094 100 ADS 40 years
Valley Hi 833,613 138,976 694,637 100 MACRS 5-27.5 years
Villa Del Mar 3,225,142 533,725 2,691,417 100 ADS 12-40 years
Villager 1,106,359 160,353 946,006 100 MACRS 5-27.5 years
Villas 6,278,546 1,036,042 5,242,504 100 ADS 12-40 years
Vista Lago** - - - 100 ADS 40 years
Waters Edge III 1,323,967 114,470 1,209,497 100 ADS 40 years
Westwood 1,897,454 253,362 1,644,092 100 ADS 40 years
Westwood Parc 1,483,208 195,500 1,287,708 100 MACRS 27.5 years
Whispering Pines 7,382,519 1,195,969 6,186,550 100 ADS 12-40 years
White Pines 673,341 90,723 582,618 100 MACRS 27.5 years
Windsor Tower 2,014,279 280,623 1,733,656 100 MACRS 27.5 years
Wood Hollow 8,632,523 1,999,434 6,633,089 100 ADS 12-40 years

149

GROSS FEDERAL ACCUMULATED TAX NET FEDERAL
PROPERTY TAX BASIS DEPRECIATION TAX BASIS RATE METHOD(1) LIFE
-------- --------- ------------ --------- ---- --------- ----

Woodlake 8,935,473 1,633,781 7,301,692 100 ADS 12-40 years
Woodsong II 5,553,747 781,852 4,771,895 100 ADS 12-40 years

OFFICE BUILDINGS

56 Expressway 3,560,831 1,025,583 2,535,248 100 ADS 12-40 years
Centura Tower 56,326,747 2,847,642 53,479,105 100 MACRS 5-39 years
Cooley Building 4,435,200 218,164 4,217,036 100 ADS 40 years
Encino 31,520,000 2,320,000 29,200,000 100 MACRS 5-39 years
Executive Court* - - - 100 ADS 40 years
Melrose Business Park 2,680,791 565,449 2,115,342 100 ADS 12-40 years
One Hickory Center 11,199,591 562,341 10,637,250 100 ADS 6-40 years
Two Hickory Center 9,041,244 216,628 8,824,616 100 ADS 40 years
Four Hickory Center** - - - 100 ADS 40 years
Rosedale Towers 5,159,244 1,673,231 3,486,013 100 ADS 10-40 years
University Square 2,733,833 785,430 1,948,403 100 ADS 12-40 years
SHOPPING CENTERS
Collection 13,724,776 1,265,832 12,458,944 100 MACRS 39 years
Cross County Mall 14,627,929 2,733,606 11,894,323 100 ADS 12-40 years
Cullman 2,473,588 351,922 2,121,666 100 ADS 12-40 years
Oaktree Shopping Village 1,608,873 222,414 1,386,459 100 ADS 40 years
Westwood 8,570,701 1,770,918 6,799,783 100 ADS 12-40 years

MERCHANDISE MART

Denver Mart 22,653,797 3,823,165 18,830,632 100 MACRS 5-39 years

HOTELS

Best Western Hotel 5,233,153 4,156,553 1,076,600 100 MACRS 5-39 years
AKC Holiday Inn 7,303,484 1,995,685 5,307,799 100 MACRS 5-39 years
Piccadilly Airport 8,324,191 979,546 7,344,645 100 ADS 6-40 years
Piccadilly Chateau 3,946,863 446,984 3,499,879 100 ADS 10-40 years
Piccadilly Shaw 10,525,142 1,246,662 9,278,480 100 ADS 10-40 years
Piccadilly University 12,145,188 1,360,137 10,785,051 100 ADS 6-40 years
Quality Inn 964,516 313,206 651,310 100 ADS 10-40 years
Grand Hotel, Sofia 14,566,761 500,612 14,066,149 100 ADS 10-40 years
Williamsburg
Hospitality House 18,184,618 2,578,840 15,605,778 100 ADS 6-40 years

SINGLE FAMILY RESIDENCE

Tavel Circle 213,576 30,035 183,541 100 ADS 40 years
----------- ---------- -----------
Total 442,608,959 60,221,957 382,387,002
=========== ========== ===========

* Sold to TCI, treated as financing transaction for book, sale for tax.
** Property under construction, no depreciable assets in service.

(1) ADS = Alternative Depreciation System
MACRS = Modified Accelerated Cost Recovery System

150

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. Management expects that the percentage of ARL's
assets invested in mortgage loans will 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. Management intends to service and hold for
investment the mortgage notes currently in the portfolio. Mortgage notes
receivable consist of first mortgage loans.

TYPES OF PROPERTIES SUBJECT TO MORTGAGES. The types of properties securing
mortgage notes receivable at December 31, 2001, consisted of apartments, a
commercial 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, 2001, the obligors on $25.9 million or 79% of the
mortgage notes receivable portfolio were affiliates of ARL. Also at that date,
$10.3 million or 31% 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, 2001), by geographic region, of the
commercial properties that serve as collateral for ARL's mortgage notes
receivable. Excluded are $26.1 million of mortgage notes secured by unimproved
land and other security. See Schedule IV to the ARL consolidated financial
statements included elsewhere in this joint proxy statement and prospectus for
additional details of ARL's mortgage notes receivable portfolio.

REGION COMMERCIAL PROPERTIES
------------------ -------------------------

Southwest 100.0%
=====

A summary of the activity in the mortgage notes receivable portfolio during 2001
is as follows:

Mortgage notes receivable at January 1, 2001 11
Loans funded 5
Loans collected in full (6)
Loans sold --
---
Mortgage notes receivable at December 31, 2001 10
===

During 2001, $1.8 million in interest and $5.0 million in principal were
collected on mortgage notes receivable.

FIRST MORTGAGE LOANS. These loans generally provide for level periodic
payments of principal and interest sufficient to substantially repay the loan at
or prior to maturity, but may involve interest-only payments or moderate or
negative amortization of principal or all interest and a "balloon" principal
payment at maturity. With respect to first mortgage loans, it is 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

151

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
2001, as well as events that affected previously funded first mortgage loans
during 2001.

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 bore
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 was secured by 100% of the shares of DM Development,
Inc. and an assignment of land sales proceeds. In March 2001, $850,000 in
principal and interest was collected. In June 2001, the loan was collected in
full, including accrued but unpaid interest.

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.

In March 2001, ARL 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. In January 2002, $274,000 in principal and $226,000 in interest was
collected. In March 2002, the note was collected in full, including accrued but
unpaid interest.

In April 2001, ARL 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, ARL 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 were due at maturity. In July 2001,
the note was collected in full, including accrued but unpaid interest.

In November 2001, ARL sold a 12.71 acre tract of its Santa Clarita parcel
for $1.9 million, receiving $1.5 million in cash and providing purchase money
financing of the remaining $437,000 of the sales price. The loan bears interest
at 8.0% per annum and matures in November 2002. All principal and accrued but
unpaid interest are due at maturity.

Also in November 2001, ARL sold the Blackhawk Apartments for $7.1 million,
receiving $1.5 million in cash after the assumption of $4.0 million of mortgage
debt and providing purchase money financing of the remaining $1.6 million of the
sales price. The loan bears interest at 10.0% per annum and matured in May 2002.
Monthly principal and interest payments were required. In April 2002, the note
was collected in full, including accrued but unpaid interest.

152

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 was secured by five
second lien deeds of trust, was non-interest bearing and matured in September
2001. Payment was not received at maturity, and ARL began to accrue default
interest. In December 2001, the $100,000 loan 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. In February 2002, $1.5
million in principal and $87,000 in interest were collected. ARL has demanded
payment of the remaining $84,000 in principal plus accrued but unpaid interest.

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 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.

RELATED PARTY. Periodically, ARL has made secured and unsecured loans to
parties deemed to be related parties. ARL makes these loans for investment and
high return income purposes. See the specific loans below.

153

January 2000, $100,000 was collected. In November 2001, the maturity date was
extended to November 2004. The collateral was changed to a subordinate pledge of
850,000 shares of ARL common stock owned by BCM. The shares are also pledged to
a lender on ARL's behalf. The interest rate was changed to 2% over the prime
rate, currently 6.75% per annum, and the accrued but unpaid interest of $984,000
was added to the principal. The new principal balance is $5.6 million. All
principal and accrued interest are due at maturity.

In December 2000, an unsecured loan due to ARL with a principal balance of
$1.7 million due from Warwick matured. The loan was made to provide funds to
purchase and renovate and expand a shopping center property in Warwick, Rhode
Island. All principal and interest were due at maturity. In February 2002,
$275,000 of interest was received. In May 2002, $33,000 of principal and
$267,000 of interest was collected. At June 2002, the loan, with a current
principal balance of $1.7 million and $12,000 of accrued interest, remained
unpaid. At July 2002, settlement terms are being negotiated. Richard D. Morgan,
a Warwick stockholder, served as a director of ARL until October 2001.

In December 2000, a loan due to ARL with a principal balance of $1.6
million due from Bordeaux, matured. The loan, to provide funds to purchase and
renovate a shopping center property in Oklahoma City, Oklahoma, 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 June 2002, the loan, and $576,000 of
accrued interest, remained unpaid. At July 2002, settlement terms are being
negotiated. Richard D. Morgan, a Bordeaux member, served as a director of ARL
until October 2001.

In March 2001, ARL funded $13.6 million of a $15.0 million unsecured line
of credit to One Realco, which owns approximately 14.8% of the outstanding
shares of ARL's common stock. One Realco periodically borrows money to meet its
cash obligations. The line of credit bears interest at 12.0% per annum. All
principal and interest were due at maturity in February 2002. The line of credit
is guaranteed by BCM. In June 2001, $394,000 in principal and $416,000 in
interest was collected. In December 2001, $21,000 in principal and $804,000 in
interest was collected. In February 2002, the line of credit was increased to
$1.8 million, accrued but unpaid interest of $217,000 was added to the
principal, and the maturity date was extended to February 2004. In March 2002,
ARL funded an additional $1.8 million, increasing the outstanding principal
balance to $15 million. All principal and interest are due at maturity. Ronald
E. Kimbrough, Executive Vice President and Chief Financial Officer of ARL, is a
10%

154

stockholder of One Realco. During 2001, Mr. Kimbrough did not participate in
day-to-day operations or management of One Realco.

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, 2001 totaled $64.1 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 $75.3 million at December 31, 2001
and the aggregate market value was $71.9 million. The aggregate investee book
value of IOT and TCI based upon the December 31, 2001 financial statements of
each entity was $118.4 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, 2001, 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 an agreement which provided
IOT and ARL with an option to purchase 1,858,900 shares of common stock of TCI
from a third party. On October 19, 2000, IOT assigned all of its rights to
purchase such shares to ARL. The total cost to purchase the TCI shares was $30.8
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. See "Business of ARL" for discussion of the proposed acquisition of TCI
and IOT by ARL.

Pertinent information regarding ARL's investment in the equity securities
of the IOT and TCI at December 31, 2001, 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, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001
-------- ----------------- ----------------- ----------------- -----------------

IOT 27.44% $ 6,789 $ 10,034 $ 7,379
TCI 49.99 68,498 108,369 64,533

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.

155

ARL does not have a controlling equity interest in either IOT or TCI;
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.

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, 2001, 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 loss of $(3.5) million in 2001 as compared to net
income of $16.8 million in 2000. IOT's net income in 2000 included gains on sale
of real estate of $20.9 million. IOT's cash flow from property operations was
$6.0 million in 2001. At December 31, 2001, IOT had total assets of $91.8
million, which consisted of $87.3 million in real estate held for investment,
$4.5 million in investments in partnerships and other assets and $66,000 in cash
and cash equivalents.

ARL received no dividends from IOT in 2001.

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, 2001, TCI owned 112 income producing properties located in 19 states. These
properties consisted of 57 apartments comprising 10,714 units, 31 office
buildings with an aggregate of 4.1 million sq. ft., 13 industrial warehouses
with an aggregate of

156

2.0 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 26 parcels of unimproved land, totaling 840 acres. TCI also
holds mortgage notes receivable secured by real estate located in the Midwest,
Southeast and Southwest regions of the continental United States.

TCI reported net income of $19.8 million in 2001 and $29.8 million in
2000. TCI's net income in 2001 included gains from the sale of real estate of
$54.3 million, whereas its net income in 2000 included gains from the sale of
real estate of $50.6 million. TCI's cash flow from property operations was $56.0
million in 2001. At December 31, 2001, TCI had total assets of $709.2 million,
which consisted of $622.2 million in real estate held for investment, $516,000
in real estate held for sale, $14.2 million in investments in real estate
entities, $22.1 million in notes and interest receivable, $39.9 million in other
assets and $10.3 million in cash and cash equivalents. At December 31, 2001, TCI
owned 345,728 shares of IOT's common stock, approximately 24.0% of the shares
then outstanding.

In 2001, ARL received a total of $53,000 from TCI in accumulated dividends
on shares of CMET that should have been exchanged for TCI common stock in 1999.

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

ART FLORIDA PORTFOLIO II, LTD. In January 2002, Investors Choice Florida
Public Funds II, in which ART Florida Portfolio II, Ltd. owned an interest, sold
Villas Continental Apartments. ARL received $1.0 million in cash from the sale.
ARL's share of the loss incurred on the sale was $531,000, which will be
included in equity in income of investees in the Consolidated Statement of
Operations.

DOUBLE TAXATION OF CORPORATIONS

ARL is taxed as a regular corporation under the Code. Corporations are
subject to complex federal income tax rules that cause the corporation to be
taxed on its income and distributions, generally, to be taxable to recipients.
As a general rule, a corporation is not entitled to a deduction for dividends
paid to its shareholders. Corporations are subject to an additional tax on
certain undistributed accumulated earnings. Currently, corporations are taxed on
net capital gains at the regular corporate tax rates. Corporations are subject
to the alterative minimum tax.

Cash distributions from a corporation to a shareholder depend upon whether
the distribution is from the corporation's "earnings and profits." If the
distribution is from the corporation's earnings and profits it is a dividend and
is includable in the distributee shareholder's gross income. Cash distributions
which are not dividends are treated as a return of the shareholder's investment
in its stock. The distributions first reduce the tax basis of the shareholder in
its stock. When the shareholder has recovered its basis in its stock, further
distributions are treated as gain from the sale or exchange of property.

Generally a corporate shareholder will receive a "dividends received
deduction" for dividends received. The percentage of the dividend which can be
excluded through the

157

dividends received deductions depends upon the percentage ownership of the
distributee shareholder in the distributor corporation. A 100% deduction is
available for dividends received by a member of the same affiliated group of
corporations. If the distributee owns 20% or more of the distributor
corporation, the distributee corporation is entitled to an 80% deduction for
dividends received. A 70% dividends received deduction is available for most
other dividends.

The above is intended only as a general summary of the "double taxation"
of corporations and the tax treatment of cash distribution. It is not intended
to be a thorough discussion of the numerous complex tax issues that affect
corporations and their shareholders including accumulated earnings tax,
alternative minimum tax, distributions of appreciated property, liquidations,
reorganizations, issues pertaining to controlled groups of corporations and
issues related to consolidated returns. Similarly, this summary should not be
considered as a discussion of material federal income tax aspects or
considerations for ARL. The above pertains only to "C" corporations under the
Code and does not address state, local, or foreign tax issues. It is not
applicable to regulated investment companies, real estate investment trusts,
banks, insurance companies and other forms of entities for which special
treatment is provided under the Code.

LEGAL PROCEEDINGS

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

158

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 of ARL" and the ARL consolidated
financial statements and related notes appearing elsewhere in this
joint proxy statement and prospectus.

FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- ------------------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA

Revenue ................... $ 38,688 $ 41,456 $ 166,018 $ 172,750 $ 193,980 $ 87,086 $ 57,031
Expense ................... 55,553 59,276 243,166 272,045 324,789 165,111 90,252
------------ ------------ ------------ ------------ ------------ ------------ ------------

(Loss) from operations .... (16,865) (17,820) (77,148) (99,295) (130,809) (78,025) (33,221)
Equity in income of
investees .............. (412) (5) 8,803 5,246 11,847 37,966 10,497
Gain on sale of real estate 18,482 20,215 83,414 96,728 129,260 17,254 20,296
------------ ------------ ------------ ------------ ------------ ------------ ------------

------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) ......... 1,205 2,390 15,069 2,679 10,298 (22,805) (2,428)
Preferred dividend
requirement ............ (611) (642) (2,485) (2,327) (2,281) (1,177) (206)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) applicable to
common shares ........... $ 594 $ 1,748 $ 12,584 $ 352 $ 8,017 $ (23,982) $ (2,634)
============ ============ ============ ============ ============ ============ ============

PER SHARE DATA

Net income (loss)
applicable to common
shares ................. $ .05 $ .17 $ 1.07 $ .03 $ .75 $ (2.24) $ (.22)
============ ============ ============ ============ ============ ============ ============
Dividends per common share $ -- $ -- $ -- $ -- $ .05 $ .20 $ .20
Weighted average shares
outstanding ............ 11,375,127 10,104,268 11,714,374 10,399,890 10,759,416 10,695,388 11,710,013

159

FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- -------- --------
(unaudited) (dollars in thousands, except per share)

BALANCE SHEET DATA

Real estate, net ......... $580,874 $588,203 $588,203 653,744 $771,630 $734,907 $302,453
Notes and interest
receivable, net .......... 28,507 30,382 30,382 13,831 38,604 52,053 25,526
Total assets ............. 746,483 758,763 758,763 787,015 919,546 918,605 433,799
Notes and interest payable 563,840 564,298 564,298 616,331 706,196 768,272 261,986
Margin borrowings ........ 27,105 28,040 28,040 13,485 33,264 35,773 53,376
Stockholders' equity ..... 86,937 85,884 85,884 73,402 46,266 38,272 63,453
Book value per share ..... $ 7.64 $ 7.33 $ 7.33 7.06 $ 4.30 $ 3.58 $ 5.42

160

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ARL

INTRODUCTION

ARL is the successor through merger to ART and NRLP. ART was organized
in 1961 to provide investors with a professionally managed, diversified
portfolio of real estate and mortgage loan investments selected to provide
opportunities for capital appreciation as well as current income. ART owns a
portfolio of real estate and mortgage loan investments. NRLP was organized in
1987, and subsequently acquired all of the assets and assumed all of the
liabilities of 35 public and private limited partnerships. NRLP owns a portfolio
of real estate and mortgage loan investments.

Effective December 18, 1998, a wholly-owned subsidiary of ART was
elected general partner of NRLP. 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 its wholly-owned subsidiary as general partner of NRLP, ART
began consolidation of NRLP's accounts and has consolidated its operations
subsequent to that date.

LIQUIDITY AND CAPITAL RESOURCES

General. Cash and cash equivalents at March 31, 2002, totaled $903,000,
compared with $709,000 at December 31, 2001. Although ARL anticipates that
during the remainder of 2002 it will generate excess cash from operations, as
discussed below, such excess cash is not sufficient to discharge all of ARL's
debt obligations as they mature. ARL will therefore again rely on externally
generated funds, including aggressive land sales, selected sales of income
producing properties, borrowings against its investments in various real estate
entities, refinancing of properties, and, to the extent necessary, borrowings to
meet its debt service obligations, pay taxes, interest and other non-property
related expenses.

At December 31, 2001, notes payable totaling $267.5 million had either
scheduled maturities or required principal reduction payments during 2002.
During the first quarter of 2002, ARL either extended, refinanced, paid down,
paid off or received commitments from lenders to extend or refinance $28.5
million of the debt scheduled to mature in 2002.

Net cash used in operating activities decreased to $11.6 million in the
three months ended March 31, 2002, from $15.9 million in the three months ended
March 31, 2001. 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
expenses applicable to rental income) increased to $7.4 million in the three
months ended March 31, 2002 from $3.9 million in 2001. The increase is primarily
attributable to a decline in the payments for operating expenses in 2002 from an
elevated level in 2001, when there was a significant paydown of accounts
payable. ARL expects a decrease in cash flow from property operations during the
remainder of 2002. Such decrease is expected to result from the continued
selective sale of income producing properties.

161

Net cash from pizza operations (sales less cost of sales) decreased to
$1.0 million in the three months ended March 31, 2002, from $1.5 million in the
three months ended March 31, 2001. The decrease is primarily attributable to a
decrease in accounts payable and an increase in accounts receivable in 2002.

Interest collected increased to $666,000 in the three months ended
March 31, 2002, from $231,000 in 2001. The increase was attributable to the
collection of $531,000 in past due interest.

Interest paid decreased to $15.2 million in the three months ended
March 31, 2002, from $16.0 million in 2001. The decrease is attributable to the
paydown and payoff of mortgages on properties sold in 2001.

Advisory fees paid of $1.7 million in the three months ended March 31,
2002, approximated the $1.8 million in 2001.

General and administrative expenses paid increased to $3.3 million in
the three months ended March 31, 2002 from $2.4 million in 2001. The increase is
primarily attributable to an increase in legal fees.

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
distributions in the first quarter of 2002 and 2001.

Other cash from operating activities improved to $398,000 in the three
months ended March 31, 2002, from a use of $881,000 in 2001. The improvement was
primarily attributable to a decrease in property prepaids.

In the first quarter of 2002, ARL received a total $3.7 million on the
collection of one mortgage note receivable and partial paydown of two mortgage
notes receivable.

In 2002, ARL purchased the following property:

PURCHASE NET CASH INTEREST MATURITY
PROPERTY LOCATION SQ.FT./ACRES PRICE PAID DEBT INCURRED RATE DATE
-------- -------- ------------ ----- --------- -------- -------- --------

FIRST QUARTER
SHOPPING CENTER
Plaza on Bachman
Creek(1) Dallas, TX 80,278 Sq.Ft. $ 3,103 $ -- $ -- -- --

SECOND QUARTER
LAND
Willow Springs Beaumont, CA 20.7 Acres 140 152 -- -- --

(1) Exchanged with TCI, a related party, for the Oaktree Village Shopping
Center, Rasor land parcel and Lakeshore Villas land parcel.

162

In 2002, ARL sold the following properties:

Net Cash Debt Gain/(Loss)
Property Location Units/Acres/Sq.Ft. Sales Price Received Discharged on Sale
-------- -------- ------------------ ----------- -------- ---------- -----------

First Quarter
Apartments
Mallard Lake(1) Greensboro, NC 336 Units $ 14,400 $ -- $ 7,362 $10,669
Villas Plano, TX 208 Units 8,525 3,701 4,023 5,615

Land
Katrina Palm Desert, CA 2.1 Acres 1,323 (40) 1,237 978

Lakeshore Villas(2) Harris County, TX 16.9 Acres $ 1,499 $ 215 $ -- $ --
Rasor(2) Plano, TX 24.5 Acres 1,211 174 -- --
Thompson II Dallas County, TX .2 Acres 21 20 -- (11)
Vista Ridge Lewisville, TX 10.0 Acres 1,525 130 1,220 401

Shopping Center
Oaktree Village(2) Lubbock, TX 45,623 Sq.Ft. 2,302 131 1,389 (3) --

Second Quarter
Land
Mason Goodrich Houston, TX 7.9 Acres 672 46 554 258

(1) Exchanged for outstanding partnership units in ART Florida Portfolio I,
Ltd., ART Florida Portfolio II, Ltd. and ART Florida Portfolio III,
Ltd.

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

(3) Debt assumed by purchaser.

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

Units/ Debt Net Cash Interest Maturity
Property Location Acres/Sq.Ft. Debt Incurred Discharged Received Rate Date
-------- -------- ------------ ------------- ---------- -------- -------- --------

First Quarter
Office Building
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. $ 5,109 $ -- $5,109 12.000% 12/04 (1)
Two Hickory Centre Farmers Branch, TX 96,127 Sq.Ft. 4,448 -- 4,448 12.000 12/04 (2)

Land
Walker Dallas County, TX 90.6 Acres 8,500 8,500 (1,411) 11.250 (3) 01/03

Shopping Center
Plaza on Bachman Dallas, TX 80,278 Sq.Ft. 5,000 -- 4,444 6.625 (3) 04/04
Creek

Second Quarter
Apartments
Confederate Point Jacksonville, FL 206 Units 1,929 -- 1,929 12.000 04/05 (4)
Foxwood Memphis, TN 220 Units 1,093 -- 1,093 12.000 04/05 (5)
Woodsong Smyrna, GA 190 Units 2,544 -- 2,544 12.000 04/05 (6)

Office Building
One Hickory Centre Farmers Branch, TX 102,615 Sq.Ft. 4,468 -- 4,468 12.000 04/05 (7)

163

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

(2) In January 2002, TCI purchased 100% of the outstanding common shares of Two
Hickory, a wholly-owned subsidiary of ARL, for $4.4 million. The purchase price
was determined based upon the market value of the property exchanged, using a
market rate multiple of net operating income. Two Hickory owns the Two Hickory
Centre Office Building. ARL has guaranteed that the asset will produce at least
a 12% annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARL will 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. The business purpose of the transaction was for TCI to make
an equity investment in Two Hickory anticipating a profitable return and ARL to
receive cash for its equity investment. Management has classified this related
party transaction as a note payable to TCI. The consideration paid for the
outstanding shares was $4.4 million. In June 2002, the first lien on the
property was refinanced. TCI received $1.3 million of the proceeds as a
principal reduction on its loan to ARL.

(3) Variable interest rate.

(4) In April 2002, TCI purchased all of the general and limited partnership
interests in Confederate Point from ARL for $1.9 million. The purchase price was
determined based on the market value of the property exchanged using a market
rate multiple of net operating income. Confederate Point owns the Confederate
Point Apartments. ARL has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARL will 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 interests in Confederate
Point for the purchase price. The business purpose of the transaction was for
TCI to make an equity investment in Confederate Point anticipating a profitable
return and ARL is to receive cash for its equity investment. Management has
classified this related party transaction as a note payable to TCI.

(5) In April 2002, TCI purchased all of the general and limited partnership
interests in Foxwood from ARL for $1.1 million. The purchase price was
determined based on the market values of the property exchanged, using a market
rate multiple of net operating income. Foxwood owns the Foxwood Apartments. ARL
has guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARL will 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 interests in Foxwood for the purchase price. The business
purpose of the transaction was for TCI to make an equity investment in Foxwood
anticipating a profitable return and ARL to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI.

(6) In April 2002, TCI purchased all of the general and limited partnership
interests in Woodsong from ARL for $2.5 million. The purchase price was
determined based on the market values of the property exchanged, using a market
rate multiple of net operating income. Woodsong owns the Woodsong Apartments.
ARL has guaranteed that the asset will produce at least a 12% annual return on
the purchase price for a period of three years from the purchase date. If the
asset fails to produce the 12% return, ARL will 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 interests in Woodsong for the purchase price.
The business purpose of the transaction was for TCI to make an equity investment
in Woodsong anticipating a profitable return and ARL to receive cash for its
equity investment. Management has classified this related party transaction as a
note payable to TCI. In July 2002, the Woodsong Apartments was sold

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for $9.1 million. TCI received $2.6 million from the proceeds of $2.8 million as
payment of principal and accrued but unpaid interest on the loan.

(7) In April 2002, TCI, a related party, purchased 100% of the common shares of
ART One Hickory Corporation ("One Hickory"), a wholly-owned subsidiary of ARL,
for $4.5 million. The purchase price was determined based on the market values
of the property exchanged, using a market rate multiple of net operating income.
One Hickory owns the One Hickory Centre Office Building. ARL has guaranteed that
the asset will produce at least a 12% annual return on the purchase price for a
period of three years from the purchase date. If the asset fails to produce the
12% return, ARL will 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 in One Hickory for the purchase price. The business purpose of the
transaction was for TCI to make an equity investment in One Hickory anticipating
a profitable return and ARL to receive cash for its equity investment.
Management has classified this related party transaction as a note payable to
TCI.

In April 2002, ARL sold nine residential properties to Metra, for a
total sales price of $34.2 million. These properties include: the 12 unit Bay
Anchor Apartments in Panama City, Florida; the 168 unit Governor Square
Apartments in Tallahassee, Florida; the 54 unit Grand Lagoon Cove Apartments in
Panama City, Florida; the 92 unit Oak Hill Apartments in Tallahassee, Florida;
the 121 unit Park Avenue Villas Apartments in Tallahassee, Florida; the 62 unit
Seville Apartments in Tallahassee, Florida; the 120 unit Westwood Apartments in
Mary Ester, Florida; the 64 unit Windsor Tower Apartments in Ocala, Florida and
the 546 unit Woodhollow Apartments in San Antonio, Texas. Innovo Realty, Inc., a
subsidiary of Innovo is a limited partner in the partnerships that purchased the
properties. Joseph Mizrachi, a director of ARL, controls approximately 11.67% of
the outstanding common stock of Innovo. ARL's relationship with Mr. Mizrachi,
management has determined to treat this sale as a refinancing transaction. ARL
will continue to report the assets and the new debt incurred by Metra on its
financial statements. ARL received net cash of $8.3 million after paying off the
existing debt of $19.3 million and various closing costs. Of the total new debt
of $29.2 million, $8.8 million bears interest at 5.00% per annum and matures in
May 2003, $17.0 million bears interest at 7.12% per annum and matures in May
2007 and $3.4 million bears interest at 7.57% per annum and matures in May 2012.
ARL also received $6.3 million of 8% non-recourse, non-convertible Series A
preferred stock of Innovo. The dividend on the Innovo preferred shares will be
funded entirely and solely through member distributions from cash flows
generated by the operation and subsequent sale of the sold properties. In the
event the cash flows for the properties are insufficient to cover the 8% annual
dividend, Innovo will have no obligation to cover any shortfall. The Innovo
preferred shares have a mandatory redemption feature, and are redeemable from
the cash proceeds received by Innovo from the operation and sale of the
properties. All member distributions that are in excess of current and accrued
8% dividends must be used by Innovo to redeem the Innovo preferred shares.

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 5.75% to 24.0%. Margin borrowing
totaled $27.1 million at March 31, 2002.

Management expects that it will be necessary for ARL to sell $102.0
million, $34.1 million and $1.2 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

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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 of its assets to pay such debt
or transfer the property to the lender.

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

COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS

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

TCI is a 63.7% limited partner and IOT is a 36.3% general partner in
the 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. The
business purpose of the transaction was to draw equity from the Chelsea Square
Shopping Center.

In 2001, TCI received $120,000 in rent from BCM for BCM's lease at
Addison Hanger. BCM owns a corporate jet that is housed at the hanger and TCI
had available space at the hanger.

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brokerage commissions and $3.9 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, BCM received cost reimbursements of $2.8 million. BCM manages ARL's
day-to-day operations pursuant to the ARL Advisory Agreement. ARL contracts with
Triad and Carmel for property management services. BCM is the general partner of
Triad. Carmel, which is owned by First Equity Properties, Inc., a company
affiliated with BCM, subcontracts property management construction services and
brokerage services to Regis. Regis is a company owned by GS Realty, the limited
partner of Triad.

In 2001, TCI paid BCM, Triad and Regis $10.8 million in advisory
incentive and net income fees, $45,000 in mortgage brokerage and equity
refinancing fees, $2.4 million in property acquisition fees, $3.8 million in
real estate brokerage commissions and $2.6 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 TCI Advisory
Agreement, BCM received cost reimbursements of $2.6 million. BCM manages TCI's
day-to-day operations pursuant to the TCI Advisory Agreement. TCI contracts with
Triad for property management services.

ADVANCES AND LOANS

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Company. The loan bore interest at 10.25% per annum, and matured in November
2001. In January 2000, $100,000 was collected. In November 2001, the maturity
date was extended to November 2004. The collateral was changed to a subordinate
pledge of 850,000 shares of ARL common stock owned by BCM. The shares are also
pledged to a lender on ARL's behalf. The interest rate was changed to 2% over
the prime rate, currently 6.75% per annum, and the accrued but unpaid interest
of $984,000 was added to the principal. The new principal balance is $5.6
million. All principal and accrued interest are due at maturity.

In March 2000, a loan due to ARL with a principal balance of $2.5
million due from Lordstown, L.P., matured. The loan, to provide funds to
purchase for resale various parcels of land, is secured by a second lien on land
in Ohio and Florida, by 100% of the general and limited partner interest in
Partners Capital, Ltd., the limited partner of Lordstown, L.P., and a profits
interest in subsequent land sales. At June 2002, the loan, and $900,000 of
accrued interest, remained unpaid. At July 2002, settlement terms are being
negotiated. Tara Group, Inc., 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.

In December 2000, an unsecured loan due to ARL with a principal balance
of $1.7 million due from Warwick matured. The loan was made to provide funds to
purchase and renovate and expand a shopping center property in Warwick, Rhode
Island. All principal and interest were due at maturity. In February 2002,
$275,000 of interest was received. In May 2002, $33,000 of principal and
$267,000 of interest was collected. At June 2002, the loan, with a current
principal balance of $1.7 million and $12,000 of accrued interest, remained
unpaid. At July 2002, settlement terms are being negotiated. Richard D. Morgan,
a Warwick stockholder, served as a director of ARL until October 2001.

In March 2001, ARL funded $13.6 million of a $15.0 million unsecured
line of credit to One Realco, which owns approximately 14.8% of the outstanding
shares of ARL's common stock. One Realco periodically borrows money to meet its
cash obligations. The line of credit bears interest at 12.0% per annum. All
principal and interest were due at maturity in February 2002. The line of credit
is guaranteed by BCM. In June 2001, $394,000 in principal and $416,000 in
interest was collected. In December 2001, $21,000 in principal and $804,000 in
interest was collected. In February 2002, the line of credit was increased to
$1.8 million, accrued but unpaid interest of $217,000 was added to the
principal, and the maturity date was extended to February 2004. In March 2002,
ARL funded an additional $1.8 million, increasing the outstanding principal
balance to $15 million. All principal and interest are due at maturity. Ronald
E. Kimbrough, Executive Vice President and Chief Financial Officer of ARL, is a
10%

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stockholder of One Realco. During 2001, Mr. Kimbrough did not participate in
day-to-day operations or management of One Realco.

PARTNERSHIP TRANSACTIONS

BCM has entered into put agreements with the holders of the Class A
units of ART Palm, L.P., to increase ARL's investment in the partnership. 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. Through December 31, 2001, ARL has repurchased 9,736,250 Class A units.
The put agreement calls for ARL to repurchase the remaining Class A units as
follows: June 30, 2002, 1,625,000 units; June 30, 2003, 1,625,000 units;
December 31, 2005, 1,625,000 units; and December 31, 2006, 8,563,750 units. ARL
subsidiaries own 100% of the general partner and Class B limited partner
beneficial interest in ART Palm, L.P. One Realco, which owns approximately 14.8%
of the outstanding shares of ARL common stock, owns the Class C limited partner
interest.

PROPERTY TRANSACTIONS

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construct apartments on the Vista Ridge land and office buildings on the
Hollywood Casino land. No consideration was paid on the transaction. However,
ARL received net cash of $3.2 million on the subsequent sale of the Glenwood
Apartments.

In December 2001, TCI, purchased 100% of the outstanding common shares
of NM, a wholly-owned subsidiary of ARL, for $2.0 million. The purchase price
was determined based upon the market value of the property exchanged, using a
market rate multiple of net operating income. NM owns the Executive Court Office
Building. ARL has guaranteed that the asset will produce at least a 12% annual
return on the purchase price for a period of three years from the purchase date.
If the asset fails to produce the annual return, ARL will 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. The
business purpose of the transaction was for TCI to make an equity investment in
NM anticipating a profitable return and ARL to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI. The consideration paid for the outstanding shares was $2.0
million.

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

In January 2002, TCI purchased 100% of the outstanding common shares of
Two Hickory, a wholly-owned subsidiary of ARL, for $4.4 million. The purchase
price was determined based upon the market value of the property exchanged,
using a market rate multiple of net operating income. Two Hickory owns the Two
Hickory Centre Office Building. ARL has guaranteed that the asset will produce
at least a 12% annual return on the purchase price for a period of three years
from the purchase date. If the asset fails to produce the 12% return, ARL will
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. The business purpose of the transaction was for TCI to
make an equity investment in Two Hickory anticipating a profitable return and
ARL to receive cash for its equity investment. Management has classified this
related party transaction as a note payable to TCI. The consideration paid for
the outstanding shares was $4.4 million. In June 2002, the first lien on the
property was refinanced. TCI received $1.3 million of the proceeds as a
principal reduction on its loan to ARL.

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receivable outstanding portfolio. TCI received consideration of $2.0 million. In
February 2002, the loan was extended until April 2002. In April 2002, IOT
extended the loan until July 2002, receiving $8,500 as an extension fee. IOT and
TCI will receive 57% and 43%, respectively, on the remaining principal and
interest payments. In July 2002, the note was extended until August 2002. IOT
and TCI will receive 57% and 43% respectively, on the remaining principal and
interest payments.

In March 2002, ARL received consideration of $600,000 and exchanged
with TCI two parcels of land, a 24.5 acre tract of Rasor land, a 16.89 acre
tract of Lakeshore Villas land, and the 45,623 sq. ft. Oaktree Village Shopping
Center for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The cost
of the Rasor land, the Lakeshore Villas land, the Oaktree Shopping Center, and
the Plaza on Bachman Shopping Center was $1.0 million, $1.3 million, $1.6
million, and $4.1 million, respectively. The purchase prices were determined
based on the market values of the properties exchanged, using a market rate
multiple of net operating income. The business purpose of the transaction was
for TCI to construct apartments on the Rasor and Lakeshore Villas land and to
give ample value for the property TCI is exchanging, the Oaktree Shopping center
was added to the transaction. The Plaza on Bachman Creek Shopping Center was
subsequently financed with ARL receiving net cash of $4.4 million.

In April 2002, TCI purchased all of the general and limited partnership
interests in Confederate Point from ARL for $1.9 million. The purchase price was
determined based on the market value of the property exchanged using a market
rate multiple of net operating income. Confederate Point owns the Confederate
Point Apartments. ARL has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARL will 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 interests in Confederate
Point for the purchase price. The business purpose of the transaction was for
TCI to make an equity investment in Confederate Point anticipating a profitable
return and ARL is to receive cash for its equity investment. Management has
classified this related party transaction as a note payable to TCI.

In April 2002, TCI purchased all of the general and limited partnership
interests in Foxwood from ARL for $1.1 million. The purchase price was
determined based on the market values of the property exchanged, using a market
rate multiple of net operating income. Foxwood owns the Foxwood Apartments. ARL
has guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARL will 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 interests in Foxwood for the purchase price. The business
purpose of the transaction was for TCI to make an equity investment in Foxwood
anticipating a profitable return and ARL to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI.

In April 2002, TCI purchased all of the general and limited partnership
interests in Woodsong from ARL for $2.5 million. The purchase price was
determined based on the market values of the property exchanged, using a market
rate multiple of net operating income. Woodsong owns the Woodsong Apartments.
ARL has guaranteed that the asset will produce at

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least a 12% annual return on the purchase price for a period of three years from
the purchase date. If the asset fails to produce the 12% return, ARL will 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 interests in Woodsong for
the purchase price. The business purpose of the transaction was for TCI to make
an equity investment in Woodsong anticipating a profitable return and ARL to
receive cash for its equity investment. Management has classified this related
party transaction as a note payable to TCI. In July 2002, the Woodsong
Apartments was sold for $9.1 million. TCI received $2.6 million from the
proceeds of $2.8 million as payment of principal and accrued but unpaid interest
on the loan.

In April 2002, TCI, a related party, purchased 100% of the common
shares of ART One Hickory Corporation ("One Hickory"), a wholly-owned subsidiary
of ARL, for $4.5 million. The purchase price was determined based on the market
values of the property exchanged, using a market rate multiple of net operating
income. One Hickory owns the One Hickory Centre Office Building. ARL has
guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARL will 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 in One Hickory for the purchase price. The business
purpose of the transaction was for TCI to make an equity investment in One
Hickory anticipating a profitable return and ARL to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI.

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In April 2002, IOT sold all of its residential properties to
partnerships controlled by Metra. These properties include: the 60 unit Brighton
Court, the 92 unit Del Mar, the 68 unit Enclave, the 280 unit Meridian, the 57
unit Signature, the 114 unit Sinclair, located in Midland, Texas, and the 106
unit Treehouse, located in San Antonio, Texas. Innovo is a limited partner in
the partnerships that purchased the properties. Joseph Mizrachi, a director of
ARL, controls approximately 11.67% of the outstanding common stock of Innovo.
The sale constituted 23.39% of the total assets of IOT as of December 31, 2001.
The sales price for the properties totaled $26.2 million. IOT received $5.4
million in cash after the payoff of $16.1 million in debt and various closing
costs. Due to IOT's relationship with ARL and Mr. Mizrachi, management has
determined to treat this sale as a refinancing transaction. The new debt, funded
by Bank of America, on the properties totals $21.4 million, bears interest at
7.57% per annum, requires monthly interest only payments of $135,000 and matures
in May 2012. IOT also received $2.9 million of 8% non-recourse, non-convertible
Series A preferred stock of Innovo. The Innovo preferred shares have the terms
described above in the paragraph setting forth ARL's sale of residential
properties to Metra.

Scheduled principal payments on notes payable are due as follows:

2002................................. $267,526
2003................................. 40,866
2004................................. 8,153
2005................................. 57,001
2006................................. 15,714
Thereafter........................... 172,021
$561,281

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Stated interest rates on notes payable ranged from 5.0% to 16.9% per
annum at December 31, 2001, and matured in varying installments between 2002 and
2019. At December 31, 2001, notes payable were collateralized by deeds of trust
on real estate with a net carrying value of $569.7 million.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31, 2001

For the three months ended March 31, 2002, ARL reported net income of
$1.2 million, compared to $2.4 million for the three months ended March 31,
2001. The primary factors contributing to ARL's net income are discussed in the
following paragraphs.

Rents decreased to $29.4 million in the three months ended March 31,
2002, from $33.2 million in 2001. Rents from commercial properties increased to
$10.6 million for the three months ended March 31, 2002, from $9.1 million in
2001, rent from hotels of $7.6 million in the three months ended March 31, 2002,
approximated the $7.7 million in 2001 and rents from apartments decreased to
$10.9 million in the three months ended March 31, 2002, from $16.1 million in
2001. The increase in commercial property rents was primarily attributable to
increased occupancy and the decrease in apartment rent was due to the sale of 17
apartments in 2001. Rental income is expected to decrease significantly in the
remainder of 2002 as a result of the income producing properties sold in 2001
and 2002.

Property operations expense decreased to $19.9 million in the three
months ended March 31, 2002, from $23.5 million in 2001. Property operations
expense for commercial properties of $5.5 million in the three months ended
March 31, 2002, approximated the $5.1 million in 2001. For hotels, property
operations expense decreased to $5.8 million in the three months ended March 31,
2002, from $6.6 million in 2001. For land, property operations expense increased
to $2.4 million in the three months ended March 31, 2002 from $1.9 million in
2001. For apartments, property operations expense decreased to $6.1 million in
the three months ended March 31, 2002, from $9.8 million in 2001. The decrease
in hotel operations expense was primarily attributable to reduced utility,
personnel and administrative costs. The increase in land operations expense was
primarily attributable to increased real estate taxes. The decrease in apartment
operations expense was primarily attributable to the sale of 17 apartments in
2001.

Pizza parlor sales and cost of sales increased to $8.5 million and $7.0
million, respectively, in the three months ended March 31, 2002 from $7.8
million and $6.4 million in 2001. The increase was primarily attributable to the
opening of three new stores in 2001, plus an 8.75% increase in same-store sales
volume.

Interest income from notes receivable increased to $612,000 in the
three months ended March 31, 2002 from $384,000 in 2001, due to the funding of
$21.9 million of mortgage notes receivable in 2001.

Interest expense increased to $18.8 million in the three months ended
March 31, 2002 from $18.1 million in 2001. The increase was primarily
attributable to higher balances payable on stock loans, at higher interest
rates.

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Depreciation, depletion and amortization expense decreased to $3.6
million in the three months ended March 31, 2002 from $4.1 million in 2001. The
decrease is due to the sale of 17 apartments and one commercial property in
2001.

Advisory fees of $1.7 million in the three months ended March 31, 2002
approximated the $1.8 million in 2001.

Incentive fees to affiliate decreased to $152,000 in the three months
ended March 31, 2002 from $1.5 million in 2001. The decrease was attributable to
one eligible sale in 2002 compared to three eligible sales in 2001. 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 for the remainder of 2002
will be dependent on the number of operating properties sold and net capital
gains realized.

Net income fee to affiliate was $374,000 in the three months ended
March 31, 2002. The income fee payable to ARL's advisor is 10% of the annualized
net income for the year, in excess of a 10% return on shareholders' equity.

General and administrative expenses increased to $3.3 million in the
three months ended March 31, 2002 compared to $2.4 million in 2001. The increase
is primarily attributable to increased legal fees.

Minority interest decreased to $787,000 in the three months ended March
31, 2002 from $1.6 million in 2001. The decrease is attributable to the
repurchase of partnership units by ARL in 2001.

Equity in income of investees increased to $119,000 in the three months
ended March 31, 2002 from a loss $5,000 in 2001. The increase in equity income
was attributable to increased net income for IOT and TCI.

Loss on sale of investments in equity investees was $531,000 for the
three months ended March 31, 2002. See Note 5 "Investments in Equity Investees"
to the ARL consolidated financial statements included elsewhere in this joint
proxy statement and prospectus "Investments in Equity Investees."

Gains on sale of real estate decreased to $18.5 million in the three
months ended March 31, 2002 from $20.2 million in 2001. In 2002, gains of $16.3
million were recognized on the sale of two apartments: Mallard Lake and Villas;
and $1.4 million on the sale of land: 2.1 acres of Katrina land and 10.0 acres
of Vista Ridge land. Also in 2002, a gain of $830,000, which had been deferred
from the sale of 20.0 acres of Katrina land in 2001, was recognized upon receipt
of full payment in March 2002 of the purchase money financing provided by ARL at
the time of the sale. In 2002, a loss of $11,000 was recognized on the sale of
0.2 acres of Thompson II land.

In 2001, gains of $14.1 million were recognized on the sale of two
apartments: Rockborough and Carriage Park; $2.3 million on the sale of Regency
Pointe Shopping Center; and $3.8 million on the sale of land: 27.8 acres of
Frisco Bridges land, 1.7 acres of Las Colinas land, 232.8 acres of Scoggins
land, 408.0 acres of Scout land and 10.4 acres of Tree Farm land.

175

2001 COMPARED TO 2000. ARL reported net income of $13.3 million in 2001
compared to $2.7 million in 2000. ARL's net income in 2001 included gains on the
sale of real estate of $83.4 million compared to gains on the sale of real
estate of $96.7 million in 2000. The primary factors contributing to ARL's net
income are discussed in the following paragraphs.

Rents decreased to $129.3 million in 2001 from $138.2 million in 2000.
Rent from commercial properties increased to $34.0 million in 2001 from $31.5
million in 2000, rent from hotels increased to $36.1 million in 2001 from $33.1
million in 2000 and rent from apartments decreased to $58.3 million in 2001 from
$69.8 million in 2000. The increase in rent from commercial properties was
primarily attributable to completion of the Centura and Hickory Centre office
buildings during 2000. The increase in rent from hotels is attributable to the
opening of the Grand Hotel Sofia in 2001. Apartment rents decreased in 2001 as a
result of the sale of nine apartments in 2000 and 17 apartments in 2001. Rents
are expected to decrease in 2002 as a result of the apartment sales in 2001 and
expected apartment and commercial property sales in 2002.

Property operations expense decreased to $93.2 million in 2001 from
$94.1 million in 2000. Property operations expense for commercial properties of
$20.2 million in 2001 approximated the $19.8 million expense in 2000, hotel
expense increased to $28.3 million in 2001 from $24.1 million in 2000, land
expense decreased to $8.6 million in 2001 from $9.7 million expense in 2000 and
apartment expense decreased to $35.5 million in 2001 from $40.4 million in 2000.
The increase in hotel operations expense was primarily due to the opening of the
Grand Hotel Sofia in 2001. The decrease in land operations expense was primarily
due to the sale of 26 land parcels in 2000 and 34 land parcels in 2001. The
decrease in apartment property operations expense was primarily due to the sale
of nine apartments in 2000 and 17 apartments in 2001. Property operations
expense is expected to decrease in 2002 as a result of the apartment sales in
2001 and anticipated apartment and commercial property sales in 2002.

Pizza parlor sales and cost of sales were $34.2 million and $27.9
million in 2001 and $32.6 million and $26.8 million, in 2000. Pizza parlor
operations gross margin in 2001 increased over the gross margin in 2000
primarily due to reduced interest costs after refinancing debt in 2001 and
reduced occupancy costs. Pizza parlor gross margin in 2002 is expected to
approximate 2001, unless cheese prices change significantly.

Interest income of $2.8 million in 2001 approximated the $3.0 million
income in 2000. Interest income is expected to decrease in 2002 as a result of
the notes collected in early 2002, and as no new loans are expected to be funded
in 2002.

Oil and gas sales in 2001 were $59,000 representing start-up production
from six wells. Oil and gas operating expenses were $269,000. Operating expenses
include lifting costs and repairs and maintenance. See Note 5. "Oil and Gas
Operations" to the ARL consolidated financial statements included elsewhere in
this joint proxy statement and prospectus.

Equity in income of investees increased to $8.8 million in 2001 from
$5.2 million in 2000. The increase in equity income was primarily due to
increased ownership by ARL in TCI in 2001, due to purchases of TCI common stock.
Equity investees reported gains on the sale of real estate in 2001 totaling
$54.3 million of which ARL's equity share was $22.5 million. These

176

gains were offset by operating losses totaling $37.9 million, of which ARL's
equity share was $13.6 million. See Note 6. "Investments In Equity Investees" to
the ARL consolidated financial statements included elsewhere in this joint proxy
statement and prospectus.

Other income improved to a loss of $369,000 in 2001 from a loss of
$926,000 in 2000. The increase was primarily due to a reduction in losses on the
sale of marketable securities.

Interest expense of $77.0 million in 2001 approximated the $76.7
million expense in 2000.

Advisory fees increased to $6.7 million in 2001 from $5.9 million in
2000. The increase was attributable to the inclusion of NRLP assets in ARL's
gross assets, the basis for such fee. Advisory fees are expected to decrease in
2002, as ARL's gross asset base is expected to decrease through property sales.

Net income fee to affiliate in 2001 was $166,000. 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. No net income fee was paid in 2000.

Incentive fees increased to $3.8 million in 2001 from $1.6 million in
2000. The increase was attributable to 18 eligible sales in 2001 compared to
four eligible sales in 2000. 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 2002 will be dependent on the number of operating
properties sold and net capital gains realized.

General and administrative expenses decreased to $12.7 million in 2001
from $17.1 million in 2000. The decrease was primarily attributable to a
decrease in cost reimbursements to ARL's advisor. General and administrative
expenses in 2002 are expected to approximate 2001.

Depreciation, depletion and amortization increased to $17.7 million in
2001 from $16.9 million in 2000. The increase was primarily attributable to the
completion of the Hickory Centre office buildings in 2000 and the Grand Hotel
Sofia in 2001. Depreciation, depletion and amortization expense should decrease
in 2002 as a result of continued property sales.

Provision for loss increased to $2.5 million in 2001 from $2.2 million
in 2000. In 2001, the impairment of the Grand Hotel Sofia was recognized, after
comparing the carrying value of the property to an estimate of the market value
calculated by dividing the forecast 2002 net operating income, or NOI, by the
market capitalization rate. In 2000, a litigation reserve, related to a breach
of contract dispute, was established, and the carrying value of an 11.3 acre
tract of land in Plano, Texas, sold in the first quarter of 2001, was reduced to
its net realizable value.

Minority interest decreased to $972,000 in 2001 from $30.7 million in
2000. Minority interest is the earnings attributable to limited partners, other
than ARL, of certain controlled limited partnerships. Minority interest in 2001
and 2000 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

177

to the preferred returns discussed above, $29.8 million of earnings attributable
to the limited partners in NRLP prior to the merger. Minority interest in 2001
declined due to the 2000 merger of NRLP into ARL.

Gains on sale of real estate decreased to $83.4 million in 2001 from
$96.7 million in 2000. In 2001, gains of $73.5 million were recognized on the
sale of 15 apartments: Rockborough, Carriage Park, Kimberly Woods, Place One,
Shadowood, Bent Tree, Club Mar, Covered Bridge, Crossing at Church, Chalet I,
Chalet II, Nora Pines, Timbercreek, Blackhawk, and Woodstock; $2.2 million on
the sale of Regency Pointe Shopping Center; and $16.0 million on the sale of
land: two tracts totaling 27.2 acres of Chase Oaks land, 10.0 acres of Elm Fork
land, 27.8 acres of Frisco Bridges land, 1.7 acres of Las Colinas land, 22.1
acres of Mason Goodrich land, 4.2 acres of Nashville land, 5 tracts totaling
49.7 acres of Katrina land, 6.6 acres of Rasor land, 12.7 acres of Santa Clarita
land, 232.8 acres of Scoggins land, 408.0 acres of Scout land, 10.4 acres of
Tree Farm land, and .4 acres of Waters Edge Apartment land. In 2001, losses of
$8.3 million were recognized on the sale of Glenwood Apartments, 12.0 acres of
Plano Parkway land, 120.4 acres of Yorktown land, two tracts totaling 3.2 acres
of Nashville land, Ashford Apartments, 6.7 acres of Santa Clarita land, 107.0
acres of Elm Fork land, and 27.4 acres of Vista Ridge land.

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: 420 acres of Duchesne
land, three tracts totaling 166.7 acres of Frisco Bridges land, 749.1 acres of
Keller land, 0.02 acres of Katy land, four tracts totaling 41.2 acres of
Mason/Goodrich land, 157.9 acres of Mastenbrook land, 82.0 acres of McKinney
Corners I, II, III, IV and V land, 20.67 acres of Monterey land, four tracts
totaling 8.69 acres of Nashville land, 182.5 acres of Pantex land, two tracts
totaling 329.4 acres of Parkfield land, three tracts totaling 89.51 acres of
Rasor land, 80.4 acres of Rowlett Creek land, 3.0 acres of Salmon River land,
126.6 acres of Vann Cattle land, 5.4 acres of Vista Business Park land, and 70.3
acres of Wakefield land. In 2000, losses of $1.6 million were recognized on the
sale of 14.6 acres of McKinney Corners II land, 377.15 acres of Pioneer Crossing
land, 4.79 acres of Plano Parkway land, 22.4 acres of Valley Ranch land, and
36.43 acres of Vista Business Park land.

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 sold in 2000.

178

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 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.
"Investments in Equity Investees" to the ARL consolidated financial statements
included elsewhere in this joint proxy statement and prospectus.

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.

Advisory fees increased to $5.9 million in 2000 from $5.5 million in
1999. The increase was attributable to the addition of NRLP assets to ARL's
gross assets, the basis for such fee.

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.

General and administrative expenses of $17.1 million in 2000
approximated the $17.1 million expense in 1999.

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.

179

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 a wholly-owned subsidiary of ARL
as general partner of NRLP, the subsidiary assumed liability for certain legal
settlement payments. Such obligation is included in litigation expense in the
accompanying Consolidated Statement of Operations.

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.; 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.

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: 420
acres of Duchesne land, three tracts totaling 166.7 acres of Frisco Bridges
land, 749.1 acres of Keller land, 0.02 acres of Katy land, four tracts totaling
41.2 acres of Mason/Goodrich land, 157.9 acres of Mastenbrook land, 82.0 acres
of McKinney Corners I, II, III, IV and V land, 20.67 acres of Monterey land,
four tracts totaling 8.69 acres of Nashville land, 182.5 acres of Pantex land,
two tracts totaling 329.4 acres of Parkfield land, three tracts totaling 89.51
acres of Rasor land, 80.4 acres of Rowlett Creek land, 3.0 acres of Salmon River
land, 126.6 acres of Vann Cattle land, 5.4 acres of Vista Business Park land,
and 70.3 acres of Wakefield land. In 2000, losses of $1.6 million were
recognized on the sale of 14.6 acres of McKinney Corners II land, 377.15 acres
of Pioneer Crossing land, 4.79 acres of Plano Parkway land, 22.4 acres of Valley
Ranch land, and 36.43 acres of Vista Business Park land.

In 1999, gains of $96.5 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; and $24.1 million on
the sale of land: seven tracts totaling 46.9 acres of Plano Parkway land, 9.9
acres of Mason/Goodrich land, four tracts totaling 302.4 acres of McKinney
Corners II, McKinney Corners IV and Dowdy land, 13.0 acres of Rasor land, three
tracts totaling 23.0 acres of Vista Ridge land, four tracts totaling 103.6 acres
of Frisco Bridges land, .13 acres of JHL Connell land, 1.4 acres of Valley Ranch
land, Sun City lots, 121.2 acres of Katrina land, five

180

tracts totaling 187.7 acres of Keller, Scout and Scoggins land, and 205.4 acres
of Yorktown land. In 1999, losses of $545,000 were recognized on the sale of
Stone Meadows land and 6.2 acres of Plano Parkway land.

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.

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 property operations tend to fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the rate
of inflation also affect the sales values of properties and the ultimate gains
to be realized from property sales. To the extent that inflation affects
interest rates, earnings from short-term investments and the cost of new
financings as well as the cost of variable interest rate debt will be affected.

181

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS OF ARL

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

ARL is exposed to interest rate risk associated with variable rate
notes payable and maturing debt that has to be refinanced. ARL does not hold
financial instruments for trading or other speculative purposes, but rather
issues these financial instruments to finance its portfolio of real estate
assets. ARL's interest rate sensitivity position is managed by ARL's finance
department. Interest rate sensitivity is the relationship between changes in
market interest rates and the fair value of market-rate-sensitive assets and
liabilities. ARL's earnings are affected as changes in short-term interest rates
impact its cost of variable rate debt and maturing fixed rate debt. A large
portion of ARL's market risk is exposure to short-term interest rates from
variable rate borrowings. The impact on ARL's financial statements of
refinancing fixed rate debt that matured in 2001 was not material. As permitted,
management intends to convert a significant portion of those borrowings from
variable rates to fixed rates in 2002. If market interest rates for variable
rate debt average 100 basis points more in 2002 than they did in 2001, ARL's
interest expense would increase, and net income would decrease, by $1.3 million.
This amount is determined by considering the impact of hypothetical rates on
ARL's borrowing cost. This analysis did not consider the effects of the reduced
level of overall economic activity that would exist in such an environment.
Further, in the event of a change of such magnitude, management would likely
take actions to further mitigate its exposure to the change. However, due to the
uncertainty of the specific actions that would be taken and their possible
effects, the sensitivity analysis assumes no change in ARL's financial
structure.

The following table contains only those exposures that existed at
December 31, 2001. Anticipation of exposures of risk on positions that could
possibly arise was not considered. ARL'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
Price Risk

Marketable securities at
market value........................ $ 96

Notes receivable
Variable interest rate-fair
value $ 4,352

2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities ...... $ -- $ -- $ 5,633 $ -- $ -- $ -- $ 5,633
Instrument's amortization .... -- -- -- -- -- -- --
Interest ..................... 380 380 318 -- -- -- 1,078
Average rate ................. 6.8% 6.8 11.3% -- -- --

Fixed interest rate-fair value $ $25,431

182

2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities....... $11,563 $1,017 $13,200 $ -- $ -- $ -- $ 25,780
Instrument's amortization..... -- -- -- -- -- -- --
Interest...................... 2,095 1,562 213 -- -- -- 3,870
Average rate.................. 10.5% 11.4% 3.2% -- -- --
Liabilities
Notes payable
Variable interest rate-fair
value......................... $ 130,017

2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities....... $117,654 $ -- $ -- $ -- $ -- $ 1,234 $ 118,888
Instrument's amortization..... 1,413 1,297 1,305 1,508 124 2,688 8,335
Interest...................... 9,110 749 619 481 379 3,807 15,145
Average rate.................. 13.5% 10.0% 10.0% 10.0% 9.5% 9.0%

Fixed interest rate-fair
value......................... $ 439,703

2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities....... $143,362 $34,785 $ 1,898 $50,475 $10,962 $ 144,293 $ 385,775
Instrument's amortization..... 5,097 4,784 4,950 5,018 4,628 23,806 48,283
Interest...................... 32,504 21,473 20,105 16,877 13,729 38,027 142,715
Average rate.................. 9.0% 8.1% 8.3% 8.0% 7.8% % 7.5 %

At March 31, 2002, ARL'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............................................. $ 130,934 11.224% $ 1,309
========= =======

Total decrease in ARL's annual net income................. $ 1,309
=======

Per share................................................. $ .12
=======

183

MANAGEMENT OF ARL
DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of July 23, 2002
regarding ARL's executive officers and directors:

Name Age Position
---- --- --------

Mark W. Branigan*.................................... 48 Executive Vice President - Residential
Louis J. Corna*...................................... 54 Executive Vice President - Tax
Earl D. Cecil........................................ 73 Director
Collene C. Currie.................................... 53 Director
Richard W. Humphrey.................................. 54 Director
Ronald E. Kimbrough*................................. 49 Acting Principal Executive Officer,
Executive Vice President and Chief
Financial Officer
Joseph Mizrachi...................................... 57 Director
David W. Starowicz*.................................. 46 Executive Vice President - Commercial
Asset Management

EARL D. CECIL: Director (Independent) (since November 2001) of ARL.
Financial and business consultant (since January 1994); Division Vice President
(February 1987 to December 1993) of James Mitchell & Company, a financial
services marketing organization; and director (since March 2002) of IOT and TCI.

COLLENE C. CURRIE: Director (Independent) (since August 2000) of ARL.
CEO (since January 2002) of Acorn Capital Company; CEO (since January 2001) of
c3 Solutions; Associate Director (June 2000 to December 2001) of Cambridge
Technology Partners; CFO (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 NRLP Management Corp. ("NMC"), the
former general partner of National Realty, L.P.; Director of Marketing and
Communications (October 1993 to January 1999) of the Dallas Opera; and Director
of ART (February 1999 to August 2000).

RICHARD W. HUMPHREY: Director (Affiliated) (since November 2001) of
ARL. Real estate broker (since December 1999) of Regis Realty, Inc. and (June
1992 to November 1999) of Carmel Realty, Inc.

JOSEPH MIZRACHI: Director (Independent) (since August 2000) of ARL
Registered Investment Advisor and Principal and President (since 1980) of PAZ
Securities, Inc.; Chairman of the board (since 1980) of Midwest Properties
Management, Inc.; Director (since June 2001) of Tarrant Apparel Group; and
Director of ART (June 2000 to August 2000).

----------

* See "The Advisor - BCM - Directors and Principal Officers of Advisor" for
background and business experience information.

184

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.

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 received 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 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 an
exercise price 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, 2001, 2,000 options were
exercisable at $17.71 per common share, 3,000 options were exercisable at $18.53
per share and 5,000 options were exercisable at $13.625 per share.

In January 1998, stockholders approved the 1997 Stock Option Plan (the
"Option Plan") which provides for options to purchase up to 300,000 shares of
common stock. At December 31, 2001, there were 173,750 options outstanding under
the Option Plan. No options were granted under the Option Plan in 2001.

185

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 July 16, 2002.

Assuming Conversion of all Shares of Series G
and Series H Redeemable Convertible 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 Owned Owned After
Name and Address of Beneficial of After the Percentage After the Percentage the TCI and Percentage
Beneficial Owner Ownership Class(1) TCI Merger of Class IOT Merger of Class IOT Merger of Class
---------------- --------- -------- ---------- -------- ---------- -------- ---------- --------

Basic Capital Management,
Inc.(2)....................... 6,629,744 58.3% 9,480,924 66.3% 6,870,049 59.1% 9,721,229 66.9%
One Realco Corporation(3)..... 1,671,659 14.7% 1,671,659 11.7% 1,671,659 14.4% 1,671,659 11.5%
Transcontinental Realty
Investors, Inc.(4)............ 746,972 6.6% 746,972 5.2% 746,972 6.4% 746,972 5.1%
Ryan T. Phillips(2)(5)........ 6,650,526 58.5% 9,485,491 66.5% 6,897,650 59.4% 9,753,398 67.1%

(1) Percentages are based upon 11,375,127 shares outstanding as of July 16,
2002.

(2) Includes 6,625,944 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 1,140,472 shares of
Series G redeemable convertible preferred stock and 106,802 shares of Series H
redeemable convertible 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 1,521,659 shares owned by One Realco and 150,000 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, Earl D. Cecil, 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
redeemable convertible preferred stock to be received in the TCI merger.

186

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 July 16, 2002.

Mark W. Branigan (3)(4)....... 7,376,716 64.8% 10,294,083 72.0% 7,617,020 65.6% 10,534,387 72.5%
Earl D. Cecil(2).............. 1,000 * 1,000 * 1,000 * 1,000 *
Louis J. Corna(3)(4).......... 7,376,716 64.8% 10,294,083 72.0% 7,617,020 65.6% 10,534,387 72.5%
Collene C. Currie(2).......... 3,000 * 3,000 * 3,000 * 3,000 *
Richard W. Humphrey(2)........ 1,200 * 1,200 * 1,200 * 1,200 *
Ronald E. Kimbrough(3)(4)..... 7,376,716 64.8% 10,294,083 72.0% 7,617,020 65.6% 10,534,387 72.5%
Joseph Mizrachi(2)............ 2,000 * 2,000 * 2,000 * 2,000 *
David W. Starowicz(2)(3)(4)(5) 7,379,716 64.9% 10,297,083 72.0% 7,620,020 65.6% 10,537,387 72.5%
All Directors and Executive
Officers as a group
(8 persons)(2)(3)(4)(5)..... 7,386,916 64.9% 10,304,283 72.1% 7,623,421 65.7% 10,544,587 72.6%

----------

*less than one percent

(1) Percentage is based upon 11,375,127 shares outstanding at July 16, 2002.

(2) Each of Ms. Currie and Messrs. Cecil, Humphrey, Mizrachi and Starowicz have
options to purchase shares of ARL common stock which are exercisable within 60
days of July 16, 2002.

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

(4) Includes 6,629,744 shares owned by BCM of which the executive officers of
ARL 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.

(5) Mr. Starowicz has options to acquire 3,000 shares of ARL common stock
pursuant to the 1997 Stock Option Plan which are exercisable within 60 days of
July 16, 2002.

RECENT SALES OF UNREGISTERED ARL SECURITIES

Each issuance set forth below was made in reliance upon the exemptions
from registration requirements of the Securities Act of 1933, as amended,
contained in Section 4(2) on the basis that such transactions did not involve a
public offering. When appropriate, ARL determined that the purchasers of
securities described below were sophisticated investors who had the financial
ability to assume the risk of their investment in ARL's securities and acquired
such securities for their own account and not with a view to any distribution
thereof to the public.

In 2000, ARL issued 50,000 shares of Series E 6% cumulative preferred
stock to a private investor in exchange for a $500,000 note receivable.

Also in 2000, ARL issued 121,332 shares of ARL Series A cumulative
convertible preferred stock to unsecured creditors of EQK Realty Investors I.
These shares were issued in ARL's acquisition of a 100% interest in EQK Realty
Investors I for $1.1 million in cash and

187

$1.21 million in Series A convertible preferred stock. At the date of the
acquisition, EQK's assets consisted of $2.0 million in cash.

In 2001, ARL issued 3,968.75 shares of Series F redeemable preferred
stock in connection with the purchase of lease hold interests in 37 oil and gas
mineral development properties. The Series F shares paid $3,968,750 of the $4.7
million purchase price.

In 2002, ARL issued 600,000 shares of Series A cumulative convertible
preferred stock to ART Hotel Equities, Inc., a subsidiary of ARL. The shares
were pledged as security for an ARL guarantee of a loan.

188

PERFORMANCE GRAPH OF ARL

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.

[LINE 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

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
redeemable convertible 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 100,000,000 shares of ARL common stock authorized
and 11,375,127 shares outstanding. Assuming conversion of all of the shares of
Series G and Series H redeemable convertible preferred stock issuable in
connection with the business combination and none of the TCI and IOT
stockholders elect to receive Series G and Series H preferred stock in
connection with the mergers, there will be 14,529,679 shares of ARL common stock
outstanding.

189

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 cumulative convertible
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 A cumulative convertible
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 cumulative
convertible 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
cumulative convertible 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 cumulative convertible preferred stock held. ARL is not obligated to maintain
a sinking fund with respect to the Series A cumulative convertible preferred
stock.

190

The Series A cumulative convertible 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 cumulative convertible 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 cumulative convertible preferred stock because of
a proposal by ARL at any time before all of the shares of
Series A cumulative convertible 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 cumulative convertible 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
cumulative convertible preferred stock sought to be so converted by paying the
holder of the Series A cumulative convertible preferred stock cash in an amount
equal to the conversion price for each share of Series A cumulative convertible
preferred stock redeemed.

The Series A cumulative convertible 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 of those dividends. Dividends on the Series A
cumulative convertible 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 cumulative convertible 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 cumulative convertible
preferred stock as to dividends or rights upon liquidation, dissolution or
winding up of ARL as long as any shares of Series A cumulative convertible
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 cumulative
convertible preferred stock then outstanding voting separately as a class.

191

In addition to ARL's redemption rights described above upon a
conversion of Series A cumulative convertible preferred stock, ARL may redeem
any or all of the Series A cumulative convertible 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
cumulative convertible preferred stock shall be an amount per share equal to
103% of the adjusted liquidation value.

There were 3,324,910 shares of Series A cumulative convertible
preferred stock outstanding at July 16, 2002. There are reserved 1,998,797
shares of Series A cumulative convertible preferred stock for issuance as future
consideration in various business transactions of ARL.

SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK. There are designated
80,000 shares of Series B redeemable 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 redeemable convertible
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 redeemable convertible 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 redeemable convertible preferred stock bears a cumulative
dividend per share equal to $11.00 per annum ($2.75 per quarter). Dividends on
the Series B redeemable convertible preferred stock are in preference to and
with priority over dividends upon the ARL common shares. The Series B redeemable
convertible 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 redeemable
convertible 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 redeemable convertible 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 redeemable convertible preferred stock
outstanding at July 16, 2002.

SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK. There are designated
231,750 shares of Series C redeemable 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 redeemable convertible
preferred stock is non-voting except as required by the law. ARL is not required
to maintain a sinking fund for the stock.

192

Each share of Series C redeemable convertible 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 redeemable
convertible 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 redeemable convertible preferred stock sought
to be converted instead of issuing shares of ARL common stock.

The Series C redeemable convertible 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 redeemable convertible 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 redeemable
convertible preferred stock are in preference to and with priority over
dividends upon the ARL common shares. The Series C redeemable convertible
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 redeem all or a portion of the shares of the Series C
redeemable convertible 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 redeemable convertible preferred stock shall be an amount per share
equal to the sum of (1):

193

(1) 104% of liquidation value during the period from January 1,
2000 through December 31, 2000;

(2) 103% of liquidation value during the period from January 1,
2001 through December 31, 2001;

(3) 102% of liquidation value during the period from January 1,
2002 through December 31, 2002;

(4) 101% of liquidation value during the period from January 1,
2003 through December 31, 2003; and

(5) 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 redeemable convertible
preferred stock remains effective notwithstanding prior receipt by ARL of notice
by any holder of Series C redeemable convertible preferred stock of the holder's
intent to convert shares of Series C redeemable convertible preferred stock into
shares of ARL common stock. There were no shares of Series C redeemable
convertible preferred stock issued or outstanding at July 16, 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 July 16, 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 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

194

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 July 16, 2002, there were 50,000 shares of Series E preferred
stock issued and outstanding.

SERIES F REDEEMABLE PREFERRED STOCK. There are 4,961 shares of Series F
redeemable 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 redeemable
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 redeemable preferred stock are not entitled to
receive any dividends or distributions. The Series F redeemable 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 redeemable
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 redeemable 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 redeemable 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 redeemable 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 redeemable preferred stock at a
price per share equal to the liquidation price of $1,000.00.

As of July 16, 2002 there were no shares of Series F redeemable
preferred stock issued and outstanding.

10% SERIES G CUMULATIVE CONVERTIBLE PREFERRED STOCK. There are
4,050,000 shares of the Series G redeemable convertible 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. There are
currently no shares of Series G redeemable convertible preferred stock
outstanding. The Series G redeemable convertible preferred stock is non-voting
except:

195

(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 redeemable convertible
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 redeemable
convertible 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
redeemable convertible 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 redeemable convertible preferred stock held. ARL is not required to maintain a
sinking fund for the stock.

Each share of Series G redeemable convertible 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 redeemable convertible preferred stock are in preference to and with
priority over dividends upon the ARL common stock. The Series G redeemable
convertible 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 redeemable convertible preferred stock may be converted at
the option of the holder of Series G redeemable convertible preferred stock into
2.5 shares of ARL common stock for each share of Series G redeemable convertible
preferred stock.

ARL may provide notice of its intention to redeem the Series G
redeemable convertible 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
redeemable convertible 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
redeemable convertible preferred stock provided that there are an adequate
number of Series G redeemable convertible preferred stock stockholders and
shares of Series G redeemable convertible preferred stock outstanding to list
the Series G redeemable convertible preferred stock on the NYSE.

10% SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK. There are
1,030,000 shares of the Series H redeemable convertible preferred stock
designated with a par value of $2.00 per share and a preference on liquidation
of $21.50 per share plus payment of accrued and unpaid dividends. There are
currently no shares of Series H redeemable convertible preferred stock
outstanding. The Series H redeemable convertible preferred stock is non-voting
except:

196

(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 redeemable convertible
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 redeemable
convertible 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
redeemable convertible 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 redeemable convertible preferred stock held. ARL is not required to maintain a
sinking fund for the stock.

Each share of Series H redeemable convertible 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 redeemable convertible preferred stock are in preference to and with
priority over dividends upon the ARL common stock. The Series H redeemable
convertible 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
redeemable convertible preferred stock provided that there are an adequate
number of Series H redeemable convertible preferred stock stockholders and
shares of Series H redeemable convertible preferred stock outstanding to list
the Series H redeemable convertible 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 redeemable convertible 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:

- 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

- 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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Section 78.7502 of the Nevada Law permits a corporation to indemnify
any of its directors, officers, employees and agents against costs and expenses
arising from claims, suits and proceedings if such persons acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Notwithstanding the foregoing, no indemnification may be made in respect of any
claim, issue or matter, as to which such person is adjudged to be liable to the
corporation unless and only to the extent that a court of competent jurisdiction
determines that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.

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.

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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
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.

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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 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.

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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:

- to finance acquisitions

- to develop or redevelop properties

- to refinance existing indebtedness for working capital or
capital improvements

- the payment of distributions

- 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.

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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INFORMATION ABOUT TCI

BUSINESS OF TCI

TCI, a Nevada corporation, is the successor by merger on March 24, 1992
of a corporation by the same name, which was the successor to a California
business trust named Transcontinental Realty Investors Trust which was formerly
named Johnstown/Consolidated Realty Trust that 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 Continental
Mortgage and Equity Trust ("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 files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document filed by TCI
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 company's 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 TCI is listed
on the NYSE, reports and other information concerning TCI (symbol: "TCI") can
also be inspected at the office of the NYSE, Inc., 20 Broad Street, New York,
New York 10005.

Prior to January 1, 2000, TCI elected to be treated as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code"). Section 856(a)(6) of the Code provides
that a corporation or other entity wishing to qualify for treatment as a REIT
must not be "closely held," as that term is defined in the REIT provisions. A
corporation or other entity will be considered closely held for this purpose if
it meets the stock ownership test for a personal holding company under Section
542(a)(2) of the Code. This test is met if more than 50% in value of the
outstanding shares or certificates of beneficial interest is held directly or
indirectly by or for five or fewer individuals at any time during the last half
of the tax year. For purposes of determining whether or not a REIT is closely
held, an individual also will be attributed ownership of stock that is owned by
a family member pursuant to Section 544(a)(2) of the Code. In addition, an
individual is deemed to own the proportionate share of the equity interests
owned by a corporation, partnership, estate, or trust in which the individual
has an interest pursuant to Section 544(a)(1) of the Code. During the third
quarter of 2000, it was determined that the top five individual holders, for
purposes of the 50% test, held an aggregate ownership interest of 51.5232%.
Accordingly, TCI deviated from the REIT requirement by 1.5232% the equivalent of
131,457 shares. Under the Code, TCI cannot re-qualify for REIT tax status for at
least five years.

TCI's real estate at December 31, 2001, consisted of 136 properties
held for investment, three partnership properties and three properties held for
sale that were primarily obtained through foreclosure. In 2001, TCI purchased 17
properties held for investment. TCI's mortgage notes receivable portfolio at
December 31, 2001, consisted of ten mortgage loans. In addition, TCI has an
interest in a partnership that holds a wraparound mortgage note receivable.
TCI's real estate and mortgage notes receivable portfolios are more fully
discussed in "Properties of TCI."

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On October 23, 2001, TCI, IOT and ARL jointly announced a preliminary
agreement with the plaintiff's legal counsel of the derivative action entitled
Olive et al. V. National Income Realty Trust, et al. for complete settlement of
all disputes in the lawsuit. In February 2002, the court granted final approval
of the proposed settlement. Under the proposal, ARL would acquire all of the
outstanding shares of IOT and TCI not currently owned by ARL for a cash payment
or shares of ARL Preferred Stock. ARL will pay $17.50 cash per TCI share and
$19.00 cash per IOT share for the stock held by nonaffiliated stockholders. ARL
would issue one share of Series G redeemable convertible preferred stock with a
liquidation value of $20.00 per share for each share of TCI common stock for
stockholders who elect to receive ARL preferred stock in lieu of cash. ARL would
issue one share of Series H redeemable convertible preferred stock with a
liquidation value of $21.50 per share for each share of IOT common stock for
stockholders who elect to receive ARL preferred stock in lieu of cash. Each
share of Series G redeemable convertible preferred stock will be convertible
into 2.5 shares of ARL common stock during a 75-day period that commences
fifteen days after the date of the first ARL Form 10-Q filing that occurs after
the closing of the merger transaction. Upon the acquisition of IOT and TCI
shares, TCI and IOT would become wholly-owned subsidiaries of ARL. The
transaction is subject to the negotiation of a definitive merger agreement and a
vote of the stockholders of all three entities. TCI has the same board as IOT
and the same advisor as IOT and ARL.

BUSINESS PLAN AND INVESTMENT POLICY

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 and one property is located in Poland. Information
regarding TCI's real estate and mortgage notes receivable portfolios is set
forth in "-- Properties of TCI", and in Schedules III and IV to the TCI
consolidated financial statements included elsewhere in this joint proxy
statement and prospectus.

TCI's business is not seasonal. 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, management's plan of
operation is to consider all types of real estate with an emphasis on properties
generating current cash flow. Management expects to invest in and improve these
properties to maximize both their immediate and long-term value. Management will
also consider the development of apartment properties in selected markets
primarily in Texas.

Management also expects to consider property sales opportunities for
properties in stabilized real estate markets where TCI's properties have reached
their potential. Management also expects to be an opportunistic seller of
properties in markets that have become overheated, i.e. an abundance of buyers.

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

206

expenses, management believes that such expenditures are necessary to maintain
or enhance the value of the properties.

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. 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.
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.

MANAGEMENT OF THE COMPANY

Although the 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
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 Board.

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, has substantial contact with the
management of BCM and input with respect to its performance of advisory services
to TCI. BCM is more fully described in "The Advisor -- BCM."

BCM has been providing advisory services to TCI since March 28, 1989.
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 July 16, 2002, TCI owned approximately 24.0% of IOT's outstanding
shares of common stock and ARL indirectly owned approximately 28.5% and BCM
owned approximately 14.5% 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 Realty Services, Ltd. ("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 partner of Triad is GS Realty
Services, Inc. ("GS Realty"), a related party. Triad subcontracts the
property-level management and leasing of 51 of TCI's commercial properties and
the two commercial properties owned by real estate partnerships in which TCI and
IOT are partners 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. Regis also is
entitled to receive real estate

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brokerage commissions in accordance with the terms of a non-exclusive brokerage
agreement. Regis Hotel Corporation, a related party, manages TCI's five hotels.
See "The Advisor."

TCI has no employees. Employees of BCM render services to TCI.

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. 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. 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 "Certain Relationships and Related
Transactions of ARL, TCI and IOT -- Certain Business Relationships," TCI also
competes with other entities which 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 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.

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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 management or BCM. 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 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 management, suitable and
adequate for TCI's present operations.

Details of TCI's real estate and mortgage notes receivable portfolios
at December 31, 2001, are set forth in Schedules III and IV to the TCI
consolidated financial statements included elsewhere in this joint proxy
statement and prospectus. 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, 2001, none of TCI's properties, mortgage notes
receivable or investment in partnerships exceeded 10% of total assets. At
December 31, 2001, 88% of TCI's assets consisted of properties held for
investment, less than 1% consisted of properties held for sale, 3% consisted of
mortgage notes and interest receivable and 2% consisted of investments in
partnerships. The remaining 7% of TCI's assets were invested in cash, cash
equivalents 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, 2001, 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

209

Southeast and Southwest regions, as shown more specifically in the table under
"Real Estate" below. At December 31, 2001, 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.

Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. TCI owns 8
apartments and 19 commercial properties in this region.

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.

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 2 apartments, 4 commercial
properties and 3 hotels in this region.

Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. TCI owns 3 commercial properties in this region.

Pacific region comprised of the states of California, Oregon and
Washington. TCI owns 2 apartments, a hotel and 2 commercial properties in this
region.

Excluded from the above are 26 parcels of unimproved land and one hotel
in Wroclaw, Poland, as described below.

REAL ESTATE

At December 31, 2001, approximately 93% of TCI's assets were invested
in real estate. TCI invests primarily 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, investments in
partnerships and properties held for sale (which were primarily obtained through
foreclosure of the collateral securing mortgage notes receivable).

Excluded from the above are 26 parcels of unimproved land and one hotel
in Wroclaw, Poland, as described below.

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,

210

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, 2001, TCI had the following properties under
construction:

ADDITIONAL
AMOUNT AMOUNT CONSTRUCTION LOAN
PROPERTY LOCATION UNITS/ROOMS EXPENDED TO EXPEND FUNDING
-------- -------- ----------- -------- --------- -------

APARTMENTS
Falcon Lakes Arlington, TX 284 Units $ 1,688 $ 14,057 $ 13,469
Limestone Ranch Lewisville, TX 252 Units 8,225 6,396 13,000
River Oaks Wiley, TX 180 Units 2,228 9,763 10,023
Sendero Ridge San Antonio, TX 384 Units 6,561 22,100 24,420
Tivoli Dallas, TX 190 Units 4,299 9,135 11,000
Verandas at City View Fort Worth, TX 314 Units 2,570 20,380 19,000
Waters Edge IV Gulfport, MS 80 Units 1,979 2,104 --

HOTEL
Akademia Wroclaw, Poland 165 Rooms 11,761 6,974 14,240

In the opinion of 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, one hotel in Poland and 26 parcels of unimproved land, as
described below) at December 31, 2001.

REGION APARTMENTS COMMERCIAL PROPERTIES
------ ---------- ---------------------

Pacific 2% 1%
Midwest 2 11
Northeast -- 1
Southwest 83 51
Southeast 13 31
Mountain -- 5
-------- --------
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 26 parcels of unimproved land, 1 parcel of
4.66 acres in the Southeast region and 25 parcels of .67 acres, .68 acres, 14.39
acres, 2.89 acres, 2.14 acres, 4.7 acres, 6.8 acres, 18.99 acres, 34.58 acres,
36.38 acres, 97.97 acres, 55.8 acres, 160.38 acres, 97.0 acres, 101.94 acres,
16.16 acres, 18 acres, 17.07 acres, 9.96 acres, 108.9 acres, 6.07 acres, 10.5
acres, 5.36 acres, 7.11

211

acres, and 18,000 sq. ft. in the Southwest region. See Schedule III to the TCI
consolidated financial statements to the ARL consolidated financial statements
included elsewhere in this joint proxy statement and prospectus for a detailed
description of TCI's real estate portfolio.

A summary of activity in TCI's owned real estate portfolio during 2001
is as follows:

Owned properties at January 1, 2001 144
Properties purchased 17
Properties sold (22)
---
Owned properties at December 31, 2001 139
===

212

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, 2001, 2000 and 1999, for apartments and commercial properties and
average occupancy during 2001, 2000 and 1999 for hotels:

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/ -------------------- -----------
PROPERTY LOCATION SQUARE FOOTAGE 2001 2000 1999 2001 2000 1999
-------- -------- -------------- ---- ---- ---- ---- ---- ----

APARTMENTS
4242 Cedar Springs Dallas, TX 76 Units/60,600 Sq. Ft. $ .89 $ .87 $ .84 90 92 99
4400 Midland, TX 92 Units/94,472 Sq. Ft. .49 .49 .49 95 91 85
Apple Lane Lawrence, KS 75 Units/30,000 Sq. Ft. 1.04 1.00 * 99 97 *
Arbor Point Odessa, TX 195 Units/178,920 Sq. Ft. .41 .39 .37 91 95 95
Ashton Way Midland, TX 178 Units/138,964 Sq. Ft. .43 .41 .41 89 95 78
Autumn Chase Midland, TX 64 Units/58,652 Sq. Ft. .53 .52 * 94 97 *
Bay Walk Galveston, TX 192 Units/153,120 Sq. Ft. .74 * * 92 * *
By the Sea Corpus Christi, TX 153 Units/123,945 Sq. Ft. .83 * * 93 * *
Camelot Largo, FL 120 Units/141,024 Sq. Ft. .56 .54 .53 92 99 92
Cliffs of Eldorado McKinney, TX 208 Units/182,288 Sq. Ft. .84 .84 .84 94 95 91
Country Crossing Tampa, FL 227 Units/199,952 Sq. Ft. .61 .58 .56 93 94 95
Courtyard Midland, TX 133 Units/111,576 Sq. Ft. .43 * * 89 * *
Coventry Midland, TX 120 Units/105,608 Sq. Ft. .43 .42 .42 77 98 78
El Chapparal San Antonio, TX 190 Units/174,220 Sq. Ft. .72 .69 .67 92 93 99
Fairway View Estates El Paso, TX 264 Units/204,000 Sq. Ft. .62 .61 .57 86 83 76
Fairways Longview, TX 152 Units/134,176 Sq. Ft. .54 .53 .53 93 95 78
Falcon Lakes Arlington, TX 284 Units/207,960 Sq. Ft. ** * * ** * *
Fountain Lake Texas City, TX 166 Units/161,220 Sq. Ft. .59 .56 .55 96 86 85
Fountains of Waterford Midland, TX 172 Units/129,200 Sq. Ft. .53 .53 .53 94 88 52
Gladstell Forest Conroe, TX 168 Units/121,536 Sq. Ft. .72 .72 .72 95 90 90
Grove Park Plano, TX 188 Units/143,556 Sq. Ft. .86 .81 .77 94 95 95
Harper's Ferry Lafayette, LA 122 Units/112,500 Sq. Ft. .58 .58 .57 91 94 75
Heritage on the River Jacksonville, FL 301 Units/289,490 Sq. Ft. .65 .63 .63 97 98 92
Hunters Glen Midland, TX 212 Units/174,180 Sq. Ft. .38 .37 .37 91 91 86
In the Pines Gainesville, FL 242 Units/294,860 Sq. Ft. .54 .54 .52 96 97 98
Island Bay Galveston, TX 458 Units/374,784 Sq. Ft. .81 * * 87 * *
Limestone Canyon Austin, TX 260 Units/216,000 Sq. Ft. 1.06 1.00 .97 91 96 83
Limestone Ranch Lewisville, TX 252 Units/219,600 Sq. Ft. ** * * ** * *
Marina Landing Galveston, TX 256 Units/205,504 Sq. Ft. .87 * * 90 * *
Mountain Plaza El Paso, TX 188 Units/220,710 Sq. Ft. .49 .49 .48 95 94 94
Oak Park IV Clute, TX 108 Units/78,708 Sq. Ft. .54 .52 .51 94 88 84
Paramount Terrace Amarillo, TX 181 Units/123,840 Sq. Ft. .57 .55 * 94 94 *
Plantation Tulsa, OK 138 Units/103,500 Sq. Ft. .59 .56 .54 93 95 91
Primrose Bakersfield, CA 162 Units/144,836 Sq. Ft. .59 .56 * 97 93 *
Quail Creek Lawrence, KS 95 Units/113,416 Sq. Ft. .57 .55 * 98 97 *
Quail Oaks Balch Springs, TX 131 Units/72,848 Sq. Ft. .81 .77 .73 93 97 96
River Oaks Wiley, TX 180 Units/164,604 Sq. Ft. ** * * ** * *
Sandstone Mesa, AZ 238 Units/146,320 Sq. Ft. .90 .90 .88 88 91 93
Sendero Ridge San Antonio, TX 384 Units/340,880 Sq. Ft. ** * * ** * *
Somerset Texas City, TX 200 Units/163,368 Sq. Ft. .66 .64 .63 91 91 85
Southgate Odessa, TX 180 Units/151,656 Sq. Ft. .42 .41 .41 95 96 86
Southgreen Bakersfield, CA 80 Units/66,000 Sq. Ft. .80 .77 .70 96 95 92
Stone Oak San Antonio, TX 252 Units/187,686 Sq. Ft. .68 .65 .63 91 94 85
Summerfield Orlando, FL 224 Units/204,116 Sq. Ft. .75 .70 .67 93 95 86
Sunchase Odessa, TX 300 Units/223,048 Sq. Ft. .44 .43 .43 96 95 87

213

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/ -------------------- -----------
PROPERTY LOCATION SQUARE FOOTAGE 2001 2000 1999 2001 2000 1999
-------- -------- -------------- ---- ---- ---- ---- ---- ----

Terrace Hills El Paso, TX 310 Units/233,192 Sq. Ft. $ .67 $ .66 $ .63 91 93 94
Tivoli Dallas, TX 190 Units/168,862 Sq. Ft. ** * * ** * *
Timbers Tyler, TX 180 Units/101,666 Sq. Ft. .57 .55 .54 92 98 93
Trails at Windfern Houston, TX 240 Units/173,376 Sq. Ft. .73 .71 .68 96 97 96
Treehouse Irving, TX 160 Units/153,072 Sq. Ft. .78 .75 .71 94 94 93
Verandas at City View Fort Worth, TX 314 Units/295,170 Sq. Ft. ** * * ** * *
Waters Edge IV Gulfport, MS 80 Units/76,400 Sq. Ft. ** * * ** * *
Westwood Odessa, TX 79 Units/49,001 Sq. Ft. .48 .43 .41 92 100 91
Willow Creek El Paso, TX 112 Units/103,140 Sq. Ft. .54 .50 .49 94 97 77
Willo-Wick Gardens Pensacola, FL 152 Units/153,360 Sq. Ft. .54 .56 .53 91 89 80
Willow Wick North Augusta, SC 104 Units/94,128 Sq. Ft. .56 .56 .55 97 91 96
Woodview Odessa, TX 232 Units/165,840 Sq. Ft. .48 .46 .45 95 96 91
**
OFFICE BUILDINGS
1010 Common New Orleans, LA 494,579 Sq. Ft. 11.28 10.83 10.45 36 32 21
225 Baronne New Orleans, LA 416,834 Sq. Ft. 9.77 9.61 9.32 75 76 77
4135 Beltline Road Addison, TX 90,000 Sq. Ft. 10.33 10.17 10.00 -- 33 *
9033 Wilshire Los Angeles, CA 44,253 Sq. Ft. 27.67 26.08 * 88 90 *
Ambulatory Surgery Center Sterling, VA 33,832 Sq. Ft. 20.37 34.26 * 100 100 *
Amoco New Orleans, LA 378,244 Sq. Ft. 12.07 11.54 11.23 79 80 78
Atrium Palm Beach, FL 74,603 Sq. Ft. 12.69 11.55 11.31 82 84 96
Bay Plaza Tampa, FL 75,780 Sq. Ft. 15.96 15.60 15.14 99 95 85
Bay Plaza II Tampa, FL 78,882 Sq. Ft. 13.03 12.80 * 91 93 *
Bonita Plaza Bonita, CA 47,777 Sq. Ft. 19.50 18.66 18.78 93 92 88
Brandeis Omaha, NE 319,234 Sq. Ft. 10.88 15.87 * 89 100 *
Corporate Pointe Chantilly, VA 65,918 Sq. Ft. 19.72 18.31 16.85 100 100 100
Countryside Retail Center Sterling, VA 133,422 Sq. Ft. 16.02 18.02 * 89 89 0
Durham Center Durham, NC 207,171 Sq. Ft. 17.65 17.79 17.93 94 95 78
Eton Square Tulsa, OK 222,654 Sq. Ft. 11.27 10.52 9.78 63 60 86
Forum Richmond, VA 79,791 Sq. Ft. 15.99 15.65 15.34 70 84 88
Harmon Sterling, VA 72,062 Sq. Ft. 19.72 19.50 * 70 85 *
Hartford* Dallas, TX 174,513 Sq. Ft. 11.08 10.78 10.68 47 50 57
Institute Place Chicago, IL 144,915 Sq. Ft. 16.23 14.99 14.47 95 100 95
Jefferson Washington, DC 71,877 Sq. Ft. 31.65 31.94 30.94 91 89 100
Lexington Center Colorado Springs, CO 74,603 Sq. Ft. 12.88 12.26 11.71 83 54 97
Mimado Sterling, VA 35,127 Sq. Ft. 19.97 19.55 * 73 89 *
NASA Clear Lake, TX 78,159 Sq. Ft. 11.86 11.74 11.44 68 66 66
One Steeplechase Sterling, VA 103,376 Sq. Ft. 17.19 16.64 16.26 100 100 100
Parkway North Dallas, TX 71,041 Sq. Ft. 17.00 14.77 7.82 73 76 85
Plaza Towers St. Petersburg, FL 186,281 Sq. Ft. 15.54 14.54 14.03 97 95 95
Remington Tower Tulsa, OK 90,009 Sq. Ft. 11.61 11.34 10.89 88 86 76
Savings of America Houston, TX 68,634 Sq. Ft. 12.63 11.68 11.28 85 79 71
Venture Center Atlanta, GA 38,272 Sq. Ft. 17.85 17.16 16.62 100 100 100
Westgrove Air Plaza Addison, TX 78,326 Sq. Ft. 13.54 12.91 12.69 81 90 89
Windsor Plaza Windcrest, TX 80,522 Sq. Ft. 13.72 13.70 13.43 66 63 62

INDUSTRIAL WAREHOUSES
5360 Tulane Atlanta, GA 30,000 Sq. Ft. 2.75 2.60 2.55 100 100 100

----------
* In March 2002, TCI sold the 174,513 sq. ft. Hartford Office Building in
Dallas, Texas for $4.0 million and provided the $4.0 million purchase price as
seller financing and an additional $1.4 million line of credit for leasehold
improvements in the form of a mortgage note. The note bears interest at a
variable interest rate, currently 6.0% per annum, requires monthly interest only
payments of $14,667 and matures in March 2007.

214

RENT PER SQUARE FOOT OCCUPANCY %
UNITS/ -------------------- -----------
PROPERTY LOCATION SQUARE FOOTAGE 2001 2000 1999 2001 2000 1999
-------- -------- -------------- ---- ---- ---- ---- ---- ----

5700 Tulane Atlanta, GA 67,850 Sq. Ft. 2.93 2.83 2.63 7 77 9
Addison Hanger Addison, TX 23,650 Sq. Ft. 10.07 11.08 11.29 86 51 50
Addison Hanger II Addison, TX 29,000 Sq. Ft. 7.21 * * 12 * *
Central Storage Dallas, TX 216,035 Sq. Ft. 2.40 1.48 1.48 100 100 100
Encon Fort Worth, TX 256,410 Sq. Ft. 3.08 2.00 2.00 100 100 100
Kelly Dallas, TX 294,899 Sq. Ft. $ 3.61 $ 3.85 $ 3.74 94 100 98
McLeod Orlando, FL 110,914 Sq. Ft. 8.01 7.86 7.62 92 88 91
Ogden Industrial Ogden, UT 107,112 Sq. Ft. 2.94 3.32 3.79 100 86 100
Space Center San Antonio, TX 101,500 Sq. Ft. 3.18 3.09 2.97 89 100 83
Texstar Arlington, TX 97,846 Sq. Ft. 2.11 2.11 2.11 100 100 100
Tricon Atlanta, GA 570,877 Sq. Ft. 3.87 3.75 3.21 93 91 96

SHOPPING CENTERS
Dunes Plaza Michigan City, IN 223,869 Sq. Ft. 5.81 5.61 5.54 62 63 64
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. 15.08 14.67 13.60 86 100 100
Plaza on Bachman Creek Dallas, TX 80,278 Sq. Ft. 12.11 11.13 11.70 88 79 65
Promenade Highland Ranch, CO 133,558 Sq. Ft. 13.06 10.57 10.34 75 73 93
Sadler Square Amelia Island, FL 70,295 Sq. Ft. 7.21 7.15 6.99 93 95 96
Sheboygan Sheboygan, WI 74,532 Sq. Ft. 2.36 1.99 1.99 100 100 100

OTHER
Signature Athletic Club Dallas, TX 56,532 Sq. Ft.

TOTAL ROOM REVENUES
DIVIDED BY TOTAL
AVERAGE ROOM RATE OCCUPANCY % AVAILABLE ROOMS
----------------- ----------- ---------------
PROPERTY LOCATION ROOMS 2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----

HOTELS
Willows Chicago, IL 52 Rooms $130.37 $131.78 $115.12 53 52 60 69.65 $ 69.10 $ 79.24
City Suites Chicago, IL 45 Rooms 131.16 125.32 111.45 61 74 71 81.13 92.40 69.23
Majestic Inn San Francisco, CA 57 Rooms 174.85 170.08 162.58 41 79 79 79.10 133.65 128.76
The Majestic Chicago, IL 55 Rooms 129.63 120.67 105.27 55 65 63 71.52 77.89 66.62
Akademia Wroclaw, Poland 165 Rooms ** * * ** * * ** * *

SQUARE
PROPERTY LOCATION 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 18.99 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 34.58 Acres

215

SQUARE
PROPERTY LOCATION FOOTAGE/ACRES
-------- -------- -------------

Mira Lago Farmers Branch, TX 8.88 Acres
Pac Trust Farmers Branch, TX 7.11 Acres
Red Cross Dallas, TX 2.89 Acres
Sandison Collin County, TX 97.97 Acres
Seminary West Fort Worth, TX 5.36 Acres
Solco - Allen Collin County, TX 55.8 Acres
Solco - Valley Ranch Dallas, TX 6.07 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 2000 or 2001.
** Property was under construction in 2001.

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

In 2001, TCI purchased the following properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION ROOMS/ACRES PRICE PAID INCURRED RATE DATE
-------- -------- ----------- ----- ---- -------- ---- ----

APARTMENTS
Baywalk Galveston, TX 192 Units $ 6,590 $ 390 $ 5,856 7.45% 02/11
By the Sea Corpus Christi, TX 153 Units 6,175 862 5,538 7.07 05/09
Courtyard Midland, TX 133 Units 1,425 425 1,051 9.25 04/06
Falcon Lakes(1) Arlington, TX 284 Units 1,435 1,437 -- -- --
Island Bay Galveston, TX 458 Units 20,360 3,225 16,232 7.40 07/11
Limestone Ranch(1) Lewisville, TX 252 Units 505 -- -- -- --(2)
Marina Landing Galveston, TX 256 Units 12,050 518 10,912 5.30 01/02
River Oaks(1) Wiley, TX 180 Units 531 578 -- -- --
Sendero Ridge(1) San Antonio, TX 384 Units 1,850 2,635 -- -- --
Tivoli(1) Dallas, TX 190 Units 3,000 2,475 1,000 12.00 12/02
Verandas at City View(1) Fort Worth, TX 314 Units $ 2,544 $ 276 $ 2,197 4.75% 03/02
Waters Edge IV(1) Gulfport, MS 80 Units 441 441 -- -- --

HOTEL
Akademia(3) Wroclaw, Poland 165 Rooms 2,184 2,669 -- -- --

LAND
Mira Lago Farmers Branch, TX 8.88 Acres 541 -- -- -- --(2)
Pac Trust Farmers Branch, TX 7.11 Acres 1,175 1,231 -- -- --
Seminary West Fort Worth, TX 5.36 Acres 222 232 -- -- --
Solco-Valley Ranch Dallas, TX 6.07 Acres 1,454 1,525 -- -- --

(1) Land purchased for apartment construction.
(2) Land was received from ARL in exchange for the Glenwood Apartments.
(3) Land purchased for hotel construction.

216

In 2001, TCI sold the following properties:

UNITS/SQ.FT./ SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----- ----- -------- ---------- -------

APARTMENTS
Bent Tree Gardens Addison, TX 204 Units $ 9,000 $2,669 $ 6,065(1) $ 601
Carseka Los Angeles, CA 54 Units 4,000 2,138 1,466 1,352
Fontenelle Hills Bellevue, NE 338 Units 16,500 3,680 12,454(1) 4,565
Forest Ridge Denton, TX 56 Units 2,000 682 1,151 1,014
Glenwood Addison, TX 168 Units 3,659 -- 2,537(1) --(2)
Heritage Tulsa, OK 136 Units 2,286 206 1,948 1,575
Madison at Bear Creek Houston, TX 180 Units 5,400 828 3,442(1) 1,162(4)
McCallum Glen Dallas, TX 275 Units 8,450 2,633 5,004(1) 1,375(3)
McCallum Crossing Dallas, TX 322 Units 11,500 1,841 8,101(1) 4,486
Oak Run Pasadena, TX 160 Units 5,800 1,203 4,364 2,227
Park Lane Dallas, TX 97 Units 2,750 1,526 1,103 1,827
Park at Colonade San Antonio, TX 211 Units 5,800 927 4,066 1,592
South Cochran Los Angeles, CA 64 Units 4,650 1,897 1,873 1,660
Summerstone Houston, TX 242 Units 7,225 1,780 5,180(1) 1,884
Sunset Lakes Waukegan, IL 414 Units 15,000 6,089 7,243 7,316

OFFICE BUILDINGS
Chesapeake Center San Diego, CA 57,493 Sq.Ft. 6,575 3,111 2,844 204
Daley San Diego, CA 64,425 Sq.Ft. 6,211 2,412 3,346 836
Valley Rim San Diego, CA 54,194 Sq.Ft. 5,500 1,367 3,516 (138)
Viewridge San Diego, CA 25,062 Sq.Ft. 2,010 701 1,272 4
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
Zodiac Dallas, TX 35,435 Sq.Ft. 762 183 564 167

LAND
Eagle Crest Farmers Branch, TX 4.41 Acres 300 291 -- (215)
McKinney 36 McKinney, TX 1.822 Acres 476 476 -- 355
Moss Creek Greensboro, NC 4.79 Acres 15 13 -- (71)
Round Mountain Austin, TX 110.0 Acres 2,560 2,455 -- 1,047

(1) Debt assumed by purchaser.

(2) The Glenwood Apartments were exchanged with ARL for two parcels of
land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago.

(3) Excludes $1.5 million deferred gain from seller financing. See Note 4.
"Notes and Interest Receivable."

(4) Excludes $608,000 deferred gain from seller financing. See Note 4.
"Notes and Interest Receivable."

In 2001, TCI financed/refinanced the following property:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ACRES INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ----- -------- ---------- -------- ---- ----
(DOLLARS IN THOUSANDS)

LAND
Red Cross Dallas, TX 2.89 Acres $ 4,500 $ -- $ 4,328 12.5% 10/02

217

PROPERTIES HELD FOR SALE. Set forth below are TCI's properties held for
sale, primarily obtained through foreclosure.

PROPERTY LOCATION ACRES

LAND
Fiesta San Angelo, TX .6657 Acres
Fruitland Fruitland Park, FL 4.66 Acres
Round Mountain Austin, TX 18 Acres

PARTNERSHIP PROPERTIES. TCI accounts for partnership properties using
the equity method. Set forth below are the properties owned by partnerships, the
monthly rental rate for apartments, the average annual rental rate for
commercial properties, and occupancy rates at December 31, 2001, 2000 and 1999:

RENT PER SQUARE FOOT OCCUPANCY %
-------------------- -----------
PROPERTY LOCATION UNITS/SQUARE FOOTAGE 2001 2000 1999 2001 2000 1999
-------- -------- -------------------- ---- ---- ---- ---- ---- ----

APARTMENT
Lincoln Court Dallas, TX 55 Units/40,063 Sq. Ft. $ 1.20 $ 1.16 $ 1.14 98 94 92

OFFICE BUILDING
Prospect Park #29 Rancho Cordova, CA 40,807 Sq. Ft. 19.52 20.42 16.56 72 100 100

SHOPPING CENTER
Chelsea Square Houston, TX 70,275 Sq. Ft. 9.63 9.31 8.95 79 77 85

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 2001, TCI received no operating
distributions from SAC 9.

218

TCI FEDERAL TAX BASIS OF DEPRECIABLE PROPERTY AS OF DECEMBER 31, 2001

For each TCI property upon which depreciation is taken, the table set
forth below includes (i) the Federal tax basis; (ii) rate, (iii) method and (iv)
life claimed as of December 31, 2001.

GROSS FEDERAL ACCUMULATED NET FEDERAL
PROPERTY TAX BASIS TAX DEPRECIATION TAX BASIS RATE METHOD(1) LIFE
-------- --------- ---------------- --------- ---- --------- ----

APARTMENTS
4242 Cedar Springs $ 1,168,040 $ 272,570 $ 895,470 100% ADS 20-40 years
4400 Apartments 1,396,277 126,545 1,269,732 100 ADS 20-40 years
Apple Lane Apts. 1,510,302 73,944 1,436,358 100 ADS 40 years
Arbor Pointe 1,811,108 242,725 1,568,383 100 ADS 20-40 years
Ashton Way 1,587,686 143,109 1,444,577 100 ADS 40 years
Autumn Chase Apts 1,265,253 54,039 1,211,214 100 ADS 40 years
Baywalk 6,106,000 64,761 6,041,239 100 MACRS 27.5 years
By The Sea 5,797,000 79,050 5,717,950 100 MACRS 27.5 years
Camelot 3,106,206 628,012 2,478,194 100 ADS 20-40 years
Cliffs Of Eldorado 10,588,583 849,310 9,739,273 100 ADS 40 years
Country Crossing 2,642,414 564,034 2,078,380 100 ADS 20-40 years
Courtyard 1,359,231 21,245 1,337,986 100 ADS 40 years
Coventry Pointe 553,563 75,692 477,871 100 ADS 20-40 years
El Chapparal 5,504,184 1,994,711 3,509,473 100 ADS 10-40 years
Fairway 1,651,674 359,685 1,291,989 100 ADS 20-40 years
Fairway View Estates 5,195,432 359,800 4,835,632 100 ADS 40 years
Falcon Lakes** -- -- -- 100 ADS 40 years
Fountain Lake 2,604,472 511,118 2,093,354 100 ADS 20-40 years
Ftns Of Waterford(Em Terr) 2,781,248 222,778 2,558,470 100 ADS 40 years
Gladstell Apts 2,205,407 350,118 1,855,289 100 ADS 20-40 years
Grove Park 3,820,977 526,619 3,294,358 100 ADS 40 years
Harpers Ferry 1,476,759 345,984 1,130,775 100 ADS 20-40 years
Heritage On The River 6,540,795 974,873 5,565,922 100 ADS 20-40 years
Hunters Glen (Junction) 2,396,095 232,543 2,163,552 100 ADS 40 years
In The Pines 5,588,935 968,001 4,620,934 100 ADS 20-40 years
Island Bay 18,852,000 199,945 18,652,055 100 MACRS 27.5 years
Limestone Canyon 14,142,354 921,355 13,220,999 100 ADS 40 years
Limestone Ranch 6,604,934 89,431 6,515,503 100 ADS 40 years
Marina Landing 11,161,000 118,374 11,042,626 100 MACRS 27.5 years
Mountain Plaza 3,462,395 339,733 3,122,662 100 ADS 40 years
Oak Park Iv 700,442 131,411 569,031 100 ADS 20-40 years
Paramount Terrace 3,061,449 124,387 2,937,062 100 ADS 40 years
Plantation Apartments 3,095,890 158,014 2,937,876 100 ADS 40 years
Primrose Apts 3,851,850 164,513 3,687,337 100 ADS 40 years
Quail Creek Apts. 3,090,274 151,300 2,938,974 100 ADS 40 years
Quail Oaks 3,852,818 1,438,590 2,414,228 100 ADS 10-40 years
Sandstone 6,719,582 705,072 6,014,510 100 ADS 40 years
Sendero Ridge** -- -- -- 100 ADS 40 years
Somerset Place 2,968,407 582,912 2,385,495 100 ADS 20-40 years
Southgate Apartments 1,656,485 222,474 1,434,011 100 ADS 20-40 years
Southgreen 3,020,439 229,674 2,790,765 100 ADS 40 years
Stone Oak Place 2,859,845 867,331 1,992,514 100 ADS 10-40 years
Summerfield Apts 4,866,452 863,037 4,003,415 100 ADS 20-40 years
Sunchase 3,414,060 354,237 3,059,823 100 ADS 40 years
Terrace Hills 5,287,372 633,346 4,654,026 100 ADS 40 years
Timbers Apartments 1,992,030 254,861 1,737,169 100 ADS 40 years
Tivoli** -- -- -- 100 ADS 40 years
Trails At Windfern 3,542,832 409,524 3,133,308 100 ADS 40 years
Treehouse Apartments 3,124,523 363,439 2,761,084 100 ADS 40 years
Verandas At City View** -- -- -- 100 ADS 40 years
Waters Edge Iv 1,536,402 4,809 1,531,593 100 ADS 40 years
Westwood Square 448,708 61,131 387,577 100 ADS 20-40 years
Wiley Cascades** -- -- -- 100 ADS 40 years
Willocreek 1,907,582 356,268 1,551,314 100 ADS 20-40 years
WILLOW WICK Sc 1,342,139 204,096 1,138,043 100 ADS 20-40 years
WILL-O-WICK Florida 3,163,742 514,715 2,649,027 100 ADS 20-40 years

219

GROSS FEDERAL ACCUMULATED NET FEDERAL
PROPERTY TAX BASIS TAX DEPRECIATION TAX BASIS RATE METHOD(1) LIFE
-------- --------- ---------------- --------- ---- --------- ----

Woodview 2,966,298 268,148 2,698,150 100 ADS 40 years

OFFICE BUILDINGS
1010 Common St $ 30,773,646 $1,711,139 $ 29,062,507 100% ADS 6-40 years
225 Baronne St 16,643,612 1,275,283 15,368,329 100 ADS 6-40 years
4135 Beltline Rd O B 4,280,248 271,967 4,008,281 100 ADS 40 years
9033 Wilshire Blvd 8,751,868 369,607 8,382,261 100 ADS 40 years
Amoco Building 9,542,988 1,091,243 8,451,745 100 ADS 6-40 years
Atrium O B 4,755,800 416,478 4,339,322 100 ADS 6-40 years
Bay Plaza Office Center 4,028,570 424,397 3,604,173 100 ADS 40 years
Bay Plaza Office Center Ii 4,639,254 176,570 4,462,684 100 ADS 40 years
Bonita Plaza 5,559,059 565,212 4,993,847 100 ADS 40 years
Brandeis 13,174,868 368,880 12,805,988 100 ADS 40 years
Corporate Point 3,831,854 665,507 3,166,347 100 ADS 20-40 years
Countryside Retail 18,800,998 606,930 18,194,068 100 ADS 40 years
Durham Centre 18,427,807 1,969,344 16,458,463 100 ADS 40 years
Eton Square 13,636,733 767,592 12,869,141 100 ADS 40 years
Executive Court O/B* 1,772,683 1,844 1,770,839 100 ADS 40 years
Forum O B 6,439,382 1,384,412 5,054,970 100 ADS 20-40 years
Harmon 9,506,890 306,604 9,200,286 100 ADS 40 years
Hartford O B 3,380,275 534,004 2,846,271 100 ADS 6-40 years
Institute Place 3,615,315 738,650 2,876,665 100 ADS 20-40 years
Jefferson 12,192,152 1,436,524 10,755,628 100 ADS 40 years
Lexington Center 2,916,370 349,780 2,566,590 100 ADS 10-40 years
Mimado 5,294,166 169,863 5,124,303 100 ADS 40 years
Nasa Office Building 6,060,256 2,023,899 4,036,357 100 ADS 10-40 years
One Steeplechase O B 8,398,913 1,859,007 6,539,906 100 ADS 20-40 years
Parkway North 5,586,783 494,713 5,092,070 100 ADS 40 years
Plaza 19,643,316 12,464,715 7,178,601 100 ADS 10-40 years
Remington Tower 4,565,655 255,132 4,310,523 100 ADS 40 years
Savings Of America 1,414,953 140,713 1,274,240 100 ADS 40 years
Signature Athletic Club 3,811,004 418,417 3,392,587 100 ADS 40 years
Surgery Center 8,170,414 263,823 7,906,591 100 ADS 40 years
Venture Center 3,848,791 1,129,098 2,719,693 100 ADS 20-40 years
Westgrove Air Plaza 5,153,891 134,216 5,019,675 100 ADS 40 years
Windsor Executive Plaza 6,090,651 1,939,151 4,151,500 100 ADS 10-40 years

INDUSTRIAL WAREHOUSES
5360 Tulane 761,529 317,675 443,854 100 MACRS 7-39 years
5700 Tulane 663,795 59,592 604,203 100 MACRS 39 years
Addison Hangar 827,261 43,418 783,843 100 ADS 6-40 years
Addison Hangar Ii 1,378,823 47,410 1,331,413 100 ADS 40 years
Central Freight Whse 2,294,105 309,469 1,984,636 100 ADS 20-40 years
Encon Warehouse 4,001,033 414,877 3,586,156 100 ADS 40 years
Kelly Warehouses (5) 4,594,743 751,562 3,843,181 100 ADS 20-40 years
Mcleod Commerce Center 3,219,771 537,276 2,682,495 100 ADS 20-40 years
Ogden Industrial 1,853,095 662,886 1,190,209 100 ADS 10-40 years
Space Center 1,342,882 643,168 699,714 100 MACRS 7-39 years
Texstar Building 1,547,017 292,576 1,254,441 100 ADS 40 years
Tricon Warehouses (8) 8,244,347 1,566,120 6,678,227 100 ADS 20-40 years

SHOPPING CENTERS
Dunes Plaza 7,031,829 1,493,277 5,538,552 100 ADS 20-40 years
Kmart Cary 1,319,278 111,321 1,207,957 100 ADS 40 years
Parkway Center 2,112,085 501,769 1,610,316 100 ADS 20-40 years
Plaza On Bachman Creek 4,106,090 331,690 3,774,400 100 ADS 40 years
Promenade S C 7,400,300 992,889 6,407,411 100 ADS 20-40 years
Sadler Square 2,849,497 564,607 2,284,890 100 ADS 40 years
Sheboygan S C 1,415,949 331,584 1,084,365 100 ADS 20-40 years

HOTELS
Brompton Hotel 3,836,832 300,828 3,536,004 100 ADS 10-40 years
City Suites Hotel 4,939,235 477,054 4,462,181 100 ADS 10-40 years
Majestic Inn 6,038,695 1,556,605 4,482,090 100 ADS 10-40 years
Surf Hotel 5,244,496 498,774 4,745,722 100 ADS 10-40 years
Akademia** -- -- -- 100 ADS 40 years
------------ ----------- ------------
TOTAL 553,081,797 70,304,534 482,777,263
============ =========== ============

220

GROSS FEDERAL ACCUMULATED NET FEDERAL
PROPERTY TAX BASIS TAX DEPRECIATION TAX BASIS RATE METHOD(1) LIFE
-------- --------- ---------------- --------- ---- --------- ----

*Purchased from ARL, treated as financing transaction for book, sale for tax.

**Property under construction, no depreciable assets in service.

(1) ADS = Alternative Depreciation System
MACRS = Modified Accelerated Cost Recovery System

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. 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."

TYPES OF PROPERTIES SECURING MORTGAGE NOTES. The properties securing
TCI's mortgage notes receivable portfolio at December 31, 2001, consisted of
three apartments, five office buildings, a shopping center, and 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, as discussed in "Certain
Relationships and Related Transactions of ARL, TCI and IOT-Related Party
Transactions."

At December 31, 2001, TCI's mortgage notes receivable portfolio
included nine mortgage loans with an aggregate principal balance of $17.4
million secured by income-producing real estate located in the Midwest,
Southeast and Southwest regions of the continental United States, and two
non-performing loans with an aggregate principal balance of $5.2 million secured
by unimproved land. At December 31, 2001, 3% of TCI's assets were invested in
notes and interest receivable.

221

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, 2001. See Schedule IV to the TCI consolidated
financial statements included elsewhere in this joint proxy statement and
prospectus for further details of TCI's mortgage notes receivable portfolio.

COMMERCIAL
REGION APARTMENTS PROPERTIES TOTAL
------ ---------- ---------- -----

Southwest 19.9% 45.0% 64.9%
Southeast -- 11.3 11.3
Midwest -- 23.8 23.8
---- ---- -----
19.9% 80.1% 100.0%
==== ==== =====

A summary of the activity in TCI's mortgage notes receivable portfolio during
2001 is as follows:

Mortgage notes receivable at January 1, 2001 6
Loans paid off (2)
Loans funded 8
---
Mortgage notes receivable at December 31, 2001 12
===

During 2001, $3.7 million was collected in full payment of two mortgage
notes and $2.3 million in principal payments were received on other mortgage
notes. At December 31, 2001, less than 1% of TCI's assets were invested in
mortgage notes secured by non-income producing real estate, comprised of a first
lien mortgage note secured by 44.6 acres of unimproved land in Fort Worth,
Texas, and a second lien mortgage note secured by 1,714.6 acres of unimproved
land in Tarrant 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 participations in
first mortgage loans that it originates to other lenders.

In July 2001, TCI funded a $1.7 million mortgage loan secured by a
first lien on 44.6 acres of unimproved land in Fort Worth, Texas, and a 100%
interest in a partnership. The note receivable bears interest at 16.0% per
annum, requires monthly interest only payments and matures in June 2002.

The following discussion briefly describes events that affected
previously funded first mortgage loans during 2001.

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

222

receivable bore interest at 8.5% per annum, required monthly payments of
interest only, matured in 2001 and was secured by a first lien on the property
sold. In December 2001, the note was paid in full and a previously deferred gain
on the sale of $819,000 was recognized.

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, 2001, 3% 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 2001.

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
September 2001. In October 2001, TCI extended the loan until February 2002,
receiving $100,000 as an extension fee. In December 2001, TCI received a $1.5
million principal payment. In February 2002, TCI sold a $2.0 million senior
participation interest in the loan to IOT, a related party. TCI and IOT will
receive 43% and 57%, respectively, of the remaining principal and interest
payments. Also in February 2002, TCI extended the loan until April 2002,
receiving $23,000 as an extension fee.

In June 2001, in conjunction with the sale of 275 unit McCallum Glen
Apartments in Dallas, Texas, TCI funded a $1.5 million mortgage loan secured by
a second lien on the apartments. The note receivable bears interest at 10% per
annum, requires monthly interest only payments and matures in June 2003.

In July 2001, TCI agreed to fund a $4.4 million line of credit secured
by a second lien on 1,714.16 acres of unimproved land in Tarrant County, Texas.
The note receivable bears interest at 15% per annum, requires monthly interest
only payments beginning in September 2001 and matures in July 2003. As of March
2002, TCI has funded $3.8 million of the line of credit.

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 March 2002, TCI has funded a total of $2.3
million.

223

repurchase the shares of NM for the purchase price. The business purpose of the
transaction was for TCI to make an equity investment in NM anticipating a
profitable return and ARL to receive cash for its equity investment. Management
has classified this related party transaction as a note payable to TCI. The
consideration paid for the outstanding shares was $2.0 million.

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 bore interest at 18.0% per annum, required 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 off.

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 bore interest at 16.0% per annum, required monthly interest only
payments of $40,000 and matured in June 2001. The note was extended until
November 2001 with a $750,000 loan principal paydown. With this paydown, the
note was renegotiated to replace the existing collateral with new collateral
consisting of a 120,000 sq. ft. office building and industrial warehouse in
Carrollton, Texas. The note bears interest at 16.0% per annum, requires monthly
payments of interest only and was extended June 30, 2002.

In October 2001, TCI funded a $4.0 million loan secured by a 375,152
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 matured in February 2002. In February 2002, TCI extended the loan maturity
to February 2003.

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 advanced $33,000 to the partnership.

DOUBLE TAXATION OF CORPORATIONS

TCI is taxed as a regular corporation under the Code. Corporations are
subject to complex federal income tax rules that cause the corporation to be
taxed on its income and distributions, generally, to be taxable to recipients.
As a general rule, a corporation is not entitled to a deduction for dividends
paid to its shareholders. Corporations are subject to an additional tax on
certain undistributed accumulated earnings. Currently, corporations are taxed on
net capital gains at the regular corporate tax rates. Corporations are subject
to the alterative minimum tax.

Cash distributions from a corporation to a shareholder depend upon
whether the distribution is from the corporation's "earnings and profits." If
the distribution is from the corporation's earnings and profits it is a dividend
and is includable in the distributee shareholder's gross income. Cash
distributions which are not dividends are treated as a return of the
shareholder's investment in its stock. The distributions first reduce the tax
basis of the shareholder in its stock. When the shareholder has recovered its
basis in its stock, further distributions are treated as gain from the sale or
exchange of property.

224

Generally a corporate shareholder will receive a "dividends received
deduction" for dividends received. The percentage of the dividend which can be
excluded through the dividends received deductions depends upon the percentage
ownership of the distributee shareholder in the distributor corporation. A 100%
deduction is available for dividends received by a member of the same affiliated
group of corporations. If the distributee owns 20% or more of the distributor
corporation, the distributee corporation is entitled to an 80% deduction for
dividends received. A 70% dividends received deduction is available for most
other dividends.

The above is intended only as a general summary of the "double
taxation" of corporations and the tax treatment of cash distribution. It is not
intended to be a thorough discussion of the numerous complex tax issues that
affect corporations and their shareholders including accumulated earnings tax,
alternative minimum tax, distributions of appreciated property, liquidations,
reorganizations, issues pertaining to controlled groups of corporations and
issues related to consolidated returns. Similarly, this summary should not be
considered as a discussion of material federal income tax aspects or
considerations for TCI. The above pertains only to "C" corporations under the
Code and does not address state, local, or foreign tax issues. It is not
applicable to regulated investment companies, real estate investment trusts,
banks, insurance companies and other forms of entities for which special
treatment is provided under the Code.

LEGAL PROCEEDINGS

OLIVE LITIGATION

In February 1990, TCI, together with National Income Realty Trust, CMET
and IOT three real estate entities which, at the time, had the same officers,
directors or trustees and advisor as TCI, entered into the Olive 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 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
IOT, including, but not limited to, the fairness to TCI, CMET and IOT 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.

225

counsel. The board believes that any alleged breach of the Olive Amendment has
been fully remedied by the Board's engagement of this second consultant.
Although several status conferences on this matter were held, there has been no
court order resolving whether there was any breach of the Olive Amendment.

In June 2000, plaintiffs' counsel asserted that loans made by TCI to
BCM and American Realty Trust, Inc. breached the provision of the Modification.
The board believes that the provisions of the Settlement, Modification and the
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 was appealed by TCI and IOT.

On October 23, 2001, TCI, IOT and ARL jointly announced a preliminary
agreement with the plaintiffs' counsel for complete settlement of all disputes
in the lawsuit. In February 2002, the court granted final approval of the
proposed settlement. Under the proposal, the appeal has been dismissed and ARL
will acquire all of the outstanding shares of IOT and TCI not currently owned by
ARL for a cash payment or shares of ARL Preferred Stock. ARL will pay $17.50
cash per TCI share and $19.00 cash per IOT share for the stock held by
nonaffiliated stockholders. ARL would issue one share of Series G redeemable
convertible preferred stock with a liquidation value of $20.00 per share for
each share of TCI common stock for stockholders who elect to receive ARL
preferred stock in lieu of cash. ARL would issue one share of Series H
redeemable convertible preferred stock with a liquidation value of $21.50 per
share for each share of IOT common stock for stockholders who elect to receive
ARL preferred stock in lieu of cash. Each share of Series G redeemable
convertible preferred stock will be convertible into 2.5 shares of ARL common
stock during a 75-day period that commences fifteen days after the date of the
first ARL Form 10-Q filing that occurs after the closing of the merger
transaction. Upon the acquisition of IOT and TCI shares, TCI and IOT would
become wholly-owned subsidiaries of ARL. The transaction is subject to the
execution of a definitive merger agreement and a vote of the stockholders of all
three entities. TCI has the same board as IOT and the same advisor as IOT and
ARL.

226

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 of TCI"
and the TCI consolidated financial statements and related notes appearing
elsewhere in this joint proxy statement and prospectus.

FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- -------------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(unaudited)

EARNINGS DATA
Rents ............................. $ 30,869 $ 35,265 $ 134,911 $ 139,357 $ 82,039 $ 69,829 $ 54,462
Property expense .................. 19,468 20,395 80,562 78,061 44,497 38,282 32,424
----------- ----------- ----------- ----------- ----------- ----------- ----------
Operating income .................. 11,401 14,870 54,349 61,296 37,542 31,547 22,038
Other income ...................... (209) (735) (3,002) 1,814 555 739 2,311
Other expense ..................... 17,956 20,303 85,806 83,878 48,395 38,320 33,154
Gain on sale of real estate ....... 5,429 6,484 54,270 50,550 40,517 12,940 21,404
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) ................. (1,335) 316 19,811 29,782 30,219 6,906 12,599
Preferred dividend requirement .... (45) (7) (172) (22) (30) (1) --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) applicable to
Common shares ................. $ (1,380) 309 $ 19,639 $ 29,760 $ 30,189 $ 6,905 $ 12,599
=========== =========== =========== =========== =========== =========== ==========
Basic and Diluted Earnings Per
Share Net income (loss)
applicable to Common shares ... $ (.17) .04 $ 2.32 $ 3.45 $ 7.05 $ 1.78 $ 3.22
=========== =========== =========== =========== =========== =========== ==========
Dividends per Common share ........ -- -- -- $ .54 $ .60 $ .60 $ .28*
Weighted average Common shares
outstanding ................... 8,042,594 8,686,346 8,478,377 8,631,621 4,283,574 3,876,797 3,907,221

FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------- -----------------------------------------------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
(unaudited)

BALANCE SHEET DATA
Real estate held for investment, net $618,784 $622,171 $639,040 $599,746 $347,389 $269,845
Real estate held for sale, net ..... 14,831
Foreclosed .................... 516 516 1,824 1,790 1,356 1,356
Other ......................... 14,315 -- -- -- -- 3,630
Notes and interest receivable, net . 26,510 22,049 8,172 11,530 1,493 3,947
Total assets ....................... 720,198 709,152 731,885 714,195 382,203 319,135
Notes and interest payable ......... 472,486 461,037 501,734 503,406 282,688 222,029
Stockholders' equity ............... 215,365 216,768 200,560 179,112 91,132 86,133
Book value per share ............... $ 26.78 $ 26.95 $ 23.22 $ 20.76 $ 23.35 $ 22.15

227

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, TCI no
longer met the requirement for tax treatment as a REIT due to a concentration of
ownership.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $4.9 million at March 31, 2002,
compared with $10.3 million at December 31, 2001. 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.
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 $15,000 for the first
quarter of 2002, compared to $620,000 for the first quarter of 2001. 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) decreased to $11.9 million in the first
quarter of 2002, from the $16.4 million in 2001. Decreases in cash flow from
property operations of $2.0 million were from the sale of 16 apartments in 2002
and 2001, $3.1 million was from the sale of nine commercial properties in 2002
and 2001, and $97,000 was from decreased room revenues at TCI's hotels. These
decreases were offset by increases in cash flow of $578,000 and $94,000 from the
purchase of five existing apartments in 2001 and one commercial property in
2002. Management believes that this trend of decreased cash flow from property
operations may continue depending on TCI's selling of income producing
properties to meet its cash requirements.

Interest collected increased to $850,000 in the first quarter of 2002,
from $216,000 in 2001. The increase was primarily due to TCI funding seven loans
in 2001.

Interest paid decreased to $9.0 million in the first quarter of 2002,
from $10.6 million in the first quarter of 2001. Of the decreases, $2.1 million
was from the sale of 24 properties in 2002 and 2001 subject to debt, and
$503,000 was from lower variable interest rates and principal paydowns in 2002
and 2001. These decreases were offset by increases of $853,000 from the

228

purchase of nine properties in 2002 and 2001 subject to debt, and $130,000 from
the refinancing of one land property in 2001.

Advisory and net income fees paid decreased to $1.5 million in the
first quarter of 2002, from $2.6 million in the first quarter of 2001. The
decrease was due to TCI having a net loss in the fourth quarter of 2001.

General and administrative expenses paid decreased to $2.3 million in
first quarter of 2002, from $3.0 million in the first quarter of 2001. This
decrease was mainly due to a decrease in legal fees and consulting fees.

In the first quarter 2002, TCI sold one apartment, one warehouse, one
shopping center and one office building for a total of $17.7 million, receiving
net cash of $3.8 million after the payoff of existing debt and the payment of
various closing costs.

Also in the first quarter of 2002, TCI financed an industrial warehouse
for $2.7 million, receiving $942,000 in cash after the payment of various
closing costs.

Further in the first quarter of 2002, TCI purchased four apartments,
one shopping center and one parcel of unimproved land for a total of $7.8
million, paying $3.5 million in cash, including various closing costs, and
assumed existing mortgage debt of $1.4 million. TCI also expended $13.3 million
on property construction in the quarter, of which $10.9 million was funded by
debt. As of March 31, 2002, TCI has expended a total of $58.0 million on
property construction, of which $30.0 million was funded by debt. For the
remainder of 2002, TCI expects to expend an additional $132.6 million on
property construction projects, of which $127.0 million will be funded by debt.

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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31,2001. TCI had a
net loss of $1.3 million in the first quarter of 2002, including gains on sale
of real estate totaling $5.4 million, compared to net income of $316,000 in the
corresponding period in 2001, including gains on sale of real estate totaling
$6.5 million. Fluctuations in this and other components of revenues and expense
between the 2002 and 2001 periods are discussed below.

229

Rents in the first quarter of 2002, decreased to $30.9 million compared
to $35.3 million in 2001. Of this decrease, $4.8 million was due to the sale of
16 apartments in 2002 and 2001 and $2.2 million was due to the sale of nine
commercial properties in 2002 and 2001 and $326,000 was due to lower occupancies
at TCI's hotels. These decreases were offset by increases of $1.9 million due to
the purchase of five apartments in 2002 and 2001 and $31,000 was due to the
purchase of one commercial property in 2002. Rental rates and occupancies
increased by $208,000 for TCI's apartments and by $795,000 for TCI's commercial
properties. Rents in the remaining quarters of 2002 may decrease as TCI sells
income producing properties.

Property operations expense decreased in the first quarter of 2002, to
$19.5 million from $20.4 million compared to the corresponding period in 2001.
Of this decrease, $2.7 million was due to the sale of 16 apartments in 2002 and
2001, $449,000 was due to the sale of nine commercial properties and hotel
operating expenses decreased by $351,000. These decreases were offset by
increases of $1.5 million due to the purchase of five apartments in 2002 and
2001 and $15,000 due to the purchase of one commercial property in 2002.
Apartment operating expenses increased by $242,000 due to increased leasing
costs and utilities and an increase of $800,000 was due to increased leasing,
utility and maintenance costs at TCI's commercial properties.

Interest and other income increased to $1.1 million in the first
quarter of 2002, compared to $638,000 in 2001. The increase was primarily due to
TCI funding seven loans in 2001 and one loan in 2002. Interest income for the
remaining quarters of 2002 is expected to increase from the additional loans
funded in 2001 and 2002.

Equity losses of investees decreased to $1.3 million in the first
quarter of 2002, from $1.4 million in the first quarter of 2001. The decreases
in losses from equity investees are primarily attributed to decreased operating
losses for IOT and ARL.

In the first quarter of 2002, gains on sale of real estate totaling
$5.4 million were recognized, $659,000 on the sale of the Primrose Apartments,
$1.2 million on the sale of the Central Storage Warehouse, a $608,000 deferred
gain on the sale of the Madison at Bear Creek Apartments and $2.9 million on
gains on sale of real estate from equity investees.

In the first quarter of 2001, gains on sale of real estate totaling
$6.5 million were recognized, $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, $1.1 million on the sale of Park at Colonade Apartments, $1.0
million on the sale of a tract of the Round Mountain land parcel and $1.3
million on gains on sale of real estate from an equity investee.

Interest expense decreased to $9.2 million in the first quarter of
2002, from $11.2 million in 2001. Of this decrease, $1.4 million was due to the
sale of 16 apartments in 2002 and 2001, $769,000 was due to the sale of five
commercial properties in 2002 and 2001, and decreases of $20,000 were due to
principal paydowns in 2001. Of the remaining decreases, $341,000 was due to
lower variable interest rates at TCI's apartments, $478,000 was due to lower
variable interest rates at TCI's commercial properties, and $49,000 was due to
lower variable interest rates at TCI's hotels. These decreases were offset by
increases of $823,000 due to the purchase of five

230

apartments in 2002 and 2001, and $194,000 due to the financing of one property
in 2001. Interest expense for the remaining quarters of 2002 are expected to
decrease as TCI selectively sells properties.

Depreciation expense increased to $5.2 million in the first quarter of
2002, from $5.1 million in 2001. Of these increases, $273,000 was due to the
purchase of five apartments in 2002 and 2001, and $548,000 was due to building
and tenant improvements at TCI's commercial properties. These increases were
offset by decreases of $450,000 due to the sale of 16 apartments and $283,000
due to the sale of five commercial properties in 2002 and 2001. Depreciation
expense for the remaining quarters of 2002 is expected to decrease as TCI
selectively sells properties.

Advisory fee decreased to $1.4 million in the first quarter of 2002,
from $1.5 million in 2001. The decrease was due to a decrease in TCI's gross
assets from 2001, the basis for such fee. Advisory fees for the remaining
quarters of 2002 are expected to decrease with decreases in TCI's gross assets.

Net income fee to affiliate was $26,000 in the first quarter of 2001.
The net income fee is payable to TCI's advisor based on 7.5% of TCI's net
income.

General and administrative expenses decreased to $2.2 million in the
first quarter of 2002, from $2.4 million in 2001. These decreases were mainly
due to a decrease in legal fees and other professional fees.

2001 COMPARED TO 2000. TCI had net income of $19.8 million in 2001,
including gains on sale of real estate totaling $54.3 million, as compared to
$29.8 million in 2000, including gains on sale of real estate totaling $50.6
million. Fluctuations in the components of revenues and expense between 2001 and
2000 are discussed below.

Rents decreased to $134.9 million in 2001 from $139.7 million in 2000.
Of this decrease, $20.6 million was due to the sale of 29 apartments in 2001 and
2000 and $3.2 million was due to the sale of eight commercial properties and one
industrial warehouse in the Kelly portfolio in 2001 and 2000. These decreases
were offset by increases of $3.0 million due to the purchase of 10 operating
apartments in 2001 and 2000 and $8.2 million was due to the purchase of eight
commercial properties in 2001 and 2000. Decreases in rents of $91,000 also was
due to decreased parking revenues for TCI's land properties. Rental rates
increased by $1.5 million for TCI's apartments and by $2.1 million for TCI's
commercial properties. In 2000, TCI leased its four U.S. 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 $4.4 million. Rents
are expected to decrease in 2002 as TCI selectively sells income producing
properties in 2002.

Property operations expenses increased to $80.6 million in 2001 from
$78.2 million in 2000. Of this increase, $1.9 million was due to the purchase of
10 operating apartments, $4.4 million was due to the purchase of eight
commercial properties and $400,000 was due to the purchase of eight land
properties in 2001 and 2000. An increase of $3.0 million was due to

231

increased leasing, utility and maintenance costs at TCI's commercial properties.
Hotel operating expenses increased by $4.3 million and increases of $300,000
were due to increases in maintenance and taxes for TCI's land parcels. These
increases were offset by decreases of $10.9 million due to the sale of 29
apartments in 2001 and 2000 and $1.1 million due to the sale of eight commercial
properties and one industrial warehouse in the Kelly portfolio in 2001 and 2000.
Property operating expenses are expected to decrease as TCI selectively sells
properties in 2002.

Interest and other income increased to $2.9 million in 2001, compared
to $2.4 million in 2000. The increase was primarily due to TCI funding two loans
in the fourth quarter of 2000 and eight loans in 2001. Interest income in 2002
is expected to decrease due to six of TCI's twelve loans maturing in 2002.

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 $6.0 million in 2001, from
$556,000 in 2000. The losses from equity investees are primarily attributed to
increased operating losses for IOT and TCI's accounting for its investment in
ARL. Equity losses are expected to increase with decreases in operating income
from ARL and IOT as ARL and IOT continue to sell income producing properties.

In 2001, gains on sale of real estate totaling $54.3 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, $9.1 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, $1.3 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, $4,000
on the sale of Viewridge Office Building, $1.7 million on the sale of South
Cochran Apartments, $1.2 million on the sale of Madison at Bear Creek
Apartments, $1.9 million on the sale of Summerstone Apartments, a $819,000
previously deferred gain on the sale of the Town and Country Shopping Center,
and $5.3 million in gains on sale of real estate from ARL, an equity investee.
These gains were partially offset by a loss of $71,000 on the Moss Creek land
parcel, a loss of $138,000 on the sale of the Valley Rim Office Building, and a
loss of $215,000 on the sale of a tract of the Eagle Crest land parcel.

232

$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. "Real Estate" to the TCI
consolidated financial statements included elsewhere in this joint proxy
statement and prospectus.

Interest expense decreased to $41.0 million in 2001 from $48.1 million
in 2000. Of this decrease, $6.0 million was due to the sale of 29 apartments in
2001 and 2000, $1.3 million was due to the sale of eight commercial properties
and one industrial warehouse in the Kelly portfolio in 2001 and 2000, and
$316,000 was due to the sale of two land parcels subject to debt in 2000. A
decrease of $252,000 was due to the refinancing of six commercial properties in
2000, and an increase of $18,000 was due to the refinancing of three apartment
properties in 2000, and decreases of $1.1 million were due to land loan payoffs
and principal paydowns in 2001 and 2000. Of the remaining decrease, $248,000 was
due to lower variable interest rates at TCI's apartments, $1.6 million was due
to lower variable interest rates at TCI's commercial properties and $278,000 was
due to lower variable interest rates at TCI's hotels. These decreases were
offset by increases of $817,000 due to the purchase of 10 operating apartments
in 2001 and 2000, and $3.2 million due to the purchase of eight commercial
properties in 2001 and 2000. Interest expense is expected to decrease as TCI
sells properties.

Depreciation expense of $19.7 million in 2001, approximated the $19.7
million in 2000.

Advisory fee expense of $5.3 million in 2001, approximated the $5.3
million in 2000. Advisory fees are expected to decrease as TCI sells properties.

Net income fee to affiliate was $1.9 million in 2001, as compared to
$2.4 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 $3.2 million in 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. No incentive fee was paid in 2000.

General and administrative expenses increased to $11.4 million in 2001,
from $8.5 million in 2000. Increases of $1.8 million, $615,000, $249,000, and
$219,000 were due to increases in consulting fees, legal fees, taxes, and
insurance, respectively. General and administrative expenses are expected to
remain constant or decrease from decreased litigation and consulting fees.

Realized losses on investments of $3.1 million were recognized in 2001.
TCI recognized a previously unrealized loss on ARL's marketable equity
securities of $3.1 million in 2001.

233

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 $139.7 million in 2000 from $82.1 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 $78.2 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. "Notes and Interest Receivable" to the TCI
consolidated financial statements included elsewhere in this joint proxy
statement and prospectus.

Interest expense increased to $48.1 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.

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 to properties
sold in 2000 and 1999.

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. "Advisory Agreement" to the TCI consolidated financial statements included
elsewhere in this joint proxy statement and prospectus.

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.

234

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. "Investment in Equity Method
Real Estate Entities" to the TCI consolidated financial statements included
elsewhere in this joint proxy statement and prospectus.

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. "Real Estate" to the TCI consolidated financial
statements included elsewhere in this joint proxy statement and prospectus.

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. "Real Estate" and Note 7. "Investment in Equity Method Real Estate Entities"
to the TCI consolidated financial statements included elsewhere in this joint
proxy statement and prospectus.

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.

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.

235

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.

TAX MATTERS

For the year 1999, TCI elected and in the opinion of management,
qualified to be taxed as a REIT as defined under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. 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 in the first quarter of
2002 and 2001; therefore, it recorded no provision for income taxes.

236

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 change 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.

TCI is exposed to interest rate risk associated with variable rate
notes payable and maturing debt that has to be refinanced. TCI does not hold
financial instruments for trading or other speculative purposes, but rather
issues these financial instruments to finance its portfolio of real estate
assets. TCI's interest rate sensitivity position is managed by the Company's
finance department. Interest rate sensitivity is the relationship between
changes in market interest rates and the fair value of market rate sensitive
assets and liabilities. TCI's earnings are affected as changes in short-term
interest rates impact its cost of variable rate debt and maturing fixed rate
debt. A large portion of TCI's market risk is exposure to short-term interest
rates from variable rate borrowings. The impact on TCI's financial statements of
refinancing fixed rate debt that matured during 2001 was not material. As
permitted, management intends to convert a significant portion of those
borrowings from variable rates to fixed rates in 2002. If market interest rates
for variable rate debt average 100 basis points more in 2002 than they did
during 2001, TCI's interest expense would increase, and income would decrease by
$1.4 million. This amount is determined by considering the impact of
hypothetical interest rates on TCI's borrowing cost. This analysis did not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment. Further, in the event of a change of such
magnitude, management would likely take actions to further mitigate its exposure
to the change. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, the sensitivity analysis assumes no
change in TCI's financial structure.

The following table contains only those exposures that existed at
December 31, 2001. 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
Notes receivable
Variable interest rate-fair value... $ 2,932
2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities ............ $ -- $ 1,738 $ 1,369 $ -- $ -- $ -- $ 3,107
Instrument's amortization .......... -- -- -- -- -- -- --
Interest ........................... 213 90 39 -- -- -- 342
Average rate ....................... 7.0% 6.0% 5.8% -- -- --

Fixed interest rate-fair value ..... $ 20,378
2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities ............ $ 12,206 $ 5,047 $ 1,970 $ -- $ -- $ -- $ 19,223
Instrument's amortization .......... 48 45 49 56 62 99 359
Interest ........................... 1,493 684 262 20 14 8 2,481
Average rate ....................... 13.9% 13.2% 11.8% 10.4% 10.4% 10.4%
Liabilities

237

Non-trading Instruments-Equity Price
Risk
Notes payable

Variable interest rate-fair value .. $142,097
2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities ............ $ 71,956 $18,739 $24,194 $ 9,510 $ 1,636 $ 9,877 $135,912
Instrument's amortization .......... 1,453 1,014 905 680 409 6,081 10,542
Interest ........................... 6,168 3,487 2,650 1,541 1,032 9,159 24,037
Average rate ....................... 6.3% 6.2% 5.6% 5.9% 6.3% 6.3%

Fixed interest rate-fair value ..... $319,778
2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities ............ $ 75,187 $17,818 $48,826 $15,864 $14,530 $97,937 $270,162
Instrument's amortization .......... 4,159 3,526 3,565 3,130 3,106 23,930 41,416
Interest ........................... 23,125 18,651 17,296 13,733 12,445 55,671 140,921
Average rate ....................... 8.5% 8.3% 8.0% 7.8% 7.8% 7.8%

At March 31, 2002, TCI's exposure to a change in interest rates on its
debt is as follows:

EFFECT OF 1%
WEIGHTED AVERAGE INCREASE IN
BALANCE INTEREST RATE BASE RATES
------- ------------- ----------

Notes payable:
Variable rate............................. $ 149,099 6.28% $ 1,491
========= =======

Total decrease in TCI's annual net income... $ 1,491
=======

Per share................................... $ .18
=====

238

MANAGEMENT OF TCI

DIRECTORS AND EXECUTIVE OFFICERS OF TCI

The following table sets forth certain information as of July 23, 2002
regarding TCI's executive officers and directors:

Name Age Position
---- --- --------

Mark W. Branigan* .................................. 48 Executive Vice President - Residential
Henry A. Butler .................................... 52 Director
Earl D. Cecil** .................................... 73 Director
Louis J. Corna* .................................... 54 Executive Vice President - Tax
Ronald E. Kimbrough* ............................... 49 Executive Vice President and Chief Financial
Officer
David W. Starowicz* ................................ 46 Executive Vice President - Commercial Asset
Management
Ted P. Stokely ..................................... 68 Director and Chairman of the Board
Martin L. White .................................... 62 Director

HENRY BUTLER: Director (Affiliated) (since December 2001) of TCI.
Broker - Land Sales (since 1992) of Basic Capital Management, Inc. ("BCM");
Owner/Operator (1989 to 1991) of Butler Interests, Inc.; and Director (since
December 2001) of IOT.

TED P. STOKELY: 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) and paid
consultant (April 1992 to December 1992) of Eldercare Housing Foundation
("Eldercare"), a nonprofit corporation; and Director (since April 1990) and
Chairman of the board (since January 1995) of IOT.

MARTIN L. WHITE: 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.

----------
* See "The Advisor - BCM - Directors and Principal Officers of Advisor" for
background and business experience information.

** See "Management of ARL - Directors and Executive Officers of ARL" for
background and business experience information.

239

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 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.
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 July 16, 2002, TCI owned approximately 24% of IOT's outstanding
shares of common stock and ARL indirectly owned approximately 28.5% and BCM
directly and indirectly owned approximately 14.5% 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 partner of Triad is GS Realty, a related party. 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.

240

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 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 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.

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 June 30, 2002, TCI had 140,000 shares of common stock reserved
for issuance under the TCI Director Plan of which options for 130,000 shares
were outstanding.

241

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 July 16, 2002.

Shares of
Percentage of Series H
Shares of Series Class if the Redeemable
Amount and G Redeemable Non-Affiliates Convertible
Nature of Convertible Percentage of Elect to Preferred
Beneficial Preferred Stock Class if the Receive Series Stock
Ownership of Percent Beneficially Non-Affiliates G Redeemable Beneficially
TCI Common of Owned After the Elect to Convertible Owned After
Name of Beneficial Owner Stock Class(1) TCI Merger Receive Cash(2) Preferred Stock the IOT Merger
------------------------ ------------ --------- --------------- --------------- --------------- --------------

EQK Holdings, Inc.(4)(5)(6)... 3,994,300 49.5% -- -- -- --
Basic Capital Management,
Inc.(5)(7).................... 1,166,947 14.5% 1,140,472 97.8% 28.3% 106,802

Shares of ARL Common
Stock Beneficially
Owned After the TCI and
Percentage Percentage of Class IOT Mergers Assuming
of Class if if the Conversion of all
the Non-Affiliates Series G and Series H
Non-Affiliate Elect to Receive Redeemable Convertible
Elect to Series H Redeemable Preferred Stock and
Receive Convertible Nonaffiliates Elect to Percentage of
Name of Beneficial Owner Cash(3) Preferred Stock Receive Cash Class
------------------------ ------------- ----------------- ------------------------ -------------

EQK Holdings, Inc.(4)(5)(6)... -- -- -- --
Basic Capital Management,
Inc.(5)(7).................... 100% 15.6% 9,721,229 66.9%

(1) Percentage is based upon 8,072,594 shares of TCI common stock outstanding at
July 16, 2002.

(2) Percentage is based upon 1,165,699 shares of Series G redeemable convertible
preferred stock outstanding after the TCI merger if all persons not affiliated
with ARL elect to receive cash and 4,025,344 shares of Series G redeemable
convertible preferred stock outstanding after the TCI merger if all persons not
affiliated with ARL elect to receive Series G redeemable convertible preferred
stock.

(3) Percentage is based upon 106,802 shares of Series H redeemable convertible
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 redeemable
convertible preferred stock outstanding after the TCI merger if all persons not
affiliated with ARL elect to receive Series H redeemable convertible preferred
stock.

(4) Includes 3,994,300 shares of TCI common stock of which ARL may be deemed to
beneficially own. EQK Holdings, Inc. is a wholly-owned subsidiary of American
Realty Trust, which is a wholly-owned subsidiary of ARL.

(5) The business address of EQK Holdings and BCM is 1800 Valley View Lane, Suite
300, Dallas, Texas 75234.

(6) The shares of TCI common stock owned by EQK Holdings will be cancelled 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. The general partners of Syntek Asset Management, L.P., are Gene E.
Phillips and Syntek Asset Management, Inc. Syntek Asset Management, Inc. is a
wholly-owned subsidiary of BCM. Mr. Gene E. Phillips' business address is 1800
Valley View Lane, Suite 300, Dallas, Texas 75234. Mr. Gene E. Phillips's
principal occupation is Chief Executive Officer and President of Syntek West,
Inc. Mr. Gene E. Phillips has served in such capacity for over the past five
years. Mr. Gene E. Phillips is a citizen of the United States of America. During
the last five years, Mr. Gene E. Phillips has not been convicted in a criminal
proceeding (excluding traffic violations and/or similar misdemeanors) and has
not been a party to any civil proceeding of a judicial or administrative body of
competent jurisdiction which resulted in a judgment, decree or final order
enjoining future violations of, or prohibiting or mandating activities subject
to, federal or state securities laws or finding any violation with respect to
such laws. The shares of TCI common stock held by Syntek Asset

242

Management L.P. will be cancelled 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.

243

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 July 16, 2002.

Mark W. Branigan(4)(5)........ 5,187,722 64.5% 1,140,472 97.8% 28.3% 106,802
Henry A. Butler............... -- -- -- -- -- --
Earl D. Cecil................. -- -- -- -- -- --
Louis J. Corna(4)(5).......... 5,187,722 64.5% 1,140,472 97.8% 28.3% 106,802
Ronald E. Kimbrough(4)(5)..... 5,187,722 64.5% 1,140,472 97.8% 28.3% 106,802
David W. Starowicz(4)(5)...... 5,187,722 64.5% 1,140,472 97.8% 28.3% 106,802
Ted P. Stokely................ 14,400 * 14,400 * * --
Martin L. White............... 9,000 * 9,000 * * --
All Directors and Executive
Officers as a group (8
individuals)(4)(5)........ 5,211,122 64.8% 1,163,872 99.8% 29.6% 106,802

Mark W. Branigan(4)(5)........ 100% 15.6% 9,721,229 66.9%
Henry A. Butler............... -- -- -- --
Earl D. Cecil................. -- -- 1,000 *
Louis J. Corna(4)(5).......... 100% 15.6% 9,721,229 66.9%
Ronald E. Kimbrough(4)(5)..... 100% 15.6% 9,721,229 66.9%
David W. Starowicz(4)(5)...... 100% 15.6% 9,721,229 66.9%
Ted P. Stokely................ -- -- 36,000 *
Martin L. White............... -- -- 20,250 *
All Directors and Executive
Officers as a group (8
individuals)(4)(5)........ 100% 15.6% 9,778,729 67.3%

* Less than 1%

(1) Percentage is based upon 8,042,594 shares of common stock outstanding at
July 16, 2002.

(4) Includes 26,475 shares of TCI common stock owned by Syntek Asset Management,
L.P., 1,166,947 shares of TCI common stock owned by BCM and 3,994,300 shares of
TCI common stock owned by EQK. 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.

(5) Includes 106,802 shares of IOT common stock held by BCM. 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.

244

PERFORMANCE GRAPH OF TCI

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.

[LINE 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

245

INFORMATION ABOUT IOT

BUSINESS OF IOT

IOT, a Nevada corporation, is the successor to a California business
trust named Income Opportunity Realty 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
management, qualified for federal taxation as a REIT for all periods since May
1, 1985.

IOT files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document filed by 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 company's 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." 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.

At December 31, 2001, 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. IOT's real estate portfolio is more fully discussed in "--
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 in "-- Properties of IOT," and in Schedule III to the IOT consolidated
financial statements included elsewhere in this joint proxy statement and
prospectus.

IOT's business is not seasonal. Management has determined to continue
to pursue a balanced investment strategy, seeking both current income and
capital appreciation. With respect to new investments, 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
2002, management intends to focus on income producing property acquisitions to
maintain a balance between income producing and non-income producing properties.
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. 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

246

revenue required to cover operating expenses, 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.

MANAGEMENT OF THE COMPANY

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. BCM's duties 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 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 has substantial contact with the
management of BCM and input with respect to its performance of advisory services
to IOT. BCM is more fully described in "The Advisor -- BCM."

BCM has been providing advisory services to IOT since March 28, 1989.
BCM also serves as advisor to TCI and directors of IOT are also directors of
TCI. BCM also serves as Advisor to ART. The officers of IOT also serve as
officers of ART, TCI and BCM. As of March 31, 2002, ART and TCI owned
approximately 28.5% and 24.0%, 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 Realty Services, Ltd. ("Triad")
provides such property management services. Triad subcontracts with other
entities for the provision of property-level management services to IOT. The
general partner of Triad is BCM. The limited partner of Triad is GS Realty
Services, Inc. ("GS Realty"), a related party. 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 Realty, Inc. ("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 as discussed in
"The Advisor."

IOT has no employees. Employees of BCM render services to IOT.

247

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 ARL, TCI and IOT
-- Related Party Transactions"), some of which have greater financial resources
than those of IOT. 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. 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 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 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 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

248

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 other factors beyond the control of management or BCM. The illiquidity of
real estate investments also may 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 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

PROPERTIES

IOT'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 IOT's present operations.

IOT's real estate portfolio at December 31, 2001, is set forth in
Schedule III to the IOT consolidated financial statements included elsewhere in
this joint proxy statement and prospectus. 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 that 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, 2001, 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, 2001,
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, 2001, one of IOT's properties, the Travelers land
parcel, exceeded 10% of IOT's total assets. At December 31, 2001, 95% of IOT's
assets consisted of owned properties and less than 1% consisted of investments
in partnerships. The remaining 5% 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."

249

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.

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.

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.

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. IOT has no properties in this region.

Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. IOT has no properties in this region.

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, 2001, 95% 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.

250

IOT has typically invested in developed real estate, although it also
may invest in new construction or development either directly or in partnership
with nonaffiliated 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.

In the opinion of 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, 2001.

REGION APARTMENTS COMMERCIAL 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 204 acres, both in the Southwest region. See Schedule III to the IOT
consolidated financial statements included elsewhere in this joint proxy
statement and prospectus for a detailed description of IOT's real estate.

A summary of the activity in IOT's owned real estate portfolio during
2001 is as follows:

Owned properties at January 1, 2001.......... 16
Properties purchased......................... --
Properties sold.............................. --
--
Owned properties at December 31, 2001........ 16
==

PROPERTIES HELD FOR INVESTMENT. Set forth below are IOT's owned
properties at December 31, 2001, 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, 2001, 2000 and 1999:

UNITS/ RENT PER SQUARE FOOT OCCUPANCY %
PROPERTY LOCATION SQUARE FOOTAGE/ACRES 2001 2000 1999 2001 2000 1999
-------- -------- -------------------- ---- ---- ---- ---- ---- ----

APARTMENTS
Brighton Court Midland, TX 60 Units/90,672 Sq.Ft. $ .54 $ .53 $ * 93 93 *
Del Mar Midland, TX 92 Units/105,348 Sq.Ft. .50 .50 * 98 98 *
Enclave Midland, TX 68 Units/89,734 Sq.Ft. .57 .56 * 93 93 *
Meridian Midland, TX 280 Units/264,000 Sq.Ft. .45 .41 .46 95 95 69
Signature Place Midland, TX 57 Units/72,480 Sq.Ft. .57 .56 * 86 86 *
Sinclair Place Midland, TX 114 Units/91,529 Sq.Ft. .50 .49 * 96 96 *
Treehouse San Antonio, TX 106 Units/88,957 Sq.Ft. .84 .83 .80 95 95 96

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OFFICE BUILDINGS
2010 Valley View Farmers Branch, TX 39,568 Sq. Ft. 17.98 17.40 16.26 87 86 64
5600 Mowry Newark, CA 56,120 Sq. Ft. 26.70 24.64 22.94 72 100 100
Akard Plaza Dallas, TX 42,895 Sq. Ft. 16.95 15.46 15.34 90 91 92
Chuck Yeager Chantilly, VA 60,060 Sq. Ft. 13.02 11.21 14.70 100 41 41
Daley Plaza San Diego, CA 122,795 Sq. Ft. 18.42 15.32 14.68 98 88 79
La Mesa Village La Mesa, CA 92,611 Sq. Ft. 19.45 16.87 17.29 68 77 88
Westlake Village Westlake Village, 45,500 Sq. Ft. 18.72 18.10 16.96 60 52 70
CA

LAND
Frankel Midland County, TX 1.01 Acres
Travelers Farmers Branch, TX 204 Acres

*Property was purchased in 2000.

(1) On January 28, 2002, IOT sold the 122,795 sq. ft. Daley Plaza in San Diego,
California, for a sales price of $15.5 million to Janey Enterprises, LP. The
sale constituted 8.14% of the total assets of IOT as of December 31, 2001. IOT
received $8.1 million in cash after the payoff of $8.6 million in debt and
various closing costs and recognized a gain on the sale of $7.1 million

PARTNERSHIP PROPERTIES. Set forth below is the commercial property
owned by each of the two partnerships in which IOT is an equity investor and the
average annual rental rate and occupancy thereof at December 31, 2001, 2000 and
1999:

RENT PER SQUARE FOOT OCCUPANCY %
PROPERTY LOCATION SQUARE FOOTAGE 2001 2000 1999 2001 2000 1999
-------- -------- -------------- ---- ---- ---- ---- ---- ----

SHOPPING CENTER
Chelsea Square Houston, TX 70,275 Sq. Ft. $ 9.63 $ 9.31 $8.78 77 77 100

OFFICE BUILDING
Eton Square Tulsa, OK 222,654 Sq. Ft. 11.27 10.52 9.77 85 59 87

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.

252

IOT FEDERAL TAX BASIS OF DEPRECIABLE PROPERTY AS OF DECEMBER 31, 2001

For each IOT property upon which depreciation is taken, the table set
forth below includes (i) the Federal tax basis; (ii) rate, (iii) method and (iv)
life claimed as of December 31, 2001.

Gross
Federal Accumulated Tax Net Federal
Property Tax Basis Depreciation Tax Basis Rate Method(1) Life
---------------- ----------- --------------- ----------- ------ --------- ----------

Apartments

Brighton Court $3,051,349 $ 117,599 $ 2,933,750 100 % ADS 40 years
Del Mar 2,918,682 112,486 2,806,196 100 ADS 40 years
Enclave 2,918,682 112,486 2,806,196 100 ADS 40 years
Meridian 4,552,319 232,350 4,319,969 100 ADS 40 years
Signature Place 2,388,012 92,034 2,295,978 100 ADS 40 years
Sinclair Place 1,990,010 76,695 1,913,315 100 ADS 40 years
Treehouse 2,325,236 697,207 1,628,029 100 ADS 20-40 years

Office Buildings

2010 Valley View 3,316,937 279,017 3,037,920 100 ADS 10-40 years
5600 Mowry 5,512,892 543,438 4,969,454 100 ADS 40 years
Akard Plaza 3,230,346 314,863 2,915,483 100 ADS 40 years
Chuck Yeager 5,707,935 601,989 5,105,946 100 ADS 40 years
Daley Plaza 7,206,703 879,607 6,327,096 100 ADS 20-40 years
La Mesa Village 7,515,139 823,201 6,691,938 100 ADS 40 years
Westlake Village 3,561,378 355,504 3,205,874 100 ADS 40 years
----------- ----------- -----------
TOTAL 56,195,620 5,238,476 50,957,144
=========== =========== ===========

(1) ADS = Alternative Depreciation System
MACRS = Modified Accelerated Cost Recovery System

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, 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.

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 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. In May 2001, IOT
received $1.0 million as a partial principal paydown. The loan bears interest at
18.0% per annum, requires monthly payments of interest only and matured in
January 2002. In January 2002, the loan was paid off in April 2002.

253

PARTNERSHIP MORTGAGE LOANS. IOT owns a 40% general partner interest and
TCI owns a 60% general partner interest in Nakash Income Associates ("NIA"),
which holds a wraparound mortgage note receivable secured by a building occupied
by a Wal-Mart in Maulden, Missouri. IOT advanced the partnership $24,000 in
2001.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

IOT is treated as a REIT for federal income tax purposes. As a result of
the merger, IOT will lose its status as a REIT. Neither ARL nor TCI is a REIT.

The following is a summary of certain U. S. federal income tax
consequences relating to the taxation of a REIT. Because the following is a
summary, it does not address all tax considerations pertaining to a REIT or its
stockholders. Special rules not discussed below may apply to tax exempt
organizations, broker-dealers, non U.S. persons, trusts, estates, regulated
investment companies, financial institutions, insurance companies and other
forms of entities subject to special tax treatment under the Code. The following
summary does not address, state, local or non U.S. tax considerations. This
summary is not intended to be and should not be construed as tax advice and you
are urged to consult with your own tax advisor.

REQUIREMENTS FOR REIT STATUS. To qualify as a REIT an entity must:

- be organized as a corporation, trust or association;

- be managed by one or more trustees or directors;

- have transferable shares or certificates;

- be taxable as a domestic corporation but for the operation of
Sections 856 - 859 of the Code;

- not be a financial institution or insurance company;

- be owned by 100 or more persons;

- not be closely held; and

- elect to be taxed as a REIT.

In addition to the above requirements, a REIT must meet other tests
contained in the Code, including the asset and income tests described below.

ASSET AND INCOME TESTS. At the close of each calendar quarter of its
taxable year, a REIT must satisfy the following six asset tests:

- 75% of the value of the REIT's total assets must consist of real
estate assets, cash and cash items and government securities;

- not more the 25% of the value of the REIT's total assets may consist
of securities other than those includable under the 75% test;

- not more than 20% of the value of the REIT's total assets is
represented by securities of one or more taxable REIT subsidiaries;

- not more than 5% of the value of a REIT's total assets may consist
of securities of any one issuer, other than those of a taxable REIT
subsidiary and securities includable in the 75% test;

254

- the REIT does not hold securities possessing more than 10% of the
total voting power of the outstanding securities of any one issuer,
other than those of a taxable REIT subsidiary and securities
includable under the 75% test; and

- the REIT does not hold securities having a value of more than 10% of
the total value of the outstanding securities of any one issuer,
other than those of a taxable REIT subsidiary and securities
includable under the 75% asset test.

In addition to the asset tests, a REIT must satisfy the following two
income tests each year:

- 75% of a REIT's gross income (excluding gross income from prohibited
transactions) must consist of rents from real property, interest on
obligations secured by mortgages, gain from the sale of real
property that was not held primarily for sale, dividends from other
REITs and gain from the sale of REIT shares, refunds and abatements
of real property taxes, income and gain from foreclosure property,
commitment and certain other fees, qualified temporary investment
income, and gain from the sale of certain other property; and

- 95% of the REIT's gross income (excluding gross income from
prohibited transactions) must consist of items that would satisfy
the 75% income test and dividends, interest and gain from the sale
or other disposition of stocks or securities.

TAXATION OF A REIT. A REIT generally is not subject to federal income tax
on the income that it distributes to stockholders if it meets certain
distribution and other requirements described in the Code. In general, a REIT
calculates its taxable income similar to other corporations except a REIT is
entitled to a deduction for dividends paid. A REIT is required to distribute to
its stockholders each year at least 90% of its taxable income (excluding net
capital gain).

A REIT will be taxed at regular corporate rates on its undistributed "REIT
taxable income." REIT taxable income is the taxable income of the REIT subject
to specified adjustments, including a deduction for dividends paid. If a REIT
has net capital gain, the REIT's tax is the lower of the tax imposed on the REIT
taxable income at regular corporate rates or the sum of (x) the tax at corporate
rates on REIT taxable income computed without regard to net capital gain and the
deduction for capital gain dividends, and (y) a tax on undistributed net capital
gain at the rate provided in Code Section 1201(a). A REIT generally is subject
to the alternative minimum tax. If a REIT has "net income from foreclosure
property" it is subject to tax on the income at the highest corporate rate. A
REIT's net income from a "prohibited transaction" is subject to a 100% tax. If a
REIT fails to satisfy the 75% or 95% income tests discussed above, but has
maintained its qualification as a REIT because other requirements are met, it is
subject to 100% tax on the taxable income attributable to the gross income which
has caused it to fail the income test. A REIT is subject to a 4% excise tax if
it fails to make certain minimum distributions during a calendar year.

DISTRIBUTIONS TO REIT STOCKHOLDERS. In general, distributions to REIT
stockholders that are made out of current accumulated earnings and profits that
are not designated as capital gain dividends, will be taxable as ordinary income
and will not be eligible for the dividends received deduction generally
available for corporations. REIT distributions in excess of the REIT's

255

earnings and profits will be considered a return of capital and will not be
taxable to the extent that the distributions do not exceed the adjusted tax
basis of the stockholder in its stock. However, such distributions will reduce
the adjusted basis of such stock. Distributions that exceed a stockholder's
adjusted basis in its stock will be taxable as capital gain if the stock is held
as a capital asset.

A REIT may elect to designate distributions of its net capital gain as a
capital gain dividend. A distribution designated by a REIT as a capital gain
dividend is treated as a long-term capital gain to the stockholder.

LEGAL PROCEEDINGS OF IOT

OLIVE LITIGATION

In February 1990, IOT, 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 IOT, 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 IOT'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 IOT, CMET and
TCI, including, but not limited to, the fairness to IOT, 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 on this matter have been held, 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 IOT and ARL, an
affiliate of IOT, in October 2000 with an investment fund, breached a provision
of the Modification. As a result of this assertion, IOT assigned all of its
rights to purchase the TCI shares under this stock option agreement to ARL.

256

The board believes that the provisions of the Settlement, Modification and
the 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 was appealed to the United
States Court of Appeals for the Ninth Circuit by IOT and TCI.

On October 23, 2001, IOT, TCI and ARL jointly announced a preliminary
agreement with the plaintiffs' counsel for complete settlement of all disputes
in the lawsuit. In February 2002, the court granted final approval for the
proposed settlement. Under the proposal, the appeal has been dismissed and ARL
will acquire all of the outstanding shares of IOT and TCI not currently owned by
ARL for a cash payment or shares of ARL preferred stock. ARL will pay $19.00
cash per IOT share and $17.50 cash per TCI share for the stock held by
nonaffiliated stockholders. ARL would issue one share of Series H redeemable
convertible preferred stock with a liquidation value of $21.50 per share for
each share of IOT common stock for stockholders who elect to receive ARL
preferred stock in lieu of cash. ARL would issue one share of Series G
redeemable convertible preferred stock with a liquidation value of $20.00 per
share for each share of TCI common stock for stockholders who elect to receive
ARL preferred stock in lieu of cash. Each share of Series H redeemable
convertible preferred stock will be convertible into 2.25 shares of ARL common
stock during a 75-day period that commences fifteen days after the date of the
first ARL Form 10-Q filing that occurs after the closing of the merger
transaction. Upon the acquisition of the IOT and TCI shares, IOT and TCI would
become wholly-owned subsidiaries of ARL. The transaction is subject to the
negotiation of a definitive merger agreement and a vote of the stockholders of
all three entities. IOT has the same board as TCI and the same advisor as TCI
and ARL.

257

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 of IOT"
and the IOT consolidated financial statements and related notes appearing
elsewhere in this joint proxy statement and prospectus.

FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(unaudited) (dollars in thousands, except per share)

EARNINGS DATA

Rents .................................... $ 2,800 $ 3,251 $ 13,001 $ 13,731 $ 15,968 $ 14,326 $ 12,221
Property expense ......................... 1,641 1,479 6,591 6,969 6,768 6,462 5,900
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income ......................... 1,159 1,772 6,410 6,762 9,200 7,864 6,321
Interest income .......................... 37 72 194 319 29 172 266
Income (loss) from equity partnerships ... (17) 9 (9) (61) 148 113 52
Gain on sale of real estate .............. 7,105 -- -- 20,878 1,525 180 3,953
========== ========== ========== ========== ========== ========== ==========
185 21,136 1,702 465 4,271

Other expense ............................ 3,211 2,570 10,057 11,104 9,580 9,008 7,275
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ........................ 5,073 $ (717) (3,462) $ 16,794 $ 1,322 $ (679) $ 3,317
========== ========== ========== ========== ========== ========== ==========

PER SHARE DATA

Net income (loss) ........................ $ 3.53 $ (.47) (2.32) $ 11.03 $ .87 $ (.44) $ 2.18
========== ========== ========== ========== ========== ========== ==========
Dividends per share ...................... $ -- $ -- -- $ .45 $ .60 $ .60 $ .40
Weighted average Common shares
outstanding .............................. 1,438,945 1,514,045 1,493,675 1,522,510 1,527,386 1,521,832 1,519,888

FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
(unaudited)

BALANCE SHEET DATA

Real estate held for investment, net ... $ 79,574 $ 87,315 $ 86,277 $ 86,542 $ 83,691 $ 81,914
Real estate held for sale, net ......... -- -- -- -- -- --
Notes and interest receivable, net ..... 6,847 505 1,500 -- -- 2,010
Total assets ........................... 89,756 91,833 96,519 91,185 88,695 90,309
Notes and interest payable ............. 47,552 54,426 54,206 62,852 60,786 61,323
Stockholders' equity ................... 40,295 35,222 39,998 23,991 23,560 25,131
Book value per share ................... $ 28.00 $ 24.48 $ 26.42 $ 15.69 $ 15.44 $ 16.53

258

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.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents at March 31, 2002, were $59,000 compared with
$66,000 at December 31, 2001. 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 management
anticipates that IOT will generate excess cash from operations in 2002 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. 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) increased to $1.2 million in the first
quarter of 2002, from $486,000 in 2001. Of this increase, $1.2 million was due
to the payment of property taxes in the first quarter of 2001 and an increase of
$180,000 was due to increased occupancy at IOT's apartments. This increase was
offset by a decrease of $570,000 from the sale of one commercial property in
2002 and a decrease of $20,000 and $62,000 due to decreased occupancies at IOT's
commercial properties and an increase in real estate taxes on IOT's land.

Interest paid decreased to $1.0 million for the first quarter of 2002 from
$1.1 million in 2001. The decrease was due to the sale of one commercial
property in 2002.

During the first quarter of 2002, IOT paid $186,000 to its advisor
compared to $157,000 in the first quarter of 2001. Fees paid to the advisor are
based on gross assets. The increase in advisory fees was due to IOT's increase
in gross assets.

General and administrative expenses paid increased to $361,000 in the
first quarter of 2002, from $317,000 paid in 2001. The increase was due to
increases in insurance.

In the first quarter of 2002, IOT sold one office building for $15.5
million, receiving net cash of $8.1 million after the payoff of existing debt
and the payment of various closing costs. IOT also funded two loans in the first
quarter for $7.1 million.

In the second quarter of 2002, IOT received $500,000 cash on one mortgage
note and $5.4 million cash on its residential property refinancing.

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

259

(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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31, 2001. For the
first quarter of 2002, IOT had net income of $5.1 million, as compared to a net
loss of $717,000 for the corresponding period in 2001, which included gains on
sale of on real estate totaling $7.1 million in 2002. Fluctuations in components
of revenue and expense between the 2002 and 2001 periods are discussed below.

Rents for the first quarter of 2002, decreased to $2.8 million, as
compared to $3.3 million in the corresponding period in 2001. Of this decrease,
$390,000 was due to the sale of one commercial property, $14,000 was due to a
decrease in occupancy at IOT's commercial properties, and $136,000 was due to an
earnest money deposit refund on IOT's land property in 2001. These decreases
were offset by an increase of $90,000 due to increased occupancies at IOT's
apartments. Rental income for the remaining quarters of 2002, are expected to
decline as IOT selectively sells properties.

Property operations expense increased in the first quarter of 2002, to
$1.6 million, as compared to $1.5 million in the corresponding period in 2001.
Of this increase, $183,000 was due to increased leasing costs associated with
IOT's commercial properties and was offset by a decrease of $89,000 in repairs
at IOT's apartment properties. Operating expense for the remaining quarters of
2002, are expected to decline as IOT selectively sells properties.

Interest income in the first quarter of 2002, was $37,000, as compared to
$72,000 in the corresponding period in 2001. The decrease was due to a $1.0
million paydown received in May 2001 on one of IOT's note receivables. Interest
income for the remainder of 2002 is expected to decrease from one note maturing
in April 2002, and one note maturing in July 2002.

Interest expense for the first quarter of 2002, decreased to $1.1 million
from $1.5 million in the corresponding period in 2001. Of this decrease,
$191,000 was due to the loan refinancing in 2001 for one parcel of unimproved
land, $114,000 was due to the sale of one commercial property in 2002, and the
remaining $95,000 was due to lower variable interest rates at IOT's apartments
and commercial properties. Interest expense for the remaining quarters of 2002,
is expected to increase due to the refinancing of IOT's residential properties.

Depreciation expense for the first quarter of 2002, decreased to $500,000
from $585,000 in the corresponding period in 2001. The decrease was due to a
decrease of $100,000 from the sale of one commercial property in 2002 and was
offset by an increase of $16,000 from increased tenant improvements at IOT's
commercial properties. Depreciation for the remaining quarters of 2002, is
expected to approximate the first quarter of 2002.

260

Advisory fee expense in the first quarter of 2002, was $186,000, as
compared to $157,000 in the corresponding period in 2001. The advisory fee is
based on IOT's gross assets. Advisory fees for the remainder of 2002 are
expected to decrease as IOT selectively sells properties.

Net income fee was $411,000 in the first quarter of 2002. The net income
fee is payable to IOT's advisor based on 7.5% of IOT's net income.

General and administrative expense was $285,000 for the first quarter of
2002, as compared to $311,000 in the corresponding period in 2001. The decrease
was primarily due to a decrease in professional fees. General and administrative
expense for the remaining quarters of 2002 is expected to approximate that of
the first quarter.

2001 COMPARED TO 2000. IOT reported a net loss of $3.5 million in 2001, as
compared to net income of $16.8 million in 2000, which included gains on real
estate totaling $20.9 million. Fluctuations in these and the other components of
revenue and expense are discussed in the following paragraphs.

Rents decreased to $13.0 million in 2001 from $13.7 million in 2000. Of
this decrease, $1.6 million was due to the sale of two commercial properties in
2000 and $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 $1.3 million and $151,000 was due to increased
rental rates at IOT's commercial and apartment properties, respectively. Rents
in 2002 are expected to decrease as IOT selectively sells properties.

Property operations expense decreased to $6.6 million in 2001 from $7.0
million in 2000. Of this decrease, $1.1 million was due to the sale of three
apartments and $570,000 due to the sale of two commercial properties in 2000.
This decrease was offset by an increase of $673,000 due to the purchase of five
apartments in 2000, $320,000 was due to increased utility, cleaning, repairs,
and insurance expenses at IOT's commercial properties, and $250,000 was due to
an increase in property taxes for IOT's land. Properties operations expense is
expected to decrease in 2002 as IOT selectively sells properties.

Interest income decreased to $194,000 in 2001 from $319,000 in 2000. This
decrease was due to a decrease in short-term investments, and from a $1.0
million principal paydown received in May 2001 on IOT's only note receivable.
Interest income is expected to decrease as IOT's mortgage loan is paid in full
in 2002.

Interest expense increased to $6.1 million in 2001 from $5.1 million in
2000. Of this increase, $345,000 and $2.0 million was due to the purchase of
five apartments and one unimproved land parcel in 2000, respectively, and
$174,000 was due to one loan refinanced in 2001. These increases were offset by
decreases of $441,000 due to the sale of two commercial properties; $755,000 due
to the sale of three apartments; and $134,000 due to the sale of two unimproved
land parcels in 2000. The remaining decrease of $203,000 was due to lower
variable interest rates at IOT's apartment and commercial properties. Interest
expense in 2002 is expected to decrease from 2001 due to a decrease in
outstanding debt.

261

Depreciation expense decreased to $2.4 million in 2001 from $2.5 million
in 2000. A decrease of $427,000 was from the sale of five properties in 2000,
offset by an increase of $138,000 from the purchase of five properties in 2000
and an increase of $200,000 was from tenant improvements. Depreciation expense
in 2002 is expected to approximate 2001.

Advisory fee to affiliate increased to $817,000 in 2001 from $664,000 in
2000. The increase was attributable to an increase in gross assets, the basis of
such fee. The advisory fee in 2002 is expected to approximate 2001. See Note 8.
"Advisory Agreement" to the IOT consolidated financial statements included
elsewhere in this joint proxy statement and prospectus.

IOT paid no net income fee in 2001 compared to the $1.4 million in 2000.
The net income fee is based on 7.5% of IOT's net income.

General and administrative expense decreased to $739,000 in 2001 from $1.5
million in 2000. This decrease was primarily due to a decrease in taxes.

Equity losses of partnerships was $9,000 in 2001 compared to $61,000 in
2000. The decrease was primarily due to a decrease in operating expenses at Eton
Square Office Building.

In 2001, IOT realized no gains on the sale of real estate.

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.

262

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.

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. "Advisory Agreement" to the IOT consolidated
financial statements included elsewhere in this joint proxy statement and
prospectus.

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 a $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. Real Estate" and Note 4. "Investment in Equity Method
Partnerships" to the IOT consolidated financial statements included elsewhere in
this joint proxy statement and prospectus.

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.

263

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.

TAXES

For the years 1999, 2000 and 2001, IOT elected and in the opinion of
management qualified to be taxed as a REIT as defined under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended. 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 90% (95% in 2000 and 1999) of its REIT
taxable income plus 90% (95% in 2000 and 1999) of its net income from
foreclosure property on an annual basis to stockholders.

264

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.

IOT is exposed to interest rate risk associated with variable rate notes
payable and maturing debt that has to be refinanced. IOT does not hold financial
instruments for trading or other speculative purposes, but rather issues these
financial instruments to finance its portfolio of real estate assets. IOT's
interest rate sensitivity position is managed by the Company's finance
department. Interest rate sensitivity is the relationship between changes in
market interest rates and the fair value of market rate sensitive assets and
liabilities. IOT's earnings are affected as changes in short-term interest rates
impact its cost of variable rate debt and maturing fixed rate debt. A large
portion of IOT's market risk is exposure to short-term interest rates from
variable rate borrowings. The impact on IOT's financial statements of
refinancing fixed rate debt that matured during 2001 was not material. As
permitted, management intends to convert a significant portion of those
borrowings from variable rates to fixed rates in 2002. If market interest rates
for variable rate debt average 100 basis points more in 2002 than they did
during 2001, IOT's interest expense would increase, and income would decrease by
$417,000. This amount is determined by considering the impact of hypothetical
interest rates on IOT's borrowing cost. This analysis did not consider the
effects of the reduced level of overall economic activity that could exist in
such an environment. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate its exposure to the
change. However, due to the uncertainty of the specific actions that would be
taken and their possible effects, the sensitivity analysis assumes no change in
IOT's financial structure.

The following table contains only those exposures that existed at December
31, 2001. 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 $ 4,773

2002 2003 2004 2005 2006 Thereafter Total
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities....... $ 11,289 $ 20,270 $ 7,442 $ -- $ -- $ -- $ 39,001
Instrument's amortization..... 503 280 122 27 30 1,690 2,652
Interest...................... 3,422 1,729 433 180 177 2,063 8,004
Average rate.................. 9.04% 9.06% 9.50% 10.39% 10.39% 10.39%

Fixed interest rate-fair value $ 12,393

265

2002 2003 2004 2005 2006 Thereafter Total
---- ---- ---- ---- ---- ---------- -----

Instrument's maturities....... $ -- $ -- $ -- $ -- $ 6,214 $ 4,998 $ 11,212
Instrument's amortization..... 204 223 243 266 184 63 1,183
Interest...................... 1,102 1,083 1,063 1,040 838 412 5,538
Average rate.................. 9.00% 9.00% 9.01% 9.01% 9.28% 9.28%

At March 31, 2002, IOT's exposure to a change in interest rates on its
debt is as follows:

Effect of 1%
Weighted Average Increase In
Balance Interest Rate Base Rates
------- ------------- ----------

Wholly-owned debt:
Variable rate....................................... $ 18,201 8.48% $ 182
========= ========
Total increase in IOT's annual net loss............. $ 182
========
Per share........................................... $ .13
========

266

MANAGEMENT OF IOT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of July 23, 2002
regarding IOT's executive officers and directors:

Name Age Position
---- --- --------

Mark W. Branigan*............................ 48 Executive Vice President - Residential
Henry A. Butler**............................ 52 Director
Earl D. Cecil***............................. 73 Director
Louis J. Corna*.............................. 54 Executive Vice President - Tax
Ronald E. Kimbrough*......................... 49 Executive Vice President and Chief Financial Officer
David W. Starowicz*.......................... 46 Executive Vice President - Commercial Asset Management
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. 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 July 16, 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 Principal Officers of Advisor" for
background and business experience information.

** See "Management of TCI - Directors and Executive Officers of TCI" for
background and business experience information.

*** See "Management of ARL - Directors and Executive Officers of ARL" for
background and business experience information.

267

partner of Triad is BCM. The limited partner of Triad is GS Realty, a related
party. 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 - BCM" 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 2001, $76,250 was paid to the 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: R. Douglas Leonhard, $18,250; Murray Shaw, $7,500; Ted P. Stokely,
$18,000; Martin L. White, $17,000; and Edward G. Zampa, $15,500.

268

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 July 16, 2002.

Percentage
Shares of of Class if Shares of
Series G the Non- Series H
Redeemable Affiliates Redeemable
Amount Convertible Percentage Elect to Convertible
and Preferred of Class if Receive Preferred
Nature of Stock the Non- Series G Stock
Beneficial Beneficially Affiliates Redeemable Beneficially
Ownership Owned Elect to Convertible Owned
Name of of IOT Percent of After the Receive Preferred After the
Beneficial Owner Common Stock Class(1) IOT Merger Cash(2) Stock IOT Merger
---------------- ------------ -------- ---------- ------- ----- ----------

EQK Holdings, Inc.(4) 409,935 28.5% -- -- -- --
Transcontinental Realty Investors, Inc.(4) 345,728 24.0% -- -- -- --
Basic Capital Management, Inc.(4) 106,802 7.4% 1,140,472 97.8% 28.3% 106,802

Shares of ARL
Common
Stock
Beneficially
Owned
After the
TCI and
Percentage IOT
of Class if mergers
the Non- Assuming
Affiliates Conversion
Percentage Elect to of all Series
of Class if Receive G and
the Non- Series H Series H
Affiliates Redeemable Redeemable
Elect to Convertible Convertible
Name of Receive Preferred Preferred Percentage
Beneficial Owner Cash(3) Stock Stock of Class
---------------- ------- ----- ----- --------

EQK Holdings, Inc.(4) -- -- -- --
Transcontinental Realty Investors, Inc.(4) -- -- -- --
Basic Capital Management, Inc.(4) 100% 15.6% 9,721,229 66.9%

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

(1) Percentages are based upon 1,438,945 shares of IOT common stock outstanding
at July 16, 2002.

(4) EQK Holdings, Inc. is a wholly-owned subsidiary of American Realty Trust,
which is a wholly-owned subsidiary of ARL. The business address of each of EQK
Holdings, Inc., ARL, TCI and BCM is 1800 Valley View Lane, Suite 300, Dallas,
Texas 75234.

269

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 July 16, 2002.

Shares of Shares of
Series G Percentage of Series H
Amount Redeemable Class if the Redeemable
and Nature Convertible Percentage Non-Affiliates Convertible
of Preferred of Class if Elect to Preferred
Beneficial Stock the Non- Receive Series Stock
Ownership Beneficially Affiliates G Redeemable Beneficially
of IOT Owned After Elect to Convertible Owned After
Common Percent of the TCI Receive Preferred the IOT
Name of Beneficial Owner Stock Class(1) Merger Cash(2) Stock Merger
------------------------ ----- -------- ------ ------- ----- ------

Mark W. Branigan(4)...................... 862,465 59.9% 1,140,472 97.8% 28.3% 106,802
Henry A. Butler(5)....................... 345,728 24.0% -- -- -- --
Earl D. Cecil(4)......................... 755,663 52.5% -- -- -- --
Louis J. Corna(4)........................ 862,465 59.9% 1,140,472 97.8% 28.3% 106,802
Ronald E. Kimbrough(4)................... 862,465 59.9% 1,140,472 97.8% 28.3% 106,802
David W. Starowicz(4).................... 862,465 59.9% 1,140,472 97.8% 28.3% 106,802
Ted P. Stokely(4)........................ 345,728 24.0% 14,400 * * --
Martin L. White(4)....................... 345,728 24.0% 9,000 * * --
All Directors and Executive Officers as
a group (8 individuals)(4).......... 862,465 59.9% 1,193,422 99.8% 29.5% 106,802

Shares of ARL
Common Stock
Beneficially
Owned After
the TCI and
Percentage of IOT mergers
Percentage Class if the Assuming
of Class if Non-Affiliates Conversion of
the Non- Elect to all Series G and
Affiliates Receive Series Series H
Elect to H redeemable Redeemable
Receive convertible Convertible Percentage of
Name of Beneficial Owner Cash(3) preferred stock Preferred Stock Class
------------------------ ------- --------------- --------------- -----

Mark W. Branigan(4)...................... 100% 15.6% 9,721,229 66.9%
Henry A. Butler(5)....................... -- -- -- --
Earl D. Cecil(4)......................... -- -- 1,000 *
Louis J. Corna(4)........................ 100% 15.6% 9,721,229 66.9%
Ronald E. Kimbrough(4)................... 100% 15.6% 9,721,229 66.9%
David W. Starowicz(4).................... 100% 15.6% 9,721,229 66.9%
Ted P. Stokely(4)........................ -- -- 36,000 *
Martin L. White(4)....................... -- -- 20,250 *
All Directors and Executive Officers as
a group (8 individuals)(4).......... 100% 15.6% 9,778,729 67.3%

---------------
* Less than 1%.

(1) Percentage is based upon 1,438,945 shares of IOT common stock outstanding at
July 16, 2002.

(4) Includes 345,728 shares owned by TCI of which the directors of IOT may be
deemed to be beneficial owners by virtue of their positions as directors of TCI
and 409,935 shares owned by EQK, of which Messrs. Branigan, Cecil, Corna,
Kimbrough or Starowicz may be deemed to beneficially own, and 106,802 shares
owned by BCM, of which Messrs. Branigan, Corna, Kimbrough or Starowicz may be
deemed to be beneficial owners by virtue of their positions as executive
officers of ART and BCM. The directors and executive officers disclaim
beneficial ownership of such shares. Each of the directors of ART may be deemed
to be beneficial owners of the shares indirectly owned by ART through its sole
ownership of EQK by virtue of their positions as directors of ART. Each of the

270

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 ART and
BCM disclaim such beneficial ownership.

271

PERFORMANCE GRAPH OF IOT

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 LINE 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

272

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 redeemable convertible preferred stock to be
delivered to the TCI and IOT stockholders in the business combination. 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. 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

273

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.

274

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.
"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.

"NAV" or "net asset value" means the estimated fair market value of a particular
property less any indebtedness applicable to that property; Net Asset Value of
an entity as a whole means the estimated market value of all assets less all
liabilities; Net Asset Value on a per common share basis is obtained by dividing
total Net Asset Value by fully diluted shares of common stock as of the date of
determination.

"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.

"NOI" or "net operating income" means rental revenue less property operating
expenses and replacements before debt service.

"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. National Income
Realty Trust, 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 redeemable preferred stock" means the Series F redeemable preferred
stock.
"Series G Redeemable Convertible Preferred Stock" means the 10% Series G
cumulative convertible preferred stock.
"Series H Redeemable Convertible 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.

275

"Subject Companies" means TCI, IOT or ARL.
"TCI" means Transcontinental Realty Investors, Inc.
"TCI Director Plan" means the TCI director stock option plan.
"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.

276

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma combined financial statements have been prepared
assuming that the nonaffiliated 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 December 31, 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 only; and (iii) the acquisition by ARL by IOT only.
The acquisitions of TCI and IOT are not dependent upon each other. Under each of
these three scenarios the following three assumptions were made: (i) all
nonaffiliated TCI and IOT stockholders receive cash for their TCI or IOT common
stock, respectively; (ii) all nonaffiliated TCI and IOT stockholders receive
Series G or Series H redeemable convertible preferred stock for their shares of
TCI or IOT common stock, respectively; and (iii) 50% of the nonaffiliated TCI
and IOT stockholders receive cash and 50% of the unaffiliated stockholders
receive Series G and Series H redeemable convertible preferred stock for their
shares of TCI and IOT common stock, respectively. 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, 2002 for statement of
operations purposes and on December 31, 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.
Under the two different scenarios that all TCI and IOT stockholders and 50% of
the TCI and IOT stockholders will take cash for their shares of TCI and IOT
common stock, ARL intends to generate enough cash through a combination of
financings and property sales.

The historical financial data for ARL, TCI and IOT for the year ended
December 31, 2001 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, 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, 2001.

P-1

INDEX TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

SCENARIO I

THE FOLLOWING FINANCIAL INFORMATION ASSUMES (I) THAT ALL NONAFFILIATED TCI
OR IOT STOCKHOLDERS, AS APPLICABLE, RECEIVE CASH AND (II) THAT THE FOLLOWING
ALSO OCCURS:

PAGE
----

ARL'S ACQUISITION OF TCI AND IOT
Balance Sheet as of March 31, 2002..................... P-4
Notes to Balance Sheet as of March 31, 2002............ P-5
Statement of Operations as of March 31, 2002........... P-7
Notes to Statement of Operations as of March 31,
2002.................................................. P-8
Statement of Operations as of December 31, 2001........ P-9
Notes to Statement of Operations as of December 31,
2001.................................................. P-10
ARL'S ACQUISITION OF IOT ONLY
Balance Sheet as of March 31, 2002..................... P-11
Notes to Balance Sheet as of March 31, 2002............ P-12
Statement of Operations as of March 31, 2002........... P-13
Notes to Statement of Operations as of March 31,
2002.................................................. P-14
Statement of Operations as of December 31, 2001........ P-15
Notes to Statement of Operations as of December 31,
2001.................................................. P-16
ARL'S ACQUISITION OF TCI ONLY
Balance Sheet as of March 31, 2002..................... P-17
Notes to Balance Sheet as of March 31, 2002............ P-1
Statement of Operations as of March 31, 2002........... P-19
Notes to Statement of Operations as of March 31,
2002.................................................. P-20
Statement of Operations as of December 31, 2001........ P-21
Notes to Statement of Operations as of December 31,
2001.................................................. P-22

SCENARIO II

THE FOLLOWING FINANCIAL INFORMATION ASSUMES (I) THAT ALL NONAFFILIATED TCI
OR IOT STOCKHOLDERS, AS APPLICABLE, ELECT TO RECEIVE SERIES G OR SERIES H
REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY, AND (II) THAT THE
FOLLOWING ALSO OCCURS:

PAGE
----

ARL'S ACQUISITION OF TCI AND IOT
Balance Sheet as of March 31, 2002..................... P-23
Notes to Balance Sheet as of March 31, 2002............ P-24
Statement of Operations as of March 31, 2002........... P-25
Notes to Statement of Operations as of March 31,
2002.................................................. P-26
Statement of Operations as of December 31, 2001........ P-27
Notes to Statement of Operations as of December 31,
2001.................................................. P-28

P-2

PAGE
----

ARL'S ACQUISITION OF IOT ONLY
Balance Sheet as of March 31, 2002..................... P-29
Notes to Balance Sheet as of March 31, 2002............ P-30
Statement of Operations as of March 31, 2002........... P-31
Notes to Statement of Operations as of March 31,
2002.................................................. P-32
Statement of Operations as of December 31, 2001........ P-33
Notes to Statement of Operations as of December 31,
2001.................................................. P-34
ARL'S ACQUISITION OF TCI ONLY
Balance Sheet as of March 31, 2002..................... P-35
Notes to Balance Sheet as of March 31, 2002............ P-36
Statement of Operations as of March 31, 2002........... P-37
Notes to Statement of Operations as of March 31,
2002.................................................. P-38
Statement of Operations as of December 31, 2001........ P-39
Notes to Statement of Operations as of December 31,
2001.................................................. P-40

SCENARIO III

THE FOLLOWING FINANCIAL INFORMATION ASSUMES (I) THAT 50% OF THE
NONAFFILIATED TCI OR IOT STOCKHOLDERS RECEIVE CASH, AS APPLICABLE, (II) THAT 50%
OF THE NONAFFILIATED TCI OR IOT STOCKHOLDERS ELECT TO RECEIVE SERIES G OR SERIES
H REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY, AS APPLICABLE, AND (III)
THAT THE FOLLOWING ALSO OCCURS:

PAGE
----

ARL'S ACQUISITION OF TCI AND IOT
Balance Sheet as of March 31, 2002..................... P-41
Notes to Balance Sheet as of March 31, 2002............ P-42
Statement of Operations as of March 31, 2002........... P-44
Notes to Statement of Operations as of March 31,
2002.................................................. P-45
Statement of Operations as of December 31, 2001........ P-46
Notes to Statement of Operations as of December 31,
2001.................................................. P-47
ARL'S ACQUISITION OF IOT ONLY
Balance Sheet as of March 31, 2002..................... P-48
Notes to Balance Sheet as of March 31, 2002............ P-49
Statement of Operations as of March 31, 2002........... P-50
Notes to Statement of Operations as of March 31,
2002.................................................. P-51
Statement of Operations as of December 31, 2001........ P-52
Notes to Statement of Operations as of December 31,
2001.................................................. P-53
ARL'S ACQUISITION OF TCI ONLY
Balance Sheet as of March 31, 2002..................... P-54
Notes to Balance Sheet as of March 31, 2002............ P-55
Statement of Operations as of March 31, 2002........... P-56
Notes to Statement of Operations as of March 31,
2002.................................................. P-57
Statement of Operations as of December 31, 2001........ P-58
Notes to Statement of Operations as of December 31,
2001.................................................. P-59

P-3

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF TCI AND IOT COMMON STOCK)

HISTORICAL PROFORMA ADJUSTMENTS
------------------------------ ----------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
-------- -------- -------- --------- -------- ----------

ASSETS
Real estate held for investment, net of
accumulated depreciation.............. $368,248 $618,784 $ 79,574 $ (51,470)(A) $(14,367)(B) $1,001,769
879(C) 121(C)
-------- -------- -------- --------- -------- ----------
368,248 618,784 79,574 (50,591) (14,246) 1,001,769(N)
Real estate held for sale............... 212,626 14,831 -- -- -- 227,457(N)
Notes and interest receivable........... 31,084 27,249 7,614 (6,372)(D) (5,109)(E) 54,466
Less -- allowance for estimated
losses................................ (2,577) (739) (767) -- 767(E) (3,316)
-------- -------- -------- --------- -------- ----------
28,507 26,510 6,847 (6,372) (4,342) 51,150
Pizza parlor equipment, net of
accumulated depreciation.............. 6,793 -- -- -- -- 6,793
Leasehold interest -- oil and gas
properties, net of accumulated
depreciation.......................... 4,718 -- -- -- -- 4,718
Oilfield equipment, net of accumulated
depreciation.......................... 490 -- -- -- -- 490
Marketable equity securities, at market
value................................. 162 -- -- -- -- 162
Cash and cash equivalents............... 903 4,946 59 (49,928)(F) (10,953)(G) (54,973)(N)
Investment in equity investees.......... 76,460 15,887 103 (82,138)(H) (8,337)(I) 1,975
Intangibles, net of accumulated
amortization.......................... 15,580 -- -- -- -- 15,580
Other assets............................ 31,996 39,240 3,173 -- -- 74,409
-------- -------- -------- --------- -------- ----------
$746,483 $720,198 $ 89,756 $(189,029) $(37,878) $1,329,530
======== ======== ======== ========= ======== ==========
LIABILITIES AND EQUITY

Liabilities
Notes and interest payable.............. $563,840 $472,486 $ 47,552 $ (6,372)(D) $ (5,109)(E) $1,072,397
Margin borrowings....................... 27,105 -- -- -- -- 27,105
Other liabilities....................... 41,477 25,674 1,909 879(C) 121(C) 70,060
-------- -------- -------- --------- -------- ----------
632,422 498,160 49,461 (5,493) (4,988) 1,169,562
Commitments and contingencies
Minority Interest....................... 23,155 6,673 -- (2,031)(J) -- 27,797
Series F Redeemable Preferred Stock;
$2.00 par value; authorized, 30,000
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, convertible 1,195,249 shares,
(liquidation preference $23,905,
$20.00 per share)..................... -- -- -- 2,390(K) -- 2,390
Series H, convertible 106,802 shares,
(liquidation preference $2,296, $21.50
per share)............................ -- -- -- -- 214(L) 214
Series A, $.01 par value; authorized
6,000 shares; issued and outstanding
5,829 shares (liquidation preference
$583)................................. -- -- -- -- -- --
Series C, $.01 par value; authorized,
issued and outstanding 30,000 shares
(liquidation preference $3,000)....... -- -- -- -- -- --
Common Stock, $.01 par value; authorized
100,000,000 shares, issued 11,375,127
shares................................ 114 -- -- (7)(H) -- 107
Paid-in capital......................... 112,184 -- -- 21,522(K) 2,082(L) 139,371
3,583(M)
Accumulated deficit..................... (30,770) -- -- 6,372(D) 5,109(E) (19,289)
Accumulated other comprehensive
income................................ 459 -- -- -- -- 459
TCI
Preferred Stock, $.01 par value,
authorized 36,000 shares, issued and
outstanding
Series A, 5,829 shares (liquidation
preference $583)...................... -- -- -- -- -- --
Series C, 30,000 shares (liquidation
preference $3,000).................... -- -- -- -- -- --
Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued
and outstanding 8,042,629 shares...... -- 80 -- (80)(A) -- --
Paid-in capital......................... -- 271,761 -- (271,761)(A) -- --
Accumulated deficit..................... -- (56,453) -- 56,453(A) -- --
Accumulated other comprehensive
income................................ -- (23) -- 23(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 deficit..................... -- -- (23,178) -- 23,178(B) --
-------- -------- -------- --------- -------- ----------
86,937 215,365 40,295 (181,505) (32,890) 128,202
$746,483 $720,198 $ 89,756 $(189,029) $(37,878) $1,329,530
======== ======== ======== ========= ======== ==========

P-4

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assumes that 100% of the
non-affiliated shareholders will accept cash.

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

Current amount of equity method investment on ARL's
balance sheet at March 31, 2002........................ 67,147
Cash required to purchase 2,853,045 non-affiliated common
shares of TCI at $17.50 per share...................... 49,928
Issuance of 1,195,249 Series G convertible Preferred
Stock, liquidation value $23,905, $20.00 per share..... 23,905
--------
Total Consideration....................................... 140,980
Real Estate held for investment........................... 567,314
Real Estate held for sale................................. 14,831
Notes and interest receivable............................. 20,138
Cash and cash equivalents................................. 4,946
Investment in equity investees............................ 896
Other assets.............................................. 39,240
Notes and interest payable................................ (472,486)
Other liabilities......................................... (25,674)
Minority Interest......................................... (4,642)
Series A Preferred Stock.................................. (583)
Series C Preferred Stock.................................. (3,000)
--------
140,980

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

Current amount of equity method investment on ARL's
balance sheet at March 31, 2002........................ 8,234
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 convertible Preferred Stock,
liquidation value $2,296, $21.50 per share............. 2,296
-------
Total Consideration....................................... 21,483
Real Estate held for investment........................... 65,207
Notes and interest receivable............................. 2,505
Cash and cash equivalents................................. 59
Other assets.............................................. 3,173
Notes and interest payable................................ (47,552)
Other liabilities......................................... (1,909)
-------
21,483

Note C. To record estimate of additional closing costs.

Note D. To record forgiveness of debt ARL owes TCI.

Note E. To record forgiveness of debt ARL owes IOT.

Note F. To record cash required to purchase TCI.

Note G. To record cash required to purchase IOT.

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

Note I. To record the elimination ARL's investment in IOT and IOT's elimination
of minority investments in equity investees that are co-owned by TCI.

Note J. To record the elimination of TCI minority interests in equity investees
that are co-owned by IOT.

P-5

Note K. To record the issuance of the Series G Redeemable Convertible Preferred
Stock to purchase TCI.

Note L. To record the issuance of the Series H Redeemable Convertible Preferred
Stock to purchase IOT.

Note M. To record TCI's Series A and Series C Preferred Stock that will continue
to be outstanding.

Note N. ARL intends to generate enough cash to purchase all of the stock of the
nonaffiliate stockholders of TCI and IOT through a combination of
financings and property sales. ARL expects to obtain $20 million in new
loans secured by ARL stock. ARL and TCI intend to refinance eight and
eleven properties, respectively, raising cash of $7,821,926 and
$18,234,538, respectively. Also, ARL and TCI intend to sell 12
properties each over the next sixty days raising cash of $22,946,515 and
$54,720,327, respectively. These properties are currently under contract
and are subject to various stages of due diligence and buyer finance
approval. Finally, ARL may also consider selling securities in privately
negotiated transactions to raise funds. For more information regarding
sources of funds, see "Financing of the Business Combination."

P-6

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF TCI AND IOT COMMON STOCK)

HISTORICAL PROFORMA ADJUSTMENTS
------------------------------ -------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
----------- ------- ------ ------- ------- -----------

Property Revenue
Rents.................................. $ 29,352 $30,869 $2,800 $ -- $ -- $ 63,021
Property operations.................... 19,892 19,468 1,641 -- -- 41,001
----------- ------- ------ ------- ------- -----------
Operating income.................... 9,460 11,401 1,159 -- -- 22,020
Land Operations
Sales.................................. 5,580 -- -- -- -- 5,580
Cost of Sales.......................... 3,381 -- -- -- -- 3,381
----------- ------- ------ ------- ------- -----------
Gain on land sales.................. 2,199 -- -- -- -- 2,199
Pizza Parlor operations
Sales.................................. 8,540 -- -- -- -- 8,540
Cost of Sales.......................... 6,953 -- -- -- -- 6,953
----------- ------- ------ ------- ------- -----------
Gross margin........................ 1,587 -- -- -- -- 1,587
Other Income
Interest and other..................... 796 1,067 37 (74)(A) -- 1,826
Equity income (loss) in equity
investees........................... 119 (1,276) (17) 2,894(B) (1,429)(C) 291
Loss on sale of investments in equity
investees........................... (531) -- -- -- -- (531)
Gain on sale of real estate............ 16,283 5,429 7,105 (2,921)(D) -- 25,896
----------- ------- ------ ------- ------- -----------
16,667 5,220 7,125 (101) (1,429) 27,482
Other expense
Interest............................... 18,792 9,156 1,062 (74)(A) -- 28,936
Depreciation........................... 3,555 5,242 500 (164)(E) (89)(E) 9,044
Advisory fees to affiliate............. 1,736 1,415 186 (354)(F) (71)(F) 2,912
Net income fee to affiliate............ 374 -- 411 -- (785)(G) --
Incentive fees to affiliate............ 152 -- -- 33(H) 653(H) 838
General and administrative............. 3,312 2,202 285 -- -- 5,799
Realized loss on investments........... -- -- -- -- -- --
Litigation settlement.................. -- -- -- -- -- --
Provision for loss..................... -- -- 767 -- -- 767
Minority Interest...................... 787 (59) -- 17(I) -- 745
----------- ------- ------ ------- ------- -----------
28,708 17,956 3,211 (542) (292) 49,041
Net income (loss)........................ 1,205 (1,335) 5,073 441 (1,137) 4,247
Preferred dividend requirement........... (611) (45) -- (598)(J) (57)(K) (1,311)
----------- ------- ------ ------- ------- -----------
Net income (loss)........................ $ 594 $(1,380) $5,073 $ (157) $(1,194) $ 2,936
Earnings per share
Net income applicable to Common shares
Basic.................................. $ 0.05 $ 0.28
Diluted................................ $ 0.05 $ 0.21
Average Common shares used in computing
earnings per share
Basic.................................. 11,375,127 10,628,155
Diluted................................ 11,375,127 13,946,754

P-7

ARL ACQUISITION OF IOT AND TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept cash.

Note A. To record the elimination of interest income received by TCI from ARL
relating to TCI's loan to ARL.

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

Note C. To record the elimination of ARL's equity gains from IOT.

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

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

Note F. To record the advisor fee adjustment for new gross asset basis. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI, IOT, and ARL. TCI's and ARL's combined gross assets would be
reduced by $189,029,000 if the transaction had taken place on January 1,
2002. IOT's and ARL's combined gross assets would be reduced by
$37,878,000 if the transaction had taken place on January 1, 2002. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note G. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI and IOT Advisory Agreement provides for
BCM to receive a net income fee equal to 7.5% of net income for the
year. The combined net income of TCI, IOT, and ARL does not meet the 10%
return on stockholders' equity based on ARL's Advisory Agreement with
BCM. The agreement currently in place between ARL and BCM will be in
effect if the transaction takes place.

Note H. To record the incentive fee adjustment for TCI and IOT on ARL basis.
ARL's Advisory Agreement provides for BCM to receive an incentive fee
equal to 10% of the excess of net capital gains over net capital losses.
TCI's and IOT's Advisory Agreement provides for BCM to receive an
incentive fee equal to 10% of the amount, if any, by which the aggregate
sales consideration for all real estate sold by TCI or IOT during the
year exceeds the sum of: (1) the cost of each such property, (2) capital
improvements made to such property, and (3) all closing costs incurred
in the sale of such real estate. TCI's and IOT's incentive fee would be
$33,000 and $653,000, respectively based on ARL's Advisory Agreement.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note I. To record the elimination of TCI's minority interest from equity
investees co-owned by TCI and IOT.

Note J. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

Note L. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-8

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING ALL NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF TCI AND IOT COMMON STOCK)

HISTORICAL PROFORMA ADJUSTMENTS
-------------------------------- -------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
----------- -------- ------- -------- ------ -----------

Property Revenue
Rents...................... $ 129,300 $134,911 $13,001 $ -- $ -- $ 277,212
Property operations........ 93,185 80,562 6,591 -- -- 180,338
----------- -------- ------- -------- ------ -----------
Operating income...... 36,115 54,349 6,410 -- -- 96,874
Land Operations
Sales...................... 45,290 -- -- -- -- 45,290
Cost of Sales.............. 36,083 -- -- -- -- 36,083
----------- -------- ------- -------- ------ -----------
Gain on land sales.... 9,207 -- -- -- -- 9,207
Pizza Parlor operations
Sales...................... 34,211 -- -- -- -- 34,211
Cost of Sales.............. 27,934 -- -- -- -- 27,934
----------- -------- ------- -------- ------ -----------
Gross margin............. 6,277 -- -- -- -- 6,277
Oil and gas operations
Sales...................... 59 -- -- -- -- 59
Operating expenses......... 269 -- -- -- -- 269
----------- -------- ------- -------- ------ -----------
Gross margin............. (210) -- -- -- -- (210)
Other Income
Interest and other......... 2,448 2,948 194 -- -- 5,590
Equity income (loss) in
equity investees......... (13,739) (5,950) (9) 18,832(A) 950(B) 84
Gain on sale of real
estate................... 96,749 54,270 -- (27,852)(C) -- 123,167
----------- -------- ------- -------- ------ -----------
85,458 51,268 185 (9,020) 950 128,841
Other expense
Interest................... 77,048 41,058 6,074 -- -- 124,180
Depreciation............... 17,707 19,705 2,427 (1,144)(D) (143)(D) 38,552
Advisory fees to
affiliate................ 6,715 5,346 817 (1,416)(E) (246)(E) 11,216
Net income fee to
affiliate................ 166 1,850 -- (2,016)(F) -- --
Incentive fees to
affiliate................ 3,827 3,167 -- 493(G) -- 7,487
General and
administrative........... 12,743 11,412 739 -- -- 24,894
Realized loss on
investments.............. -- 3,059 -- -- -- 3,059
Litigation settlement...... 100 100
Provision for loss......... 2,500 281 -- -- -- 2,781
Minority Interest.......... 972 (72) -- -- -- 900
----------- -------- ------- -------- ------ -----------
121,778 85,806 10,057 (4,083) (389) 213,169
Net income (loss)............ 15,069 19,811 (3,462) (4,937) 1,339 27,820
Preferred dividend
requirement................ (2,485) (172) -- (2,390)(H) (230)(I) (5,277)
----------- -------- ------- -------- ------ -----------
Net income (loss)............ $ 12,584 $ 19,639 $(3,462) $ (7,327) $1,109 $ 22,543
Earnings per share
Net income applicable to
Common shares
Basic...................... $ 1.07 $ 2.06
Diluted.................... $ 1.07 $ 1.59
Average Common shares used in
computing earnings per
share
Basic...................... 11,714,374 10,967,402
Diluted.................... 11,714,374 14,161,324

P-9

ARL ACQUISITION OF IOT AND TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept cash.

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

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 and ARL's share of gains on sales of real estate from
TCI.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI, IOT, and ARL. TCI's and ARL's combined gross assets would be
reduced by $188,782,000 if the transaction had taken place on January 1,
2001. IOT's and ARL's combined gross assets would be reduced by
$32,805,000 if the transaction had taken place on January 1, 2001. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note F. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI and IOT Advisory Agreement provides for
BCM to receive a net income fee equal to 7.5% of net income for the
year. The combined net income of TCI, IOT, and ARL does not meet the 10%
return on stockholders' equity based on ARL's Advisory Agreement with
BCM. The agreement currently in place between ARL and BCM will be in
effect if the transaction takes place.

Note G. To record the incentive fee adjustment for TCI on ARL basis. ARL's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the excess of net capital gains over net capital losses. TCI's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the amount, if any, by which the aggregate sales consideration
for all real estate sold by TCI during the year exceeds the sum of: (1)
the cost of each such property, (2) capital improvements made to such
property, and (3) all closing costs incurred in the sale of such real
estate. TCI's incentive fee would increase by $493,000 based on ARL's
Advisory Agreement. . The agreement currently in place between ARL and
BCM will be in effect if the transaction takes place.

Note H. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

Note I. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-10

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED IOT STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF IOT COMMON STOCK)

HISTORICAL
------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
-------- -------- ----------- --------

ASSETS
Real estate held for investment, net of accumulated
depreciation.............................................. $368,248 $ 79,574 $ (7,037)(A) $440,906
121(B)
-------- -------- -------- --------
368,248 79,574 (6,916) 440,906]
Real estate held for sale................................... 212,626 -- -- 212,626
Notes and interest receivable............................... 31,084 7,614 (5,109)(C) 33,589
Less-allowance for estimated losses......................... (2,577) (767) 767(C) (2,577)
-------- -------- -------- --------
28,507 $ 6,847 (4,342) 31,012
Pizza parlor equipment, net of accumulated depreciation..... 6,793 -- -- 6,793
Leasehold interest -- oil and gas properties, net of
accumulated depreciation.................................. 4,718 -- -- 4,718
Oilfield equipment, net of accumulated depreciation......... 490 490
Marketable equity securities, at market value............... 162 -- -- 162
Cash and cash equivalents................................... 903 59 (10,953)(D) (9,991)
Investment in equity investees.............................. 76,460 103 (8,234)(E) 68,329
Intangibles, net of accumulated amortization................ 15,580 -- -- 15,580
Other assets................................................ 31,996 3,173 -- 35,169
-------- -------- -------- --------
$746,483 $ 89,756 $(30,445) $805,794
======== ======== ======== ========

LIABILITIES AND EQUITY
Liabilities
Notes and interest payable.................................. $563,840 $ 47,552 $ (5,109)(C) $606,283
Margin borrowings........................................... 27,105 -- -- 27,105
Other liabilities........................................... 41,477 1,909 121(B) 43,507
-------- -------- -------- --------
632,422 49,461 (4,988) 676,895
Commitments and contingencies
Minority Interest........................................... 23,155 -- -- 23,155
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 shares; issued and outstanding 3,968.75
shares (liquidation preference $3,969).................... 3,969 -- -- 3,969

P-11

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assumes that 100% of the
non-affiliated shareholders will accept cash.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 8,234
Cash required to purchase 576,480 non-affiliated common
shares of IOT at $19.00 per share......................... 10,953
Issuance of 452,530 Series H convertible Preferred Stock,
liquidation value $9,729, $21.50 per share................ 9,729
--------
Total Consideration......................................... 28,916
Real Estate held for investment............................. 72,537
Notes and interest receivable............................... 2,505
Cash and cash equivalents................................... 59
Investment in equity investees.............................. 103
Other assets................................................ 3,173
Notes and interest payable.................................. (47,552)
Other liabilities........................................... (1,909)
--------
28,916

Note B. To record estimate of additional closing costs.

Note C. To record forgiveness of debt ARL owes IOT.

Note D. To record cash required to purchase IOT.

Note E. To record the elimination ARI's investment in IOT.

Note F. To record the issuance of the Series H Redeemable Convertible Preferred
Stock to purchase IOT.

P-12

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED IOT STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF IOT COMMON STOCK)

HISTORICAL
-------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
----------- ------ ----------- -----------

Property Revenue
Rents..................................... $ 29,352 $2,800 $ -- $ 32,152
Property operations....................... 19,892 1,641 -- 21,533
----------- ------ ------- -----------
Operating income..................... 9,460 1,159 -- 10,619
Land Operations
Sales..................................... 5,580 -- -- 5,580
Cost of Sales............................. 3,381 -- -- 3,381
----------- ------ ------- -----------
Gain on land sales................... 2,199 -- -- 2,199
Pizza Parlor operations
Sales..................................... 8,540 -- -- 8,540
Cost of Sales............................. 6,953 -- -- 6,953
----------- ------ ------- -----------
Gross margin......................... 1,587 -- -- 1,587
Other Income
Interest and other........................ 796 37 -- 833
Equity (loss) in equity investees......... 119 (17) (1,446)(A) (1,344)
Loss on sale of investments in equity
investees.............................. (531) -- -- (531)
Gain on sale of real estate............... 16,283 7,105 -- 23,388
----------- ------ ------- -----------
16,667 7,125 (1,446) 22,346
Other expense
Interest.................................. 18,792 1,062 -- 19,854
Depreciation.............................. 3,555 500 (43)(B) 4,012
Advisory fee to affiliate................. 1,736 186 (57)(C) 1,865
Net income fee to affiliate............... 374 411 150(D) 935
Incentive fees to affiliate............... 152 -- 653(E) 805
General and administrative................ 3,312 285 -- 3,597
Provision for loss........................ -- 767 -- 767
Minority Interest......................... 787 -- -- 787
----------- ------ ------- -----------
28,708 3,211 703 32,622
Net income (loss)........................... 1,205 5,073 (2,149) 4,129
Preferred dividend requirement.............. (611) -- (243)(F) (854)
----------- ------ ------- -----------
Net income (loss)........................... $ 594 $5,073 $(2,392) $ 3,275
Earnings per share
Net income applicable to Common shares
Basic..................................... $ 0.05 $ 0.29
Diluted................................... $ 0.05 $ 0.27
Average Common shares used in computing
earnings per share
Basic..................................... 11,375,127 11,375,127
Diluted................................... 11,375,127 12,184,102

P-13

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept cash.

Note A. To record the elimination of ARL's equity gains 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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from IOT and ARL. IOT's and ARL's combined gross assets would be reduced
by $30,445,000 if the transaction had taken place on January 1, 2002.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note D. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The IOT Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of IOT and ARL exceeds the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM by
$1,498,000. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note E. To record the incentive fee adjustment for IOT on ARL basis. ARL's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the excess of net capital gains over net capital losses. IOT's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the amount, if any, by which the aggregate sales consideration
for all real estate sold by IOT during the year exceeds the sum of: (1)
the cost of each such property, (2) capital improvements made to such
property, and (3) all closing costs incurred in the sale of such real
estate. IOT's incentive fee would be $653,000 based on ARL's Advisory
Agreement. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note F. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-14

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

ASSUMING ALL NONAFFILIATED IOT STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF IOT COMMON STOCK)

HISTORICAL
--------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
----------- ------- ----------- -----------

Property Revenue
Rents.................................... $ 129,300 $13,001 $ -- $ 142,301
Property operations...................... 93,185 6,591 -- 99,776
----------- ------- ------ -----------
Operating income...................... 36,115 6,410 -- 42,525
Land Operations
Sales.................................... 45,290 45,290
Cost of Sales............................ 36,083 36,083
----------- ------- ------ -----------
Gain on land sales.................... 9,207 -- -- 9,207
Pizza Parlor operations
Sales.................................... 34,211 34,211
Cost of Sales............................ 27,934 27,934
----------- ------- ------ -----------
Gross margin.......................... 6,277 -- -- 6,277
Oil and gas operations
Sales.................................... 59 59
Operating expenses....................... 269 269
----------- ------- ------ -----------
Gross margin.......................... (210) -- -- (210)
Other Income
Interest and other....................... 2,448 194 -- 2,642
Equity (loss) in equity investees........ (13,739) (9) 950(A) (12,798)
Gain on sale of real estate.............. 96,749 -- -- 96,749
----------- ------- ------ -----------
85,458 185 950 86,593
Other expense
Interest................................. 77,048 6,074 -- 83,122
Depreciation............................. 17,707 2,427 39(B) 20,173
Advisory fee to affiliate................ 6,715 817 (190)(C) 7,342
Net income fee to affiliate.............. 166 -- -- 166
Incentive fees to affiliate.............. 3,827 -- -- 3,827
General and administrative............... 12,743 739 -- 13,482
Litigation settlement.................... 100 -- -- 100
Provision for loss....................... 2,500 -- -- 2,500
Minority Interest........................ 972 -- -- 972
----------- ------- ------ -----------
121,778 10,057 (151) 131,684
Net income (loss).......................... 15,069 (3,462) 1,101 12,708
Preferred dividend requirement............. (2,485) -- (973)(D) (3,458)
----------- ------- ------ -----------
Net income (loss).......................... $ 12,584 $(3,462) $ 128 $ 9,250
Earnings per share
Net income applicable to Common shares
Basic.................................... $ 1.07 $ 0.79
Diluted.................................. $ 1.07 $ 0.74
Average Common shares used in computing
earnings per share
Basic.................................... 11,714,374 11,714,374
Diluted.................................. 11,714,374 12,523,349

P-15

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept cash.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from IOT and ARL. IOT's and ARL's combined gross assets would be reduced
by $25,372,000 if the transaction had taken place on January 1, 2001.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note D. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-16

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI STOCKHOLDERS RECEIVE CASH FOR THEIR SHARES OF
TCI COMMON STOCK)

HISTORICAL
------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
-------- -------- ----------- ----------

ASSETS
Real estate held for investment,............................ $368,248 $618,784 $ (54,248)(A) $ 933,663
net of accumulated depreciation........................... 879(B)
-------- -------- --------- ----------
368,248 618,784 (53,369) 933,663
Real estate held for sale................................... 212,626 14,831 -- 227,457
Notes and interest receivable............................... 31,084 27,249 (6,372)(C) 51,961
Less -- allowance for estimated losses...................... (2,577) (739) -- (3,316)
-------- -------- --------- ----------
28,507 26,510 (6,372) 48,645
Pizza parlor equipment, net of accumulated depreciation..... 6,793 -- -- 6,793
Leasehold interest -- oil and gas properties, net of
accumulated depreciation.................................. 4,718 -- -- 4,718
Oilfield equipment, net of accumulated depreciation......... 490 -- -- 490
Marketable equity securities, at market value............... 162 -- -- 162
Cash and cash equivalents................................... 903 4,946 (49,928)(D) (44,079)
Investment in equity investees.............................. 76,460 15,887 (10,182)(E) 15,018
(67,147)(F)
Intangibles, net of accumulated amortization................ 15,580 -- -- 15,580
Other assets................................................ 31,996 39,240 -- 71,236
-------- -------- --------- ----------
$746,483 $720,198 $(186,998) $1,279,683
======== ======== ========= ==========

LIABILITIES AND EQUITY
Liabilities
Notes and interest payable.................................. $563,840 $472,486 $ (6,372)(C) $1,029,954
Margin borrowings........................................... 27,105 -- -- 27,105
Other liabilities........................................... 41,477 25,674 879(B) 68,030
-------- -------- --------- ----------
632,422 498,160 (5,493) 1,125,089
Commitments and contingencies
Minority Interest........................................... 23,155 6,673 -- 29,828
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 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
Convertible Series G, 1,195,249 shares, (liquidation
preference $23,905)....................................... 2,390(G) 2,390
Series A, $.01 par value; authorized 6,000 shares; issued
and outstanding 5,829 shares (liquidation preference
$583)..................................................... -- -- -- --
Series C, $.01 par value; authorized, issued and outstanding
30,000 shares (liquidation preference $3,000)............. -- -- -- --
Common Stock, $.01 par value; authorized 100,000,000 shares,
issued 11,375,127 shares.................................. 114 (7)(E) 107
Paid-in capital............................................. 112,184 21,522(G) 137,289
3,583(H)
Accumulated deficit......................................... (30,770) 6,372(C) (24,398)
Accumulated other comprehensive income...................... 459 -- 459
TCI
Preferred Stock, $.01 par value, authorized 36,000 shares,
issued and outstanding
Series A, 5,829 shares (liquidation preference $583)........ -- -- --
Series C, 30,000 shares (liquidation preference $3,000)..... -- -- --
Common Stock, $.01 par value; authorized, 10,000,000 shares;
issued and outstanding 8,042,629 shares................... 80 (80)(A) --
Paid-in capital........................................... 271,761 (271,761)(A) --
Accumulated deficit......................................... (56,453) 56,453(A) --
Accumulated other comprehensive income...................... (23) 23(A) --
-------- -------- --------- ----------
86,937 215,365 (181,505) 120,797
$746,483 $720,198 $(186,998) $1,279,683
======== ======== ========= ==========

P-17

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assumes that 100% of the
non-affiliated shareholders will accept cash.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 67,147
Cash required to purchase 2,853,045 non-affiliated common
shares of TCI at $17.50 per share......................... 49,928
Issuance of 1,195,249 Series G convertible Preferred Stock,
liquidation value $23,905, $20.00 per share............... 23,905
--------
Total Consideration......................................... 140,980
Real Estate held for investment............................. 564,536
Real Estate held for sale................................... 14,831
Notes and interest receivable............................... 20,138
Cash and cash equivalents................................... 4,946
Investment in equity investees.............................. 5,705
Other assets................................................ 39,240
Notes and interest payable.................................. (472,486)
Other liabilities........................................... (25,674)
Minority Interest........................................... (6,673)
Series A Preferred Stock.................................... (583)
Series C Preferred Stock.................................... (3,000)
--------
140,980

Note B. To record estimate of additional closing costs.

Note C. To record forgiveness of debt ARL owes TCI.

Note D. To record cash required to purchase TCI.

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

Note F. To record the elimination of ARL's investment in TCI.

Note G. To record the issuance of the Series G Redeemable Convertible Preferred
Stock.

Note H. To record TCI Series A and Series C Preferred Stock that will continue
to be outstanding.

P-18

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF TCI COMMON STOCK)

HISTORICAL
--------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
----------- ------- ----------- -----------

Property Revenue
Rents.................................... $ 29,352 $30,869 $ -- $ 60,221
Property operations...................... 19,892 19,468 -- 39,360
----------- ------- ------- -----------
Operating income.................... 9,460 11,401 -- 20,861
Land Operations
Sales.................................... 5,580 -- -- 5,580
Cost of Sales............................ 3,381 -- -- 3,381
----------- ------- ------- -----------
Gain on land sales.................. 2,199 -- -- 2,199
Pizza Parlor operations
Sales.................................... 8,540 -- -- 8,540
Cost of Sales............................ 6,953 -- -- 6,953
----------- ------- ------- -----------
Gross margin........................ 1,587 -- -- 1,587
Other Income
Interest and other....................... 796 1,067 (74)(A) 1,789
Equity (loss) in equity investees........ 119 (1,276) 1,348(B) 1,337
1,146(C)
Loss on sale of investments in equity
investees............................. (531) -- -- (531)
Gain on sale of real estate.............. 16,283 5,429 (1,214)(D) 20,498
----------- ------- ------- -----------
16,667 5,220 1,206 23,093
Other expense
Interest................................. 18,792 9,156 (74)(A) 27,874
Depreciation............................. 3,555 5,242 (181)(E) 8,616
Advisory fee to affiliate................ 1,736 1,415 (351)(F) 2,800
Net income fee to affiliate.............. 374 -- (374)(G) --
Incentive fees to affiliate.............. 152 -- 33(H) 185
General and administrative............... 3,312 2,202 -- 5,514
Litigation settlement.................... -- -- -- --
Provision for loss....................... -- -- -- --
Impairment loss.......................... -- -- -- --
Minority Interest........................ 787 (59) -- 728
----------- ------- ------- -----------
28,708 17,956 (947) 45,717
Net income (loss).......................... 1,205 (1,335) 2,153 2,023
Preferred dividend requirement............. (611) (45) (598)(I) (1,254)
----------- ------- ------- -----------
Net income (loss).......................... $ 594 $(1,380) $ 1,555 $ 769
Earnings per share
Net income applicable to Common shares
Basic.................................... $ 0.05 $ 0.07
Diluted.................................. $ 0.05 $ 0.06
Average Common shares used in computing
earnings per share
Basic.................................... 11,375,127 10,628,155
Diluted.................................. 11,375,127 13,755,827

P-19

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept cash.

Note A. To record the elimination of interest income received by TCI from ARL
relating to TCI's loan to ARL.

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

Note C. To record the elimination of TCI's equity losses from ARL.

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

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

Note F. To record the advisor fee adjustment for new gross asset basis. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI and ARL. TCI's and ARL's combined gross assets would be reduced
by $186,998,000 if the transaction had taken place on January 1, 2002.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note G. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of TCI and ARL does not meet the 10% return on
stockholders' equity based on ARL's Advisory Agreement. The agreement
currently in place between ARL and BCM will be in effect if the
transaction takes place.

Note H. To record the incentive fee adjustment for TCI on ARL basis. ARL's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the excess of net capital gains over net capital losses. TCI's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the amount, if any, by which the aggregate sales consideration
for all real estate sold by TCI during the year exceeds the sum of: (1)
the cost of each such property, (2) capital improvements made to such
property, and (3) all closing costs incurred in the sale of such real
estate. TCI's incentive fee would be $33,000 based on ARL's Advisory
Agreement. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note I. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

P-20

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING ALL NONAFFILIATED TCI STOCKHOLDERS RECEIVE CASH

FOR THEIR SHARES OF TCI COMMON STOCK)

HISTORICAL
---------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
----------- -------- ----------- -----------

Property Revenue
Rents................................... $ 129,300 $134,911 $ -- $ 264,211
Property operations..................... 93,185 80,562 -- 173,747
----------- -------- -------- -----------
Operating income................... 36,115 54,349 -- 90,464
Land Operations
Sales................................... 45,290 -- -- 45,290
Cost of Sales........................... 36,083 -- -- 36,083
----------- -------- -------- -----------
Gain on land sales................. 9,207 -- -- 9,207
Pizza Parlor operations
Sales................................... 34,211 -- -- 34,211
Cost of Sales........................... 27,934 -- -- 27,934
----------- -------- -------- -----------
Gross margin....................... 6,277 -- -- 6,277
Oil and gas operations
Sales................................... 59 -- -- 59
Operating expenses...................... 269 -- -- 269
----------- -------- -------- -----------
Gross margin....................... (210) -- -- (210)
Other Income
Interest and other...................... 2,448 2,948 -- 5,396
Equity (loss) in equity investees....... (13,739) (5,950) 12,696(A) (1,688)
5,30(B)
Gain on sale of real estate............. 96,749 54,270 (27,852)(C) 123,167
----------- -------- -------- -----------
85,458 51,268 (9,851) 126,875
Other expense
Interest................................ 77,048 41,058 -- 118,106
Depreciation............................ 17,707 19,705 (1,144)(D) 36,268
Advisory fee to affiliate............... 6,715 5,346 (1,413)(E) 10,648
Net income fee to affiliate............. 166 1,850 846(F) 2,862
Incentive fees to affiliate............. 3,827 3,167 493(G) 7,487
General and administrative.............. 12,743 11,412 -- 24,155
Realized loss on investments............ -- 3,059
Litigation settlement................... 100 -- -- 100
Provision for loss...................... 2,500 281 -- 2,781
Minority Interest....................... 972 (72) -- 900
----------- -------- -------- -----------
121,778 85,806 (1,218) 203,307
Net income (loss)......................... 15,069 19,811 (8,633) 29,306
Preferred dividend requirement............ (2,485) (172) (2,390)(H) (5,047)
----------- -------- -------- -----------
Net income (loss)......................... $ 12,584 $ 19,639 $(11,023) $ 24,259
Earnings per share
Net income applicable to Common shares
Basic................................... $ 1.07 $ 2.21
Diluted................................. $ 1.07 $ 1.74
Average Common shares used in computing
earnings per share
Basic................................... 11,714,374 10,967,402
Diluted................................. 11,714,374 13,970,397

P-21

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept cash.

Note A. To record the elimination of ARL's equity losses 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 and ARL's share of gains on sales of real estate from
TCI.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI and ARL. TCI's and ARL's combined gross assets would be reduced
by $188,401,000 if the transaction had taken place on January 1, 2001.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note F. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of TCI and ARL exceeds the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM by
$8,456,000. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note G. To record the incentive fee adjustment for TCI on ARL basis. ARL's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the excess of net capital gains over net capital losses. TCI's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the amount, if any, by which the aggregate sales consideration
for all real estate sold by TCI during the year exceeds the sum of: (1)
the cost of each such property, (2) capital improvements made to such
property, and (3) all closing costs incurred in the sale of such real
estate. TCI's incentive fee would increase by $493,000 based on ARL's
Advisory Agreement. The agreement currently in place between ARL and BCM
will be in effect if the transaction takes place.

Note H. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

P-22

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE SERIES G AND

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY)

HISTORICAL PROFORMA ADJUSTMENTS
----------------------------- ------------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
-------- -------- ------- ---------- --------- ----------

ASSETS
Real estate held for investment, net of accumulated
depreciation........................................ $368,248 $618,784 $79,574 $ (44,337)(A) $ (12,925)(B) $1,010,344
879(C) 121(C)
-------- -------- ------- ---------- --------- ----------
368,248 618,784 79,574 (43,458) (12,804) 1,010,344
Real estate held for sale............................. 212,626 14,831 -- -- -- 227,457
Notes and interest receivable......................... 31,084 27,249 7,614 (6,372)(D) (5,109)(E) 54,466
Less -- allowance for estimated losses................ (2,577) (739) (767) -- 767(E) (3,316)
-------- -------- ------- ---------- --------- ----------
28,507 26,510 6,847 (6,372) (4,342) 51,150
Pizza parlor equipment, net of accumulated
depreciation........................................ 6,793 -- -- -- -- 6,793
Leasehold interest -- oil and gas properties, net of
accumulated depreciation............................ 4,718 -- -- -- -- 4,718
Oilfield equipment, net of accumulated depreciation... 490 -- -- -- -- 490
Marketable equity securities, at market value......... 162 -- -- -- -- 162
Cash and cash equivalents............................. 903 4,946 59 -- -- 5,908
Investment in equity investees........................ 76,460 15,887 103 (82,138)(F) (8,337)(G) 1,975
Intangibles, net of accumulated amortization.......... 15,580 -- -- -- -- 15,580
Other assets.......................................... 31,996 39,240 3,173 -- -- 74,409
-------- -------- ------- ---------- --------- ----------
$746,483 $720,198 $89,756 $ (131,968) $ (25,483) $1,398,986
======== ======== ======= ========== ========= ==========

LIABILITIES AND EQUITY
Liabilities
Notes and interest payable............................ $563,840 $472,486 $47,552 $ (6,372)(D) $ (5,109)(E) $1,072,397
Margin borrowings..................................... 27,105 -- -- -- -- 27,105
Other liabilities..................................... 41,477 25,674 1,909 879(C) 121(C) 70,060
-------- -------- ------- ---------- --------- ----------
632,422 498,160 49,461 (5,493) (4,988) 1,169,562
Commitments and contingencies
Minority Interest..................................... 23,155 6,673 -- (2,031)(H) -- 27,797
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 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
Convertible Series G, 4,048,294 shares, (liquidation
preference $80,966)................................. -- -- -- 8,097(I) -- 8,097
Convertible Series H, 683,282 shares, (liquidation
preference $14,691)................................. -- -- -- -- 1,367(J) 1,367
Series A, $.01 par value; authorized, 6,000 shares;
issued and outstanding 5,829 shares (liquidation
preference $583).................................... -- -- -- -- -- --
Series C, $.01 par value; authorized, issued and
outstanding 30,000 shares (liquidation preference
$3,000)............................................. -- -- -- -- -- --
Common Stock, $.01 par value; authorized 100,000,000
shares, issued 11,375,127 shares.................... 114 -- -- (7)(F) -- 107
Paid-in capital....................................... 112,184 -- -- 72,876(I) 13,324(J) 201,967
3,583(K)
Accumulated deficit................................... (30,770) -- -- 6,372(D) 5,109(E) (19,289)
Accumulated other comprehensive income................ 459 -- -- -- -- 459
TCI
Preferred Stock, $.01 par value, authorized 36,000
shares, issued and outstanding
Series A, 5,829 shares (liquidation preference
$583)............................................... -- -- -- -- -- --
Series C, 30,000 shares (liquidation preference
$3,000)............................................. -- -- -- -- -- --
Common Stock, $.01 par value; authorized, 10,000,000
shares; issued and outstanding 8,042,629 shares..... -- 80 -- (80)(A) -- --
Paid-in capital....................................... -- 271,761 -- (271,761)(A) -- --
Accumulated deficit................................... -- (56,453) -- 56,453(A) -- --
Accumulated other comprehensive income................ -- (23) -- 23(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 deficit................................... -- -- (23,178) -- 23,178(B) --
-------- -------- ------- ---------- --------- ----------
86,937 215,365 40,295 (124,444) (20,495) 197,658
$746,483 $720,198 $89,756 $ (131,968) $ (25,483) $1,398,986
======== ======== ======= ========== ========= ==========

P-23

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assumes that 100% of the
non-affiliated shareholders will accept preferred stock.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... $ 67,147
Issuance of 4,048,294 Series G convertible Preferred Stock,
liquidation value $80,966, $20.00 per share............... 80,966
---------
Total Consideration......................................... 148,113
Real Estate held for investment............................. 574,447
Real Estate held for sale................................... 14,831
Notes and interest receivable............................... 20,138
Cash and cash equivalents................................... 4,946
Investment in equity investees.............................. 896
Other assets................................................ 39,240
Notes and interest payable.................................. (472,486)
Other liabilities........................................... (25,674)
Minority Interest........................................... (4,642)
Series A Preferred Stock.................................... (583)
Series C Preferred Stock.................................... (3,000)
---------
$ 148,113

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... $ 8,234
Issuance of 683,282 Series H convertible Preferred Stock,
liquidation value $14,691, $21.50 per share............... 14,691
--------
Total Consideration......................................... 22,925
Real Estate held for investment............................. 66,649
Notes and interest receivable............................... 2,505
Cash and cash equivalents................................... 59
Other assets................................................ 3,173
Notes and interest payable.................................. (47,552)
Other liabilities........................................... (1,909)
--------
$ 22,925

Note C. To record estimate of additional closing costs.

Note D. To record forgiveness of debt ARL owes TCI.

Note E. To record forgiveness of debt ARL owes IOT.

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

Note G. To record the elimination ARL's investment in IOT and IOT's elimination
of minority investments in equity investees that are co-owned by TCI.

Note H. To record the elimination of TCI minority interests in equity investees
that are co-owned by IOT.

Note I. To record the issuance of the Series G Redeemable Convertible Preferred
Stock to purchase TCI.

Note J. To record the issuance of the Series H Redeemable Convertible Preferred
Stock to purchase IOT.

Note K. To record TCI's Series A and Series C Preferred Stock that will continue
to be outstanding.

P-24

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE SERIES G AND

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY)

HISTORICAL PROFORMA ADJUSTMENTS
------------------------------ --------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
----------- ------- ------ ------- ------- -----------

Property Revenue
Rents....................... $ 29,352 $30,869 $2,800 $ -- $ -- $ 63,021
Property operations......... 19,892 19,468 1,641 -- -- 41,001
----------- ------- ------ ------- ------- -----------
Operating income.......... 9,460 11,401 1,159 -- -- 22,020
Land Operations
Sales....................... 5,580 -- -- -- -- 5,580
Cost of Sales............... 3,381 -- -- -- -- 3,381
----------- ------- ------ ------- ------- -----------
Gain on land sales........ 2,199 -- -- -- -- 2,199
Pizza Parlor operations
Sales....................... 8,540 -- -- -- -- 8,540
Cost of Sales............... 6,953 -- -- -- -- 6,953
----------- ------- ------ ------- ------- -----------
Gross margin.............. 1,587 -- -- -- -- 1,587
Other Income
Interest and other.......... 796 1,067 37 $ (74)(A) $ -- $ 1,826
Equity income (loss) in
equity investees.......... 119 (1,276) (17) 2,894(B) (1,429)(C) 291
Loss on sale of investments
in equity investees....... (531) -- -- -- -- (531)
Gain on sale of real
estate.................... 16,283 5,429 7,105 (2,921)(D) -- 25,896
----------- ------- ------ ------- ------- -----------
$ 16,667 $ 5,220 $7,125 $ (101) $(1,429) $ 27,482
Other expense
Interest.................... 18,792 9,156 1,062 $ (74)(A) $ -- $ 28,936
Depreciation................ 3,555 5,242 500 (119)(E) (80)(E) 9,098
Advisory fees to
affiliate................. 1,736 1,415 186 (247)(F) (48)(F) 3,042
Net income fee to
affiliate................. 374 -- 411 -- (785)(G) --
Incentive fees to
affiliate................. 152 -- -- 33(H) 653(H) 838
General and
administrative............ 3,312 2,202 285 -- -- 5,799
Provision for loss.......... -- -- 767 -- -- 767
Minority Interest........... 787 (59) -- 17(I) -- 745
----------- ------- ------ ------- ------- -----------
$ 28,708 $17,956 $3,211 $ (390) $ (260) $ 49,225
Net income (loss)............. $ 1,205 $(1,335) $5,073 $ 289 $(1,169) $ 4,063
Preferred dividend
requirement................. (611) (45) -- (2,024)(J) (367)(K) (3,047)
----------- ------- ------ ------- ------- -----------
Net income (loss)............. $ 594 $(1,380) $5,073 $(1,735) $(1,536) $ 1,016
Earnings per share
Net income applicable to
Common shares
Basic....................... $ 0.05 $ 0.10
Diluted..................... $ 0.05 $ 0.05
Average Common shares used in
computing earnings per share
Basic....................... 11,375,127 10,628,155
Diluted..................... 11,375,127 20,644,318

P-25

ARL ACQUISITION OF IOT AND TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept Preferred Stock.

Note A. To record the elimination of interest income received by TCI from ARL
relating to TCI's loan to ARL.

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

Note C. To record the elimination of ARL's equity gains from IOT.

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

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

Note F. To record the advisor fee adjustment for new gross asset basis. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI, IOT, and ARL. TCI's and ARL's combined gross assets would be
reduced by $131,968,000 if the transaction had taken place on January 1,
2002. IOT's and ARL's combined gross assets would be reduced by
$25,483,000 if the transaction had taken place on January 1, 2002. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note I. To record the elimination of TCI's minority interest from equity
investees co-owned by TCI and IOT.

Note J. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

Note K. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-26

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING ALL NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE SERIES G AND

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY)

HISTORICAL PROFORMA ADJUSTMENTS
-------------------------------- --------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
----------- -------- ------- -------- ------- -----------

Property Revenue
Rents.................... $ 129,300 $134,911 $13,001 $ -- $ -- $ 277,212
Property operations...... 93,185 80,562 6,591 -- -- 180,338
----------- -------- ------- -------- ------- -----------
Operating income....... 36,115 54,349 6,410 -- -- 96,874
Land Operations
Sales.................... 45,290 -- -- -- -- 45,290
Cost of Sales............ 36,083 -- -- -- -- 36,083
----------- -------- ------- -------- ------- -----------
Gain on land sales..... 9,207 -- -- -- -- 9,207
Pizza Parlor operations
Sales.................... 34,211 -- -- -- -- 34,211
Cost of Sales............ 27,934 -- -- -- -- 27,934
----------- -------- ------- -------- ------- -----------
Gross margin........... 6,277 -- -- -- -- 6,277
Oil and gas operations
Sales.................... 59 -- -- -- -- 59
Operating expenses....... 269 -- -- -- -- 269
----------- -------- ------- -------- ------- -----------
Gross margin........... (210) -- -- -- -- (210)
Other Income
Interest and other....... 2,448 2,948 194 -- -- 5,590
Equity income (loss) in
equity investees....... (13,739) (5,950) (9) 18,832(A) 950(B) 84
Gain on sale of real
estate................. 96,749 54,270 -- (27,852)(C) -- 123,167
----------- -------- ------- -------- ------- -----------
85,458 51,268 185 (9,020) 950 128,841
Other expense
Interest................. 77,048 41,058 6,074 -- -- 124,180
Depreciation............. 17,707 19,705 2,427 (878)(D) (111)(D) 38,850
Advisory fees to
affiliate.............. 6,715 5,346 817 (985)(E) (153)(E) 11,740
Net income fee to
affiliate.............. 166 1,850 -- (2,016)(F) -- --
Incentive fees to
affiliate.............. 3,827 3,167 -- 493(G) -- 7,487
General and
administrative......... 12,743 11,412 739 -- -- 24,894
Realized loss on
investments............ -- 3,059 -- -- -- 3,059
Litigation settlement.... 100 -- -- 100
Provision for loss....... 2,500 281 -- -- -- 2,781
Minority Interest........ 972 (72) -- -- -- 900
----------- -------- ------- -------- ------- -----------
121,778 85,806 10,057 (3,386) (264) 213,991
Net income (loss).......... 15,069 19,811 (3,462) (5,634) 1,214 26,998
Preferred dividend
requirement.............. (2,485) (172) -- (8,097)(H) (1,469)(I) (12,223)
----------- -------- ------- -------- ------- -----------
Net income (loss).......... $ 12,584 $ 19,639 $(3,462) $(13,731) $ (255) $ 14,775
Earnings per share
Net income applicable to
Common shares
Basic.................... $ 1.07 $ 1.35
Diluted.................. $ 1.07 $ 0.70
Average Common shares used
in computing earnings per
share
Basic.................... 11,714,374 10,967,402
Diluted.................. 11,714,374 20,983,887

P-27

ARL ACQUISITION OF IOT AND TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept Preferred Stock.

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

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 and ARL's share of gains on sales of real estate from
TCI.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI, IOT, and ARL. TCI's and ARL's combined gross assets would be
reduced by $131,340,000 if the transaction had taken place on January 1,
2001. IOT's and ARL's combined gross assets would be reduced by
$20,410,000 if the transaction had taken place on January 1, 2001. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note G. To record the incentive fee adjustment for TCI on ARL basis. ARL's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the excess of net capital gains over net capital losses. TCI's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the amount, if any, by which the aggregate sales consideration
for all real estate sold by TCI during the year exceeds the sum of: (1)
the cost of each such property, (2) capital improvements made to such
property, and (3) all closing costs incurred in the sale of such real
estate. TCI's incentive fee would increase by $493,000 based on ARL's
Advisory Agreement. The agreement currently in place between ARL and BCM
will be in effect if the transaction takes place.

Note H. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

Note I. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-28

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED IOT STOCKHOLDERS RECEIVE

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
-------- -------- ----------- --------

ASSETS
Real estate held for investment, net of accumulated
depreciation........................................... $368,248 $ 79,574 $ (5,595)(A) $442,348
121(B)
-------- -------- -------- --------
368,248 79,574 (5,474) 442,348
Real estate held for sale................................ 212,626 -- -- 212,626
Notes and interest receivable............................ 31,084 7,614 (5,109)(C) 33,589
Less -- allowance for estimated losses................... (2,577) (767) 767(C) (2,577)
-------- -------- -------- --------
28,507 6,847 (4,342) 31,012
Pizza parlor equipment, net of accumulated
depreciation........................................... 6,793 -- -- 6,793
Leasehold interest -- oil and gas properties, net of
accumulated depreciation............................... 4,718 -- -- 4,718
Oilfield equipment, net of accumulated depreciation...... 490 -- 490
Marketable equity securities, at market value............ 162 -- -- 162
Cash and cash equivalents................................ 903 59 -- 962
Investment in equity investees........................... 76,460 103 (8,234)(D) 68,329
Intangibles, net of accumulated amortization............. 15,580 -- -- 15,580
Other assets............................................. 31,996 3,173 -- 35,169
-------- -------- -------- --------
$746,483 $ 89,756 $(18,050) $818,189
======== ======== ======== ========

LIABILITIES AND EQUITY
Liabilities
Notes and interest payable............................... $563,840 $ 47,552 $ (5,109)(C) $606,283
Margin borrowings........................................ 27,105 -- -- 27,105
Other liabilities........................................ 41,477 1,909 121(B) 43,507
-------- -------- -------- --------
632,422 49,461 (4,988) 676,895
Commitments and contingencies
Minority Interest........................................ 23,155 -- -- 23,155
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 shares; issued and outstanding
3,968.75 shares (liquidation preference $3,969)........ 3,969 -- -- 3,969

P-29

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assumes that 100% of the
non-affiliated shareholders will accept preferred stock.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 8,234
Issuance of 1,029,010 Series H convertible Preferred Stock,
liquidation value $22,124, $21.50 per share............... 22,124
-------
Total Consideration......................................... 30,358
Real Estate held for investment............................. 73,979
Notes and interest receivable............................... 2,505
Cash and cash equivalents................................... 59
Investment in equity investees.............................. 103
Other assets................................................ 3,173
Notes and interest payable.................................. (47,552)
Other liabilities........................................... (1,909)
-------
30,358

Note B. To record estimate of additional closing costs.

Note C. To record forgiveness of debt ARL owes IOT.

Note D. To record the elimination ARI's investment in IOT.

Note E. To record the issuance of the Series H Redeemable Convertible Preferred
Stock to purchase IOT.

P-30

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED IOT STOCKHOLDERS RECEIVE

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
-------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
----------- ------ ------------ -----------

Property Revenue
Rents................................... $ 29,352 $2,800 $ -- $ 32,152
Property operations..................... 19,892 1,641 -- 21,533
----------- ------ ------------ -----------
Operating income..................... 9,460 1,159 -- 10,619
Land Operations
Sales................................... 5,580 -- -- 5,580
Cost of Sales........................... 3,381 -- -- 3,381
----------- ------ ------------ -----------
Gain on land sales................... 2,199 -- -- 2,199
Pizza Parlor operations
Sales................................... 8,540 -- -- 8,540
Cost of Sales........................... 6,953 -- -- 6,953
----------- ------ ------------ -----------
Gross margin......................... 1,587 -- -- 1,587
Other Income
Interest and other...................... $ 796 $ 37 $ -- $ 833
Equity (loss) in equity investees....... 119 (17) (1,446)(A) (1,344)
Loss on sale of investments in equity
investees............................ (531) -- -- (531)
Gain on sale of real estate............. 16,283 7,105 -- 23,388
----------- ------ ------------ -----------
$ 16,667 $7,125 $ (1,446) $ 22,346
Other expense
Interest................................ $ 18,792 $1,062 $ -- $ 19,854
Depreciation............................ 3,555 500 (34)(B) 4,021
Advisory fee to affiliate............... 1,736 186 (34)(C) 1,888
Net income fee to affiliate............. 374 411 (785)(D) --
Incentive fees to affiliate............. 152 -- 653(E) 805
General and administrative.............. 3,312 285 -- 3,597
Provision for loss...................... -- 767 -- 767
Minority Interest....................... 787 -- -- 787
----------- ------ ------------ -----------
$ 28,708 $3,211 $ (200) $ 31,719
Net income (loss)......................... $ 1,205 $5,073 $ (1,246) $ 5,032
Preferred dividend requirement............ (611) -- (553)(F) (1,164)
----------- ------ ------------ -----------
Net income (loss)......................... $ 594 $5,073 $ (1,799) $ 3,868
Earnings per share
Net income applicable to Common shares
Basic................................... $ 0.05 $ 0.34
Diluted................................. $ 0.05 $ 0.29
Average Common shares used in computing
earnings per share
Basic................................... 11,375,127 11,375,127
Diluted................................. 11,375,127 13,214,659

P-31

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept Preferred Stock.

Note A. To record the elimination of ARL's equity gains 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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from IOT and ARL. IOT's and ARL's combined gross assets would be reduced
by $18,050,000 if the transaction had taken place on January 1, 2002.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note D. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The IOT Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of IOT and ARL exceeds the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM by
$2,973,000. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note F. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-32

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING ALL NONAFFILIATED IOT STOCKHOLDERS RECEIVE

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
--------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
----------- ------- ----------- -----------

Property Revenue
Rents........................................ $ 129,300 $13,001 $ -- $ 142,301
Property operations.......................... 93,185 6,591 -- 99,776
----------- ------- ------- -----------
Operating income........................ 36,115 6,410 -- 42,525
Land Operations
Sales........................................ 45,290 -- -- 45,290
Cost of Sales................................ 36,083 -- -- 36,083
----------- ------- ------- -----------
Gain on land sales...................... 9,207 -- -- 9,207
Pizza Parlor operations
Sales........................................ 34,211 -- -- 34,211
Cost of Sales................................ 27,934 -- -- 27,934
----------- ------- ------- -----------
Gross margin............................ 6,277 -- -- 6,277
Oil and gas operations
Sales........................................ 59 -- -- 59
Operating expenses........................... 269 -- -- 269
----------- ------- ------- -----------
Gross margin............................ (210) -- -- (210)
Other Income
Interest and other........................... 2,448 194 -- 2,642
Equity (loss) in equity investees............ (13,739) (9) 950(A) (12,798)
Gain on sale of real estate.................. 96,749 -- -- 96,749
----------- ------- ------- -----------
85,458 185 950 86,593
Other expense
Interest..................................... 77,048 6,074 -- 83,122
Depreciation................................. 17,707 2,427 75(B) 20,209
Advisory fee to affiliate.................... 6,715 817 (97)(C) 7,435
Net income fee to affiliate.................. 166 -- -- 166
Incentive fees to affiliate.................. 3,827 -- -- 3,827
General and administrative................... 12,743 739 -- 13,482
Litigation settlement........................ 100 -- -- 100
Provision for loss........................... 2,500 -- -- 2,500
Minority Interest............................ 972 -- -- 972
----------- ------- ------- -----------
121,778 10,057 (22) 131,813
Net income (loss).............................. 15,069 (3,462) 972 12,579
Preferred dividend requirement................. (2,485) -- (2,212)(D) (4,697)
----------- ------- ------- -----------
Net income (loss).............................. 12,584 (3,462) (1,240) 7,882
Earnings per share
Net income applicable to Common shares
Basic........................................ $ 1.07 $ 0.67
Diluted...................................... $ 1.07 $ 0.58
Average Common shares used in computing
earnings per share
Basic........................................ 11,714,374 11,714,374
Diluted...................................... 11,714,374 13,553,906

P-33

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept preferred stock.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from IOT and ARL. IOT's and ARL's combined gross assets would be reduced
by $12,977,000 if the transaction had taken place on January 1, 2001.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note D. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-34

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI STOCKHOLDERS RECEIVE

SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
-------- -------- ----------- ----------

ASSETS
Real estate held for investment, net of accumulated
depreciation.............................................. $368,248 $618,784 $ (47,115)(A) $ 940,796
879(B)
-------- -------- --------- ----------
368,248 618,784 (46,236) 940,796
Real estate held for sale................................... 212,626 14,831 -- 227,457
Notes and interest receivable............................... 31,084 27,249 (6,372)(C) 51,961
Less -- allowance for estimated losses...................... (2,577) (739) -- (3,316)
-------- -------- --------- ----------
28,507 26,510 (6,372) 48,645
Pizza parlor equipment, net of accumulated depreciation..... 6,793 -- -- 6,793
Leasehold interest -- oil and gas properties, net of
accumulated depreciation.................................. 4,718 -- -- 4,718
Oilfield equipment, net of accumulated depreciation......... 490 -- -- 490
Marketable equity securities, at market value............... 162 -- -- 162
Cash and cash equivalents................................... 903 4,946 -- 5,849
Investment in equity investees.............................. 76,460 15,887 (10,182)(D) 15,018
(67,147)(E)
Intangibles, net of accumulated amortization................ 15,580 -- -- 15,580
Other assets................................................ 31,996 39,240 -- 71,236
-------- -------- --------- ----------
$746,483 $720,198 $(129,937) $1,336,744
======== ======== ========= ==========

LIABILITIES AND EQUITY
Liabilities
Notes and interest payable.................................. $563,840 $472,486 $ (6,372)(C) $1,029,954
Margin borrowings........................................... 27,105 -- -- 27,105
Other liabilities........................................... 41,477 25,674 879(B) 68,030
-------- -------- --------- ----------
$632,422 $498,160 $ (5,493) $1,125,089
Commitments and contingencies
Minority Interest........................................... $ 23,155 $ 6,673 $ -- $ 29,828
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 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
Convertible Series G, 4,048,294 shares, liquidation
preference $80,966)....................................... 8,097(F)} 8,097
Series A, $.01 par value; authorized, 6,000 shares; issued
and outstanding 5,829 shares (liquidation preference
$583)..................................................... -- -- -- --
Series C, $.01 par value; authorized, issued and outstanding
30,000 shares (liquidation preference $3,000)............. -- -- -- --
Common Stock, $.01 par value; authorized 100,000,000 shares,
issued 11,375,127 shares.................................. 114 -- (7)(E) 107
Paid-in capital............................................. 112,184 -- 72,876(F) 188,643
3,583(G)
Accumulated deficit......................................... (30,770) -- 6,372(C) (24,398)
Accumulated other comprehensive income...................... 459 -- -- 459

TCI
Preferred Stock, $.01 par value, authorized 36,000 shares,
issued and outstanding Series A, 5,829 shares (liquidation
preference $583).......................................... -- -- -- --
Series C, 30,000 shares (liquidation preference $3,000)..... -- -- -- --
Common Stock, $.01 par value; authorized, 10,000,000 shares;
issued and outstanding 8,042,629 shares................... -- 80 (80)(A) --
Paid-in capital............................................. -- 271,761 (271,761)(A) --
Accumulated deficit......................................... -- (56,453) 56,453(A} --
Accumulated other comprehensive income...................... -- (23) 23(A) --
-------- -------- --------- ----------
86,937 215,365 (124,444) 177,858
-------- -------- --------- ----------
$746,483 $720,198 $(129,937) $1,336,744
======== ======== ========= ==========

P-35

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assumes that 100% of the
non-affiliated shareholders will accept preferred stock.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 67,147
Issuance of 4,048,294 Series G convertible Preferred Stock,
liquidation value $80,966, $20.00 per share............... 80,966
--------
Total Consideration....................................... 148,113
Real Estate held for investment............................. 571,669
Real Estate held for sale................................... 14,831
Notes and interest receivable............................... 20,138
Cash and cash equivalents................................... 4,946
Investment in equity investees.............................. 5,705
Other assets................................................ 39,240
Notes and interest payable.................................. (472,486)
Other liabilities........................................... (25,674)
Minority Interest........................................... (6,673)
Series A Preferred Stock.................................... (583)
Series C Preferred Stock.................................... (3,000)
--------
148,113

Note B. To record estimate of additional closing costs.

Note C. To record forgiveness of debt ARL owes 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 Redeemable Convertible Preferred
Stock to purchase TCI.

Note G. To record TCI's Series A and Series C Preferred Stock that will continue
to be outstanding.

P-36

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING ALL NONAFFILIATED TCI STOCKHOLDERS RECEIVE

SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
--------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
----------- ------- ----------- -----------

Property Revenue
Rents.................................... $ 29,352 $30,869 $ -- $ 60,221
Property operations...................... 19,892 19,468 -- 39,360
----------- ------- ------- -----------
Operating income.................... 9,460 11,401 -- 20,861
Land Operations
Sales.................................... 5,580 -- -- 5,580
Cost of Sales............................ 3,381 -- -- 3,381
----------- ------- ------- -----------
Gain on land sales.................. 2,199 -- -- 2,199
Pizza Parlor operations
Sales.................................... 8,540 -- -- 8,540
Cost of Sales............................ 6,953 -- -- 6,953
----------- ------- ------- -----------
Gross margin........................ 1,587 -- -- 1,587
Other Income
Interest and other....................... $ 796 $ 1,067 $ (74)(A) 1,789
Equity (loss) in equity investees........ 119 (1,276) 1,348(B) 1,337
1,146(C)
Loss on sale of investments in equity
investees............................. (531) -- -- (531)
Gain on sale of real estate.............. 16,283 5,429 (1,214)(D) 20,498
----------- ------- ------- -----------
$ 16,667 $ 5,220 $ 1,206 $ 23,093
Other expense
Interest................................. $ 18,792 $ 9,156 $ (74)(A) $ 27,874
Depreciation............................. 3,555 5,242 (137)(E) 8,660
Advisory fee to affiliate................ 1,736 1,415 (244)(F) 2,907
Net income fee to affiliate.............. 374 -- (374)(G) --
Incentive fees to affiliate.............. 152 -- 33(H) 185
General and administrative............... 3,312 2,202 -- 5,514
Minority Interest........................ 787 (59) -- 728
----------- ------- ------- -----------
$ 28,708 $17,956 $ (796) $ 45,868
Net income (loss).......................... $ 1,205 $(1,335) $ 2,002 $ 1,872
Preferred dividend requirement............. (611) (45) (2,024)(I) (2,680)
----------- ------- ------- -----------
Net income (loss).......................... $ 594 $(1,380) $ (22) $ (808)
Earnings per share
Net income applicable to Common shares
Basic.................................... $ 0.05 $ (0.08)
Diluted.................................. $ 0.05 $ (0.04)
Average Common shares used in computing
earnings per share
Basic.................................... 11,375,127 10,628,155
Diluted.................................. 11,375,127 19,347,834

P-37

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept Preferred Stock.

Note A. To record the elimination of interest income received by TCI from ARL
relating to TCI's loan to ARL.

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

Note C. To record the elimination of TCI's equity losses from ARL.

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

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

Note F. To record the advisor fee adjustment for new gross asset basis. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI and ARL. TCI's and ARL's combined gross assets would be reduced
by $129,937,000 if the transaction had taken place on January 1, 2002.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note G. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of TCI and ARL does not meet the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note I. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

P-38

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING ALL NONAFFILIATED TCI STOCKHOLDERS RECEIVE

SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
---------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
----------- -------- ----------- -----------

Property Revenue
Rents................................... $ 129,300 $134,911 $ -- $ 264,211
Property operations..................... 93,185 80,562 -- 173,747
----------- -------- -------- -----------
Operating income..................... 36,115 54,349 -- 90,464
Land Operations
Sales................................... 45,290 -- -- 45,290
Cost of Sales........................... 36,083 -- -- 36,083
----------- -------- -------- -----------
Gain on land sales................... 9,207 -- -- 9,207
Pizza Parlor operations
Sales................................... 34,211 -- -- 34,211
Cost of Sales........................... 27,934 -- -- 27,934
----------- -------- -------- -----------
Gross margin......................... 6,277 -- -- 6,277
Oil and gas operations
Sales................................... 59 -- -- 59
Operating expenses...................... 269 -- -- 269
----------- -------- -------- -----------
Gross margin......................... (210) -- -- (210)
Other Income
Interest and other...................... 2,448 2,948 -- 5,396
Equity (loss) in equity investees....... (13,739) (5,950) 12,696(A) (1,688)
5,305(B)
Gain on sale of real estate............. 96,749 54,270 (27,852)(C) 123,167
----------- -------- -------- -----------
85,458 51,268 (9,851) 126,875
Other expense
Interest................................ 77,048 41,058 -- 118,106
Depreciation............................ 17,707 19,705 (966)(D) 36,446
Advisory fee to affiliate............... 6,715 5,346 (985)(E) 11,076
Net income fee to affiliate............. 166 1,850 (2,016)(F) --
Incentive fees to affiliate............. 3,827 3,167 493(G) 7,487
General and administrative.............. 12,743 11,412 -- 24,155
Litigation settlement................... 100 -- 100
Provision for loss...................... 2,500 281 -- 2,781
Realized loss on investments............ -- 3,059 -- 3,059
Minority Interest....................... 972 (72) -- 900
----------- -------- -------- -----------
121,778 85,806 (3,474) 204,110
Net income (loss)......................... 15,069 19,811 (6,377) 28,503
Preferred dividend requirement............ (2,485) (172) (8,097)(H) (10,754)
----------- -------- -------- -----------
Net income (loss)......................... $ 12,584 $ 19,639 $(14,474) $ 17,749
Earnings per share
Net income applicable to Common shares
Basic................................... $ 1.07 $ 1.62
Diluted................................. $ 1.07 $ 0.90
Average Common shares used in computing
earnings per share
Basic................................... 11,714,374 10,967,402
Diluted................................. 11,714,374 19,762,404

P-39

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 100% of the
non-affiliated shareholders will accept preferred stock.

Note A. To record the elimination of ARL's equity losses 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 and ARL's share of gains on sales of real estate from
TCI.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI and ARL. TCI's and ARL's combined gross assets would be reduced
by $131,340,000 if the transaction had taken place on January 1, 2001.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note F. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of TCI and ARL exceeds the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM by
$2,307,000. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note H. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

P-40

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING 50% OF THE NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE CASH AND 50%
OF THE NONAFFILIATED

TCI AND IOT STOCKHOLDERS RECEIVE SERIES G AND SERIES H REDEEMABLE CONVERTIBLE
PREFERRED STOCK, RESPECTIVELY)

HISTORICAL PROFORMA ADJUSTMENTS
----------------------------- ----------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
-------- -------- ------- --------- -------- ----------

ASSETS
Real estate held for investment, net of accumulated
depreciation.......................................... $368,248 $618,784 $79,574 $ (47,904)(A) $(13,646)(B) $1,006,056
879(C) 121(C)
-------- -------- ------- --------- -------- ----------
368,248 618,784 79,574 (47,025) (13,525) 1,006,056
Real estate held for sale............................... 212,626 14,831 -- -- -- 227,457
Notes and interest receivable........................... 31,084 27,249 7,614 (6,372)(D) (5,109)(E) 54,466
Less -- allowance for estimated losses.................. (2,577) (739) (767) -- 767(E) (3,316)
-------- -------- ------- --------- -------- ----------
28,507 26,510 6,847 (6,372) (4,342) 51,150
Pizza parlor equipment, net of accumulated
depreciation.......................................... 6,793 -- -- -- -- 6,793
Leasehold interest -- oil and gas properties, net of
accumulated depreciation.............................. 4,718 -- -- -- -- 4,718
Oilfield equipment, net of accumulated depreciation..... 490 -- -- -- -- 490
Marketable equity securities, at market value........... 162 -- -- -- -- 162
Cash and cash equivalents............................... 903 4,946 59 (24,964)(F) (5,477)(G) (24,533)
Investment in equity investees.......................... 76,460 15,887 103 (82,138)(H) (8,337)(I) 1,975
Intangibles, net of accumulated amortization............ 15,580 -- -- -- -- 15,580
Other assets............................................ 31,996 39,240 3,173 -- -- 74,409
-------- -------- ------- --------- -------- ----------
$746,483 $720,198 $89,756 $(160,499) $(31,681) $1,364,257
======== ======== ======= ========= ======== ==========

LIABILITIES AND EQUITY
Liabilities
Notes and interest payable.............................. $563,840 $472,486 $47,552 $ (6,372)(D) $ (5,109)(E) $1,072,397
Margin borrowings....................................... 27,105 -- -- -- -- 27,105
Other liabilities....................................... 41,477 25,674 1,909 879(C) 121(C) 70,060
-------- -------- ------- --------- -------- ----------
632,422 498,160 49,461 (5,493) (4,988) 1,169,562
Commitments and contingencies
Minority Interest....................................... 23,155 6,673 -- (2,031)(J) -- 27,797
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 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, convertible 2,621,772 shares, (liquidation
preference $52,435, $20.00 per share)................. -- -- -- 5,244(K) -- 5,244
Series H, convertible 395,042 shares, (liquidation
preference $8,493, $21.50 per share).................. -- -- -- 790(L) 790
Series A, $.01 par value; authorized 6,000 shares;
issued and outstanding 5,829 shares (liquidation
preference $583)...................................... -- -- -- -- -- --
Series C, $.01 par value; authorized, issued and
outstanding 30,000 shares (liquidation preference
$3,000)............................................... -- -- -- -- -- --
Common Stock, $.01 par value; authorized 100,000,000
shares, issued 11,375,127 shares...................... 114 -- -- (7)(E) -- 107
Paid-in capital......................................... 112,184 -- -- 47,199(K) 7,703(L) 170,669
3,583(M)
Accumulated deficit..................................... (30,770) -- -- 6,372(D) 5,109(E) (19,289)
Accumulated other comprehensive income.................. 459 -- -- 459
TCI
Preferred Stock, $.01 par value, authorized 36,000
shares, issued and outstanding
Series A, 5,829 shares (liquidation preference
$583)............................................... -- -- -- -- -- --
Series C, 30,000 shares (liquidation preference
$3,000)............................................... -- -- -- -- -- --
Common Stock, $.01 par value; authorized, 10,000,000
shares; issued and outstanding 8,042,629 shares....... -- 80 -- (80)(A) -- --
Paid-in capital......................................... -- 271,761 -- (271,761)(A) -- --
Accumulated deficit..................................... -- (56,453) -- 56,453(A) -- --
Accumulated other comprehensive income.................. (23) 23(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 deficit..................................... -- -- (23,178) -- 23,178(B) --
-------- -------- ------- --------- -------- ----------
86,937 215,365 40,295 (152,975) (26,693) 162,929
$746,483 $720,198 $89,756 $(160,499) $(31,681) $1,364,257
======== ======== ======= ========= ======== ==========

P-41

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 67,147
Cash required to purchase 1,426,523 non-affiliated common
shares of TCI at $17.50 per share......................... 24,964
Issuance of 2,621,772 Series G convertible Preferred Stock,
liquidation value $52,435, $20.00 per share............... 52,435
--------
Total Consideration......................................... 144,546
Real Estate held for investment............................. 570,880
Real Estate held for sale................................... 14,831
Notes and interest receivable............................... 20,138
Cash and cash equivalents................................... 4,946
Investment in equity investees.............................. 896
Other assets................................................ 39,240
Notes and interest payable.................................. (472,486)
Other liabilities........................................... (25,674)
Minority Interest........................................... (4,642)
Series A Preferred Stock.................................... (583)
Series C Preferred Stock.................................... (3,000)
--------
144,546

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 8,234
Cash required to purchase 288,240 non-affiliated common
shares of IOT at $19.00 per share......................... 5,477
Issuance of 395,042 Series H convertible Preferred Stock,
liquidation value $8,493, $21.50 per share................ 8,493
-------
Total Consideration......................................... 22,204
Real Estate held for investment............................. 65,928
Notes and interest receivable............................... 2,505
Cash and cash equivalents................................... 59
Other assets................................................ 3,173
Notes and interest payable.................................. (47,552)
Other liabilities........................................... (1,909)
-------
22,204

Note C. To record estimate of additional closing costs.

Note D. To record forgiveness of debt ARL owes TCI.

Note E. To record forgiveness of debt ARL owes IOT.

P-42

Note F. To record cash required to purchase TCI.

Note G. To record cash required to purchase IOT.

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

Note I. To record the elimination ARL's investment in IOT and IOT's elimination
of minority investments in equity investees that are co-owned by TCI.

Note J. To record the elimination of TCI minority interests in equity investees
that are co-owned by IOT.

Note K. To record the issuance of the Series G Redeemable Preferred Stock to
purchase TCI.

Note L. To record the issuance of the Series H Redeemable Preferred Stock to
purchase IOT.

Note M. To record TCI's Series A and Series C Preferred Stock that will continue
to be outstanding.

P-43

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING 50% OF THE NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE CASH AND

50% OF THE NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE SERIES G AND

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY)

HISTORICAL PROFORMA ADJUSTMENTS
------------------------------ ---------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
----------- ------- ------ -------- -------- -----------

Property Revenue
Rents...................... $ 29,352 $30,869 $2,800 $ -- $ -- $ 63,021
Property operations........ 19,892 19,468 1,641 -- -- 41,001
----------- ------- ------ -------- -------- -----------
Operating income......... 9,460 11,401 1,159 -- -- 22,020
Land Operations
Sales...................... 5,580 -- -- -- -- 5,580
Cost of Sales.............. 3,381 -- -- -- -- 3,381
----------- ------- ------ -------- -------- -----------
Gain on land sales....... 2,199 -- -- -- -- 2,199
Pizza Parlor operations
Sales...................... 8,540 -- -- -- -- 8,540
Cost of Sales.............. 6,953 -- -- -- -- 6,953
----------- ------- ------ -------- -------- -----------
Gross margin............. 1,587 -- -- -- -- 1,587
Other Income
Interest and other......... 796 1,067 37 (74)(A) -- 1,826
Equity income (loss) in
equity investees......... 119 (1,276) (17) 2,894(B) (1,446)(C) 274
Loss on sale of investments
in equity investees...... (531) -- -- (531)
Gain on sale of real
estate................... 16,283 5,429 7,105 (2,921)(D) -- 25,896
----------- ------- ------ -------- -------- -----------
16,667 5,220 7,125 (101) (1,446) 27,465
Other expense
Interest................... 18,792 9,156 1,062 74(E) -- 29,084
Depreciation............... 3,555 5,242 500 (142)(F) (39)(F) 9,116
Advisory fees to
affiliate................ 1,736 1,415 186 (301)(G) (59)(G) 2,977
Net income fee to
affiliate................ 374 -- 411 -- (785)(H) --
Incentive fees to
affiliate................ 152 -- -- 33(I) 653(I) 838
General and
administrative........... 3,312 2,202 285 -- -- 5,799
Provision for loss......... -- -- 767 -- -- 767
Minority Interest.......... 787 (59) -- 17(J) -- 745
----------- ------- ------ -------- -------- -----------
28,708 17,956 3,211 (319) (230) 49,326
Net income (loss)............ 1,205 (1,335) 5,073 218 (1,216) 3,945
Preferred dividend
requirement................ (611) (45) -- (1,311)(K) (212)(L) (2,179)
----------- ------- ------ -------- -------- -----------
Net income (loss)............ $ 594 $(1,380) $5,073 $ (1,093) $ (1,428) $ 1,766
Earnings per share
Net income applicable to
Common shares
Basic...................... $ 0.05 $ 0.17
Diluted.................... $ 0.05 $ 0.10
Average Common shares used in
computing earnings per
share
Basic...................... 11,375,127 10,628,155
Diluted.................... 11,375,127 17,220,536

P-44

ARL ACQUISITION OF IOT AND TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

Note A. To record the elimination of interest income received by TCI from ARL
relating to TCI's loan to ARL.

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

Note C. To record the elimination of ARL's equity gains from IOT.

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

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

Note F. To record the advisor fee adjustment for new gross asset basis. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI, IOT, and ARL. TCI's and ARL's combined gross assets would be
reduced by $160,499,000 if the transaction had taken place on January 1,
2002. IOT's and ARL's combined gross assets would be reduced by
$31,681,000 if the transaction had taken place on January 1, 2002. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note H. To record the incentive fee adjustment for TCI and IOT on ARL basis.
ARL's Advisory Agreement provides for BCM to receive an incentive fee
equal to 10% of the excess of net capital gains over net capital losses.
TCI's and IOT's Advisory Agreement provides for BCM to receive an
incentive fee equal to 10% of the amount, if any, by which the aggregate
sales consideration for all real estate sold by TCI or IOT during the
year exceeds the sum of: (1) the cost of each such property, (2) capital
improvements made to such property, and (3) all closing costs incurred
in the sale of such real estate. TCI's and IOT's incentive fee would be
$33,000 and $653,000, respectively based on ARL's Advisory Agreement. .
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note I. To record the elimination of TCI's minority interest from equity
investees co-owned by TCI and IOT.

Note J. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

Note K. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-45

ARL ACQUISITION OF TCI AND IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING 50% OF THE NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE CASH AND

50% OF THE NONAFFILIATED TCI AND IOT STOCKHOLDERS RECEIVE SERIES G AND

SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY)

HISTORICAL PROFORMA ADJUSTMENTS
-------------------------------- -------------------- PROFORMA
ARL TCI IOT TCI IOT COMBINED
----------- -------- ------- -------- ------ -----------

Property Revenue
Rents......................... $ 129,300 $134,911 $13,001 $ -- $ -- $ 277,212
Property operations........... 93,185 80,562 6,591 -- -- 180,338
----------- -------- ------- -------- ------ -----------
Operating income............ $ 36,115 $ 54,349 $ 6,410 $ -- $ -- $ 96,874
Land Operations
Sales......................... 45,290 -- -- -- -- 45,290
Cost of Sales................. 36,083 -- -- -- -- 36,083
----------- -------- ------- -------- ------ -----------
Gain on land sales.......... $ 9,207 $ -- $ -- $ -- $ -- $ 9,207
Pizza Parlor operations
Sales......................... 34,211 -- -- -- -- 34,211
Cost of Sales................. 27,934 -- -- -- -- 27,934
----------- -------- ------- -------- ------ -----------
Gross margin................ $ 6,277 $ -- $ -- $ -- $ -- $ 6,277
Oil and gas operations
Sales......................... 59 -- -- -- -- 59
Operating expenses............ 269 -- -- -- -- 269
----------- -------- ------- -------- ------ -----------
Gross margin................ $ (210) $ -- $ -- $ -- $ -- $ (210)
Other Income
Interest and other............ 2,448 2,948 194 -- -- 5,590
Equity income (loss) in equity
investees................... (13,739) (5,950) (9) 18,832(A) 950(B) 84
Gain on sale of real estate... 96,749 54,270 -- (27,852)(C) -- 123,167
----------- -------- ------- -------- ------ -----------
$ 85,458 $ 51,268 $ 185 $ (9,020) $ 950 $ 128,841
Other expense
Interest...................... 77,048 41,058 6,074 -- -- 124,180
Depreciation.................. 17,707 19,705 2,427 (967)(D) (129)(D) 38,743
Advisory fees to affiliate.... 6,715 5,346 817 (1,199)(E) (200)(E) 11,479
Net income fee to affiliate... 166 1,850 -- (2,016)(F) -- --
Incentive fees to affiliate... 3,827 3,167 -- 493(G) -- 7,487
General and administrative.... 12,743 11,412 739 -- -- 24,894
Realized loss on
investments................. -- 3,059 -- -- -- 3,059
Litigation settlement......... 100 100
Provision for loss............ 2,500 281 -- -- -- 2,781
Minority Interest............. 972 (72) -- -- -- 900
----------- -------- ------- -------- ------ -----------
$ 121,778 $ 85,806 $10,057 $ (3,689) $ (329) $ 213,623
Net income (loss)............... 15,069 19,811 (3,462) (5,331) 1,279 27,366
Preferred dividend
requirement................... (2,485) (172) -- (5,244)(H) $ (849)(I) (8,750)
----------- -------- ------- -------- ------ -----------
Net income (loss)............... $ 12,584 $ 19,639 $(3,462) $(10,575) $ 430 $ 18,616
Earnings per share
Net income applicable to Common
shares
Basic......................... $ 1.07 $ 1.70
Diluted....................... $ 1.07 $ 1.06
Average Common shares used in
computing earnings per share
Basic......................... 11,714,374 10,967,402
Diluted....................... 11,714,374 17,635,106

P-46

ARL ACQUISITION OF IOT AND TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

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

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 and ARL's share of gains on sales of real estate from
TCI.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI, IOT, and ARL. TCI's and ARL's combined gross assets would be
reduced by $159,871,000 if the transaction had taken place on January 1,
2001. IOT's and ARL's combined gross assets would be reduced by
$26,608,000 if the transaction had taken place on January 1, 2001. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note G. To record the incentive fee adjustment for TCI on ARL basis. ARL's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the excess of net capital gains over net capital losses. TCI's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the amount, if any, by which the aggregate sales consideration
for all real estate sold by TCI during the year exceeds the sum of: (1)
the cost of each such property, (2) capital improvements made to such
property, and (3) all closing costs incurred in the sale of such real
estate. TCI's incentive fee would increase by $493,000 based on ARL's
Advisory Agreement. The agreement currently in place between ARL and BCM
will be in effect if the transaction takes place.

Note H. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

Note I. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-47

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING 50% OF THE NONAFFILIATED IOT STOCKHOLDERS RECEIVE CASH AND 50% OF THE
NONAFFILIATED

IOT STOCKHOLDERS RECEIVE SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
-------- -------- ----------- --------

ASSETS
Real estate held for investment,........................ $368,248 $ 79,574 $ (6,315)(A) $441,628
net of accumulated depreciation..................... 121(B)
-------- -------- -------- --------
368,248 79,574 (6,194) 441,628
Real estate held for sale............................... 212,626 -- -- 212,626
Notes and interest receivable........................... 31,084 7,614 (5,109)(C) 33,589
Less -- allowance for estimated losses.................. (2,577) (767) 767(C) (2,577)
-------- -------- -------- --------
28,507 6,847 (4,342) 31,012
Pizza parlor equipment, net of accumulated
depreciation.......................................... 6,793 -- -- 6,793
Leasehold interest -- oil and gas properties,........... 4,718 -- -- 4,718
net of accumulated depreciation
Oilfield equipment, net of accumulated depreciation..... 490 -- -- 490
Marketable equity securities, at market value........... 162 -- -- 162
Cash and cash equivalents............................... 903 59 (5,477)(D) (4,515)
Investment in equity investees.......................... 76,460 103 (8,234)(E) 68,329
Intangibles, net of accumulated amortization............ 15,580 -- -- 15,580
Other assets............................................ 31,996 3,173 -- 35,169
-------- -------- -------- --------
$746,483 $ 89,756 $(24,247) $811,992
======== ======== ======== ========

LIABILITIES AND EQUITY
Liabilities
Notes and interest payable.............................. $563,840 $ 47,552 $ (5,109)(C) $606,283
Margin borrowings....................................... 27,105 -- -- 27,105
Other liabilities....................................... 41,477 1,909 121(B) 43,507
-------- -------- -------- --------
632,422 49,461 (4,988) 676,895
Commitments and contingencies
Minority Interest....................................... 23,155 -- -- 23,155
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 shares; issued and outstanding
3,968.75 shares (liquidation preference $3,969)....... 3,969 -- -- 3,969

P-48

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 8,234
Cash required to purchase 288,240 non-affiliated common
shares of IOT at $19.00 per share......................... 5,477
Issuance of 740,770 Series H convertible Preferred Stock,
liquidation value $15,927, $21.50 per share............... 15,927
-------
Total Consideration......................................... 29,638
Real Estate held for investment............................. 73,259
Notes and interest receivable............................... 2,505
Cash and cash equivalents................................... 59
Investment in equity investees.............................. 103
Other assets................................................ 3,173
Notes and interest payable.................................. (47,552)
Other liabilities........................................... (1,909)
-------
29,638

Note B. To record estimate of additional closing costs.

Note C. To record forgiveness of debt ARL owes IOT.

Note D. To record cash required to purchase IOT.

Note E. To record the elimination ARI's investment in IOT.

Note F. To record the issuance of the Series H Redeemable Convertible Preferred
Stock to purchase IOT.

P-49

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING 50% OF THE NONAFFILIATED IOT STOCKHOLDERS RECEIVE CASH AND 50% OF THE
NONAFFILIATED

IOT STOCKHOLDERS RECEIVE SERIES H REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
-------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
----------- ------ ----------- -----------

Property Revenue
Rents..................................... $ 29,352 $2,800 $ -- $ 32,152
Property operations....................... 19,892 1,641 -- 21,533
----------- ------ ------- -----------
Operating income....................... 9,460 1,159 -- 10,619
Land Operations
Sales..................................... 5,580 -- -- 5,580
Cost of Sales............................. 3,381 -- -- 3,381
----------- ------ ------- -----------
Gain on land sales..................... 2,199 -- -- 2,199
Pizza Parlor operations
Sales..................................... 8,540 -- -- 8,540
Cost of Sales............................. 6,953 -- -- 6,953
----------- ------ ------- -----------
Gross margin........................... 1,587 -- -- 1,587
Other Income
Interest and other........................ 796 37 -- 833
Equity (loss) in equity investees......... 119 (17) (1,446)(A) (1,344)
Loss on sale of investments in equity
investees.............................. (531) -- -- (531)
Gain on sale of real estate............... 16,283 7,105 -- 23,388
----------- ------ ------- -----------
16,667 7,125 (1,446) 22,346
Other expense
Interest.................................. 18,792 1,062 -- 19,854
Depreciation.............................. 3,555 500 (39)(B) 4,016
Advisory fee to affiliate................. 1,736 186 (45)(C) 1,877
Net income fee to affiliate............... 374 411 133(D) 918
Incentive fees to affiliate............... 152 -- 653(E) 805
General and administrative................ 3,312 285 -- 3,597
Litigation settlement..................... -- -- -- --
Provision for loss........................ -- 767 -- 767
Minority Interest......................... 787 -- -- 787
----------- ------ ------- -----------
28,708 3,211 702 32,621
Net income (loss)........................... 1,205 5,073 (2,148) 4,130
Preferred dividend requirement.............. (611) -- (398)(F) (1,009)
----------- ------ ------- -----------
Net income (loss)........................... $ 594 $5,073 $(2,546) $ 3,121
Earnings per share
Net income applicable to Common shares
Basic..................................... $ 0.05 $ 0.27
Diluted................................... $ 0.05 $ 0.25
Average Common shares used in computing
earnings per share
Basic..................................... 11,375,127 11,375,127
Diluted................................... 11,375,127 12,699,380

P-50

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

Note A. To record the elimination of ARL's equity gains 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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from IOT and ARL. IOT's and ARL's combined gross assets would be reduced
by $24,247,000 if the transaction had taken place on January 1, 2002.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note D. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The IOT Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of IOT and ARL exceeds the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM by
$1,333,000. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note F. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-51

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING 50% OF THE NONAFFILIATED IOT STOCKHOLDERS RECEIVE CASH AND 50% OF THE

NONAFFILIATED IOT STOCKHOLDERS RECEIVE SERIES G AND SERIES H REDEEMABLE

CONVERTIBLE PREFERRED STOCK, RESPECTIVELY)

HISTORICAL
--------------------- PROFORMA PROFORMA
ARL IOT ADJUSTMENTS COMBINED
----------- ------- ----------- -----------

Property Revenue
Rents........................................ $ 129,300 $13,001 $ -- $ 142,301
Property operations.......................... 93,185 6,591 -- 99,776
----------- ------- -------- -----------
Operating income........................... 36,115 6,410 -- 42,525
Land Operations
Sales........................................ 45,290 -- -- 45,290
Cost of Sales................................ 36,083 -- -- 36,083
----------- ------- -------- -----------
Gain on land sales......................... 9,207 -- -- 9,207
Pizza Parlor operations
Sales........................................ 34,211 -- -- 34,211
Cost of Sales................................ 27,934 -- -- 27,934
----------- ------- -------- -----------
Gross margin............................... 6,277 -- -- 6,277
Oil and gas operations
Sales........................................ 59 -- -- 59
Operating expenses........................... 269 -- -- 269
----------- ------- -------- -----------
Gross margin............................... (210) -- -- (210)
Other Income
Interest and other........................... 2,448 194 -- 2,642
Equity (loss) in equity investees............ (13,739) (9) 950(A) (12,798)
Gain on sale of real estate.................. 96,749 -- -- 96,749
----------- ------- -------- -----------
85,458 185 950 86,593
Other expense
Interest..................................... 77,048 6,074 -- 83,122
Depreciation................................. 17,707 2,427 57(B) 20,191
Advisory fee to affiliate.................... 6,715 817 (144)(C) 7,388
Net income fee to affiliate.................. 166 -- -- 166
Incentive fees to affiliate.................. 3,827 -- -- 3,827
General and administrative................... 12,743 739 -- 13,482
Litigation settlement........................ 100 -- -- 100
Provision for loss........................... 2,500 -- -- 2,500
Minority Interest............................ 972 -- -- 972
----------- ------- -------- -----------
121,778 10,057 (87) 131,748
Net income (loss).............................. 15,069 (3,462) 1,037 12,644
Preferred dividend requirement................. (2,485) -- (1,593)(D) (4,078)
----------- ------- -------- -----------
Net income (loss).............................. 12,584 (3,462) (556) 8,566
Earnings per share
Net income applicable to Common shares
Basic........................................ $ 1.07 $ 0.73
Diluted...................................... $ 1.07 $ 0.66
Average Common shares used in computing
earnings per share
Basic........................................ 11,714,374 11,714,374
Diluted...................................... 11,714,374 13,038,627

P-52

ARL ACQUISITION OF IOT

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from IOT and ARL. IOT's and ARL's combined gross assets would be reduced
by $19,174,000 if the transaction had taken place on January 1, 2001.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note D. To record preferred stock dividends of $2.15 per share on Series H
redeemable convertible preferred stock.

P-53

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

(ASSUMING 50% OF THE NONAFFILIATED TCI STOCKHOLDERS RECEIVE CASH AND 50% OF THE
NONAFFILIATED

TCI STOCKHOLDERS RECEIVE SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
-------- -------- ----------- ----------

ASSETS
Real estate held for investment, net of accumulated
depreciation.............................................. $368,248 $618,784 $ (50,682)(A) $ 937,229
879(B)
-------- -------- --------- ----------
368,248 618,784 (49,803) 937,229
Real estate held for sale................................... 212,626 14,831 -- 227,457
Notes and interest receivable............................... 31,084 27,249 (6,372)(C) 51,961
Less -- allowance for estimated losses...................... (2,577) (739) -- (3,316)
-------- -------- --------- ----------
28,507 26,510 (6,372) 48,645
Pizza parlor equipment, net of accumulated depreciation..... 6,793 -- -- 6,793
Leasehold interest -- oil and gas properties, net of
accumulated depreciation.................................. 4,718 -- -- 4,718
Oilfield equipment, net of accumulated depreciation......... 490 -- -- 490
Marketable equity securities, at market value............... 162 -- -- 162
Cash and cash equivalents................................... 903 4,946 (24,964)(D) (19,115)
Investment in equity investees.............................. 76,460 15,887 (10,182)(E) 15,018
(67,147)(F)
Intangibles, net of accumulated amortization................ 15,580 -- -- 15,580
Other assets................................................ 31,996 39,240 -- 71,236
-------- -------- --------- ----------
$746,483 $720,198 $(158,468) $1,308,213
======== ======== ========= ==========

LIABILITIES AND EQUITY
Liabilities Notes and interest payable...................... $563,840 $472,486 $ (6,372)(C) $1,029,954
Margin borrowings........................................... 27,105 -- -- 27,105
Other liabilities........................................... 41,477 25,674 879(B) 68,030
-------- -------- --------- ----------
632,422 498,160 (5,493) 1,125,089
Commitments and contingencies
Minority Interest........................................... 23,155 6,673 -- 29,828
Series F Redeemable Preferred Stock; $2.00 par value;
authorized, 30,000 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, convertible 2,621,772 shares, (liquidation
preference $52,435, $20.00 per share)..................... 5,244(G) 5,244
Series A, $.01 par value; authorized 6,000 shares; issued
and outstanding 5,829 shares (liquidation preference
$583)..................................................... -- -- -- --
Series C, $.01 par value; authorized, issued and outstanding
30,000 shares (liquidation preference $3,000)............. -- -- -- --
Common Stock, $.01 par value; authorized 100,000,000 shares,
issued 11,375,127 shares.................................. 114 -- (7)(E) 107
Paid-in capital............................................. 112,184 -- 47,199(G) 162,966
3,583(H)
Accumulated deficit......................................... (30,770) -- 6,372(C) (24,398)
Accumulated other comprehensive income...................... 459 -- 459
TCI
Preferred Stock, $.01 par value, authorized 36,000 shares,
issued and outstanding
Series A, 5,829 shares (liquidation preference $583)........ -- --
Series C, 30,000 shares (liquidation preference $3,000)..... -- -- --
Common Stock, $.01 par value; authorized, 10,000,000........ 80 (80)(A) --
shares; issued and outstanding 8,042,629 shares
Paid-in capital............................................. 271,761 (271,761)(A) --
Accumulated deficit......................................... (56,453) 56,453(A) --
Accumulated other comprehensive income...................... (23) 23(A)
-------- -------- --------- ----------
86,937 215,365 (152,975) 149,327
$746,483 $720,198 $(158,468) $1,308,213
======== ======== ========= ==========

P-54

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 2002

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

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

Current amount of equity method investment on ARL's balance
sheet at March 31, 2002................................... 67,147
Cash required to purchase 1,426,523 non-affiliated common
shares of TCI at $17.50 per share......................... 24,964
Issuance of 2,621,772 Series G convertible Preferred Stock,
liquidation value $52,435, $20.00 per share............... 52,435
--------
Total Consideration......................................... 144,546
Real Estate held for investment............................. 568,102
Real Estate held for sale................................... 14,831
Notes and interest receivable............................... 20,138
Cash and cash equivalents................................... 4,946
Investment in equity investees.............................. 5,705
Other assets................................................ 39,240
Notes and interest payable.................................. (472,486)
Other liabilities........................................... (25,674)
Minority Interest........................................... (6,673)
Series A Preferred Stock.................................... (583)
Series C Preferred Stock.................................... (3,000)
--------
144,546

Note B. To record estimate of additional closing costs.

Note C. To record forgiveness of debt ARL owes TCI.

Note D. To record cash required to purchase TCI.

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

Note F. To record the elimination of ARL's investment in TCI.

Note G. To record the issuance of the Series G Redeemable Convertible Preferred
Stock to purchase TCI.

Note H. To record TCI's Series A and Series C Preferred Stock that will remain
outstanding.

P-55

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

(ASSUMING 50% OF THE NONAFFILIATED TCI STOCKHOLDERS RECEIVE CASH AND 50% OF THE
NONAFFILIATED

TCI STOCKHOLDERS RECEIVE SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK)

HISTORICAL
--------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS COMBINED
----------- ------- ----------- -----------

Property Revenue
Rents.................................... $ 29,352 $30,869 $ -- $ 60,221
Property operations...................... 19,892 19,468 -- 39,360
----------- ------- ------- -----------
Operating income...................... 9,460 11,401 -- 20,861
Land Operations
Sales.................................... 5,580 -- -- 5,580
Cost of Sales............................ 3,381 -- -- 3,381
----------- ------- ------- -----------
Gain on land sales.................... 2,199 -- -- 2,199
Pizza Parlor operations
Sales.................................... 8,540 -- -- 8,540
Cost of Sales............................ 6,953 -- -- 6,953
----------- ------- ------- -----------
Gross margin.......................... 1,587 -- -- 1,587
Other Income
Interest and other....................... 796 1,067 (74)(A) 1,789
Equity (loss) in equity investees........ 119 (1,276) 1,348(B) 1,337
1,146(C)
Gain on sale of real estate.............. 16,283 5,429 (1,214)(D) 20,498
----------- ------- ------- -----------
17,198 5,220 1,206 23,624
Other expense
Interest................................. 18,792 9,156 (74)(A) 27,874
Depreciation............................. 3,555 5,242 (159)(E) 8,638
Advisory fee to affiliate................ 1,736 1,415 (297)(F) 2,854
Net income fee to affiliate.............. 374 -- (374)(G) --
Incentive fees to affiliate.............. 152 -- 33(H) 185
General and administrative............... 3,312 2,202 -- 5,514
Minority Interest........................ 787 (59) -- 728
----------- ------- ------- -----------
28,708 17,956 (871) 45,793
Net income (loss).......................... 1,736 (1,335) 2,077 2,478
Preferred dividend requirement............. (611) (45) (1,311)(I) (1,967)
----------- ------- ------- -----------
Net income (loss).......................... $ 1,125 $(1,380) $ 766 $ 511
Earnings per share
Net income applicable to Common shares
Basic.................................... $ 0.10 $ 0.05
Diluted.................................. $ 0.10 $ 0.03
Average Common shares used in computing
earnings per share
Basic.................................... 11,375,127 10,628,155
Diluted.................................. 11,375,127 16,514,331

P-56

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

MARCH 31, 2002

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

Note A. To record the elimination of interest income received by TCI from ARL
relating to TCI's loan to ARL.

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

Note C. To record the elimination of TCI's equity losses from ARL.

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

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

Note F. To record the advisor fee adjustment for new gross asset basis. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI and ARL. TCI's and ARL's combined gross assets would be reduced
by $158,468,000 if the transaction had taken place on January 1, 2002.
The agreement currently in place between ARL and BCM will be in effect
if the transaction takes place.

Note G. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of TCI and ARL does not meet the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM. The
agreement currently in place between ARL and BCM will be in effect if
the transaction takes place.

Note I. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

P-57

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

(ASSUMING 50% OF THE NONAFFILIATED TCI STOCKHOLDERS RECEIVE CASH AND 50% OF THE

NONAFFILIATED TCI STOCKHOLDERS RECEIVE SERIES G AND SERIES H

REDEEMABLE CONVERTIBLE PREFERRED STOCK, RESPECTIVELY)

HISTORICAL
---------------------- PROFORMA PROFORMA
ARL TCI ADJUSTMENTS ADJUSTMENTS
----------- -------- ----------- -----------

Property Revenue
Rents............................................. $ 129,300 $134,911 -- $ 264,211
Property operations............................... 93,185 80,562 -- 173,747
----------- -------- ------- -----------
Operating income................................ 36,115 54,349 -- 90,464
Land Operations
Sales............................................. 45,290 -- -- 45,290
Cost of Sales..................................... 36,083 -- -- 36,083
----------- -------- ------- -----------
Gain on land sales.............................. 9,207 -- -- 9,207
Pizza Parlor operations
Sales............................................. 34,211 -- -- 34,211
Cost of Sales..................................... 27,934 -- -- 27,934
----------- -------- ------- -----------
Gross margin.................................... 6,277 -- -- 6,277
Oil and gas operations
Sales............................................. 59 -- -- 59
Operating expenses................................ 269 -- -- 269
----------- -------- ------- -----------
Gross margin.................................... (210) -- -- (210)
Other Income
Interest and other................................ 2,448 2,948 -- 5,396
Equity (loss) in equity investees................. (13,739) (5,950) 12,696(A) (1,688)
5,305(B)
Gain on sale of real estate....................... 96,749 54,270 (27,852)(C) 123,167
----------- -------- ------- -----------
85,458 51,268 (9,851) 126,875
Other expense
Interest.......................................... 77,048 41,058 -- 118,106
Depreciation...................................... 17,707 19,705 (1,055)(D) 36,357
Advisory fee to affiliate......................... 6,715 5,346 (1,199)(E) 10,862
Net income fee to affiliate....................... 166 1,850 536(F) 2,552
Incentive fees to affiliate....................... 3,827 3,167 493(G) 7,487
General and administrative........................ 12,743 11,412 -- 24,155
Litigation settlement............................. 100 -- -- 100
Provision for loss................................ 2,500 281 -- 2,781
Realized loss on investments...................... -- 3,059 -- 3,059
Minority Interest................................. 972 (72) -- 900
----------- -------- ------- -----------
121,778 85,806 (1,225) 206,359
Net income (loss)................................... 15,069 19,811 (8,626) 26,254
Preferred dividend requirement...................... (2,485) (172) (5,244)(H) (7,901)
----------- -------- ------- -----------
Net income (loss)................................... 12,584 19,639 (13,870) 18,353
Earnings per share
Net income applicable to Common shares
Basic............................................. $ 1.07 $ 1.67
Diluted........................................... $ 1.07 $ 1.08
Average Common shares used in computing earnings per
share
Basic............................................. 11,714,374 10,967,402
Diluted........................................... 11,714,374 16,928,900

P-58

ARL ACQUISITION OF TCI

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

DECEMBER 31, 2001

The notes to these financial statements assume that 50% of the
non-affiliated shareholders will accept preferred stock and 50% will accept
cash.

Note A. To record the elimination of ARL's equity losses 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 and ARL's share of gains on sales of real estate from
TCI.

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. The
Advisory Agreement provides for BCM to receive an advisory fee comprised
of a gross asset fee of .75% per annum of the average gross asset value
from TCI, IOT, and ARL. TCI's and ARL's combined gross assets would be
reduced by $159,871,000 if the transaction had taken place on January 1,
2001. The agreement currently in place between ARL and BCM will be in
effect if the transaction takes place.

Note F. To record the net income fee adjustment for new net income. ARL's
Advisory Agreement provides for BCM to receive a net income fee equal to
10% of net income for the year in excess of a 10% return on
stockholders' equity. The TCI Advisory Agreement provides for BCM to
receive a net income fee equal to 7.5% of net income for the year. The
combined net income of TCI and ARL exceeds the 10% return on
stockholders' equity based on ARL's Advisory Agreement with BCM by
$5,361,000. The agreement currently in place between ARL and BCM will be
in effect if the transaction takes place.

Note G. To record the incentive fee adjustment for TCI on ARL basis. ARL's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the excess of net capital gains over net capital losses. TCI's
Advisory Agreement provides for BCM to receive an incentive fee equal to
10% of the amount, if any, by which the aggregate sales consideration
for all real estate sold by TCI during the year exceeds the sum of: (1)
the cost of each such property, (2) capital improvements made to such
property, and (3) all closing costs incurred in the sale of such real
estate. TCI's incentive fee would increase by $493,000 based on ARL's
Advisory Agreement. The agreement currently in place between ARL and BCM
will be in effect if the transaction takes place.

Note H. To record preferred stock dividends of $2.00 per share on Series G
redeemable convertible preferred stock.

P-59

INDEX TO FINANCIAL STATEMENTS

PAGE
----

ARL Consolidated Financial Statements....................... F-3
Consolidated Balance Sheets at March 31, 2002
(Unaudited) and December 31, 2001..................... F-3
Consolidated Statements of Operations for each of the
three month periods ended March 31, 2002 and 2001
(Unaudited)........................................... F-4
Consolidated Statements of Stockholders' Equity for the
three month period ended March 31, 2002 (Unaudited)... F-5
Consolidated Statements of Cash Flows for each of the
three month periods ended March 31, 2002 and 2001
(Unaudited)........................................... F-6
Notes to Consolidated Unaudited Financial Statements... F-7
Report of Independent Certified Public Accountants..... F-16
Consolidated Balance Sheets -- December 31, 2001 and
2000.................................................. F-17
Consolidated Statements of Operations -- Years Ended
December 31, 2001, 2000 and 1999...................... F-18
Consolidated Statements of Stockholders'
Equity -- Years Ended December 31, 2001, 2000 and
1999.................................................. F-19
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2001, 2000 and 1999...................... F-20
Notes to ARL Consolidated Audited Financial
Statements............................................ F-23
ARL Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-51
ARL Schedule IV -- Mortgage Loans on Real Estate....... F-58
TCI Consolidated Financial Statements....................... F-60
Consolidated Balance Sheets at March 31, 2002
(Unaudited) and December 31, 2001..................... F-60
Consolidated Statements of Operations for each of the
three month periods ended March 31, 2002 and 2001
(Unaudited)........................................... F-61
Consolidated Statement of Stockholders' Equity for the
three month period ended March 31, 2002 (Unaudited)... F-62
Consolidated Statements of Cash Flows for each of the
three month periods ended March 31, 2002 and 2001
(Unaudited)........................................... F-63
Notes to Consolidated Unaudited Financial Statements... F-64
Report of Independent Certified Public Accountants..... F-71
Consolidated Balance Sheets -- December 31, 2001 and
2000.................................................. F-72
Consolidated Statements of Operations -- Years Ended
December 31, 2001, 2000 and 1999...................... F-73
Consolidated Statements of Stockholders'
Equity -- Years Ended December 31, 2001, 2000 and
1999.................................................. F-74
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2001, 2000 and 1999...................... F-75
Notes to TCI Consolidated Audited Financial
Statements............................................ F-77
TCI Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-101
TCI Schedule IV -- Mortgage Loans on Real Estate....... F-108
IOT Consolidated Financial Statements....................... F-110
Consolidated Balance Sheets at March 31, 2002
(Unaudited) and December 31, 2001..................... F-110
Consolidated Statements of Operations for each of the
three month periods ended March 31, 2002 and 2001
(Unaudited)........................................... F-111
Consolidated Statement of Stockholders' Equity for the
three month period ended March 31, 2002 (Unaudited)... F-112

F-1

PAGE
----

Consolidated Statements of Cash Flows for each of three
month periods ended March 31, 2002 and 2001
(Unaudited)........................................... F-113
Notes to Consolidated Unaudited Financial Statements... F-114
Report of Independent Certified Public Accountants..... F-117
Consolidated Balance Sheets -- December 31, 2001 and
2000.................................................. F-118
Consolidated Statements of Operations -- Years Ended
December 31, 2001, 2000 and 1999...................... F-119
Consolidated Statements of Stockholders' Equity --Years
Ended December 31, 2001, 2000 and 1999................ F-120
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2001, 2000 and 1999...................... F-121
Notes to Consolidated Audited Financial Statements..... F-123
IOT Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-136
IOT Schedule IV -- Mortgage Loans on Real Estate....... F-138

F-2

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS
Real estate held for investment............................. $ 484,251 $ 495,437
Less -- accumulated depreciation............................ (116,003) (121,777)
--------- ---------
368,248 373,660
Real estate held for sale................................... 212,626 214,543
Notes and interest receivable
Performing ($21,217 in 2002 and $18,896 in 2001 from
affiliates)............................................. 23,320 22,612
Nonperforming ($6,747 in 2002 and $6,994 in 2001 from
affiliates)............................................. 7,764 10,347
--------- ---------
31,084 32,959
Less -- allowance for estimated losses...................... (2,577) (2,577)
--------- ---------
28,507 30,382
Pizza parlor equipment...................................... 10,845 10,454
Less -- accumulated depreciation............................ (4,052) (3,747)
--------- ---------
6,793 6,707
Leasehold interest -- oil and gas properties................ 4,719 4,719
Less -- accumulated depletion............................... (1) (1)
--------- ---------
4,718 4,718
Oilfield equipment.......................................... 511 511
Less -- accumulated depreciation............................ (21) (21)
--------- ---------
490 490
Marketable equity securities, at market value............... 162 96
Cash and cash equivalents................................... 903 709
Investments in equity investees............................. 76,460 77,933
Intangibles, net of accumulated amortization ($2,681 in 2002
and $2,666 in 2001)....................................... 15,580 15,594
Other assets................................................ 31,996 33,931
--------- ---------
$ 746,483 $ 758,763
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and interest payable ($14,240 in 2002 and $1,598 in
2001 to affiliates)....................................... $ 563,840 $ 564,298
Margin borrowings........................................... 27,105 28,040
Accounts payable and other liabilities ($6,846 in 2002 and
$11,389 in 2001 to affiliates)............................ 41,477 48,960
--------- ---------
632,422 641,298
Minority interest........................................... 23,155 27,612
Series F Preferred Stock, 3,968.75 shares in 2002 and 2001
(liquidation preference $3,969)........................... 3,969 3,969
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized 50,000,000
shares, issued and outstanding
Series A, 2,724,910 shares in 2002 and 2001 liquidation
preference $27,249)..................................... 4,850 4,850
Series E, 50,000 shares in 2002 and 2001 (liquidation
preference $5,000)...................................... 100 100
Common Stock, $.01 par value, authorized 100,000,000 shares;
issued 11,375,127 shares in 2002 and 2001................. 114 114
Paid-in capital............................................. 112,184 112,184
Accumulated (deficit)....................................... (30,770) (31,364)
Accumulated other comprehensive income...................... 459 --
--------- ---------
86,937 85,884
--------- ---------
$ 746,483 $ 758,763
========= =========

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 MARCH 31,
-------------------------
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

Property revenue
Rents..................................................... $ 29,352 $ 33,213
Property operations expenses.............................. 19,892 23,451
----------- -----------
Operating income....................................... 9,460 9,762
Land operations
Sales..................................................... 5,580 20,490
Cost of sales............................................. 3,381 16,701
----------- -----------
Gain on land sales..................................... 2,199 3,789
Pizza parlor operations
Sales..................................................... 8,540 7,826
Cost of sales............................................. 6,953 6,422
----------- -----------
Gross margin........................................... 1,587 1,404
Income from operations...................................... 13,246 14,955
Other income
Interest income........................................... 612 384
Equity in income (loss) of investees...................... 119 (5)
Loss on sale of investments in equity investees........... (531) --
Gain on sale of real estate............................... 16,283 16,426
Other..................................................... 184 33
----------- -----------
16,667 16,838
Other expenses
Interest.................................................. 18,792 18,070
Depreciation, depletion and amortization.................. 3,555 4,079
General and administrative................................ 3,312 2,398
Advisory fee to affiliate................................. 1,736 1,760
Incentive fee to affiliate................................ 152 1,521
Net income fee to affiliate............................... 374 --
Minority interest......................................... 787 1,575
----------- -----------
28,708 29,403
----------- -----------
Net income.................................................. 1,205 2,390
Preferred dividend requirement.............................. (611) (642)
----------- -----------
Net income applicable to Common shares...................... $ 594 $ 1,748
=========== ===========
Earnings per share
Net income................................................ $ .05 $ .17
=========== ===========
Weighted average Common shares used in computing earnings
per share................................................. 11,375,127 10,104,268
=========== ===========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002

ACCUMULATED
SERIES A SERIES E OTHER
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL (DEFICIT) INCOME EQUITY
--------- --------- ------ -------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Balance, January 1, 2002.......... $4,850 $100 $114 $112,184 $(31,364) $ -- $85,884
Comprehensive income
Foreign currency translation
gain.......................... -- -- -- -- -- 459 459
Net income...................... -- -- -- -- 1,205 -- 1,205
-------
1,664
Preferred dividends
Series A Preferred Stock ($.25
per share).................... -- -- -- -- (604) -- (604)
Series E Preferred Stock ($.15
per share).................... -- -- -- -- (7) -- (7)
------ ---- ---- -------- -------- ---- -------
Balance, March 31, 2002........... $4,850 $100 $114 $112,184 $(30,770) $459 $86,937
====== ==== ==== ======== ======== ==== =======

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 THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)

Cash Flows From Operating Activities
Rents collected........................................... $ 29,045 $ 33,070
Pizza parlor sales collected.............................. 8,303 7,848
Interest collected........................................ 666 231
Payments for property operations.......................... (21,603) (29,149)
Payments for pizza parlor operations...................... (7,352) (6,324)
Interest paid............................................. (15,184) (15,986)
Advisory fee paid to affiliate............................ (1,736) (1,760)
Distributions to minority interest holders................ (787) (574)
General and administrative expenses paid.................. (3,312) (2,398)
Other..................................................... 398 (881)
-------- --------
Net cash used in operating activities................. (11,562) (15,923)
Cash Flows From Investing Activities
Collections on notes receivable........................... 3,689 2,695
Pizza parlor equipment purchased.......................... (391) (292)
Proceeds from sale of real estate......................... 22,175 30,771
Notes receivable funded................................... (1,868) (13,654)
Earnest money/escrow deposits............................. 232 (4,347)
Investment in real estate entities........................ 1,071 --
Acquisition of partnership interest....................... -- (9,734)
Real estate improvements.................................. (2,063) (3,435)
-------- --------
Net cash provided by investing activities............. 22,845 2,004
Cash Flows from Financing Activities
Proceeds from notes payable............................... 26,084 28,998
Payments on notes payable................................. (29,628) (16,111)
Deferred borrowing costs.................................. (915) (1,858)
Net (payments to)/advances from affiliates................ (5,069) 4,159
Margin borrowings, net.................................... (950) 2,402
Repurchase of Common Stock................................ -- (133)
Preferred dividends paid.................................. (611) (37)
-------- --------
Net cash (used in) provided by financing activities... (11,089) 17,420
Net increase in cash and cash equivalents............. 194 3,501
Cash and cash equivalents, beginning of period.............. 709 4,177
-------- --------
Cash and cash equivalents, end of period.................... $ 903 $ 7,678
======== ========
Reconciliation of net income to net cash used in operating
activities
Net income................................................ $ 1,205 $ 2,390
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation, depletion and amortization................ 3,555 4,079
Gain on sale of real estate............................. (18,482) (20,215)
Distributions to minority interest holders.............. -- 1,001
Equity in (income) loss of investees.................... (119) 5
Loss on sale of investments in equity investees......... 531 --
(Increase) decrease in accrued interest receivable...... 54 (153)
Decrease in other assets................................ 2,551 1,187
Increase (decrease) in accrued interest payable......... 712 (199)
Decrease in accounts payable and other liabilities...... (1,569) (4,018)
-------- --------
Net cash used in operating activities................. $(11,562) $(15,923)
======== ========
Schedule of noncash investing and financing
Notes payable assumed by buyer on sale of real estate..... $ 1,389 $ 12,215
Exchange of real estate for partnership units............. 6,930 --
Notes receivable from sale of real estate................. -- 2,123

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6

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 2001 have been reclassified to conform to the 2002
presentation.

Operating results for the three month period ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001 (the "2001 Form 10-K").

NOTE 2. REAL ESTATE

In 2002, ARI purchased the following property:

SQ. FT./ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION ACRES PRICE PAID INCURRED RATE DATE
-------- -------- -------- -------- -------- -------- -------- --------

FIRST QUARTER
SHOPPING CENTER
Plaza on Bachman Creek(1)..... Dallas, TX 80,278 Sq. Ft. $3,103 $ -- $ -- -- --
SECOND QUARTER
LAND
Willow Springs................ Beaumont, CA 20.7 Acres 140 152 -- -- --

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

(1) Exchanged with Transcontinental Realty Investors, Inc. ("TCI"), a related
party, for the Oaktree Village Shopping Center, Rasor land parcel and
Lakeshore Villas land parcel.

In 2002, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION ACRES/SQ. FT. PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ------------- ------- -------- ---------- -----------

FIRST QUARTER
APARTMENTS
Mallard Lake(1)............... Greensboro, NC 336 Units $14,400 $ -- $7,362 $10,669
Villas........................ Plano, TX 208 Units 8,525 3,701 4,023 5,615
LAND
Katrina....................... Palm Desert, CA 2.1 Acres 1,323 (40) 1,237 978
Lakeshore Villas(2)........... Harris County, TX 16.9 Acres 1,499 215 -- --
Rasor(2)...................... Plano, TX 24.5 Acres 1,211 174 -- --
Thompson II................... Dallas County, TX .2 Acres 21 20 -- (11)
Vista Ridge................... Lewisville, TX 10.0 Acres 1,525 130 1,220 401
SHOPPING CENTER
Oaktree Village(2)............ Lubbock, TX 45,623 Sq. Ft. 2,302 131 1,389(3) --
SECOND QUARTER
LAND
Mason Goodrich................ Houston, TX 7.9 Acres $ 672 $ 46 $ 554 $ 258

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

(1) Exchanged for outstanding partnership units in ART Florida Portfolio I,
Ltd., ART Florida Portfolio II, Ltd. and ART Florida Portfolio III, Ltd.

(2) Exchanged with TCI, a related party, for the Plaza on Bachman Creek Shopping
Center.

(3) Debt assumed by purchaser.

F-7

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2001, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION ACRES/SQ. FT. PRICE RECEIVED DISCHARGED 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
LAND
Frisco Bridges............... Collin County, TX 27.8 Acres 4,500 4,130 -- 25
Katrina...................... Palm Desert, CA 20.0 Acres 2,831 (124) 596 830(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
SHOPPING CENTER
Regency Pointe............... Jacksonville, FL 67,063 Sq. Ft. 7,350 5,126 1,500 2,232

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

(1) Debt assumed by purchaser.

(2) Gain deferred until 2002, when ARI-provided financing was collected.

NOTE 3. NOTES RECEIVABLE

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

In November 2001, ARI sold a 12.7 acre tract of its Santa Clarita parcel
for $1.9 million, receiving $1.5 million in cash and providing purchase money
financing of the remaining $437,000 of the sales price. The loan bears interest
at 8.0% per annum and matures in November 2002. All principal and accrued but
unpaid interest are due at maturity.

Also in November 2001, ARI sold the Blackhawk Apartments for $7.1 million,
receiving $1.5 million in cash after the assumption of $4.0 million of mortgage
debt and providing purchase money financing of the remaining $1.6 million of the
sales price. The loan bore interest at 10.0% per annum and matured in May 2002.
Monthly principal and interest payments were required. In April 2002, the note
was collected in full, including accrued but unpaid interest.

In 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. In February 2002, $1.5
million in principal and $87,000 in interest were collected. At May 2002, terms
are being negotiated for collection of the remaining $84,000 in principal plus
accrued but unpaid interest.

F-8

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

were due at maturity in February 2002. The line of credit is guaranteed by Basic
Capital Management, Inc. ("BCM"), ARI's advisor. In June 2001, $394,000 in
principal and $416,000 in interest was collected. In December 2001, $21,000 in
principal and $804,000 in interest was collected. In February 2002, the maturity
date was extended to February 2004. In March 2002, ARI funded an additional $1.8
million, increasing the outstanding principal balance to $15.0 million. All
principal and interest are due at maturity. Ronald E. Kimbrough, Executive Vice
President and Chief Financial Officer of ARI, is a 10% shareholder of One
Realco. Mr. Kimbrough does not participate in day-to-day operations or
management of One Realco.

In October 1999, ARI funded a $4.7 million loan to Realty Advisors, Inc.,
an affiliate. The loan was secured by all of the outstanding shares of common
stock of American Reserve Life Insurance Company. The loan bore interest at
10.25% per annum and matured in November 2001. In January 2000, $100,000 was
collected. In November 2001, the maturity date was extended to November 2004.
The collateral was changed to a subordinate pledge of 850,000 shares of ARI
Common Stock owned by BCM. The shares are also pledged to a lender on ARI's
behalf. The interest rate was changed to 2% over the prime rate, currently 6.75%
per annum, and the accrued but unpaid interest of $984,000 was added to the
principal. The new principal balance is $5.6 million. All principal and accrued
interest are due at maturity.

In December 2000, an unsecured loan with a principal balance of $1.8
million to Warwick of Summit, Inc. ("Warwick") matured. All principal and
interest were due at maturity. In February 2002, $275,000 of interest was
received. At March 2002, the loan, and $239,000 of accrued interest, remained
unpaid. At May 2002, 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 March 2002, the loan, and $520,000 of
accrued interest, remained unpaid. At May 2002, 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 $2.5 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 March 2002, the loan, and $820,000 of accrued
interest, remained unpaid. At May 2002, settlement terms are being negotiated. A
corporation controlled by Richard D. Morgan is the general partner of Lordstown,
L.P. Mr. Morgan served as a director of ARI until October 2001.

NOTE 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 matured in November 2001. One-half of the principal
was paid in August 2001. The remaining $4.0 million was paid by issuing 3,968.75
shares of ARI Series F Preferred Stock, which 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.
F-9

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5. INVESTMENTS IN EQUITY INVESTEES

Real estate entities. ARI's investment in real estate entities at March
31, 2002, included equity securities of two publicly traded real estate
companies, Income Opportunity Realty Investors, Inc. ("IORI") and 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. The equity securities of IORI and TCI are
pledged as collateral for borrowings. See NOTE 8. "MARGIN BORROWINGS."

ARI's investment in real estate entities, accounted for using the equity
method, at March 31, 2002 was as follows:

PERCENTAGE CARRYING EQUIVALENT
OF ARI'S VALUE OF INVESTEE MARKET VALUE
OWNERSHIP AT INVESTMENT AT BOOK VALUE AT OF INVESTMENT AT
INVESTEE MARCH 31, 2002 MARCH 31, 2002 MARCH 31, 2002 MARCH 31, 2002
-------- -------------- -------------- -------------- ----------------

IORI......................... 28.49% $ 8,234 $ 11,480 $ 7,440
TCI.......................... 49.99% 67,147 107,650 66,745
------- -------
75,381 $74,185
=======
Other........................ 1,079
-------
$76,460
=======

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 2002, 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 TCI common stock 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. See ITEM
2. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" for discussion of the proposed acquisition of TCI and IORI by ARI.

Set forth below are summarized results of operations of equity investees
for the three months ended March 31, 2002:

Revenues.................................................... $35,097
Equity in income of partnerships............................ (1,778)
Property operating expenses................................. 26,308
Depreciation................................................ 5,742
Interest expense............................................ 10,218
-------
(Loss) before gains on sale of real estate.................. (8,949)
Gain on sale of real estate................................. 11,320
-------
Net income.................................................. $ 2,371
=======

ARI's share of equity investees' loss before gains on the sale of real
estate was $4.0 million for the three months ended March 31, 2002, and its share
of equity investees' gains on sale of real estate was $4.1 million for the three
months ended March 31, 2002.

F-10

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

ART Florida Portfolio II, Ltd. In January 2002, Investors Choice Florida
Public Funds II, in which ART Florida Portfolio II, Ltd. owned an interest, sold
Villas Continental Apartments. ARI received $1.0 million in cash from the sale.
ARI's share of the loss incurred on the sale was $531,000, which is included in
loss on sale of investments in equity investees in the accompanying Consolidated
Statements of Operations.

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. These equity securities are considered a trading portfolio and are
carried at market value. In the first quarter of 2002, ARI did not purchase or
sell any such securities. At March 31, 2002, ARI recognized an unrealized
increase in the market value of its trading portfolio securities of $66,000.
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 2002, ARI financed/refinanced or obtained second mortgage financing on
the following:

UNITS/ DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ACRES/SQ. FT. INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ------------- -------- ---------- -------- -------- --------

FIRST QUARTER
OFFICE BUILDING
Rosedale Towers............... Minneapolis, MN 84,798 Sq. Ft. $5,109 $ -- $ 5,109 12.000% 12/04(1)
Two Hickory Centre............ Farmers Branch, TX 96,127 Sq. Ft. 4,448 -- 4,448 12.000 12/04(2)
LAND
Walker........................ Dallas County, TX 90.6 Acres 8,500 8,500 (1,411) 11.250(3) 01/03
SHOPPING CENTER
Plaza on Bachman Creek........ Dallas, TX 80,278 Sq. Ft. 5,000 -- 4,444 6.625(3) 04/04
SECOND QUARTER
APARTMENTS
Confederate Point............. Jacksonville, FL 206 Units 1,929 -- 1,929 12.000 04/05(4)
Foxwood....................... Memphis, TN 220 Units 1,093 -- 1,093 12.000 04/05(5)
Woodsong...................... Smyrna, GA 190 Units 2,544 -- 2,544 12.000 04/05(6)
OFFICE BUILDING
One Hickory Centre............ Farmers Branch, TX 102,615 Sq. Ft. $4,468 $ -- $ 4,468 12.000% 04/05(7)

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

(1) In January 2002, IORI, a related party, purchased 100% of the outstanding
common shares of Rosedale Corporation ("Rosedale"), a wholly-owned
subsidiary of ARI, for $5.1 million. Rosedale owns the Rosedale Towers
Office Building. ARI has guaranteed that the asset will produce at least a
12% annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARI will pay
IORI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, IORI may require ARI to repurchase the shares of
Rosedale for the purchase price. Management has classified this related
party transaction as a note payable to IORI.

F-11

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

least a 12% annual return on the purchase price for a period of three years
from the purchase date. If the asset fails to produce the 12% return, ARI
will pay TCI any shortfall. In addition, if the asset fails to produce the
12% return for a calendar year, TCI may require ARI to repurchase the shares
of Two Hickory for the purchase price. Management has classified this
related party transaction as a note payable to TCI.

(3) Variable interest rate.

(4) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Confederate Point, L.P.
("Confederate Point") from ARI for $1.9 million. Confederate Point owns the
Confederate Point Apartments. ARI has guaranteed that the asset will produce
at least a 12% annual return on the purchase price for a period of three
years from the purchase date. If the asset fails to produce the 12% return,
ARI will pay TCI any shortfall. In addition, if the asset fails to produce
the 12% return for a calendar year, TCI may require ARI to repurchase the
interests in Confederate Point for the purchase price. Management has
classified this related party transaction as a note payable to TCI.

(5) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Foxwood, L.P. ("Foxwood") from ARI
for $1.1 million. Foxwood owns the Foxwood Apartments. ARI has guaranteed
that the asset will produce at least a 12% annual return on the purchase
price for a period of three years from the purchase date. If the asset fails
to produce the 12% return, ARI will pay TCI any shortfall. In addition, if
the asset fails to produce the 12% return for a calendar year, TCI may
require ARI to repurchase the interests in Foxwood for the purchase price.
Management has classified this related party transaction as a note payable
to TCI.

(6) In April 2002, TCI, a related party, purchased all of the general and
limited partnership interests in Garden Woodsong, L.P. ("Woodsong") from ARI
for $2.5 million. Woodsong owns the Woodsong Apartments. ARI has guaranteed
that the asset will produce at least a 12% annual return on the purchase
price for a period of three years from the purchase date. If the asset fails
to produce the 12% return, ARI will pay TCI any shortfall. In addition, if
the asset fails to produce the 12% return for a calendar year, TCI may
require ARI to repurchase the interests in Woodsong for the purchase price.
Management has classified this related party transaction as a note payable
to TCI.

(7) In April 2002, TCI, a related party, purchased 100% of the common shares of
ART One Hickory Corporation ("One Hickory"), a wholly-owned subsidiary of
ARI, for $4.5 million. One Hickory owns the One Hickory Centre Office
Building. ARI has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARI will pay
TCI any shortfall. In addition, if the asset fails to produce the 12% return
for a calendar year, TCI may require ARI to repurchase the shares in One
Hickory for the purchase price. Management has classified this related party
transaction as a note payable to TCI.

In April 2002, ARI sold nine residential properties to Metra Capital, LLC
("Metra"), for a total sales price of $34.2 million. These properties include:
the 12 unit Bay Anchor Apartments in Panama City, Florida; the 168 unit Governor
Square Apartments in Tallahassee, Florida; the 54 unit Grand Lagoon Cove
Apartments in Panama City, Florida; the 92 unit Oak Hill Apartments in
Tallahassee, Florida; the 121 unit Park Avenue Villas Apartments in Tallahassee,
Florida; the 62 unit Seville Apartments in Tallahassee, Florida; the 120 unit
Westwood Apartments in Mary Ester, Florida; the 64 unit Windsor Tower Apartments
in Ocala, Florida and the 546 unit Woodhollow Apartments in San Antonio, Texas.
Two of the members of Metra are Third Millennium Partners, LLC and Innovo
Realty, Inc., a subsidiary of Innovo Group, Inc. ("Innovo"). Joseph Mizrachi, a
Director of ARI, has a beneficial interest in Third Millennium Partners, LLC and
owns 15.5% of the outstanding common stock of Innovo. Due to ARI's relationship
with Mr. Mizrachi, management has determined to treat this sale as a refinancing
transaction.

F-12

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ARI will continue to report the assets and the new debt incurred by Metra on its
financial statements. ARI received net cash of $8.3 million after paying off the
existing debt of $19.3 million and various closing costs, including $342,000 in
brokerage commissions to Third Millennium Partners, LLC. Of the total new debt
of $29.2 million, $8.8 million bears interest at 5.00% per annum and matures in
May 2003, $17.0 million bears interest at 7.12% per annum and matures in May
2007 and $3.4 million bears interest at 7.57% per annum and matures in May 2012.
ARI also received $6.3 million of 8% non-recourse, non-convertible Series A
Preferred Stock ("Preferred Shares") of Innovo.

The dividend on the Preferred Shares will be funded entirely and solely
through member distributions from cash flows generated by the operation and
subsequent sale of the sold properties. In the event the cash flows for the
properties are insufficient to cover the 8% annual dividend, Innovo will have no
obligation to cover any shortfall.

The Preferred Shares have a mandatory redemption feature, and are
redeemable from the cash proceeds received by Innovo from the operation and sale
of the properties. All member distributions that are in excess of current and
accrued 8% dividends must be used by Innovo to redeem the Preferred Shares.

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

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ACRES 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

NOTE 8. MARGIN BORROWINGS

ARI has margin arrangements with various financial institutions and
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 and TCI and ARI's trading portfolio
securities and bear interest rates ranging from 5.75% to 24.0%. Margin borrowing
totaled $27.1 million at March 31, 2002.

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 paying
various closing costs. The loan bears interest at 1% over the prime rate,
currently 5.75% per annum, requires monthly payments of interest and matures in
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

F-13

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 5.75% 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 no taxable income or provision for income taxes in the three months
ended March 31, 2002 or 2001.

NOTE 10. OPERATING SEGMENTS

Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of administrative expenses. Management
evaluates the performance of each of the operating segments and allocates
resources to them based on their net operating income and cash flow. Items of
income that are not reflected in the segments are equity in income (loss) of
investees, loss on sale of investments in equity investees and other income
which totaled $(228,000) for the three months ended March 31, 2002 and $28,000
for 2001. Expenses that are not reflected in the segments are general and
administrative expenses, minority interest, incentive fees, advisory fees and
net income fees which totaled $6.4 million for the three months ended March 31,
2002 and $7.3 million for 2001. Excluded from operating segment assets are
assets of $116.3 million in 2002 and $96.2 million in 2001, which are not
identifiable with an operating segment. There are no intersegment revenues and
expenses, and ARI conducted all of its business within the United States, with
the exception of Hotel Sofia, which is located in Bulgaria.

Presented below are ARI's reportable segments operating income for the
three months ended March 31, and segment assets at March 31.

COMMERCIAL U.S. INTERNATIONAL PIZZA RECEIVABLES/
2002 PROPERTIES APARTMENTS HOTELS HOTELS LAND PARLORS OTHER TOTAL
---- ---------- ---------- ------- ------------- -------- ------- ------------ --------

Operating revenue........ $ 10,555 $ 10,931 $ 6,558 $ 1,003 $ 62 $ 8,540 $ 243 $ 37,892
Interest income.......... -- -- -- -- -- -- 612 612
Operating expenses....... 5,494 6,136 5,229 575 2,374 6,953 84 26,845
-------- -------- ------- ------- -------- ------- ------- --------
Operating income
(loss)................. $ 5,061 $ 4,795 $ 1,329 $ 428 $ (2,312) $ 1,587 $ 771 $ 11,659
======== ======== ======= ======= ======== ======= ======= ========
Depreciation............. $ 1,582 $ 927 $ 523 $ 264 $ -- $ 257 $ 2 $ 3,555
Interest................. 4,807 3,328 1,131 30 6,168 203 3,125 18,792
Capital expenditures..... 1,289 212 161 -- 393 391 -- 2,446
Assets................... 172,354 105,899 67,299 22,696 212,626 20,794 28,507 630,175
PROPERTY SALES:
Sales price.............. $ 2,302 $ 22,625 $ 5,580 $ 30,507
Cost of sale............. 2,302 6,342 3,381 12,025
-------- -------- -------- --------
Gain on sale............. $ -- $ 16,283 $ 2,199(1) $ 18,482
======== ======== ======== ========

F-14

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(1) Includes $830 gain recognized in 2002 upon collection of note receivable for
2001 land sale.

COMMERCIAL U.S. INTERNATIONAL PIZZA RECEIVABLES/
2001 PROPERTIES APARTMENTS HOTELS HOTELS LAND PARLORS OTHER TOTAL
---- ---------- ---------- ------- ------------- -------- ------- ------------ --------

Operating revenue........ $ 9,133 $ 16,126 $ 7,001 $ 694 $ 63 $ 7,826 $ 196 $ 41,039
Interest income.......... -- -- -- -- -- -- 384 384
Operating expenses....... 5,146 9,826 6,050 534 1,919 6,422 (24) 29,873
-------- -------- ------- ------- -------- ------- ------- --------
Operating income
(loss)................. $ 3,987 $ 6,300 $ 951 $ 160 $ (1,856) $ 1,404 $ 604 $ 11,550
======== ======== ======= ======= ======== ======= ======= ========
Depreciation............. $ 1,781 $ 1,339 $ 629 $ -- $ -- $ 329 $ 1 $ 4,079
Interest................. 4,487 5,185 1,267 97 5,290 272 1,472 18,070
Capital expenditures..... 2,218 -- 152 1,000 65 338 -- 3,773
Assets................... 161,996 141,926 69,016 29,190 245,644 21,598 27,520 696,890
PROPERTY SALES:
Sales price.............. $ 7,350 $ 18,680 $ 20,490 $ 46,520
Cost of sale............. 5,058 4,546 16,701 26,305
-------- -------- -------- --------
Gain on sale............. $ 2,292 $ 14,134 $ 3,789 $ 20,215
======== ======== ======== ========

NOTE 11. COMMITMENTS AND CONTINGENCIES

Liquidity. Management expects that excess cash generated from operations
during the remainder of 2002 will not be sufficient to discharge all of ARI's
debt obligations as they mature. Therefore, ARI will rely on aggressive land
sales, selected income producing property sales and, to the extent necessary,
additional borrowings to meet its cash requirements.

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

Litigation. ART 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-15

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, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. 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.

As discussed in Note 1, ARI adopted the provisions of SFAS 144, Accounting
for Impairment of Long Lived Assets, in 2001.

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, 2001 and
2000, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.

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

BDO SEIDMAN, LLP

Dallas, Texas
April 1, 2002

F-16

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS
Real estate held for investment............................. $495,437 $559,461
Less -- accumulated depreciation............................ (121,777) (148,686)
-------- --------
373,660 410,775
Real estate held for sale................................... 214,543 242,969
Notes and interest receivable
Performing ($18,896 in 2001 and $9,684 in 2000 from
affiliates)............................................ 22,612 13,346
Nonperforming ($6,994 in 2001 and $1,540 in 2000 from
affiliates)............................................ 10,347 3,062
-------- --------
32,959 16,408
Less -- allowance for estimated losses...................... (2,577) (2,577)
-------- --------
30,382 13,831
Pizza parlor equipment...................................... 10,454 10,191
Less -- accumulated depreciation............................ (3,747) (3,164)
-------- --------
6,707 7,027
Leasehold interest -- oil and gas properties................ 4,719 --
Less -- accumulated depletion............................... (1) --
-------- --------
4,718 --
Oilfield equipment.......................................... 511 --
Less -- accumulated depreciation............................ (21) --
-------- --------
490 --
Marketable equity securities, at market value............... 96 153
Cash and cash equivalents................................... 709 4,177
Investments in equity investees............................. 77,933 44,777
Intangibles, net of accumulated amortization ($2,666 in 2001
and $2,233 in 2000)....................................... 15,594 16,075
Other assets................................................ 33,931 47,231
-------- --------
$758,763 $787,015
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and interest payable ($1,598 in 2001 to affiliate).... $564,298 $616,331
Margin borrowings........................................... 28,040 13,485
Accounts payable and other liabilities ($11,389 in 2001 and
$3,030 in 2000 to affiliates)............................. 48,960 41,221
-------- --------
641,298 671,037
Minority interest........................................... 27,612 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 shares in
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 11,375,127 shares in 2001 and 11,829,217 shares in
2000...................................................... 114 118
Paid-in capital............................................. 112,184 112,301
Accumulated (deficit)....................................... (31,364) (43,943)
Treasury stock at par, 1,718,749 shares in 2000............. -- (17)
-------- --------
85,884 73,402
-------- --------
$758,763 $787,015
======== ========

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

F-17

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Property revenue
Rents................................................. $ 129,300 $ 138,160 $ 157,631
Property operations expenses ($5,204 in 2001, $5,356
in 2000 and $6,822 in 1999 to affiliates).......... 93,185 94,081 106,554
----------- ----------- -----------
Operating income.............................. 36,115 44,079 51,077
Land operations
Sales................................................. 45,290 119,384 69,618
Cost of sales......................................... 36,083 90,383 46,066
----------- ----------- -----------
Gain on land sales............................ 9,207 29,001 23,552
Pizza parlor operations
Sales................................................. 34,211 32,551 30,781
Cost of sales......................................... 27,934 26,767 26,278
----------- ----------- -----------
Gross margin.................................. 6,277 5,784 4,503
Oil and gas operations
Sales................................................. 59 -- --
Operating expenses.................................... 269 -- --
----------- ----------- -----------
Gross margin.................................. (210) -- --
----------- ----------- -----------
Income from operations.................................. 51,389 78,864 79,132
Other income
Interest income ($2,239 in 2001, $1,843 in 2000 and
$187 in 1999 from affiliates)...................... 2,817 2,965 6,414
Equity in income of investees......................... 9,190 13,990 11,847
Loss on sale of equity investments.................... (387) (8,744) --
Gain on sale of real estate........................... 74,207 67,727 105,708
Other................................................. (369) (926) (846)
----------- ----------- -----------
85,458 75,012 123,123
Other expenses
Interest ($358 in 2000 and $2,393 in 1999 to
affiliates)........................................ 77,048 76,702 91,736
Depreciation, depletion and amortization.............. 17,707 16,879 17,376
General and administrative ($2,845 in 2001, $4,493 in
2000 and $5,824 in 1999 to affiliate).............. 12,743 17,131 17,111
Advisory fee to affiliate............................. 6,715 5,891 5,538
Net income fee to affiliate........................... 166 -- --
Incentive fee to affiliate............................ 3,827 1,646 --
Litigation settlement................................. 100 -- 425
Provision for loss.................................... 2,500 2,248 3,109
Minority interest..................................... 972 30,700 56,662
----------- ----------- -----------
121,778 151,197 191,957
----------- ----------- -----------
Net income.............................................. 15,069 2,679 10,298
Preferred dividend requirement.......................... (2,485) (2,327) (2,281)
----------- ----------- -----------
Net income applicable to Common shares.................. $ 12,584 $ 352 $ 8,017
=========== =========== ===========
Earnings per share
Net income............................................ $ 1.07 $ .03 $ .75
=========== =========== ===========
Weighted average Common shares used in computing
earnings per share.................................... 11,714,374 10,399,890 10,759,416
=========== =========== ===========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-18

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, 1999...... $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
Series A Preferred Stock cash
dividend ($1.00 per
share)...................... -- -- -- -- -- -- (2,455) (2,455)
Series A Preferred Stock
issued...................... 7 -- -- -- -- 29 -- 36
Series E Preferred Stock cash
dividend ($0.60 per
share)...................... -- -- -- -- -- -- (30) (30)
Retirement of Treasury
Stock....................... -- -- -- -- 17 (17) -- --
Repurchase of Common Stock.... -- -- -- -- -- (133) -- (133)
Cancellation of Common
Stock....................... -- -- -- (4) -- 4 -- --
Common Stock dividends
(pre-merger)................ -- -- -- -- -- -- (5) (5)
Net income.................... -- -- -- -- -- -- 15,069 15,069
------ ---- --- ---- ---- -------- -------- -------
BALANCE, DECEMBER 31, 2001.... $4,850 $100 $-- $114 $ -- $112,184 $(31,364) $85,884
====== ==== === ==== ==== ======== ======== =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-19

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Rents collected........................................... $126,350 $138,212 $156,473
Pizza parlor sales collected.............................. 33,997 32,526 31,361
Interest collected ($1,220 in 2001, $1,490 in 2000 and
$261 in 1999 from affiliates).......................... 1,772 4,393 4,221
Distributions from equity investees' operating
activities............................................. 53 1,823 3,533
Interest paid............................................. (62,608) (66,955) (72,957)
Payments for property operations ($5,204 in 2001, $1,792
in 2000 and $6,822 in 1999 to affiliates).............. (99,509) (105,523) (101,275)
Payments for pizza parlor operations...................... (27,563) (26,646) (27,044)
Payments for oil and gas operations....................... (259) -- --
Advisory fee paid to affiliate............................ (6,715) (5,050) (5,538)
Incentive fee paid to affiliate........................... (1,646) -- --
Distributions to minority interest holders................ (4,114) (4,941) (6,792)
General and administrative expenses paid ($2,845 in 2001,
$4,493 in 2000 and $5,824 in 1999 to affiliate)........ (12,740) (18,139) (16,634)
Other..................................................... 4,371 (4,278) 13,376
-------- -------- --------
Net cash used in operating activities............. (48,611) (54,578) (21,276)
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable ($21 in 2001, $17,324 in
2000, $918 in 1999 from affiliates).................... 4,995 36,039 39,978
Proceeds from sale of notes receivable.................... -- 3,893 --
Notes receivable funded................................... (14,094) (14,674) (63,728)
Proceeds from sale of real estate......................... 136,171 148,141 253,506
Purchase of marketable equity securities.................. -- (5,316) (3,709)
Proceeds from sale of marketable equity securities........ -- 5,252 5,388
Acquisitions of real estate............................... -- (15,882) (77,918)
Real estate improvements.................................. (19,581) (24,547) (12,252)
Acquisition of EQK Realty Investors, I.................... -- (1,125) --
Pizza parlor equipment purchased.......................... (1,493) (1,087) (895)
Acquisition of leasehold interests........................ (400) -- --
Purchase of oilfield equipment............................ (511) -- --
Earnest money deposits.................................... (1,825) (7,703) 6,725
Investment in real estate entities........................ (39,505) 4,602 (3,570)
-------- -------- --------
Net cash provided by investing activities......... 63,757 127,593 143,525

F-20

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable............................... $146,773 $177,144 $133,039
Margin borrowings (payments), net......................... 14,389 (21,624) (7,362)
Payments on notes payable................................. (171,531) (197,849) (256,307)
Deferred borrowing costs.................................. (9,478) (10,528) (8,256)
Net advances from (payments to) affiliates................ 3,833 (15,887) 9,997
Redemption of Preferred Stock............................. -- -- (100)
Sale of Preferred Stock................................... -- 500 500
Sale of Common Stock under dividend reinvestment plan..... -- -- 9
Dividends paid............................................ (2,467) (2,327) (2,813)
Repurchase of Common Stock................................ (133) (746) --
-------- -------- --------
Net cash used in financing activities............. (18,614) (71,317) (131,293)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (3,468) 1,698 (9,044)
Cash and cash equivalents, beginning of year................ 4,177 2,479 11,523
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 709 $ 4,177 $ 2,479
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING
ACTIVITIES
Net income................................................ $ 15,069 $ 2,679 $ 10,298
Adjustments to reconcile net income to net cash used in
operating activities
Gain on sale of real estate............................... (83,414) (96,728) (129,260)
Depreciation, depletion and amortization.................. 17,707 16,879 17,376
Amortization of deferred borrowing costs.................. 14,335 10,382 11,054
Provision for loss..................................... 2,500 2,248 3,110
Litigation settlement..................................... 100 -- 425
Equity in income of investees............................. (8,803) (5,246) (11,847)
Distributions from equity investees' operating
activities............................................. 53 1,823 3,533
(Increase) decrease in accrued interest receivable........ (1,045) 1,428 (746)
(Increase) decrease in other assets....................... 1,517 (3,325) 7,068
Increase (decrease) in accrued interest payable........... (61) (2,441) 5,450
Increase (decrease) in accounts payable and other
liabilities (includes $4,526 increase in 2001 and
$1,645 in 2000 in payable due to affiliate)............ (3,427) (8,036) 12,393
Increase (decrease) in minority interest.................. (3,142) 25,759 49,870
-------- -------- --------
Net cash used in operating activities............. $(48,611) $(54,578) $(21,276)
======== ======== ========

F-21

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Notes payable from acquisition of real estate............. $ 2,549 $ 6,262 $ 69,159
Notes payable assumed by buyer upon sale of real estate... 34,293 40,460 6,776
Conversion of notes receivable to property interest....... -- -- 30,138
Series A Preferred Stock issued in conjunction with the
acquisition of EQK Realty Investors, I................. 36 1,213 --
Current value of property obtained through foreclosure of
note receivable........................................ -- -- 7,638
Carrying value of real estate exchanged for other real
estate................................................. 3,726 2,971 --
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................. 6,336 2,790 --
Series F Preferred Stock issued in conjunction with the
acquisition of leasehold interests in oil and gas
properties............................................. 3,969 -- --
Contribute new pizza restaurant to new venture............ 210 -- --
Asset impairment writedown................................ 2,500 -- --

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-22

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 1999 and 2000 have been reclassified to conform to the
2001 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.

On October 23, 2001, ARI, Transcontinental Realty Investors, Inc. ("TCI"),
and Income Opportunity Realty Investors, Inc. ("IORI") jointly announced a
preliminary agreement with the plaintiff's legal counsel of the derivative
action entitled Olive et al. V. National Income Realty Trust, et al. for
complete settlement of all disputes in the lawsuit. In February 2002, the court
granted final approval of the proposed settlement. Under the proposal, ARI would
acquire all of the outstanding shares of IORI and TCI not currently owned by ARI
for a cash payment or shares of ARI preferred stock. ARI will pay $17.50 cash
per TCI share and $19.00 cash per IORI share for the stock held by
non-affiliated stockholders. ARI will issue one share of Series G Preferred
Stock with a liquidation value of $20.00 per share for each share of TCI Common
Stock for stockholders who affirmatively elect to receive ARI Preferred Stock in
lieu of cash. ARI will issue one share of Series H Preferred Stock with a
liquidation value of $21.50 per share for each share of IORI Common Stock for
stockholders who affirmatively elect to receive ARI Preferred Stock in lieu of
cash. All affiliated stockholders will receive ARI Preferred Stock. Each share
of Series G Preferred Stock will be convertible into 2.5 shares of ARI Common
Stock, and each share of Series H Preferred Stock will be convertible into 2.25
shares of ARI Common Stock during a 75-day period that commences fifteen days
after the date of the first ARI Form 10-Q filing that occurs after the closing
of the merger transaction. Upon the acquisition of IORI and TCI shares, TCI and
IORI would become wholly-owned subsidiaries of ARI. The transaction is subject
to the negotiation of a definitive merger agreement and a vote of the
shareholders of all three entities. ARI has the same advisor as TCI and IORI,
and TCI and IORI have the same board of directors.

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

F-23

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NRLP prior to December 31, 1998. 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 materially 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.

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

SFAS 142 requires, among other things that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that ARI identify reporting units in order to assess
potential future impairment of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. SFAS 142 requires that an intangible
asset with an indefinite useful life be tested for impairment in accordance with
specified guidelines. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires ARI to complete a transitional goodwill impairment
test six months from the date of adoption. ARI is also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142. Currently, ARI does not believe that the adoption of SFAS
141 and SFAS 142 will impact its financial position and results of operations.

SFAS 143 requires that the fair value for an asset retirement obligation be
recognized in the period in which it is incurred, if a reasonable estimate of
fair value can be made, and that the carrying value of the asset, including
capitalized asset retirement costs, be tested for impairment. SFAS 143, is
effective for fiscal years beginning after June 15, 2002. Management does not
believe this statement will have a material effect on ARI's financial position
or results of operations.

Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Effective January 1, 2002 ARI adopted Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144") requires that a
property be considered impaired, if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the property. If impairment exists, an impairment loss is recognized, by a
charge against earnings, equal to the amount by
F-24

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which the carrying amount of the property exceeds the fair value less cost to
sell the property. If impairment of a property is recognized, the carrying
amount of the property is reduced by the amount of the impairment, and a new
cost for the property is established. Such new cost is depreciated over the
property's remaining useful life. Depreciation is provided by the straight-line
method over estimated useful lives, which range from five to 40 years.

Real estate held for sale. Foreclosed real estate is initially recorded at
new cost, defined as the lower of original cost or fair value minus estimated
costs of sale. SFAS No. 144 also requires that properties held for sale be
reported at the lower of carrying amount or fair value less costs of sale. If a
reduction in a held for sale property's carrying amount to fair value less costs
of sale is required, a provision for loss is recognized by a charge against
earnings. Subsequent revisions, either upward or downward, to a held for sale
property's estimated fair value less costs of sale 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 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.

F-25

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. See Note 12. "Stock Options."

NOTE 2. REAL ESTATE

In 2001, ARI purchased the following property:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS PRICE PAID INCURRED RATE DATE
-------- -------- --------- -------- -------- -------- -------- --------

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 TCI, a related party.

(2) Assumed debt of seller. Exchanged with TCI, a related party.

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 136 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.

(4) Property sold in September 2000.

F-26

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2001, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN (LOSS)
PROPERTY LOCATION SQUARE FEET/ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ----------------- ------- -------- ---------- -----------

APARTMENTS
Ashford................... Tampa, FL 56 Units $ 2,145 $ 593 $ 1,182 $ (985)
Bent Tree................. Addison, TX 292 Units 12,050 2,480 8,867 7,081
Blackhawk................. Ft. Wayne, IN 209 Units 7,100 904 4,030 5,110
Carriage Park............. Tampa, FL 46 Units 2,005 757 1,069 663
Chalet I.................. Topeka, KS 162 Units 5,650 1,288 4,109(1) 3,952
Chalet II................. Topeka, KS 72 Units 2,100 485 1,550(1) 434
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 6,042
Crossing at Church........ Tampa, FL 52 Units 1,880 750 948 623
Glenwood.................. Addison, TX 168 Units 6,650 3,166 2,549 (581)
Kimberly Woods............ Tucson, AZ 279 Units 8,450 1,667 6,191(1) 6,053
Nora Pines................ Indianapolis, IN 254 Units 9,850 2,548 5,574 6,957
Place One................. Tulsa, OK 407 Units 12,935 3,310 7,539 8,623
Rockborough............... Denver, CO 345 Units 16,675 3,654 12,215(1) 13,471
Shadowood................. Addison, TX 184 Units 7,125 1,980 4,320 4,644
Timbercreek............... Omaha, NE 180 Units 7,500 1,871 4,517 5,219
Woodstock................. Dallas, TX 320 Units 9,600 3,877 4,542 5,951
SHOPPING CENTER
Regency Pointe............ Jacksonville, FL 67,410 Sq.Ft. 7,350 5,126 1,500 2,232
LAND
Chase Oaks................ Plano, TX 22.3 Acres 2,875 663 2,027 871
Chase Oaks................ Plano, TX 4.9 Acres 1,973 1,832 -- 1,416
Elm Fork.................. Denton County, TX 10.0 Acres 1,002 (30) 958 283
Elm Fork.................. Denton County, TX 107.0 Acres 5,600 (168) 5,316 (1,616)
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)
Katrina................... Palm Desert, CA 20.0 Acres 2,940 78 -- 616
Katrina................... Palm Desert, CA 6.1 Acres 1,196 1,108 -- 570
Katrina................... Palm Desert, CA 2.2 Acres 800 (24) 737 514
Katrina................... Palm Desert, CA 1.4 Acres 284 (9) 253 93
Las Colinas............... Las Colinas, TX 1.7 Acres 825 233 400 539
Mason/Goodrich............ Houston, TX 22.1 Acres 4,168 (34) 3,750 2,896
Nashville................. Nashville, TN 2.0 Acres 26 (1) 24 (82)
Nashville................. Nashville, TN 1.2 Acres 8 -- 4 (59)
Nashville................. Nashville, TN 4.2 Acres 600 (53) 561 302
Plano Parkway............. Plano, TX 11.3 Acres 1,445 312 950 --
Plano Parkway............. Plano, TX 12.0 Acres 740 672 -- (991)
Rasor..................... Plano, TX 6.6 Acres 350 267 -- 34
Santa Clarita............. Santa Clarita, CA 12.7 Acres 2,100 1,791 -- 952
Santa Clarita............. Santa Clarita, CA 6.7 Acres 500 608 -- (501)
Scoggins.................. Tarrant County, TX 232.8 Acres 2,913 892 1,800 181

F-27

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

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
Vista Ridge............... Denton County, TX 27.4 Acres 871 (26) 812 (1,993)
Watersedge................ Gulfport, MS .4 Acres 80 78 -- --(3)
Yorktown.................. Harris County, TX 120.4 Acres 5,239 (160) 4,991 (1,497)

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

(1) Debt assumed by purchaser.

(2) Gain of $830 deferred until ARI-provided financing is collected.

(3) Sold to TCI, a related party. Gain of $65 deferred until sale to unrelated
party.

In 2000, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION SQ.FT./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
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,III,IV,V............ Collin County, TX 82.0 Acres 9,150 613 8,123 1,638

F-28

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS/ SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION SQ.FT./ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- --------------- ------- -------- ---------- -----------

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
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.

NOTE 3. NOTES AND INTEREST RECEIVABLE

2001 2000
------------------- -------------------
ESTIMATED ESTIMATED
FAIR BOOK FAIR BOOK
VALUE VALUE VALUE VALUE
--------- ------- --------- -------

Notes receivable
Performing (including $18,834 in 2001 and $8,433 in
2000 from affiliates)............................ $21,021 $22,470 $11,543 $11,965
Nonperforming (including $5,802 in 2001 and $1,540
in 2000 from affiliates)......................... 8,762 8,943 3,017 3,062
------- ------- ------- -------
$29,783 31,413 $14,560 15,027
======= =======
Interest receivable (including $1,254 in 2001 and
$1,251 in 2000 from affiliate)................... 1,546 1,381
------- -------
$32,959 $16,408
======= =======

Interest income is recognized on nonperforming notes receivable on a cash
basis. For the years 2001, 2000 and 1999 unrecognized interest income on such
nonperforming notes receivable totaled $233,000, $316,000 and $1.0 million,
respectively.

Notes receivable at December 31, 2001, mature from 2000 to 2004 with
interest rates ranging from 0.00% to 14.0% per annum and a weighted average rate
of 11.8% per annum. Notes receivable are

F-29

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $11.6 million
are due in 2002.

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. In January 2002, $274,000 in principal and $226,000 in interest was
collected. In March 2002, the note was collected in full, including accrued but
unpaid interest.

In 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 were due at maturity. In July 2001,
the note was collected in full, including accrued but unpaid interest.

In November 2001, ARI sold a 12.71 acre tract of its Santa Clarita parcel
for $1.9 million, receiving $1.5 million in cash and providing purchase money
financing of the remaining $437,000 of the sales price. The loan bears interest
at 8.00% per annum and matures in November 2002. All principal and accrued but
unpaid interest are due at maturity.

Also in November 2001, ARI sold the Blackhawk Apartments for $7.1 million
receiving $1.5 million in cash after the assumption of $4.0 million of mortgage
debt and providing purchase money financing of the remaining $1.6 million of the
sales price. The loan bears interest at 10.00% per annum and matures in May
2002. Monthly principal and interest payments are required. All remaining
principal and accrued but unpaid interest are due at maturity.

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 bore
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 was secured by 100% of the shares of DM Development,
Inc. and an assignment of proceeds. In March 2001, $850,000 in principal and
interest was collected. In June 2001, the loan was collected in full, including
accrued but unpaid interest.

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 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

F-30

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 was secured by five
second lien deeds of trust, was non-interest bearing and matured in September
2001. Payment was not received at maturity, and ARI began accruing default
interest. In December 2001, the $100,000 loan was collected in full, including
accrued but unpaid interest.

In December 1999, a note with a principal balance of $1.2 million and
secured by a pledge of a partnership interest in a partnership which owns real
estate in Addison, Texas, matured. The maturity date was extended to April 2000
in exchange for an increase in the interest rate to 14.0% per annum. All other
terms remained the same. In February 2001, the loan amount was increased to $1.6
million and the maturity date was extended to June 2001. In February 2002, $1.5
million in principal and $87,000 in interest was collected. ARI has demanded
payment of the remaining $84,000 in principal plus accrued but unpaid interest.

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)

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 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 14.8% of the outstanding shares of ARI's Common Stock. The line of
credit bears interest at 12.0% per annum. All principal and interest were due at
maturity in February 2002. The line of credit is guaranteed by BCM. In June
2001, $394,000 in principal and $416,000 in interest was collected. In December
2001, $21,000 in principal and $804,000 in interest was collected. In February
2002, the maturity date was extended to February 2004. All principal and
interest are due at maturity. Ronald E. Kimbrough, Executive Vice President and
Chief Financial Officer of ARI, is a 10% shareholder of One Realco. During 2001,
Mr. Kimbrough did not participate in the day-to-day operations or management of
One Realco.

In October 1999, ARI funded a $4.7 million loan to Realty Advisors, Inc.,
an affiliate. The loan was secured by all of the outstanding shares of common
stock of American Reserve Life Insurance Company. The loan bore interest at
10.25% per annum, and matured in November 2001. In January 2000, $100,000 was
collected. In November 2001, the maturity date was extended to November 2004.
The collateral was changed to a subordinate pledge of 850,000 shares of ARI
Common Stock owned by BCM. The shares are also pledged to a lender on ARI's
behalf. The interest rate was changed to 2% over the prime rate, currently 6.75%
per annum, and the accrued but unpaid interest of $984,000 was added to the
principal. The new principal balance is $5.6 million. All principal and accrued
interest are due at maturity.

In December 2000, an unsecured loan with a principal balance of $1.7
million to Warwick of Summit, Inc. ("Warwick") matured. All principal and
interest were due at maturity. At December 2001, the loan, and $451,000 of
accrued interest, remained unpaid. At March 2002, 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 December 2001, the loan, and $471,000 of
accrued interest, remained unpaid. At March 2002, settlement terms are being
negotiated. Richard D. Morgan, a Bordeaux member, served as a director of ARI
until October 2001.

F-32

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In March 2000, a loan with a principal balance of $2.5 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 December 2001, the loan, and $741,000 of accrued
interest, remained unpaid. At March 2002, settlement terms are being negotiated.
A corporation controlled by Richard D. Morgan is the general partner of
Lordstown, L.P. Mr. Morgan served as a director of ARI until October 2001.

NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

2001 2000 1999
------ ------ -------

Balance January 1,........................................ $2,577 $2,577 $ 2,398
NRLP allowance............................................ -- -- 1,910
Write down of property.................................... -- -- (1,731)
------ ------ -------
Balance December 31,...................................... $2,577 $2,577 $ 2,577
====== ====== =======

NOTE 5. OIL AND GAS OPERATIONS

NOTE 6. INVESTMENTS IN EQUITY INVESTEES

Investments in equity investees at December 31, 2001, 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.

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-33

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 2001 2001 2001 2001
-------- ------------- ------------- ------------- ----------------

IORI............................. 27.44% $ 6,789 $ 10,034 $ 7,379
TCI.............................. 49.99 68,498 108,369 64,533
------- -------- -------
75,287 $118,403 $71,912
======== =======
Other............................ 2,646
-------
$77,933
=======

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
=======

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 2002, as its liquidity permits. On October 3,
2000, ARI and IORI entered into an 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. See Item 1.
"Business" for discussion of the proposed acquisition of TCI and IORI by ARI.

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 in income of investees in the accompanying
Consolidated Financial Statements.

In January 2002, Investors Choice Florida Public Funds II, in which ART
Florida Portfolio II, Ltd. owned an interest, sold Villas Continental
Apartments. ARI received $1.0 million in cash from the sale. ARI's share of the
loss incurred on the sale was $531,000, which will be included in equity in
income of investees in the Consolidated Statement of Operations.

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.

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.

F-34

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below are summary financial data for equity investees:

2001 2000
--------- ---------

Property and notes receivable, net.......................... $ 732,556 $ 748,935
Other assets................................................ 68,429 74,462
Notes payable............................................... (515,463) (550,280)
Other liabilities........................................... (33,532) (31,551)
--------- ---------
Equity...................................................... $ 251,990 $ 241,566
========= =========

2001 2000 1999
--------- --------- --------

Revenues........................................... $ 145,095 $ 155,160 $ 99,077
Depreciation....................................... (22,132) (22,152) (14,417)
Provision for losses............................... (281) -- --
Interest........................................... (47,132) (53,065) (33,355)
Operating expenses................................. (113,471) (103,787) (60,578)
--------- --------- --------
(Loss) before gains on sale of real estate......... (37,921) (23,844) (9,273)
Gains on sale of real estate....................... 54,270 71,428 41,804
--------- --------- --------
Net income......................................... $ 16,349 $ 47,584 $ 32,531
========= ========= ========

ARI's equity share of:

2001 2000 1999
--------- --------- --------

(Loss) before gains on sale of real estate......... $ (13,646) $ (5,260) $ (5,512)
Gains on sale of real estate....................... 22,542 18,571 17,359
--------- --------- --------
Net income......................................... $ 8,896 $ 13,311 $ 11,847
========= ========= ========

In 2001, ARI received $53,000 from TCI in accumulated dividends on shares
of CMET that should have been exchanged for TCI common stock in 1999.

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.

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

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 2001, ARI did not purchase or sell any
trading portfolio securities. Trading portfolio securities are considered
available for sale and are carried at market value. In 2000, ARI purchased $5.3
million and sold $5.3 million of trading portfolio securities. At December 31,
2001, ARI recognized an unrealized decline in the market value of trading
portfolio securities of $55,000. In 2001, ARI realized no gains or losses from
the sale of trading portfolio securities and received no dividends. 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

F-35

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

received $5,000 in dividends. Unrealized and realized gains and losses in
trading portfolio securities are included in other income in the accompanying
Consolidated Statements of Operations.

NOTE 8. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

2001 2000
--------------------- ---------------------
ESTIMATED BOOK ESTIMATED BOOK
FAIR VALUE VALUE FAIR VALUE VALUE
---------- -------- ---------- --------

NOTES PAYABLE
Mortgage loans............................. $559,367 $551,207 $600,395 $604,858
Borrowings from financial institutions..... 8,620 8,476 9,029 8,451
Notes payable to affiliates................ 1,733 1,598 -- --
-------- -------- -------- --------
$569,720 561,281 $609,424 613,309
======== ========
Interest payable........................... 3,017 3,022
-------- --------
$564,298 $616,331
======== ========

Scheduled principal payments on notes payable are due as follows:

2002........................................................ $267,526
2003........................................................ 40,866
2004........................................................ 8,153
2005........................................................ 57,001
2006........................................................ 15,714
Thereafter.................................................. 172,021
--------
$561,281
========

Stated interest rates on notes payable ranged from 5.0% to 16.9% per annum
at December 31, 2001, and matured in varying installments between 2002 and 2019.
At December 31, 2001, notes payable were collateralized by deeds of trust on
real estate with a net carrying value of $569.7 million.

In January 2002, the lender on three of ARI's residential properties
located in Florida commenced foreclosure actions, due to ARI's failure to pay
the loans at maturity on January 1, 2002. ARI has filed counterclaims asserting
the lender had abruptly withdrawn from discussions for refinancing. The balance
owed on the three loans is $7.2 million. ARI is pursuing alternative financing
for the properties.

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

UNITS/SQ.FT. DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ROOMS/ACRES INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- -------------- -------- ---------- -------- -------- --------

APARTMENTS
Sun Hollow........... El Paso, TX 216 Units $ --(1) $ -- $ -- -- --
Waters Edge III...... Gulfport, MS 238 Units --(1) -- -- -- --
Woodlake............. Carrollton, TX 256 Units --(1) -- -- -- --

F-36

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITS/SQ.FT. DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ROOMS/ACRES INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- -------------- -------- ---------- -------- -------- --------

OFFICE BUILDING
Centura Tower........ Farmers Branch, TX 410,910 Sq.Ft. 28,739 28,384 (526) 10.50% 07/02
Executive Court...... Memphis, TN 41,840 Sq.Ft. 1,970 -- 1,598 12.00 12/04(9)
Four Hickory Centre.. Farmers Branch, TX 221,000 Sq.Ft. 5,000 -- 5,000 6.75(5) 10/02
Rosedale Towers...... Minneapolis, MN 84,798 Sq.Ft. 7,500(1) -- 7,500 5.00 07/02
SHOPPING CENTER
Cross County......... Mattoon, IL 307,174 Sq.Ft. 3,200 700 2,436 15.00 06/02
Cullman.............. Cullman, AL 92,486 Sq.Ft. --(2) 129 -- -- --
Sesame Square Anchorage, AK 27,651 Sq.Ft. 800 -- 777 15.00 06/02
Westwood............. Tallahassee, FL 149,244 Sq.Ft. 3,000 700 2,221 15.00 06/02
HOTEL
Williamsburg
Hospitality
House.............. Williamsburg, VA(3) 296 Rooms 10,309 -- 9,851 36.00 01/02(6)
LAND
Chase Oaks........... Plano, TX 6.9 Acres 1,633 1,000 425 13.00 03/03
Hollywood Casino..... Farmers Branch, TX 51.7 Acres 2,500(4) -- 1,916 9.00 04/03
Jeffries Ranch....... Oceanside, CA 82.4 Acres 5,250(2) 750 3,944 14.50 06/02
Katrina.............. Palm Desert, CA 300.5 Acres 22,000 15,584 4,417 12.50(5) 10/02
Marine Creek......... Fort Worth, TX 54.2 Acres 1,500 750 701 9.00 01/03
Mason/Goodrich....... Houston, TX 235.0 Acres 6,750 -- 6,302 14.00 01/02(7)
Mercer Crossing...... Carrollton, TX 31.3 Acres 2,937 1,986 16 13.00 03/03
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(8)
Valwood.............. Dallas County, TX 19.4 Acres --(4) -- -- -- --
Varner Road.......... Riverside, CA 127.8 Acres 2,450 -- 2,333 9.00 10/02
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
Willow Springs....... Riverside, CA 1,485.7 Acres --(2) -- -- -- --

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

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

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

(3) Also secured by 1,846,000 shares of TCI Common Stock.

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

(5) Variable interest rate.

(6) Paid off in September 2001.

(7) Extended to April 2002.

(8) Extended to April 2002.

(9) In December 2001, TCI, a related party, purchased 100% of the outstanding
common shares of National Melrose, Inc. ("NM"), a wholly-owned subsidiary of
ARI, for $2.0 million. NM owns the Executive Court Office Building. ARI has
guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the
asset fails to produce the annual return, ARI will pay TCI any shortfall. In
addition, if the asset fails to

F-37

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

produce 12% return for a calendar year, TCI may require ARI to repurchase the
shares of NM for the purchase price. Management has classified this related
party transaction as a note payable to TCI.

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

ACRES/ DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION UNITS/SQ.FT. 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
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 5.75% to 24.0% per annum. Margin
borrowings were $28.0 million at December 31, 2001, and $13.5 million at
December 31, 2000, 39.2% and 46.1%, respectively, of the market values of the
equity securities at those dates.

F-38

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In June 2000, 1.6 million shares of TCI common stock and 54,000 shares of
IORI common 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
loss on sale of equity investments in the Consolidated Statements of Operations.
See Note 6. "Investments in Equity Investees."

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 common stock owned by ARI and 128,000 shares of
ARI Common Stock owned by One Realco.

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 5.75% per annum, requires monthly payments of interest only and
matures September 2002. 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.

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 or 2001. 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. ARI reported to the Internal Revenue Service that 100% of the dividends
paid on Common Stock in 1999 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

F-39

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 ARI Common
Stock at 90% of the average daily closing price of ARI's Common Stock for the
prior 20 trading days. At December 31, 2001, 2,724,910 shares of Series A
Preferred Stock were outstanding and 1,808,879 shares were reserved for issuance
as future consideration in various business transactions. Of the outstanding
shares, 300,000 shares are owned by ART Edina, Inc., a wholly-owned subsidiary
of ARI. Dividends are not paid on these shares.

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, 2001, two
million of the Class A units remained to be purchased in May 2002. At December
31, 2001, 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.P. At December 31, 2001, 13,438,750 Class A units
were outstanding. The Class A units may be exchanged for Series C Preferred
Stock at the rate of 100 Class A units for each share of Series C Preferred
Stock. At 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 16,250
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 16,250
shares of ARI Common Stock. On or after December 31, 2006, all remaining
outstanding shares of Series C Preferred Stock may be converted into ARI Common
Stock. All conversions of Series C Preferred Stock 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. 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 10.0% per annum, with a payment of $1.9
million plus accrued but unpaid interest due at maturity in December 2002. At
December 31, 2001, no Series C Preferred Stock was outstanding.

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

F-40

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2001, 50,000 shares of Series E Preferred Stock were outstanding.

There are 4,961 shares of Series F Redeemable Preferred Stock authorized,
with a par value of $2.00 per share and a liquidation value of $1,000 per share.
There are no dividends. The shares are redeemable quarterly in an amount equal
to 20% of net cash flow from oil and gas operations. Through December 2001,
sales have totaled $59,000, total operating expenses are $269,000 and oil field
equipment purchases have been $511,000. At December 31, 2001, 3,968.75 shares of
Series F Preferred Stock were outstanding. See Note 5. "Oil and Gas Operations."

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.

2001 2000 1999
------------------------ ------------------------ ------------------------
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ------------ --------- ------------ --------- ------------

Outstanding at January
1,................... 205,750 $16.35-18.53 297,250 $16.35-18.53 276,750 $ 16.35
Granted................ -- -- 37,500 18.53
Canceled............... (32,000) 16.35-18.53 (91,500) 16.35 (17,000) 16.35
------- ------- -------
Outstanding at December
31,.................. 173,750 16.35-18.53 205,750 16.35-18.53 297,250 16.35-18.53
======= ======= =======

At December 31, 2001, 83,850 options were exercisable at an exercise price
of $16.35 per Common share and 13,600 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, 2001 and 2002, each
Independent Director was granted an option to purchase 1,000 Common shares at
exercise prices of $18.53, $13.625 and $9.87 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, 2001, 10,000 options
were exercisable at prices ranging from $13.625 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 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

F-41

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," net income and net income per share would have been the pro forma
amounts indicated below.

2001 2000 1999
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------

Net income applicable to common
shares........................ $12,584 $11,915 $352 $21 $8,017 $7,673
Net income applicable to common
shares, per share............. 1.07 1.02 .03 -- .75 .71

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:

2001 2000 1999
---- ---- ----

Dividend yield.............................................. -- -- .29%
Expected volatility......................................... 72% 43% 18%
Risk-free interest rate..................................... 1.25% 5.75% 5.75%
Expected lives (in years)................................... 10 10 9
Forfeitures................................................. 10% 10% 10%

The weighted average fair value per share of options in 2001 was $6.86.

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 has
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services for ARI.

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.

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.

F-42

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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"), an affiliate, and Carmel Realty, Inc.
("Carmel") provide property management services to ARI's properties for a fee of
5% or less of the monthly gross rents collected on the residential properties
under its management and 3% or less of the monthly gross rents collected on the
commercial properties under its management. Triad and Carmel subcontract with
other entities for property-level management services at various rates. The
general partner of Triad is BCM. The limited partner of Triad is GS Realty
Services, Inc. ("GS Realty"), a related party. Triad subcontracts the
property-level management of 13 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 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. Carmel is a company owned by First Equity
Properties, Inc., which is a company affiliated with BCM.

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

Fees and cost reimbursements to BCM and its affiliates were as follows:

2001 2000 1999
------- ------- -------

Fees
Advisory fee.......................................... $ 6,715 $ 5,049 $ 5,538
Net income fee........................................ 166 -- --
Incentive fee......................................... 3,827 1,646 --
Loan arrangement...................................... 1,221 1,186 941
Brokerage commissions................................. -- 1,152 10,706
Property and construction management and leasing
commissions*....................................... -- 1,385 3,688
------- ------- -------
$11,929 $10,418 $20,873
======= ======= =======
Cost reimbursements................................... $ 2,845 $ 5,335 $ 5,824
======= ======= =======

Fees paid to Triad, an affiliate, and GS Realty, a related party:

2001 2000
------ ------

Fees
Real estate brokerage..................................... $5,883 $5,777
Property and construction management and leasing
commissions*........................................... 3,919 2,011
------ ------
$9,802 $7,788
====== ======

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

* Net of property management fees paid to subcontractors, other than affiliates
of BCM.

F-43

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16. INCOME TAXES

ARI had losses for federal income tax purposes for 2001, 2000 and 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, 2001, ARI's tax basis in its net real and
personal property assets exceeded their basis for financial statement purposes
by $32.4 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, 2001, ARI had current and carryforward net operating losses of
$146.0 million expiring through the year 2021. Certain of the net operating and
capital loss carryforwards may be subject to limitation under the current tax
laws.

At December 31, 2001, ARI had a net deferred tax asset of $60.0 million due
to tax deductions available to it in future years. However, as management cannot
determine that it is more likely than not that ARI will realize the benefit of
the deferred tax asset, a 100% valuation allowance has been established.

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 2015. The following is a schedule of minimum future
rents under non-cancelable operating leases as of December 31, 2001:

2002........................................................ $17,107
2003........................................................ 15,299
2004........................................................ 13,059
2005........................................................ 11,163
2006........................................................ 8,974
Thereafter.................................................. 33,743
-------
$99,345
=======

Pizza World Supreme, Inc. ("PWSI") conducts its operations from leased
facilities which include office space, a warehouse, and 52 pizza parlor
locations for which a lease was signed and the pizza parlor was either open at
December 31, 2001 or scheduled to open thereafter. The leases expire over the
next 20 years. PWSI also leases vehicles under operating leases.

The following is a schedule of minimum future rent commitments under
operating leases as of December 31, 2001:

2002........................................................ $ 2,222
2003........................................................ 2,126
2004........................................................ 2,032
2005........................................................ 1,784
2006........................................................ 1,502
Thereafter.................................................. 4,759
-------
$14,425
=======

F-44

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total facilities and automobile rent expense relating to these leases was
$2.2 million in 2001, $2.5 million in 2000 and $2.9 million in 1999.

NOTE 18. OPERATING SEGMENTS

Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of administrative expenses. Management
evaluates the performance of each of the operating segments and allocates
resources to them based on their net operating income and cash flow. Items of
income that are not reflected in the segments are equity in income of investees
and other income which totaled $8.4 million in 2001, $4.3 million in 2000 and
$11.0 million in 1999. Expenses that are not reflected in the segments are
general and administrative expenses, minority interest, incentive fees, advisory
fees, net income fees, litigation settlement expenses and provision for losses
which totaled $27.0 million in 2001, $57.6 million in 2000 and $82.8 million in
1999. Excluded from operating segment assets are assets of $118.7 million in
2001 and $97.8 million in 2000 and $88.1 million in 1999 which are not
identifiable with an operating segment. There are no intersegment revenues and
expenses and ARI conducted all of its business within the United States, with
the exception of Hotel Sofia (Bulgaria), which had operating revenues of $4.1
million and operating expenses of $3.0 million in 2001. Hotel Sofia had no
operations in 2000. See Note 2. "Real Estate" and Note 3. "Notes and Interest
Receivable."

Presented below is the operating income of each operating segment and each
segment's assets for 2001, 2000 and 1999.

COMMERCIAL U.S. INTERNATIONAL RECEIVABLES/
PROPERTIES APARTMENTS HOTELS HOTELS LAND PWSI OTHER TOTAL
---------- ---------- ------- ------------- -------- ------- ------------ --------

2001
Operating revenue.... $33,952 $58,272 $31,999 $4,131 $ 253 $34,211 $ 752 $163,570
Interest income...... -- -- -- -- -- -- 2,817 2,817
Operating expenses... 20,219 35,535 25,243 3,013 8,577 27,934 867 121,388
------- ------- ------- ------ -------- ------- ------- --------
Operating income
(loss)............. 13,733 22,737 6,756 1,118 (8,324) 6,277 2,702 44,999
Depreciation......... 7,614 4,601 2,575 1,562 4 1,320 31 17,707
Interest............. 17,079 18,974 4,483 624 28,885 940 6,063 77,048
Capital
expenditures....... 9,838 166 664 7,090 1,823 1,493 511 21,585
Assets............... 172,712 111,008 67,605 22,335 214,543 20,976 30,872 640,051

COMMERCIAL
PROPERTIES APARTMENTS LAND TOTAL
---------- ---------- -------- --------

Sales price.......... $ 7,350 $135,131 $ 45,290 $187,771
Cost of sales........ 5,118 63,156 36,083 104,357
------- ------- -------- --------
Gains on sale........ $ 2,232 $71,975 $ 9,207 $ 83,414
======= ======= ======== ========

F-45

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL U.S. RECEIVABLES/
PROPERTIES APARTMENTS HOTELS LAND PWSI 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 6,449 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..................... 165,781 147,070 97,682 242,969 21,679 14,073 689,254

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
======== ======== ======== ========

COMMERCIAL U.S. RECEIVABLES/
PROPERTIES APARTMENTS HOTELS LAND PWSI 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 7,541 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 --
Assets..................... 192,742 189,438 71,357 317,846 21,177 38,851 831,411

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
======== ======= ======== ========

F-46

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 2001 and 2000 (unaudited):

THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------

2001
Operating income................................ $ 9,762 $ 7,180 $10,560 $ 8,613
Gain on land sales.............................. 3,789 924 3,547 947
Pizza parlor gross margin....................... 1,404 1,604 1,559 1,710
Oil and gas gross margin........................ -- -- (89) (121)
------- ------- ------- -------
Income from operations........................ 14,955 9,708 15,577 11,149
Equity in income (loss) of investees............ (5) 5,710 3,452 (354)
Gains on sale of real estate.................... 16,426 25,840 12,334 19,607
Interest and other income....................... 417 820 818 393
------- ------- ------- -------
Total other income............................ 16,838 32,370 16,604 19,646
Total other expenses.......................... 29,403 33,545 31,115 27,715
------- ------- ------- -------
Net income (loss)............................... 2,390 8,533 1,066 3,080
Preferred dividend requirement.................. (642) (606) (620) (617)
------- ------- ------- -------
Net income attributable to Common shares........ $ 1,748 $ 7,927 $ 446 $ 2,463
======= ======= ======= =======
EARNINGS PER SHARE
Net income (loss)............................... $ .17 $ .78 $ .04 $ .22
======= ======= ======= =======

F-47

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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
shares........................................ $(6,231) $(1,427) $ 7,638 $ 372
======= ======= ======= =======
EARNINGS PER SHARE
Net income (loss)............................... $ (.58) $ (.13) $ .76 $ .03
======= ======= ======= =======

NOTE 20. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

Liquidity. Although management anticipated that ARI would generate excess
cash from operations in 2001, 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 2002, 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. 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. See Note 11. "Preferred Stock."

On October 3, 2000, ARI and IORI entered into an 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.

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.

F-48

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 21. SUBSEQUENT EVENTS

In 2002, ARI purchased the following property:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQ.FT. PRICE PAID INCURRED RATE DATE
-------- -------- ------------- -------- -------- -------- -------- --------

SHOPPING CENTER
Plaza on Bachman Creek(1)......... Dallas, TX 80,278 Sq.Ft. $4,707 $ -- $ -- -- --

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

(1) Exchanged with TCI, a related party, for the Oaktree Village Shopping
Center, Rasor land parcel and Lakeshore Villas land parcel.

In 2002, ARI sold the following properties:

UNITS/ SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION ACRES/SQ.FT. PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ------------ ------ -------- ---------- -----------

APARTMENTS
Villas...................... Plano, TX 208 Units $8,525 $3,701 $4,023 $5,604
LAND
Katrina..................... Palm Desert, CA 2.1 Acres 1,323 (40) 1,237 978
Lakeshore Villas(1)......... Harris County, TX 16.9 Acres 941 294 -- --
Rasor(1).................... Plano, TX 24.5 Acres 2,306 120 -- --
Thompson II................. Dallas County, TX .2 Acres 21 20 -- (10)
Vista Ridge................. Lewisville, TX 10.0 Acres 1,525 130 1,220 401

UNITS/ SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION ACRES/SQ.FT. PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ------------- ----- -------- ---------- -----------

SHOPPING CENTER
Oaktree Village(1).............. Lubbock, TX 45,623 Sq.Ft. 1,734 186 1,430 --

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

(1) Exchanged with TCI, a related party, for the Plaza on Bachman Creek Shopping
Center.

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

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ACRES/SQ.FT. INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ------------- -------- ---------- -------- -------- --------

OFFICE BUILDING
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. $5,109 $ -- $ 5,109 12.000% 12/04(1)
Two Hickory Centre.... Farmers Branch, TX 96,127 Sq.Ft. 4,448 -- 4,448 12.000 12/04(2)
LAND
Walker................ Dallas County, TX 90.6 Acres 8,500 8,500 (1,411) 11.250(3) 01/03
SHOPPING CENTER
Plaza on Bachman
Creek............... Dallas, TX 80,278 Sq.Ft. 5,000 -- 4,444 6.625(3) 04/04

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

F-49

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) In January 2002, TCI, a related party, purchased 100% of the common shares
of ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of
ARI, for $4.4 million. Two Hickory owns the Two Hickory Centre Office
Building. ARI has guaranteed that the asset will produce at least a 12%
annual return on the purchase price for a period of three years from the
purchase date. If the asset fails to produce the 12% return, ARI will pay
TCI any shortfall. In addition, if the asset fails to produce the 12% return
for a calendar year, TCI may require ARI to repurchase the shares of Two
Hickory for the purchase price. Management has classified this related party
transaction as a note payable to TCI.

(3) Variable interest rate.

ART Florida Portfolio II, Ltd. In January 2002, Investors Choice Florida
Public Fund II, in which ART Florida Portfolio II, Ltd. owned an interest, sold
Villas Continental Apartments. ARI received $1.0 million in cash from the sale.
ARI's share of the loss incurred on the sale was $531,000, which will be
included in equity in income of investees in the Consolidated Statement of
Operations.

F-50

SCHEDULE III
AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001

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........................ $ 4,249 $ 330 $ 3,275 $ 752 $ 398(4)
Bay Anchor, Panama City,
FL........................ -- 13 117 -- --
Bridgestone, Friendswood,
TX........................ 2,080 169 1,780 192 227(4)
Chateau, Bellevue, NE...... 3,347 130 1,723 141 270(4)
Chateau Bayou, Ocean
Springs, MS............... 3,926 591 2,364 -- --
Confederate Point,
Jacksonville, FL.......... 7,358 246 3,736 717 467(4)
Conradi House, Tallahassee,
FL........................ 1,058 128 1,151 -- --
Daluce, Tallahassee, FL.... 2,520 221 2,619 4 --
Falcon House, Ft. Walton,
FL........................ 2,010 219 1,967 -- --
Foxwood, Memphis, TN....... 5,876 218 3,188 951 743(4)
Georgetown, Panama City,
FL........................ 810 114 1,025 -- --
Governor Square,
Tallahassee, FL........... 3,202 519 4,724 28 --
Grand Lagoon, Panama City,
FL........................ 1,211 165 1,498 2 --
Greenbriar, Tallahassee,
FL........................ 991 122 1,094 -- --
La Mirada, Jacksonville,
FL........................ 7,404 392 5,454 1,675 648(4)
Lake Chateau, Thomasville,
GA........................ 1,081 153 1,380 -- --
Lakeshore Villas, Harris
County, TX................ 12,520 2,554 -- 14,469 (3,249)(4)
Landings/Marina, Pensacola,
FL........................ 1,184 139 1,256 -- --
Lee Hills, Tallahassee,
FL........................ 122 26 236 -- --
Mallard Lake, Greensboro,
NC........................ 7,403 534 7,099 858 416(4)
Med Villas, San Antonio,
TX........................ 2,826 712 2,848 -- --
Morning Star, Tallahassee,
FL........................ 1,201 149 1,346 2 --

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 $ 4,425 $ 4,755 $ 3,196 1973 11/76 10-40 years
Bay Anchor, Panama City,
FL........................ 13 117 130 12 1979 1998 7-40 years
Bridgestone, Friendswood,
TX........................ 169 2,119 2,368 1,292 1979 06/82 5-40 years
Chateau, Bellevue, NE...... 130 2,134 2,264 1,265 1968 02/81 5-40 years
Chateau Bayou, Ocean
Springs, MS............... 591 2,364 2,955 227 1973 1998 10-40 years
Confederate Point,
Jacksonville, FL.......... 246 4,920 5,166 3,333 1969 05/79 7-40 years
Conradi House, Tallahassee,
FL........................ 128 1,151 1,279 115 1968 1998 7-40 years
Daluce, Tallahassee, FL.... 221 2,623 2,844 262 1974 1998 7-40 years
Falcon House, Ft. Walton,
FL........................ 219 1,967 2,186 197 1969 1998 10-40 years
Foxwood, Memphis, TN....... 218 4,882 5,100 2,926 1974 08/79 7-40 years
Georgetown, Panama City,
FL........................ 114 1,025 1,139 103 1974 1998 7-40 years
Governor Square,
Tallahassee, FL........... 519 4,752 5,271 475 1974 1998 10-40 years
Grand Lagoon, Panama City,
FL........................ 165 1,500 1,665 150 1979 1998 7-40 years
Greenbriar, Tallahassee,
FL........................ 122 1,094 1,216 109 1985 1998 7-40 years
La Mirada, Jacksonville,
FL........................ 392 7,777 8,169 5,249 1971 01/79 10-40 years
Lake Chateau, Thomasville,
GA........................ 153 1,380 1,533 138 1972 1998 7-40 years
Lakeshore Villas, Harris
County, TX................ 2,554 11,220 13,774 460 2000 1999 10-40 years
Landings/Marina, Pensacola,
FL........................ 139 1,256 1,395 126 1979 1998 7-40 years
Lee Hills, Tallahassee,
FL........................ 26 236 262 24 1974 1998 10-40 years
Mallard Lake, Greensboro,
NC........................ 534 8,373 8,907 5,716 1974 05/79 10-40 years
Med Villas, San Antonio,
TX........................ 712 2,848 3,560 273 1967 1998 10-40 years
Morning Star, Tallahassee,
FL........................ 149 1,348 1,497 135 1970 1998 7-40 years

F-51

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Oak Hill, Tallahassee,
FL........................ $ 1,880 $ 233 $ 2,101 $ 6 $ --
Oak Tree, Grandview, MO.... 4,094 304 3,543 245 418(4)
Oaks of Vista Ridge,
Lewisville, TX............ -- -- 142 -- --
Park Avenue, Tallahassee,
FL........................ 2,764 369 3,347 5 (17)(4)
Pheasant Ridge, Bellevue,
NE........................ 6,297 231 4,682 1,099 455(4)
Pinecrest, Tallahassee,
FL........................ 947 99 891 1 --
Quail Point, Huntsville,
AL........................ 3,704 184 2,716 267 217(4)
Regency, Lincoln, NE....... 3,238 304 1,865 412 328(4)
Regency, Tampa, FL......... 1,721 450 4,052 1 --
Rolling Hills, Tallahassee,
FL........................ 2,850 335 3,012 45 --
Seville, Tallahassee, FL... 1,269 187 1,687 -- --
Stonebridge, Florissant,
MO........................ 2,908 193 2,076 261 267(4)
Stonegate, Tallahassee,
FL........................ 1,036 188 1,693 5 --
Sun Hollow, El Paso, TX.... 4,565 385 4,159 75 503(4)
Sunset, Odessa, TX......... 1,792 345 1,382 -- --
Valley Hi, Tallahassee,
FL........................ 883 92 834 -- --
Villa Del Mar, Wichita,
KS........................ 3,669 387 3,134 116 546(4)
Villager, Ft. Walton, FL... 531 125 1,123 3 --
Villas, Plano, TX.......... 3,518 516 3,948 607 426(4)
Vista Lago, Farmers Branch,
TX........................ -- -- 18 -- --
Waters Edge III, Gulfport,
MS........................ 7,447 331 1,324 (14) --
Westwood, Mary Ester, FL... 2,482 318 2,876 1 --
Westwood Parc, Tallahassee,
FL........................ 1,382 165 1,483 -- --
Whispering Pines, Topeka,
KS........................ 7,447 228 4,330 1,054 653(4)
White Pines, Tallahassee,
FL........................ -- 75 671 2 --
Windsor Tower, Ocala, FL... 1,132 225 2,031 -- --
Wood Hollow, San Antonio,
TX........................ 5,370 888 7,261 1,795 1,024

Oak Hill, Tallahassee,
FL........................ $ 233 $ 2,107 $ 2,340 $ 211 1974 1998 10-40 years
Oak Tree, Grandview, MO.... 304 4,206 4,510 2,248 1968 03/82 7-40 years
Oaks of Vista Ridge,
Lewisville, TX............ -- 142 142 -- 2002 2002 N/A
Park Avenue, Tallahassee,
FL........................ 369 3,335 3,704 335 1985 1998 10-40 years
Pheasant Ridge, Bellevue,
NE........................ 231 6,236 6,467 4,199 1974 10/78 7-40 years
Pinecrest, Tallahassee,
FL........................ 99 892 991 89 1978 1998 7-40 years
Quail Point, Huntsville,
AL........................ 184 3,200 3,384 2,404 1960 08/75 7-40 years
Regency, Lincoln, NE....... 304 2,605 2,909 1,455 1973 05/82 7-40 years
Regency, Tampa, FL......... 450 4,053 4,503 380 1967 1998 10-40 years
Rolling Hills, Tallahassee,
FL........................ 335 3,057 3,392 316 1972 1998 10-40 years
Seville, Tallahassee, FL... 187 1,687 1,874 169 1972 1998 10-40 years
Stonebridge, Florissant,
MO........................ 193 2,604 2,797 1,748 1975 10/77 5-40 years
Stonegate, Tallahassee,
FL........................ 188 1,698 1,886 159 1972 1998 10-40 years
Sun Hollow, El Paso, TX.... 385 4,737 5,122 2,918 1977 09/79 7-40 years
Sunset, Odessa, TX......... 345 1,382 1,727 132 1981 1998 10-40 years
Valley Hi, Tallahassee,
FL........................ 92 834 926 83 1980 1998 10-40 years
Villa Del Mar, Wichita,
KS........................ 387 3,796 4,183 2,127 1971 10/81 7-40 years
Villager, Ft. Walton, FL... 125 1,126 1,251 106 1972 1998 10-40 years
Villas, Plano, TX.......... 516 4,981 5,497 3,304 1977 04/79 7-40 years
Vista Lago, Farmers Branch,
TX........................ -- 18 18 -- 2002 2002 N/A
Waters Edge III, Gulfport,
MS........................ 331 1,310 1,641 116 1968 1998 10-40 years
Westwood, Mary Ester, FL... 318 2,877 3,195 288 1972 1998 10-40 years
Westwood Parc, Tallahassee,
FL........................ 165 1,483 1,648 148 1974 1998 10-40 years
Whispering Pines, Topeka,
KS........................ 228 6,037 6,265 3,836 1972 02/78 7-40 years
White Pines, Tallahassee,
FL........................ 75 673 748 63 1974 1998 10-40 years
Windsor Tower, Ocala, FL... 225 2,031 2,256 190 1982 1998 10-40 years
Wood Hollow, San Antonio,
TX........................ 888 10,080 10,968 6,884 1974 11/78 5-40 years

F-52

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Woodlake, Carrollton, TX... $ 8,551 $ 585 $ 5,848 $ 1,041 $ 785(4)
Woodsong II, Smyrna, GA.... 5,695 322 3,705 340 336(4)

OFFICE BUILDING
56 Expressway, Oklahoma
City, OK.................. 1,602 406 3,976 629 (2,356)(2)
(252)(4)
Centura Tower, Farmers
Branch, TX................ 43,739 3,900 29,285 24,795 (8,200)(4)
Cooley Building, Farmers
Branch, TX................ 1,916 729 2,918 4 (307)(4)
Encino, Encino, CA......... 34,089 4,072 36,651 392 845
Executive Court, Memphis,
TN........................ 1,598 271 2,099 749 (6)
Melrose Business Park,
Oklahoma City, OK......... 838 367 2,674 356 (1,000)(2)
(373)(4)
One Hickory Centre, Farmers
Branch, TX................ 8,020 335 7,651 3,548 --
Two Hickory Centre, Farmers
Branch, TX................ 6,805 318 7,827 1,214 --
Four Hickory Centre,
Farmers Branch, TX........ 5,000 303 11,894 -- --
Rosedale Towers, Roseville,
MN........................ 2,601 665 3,769 1,490 (50)
University Square,
Anchorage, AK............. 800 562 3,276 223 (1,881)(2)
(52)(4)
SHOPPING CENTERS
Collection, Denver, CO..... 13,887 -- 20,791 158 (461)
Cross County Mall, Mattoon,
IL........................ 8,781 608 6,468 6,407 (810)(4)
Cullman, Cullman, AL....... 5,250 400 1,830 179 (110)(4)
Oaktree Shopping Village,
Lubbock, TX............... 1,396 192 1,431 15 163
Westwood, Tallahassee,
FL........................ 5,834 -- 5,424 1,664 1,135(5)

Woodlake, Carrollton, TX... $ 585 $ 7,674 $ 8,259 $ 4,677 1979 08/78 7-40 years
Woodsong II, Smyrna, GA.... 322 4,381 4,703 3,431 1975 08/80 7-40 years

OFFICE BUILDING
56 Expressway, Oklahoma
City, OK.................. 406 1,997 2,403 2,031 1981 03/82 7-40 years

Centura Tower, Farmers
Branch, TX................ 3,900 45,880 49,780 4,135 1999 1999 7-40 years
Cooley Building, Farmers
Branch, TX................ 729 2,615 3,344 267 1996 1999 7-40 years
Encino, Encino, CA......... 4,072 37,888 41,960 2,466 1,986 05/99 7-40 years
Executive Court, Memphis,
TN........................ 271 2,842 3,113 1,890 1980 09/82 7-40 years
Melrose Business Park,
Oklahoma City, OK......... 367 1,657 2,024 1,559 1980 03/82 5-40 years

One Hickory Centre, Farmers
Branch, TX................ 335 11,199 11,534 1,152 1998 1998 10-40 years
Two Hickory Centre, Farmers
Branch, TX................ 318 9,041 9,359 587 2000 2000 7-40 years
Four Hickory Centre,
Farmers Branch, TX........ 303 11,894 12,197 -- 2002 2002 7-40 years
Rosedale Towers, Roseville,
MN........................ 665 5,209 5,874 2,104 1974 1990 10-40 years
University Square,
Anchorage, AK............. 562 1,566 2,128 1,487 1981 12/81 5-40 years

SHOPPING CENTERS
Collection, Denver, CO..... -- 20,488 20,488 2,256 1955 1997 10-40 years
Cross County Mall, Mattoon,
IL........................ 608 12,065 12,673 9,298 1971 08/79 5-40 years
Cullman, Cullman, AL....... 400 1,899 2,299 1,407 1979 02/79 7-40 years
Oaktree Shopping Village,
Lubbock, TX............... 192 1,609 1,801 241 1981 1995 10-40 years
Westwood, Tallahassee,
FL........................ -- 5,953 5,953 3,877 1980 10/83 5-40 years

F-53

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

MERCHANDISE MART
Denver Mart, Denver, CO.... $ 28,490 $ 4,824 $ 5,184 $ 15,888 $ 24

HOTELS
Best Western Hotel,
Virginia Beach, VA........ 4,228 1,521 5,754 1,070 --
AKC Holiday Inn, Kansas
City, MO.................. 5,145 1,110 4,535 2,769 --
Piccadilly Airport, Fresno,
CA........................ 5,022 -- 7,834 490 --
Piccadilly Chateau, Fresno,
CA........................ 2,113 -- 3,906 74 (33)
Piccadilly Shaws, Fresno,
CA........................ 5,831 2,392 9,567 958 --
Piccadilly University,
Fresno, CA................ 5,671 -- 12,011 297 (163)
Quality Inn, Denver, CO.... 3,763 -- 302 2,421 --
Grand Hotel, Sofia,
Bulgaria.................. 4,994 140 11,884 14,567 (2,500)(7)
Williamsburg Hospitality
House, Williamsburg, VA... 13,567 4,049 16,195 2,256 --

SINGLE FAMILY RESIDENCE
Tavel Circle, Dallas, TX... 96 53 214 -- --
-------- -------- -------- -------- ---------
383,465 43,539 354,922 109,772 (12,796)
PROPERTIES HELD FOR SALE
LAND
Bonneau, Dallas County,
TX........................ --(6) 1,102 -- -- --
Centura Holdings, Farmers
Branch, TX................ 7,242 7,070 -- 275 (968)(4)
Chase Oaks, Plano, TX...... 1,633 4,511 -- 377 (3,898)(4)
Clark, Farmers Branch,
TX........................ -- 2,989 -- 107 (703)(4)
Croslin, Dallas, TX........ -- 327 -- 6 --
Dalho, Farmers Branch,
TX........................ --(6) 331 -- -- --
Desert Wells, Palm Desert,
CA........................ 9,500 12,846 -- 482 --
Eldorado Parkway, Collin
County, TX................ 378 1,015 -- 7 --
Elm Fork, Denton County,
TX........................ 2,001 17,294 -- -- (7,555)(3)

MERCHANDISE MART
Denver Mart, Denver, CO.... $ 4,824 $ 21,096 $ 25,920 $ 5,374 1965/1986 1992 10-40 years

HOTELS
Best Western Hotel,
Virginia Beach, VA........ 1,521 6,824 8,345 1,276 1983 1996 10-40 years
AKC Holiday Inn, Kansas
City, MO.................. 1,110 7,304 8,414 3,301 1974 1993 10-40 years
Piccadilly Airport, Fresno,
CA........................ -- 8,324 8,324 999 1970 1997 10-40 years
Piccadilly Chateau, Fresno,
CA........................ -- 3,947 3,947 452 1989 1997 10-40 years
Piccadilly Shaws, Fresno,
CA........................ 2,392 10,525 12,917 1,253 1973 1997 10-40 years
Piccadilly University,
Fresno, CA................ -- 12,145 12,145 1,344 1984 1997 10-40 years
Quality Inn, Denver, CO.... -- 2,723 2,723 463 1974 1994 10-40 years
Grand Hotel, Sofia,
Bulgaria.................. 140 23,951 24,091 1,754 1969 09/00 10-40 years
Williamsburg Hospitality
House, Williamsburg, VA... 4,049 18,451 22,500 2,623 1973 1997 10-40 years

SINGLE FAMILY RESIDENCE
Tavel Circle, Dallas, TX... 53 214 267 30
-------- -------- -------- --------
43,539 451,898 495,437 121,777
PROPERTIES HELD FOR SALE
LAND
Bonneau, Dallas County,
TX........................ 1,102 -- 1,102 -- N/A 1998 --
Centura Holdings, Farmers
Branch, TX................ 6,102 275 6,377 -- N/A 1999 --
Chase Oaks, Plano, TX...... 990 -- 990 -- N/A 1997 --
Clark, Farmers Branch,
TX........................ 2,286 107 2,393 15 N/A 2000 --
Croslin, Dallas, TX........ 333 -- 333 -- N/A 1998 --
Dalho, Farmers Branch,
TX........................ 331 -- 331 -- N/A 1997 --
Desert Wells, Palm Desert,
CA........................ 12,846 482 13,328 -- N/A 1998 --
Eldorado Parkway, Collin
County, TX................ 1,022 -- 1,022 -- N/A 1998 --
Elm Fork, Denton County,
TX........................ 9,739 -- 9,739 N/A 2001 --

F-54

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Frisco Bridges, Collin
County, TX................ $ 7,800 $ 50,361 $ -- $ -- $ (48,519)(3)
FRWM Cummings, Farmers
Branch, TX................ -- 1,284 -- -- --
Hollywood Casino, Farmers
Branch, TX................ 6,222 11,582 -- -- (2,114)(3)
HSM, Farmers Branch, TX.... 2,937 2,361 -- -- --
Jeffries Ranch, Oceanside,
CA........................ --(6) 1,178 -- -- --
JHL Connell, Carrollton,
TX........................ --(6) 1,451 -- -- (25)(3)
Katrina, Palm Desert, CA... 17,838 40,211 298 -- (11,968)(3)
Katy Road, Harris County,
TX........................ 4,250 5,919 -- 20 --
Keller, Tarrant County,
TX........................ --(6) 6,847 -- 376 (6,593)(3)
Kelly Lots, Collin County,
TX........................ 89 131 -- -- --
Lacy Longhorn, Farmers
Branch, TX................ --(6) 1,908 -- -- --
Las Colinas I, Las Colinas,
TX........................ 4,550 14,076 -- 28 (4,420)(3)
Leone, Irving TX........... 1,210 1,625 -- -- --
Marine Creek, Fort Worth,
TX........................ 1,500 2,366 -- 50 --
McKinney Corners II, Collin
County, TX................ 5,000 5,911 -- -- (5,328)(3)
Mason/Goodrich, Houston,
TX........................ 5,543 10,983 -- 119 (2,978)(3)
Mendoza, Dallas, TX........ -- 192 -- -- --
Messick, Palm Springs,
CA........................ 1,500 3,610 -- -- --
Monterrey, Riverside, CA... -- 5,968 -- -- (1,404)(3)
Nashville, Nashville, TN... 5,911 7,774 -- -- (849)(3)
Pioneer Crossing, Austin,
TX........................ 22,000 23,255 -- 297 (6,135)(3)
Rasor, Plano, TX........... -- 15,316 -- 320 (14,091)(3)
Scout, Tarrant County,
TX........................ -- 2,388 -- -- (2,106)(3)
Sladek, Travis County,
TX........................ 385 764 -- -- --
Stagliano, Farmers Branch,
TX........................ --(6) 566 -- -- --
Thompson, Farmers Branch,
TX........................ --(6) 948 -- -- --
Thompson II, Dallas County,
TX........................ -- 505 -- -- --

Frisco Bridges, Collin
County, TX................ $ 1,842 $ -- $ 1,842 $ -- N/A 1999 --
FRWM Cummings, Farmers
Branch, TX................ 1,284 -- 1,284 -- N/A 1998 --
Hollywood Casino, Farmers
Branch, TX................ 9,468 -- 9,468 -- 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... 28,243 298 28,541 -- N/A 1998 --
Katy Road, Harris County,
TX........................ 5,919 20 5,939 -- N/A 1997 --
Keller, Tarrant County,
TX........................ 254 376 630 -- 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........................ 9,684 -- 9,684 -- 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................ 583 -- 583 -- N/A 1997 --
Mason/Goodrich, Houston,
TX........................ 8,124 -- 8,124 -- N/A 1998 --
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... 6,925 -- 6,925 -- N/A 1999 --
Pioneer Crossing, Austin,
TX........................ 17,120 297 17,417 -- N/A 1997 --
Rasor, Plano, TX........... 1,225 320 1,545 -- N/A 1997 --
Scout, Tarrant County,
TX........................ 282 -- 282 -- 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 --

F-55

AMERICAN REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Tomlin, Farmers Branch,
TX........................ $ --(6) $ 1,878 $ -- $ -- $ --
Valley Ranch, Irving, TX... -- 16,592 -- -- (12,092)(3)
(3,916)(2)
Valley Ranch III, Irving,
TX........................ -- 2,248 -- -- --
Valley Ranch IV, Irving,
TX........................ 1,128 2,187 -- -- --
Valley View 34, Farmers
Branch, TX................ -- 1,652 -- 1,035 32
Valwood, Dallas, TX........ 13,300 13,969 -- 818 (2,607)(3)
Varner Road, Riverside,
CA........................ 2,450 2,550 -- -- (508)(4)
Vineyards, Grapevine, TX... 2,717 4,982 -- -- --
Vineyards II, Grapevine,
TX........................ 4,000 6,934 -- -- --
Vista Ridge, Lewisville,
TX........................ 9,617 16,322 -- 440 (6,588)(3)
Walker, Dallas County,
TX........................ 11,789 13,534 34 -- --
Willow Springs, Riverside,
CA........................ --(6) 5,082 -- -- (1,012)(4)
Woolley, Farmers Branch,
TX........................ -- 214 -- -- (43)(4)
Other (5 properties)....... -- 755 -- -- (3)(3)
-------- -------- -------- -------- ---------
152,490 355,864 332 4,757 (146,391)
-------- -------- -------- -------- ---------
$535,955 $399,403 $355,254 $114,529 $(159,187)
======== ======== ======== ======== =========

Tomlin, Farmers Branch,
TX........................ $ 1,878 $ -- $ 1,878 $ -- 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 1,067 2,719 4 N/A 1996 --
Valwood, Dallas, TX........ 11,362 818 12,180 -- 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........................ 9,734 440 10,174 -- N/A 1998 --
Walker, Dallas County,
TX........................ 13,534 34 13,568 -- N/A 1998 --
Willow Springs, Riverside,
CA........................ 4,070 -- 4,070 -- N/A 1999 --
Woolley, Farmers Branch,
TX........................ 171 -- 171 -- N/A 1999 --
Other (5 properties)....... 752 -- 752 -- N/A Various --
-------- -------- -------- --------
210,028 4,534 214,562 19
-------- -------- -------- --------
$253,567 $456,432 $709,999 $121,796
======== ======== ======== ========

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

(1) The aggregate cost for federal income tax purposes is $692.0 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.

(7) Impairment loss.

F-56

AMERICAN REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

2001 2000 1999
--------- --------- ---------
(DOLLARS IN THOUSANDS)

Reconciliation of Real Estate
Balance at January 1,..................................... $ 802,434 $ 936,213 $ 943,303
Additions
Acquisitions and improvements........................ 39,839 46,691 194,605
Foreclosures......................................... -- -- 6,389
Deductions
Sales of real estate................................. (129,774) (144,376) (208,084)
Purchase accounting write down....................... -- (35,846) --
Property write down.................................. (2,500) (248) --
--------- --------- ---------
Balance at December 31,................................... $ 709,999 $ 802,434 $ 936,213
========= ========= =========
Reconciliation of Accumulated Depreciation
Balance at January 1,..................................... $ 148,690 $ 164,583 $ 208,396
Additions
Depreciation......................................... 16,253 15,878 15,130
Deductions
Sales of real estate................................. (43,147) (31,771) (58,943)
--------- --------- ---------
Balance at December 31,................................... $ 121,796 $ 148,690 $ 164,583
========= ========= =========

F-57

SCHEDULE IV

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2001

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
PRINCESSA PLAZA................ 8.00%/ 05/02/ All principal and $ -- $ 437 $ 437 $ --
Secured by vacant land in 12.00% 11/02 interest are due at
Santa Clarita. November 2002.
RLA LIMITED PARTNERSHIP........ 10.00% 05/02 Minimum of -- 1,570 1,570
Secured by Blackhawk $14,628.10 due
Apartments. monthly.
DESERT SPORTS GROUP............ 12.00% 07/01 Principal and -- 2,123 2,123 2,123
Secured by vacant land in interest are due at
Palm Desert, CA. maturity.

OTHER
14875 LANDMARK, L.L.C. ........ 14.00% 06/01 Monthly interest -- 1,630 1,630 1,630
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 1,597 1,597
Secured by (1) a 100% interest are due at
membership interest in maturity.
Bordeaux, which owns a
shopping center in Oklahoma
City, OK; (2) 100% of the
stock of Bordeaux Investments
One, Inc., which owns 6.5
acres of undeveloped land in
Oklahoma City, OK; and (3)
the personal guarantees of
the Bordeaux members.
LORDSTOWN, L.P. ............... 14.00% 03/00 All principal and -- 2,138 2,474 2,474
Secured by 100% partnership interest are due at
interest in Partner Capital, maturity.
Ltd.
REALTY ADVISORS................ Prime 11/04 All principal and -- 5,633 5,633 --
Secured by a subordinate + 2.00% interest are due at
pledge of 850,000 shares of maturity.
ARI Common Stock owned by
BCM. The shares are also
pledged to a lender on ARI's
behalf.

F-58

AMERICAN REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE -- (CONTINUED)

UNSECURED
ONE REALCO..................... 12.00% 02/04 All principal and $ -- $15,000 $13,201 $ --
interest are due at
maturity.
TREETOPS/COLONY MEADOWS........ -- 04/03 All principal and -- 1,017 1,017 --
interest are due at
maturity.
WARWICK SUMMIT, INC............ 14.00% 12/99 All principal and -- 1,886 1,731 1,731
interest are due at
maturity.
----- ------- ------- ------
$ -- $33,025 31,413 $9,555
===== ======= ======
Interest receivable............ 1,546
Allowance for estimated (2,577)
losses.......................
-------
$30,382
=======

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

(1) Interest rates and maturity dates shown are as stipulated in the loan
documents at December 31, 2001. Where applicable, these rates have been
adjusted at issuance to yield between 8% and 12%.

2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)

Balance at January 1,....................................... $ 15,027 $ 38,895 $ 52,164
Additions
New mortgage loans........................................ 6,349 11,937 47,769
Funding of existing loans................................. 15,532 10,231 5,824
Deductions
Collections of principal.................................. (5,495) (42,143) (41,590)
Conversion to property interest........................... -- (3,893) (19,072)
Foreclosures.............................................. -- -- (6,200)
-------- -------- --------
Balance at December 31,..................................... $ 31,413 $ 15,027 $ 38,895
======== ======== ========

F-59

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS

Real estate held for investment............................. $714,706 $712,832
Less -- accumulated depreciation............................ (95,922) (90,661)
-------- --------
618,784 622,171
Real estate held for sale................................... 14,831 516
Notes and interest receivable
Performing (including $6,372 in 2002 and $1,970 in 2001
from related parties).................................. 25,549 17,620
Nonperforming, nonaccruing................................ 1,700 5,247
-------- --------
27,249 22,867
Less -- allowance for estimated losses...................... (739) (818)
-------- --------
26,510 22,049
Investment in real estate entities.......................... 15,887 14,230
Cash and cash equivalents................................... 4,946 10,346
Other assets (including $14,297 in 2002 and $14,170 in 2001
from affiliates and related parties)...................... 39,240 39,840
-------- --------
$720,198 $709,152
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Notes and interest payable.................................. $472,486 $461,037
Other liabilities (including $421 in 2002 and $1,068 in 2001
to affiliates and related parties)........................ 25,674 25,966
-------- --------
498,160 487,003
Commitments and contingencies
Minority interest........................................... 6,673 5,381
Stockholders' equity
Preferred Stock
Series A; $.01 par value; authorized, 6,000 shares; issued
and outstanding 5,829 shares (liquidation preference
$583).................................................. -- --
Series C; $.01 par value; authorized, issued and
outstanding 30,000 shares; (liquidation preference
$3,000)................................................ -- --
Common Stock, $.01 par value; authorized, 10,000,000 shares;
issued and outstanding 8,042,594 shares in 2002 and
2001...................................................... 80 80
Paid-in capital............................................. 271,761 271,761
Accumulated distributions in excess of accumulated
earnings.................................................. (56,453) (55,073)
Foreign currency translation loss........................... (23) --
-------- --------
215,365 216,768
-------- --------
$720,198 $709,152
======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-60

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

Property revenue
Rents (including $30 from affiliates in 2002 and 2001).... $ 30,869 $ 35,265
Property expense
Property operations (including $807 in 2002 and $643 in
2001 to affiliates and related parties)................ 19,468 20,395
---------- ----------
Operating income....................................... 11,401 14,870
Other income
Interest and other (including $74 in 2002 from related
parties)............................................... 1,067 638
Equity loss of equity investees........................... (1,276) (1,373)
Gain on sale of real estate............................... 5,429 6,484
---------- ----------
5,220 5,749
Other expense
Interest.................................................. 9,156 11,211
Depreciation.............................................. 5,242 5,120
Advisory fee to affiliate................................. 1,415 1,502
Net income fee to affiliate............................... -- 26
General and administrative (including $786 in 2002 and
$769 in 2001 to affiliates)............................ 2,202 2,425
Minority interest......................................... (59) 19
---------- ----------
17,956 20,303
---------- ----------
Net income (loss)........................................... (1,335) 316
Preferred dividend requirement.............................. (45) (7)
---------- ----------
Net income (loss) applicable to Common shares............... $ (1,380) $ 309
========== ==========
Basic and diluted earnings per share
Net income (loss) applicable to Common shares............... $ (.17) $ .04
========== ==========
Weighted average Common shares used in computing earnings
per share................................................. 8,042,594 8,686,346
========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-61

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, 2002...... 8,042,594 $80 $271,761 $(55,073) $ -- $216,768
Unrealized loss on foreign
currency translation........ -- -- -- -- (23) (23)
Net income.................. -- -- -- (1,335) -- (1,335)
--------
(1,358)
Series A Preferred Stock cash
dividend ($1.25 per
share)...................... -- -- -- (7) -- (7)
Series C Preferred Stock cash
dividends ($1.25 per
share)...................... -- -- -- (38) -- (38)
--------- --- -------- -------- ---- --------
Balance, March 31, 2002....... 8,042,594 $80 $271,761 $(56,453) $(23) $215,365
========= === ======== ======== ==== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-62

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)

Cash Flows from Operating Activities
Rents collected (including $90 in 2002 and $30 in 2001
from affiliates)........................................ $ 31,003 $ 35,341
Interest collected (including $74 in 2002 from related
parties)................................................ 850 216
Interest paid............................................. (8,994) (10,631)
Payments for property operations (including $807 in 2002
and $643 in 2001 to affiliates and related parties)..... (19,126) (18,911)
Advisory and net income fee paid to affiliate............. (1,454) (2,563)
General and administrative expenses paid (including $786
in 2002 and $769 in 2001 to affiliates and related
parties)................................................ (2,264) (3,039)
Other..................................................... -- 207
-------- --------
Net cash provided by operating activities............. 15 620
Cash Flows from Investing Activities
Collections on notes receivable (including $2,045 in 2002
from related parties)................................... 4,472 17
Funding of notes receivable (including $4,448 in 2002 to
related parties)........................................ (5,351) (3,500)
Acquisition of real estate................................ (2,412) --
Real estate improvements.................................. (15,476) (1,428)
Proceeds from sale of real estate......................... 6,779 13,099
Deposits on pending purchases and financings.............. 35 (1,216)
Distributions from/(contributions to) equity investees.... 323 (618)
-------- --------
Net cash (used in) provided by investing activities... (11,630) 6,354
Cash Flows from Financing Activities
Payments on notes payable................................. (7,838) (10,277)
Proceeds from notes payable............................... 14,328 100
Deferred financing costs (including $27 in 2002 to
affiliates and related parties)......................... (133) --
Payments from advisor..................................... 2,573 7,623
Advance to affiliates and related parties................. (2,670) --
Dividends to stockholders................................. (45) --
-------- --------
Net cash provided by (used in) financing activities... 6,215 (2,554)
Net increase (decrease) in cash and cash equivalents........ (5,400) 4,420
Cash and cash equivalents, beginning of period.............. 10,346 22,323
-------- --------
Cash and cash equivalents, end of period.................... $ 4,946 $ 26,743
======== ========
Reconciliation of net income to net cash provided by
operating activities
Net income (loss)........................................... $ (1,335) $ 309
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................. 5,242 5,057
Gain on sale of real estate............................... (5,429) (6,484)
Equity loss of equity investees........................... 1,276 1,367
(Increase) decrease in interest receivable................ 30 (121)
Decrease in other assets.................................. 657 2,832
(Decrease) increase in interest payable................... (134) 8
Decrease in other liabilities............................. (292) (2,348)
-------- --------
Net cash provided by operating activities............... $ 15 $ 620
======== ========
Schedule of noncash investing and financing activities
Notes payable assumed on purchase of real estate............ $ 1,389 $ --
Limited partnership interest received on sale of real
estate.................................................... -- 550
Notes receivable provided on sale of real estate............ 4,000 --
Real estate received on exchange with related party......... 4,145 --
Real estate exchanged with related party.................... (4,145) --

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-63

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 three month period ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001 (the "2001 Form 10-K").

Certain balances for 2001 have been reclassified to conform to the 2002
presentation.

NOTE 2. REAL ESTATE

In 2002, TCI purchased the following properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION SQ. FT./ACRES PRICE PAID INCURRED RATE DATE
-------- -------- ------------- -------- -------- -------- -------- --------

FIRST QUARTER
APARTMENTS
Blue Lakes
Villas(1)........... Waxahachie, TX 186 Units $1,012 $1,048 $ -- --% --
Echo Valley(1)........ Dallas, TX 216 Units 787 788 -- -- --
Spy Glass(1).......... Mansfield, TX 256 Units 1,280 1,042 208 7.5 08/43
Rasor(1)(2)........... Plano, TX 200 Units 2,319 310 -- -- --
SHOPPING CENTER
Oak Tree Village(2)... Lubbock, TX 45,623 Sq. Ft. 1,467 196 1,389 8.48 11/07
LAND
Lakeshore Villas(2)... Humble, TX 16.89 Acres 947 127 -- -- --

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

(1) Land purchased for apartment construction.

(2) Property exchanged with American Realty Investors, Inc. ("ARI"), a related
party, for the Plaza at Bachman Retail Center.

F-64

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2002, TCI sold the following properties:

SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION UNITS/SQ. FT. PRICE RECEIVED DISCHARGED ON SALE
-------- -------- ------------- ------ -------- ---------- -----------

FIRST QUARTER
APARTMENTS
Primrose.................. Bakersfield, CA 162 Units $5,000 $1,722 $2,920 $ 659
OFFICE BUILDING
Hartford.................. Dallas, TX 174,513 Sq. Ft. 4,000 -- -- --(1)
INDUSTRIAL WAREHOUSE
Central Storage........... Dallas, TX 216,035 Sq. Ft. 4,000 2,095 1,063 1,241
SHOPPING CENTER
Plaza at Bachman(2)....... Dallas, TX 80,278 Sq. Ft. 4,707 -- -- --

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

(1) Excludes a $920,000 deferred gain from seller financing. See NOTE 3. "NOTES
AND INTEREST RECEIVABLE."

(2) Property was exchanged with ARI, a related party, for the Oak Tree Village
Shopping Center and two parcels of land; the Rasor land parcel and Lakeshore
Villas land parcel.

In the first quarter of 2001, TCI sold the following properties:

UNITS/SQ. FT./ SALES NET CASH DEBT GAIN/(LOSS)
PROPERTY LOCATION ACRES PRICE RECEIVED DISCHARGED ON SALE
-------- -------- -------------- ------ -------- ---------- -----------

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 1,052(1)
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

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

(1) Excludes a $550,000 gain from a limited partnership interest in the sold
property.

F-65

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At March 31, 2002, TCI had the following properties under construction:

ADDITIONAL
AMOUNT AMOUNT CONSTRUCTION
PROPERTY LOCATION UNITS/ROOMS EXPENDED TO EXPEND LOAN FUNDING
-------- -------- ----------- -------- ---------- ------------

APARTMENTS
Blue Lake Villas.................. Waxahachie, TX 186 Units $ 3,126 $ 9,464 $10,736
Echo Valley....................... Dallas, TX 216 Units 981 13,238 12,509
Falcon Lakes...................... Arlington, TX 284 Units 1,695 14,050 13,469
Limestone Ranch................... Lewisville, TX 252 Units 12,081 2,540 13,000
Rasor Glen........................ Plano, TX 200 Units 2,418 13,164 12,600
River Oaks........................ Wiley, TX 180 Units 2,235 9,756 10,023
Sendero Ridge..................... San Antonio, TX 384 Units 6,577 22,084 24,420
Spyglass.......................... Mansfield, TX 256 Units 2,698 15,305 16,017
Tivoli............................ Dallas, TX 190 Units 4,755 8,679 11,000
Verandas at City View............. Fort Worth, TX 314 Units 2,895 20,055 19,000
Waters Edge IV.................... Gulfport, MS 80 Units 3,226 857 --
HOTEL
Akademia.......................... Wroclaw, Poland 165 Rooms 15,325 3,410 14,240

NOTE 3. NOTES AND INTEREST RECEIVABLE

In January 2002, TCI purchased 100% of the outstanding common shares of ART
Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARI, a
related party, for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two
Hickory Center Office Building in Farmers Branch, Texas. ARI has guaranteed that
the asset shall produce at least a 12% annual return of the purchase price for a
period of three years from the purchase date. If the asset fails to produce the
12% annual return, ARI shall pay TCI any shortfall. In addition, if the asset
fails to produce the 12% return for a calendar year and ARI fails to pay the
shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the
purchase price. Because ARI has guaranteed the 12% return and TCI has the option
of requiring ARI to repurchase the entities, management has classified this
related party transaction as a note receivable from ARI.

Also in January 2002, a mortgage loan with a principal balance of $608,000
was paid off, including accrued but unpaid interest. With the payoff of the
note, TCI recognized a previously deferred gain on the sale of the property of
$608,000.

In August 2001, TCI agreed to fund up to $5.6 million under a revolving
line of credit secured by an office building in Dallas, Texas. In February 2002,
TCI funded an additional $600,000. At March 31, 2002, TCI had funded a total of
$2.3 million of the note.

In February 2002, TCI sold a $2.0 million senior participation interest in
a loan secured by a second lien on a retail center in Montgomery County, Texas
to Income Opportunity Realty Investors, Inc. ("IORI"), a related party. TCI and
IORI will receive 43% and 57%, respectively, of the remaining principal and
interest payments. Also in February 2002, TCI extended the loan until April
2002, receiving $23,000 as an extension fee. In April 2002, TCI extended the
loan until July 2002, receiving $6,500 as an extension fee.

Also in February 2002, TCI funded an additional $231,000 line of credit to
Sendera Ranch, under a loan secured by 1,714.16 acres of unimproved land in
Tarrant County, Texas. In March 2002, TCI received a $2.4 million payment from
Sendera Ranch. TCI received $1.8 million as a principal paydown, $277,000 as
accrued interest, and $323,000 as a partnership distribution.

In March 2002, TCI sold the 174,513 sq. ft. Hartford Office Building in
Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as
seller financing and an additional $1.4 million

F-66

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

line of credit for leasehold improvements in the form of a mortgage note. The
note bears interest at a variable interest rate, currently 6.0% per annum,
requires monthly interest only payments of $14,667 and matures in March 2007.

In April 2002, TCI purchased 100% of the following entities: ART One
Hickory Corporation ("One Hickory"), Garden Confederate Point, LP ("Confederate
Point"), Garden Foxwood, LP ("Foxwood"), and Garden Woodsong, LP ("Woodsong"),
all wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One
Hickory owns the 120,615 sq. ft. One Hickory Center Office Building in Farmers
Branch, Texas, Confederate Point owns the 206 unit Confederate Apartments in
Jacksonville, FL, Foxwood owns the 220 unit Foxwood Apartments in Memphis,
Tennessee, and Woodsong owns the 190 unit Woodsong Apartments in Smyrna,
Georgia. ARI has guaranteed that these assets 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 assets fail to produce the 12% return for a
calendar year and ARI fails to pay the shortfall, TCI may require ARI to
repurchase the entities for the purchase price. Because ARI has guaranteed the
12% return and TCI has the option of requiring ARI to repurchase the entities,
management has classified this related party transaction as a note receivable
from ARI.

NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES

Prior to the first quarter of 2002, TCI accounted for its investments in
Tri-City, Nakash and Jor-Trans on the equity method. In the first quarter of
2002, TCI began accounting for its investment in Tri-City, Nakash and Jor-Trans
using a consolidated basis.

Real estate entities. TCI's investment in real estate entities at March
31, 2002, included equity securities of two publicly traded real estate
entities, IORI and ARI, related parties, 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 March 31, 2002 was as follows:

PERCENTAGE CARRYING EQUIVALENT
OF TCI'S VALUE OF INVESTEE MARKET VALUE
OWNERSHIP AT INVESTMENT AT BOOK VALUE AT OF INVESTMENT AT
INVESTEE MARCH 31, 2002 MARCH 31, 2002 MARCH 31, 2002 MARCH 31, 2002
-------- -------------- -------------- -------------- ----------------

IORI............................ 24.0% $ 4,809 $ 9,782 $ 6,275
ARI............................. 6.5% 10,249 5,685 5,266
------- ------- -------
15,058 $15,467 $11,541
======= =======
Other........................... 829
-------
$15,887
=======

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.

F-67

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below is summarized results of operations of equity investees for
the first quarter of 2002 and 2001.

2002 2001
-------- --------

Revenues.................................................... $ 41,527 $ 45,000
Equity in income of partnerships............................ (429) 4
Property operating expenses................................. (35,631) (39,295)
Depreciation................................................ (4,096) (4,714)
Interest expense............................................ (19,854) (19,587)
-------- --------
(Loss) before gains on sale of real estate.................. (18,483) (18,592)
Gain on sale of real estate................................. 25,586 20,215
-------- --------
Net income.................................................. $ 7,103 $ 1,623
======== ========

TCI's share of equity investees' loss before gains on the sale of real
estate was $1.3 million for the first quarter of 2002, and its share of equity
investees' gains on sale of real estate was $2.9 million for the first quarter
of 2002.

NOTE 5. OTHER ASSETS

Related Party. From time-to-time, TCI and its affiliates and related
parties have made advances to each other, which generally have not had specific
repayment terms and have been reflected in TCI's financial statements as other
assets. At March 31, 2002, TCI had receivables of $9.1 million, $1.9 million and
$3.3 million from BCM, GS Realty Services, Inc. and ARI, respectively.

NOTE 6. NOTES AND INTEREST PAYABLE

In 2002, TCI refinanced the following property:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQ. FT. INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ---------------- --------- ------------ --------- --------- ---------

FIRST QUARTER
INDUSTRIAL WAREHOUSE
Addison Hanger(1)....... Addison, TX 23,650 Sq. Ft. $2,687 $1,580 $942 6.75%(2) 02/07

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

(1) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger
II in Addison, Texas.

(2) Variable interest rate.

In the second quarter of 2002, TCI sold 12 residential properties to Metra
Capital, LLC ("Metra"). These properties include: the 75 unit Apple Lane
Apartments in Lawrence, Kansas, the 195 unit Arbor Point Apartments in Odessa,
Texas, the 264 unit Fairway View Estates Apartments in El Paso, Texas, the 152
unit Fairways Apartments in Longview, Texas, the 166 unit Fountain Lake
Apartments in Texas City, Texas, the 172 unit Fountains of Waterford Apartments
in Midland, Texas, the 122 unit Harper's Ferry Apartments in Lafayette,
Louisiana, the 108 unit Oak Park IV Apartments in Clute, Texas, the 131 unit
Quail Oaks Apartments in Balch Springs, Texas, the 300 unit Sunchase Apartments
in Odessa, Texas, the 180 unit Timbers Apartments in Tyler, Texas, and the 112
unit Willow Creek Apartments in El Paso, Texas. Two of the members of Metra are
Third Millennium Partners, LLC and Innovo Realty, Inc., a subsidiary of Innovo
Group, Inc. ("Innovo"). Joseph Mizrachi, a director of ARI, a related party, has
a beneficial interest in Third Millennium Partners, LLC and owns 15.5% of the
outstanding common stock of Innovo. Due to TCI's relationship with ARI and Mr.
Mizrachi, management has determined to treat this sale as a refinancing
transaction. TCI will continue to report the assets and the new debt incurred by

F-68

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Metra on its financial statements. The sales price for the properties totaled
$37.6 million. TCI received net cash of $10.5 million after paying off the
existing debt of $18.0 million and various closing costs, including $376,000 in
brokerage commissions to Third Millennium Partners, LLC. The new debt of $30.3
million bears interest at 7.57% per annum, requires monthly interest only
payments of $212,000 and matures in May 2012. TCI also received $5.7 million of
8% non-recourse, non-convertible Series A Preferred Stock ("Preferred Shares")
of Innovo.

The Preferred Shares have a mandatory redemption feature, and are
redeemable from the cash proceeds received by Innovo from the operation and sale
of the properties. All member distributions that are in excess of current and
accrued 8% dividends, must be used by Innovo to redeem the Preferred Shares.

NOTE 7. 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 from equity investees which totaled $3.3 million and
$539,000 for the first quarter of 2002 and 2001, respectively. Expenses not
reflected in the segments are general and administrative expenses, minority
interest, advisory fees, and net income fees which totaled $3.6 million and $4.0
million for the first quarter of 2002 and 2001, respectively. Also excluded from
segment assets are assets of $86.6 million at March 31, 2002, and $92.3 million
at March 31, 2001, 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
first quarter of 2002 and 2001, and each segment's assets at March 31.

COMMERCIAL
QUARTER ENDED MARCH 31, 2002 LAND PROPERTIES APARTMENTS HOTELS TOTAL
---------------------------- ------- ---------- ---------- ------- --------

Rents......................................... $ 161 $ 16,424 $ 13,396 $ 888 $ 30,869
Property operating expenses................... 470 9,676 8,462 860 19,468
------- -------- -------- ------- --------
Operating income (loss)....................... (309) 6,748 4,934 28 11,401
Depreciation.................................. -- 3,581 1,359 302 5,242
Interest...................................... 493 4,658 3,693 312 9,156
Real estate improvements...................... 40 1,537 10,309 3,590 15,476
Assets........................................ 63,308 298,813 237,371 34,123 633,615
PROPERTY SALES
Sales price................................... $ 12,707 $ 5,000 $ 17,707
Cost of sales................................. (11,466) (4,341) (15,807)
-------- -------- --------
Gain on sale.................................. $ 1,241 $ 659 $ 1,900(1)
======== ======== ========

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

(1) Excludes TCI's share of gains on sale of real estate recognized by an equity
investee of $2.9 million and a previously deferred gain on the sale of the
Madison at Bear Creek Apartments of $608,000.

F-69

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL
QUARTER ENDED MARCH 31, 2001 LAND PROPERTIES APARTMENTS HOTELS TOTAL
---------------------------- ------- ---------- ---------- ------- --------

Rents.................................... $ 136 $ 17,767 $ 16,032 $ 1,330 $ 35,265
Property operating expenses.............. 382 9,386 9,429 1,198 20,395
------- -------- -------- ------- --------
Operating income (loss).................. (246) 8,381 6,603 132 14,870
Depreciation............................. -- 3,287 1,581 252 5,120
Interest................................. 324 5,994 4,532 361 11,211
Real estate improvements................. -- 1,251 34 143 1,428
PROPERTY SALES
Assets................................... 57,966 345,071 204,991 19,821 627,849
Sales price.............................. $ 3,036 $ 762 $ 10,086 $ 13,884
Cost of sales............................ 1,634 595 6,445 8,674
------- -------- -------- --------
Gain on sale............................. $ 1,402 $ 167 $ 3,641 $ 5,210(1)
======= ======== ======== ========

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

(1) Excludes TCI's share of gains on sale of real estate recognized by an equity
investee of $1.3 million.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Liquidity. Although management anticipates that TCI will generate excess
cash from operations in 2002, 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, 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 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.
TCI had a loss for federal income tax purposes in the first quarter of 2002 and
2001; therefore, it recorded no provision for income taxes.

F-70

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, 2001
and 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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.

As discussed in Note 1, TCI adopted the provisions of SFAS 144, Accounting
for Impairment of Long Lived Assets, in 2001.

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, 2001
and 2000, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.

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

BDO SEIDMAN, LLP

Dallas, Texas
March 11, 2002

F-71

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS
Real estate held for investment............................. $712,832 $727,227
Less -- accumulated depreciation............................ (90,661) (88,187)
-------- --------
622,171 639,040
Foreclosed real estate held for sale........................ 516 1,824
Notes and interest receivable Performing (including $1,970
from related parties in 2001)............................. 17,620 8,709
Nonperforming, nonaccruing.................................. 5,247 --
-------- --------
22,867 8,709
Less -- allowance for estimated losses...................... (818) (537)
-------- --------
22,049 8,172
Investment in real estate entities.......................... 14,230 5,287
Investment in marketable equity securities of affiliate, at
market.................................................... -- 10,177
Cash and cash equivalents................................... 10,346 22,323
Other assets (including $14,170 in 2001 and $14,058 in 2000
from affiliates and related parties)...................... 39,840 45,062
-------- --------
$709,152 $731,885
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and interest payable.................................. $461,037 $501,734
Other liabilities (including $1,068 in 2001 and $1,580 in
2000 to affiliates and related parties)................... 25,966 23,722
-------- --------
487,003 525,456
Commitments and contingencies
Minority interest........................................... 5,381 4,369
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).................................................. -- --
Series C; $.01 par value; authorized, issued and
outstanding 30,000 shares; (liquidation preference
$3,000)................................................ -- --
Common Stock, $.01 par value; authorized, 10,000,000 shares;
issued and outstanding 8,042,594 shares in 2001 and
8,636,354 shares in 2000.................................. 80 86
Paid-in capital............................................. 271,761 278,245
Accumulated distributions in excess of accumulated
earnings.................................................. (55,073) (74,712)
Unrealized (loss) gain on marketable equity securities of
affiliate................................................. -- (3,059)
-------- --------
216,768 200,560
-------- --------
$709,152 $731,885
======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-72

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Property revenue
Rents (including $120 in 2001, $2,263 in 2000 and
$1,653 in 1999 from affiliates and related
parties)............................................ $ 134,911 $ 139,662 $ 82,101
Property expense Property operations (including $2,599 in
2001, $4,321 in 2000, and $2,864 in 1999 to affiliates
and related parties)................................... 80,562 78,170 44,514
---------- ---------- ----------
Operating income............................... 54,349 61,492 37,587
Other income
Interest and other income.............................. 2,948 2,370 453
Income (loss) from equity investees.................... (5,950) (556) 102
Gain on sale of real estate............................ 54,270 50,550 40,517
---------- ---------- ----------
51,268 52,364 41,072
Other expense
Interest............................................... 41,058 48,114 27,720
Depreciation........................................... 19,705 19,749 11,702
Provision for loss..................................... 281 -- --
Advisory fee to affiliate.............................. 5,346 5,258 3,219
Net income fee to affiliate.............................. 1,850 2,415 2,450
Incentive fee to affiliate............................... 3,167 -- --
General and administrative (including $2,582 in 2001,
$2,146 in 2000 and $1,367 in 1999 to affiliates)....... 11,412 8,506 3,335
Realized loss on investments............................. 3,059 -- --
Minority interest........................................ (72) 32 14
---------- ---------- ----------
85,806 84,074 48,440
---------- ---------- ----------
Net income............................................... 19,811 29,782 30,219
Preferred dividend requirement........................... (172) (22) (30)
---------- ---------- ----------
Net income applicable to Common shares................... $ 19,639 $ 29,760 $ 30,189
========== ========== ==========
Basic and diluted earnings per share
Net income applicable to Common shares
Basic.................................................. $ 2.32 $ 3.45 $ 7.05
Diluted................................................ $ 2.28 $ 3.45 $ 7.05
========== ========== ==========
Weighted average Common shares used in computing earnings
per share
Basic.................................................. 8,478,377 8,631,621 4,283,574
Diluted................................................ 8,615,465 8,637,290 4,283,574
========== ========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-73

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

BALANCE, JANUARY 1, 1999............. 3,878,463 $39 $218,087 $(126,994) $ -- $ 91,132
Comprehensive income Unrealized gain
on marketable 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 ($5.00 per
share)............................. -- -- -- (30) -- (30)
--------- --- -------- --------- ------- --------
BALANCE, DECEMBER 31, 1999........... 8,626,611 86 278,119 (99,811) 718 179,112
Comprehensive income
Unrealized (loss) on marketable
equity securities of affiliate... -- -- -- -- (3,777) (3,777)
Net income......................... -- -- -- 29,782 -- 29,782
--------
26,005
Sale of Common Stock under dividend
reinvestment plan.................. 9,743 -- 126 -- -- 126
Common dividends ($.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
Issuance of Series C Preferred Stock,
30,000 shares...................... -- -- 3,000 -- -- 3,000
Comprehensive income
Realized (loss) on marketable
equity securities of affiliate... -- -- -- -- 3,059 3,059
Net income......................... -- -- -- 19,811 -- 19,811
--------
22,870
Fractional shares.................... (560)
Repurchase of Common Stock........... (593,200) (6) (9,484) -- -- (9,490)
Series A Preferred Stock cash
dividend ($5.00 per share)......... -- -- -- (29) -- (29)
Series B Preferred Stock cash
dividend ($.38 per share).......... -- -- -- (115) -- (115)
Series C Preferred Stock cash
dividends ($.95 per share)......... -- -- -- (28) -- (28)
--------- --- -------- --------- ------- --------
BALANCE, DECEMBER 31, 2001........... 8,042,594 $80 $271,761 $ (55,073) $ -- $216,768
========= === ======== ========= ======= ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-74

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- --------- ---------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Rents collected (including $359 in 2001 and $1,040 in 1999
from affiliates)........................................ $136,076 $ 136,767 $ 81,244
Interest collected (including $411 in 2000 from
affiliates)............................................. 1,645 1,008 449
Interest paid............................................. (39,452) (45,142) (25,543)
Payments for property operations (including $2,599 in
2001, $4,321 in 2000 and $2,864 in 1999 to affiliates
and related parties).................................... (80,113) (80,148) (44,039)
Advisory and net income fee paid to affiliate............. (7,881) (10,486) (3,958)
Incentive fee paid to affiliate........................... (2,903) -- --
General and administrative expenses paid (including $2,582
in 2001, $2,146 in 2000 and $1,367 in 1999 to
affiliates)............................................. (10,877) (7,936) (3,488)
Distributions from operating cash flow of equity
investees............................................... 646 172 331
Other..................................................... 1,964 4,676 (905)
-------- --------- ---------
Net cash (used in) provided by operating
activities....................................... (895) (1,089) 4,091

CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable (including $12,000 in 2000
from affiliates)........................................ 6,042 20,532 37
Funding of notes receivable (including $1,970 in 2001 and
$12,000 in 2000 to affiliates).......................... (19,455) (17,500) --
Real estate improvements and construction................. (33,617) (14,664) (21,826)
Proceeds from sale of real estate......................... 100,818 79,869 104,210
Refunds/(deposits) on pending purchase.................... (724) 1,887 (2,912)
Acquisitions of real estate (including $1,998 in 2001,
$2,741 in 2000 and $1,815 in 1999 to affiliates and
related parties)........................................ (19,669) (32,450) (45,510)
Distributions from investing cash flow of equity
investees............................................... -- 1,296 4,709
Contributions to equity investees......................... (151) (3,974) (111)
-------- --------- ---------
Net cash provided by investing activities.......... 33,244 34,996 38,597

CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable................................. (66,063) (107,547) (99,163)
Proceeds from notes payable............................... 29,094 63,009 91,959
Reimbursements from/to advisor............................ 3,368 (2,634) --
Advance to affiliate...................................... (553) -- --
Dividends paid............................................ (172) (4,683) (3,036)
Shares of Common Stock repurchased........................ (9,490) -- --
Deferred financing costs (including ($45 in 2001, $464 in
2000 and $422 in 1999 to affiliates).................... (510) (1,121) (1,740)
Sale of Common Stock under dividend reinvestment plan..... -- 126 53
-------- --------- ---------
Net cash used in financing activities.............. (44,326) (52,850) (11,927)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (11,977) (18,943) 30,761
Cash and cash equivalents, beginning of year.............. 22,323 41,266 10,505
-------- --------- ---------
Cash and cash equivalents, end of year.................... $ 10,346 $ 22,323 $ 41,266
======== ========= =========

F-75

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- --------- ---------
(DOLLARS IN THOUSANDS)

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES
Net income................................................ $ 19,811 $ 29,782 $ 30,219
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization............................. 19,705 19,702 13,470
Equity in (income) loss of equity investees............... 5,950 556 (102)
Realized loss on investments.............................. 3,059 -- --
Gain on sale of real estate............................... (54,270) (50,550) (40,517)
Distributions from operating cash flow of equity.......... 646 172 331
Increase in interest receivable........................... (137) (28) (1)
(Increase) decrease in other assets....................... 2,283 (1,463) (7,093)
Increase (decrease) in interest payable................... (185) 299 375
Increase in other liabilities............................. 2,243 441 7,409
-------- --------- ---------
Net cash (used in) provided by operating
activities....................................... $ (895) $ (1,089) $ 4,091
======== ========= =========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Carrying value of real estate acquired through foreclosure
in satisfaction of notes receivable..................... $ -- $ 318 $ --
Notes payable from purchase of real estate................ 37,776 58,949 6,848
Series B Preferred Stock issued in conjunction with
purchase of real estate................................. (1,500) 1,500 --
Series C Preferred Stock, issued in conjunction with
purchase of real estate................................. 3,000 -- --
Debt assumed from sales of real estate.................... 42,784 16,798 9,680
Limited partnership interest received on sale of real
estate.................................................. 1,500 -- --

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-76

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 2000 and 1999 have been reclassified to conform to the
2001 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. In October
2001, TCI announced a preliminary agreement for the acquisition of TCI by
American Realty Investors, Inc. ("ARI"). See Item 1. "Business" and Note 20.
"Commitments and Contingencies and Liquidity."

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.

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

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accordance with specified guidelines. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires TCI to complete a transitional goodwill
impairment test six months from the date of adoption. TCI is also required to
reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142. Currently, TCI does not believe that the
adoption of SFAS 141 and SFAS 142 will impact its financial position and results
of operations.

Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Effective January 1, 2002, TCI adopted, Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144") which requires that a
property be considered impaired, if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the property. If impairment exists, an impairment loss is recognized, by a
charge against earnings, equal to the amount by which the carrying amount of the
property exceeds the fair value less cost to sell 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.

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") and ARI. 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 and notes payable. For
performing notes receivable, the fair value was estimated by
F-78

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 and convertible preferred stock. The weighted average
common shares used to calculate diluted earnings per share for the years ended
December 31, 2001 and 2000 include 301,548 and 25,000 shares, respectively, to
reflect the dilutive effect of options and convertible preferred stock to
purchase shares of common stock.

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.

Pro forma operating results for 1999, as if CMET had been acquired on
January 1, would have been:

1999
--------

Revenues.................................................... $143,579
Property operating expenses................................. (79,295)
Interest.................................................... (47,273)
Depreciation................................................ (19,150)
Advisory fee................................................ (4,952)
Net income fee.............................................. (3,083)
General and administrative expenses......................... (5,442)
Provision for losses........................................ --
--------
(Loss) from operations...................................... (15,616)
Equity in income of investees............................... 302
Gains on sale of real estate................................ 47,117
--------
Net income.................................................. $ 31,803
========

F-79

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. REAL ESTATE

In 2001, TCI purchased the following properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION ROOMS/ACRES PRICE PAID INCURRED RATE DATE
-------- -------- --------------- -------- -------- -------- -------- --------

APARTMENTS
Baywalk............... Galveston, TX 192 Units $ 6,590 $ 390 $ 5,856 7.45% 02/11
By the Sea............ Corpus Christi, TX 153 Units 6,175 862 5,538 7.07 05/09
Courtyard............. Midland, TX 133 Units 1,425 425 1,051 9.25 04/06
Falcon Lakes(1)....... Arlington, TX 284 Units 1,435 1,437 -- -- --
Island Bay............ Galveston, TX 458 Units 20,360 3,225 16,232 7.40 07/11
Limestone Ranch(1).... Lewisville, TX 252 Units 505 -- -- -- --(2)
Marina Landing........ Galveston, TX 256 Units 12,050 518 10,912 5.30 01/02
River Oaks(1)......... Wiley, TX 180 Units 531 578 -- -- --
Sendero Ridge(1)...... San Antonio, TX 384 Units 1,850 2,635 -- -- --
Tivoli(1)............. Dallas, TX 190 Units 3,000 2,475 1,000 12.00 12/02
Verandas at City
View(1)............. Fort Worth, TX 314 Units 2,544 276 2,197 4.75 03/02
Waters Edge IV(1)..... Gulfport, MS 80 Units 441 441 -- -- --

HOTEL
Akademia(3)........... Wroclaw, Poland 165 Rooms 2,184 2,669 -- -- --

LAND
Mira Lago............. Farmers Branch, TX 8.88 Acres 541 -- -- -- --(2)
Pac Trust............. Farmers Branch, TX 7.11 Acres 1,175 1,231 -- -- --
Seminary West......... Fort Worth, TX 5.36 Acres 222 232 -- -- --
Solco-Valley Ranch.... Dallas, TX 6.07 Acres 1,454 1,525 -- -- --

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

(1) Land purchased for apartment construction.

(2) Land was received from ARI, a related party, in exchange for the Glenwood
Apartments.

(3) Land purchased for hotel construction.

In 2000, TCI purchased the following properties:

Net
Units/ Purchase Cash Debt Interest Maturity
Property Location 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(2)
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(3)........ Sterling, VA 265,718 Sq.Ft 44,940 4,825 36,297 7.75 12/02

F-80

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net
Units/ Purchase Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
-------- -------- --------------- -------- -------- -------- -------- --------

LAND
DF Fund............... Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01(4)
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(5)
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(6)
Netzer................ Collin County, TX 20 Acres 400 418 -- -- --

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

(1) Variable interest rate.

(2) The loan was extended to March 2002.

(3) 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.

(4) The DF Fund land was sold in September 2000.

(5) The mortgage loan was paid off in March 2001.

(6) The mortgage loan was paid off in June 2000.

In 2001, TCI sold the following properties:

Net
Units/ Sales Cash Debt Gain/(Loss)
Property Location Sq.Ft./Acres Price Received Discharged on Sale
-------- -------- --------------- --------- -------- ---------- -----------

APARTMENTS
Bent Tree Gardens....... Addison, TX 204 Units $ 9,000 $2,669 $ 6,065(1) $ 601
Carseka................. Los Angeles, CA 54 Units 4,000 2,138 1,466 1,352
Fontenelle Hills........ Bellevue, NE 338 Units 16,500 3,680 12,454(1) 4,565
Forest Ridge............ Denton, TX 56 Units 2,000 682 1,151 1,014
Glenwood................ Addison, TX 168 Units 3,659 -- 2,537(1) --(2)
Heritage................ Tulsa, OK 136 Units 2,286 206 1,948 1,575
Madison at Bear Creek... Houston, TX 180 Units 5,400 828 3,442(1) 1,162(4)
McCallum Glen........... Dallas, TX 275 Units 8,450 2,633 5,004(1) 1,375(3)
McCallum Crossing....... Dallas, TX 322 Units 11,500 1,841 8,101(1) 4,486
Oak Run................. Pasadena, TX 160 Units 5,800 1,203 4,364 2,227
Park at Colonade........ San Antonio, TX 211 Units 5,800 927 4,066 1,592
Park Lane............... Dallas, TX 97 Units 2,750 1,526 1,103 1,827
South Cochran........... Los Angeles, CA 64 Units 4,650 1,897 1,873 1,660
Summerstone............. Houston, TX 242 Units 7,225 1,780 5,180(1) 1,884
Sunset Lakes............ Waukegan, IL 414 Units 15,000 6,089 7,243 7,316

OFFICE BUILDINGS
Chesapeake Center....... San Diego, CA 57,493 Sq.Ft 6,575 3,111 2,844 204
Daley................... San Diego, CA 64,425 Sq.Ft 6,211 2,412 3,346 836
Valley Rim.............. San Diego, CA 54,194 Sq.Ft 5,500 1,367 3,516 (138)
Viewridge............... San Diego, CA 25,062 Sq.Ft 2,010 701 1,272 4
Waterstreet............. Boulder, CO 106,257 Sq.Ft 22,250 7,126 12,949 9,154

F-81

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net
Units/ Sales Cash Debt Gain/(Loss)
Property Location Sq.Ft./Acres Price Received Discharged on Sale
-------- -------- --------------- --------- -------- ---------- -----------

INDUSTRIAL WAREHOUSE
Technology Trading...... Sterling, VA 197,659 Sq.Ft 10,775 4,120 6,214 4,163
Zodiac.................. Dallas, TX 35,435 Sq.Ft 762 183 564 167

LAND
Eagle Crest............. Farmers Branch, TX 4.41 Acres 300 291 -- (215)
McKinney 36............. McKinney, TX 1.822 Acres 476 476 -- 355
Moss Creek.............. Greensboro, NC 4.79 Acres 15 13 -- (71)
Round Mountain.......... Austin, TX 110.0 Acres 2,560 2,455 -- 1,047

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

(1) Debt assumed by purchaser.

(2) The Glenwood Apartments were exchanged with ARI, a related party, for two
parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago.

(3) Excludes $1.5 million deferred gain from seller financing. See Note 4.
"Notes and Interest Receivable.")

(4) Excludes a $608,000 deferred gain from seller financing. (See Note 4. "Notes
and Interest Receivable.")

In 2000, TCI sold the following properties:

Net
Units/Sq.Ft. Sales 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 Bernadino,
Parkwood Knoll..................... CA 178 Units 9,100 3,007 5,491 2,967
Pinellas Park,
Shadow Run......................... 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

F-82

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net
Units/Sq.Ft. Sales Cash Debt Gain on
PROPERTY LOCATION ROOMS/ACRES PRICE RECEIVED DISCHARGED SALE
-------- -------- -------------- ------- -------- ---------- -------

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.

NOTE 4. NOTES AND INTEREST RECEIVABLE

Notes and interest receivable consisted of the following:

2001 2000
------------------- -------------------
ESTIMATED ESTIMATED
FAIR BOOK FAIR BOOK
VALUE VALUE VALUE VALUE
--------- ------- --------- -------

Notes receivable
Performing.......................................... $17,680 $17,442 $ 8,664 $ 8,668
Nonperforming, nonaccruing.......................... 5,630 5,247 -- --
------- ------- ------- -------
$23,310 22,689 $ 8,664 8,668
======= =======
Interest receivable................................. 178 41
------- -------
$22,867 $ 8,709
======= =======

Interest income is not recognized on nonperforming notes receivable. For
the years 2001 and 1999, unrecognized interest income on nonperforming notes
totaled $192,500 and $26,000, respectively.

Notes receivable at December 31, 2001, mature from 2002 through 2008 with
interest rates ranging from 5.8% to 16.0% per annum, with a weighted average
rate of 12.2%. Notes receivable are generally nonrecourse and are generally
collateralized by real estate. Scheduled principal maturities of $12.2 million
are due in 2002.

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 September
2001. In October 2001, TCI extended the loan until February 2002, receiving
$100,000 as an extension fee. In December 2001, TCI received a $1.5 million
principal payment. In February 2002, TCI sold a $2.0 million senior
participation interest in the loan to IORI, a related party. TCI and IORI will
receive 43% and 57%, respectively, of the remaining principal and interest
payments. Also in February 2002, TCI received $23,000 as an extension fee and
the loan was extended until April 2002.

F-83

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In July 2001, TCI agreed to fund a $4.4 million line of credit secured by
1,714.16 acres of unimproved land in Tarrant County, Texas. The note receivable
bears interest at 15% per annum, requires monthly interest only payments
beginning in September 2001 and matures in July 2003. As of March 2002, TCI has
funded $3.8 million of the line of credit, and received no interest payments.

Also 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 January 2002, the note was extended until April 2002. As of
March 2002, TCI has received no interest payments.

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 March 2002, TCI has funded a total of $2.3
million.

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 matured in February 2002. In February 2002, TCI extended the loan
maturity to February 2003.

In December 2001, TCI provided $608,000 of purchase money financing in
conjunction with the sale of the Madison at Bear Creek Apartments in Houston,
Texas. The note receivable bore interest at 7% per annum, required payment of
the entire outstanding principal and all accrued and unpaid interest in January
2002. The loan was secured by a second lien on the property. The note was paid
in full according to the terms in January 2002.

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 bore interest at 18.0% per annum, required monthly payments interest
only 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
bore interest at 16.0% per annum, required monthly payments of interest only and
matured in June 2001. In June 2001, the note was extended until November 2001
with a $750,000 loan principal paydown. With the paydown, the note was
renegotiated to replace the existing collateral with new collateral consisting
of a 120,000 sq.ft. office building and industrial warehouse in Carrollton,
Texas. The renegotiated note originally was to mature in May 2002. In February
2002, the maturity date on the loan was extended to July 2002.

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.

F-84

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 bore interest at 8.5% per annum, requires monthly
payments of interest only, matured in December 2001 and was secured by a first
lien on the property sold. In December 2001, the note and all accrued but unpaid
interest was paid in full. In conjunction with the loan payoff, a previously
deferred gain of $819,000 on the sale of the property was recognized.

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.

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

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 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.

NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

2001 2000 1999
---- ---- -----

Balance January 1,.......................................... $537 $543 $ 886
Provision for loss........................................ 281 -- --
Amounts charged off....................................... -- (6) (593)
CMET allowance............................................ -- -- 250
---- ---- -----
Balance December 31,........................................ $818 $537 $ 543
==== ==== =====

F-85

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. INVESTMENT IN MARKETABLE EQUITY SECURITIES

Marketable equity securities consist of 746,972 shares of common stock of
ARI, approximately 6.5% of ARI's outstanding shares. ARI is a publicly held real
estate company.

2001 2000
------- -------

ARI......................................................... $ -- $10,177
======= =======

Prior to the first quarter of 2001, TCI accounted for its investment in
ARI, a related party, as an available for sale marketable security. In the first
quarter of 2001, TCI began accounting for its investment in ARI on the equity
method.

NOTE 7. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES

Investment in equity method real estate entities consisted of the
following:

2001 2000
------- ------

American Realty Investors, Inc. ("ARI")..................... $10,182 $ --
Income Opportunity Realty Investors, Inc. ("IORI").......... 3,501 4,326
Tri-City Limited Partnership ("Tri-City")................... 531 524
Nakash Income Associates ("NIA")............................ (553) (650)
Sacramento Nine ("SAC 9")................................... 539 490
Other....................................................... 30 597
------- ------
$14,230 $5,287
======= ======

TCI owns an approximate 6.5% interest in ARI, a publicly held real estate
company, having a market value of $112.3 million at December 31, 2001. At
December 31, 2001, ARI had total assets of $757.5 million and owned 52
apartments, 17 commercial properties, nine hotels and 54 parcels of unimproved
land. In 2001, ARI sold 17 apartments, one commercial property and 26 parcels of
unimproved land for a total of $187.3 million, receiving net cash of $52.4
million after paying off $110.2 million in mortgage debt and the payment of
various closing costs. ARI recognized gains of $83.4 million on the sales of
which TCI's equity share was $5.3 million.

TCI owns an approximate 24.0% interest in IORI, a publicly held Real Estate
Investment Trust ("REIT"), having a market value of $25.9 million at December
31, 2001. At December 31, 2001, IORI had total assets of $91.8 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.

TCI owns a 63.7% limited partner interest and IORI owns a 36.3% general
partner interest in Tri-City, which at December 31, 2001, 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 9.44% per annum, requires

F-86

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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, 2001, 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.

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 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, TCI recognized a
previously deferred gain on the sale of the apartments of $540,000.

Set forth below are summarized financial data for the entities accounted
for using the equity method:

2001 2000
-------- --------

Real estate, net of accumulated depreciation ($137,407 in
2001 and $9,540 in 2000).................................. $692,747 $ 93,170
Notes receivable............................................ 31,892 2,402
Other assets................................................ 132,665 8,973
Notes payable............................................... (651,328) (59,485)
Other liabilities........................................... (85,858) (1,815)
-------- --------
Shareholders/partners' capital.............................. $120,118 $ 43,245
======== ========

TCI's share of the above equity investee capital accounts was $15.0 million
in 2001 and $10.3 million in 2000.

2001 2000 1999
--------- -------- -------

Rents and interest income............................ $ 181,570 $ 16,245 $20,675
Depreciation......................................... (19,930) (2,917) (3,152)
Operating expenses................................... (153,557) (10,835) (8,123)
Interest expense..................................... (83,154) (5,559) (7,609)
Income (loss) before gain on sale of real estate..... (75,071) (3,066) 1,791
Gain on sale of real estate.......................... 83,414 20,878 8,020
--------- -------- -------
Net income........................................... $ 8,343 $ 17,812 $ 9,811
========= ======== =======

F-87

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TCI's equity share of:

2001 2000 1999
------- ------ ------

Income (loss) before gain on sale of real estate.......... $(5,950) $ (556) $ 102
Gain on sale of real estate............................... 5,310 4,572 3,569
------- ------ ------
Net income (loss)......................................... $ (640) $4,016 $3,671
======= ====== ======

NOTE 8. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

2001 2000
--------------------- ---------------------
ESTIMATED BOOK ESTIMATED BOOK
FAIR VALUE VALUE FAIR VALUE VALUE
---------- -------- ---------- --------

Notes payable.............................. $461,875 $458,032 $484,445 $498,914
======== ========
Interest payable........................... 3,005 2,820
-------- --------
$461,037 $501,734
======== ========

Scheduled principal payments are due as follows:

2002........................................................ $152,755
2003........................................................ 41,097
2004........................................................ 77,490
2005........................................................ 29,184
2006........................................................ 19,681
Thereafter.................................................. 137,825
--------
$458,032
========

Notes payable at December 31, 2001, bore interest at rates ranging from
3.9% to 12.5% per annum, and mature between 2002 and 2043. The mortgages were
collateralized by deeds of trust on real estate having a net carrying value of
$632.8 million.

In 2001, TCI financed the following property:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION ACRES INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ---------- -------- ---------- -------- -------- --------

LAND
Red Cross................... Dallas, TX 2.89 Acres $4,500 $-- $4,328 12.5%(1) 10/02

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

(1) Variable rate.

F-88

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2000, TCI financed/refinanced the following properties:

Net
Debt Debt Cash Interest Maturity
Property Location Units/Sq. Ft. Incurred Discharged Received Rate Date
-------- -------- ------------- -------- ---------- -------- -------- --------

APARTMENTS
Camelot................. Largo, FL 120 Units $3,800 $ -- $3,100 8.85%(1) 12/05
Country Crossing........ Tampa, FL 227 Units 3,825 2,645 985 9.65(1) 06/03
Crescent Place.......... Houston, TX 120 Units 2,165 1,722 370 7.04(1) 03/30
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.

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, 2001 and 2000, 5,829 shares of Series A Preferred
Stock were issued and outstanding.

TCI's Series B Cumulative Convertible Preferred Stock consisted of a
maximum 300,000 shares with a par value of $.01 per share and a liquidation
preference of $5.00 per share. Dividends were payable at the rate of $.38 per
share annually 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 could be
converted into Common Stock at the daily average closing price of the Common
Stock for the prior five trading days or redeemed for cash at the option of the
holder. At December 31, 2000, 300,000 shares of Series B Preferred Stock were
issued and outstanding. In November 2001, the holder redeemed its shares. TCI
paid $1.6 million in cash of which $115,000 was accrued dividends.

In conjunction with the purchase of the Baywalk, Island Bay and Marina
Landing Apartments, TCI issued 30,000 shares 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 annual rate of $5.00 per share or $1.25 per quarter through September
2002, then $6.00 per share annually or $1.50 per quarter through September 2003,
then $7.00 per share annually or $1.75 per

F-89

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. As of March 31, 2002, the average
trading price was $16.49 per share, $14.84 per share at 90%. The 30,000 shares
of Series C Cumulative Convertible Preferred Stock at $100.00 per share divided
by $14.84 per share is approximately 202,143 shares of common stock, which is
calculated into the diluted weighted average shares calculation. The Series C
Preferred Stock is redeemable for cash at any time at the option of TCI. At
December 31, 2001, 30,000 shares of Series C 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 and $3.0 million ($.60 per share) in 1999.

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
1999 represented capital gains.

In December 2000, the Board of Directors determined not to pay a fourth
quarter dividend to holders of TCI's Common Stock. The non-payment decision was
based on the Board determining that TCI needed to retain cash for acquisitions
that were anticipated in 2001 and 2002.

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 two 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, 2001, 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.

2001 2000
-------------------- --------------------
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------

Outstanding at January 1,...................... 25,000 $14.875 -- $ --
Granted........................................ 25,000 8.875 25,000 14.875
Canceled....................................... -- -- -- --
------ ------
Outstanding at December 31,.................... 50,000 25,000 $14.875
====== ======

At December 31, 2001, 50,000 options were exercisable at an average
exercise price of $11.875 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

F-90

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

2001 2000
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------

Net income applicable to Common shares..... $19,811 $19,217 $29,760 $29,537
Net income applicable to Common shares, per
share.................................... 2.28 2.23 3.45 3.42

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:

2001 2000
----- -----

Dividend yield.............................................. -- 6.08%
Expected volatility......................................... 65.00% 65.00%
Risk-free interest rate..................................... 1.25% 5.75%
Expected lives (in years)................................... 9 9
Forfeitures................................................. 10.00% 10.00%

The weighted average fair value per share of options granted in 2001 and
2000 was $7.60 and $8.93, respectively.

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, 2001:

2002........................................................ $ 45,856
2003........................................................ 36,380
2004........................................................ 27,551
2005........................................................ 19,499
2006........................................................ 10,726
Thereafter.................................................. 18,365
--------
$158,377
========

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, has substantial
contact with the management of BCM and input with respect to its performance of
advisory services to TCI.

F-91

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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. BCM was
not required to refund any of its 1999, 2000 or 2001 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 partner of Triad
is GS Realty Services, Inc. ("GS Realty"), a related party. Triad subcontracts
to Regis, a related party, which is a company owned by GS Realty, the
property-level management and leasing of 51 of TCI's commercial properties, its
five 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.

F-92

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

Revenue, fees and cost reimbursements to BCM and its affiliates:

2001 2000 1999
------- ------ -------

Fees
Advisory............................................... $ 5,346 $5,258 $ 3,219
Net income............................................. 1,850 2,415 2,450
Incentive fees......................................... 3,167 -- --
Property acquisition................................... 774 1,024 1,815
Real estate brokerage.................................. -- 331 2,727
Mortgage brokerage and equity refinancing.............. 45 464 422
Property and construction management and leasing
commissions*........................................ -- -- 3,608
------- ------ -------
$11,182 $9,492 $14,241
======= ====== =======
Cost reimbursements...................................... $ 2,582 $2,146 $ 1,367
======= ====== =======
Hotel lease revenue...................................... $ -- $2,237 $ 1,653
======= ====== =======

Fees paid to GS Realty, a related party:

2001 2000
------ ------

Fees
Property acquisition...................................... $1,668 $2,326
Real estate brokerage..................................... 3,760 3,250
Property and construction management and leasing
commissions............................................ 2,599 4,321
------ ------
$8,027 $9,897
====== ======

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

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

NOTE 17. INCOME TAXES

For the year 1999, 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 2001, 2000 and 1999; 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

F-93

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

losses, depreciation on owned properties and investments in equity method real
estate entities. At December 31, 2001, TCI's tax basis in its net assets
exceeded their basis for financial statement purposes by $50.1 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, 2001, TCI
had tax net operating loss carryforwards of approximately $47.2 million expiring
through the year 2018. The use of such loss carryforwards are subject to certain
limitations under the Internal Revenue Code.

At December 31, 2001, TCI had a net deferred tax asset of $33.1 million due
to tax deductions available to it in future years. However, as management cannot
determine that it is more likely than not that TCI will realize the benefit of
the deferred tax asset a 100% valuation has been established.

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 $3.1 million, $11.2
million and $555,000 for 2001, 2000 and 1999, respectively. Expenses that are
not reflected in the segments are general and administrative expenses, minority
interest, non-segment interest expense, advisory, incentive sales and net income
fees totaling $25.0 million, $16.2 million and $9.0 million for 2001, 2000 and
1999, respectively. Excluded from operating segment assets are assets of $86.5
million at December 31, 2001, and $91.0 million at December 31, 2000, which are
not identifiable with an operating segment. There are no intersegment revenues
and expenses. 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 2001, 2000 and 1999.

COMMERCIAL
2001 LAND PROPERTIES APARTMENTS HOTELS TOTAL
---- ------- ---------- ---------- ------- --------

Rents............................ $ 633 $ 68,676 $ 58,991 $ 6,611 $134,911
Property operating expenses...... 1,756 38,266 35,947 4,593 80,562
------- -------- -------- ------- --------
Segment operating income......... $(1,123) $ 30,410 $ 23,044 $ 2,018 $ 54,349
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 12,753 $ 5,817 $ 1,135 $ 19,705
Interest......................... 1,845 21,996 15,887 1,330 41,058
Real estate improvements and
construction................... 1,424 7,365 14,973 9,855 33,617
Asset............................ 62,209 304,657 224,986 30,835 622,687

COMMERCIAL
PROPERTY SALES LAND PROPERTIES APARTMENTS TOTAL
-------------- ------- ---------- ---------- --------

Sales price...................... $ 3,351 $ 54,083 $104,020 $161,454
Cost of sales.................... (2,235) (39,693) (71,384) (113,312)
------- -------- -------- --------
Gain on sale..................... $ 1,116 $ 14,390 $ 32,636 $ 48,142(1)
======= ======== ======== ========

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

(1) Excludes a previously deferred gain on the sale of Town & Country Shopping
Center of $819,000 as well as TCI's shares of gains recognized by ARI, an
equity affiliate, of $5.3 million.

F-94

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMERCIAL
2000 LAND PROPERTIES APARTMENTS HOTELS TOTAL
---- ------- ---------- ---------- ------- --------

Rents............................ $ 723 $ 61,496 $ 74,700 $ 2,743 $139,662
Property operating expenses...... 1,097 31,962 44,898 213 78,170
------- -------- -------- ------- --------
Segment operating income......... $ (374) $ 29,534 $ 29,802 $ 2,530 $ 61,492
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 11,358 $ 7,395 $ 996 $ 19,749
Interest......................... 3,342 21,907 21,284 1,581 48,114
Real estate improvements......... 117 11,700 1,302 1,545 14,664
Asset............................ 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)
======= ======= ======== ======= ========

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

(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 $ 33,971 $ 42,162 $ 5,113 $ 82,101
Property operating expenses...... 917 14,600 26,374 2,623 44,514
------- -------- -------- ------- --------
Operating income (loss).......... $ (62) $ 19,371 $ 15,788 $ 2,490 $ 37,587
======= ======== ======== ======= ========
Depreciation..................... $ -- $ 6,094 $ 4,872 $ 736 $ 11,702
Interest......................... 1,891 11,355 13,032 1,442 27,720
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."

F-95

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 2001 and 2000 (unaudited):

THREE MONTHS ENDED
---------------------------------------------------
2001 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---- --------- -------- ------------- ------------

Rents................................... $34,968 $36,074 $32,423 $31,446
Property expense........................ 20,247 20,194 19,643 20,478
------- ------- ------- -------
Operating income...................... 14,721 15,880 12,780 10,968
Interest income......................... 613 645 1,017 673
Income (loss) in equity partnerships.... (1,367) (999) (2,164) (1,420)
Gain on sale of real estate............. 6,484 22,265 18,780 6,741
------- ------- ------- -------
5,730 21,911 17,633 5,994
Other expense........................... 20,135 23,460 19,297 22,914
------- ------- ------- -------
Net income (loss)....................... 316 14,331 11,116 (5,952)
Preferred dividend requirement.......... (7) (8) (7) (150)
------- ------- ------- -------
Net income applicable to Common
shares................................ $ 309 $14,323 $11,109 $(6,102)
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE
Net income applicable to Common
shares................................ $ .04 $ 1.65 $ 1.28 $ (.74)
======= ======= ======= =======

In the first quarter of 2001, gains on sale of real estate totaling $6.5
million were recognized on the sale of Heritage Apartments, Forest Ridge
Apartments, Park at Colonade Apartments, the Zodiac Warehouse, a portion of the
McKinney 36 land parcel, a portion of the Round Mountain land parcel, and TCI's
share of gains recognized by ARI, an equity investee. In the second quarter of
2001, gains on sale of real estate totaling $22.3 million were recognized on the
sale of Glenwood Apartments, Fontenelle Hills Apartments, Bent Tree Gardens
Apartments, McCallum Glen Apartments, Moss Creek lots land parcel, Waterstreet
Office Building, Technology Trading Center, Daley Office Building, and TCI's
share of gains recognized by ARI. In the third quarter of 2001, gains on sale of
real estate totaling $18.8 million were recognized on the sale of Park Lane
Apartments, McCallum Crossing Apartments, Carseka Apartments, Sunset Lakes
Apartments, Oak Run Apartments, a portion of the Eagle Crest land parcel,
Chesapeake Office Building, and TCI's share of gains recognized by ARI. In the
fourth quarter of 2001, gains on sale of real estate totaling $6.7 million were
recognized on the sale of South Cochran Apartments, Madison at Bear Creek
Apartments, Summerstone Apartments, Valley Rim Office Building, a previously
deferred gain on the sale of Town and Country Shopping Center, and TCI's share
of gains recognized by ARI. See Note 3. "Real Estate" and Note 7. "Investment in
Equity Method Real Estate Entities."

F-96

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THREE MONTHS ENDED
---------------------------------------------------
2000 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---- --------- -------- ------------- ------------

Rents................................... $34,086 $34,605 $35,164 $35,807
Property expense........................ 18,419 18,345 19,896 21,510
------- ------- ------- -------
Operating income...................... 15,667 16,260 15,268 14,297
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........................... 20,673 19,630 20,883 22,888
------- ------- ------- -------
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 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."

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-97

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.

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 June 2000, plaintiffs' counsel asserted that loans made by TCI to BCM
and American Realty Trust, Inc. breached the provisions for the Modification.
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.

On October 23, 2001, TCI, IORI and American Realty Investors, Inc. ("ARI")
jointly announced a preliminary agreement with the plaintiff's legal counsel for
complete settlement of all disputes in the lawsuit. In February 2002, the court
granted final approval for a proposed settlement. Under the proposal, ARI would
acquire all of the outstanding shares of IORI and TCI not currently owned by ARI
for a cash payment or shares of ARI Preferred Stock. ARI will pay $17.50 cash
per TCI share and $19.00 cash per IORI share for the stock held by
non-affiliated stockholders. ARI would issue one share of Series G Preferred
Stock with a liquidation value of $20.00 per share for each share of TCI Common
Stock for stockholders who elect to receive ARI preferred stock in lieu of cash.
ARI would issue one share of Series H Preferred Stock with a liquidation value
of $21.50 per share for each share of IORI Common Stock for stockholders who
elect to receive ARI preferred stock in lieu of cash. Each share of Series G
Preferred Stock will be convertible into 2.5 shares of ARI Common Stock during a
75-day period that commences fifteen days after the date of the first ARI Form
10-Q filing that occurs after the closing of the merger transaction. Upon the
acquisition of IORI and TCI shares, TCI and IORI would become wholly-owned
subsidiaries of ARI. The transaction is subject to the negotiation of a
definitive merger agreement and a vote of the shareholders of all three
entities. TCI has the same board as IORI and the same advisor as IORI and ARI.

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.

F-98

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 21. SUBSEQUENT EVENTS

In the first quarter of 2002, TCI purchased the following properties:

UNITS/ PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION ACRES PRICE PAID INCURRED RATE DATE
-------- -------- --------- -------- -------- -------- -------- --------

APARTMENTS
Blue Lakes Villas(1)...... Waxahachie, TX 186 Units $1,012 $1,048 $ -- --% --
Echo Valley(1)............ Dallas, TX 216 Units 787 788 -- -- --

Net
Purchase Cash Debt Interest Maturity
Property Location Sq. Ft./Acres Price Paid Incurred Rate Date
-------- -------- --------------- -------- -------- -------- -------- --------

SHOPPING CENTER
Oak Tree
Village(2)......... Lubbock, TX 45,623 Sq. Ft. $1,734 $ 186 $1,430 8.48% 11/07

LAND
Lakeshore
Villas(2).......... Humble, TX 16.89 Acres 941 294 -- -- --
Rasor(2)............. Plano, TX 24.50 Acres 2,306 120 -- -- --

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

(1) Land purchased for apartment construction.

(2) Property exchanged with ARI, a related party, for the Plaza at Bachman
Retail Center.

In the first quarter of 2002, TCI has also sold the following properties:

Net
Sales Cash Debt Gain/(Loss)
Property Location Units/Sq.Ft. Price Received Discharged on Sale
-------- -------- --------------- ------ -------- ---------- -----------

APARTMENTS
Primrose................... Bakersfield, CA 162 Units $5,000 $1,722 $2,920 $ 659
OFFICE BUILDING
Hartford................... Dallas, TX 174,513 Sq.Ft. 4,000 -- -- --(1)

INDUSTRIAL WAREHOUSE
Central Storage............ Dallas, TX 216,035 Sq.Ft. 4,000 2,095 1,063 1,241

SHOPPING CENTER
Plaza at Bachman(2)........ Dallas, TX 80,278 Sq.Ft. 4,707 -- -- --

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

(1) Excludes a $920,000 deferred gain from seller financing.

(2) Property was exchanged with ARI, a related party, for two parcels of land;
the Rasor land parcel and Lakeshore Villas land parcel and the Oak Tree
Village Shopping Center.

In the first quarter of 2002, TCI refinanced the following property:

Net
Debt Debt Cash Interest Maturity
Property Location Sq. Ft. Incurred Discharged Received Rate Date
-------- -------- -------------- -------- ---------- -------- -------- --------

INDUSTRIAL WAREHOUSE
Addison Hanger(1).......... Addison, TX 23,650 Sq.Ft. $2,687 $1,580 $942 6.75%(2) 02/07

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

(1) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger
II in Addison, Texas.

(2) Variable interest rate.

TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TCI any shortfall. In addition, if the asset fails to produce the 12% return for
a calendar year, TCI may require ARI to repurchase the shares of Two Hickory for
the purchase price. Management has classified this related party transaction as
a note receivable from ARI.

In February 2002, TCI sold a $2.0 million senior participation interest in
a $3.5 million loan to IORI, a related party. See Item 2. "Mortgage Loans."

F-100

SCHEDULE III

TRANSCONTINENTAL REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001

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........ $ 1,302 $ 372 $ 1,117 $ 51 $ (200)(2)
4400, Midland, TX..................... 1,069 349 1,396 -- --
Apple Lane, Lawrence, KS.............. 953 168 1,510 -- --
Arbor Point, Odessa, TX............... 1,552 321 1,285 526 --
Ashton Way, Midland, TX............... 1,069 384 1,536 52 --
Autumn Chase, Midland, TX............. 907 141 1,265 -- --
Baywalk, Galveston, TX................ 5,460 679 6,106 -- --
By the Sea, Corpus Christi, TX........ 5,519 644 5,797 -- --
Camelot, Largo, FL.................... 3,747 1,230 2,870 235 (281)(2)
Cliffs of Eldorado, McKinney, TX...... 10,500 2,647 10,589 -- --
Country Crossings, Tampa, FL.......... 3,758 772 2,444 196 (358)(2)
Courtyard, Midland, TX................ 1,040 151 1,359 -- --
Coventry, Midland, TX................. 1,228 236 369 184 --
El Chapparal, San Antonio, TX......... 4,203 279 2,821 574 (330)(2)
Fairway View Estates, El Paso, TX..... 3,453 548 4,935 260 --
Fairways, Longview, TX................ 1,908 657 1,532 119 (266)(2)
Falcon Lakes, Arlington, TX........... -- 1,437 239
Fountain Lake, Texas City, TX......... 2,470 861 2,585 19 (254)(2)
Fountains of Waterford, Midland, TX... 436 311 1,243 1,538 --
Gladstell Forest, Conroe, TX.......... 2,402 504 2,015 190 --
Grove Park, Plano, TX................. 4,554 942 3,767 54 (447)(2)
Harper's Ferry, Lafayette, LA......... 1,751 349 1,398 223 --
Heritage on the River, Jacksonville,
FL................................... 7,675 2,070 6,211 330 (719)(2)
Hunters Glen, Midland, TX............. 1,895 519 2,075 321 --

HELD FOR INVESTMENT:
APARTMENTS
4242 Cedar Springs, Dallas, TX........ $ 372 $ 968 $ 1,340 $ 297 1984 06/92 5-40 years
4400, Midland, TX..................... 349 1,396 1,745 128 1981 04/98 40 years
Apple Lane, Lawrence, KS.............. 168 1,510 1,678 76 1989 01/00 40 years
Arbor Point, Odessa, TX............... 321 1,811 2,132 651 1975 08/96 5-40 years
Ashton Way, Midland, TX............... 384 1,588 1,972 173 1978 04/98 5-40 years
Autumn Chase, Midland, TX............. 141 1,265 1,406 56 1985 04/00 40 years
Baywalk, Galveston, TX................ 679 6,106 6,785 51 1979 09/01 40 years
By the Sea, Corpus Christi, TX........ 644 5,797 6,441 48 1973 08/01 40 years
Camelot, Largo, FL.................... 1,230 2,825 4,055 740 1975 08/93 5-40 years
Cliffs of Eldorado, McKinney, TX...... 2,647 10,589 13,236 861 1997 10/98 40 years
Country Crossings, Tampa, FL.......... 772 2,282 3,054 686 1973 04/93 5-40 years
Courtyard, Midland, TX................ 151 1,359 1,510 23 1976 05/01 40 years
Coventry, Midland, TX................. 236 553 789 220 1977 08/96 5-40 years
El Chapparal, San Antonio, TX......... 279 3,065 3,344 1,524 1963 01/88 5-40 years
Fairway View Estates, El Paso, TX..... 548 5,195 5,744 458 1977 03/99 40 years
Fairways, Longview, TX................ 657 1,385 2,042 432 1980 03/93 5-40 years
Falcon Lakes, Arlington, TX........... 1,437 239 1,676 -- 2001 10/01 40 years
Fountain Lake, Texas City, TX......... 861 2,350 3,211 506 1975 12/94 5-40 years
Fountains of Waterford, Midland, TX... 311 2,781 3,092 1,001 1977 05/98 5-40 years
Gladstell Forest, Conroe, TX.......... 504 2,205 2,709 474 1985 06/95 5-40 years
Grove Park, Plano, TX................. 942 3,374 4,316 532 1979 06/96 5-40 years
Harper's Ferry, Lafayette, LA......... 349 1,621 1,970 520 1972 02/92 5-40 years
Heritage on the River, Jacksonville,
FL................................... 2,070 5,822 7,892 1,174 1973 12/95 5-40 years
Hunters Glen, Midland, TX............. 519 2,396 2,915 413 1982 01/98 5-40 years

F-101

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

In the Pines, Gainesville, FL......... $ 5,514 $ 1,288 $ 5,154 $ 496 $ (573)(2)
Island Bay, Galveston, TX............. 15,334 2,095 18,852 -- --
Limestone Canyon, Austin, TX.......... 12,911 1,998 -- 12,247 1,895(4)
Limestone Ranch, Lewisville, TX....... 6,604 1,620 -- 6,605 --
Marina Landing, Galveston, TX......... 12,137 1,246 11,161 -- --
Mountain Plaza, El Paso, TX........... 4,204 837 3,347 139 --
Oak Park IV, Clute, TX................ -- 224 674 27 (95)(2)
Paramount Terrace, Amarillo, TX....... 2,818 340 3,061 -- --
Plantation, Tulsa, OK................. 1,966 344 3,096 -- --
Primrose, Bakersfield, CA............. 2,934 428 3,852 -- --
Quail Creek, Lawrence, KS............. 2,187 343 3,090 -- --
Quail Oaks, Balch Springs, TX......... 1,198 90 2,160 152 (187)(2)
River Oaks, Wiley, TX................. 1,188 590 -- 1,455 --
Sandstone, Mesa, AZ................... 5,648 1,656 6,625 95 --
Sendero Ridge, San Antonio, TX........ 3,660 2,635 -- 3,926 --
Somerset, Texas City, TX.............. 3,000 936 2,811 158 (452)(2)
Southgate, Odessa, TX................. 1,788 335 1,338 318 --
Southgreen, Bakersfield, CA........... 2,401 755 3,021 -- --
Stone Oak, San Antonio, TX............ 2,847 649 2,598 263 (409)(2)
Summerfield, Orlando, FL.............. 4,540 1,175 4,698 136 --
Sunchase, Odessa, TX.................. 1,822 742 2,967 458 --
Terrace Hills, El Paso, TX............ 6,228 1,286 5,145 167 --
Timbers, Tyler, TX.................... 1,634 497 1,988 -- --
Tivoli, Dallas, TX.................... 1,865 1,355 -- 2,984 --
Trails at Windfern, Houston, TX....... 3,695 870 3,479 63 (436)(2)
Treehouse, Irving, TX................. 2,604 716 2,865 260 --
Verandas at City View, Fort Worth,
TX................................... 2,197 2,545 -- 25 --
Waters Edge IV, Gulfport, MS.......... -- 443 -- 1,536 --
Westwood, Odessa, TX.................. -- 85 341 108 --
Willow Creek, El Paso, TX............. 1,983 608 1,832 76 (156)(2)

In the Pines, Gainesville, FL......... $ 1,288 $ 5,077 $ 6,365 $ 1,345 1972 12/94 5-40 years
Island Bay, Galveston, TX............. 2,095 18,852 20,947 157 1973 09/01 40 years
Limestone Canyon, Austin, TX.......... 1,998 13,365 16,140 668 1997 07/98 40 years
Limestone Ranch, Lewisville, TX....... 1,620 6,605 8,225 -- 2001 05/01 40 years
Marina Landing, Galveston, TX......... 1,240 11,161 12,401 93 1985 09/01 40 years
Mountain Plaza, El Paso, TX........... 837 3,486 4,323 422 1972 01/98 5-40 years
Oak Park IV, Clute, TX................ 224 606 830 148 1981 06/94 5-40 years
Paramount Terrace, Amarillo, TX....... 340 3,061 3,402 128 1983 05/00 40 years
Plantation, Tulsa, OK................. 344 3,096 3,440 161 1968 12/99 40 years
Primrose, Bakersfield, CA............. 428 3,852 4,280 169 1979 04/00 40 years
Quail Creek, Lawrence, KS............. 343 3,090 3,434 168 1969 01/00 40 years
Quail Oaks, Balch Springs, TX......... 90 2,125 2,215 1,007 1982 02/87 5-40 years
River Oaks, Wiley, TX................. 590 1,455 2,045 -- 2001 10/01 40 years
Sandstone, Mesa, AZ................... 1,656 6,720 8,376 770 1986 10/97 5-40 years
Sendero Ridge, San Antonio, TX........ 2,635 3,926 6,561 -- 2001 11/01 40 years
Somerset, Texas City, TX.............. 936 2,516 3,452 668 1985 12/93 5-40 years
Southgate, Odessa, TX................. 335 1,656 1,991 468 1976 08/96 5-40 years
Southgreen, Bakersfield, CA........... 755 3,021 3,776 234 1985 12/98 40 years
Stone Oak, San Antonio, TX............ 649 2,452 3,101 965 1978 03/90 5-40 years
Summerfield, Orlando, FL.............. 1,175 4,834 6,009 971 1971 11/94 5-40 years
Sunchase, Odessa, TX.................. 742 3,425 4,167 646 1981 10/97 5-40 years
Terrace Hills, El Paso, TX............ 1,286 5,312 6,598 671 1985 03/97 5-40 years
Timbers, Tyler, TX.................... 497 1,988 2,485 203 1973 12/97 40 years
Tivoli, Dallas, TX.................... 1,355 2,984 4,339 -- 2001 12/01 40 years
Trails at Windfern, Houston, TX....... 870 3,106 3,976 428 1975 05/97 5-40 years
Treehouse, Irving, TX................. 716 3,125 3,841 543 1974 05/97 5-40 years
Verandas at City View, Fort Worth,
TX................................... 2,545 25 2,570 -- 2001 09/01 40 years
Waters Edge IV, Gulfport, MS.......... 443 1,536 1,979 -- 2001 11/01 40 years
Westwood, Odessa, TX.................. 85 449 534 147 1977 08/96 5-40 years
Willow Creek, El Paso, TX............. 608 1,752 2,359 388 1972 05/94 5-40 years

F-102

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Will-O-Wick, Pensacola, FL............ $ 3,104 $ 747 $ 2,990 $ 174 $ (281)(2)
Willow Wick, North Augusta, SC........ 1,696 324 1,305 39 (170)(2)
Woodview, Odessa, TX.................. 2,079 716 2,864 102 --
OFFICE BUILDINGS
1010 Commons, New Orleans, LA......... 8,344 143 15,011 17,551 (1,218)(2)
225 Baronne, New Orleans, LA.......... 7,327 1,162 10,457 6,633 (1,293)(2)
4135 Beltline, Addison, TX............ 3,100 476 4,280 -- --
9033 Wilshire Blvd., Los Angeles,
CA................................... 6,756 956 8,609 143 --
Ambulatory Surgery Center, Sterling,
VA................................... 6,682 908 8170 -- --
AMOCO, New Orleans, LA................ 14,852 895 3,582 6,380 (1,149)(2)
Atrium, Palm Beach, FL................ 3,901 1,147 4,590 166 --
Bay Plaza, Tampa, FL.................. 2,502 895 3,582 508 (384)(2)
Bay Plaza II, Tampa, FL............... 3,599 506 4,550 90 --
Bonita Plaza, Bonita, CA.............. 4,929 1,168 4,670 1,011 --
Brandeis, Omaha, NE................... 8,750 1,451 13,061 114 --
Corporate Point, Chantilly, VA........ 3,799 830 3,321 834 --
Countryside Retail Center, Sterling,
VA................................... 21,307(10) 2,088 18,791 10 --
Durham Center, Durham, NC............. 14,246 4,233 16,932 1,408 (1,362)(2)
Eton Square, Tulsa, OK................ 10,211 1,469 13,219 418 --
Forum, Richmond, VA................... 5,180 1,360 5,439 958 --
Harmon, Sterling, VA.................. 8,013 1,054 9,487 20 --
Hartford, Dallas, TX.................. -- 630 2,520 815 --
Institute Place Lofts, Chicago, IL.... 5,629 665 7,057 537 --
Jefferson, Washington, DC............. 9,731 2,774 11,096 1,057 (883)(2)
Lexington Center, Colorado Springs,
CO................................... 4,133 1,103 4,413 561 --
Mimado, Sterling, VA.................. -- 582 5,236 58 --
NASA, Houston, TX..................... -- 410 3,319 (661) (272)(2)
One Steeplechase, Sterling, VA........ 7,905 1,380 5,520 2,807 72(4)
Parkway North, Dallas, TX............. 3,900 1,173 4,692 949 --
Plaza Towers, St. Petersburg, FL...... 7,033 1,760 12,617 7,136 (4,379)(3)

Will-O-Wick, Pensacola, FL............ $ 747 $ 2,883 $ 1,499 $ 225 1974 05/95 5-40 years
Willow Wick, North Augusta, SC........ 324 1,174 3,630 618 1968 09/94 5-40 years
Woodview, Odessa, TX.................. 716 2,966 3,682 322 1974 05/98 5-40 years
OFFICE BUILDINGS
1010 Commons, New Orleans, LA......... 2,113 29,374 31,487 2,484 1971 03/98 5-40 years
225 Baronne, New Orleans, LA.......... 1,162 15,797 16,959 2,451 1960 03/98 5-40 years
4135 Beltline, Addison, TX............ 476 4,280 4,756 335 1981/1982 06/99 40 years
9033 Wilshire Blvd., Los Angeles,
CA................................... 956 8,752 9,708 394 1957 04/00 5-40 years
Ambulatory Surgery Center, Sterling,
VA................................... 908 8,170 9,078 255 1991 07/00 40 years
AMOCO, New Orleans, LA................ 1,233 8,475 9,708 3,843 1974 06/97 5-40 years
Atrium, Palm Beach, FL................ 1,147 4,756 5,903 474 1985 06/98 40 years
Bay Plaza, Tampa, FL.................. 895 3,706 4,601 560 1988 07/97 5-40 years
Bay Plaza II, Tampa, FL............... 506 4,640 5,146 185 1985 06/00 40 years
Bonita Plaza, Bonita, CA.............. 1,168 5,681 6,849 935 1991 09/97 5-40 years
Brandeis, Omaha, NE................... 1,451 13,175 14,626 365 1921 11/00 40 years
Corporate Point, Chantilly, VA........ 830 4,155 4,985 1,097 1992 10/94 5-40 years
Countryside Retail Center, Sterling,
VA................................... 2,088 18,801 20,889 578 1986 09/00 40 years
Durham Center, Durham, NC............. 4,233 16,978 21,211 2,229 1988 07/97 5-40 years
Eton Square, Tulsa, OK................ 1,469 13,637 15,106 806 1985 09/99 5-40 years
Forum, Richmond, VA................... 1,360 6,397 7,757 2,018 1987 10/92 2-40 years
Harmon, Sterling, VA.................. 1,054 9,507 10,561 306 1987 09/00 5-40 years
Hartford, Dallas, TX.................. 630 3,335 3,965 984 1980 11/94 2-40 years
Institute Place Lofts, Chicago, IL.... 665 7,594 8,259 4,351 1910 01/93 2-40 years
Jefferson, Washington, DC............. 2,774 11,270 14,044 1,878 1979 02/97 5-40 years
Lexington Center, Colorado Springs,
CO................................... 1,103 4,974 6,077 755 1986 12/97 3-40 years
Mimado, Sterling, VA.................. 582 5,294 5,876 164 1986 09/00 40 years
NASA, Houston, TX..................... 172 2,624 2,796 1,629 1979 10/85 5-40 years
One Steeplechase, Sterling, VA........ 1,380 8,399 9,779 3,398 1987 12/92 5-40 years
Parkway North, Dallas, TX............. 1,173 5,641 6,813 802 1980 02/98 2-40 years
Plaza Towers, St. Petersburg, FL...... 1,241 15,893 17,134 10,027 1979 11/85 1-40 years

F-103

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

Remington Tower, Tulsa, OK............ $ 3,480 $ 480 $ 4,351 $ 214 $ --
Savings of America, Houston, TX....... 1,200 338 1,353 722 --
Signature Athletic Club, Dallas, TX... 2,613 1,075 2,921 1,071 (439)(2)
Venture Center, Atlanta, GA........... 2,643 411 2,746 407 --
Westgrove Air Plaza, Addison, TX...... 3,948 501 2,004 626 (945)(2)
Windsor Plaza, Windcrest, TX.......... -- 1,429 4,441 (352) (257)(2)
INDUSTRIAL WAREHOUSES
5360 Tulane, Atlanta, GA.............. 375 95 514 50 (44)(2)
5700 Tulane, Atlanta, GA.............. -- -- -- 720 (101)(2)
Addison Hangar, Addison, TX........... 1,587 928 1,481 32 --
Addison Hanger II, Addison, TX........ -- -- 1,150 229 --
Central Storage, Dallas, TX........... 1,070 464 1,856 438 (138)(2)
Encon, Fort Worth, TX................. 3,469 984 3,934 67 --
Kelly, Dallas, TX..................... 4,378 1,136 4,856 473 (1,196)(2)(9)
McLeod, Orlando, FL................... 1,994 673 2,693 576 (511)(2)
Ogden, Ogden, UT...................... -- 52 1,568 218 (70)(2)
Space Center, San Antonio, TX......... 1,110 247 1,332 112 (131)(2)
Texstar, Arlington, TX................ 1,225 333 1,331 216 --
Tricon, Atlanta, GA................... 9,665 2,761 6,442 1,791 --
SHOPPING CENTERS
Dunes Plaza, Michigan City, IN........ 3,088 1,230 5,430 2,344 (482)(5)
K-Mart, Cary, NC...................... 1,803 1,358 1,157 162 --
Parkway Center, Dallas, TX............ 1,697 273 1,876 408 --
Plaza on Bachman Creek, Dallas, TX.... -- 734 2,935 1,209 --
Promenade, Highlands Ranch, CO........ 7,262 1,749 6,995 105 (679)(2)
Sadler Square, Amelia Island, FL...... 2,812 679 2,715 134 --
Sheboygan, Sheboygan, WI.............. 484 242 1,371 45 --
HOTELS
Akademia, Wroclaw, Poland............. 7,266 2,184 -- 9,577 --
Brompton, Chicago, IL................. 2,302 572 2,365 1,441 --

Remington Tower, Tulsa, OK............ $ 480 $ 4,565 $ 5,045 $ 336 1982 09/99 40 years
Savings of America, Houston, TX....... 338 2,074 2,412 568 1979 03/97 3-40 years
Signature Athletic Club, Dallas, TX... 1,075 3,553 4,628 566 1985 02/99 5-40 years
Venture Center, Atlanta, GA........... 411 3,153 3,564 1,200 1981 07/89 1-40 years
Westgrove Air Plaza, Addison, TX...... 501 1,684 2,185 45 1982 10/97 5-40 years
Windsor Plaza, Windcrest, TX.......... 1,672 3,589 5,261 2,308 1984 11/86 5-40 years
INDUSTRIAL WAREHOUSES
5360 Tulane, Atlanta, GA.............. 95 520 615 292 1970 11/97 5-40 years
5700 Tulane, Atlanta, GA.............. -- 619 619 92 1998 11/97 40 years
Addison Hangar, Addison, TX........... 928 1,513 2,441 91 1992 12/99 5-40 years
Addison Hanger II, Addison, TX........ -- 1,379 1,379 44 2000 12/99 5-40 years
Central Storage, Dallas, TX........... 464 2,156 2,620 591 1966 04/96 5-40 years
Encon, Fort Worth, TX................. 984 4,001 4,985 402 1958 10/97 5-40 years
Kelly, Dallas, TX..................... 1,136 4,133 5,269 1,155 1966/1973 03/95 5-40 years
McLeod, Orlando, FL................... 673 2,758 3,431 793 1985 09/94 5-40 years
Ogden, Ogden, UT...................... 52 1,716 1,768 670 1979 01/86 5-40 years
Space Center, San Antonio, TX......... 247 1,313 1,560 737 1970 11/97 5-40 years
Texstar, Arlington, TX................ 333 1,880 421 1967 12/93 5-40 years
Tricon, Atlanta, GA................... 2,761 8,234 10,995 2,818 1971 02/93 2-40 years
SHOPPING CENTERS
Dunes Plaza, Michigan City, IN........ 1,343 7,179 8,522 2,306 1978 03/92 5-40 years
K-Mart, Cary, NC...................... 1,358 1,319 2,677 88 1981 08/98 40 years
Parkway Center, Dallas, TX............ 273 2,283 2,556 964 1979 11/91 5-40 years
Plaza on Bachman Creek, Dallas, TX.... 734 4,144 4,878 682 1986 03/98 5-40 years
Promenade, Highlands Ranch, CO........ 1,749 6,420 8,169 1,158 1985 07/96 5-40 years
Sadler Square, Amelia Island, FL...... 679 2,849 3,528 713 1987 11/93 3-40 years
Sheboygan, Sheboygan, WI.............. 242 1,416 1,658 338 1977 05/92 40 years
HOTELS
Akademia, Wroclaw, Poland............. 2,184 9,577 11,761 -- 2001 02/01 40 years
Brompton, Chicago, IL................. 572 3,806 4,378 488 1995 12/98 5-40 years

F-104

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

City Suites, Chicago, IL.............. $ 3,840 $ 950 $ 3,847 $ 1,061 $ --
Majestic Inn, San Francisco, CA....... 5,346 1,139 4,555 1,187 --
Surf, Chicago, IL..................... 3,814 945 3,851 1,363 --
LAND
1013 Commons, New Orleans, LA......... -- 615 -- 46 (36)(2)
Alamo Springs, Dallas, TX............. -- 1,385 -- -- --
Dominion, Dallas, TX.................. -- 3,931 -- -- --
Eagle Crest, Farmers Branch, TX....... -- 2,500 -- 134 (505)(9)
Folsom................................ -- 1,781 -- 450 --
Lamar Parmer, Austin, TX.............. -- 1,571 -- 94 --
Las Colinas, Las Colinas, TX.......... -- 995 -- 5 --
Lemon Carlisle, Dallas, TX............ 1,746 3,576 -- 30 --
Limestone Canyon II................... -- 428 -- 266 38
Manhattan, Farmers Branch, TX......... -- 11,186 -- 777 44
McKinney 36, Collin County, TX........ 956 2,203 -- -- (230)(2)
Mira Lago, Farmers Branch, TX......... -- 541 -- -- 41
Pac-Trust, Dallas, TX................. -- 1,232 -- -- --
Red Cross, Dallas, TX................. 4,500 8,383 -- -- --
Sandison, Collin County, TX........... 1,040 5,021 -- -- (392)(2)(7)
Seminary West, Fort Worth, TX......... -- 234 -- -- --
Solco Allen, Collin County, TX........ 305 1,388 -- -- (80)(2)
Solco-Valley, Dallas, TX.............. -- 1,525 -- -- --
Stacy Road, Allen, TX................. 1,345 2,665 -- -- (193)(2)
State Highway 121, Collin County,
TX................................... -- 4,354 -- -- (2,581)(2)(7)
Watters Road, Collin County, TX....... -- 1,787 -- -- (200)(2)
West End, Dallas, TX.................. 5,889 11,405 -- 77 (4,013)(8)
Whisenant, Collin County, TX.......... 133 631 -- -- (59)(2)(7)
-------- -------- -------- ------- --------
INVESTMENT PROPERTIES................. 456,845 171,600 453,830 114,375 (26,974)
-------- -------- -------- ------- --------

City Suites, Chicago, IL.............. $ 950 $ 4,908 $ 5,858 $ 731 1995 12/98 5-40 years
Majestic Inn, San Francisco, CA....... 1,139 5,742 6,881 2,137 1902 12/90 5-40 years
Surf, Chicago, IL..................... 945 5,215 6,160 847 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....... 2,129 -- 2,129 -- -- 05/98 --
Folsom................................ 2,231 -- 2,231 -- -- 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................... 732 -- 732 -- -- 06/00 --
Manhattan, Farmers Branch, TX......... 12,007 -- 12,007 -- -- 02/00 --
McKinney 36, Collin County, TX........ 1,973 -- 1,973 -- -- 01/98 --
Mira Lago, Farmers Branch, TX......... 582 -- 582 -- -- 05/01 --
Pac-Trust, Dallas, TX................. 1,232 -- 1,232 -- -- 10/01 --
Red Cross, Dallas, TX................. 8,383 -- 8,383 -- -- 05/99 --
Sandison, Collin County, TX........... 4,629 -- 4,629 -- -- 05/98 --
Seminary West, Fort Worth, TX......... 234 -- 234 -- -- 07/01 --
Solco Allen, Collin County, TX........ 1,308 -- 1,308 -- -- 05/98 --
Solco-Valley, Dallas, TX.............. 1,525 -- 1,525 -- -- 04/01 --
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 --
Whisenant, Collin County, TX.......... 572 -- 572 -- -- 05/98 --
-------- -------- -------- -------
INVESTMENT PROPERTIES................. 167,220 545,611 712,832 90,661
-------- -------- -------- -------

F-105

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

PROPERTIES HELD FOR SALE
LAND
Fiesta, San Angelo, TX................ $ -- $ 44 $ -- $ -- $ --
Fruitland, Fruitland Park, FL......... -- 253 -- -- (100)(6)
Round Mt, Austin, TX.................. -- 5,740 -- -- (5,421)(2)(3)
-------- -------- -------- ------- --------
Properties Held for Sale.............. -- 6,037 -- -- (5,521)
-------- -------- -------- ------- --------
$456,845 $177,637 $453,830 $114,375 $(32,495)
======== ======== ======== ======= ========

PROPERTIES HELD FOR SALE
LAND
Fiesta, San Angelo, TX................ $ 44 $ -- $ 44 $ -- -- 12/91 --
Fruitland, Fruitland Park, FL......... 153 -- 153 -- -- 05/92 --
Round Mt, Austin, TX.................. 319 -- 319 -- -- 12/86 --
-------- -------- -------- -------
Properties Held for Sale.............. 516 -- 516 --
-------- -------- -------- -------
$167,736 $545,611 $713,348 $90,661
======== ======== ======== =======

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

(1) The aggregate cost for federal income tax purposes is $744.4 million.

(2) Purchase accounting basis adjustment.

(3) Writedown of property to estimated net realizable value.

(4) Construction period interest and taxes.

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

(6) Cash received for easement deducted from the basis of the property.

(7) 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.

(8) Cash received for condemnation of part of property.

(9) Sale of portion of property.

(10) The Countryside Retail Center is collateralized with the Mimado Building.

F-106

TRANSCONTINENTAL REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

2001 2000 1999
--------- -------- --------
(DOLLARS IN THOUSANDS)

RECONCILIATION OF REAL ESTATE
Balance at January 1,....................................... $ 729,051 $686,522 $409,986
Additions
Purchases, improvements and construction.................. 97,703 122,683 76,659
Foreclosures.............................................. -- 352 --
CMET merger............................................... -- -- 290,415
Deductions
Sale of real estate....................................... (111,986) (80,188) (89,463)
Sale of foreclosed properties............................. (1,420) (318) (1,075)
--------- -------- --------
Balance at December 31,..................................... $ 713,348 $729,051 $686,522
========= ======== ========
RECONCILIATION OF ACCUMULATED DEPRECIATION
Balance at January 1,....................................... $ 88,187 $ 84,986 $ 61,241
Additions
Depreciation.............................................. 19,705 19,702 11,702
CMET merger............................................... -- -- 31,628
Deductions
Sale of real estate....................................... (17,231) (16,501) (19,585)
--------- -------- --------
Balance at December 31,..................................... $ 90,661 $ 88,187 $ 84,986
========= ======== ========

F-107

SCHEDULE IV

TRANSCONTINENTAL REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2001

FINAL
INTEREST MATURITY PRIOR FACE AMOUNT
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS OF MORTGAGE
----------- -------- -------- ---------------------- ------- -----------
(DOLLARS IN THOUSANDS)

FIRST MORTGAGE LOANS
KELLER HICKS......................... 16.0% 07/02 Interest only payments $ -- $ 1,700
Secured by 44.6 acres of unimproved of $22,667 due monthly.
land in Fort Worth, TX
EXECUTIVE COURT...................... 12.0% 12/04 Excess property cash -- 1,970
Secured by a 41,840 sq. ft office flow payments.
building in Memphis, TN
WRAPAROUND MORTGAGE LOANS
PINEMONT............................. 10.40% 07/08 Monthly principal and 367 467
Secured by an office building in interest payments of
Houston, TX $6,281.
JUNIOR MORTGAGE LOANS
COUNTRY ELMS......................... 8.00% 05/02 Monthly principal and -- 380
Secured by mobile home park in interest payments of
Galesburg, IL $3,154.
ACLP PARK TEN........................ 16.0% 05/02 Interest only payments 10,750 3,000
Secured by an office building and of $30,000 due monthly.
industrial warehouse in Carrollton,
TX
LINCOLN COURT APARTMENTS............. Varies 06/04 Two notes bearing 1,255 1,369
interest
Secured by apartment building in at prime plus 1%.
Dallas, TX Interest only payments
of $8,841 due monthly.
PORTOFINO............................ 16.0% 04/02 Interest only payments 22,160 5,000
Secured by a retail center in of $46,667 due monthly.
Montgomery County, TX
DALLAS FUND XVII..................... Varies 01/03 One note bearing 835 1,738
interest at
Secured by an office building in prime plus 3%.
Dallas, TX
MADISON AT BEAR CREEK................ 7.0% 01/02 Principal and interest 3,442 608
Secured by an apartment in Houston, due January 2002.
TX
ONE CITY CENTER...................... 9.0% 02/02 Interest only payments -- 4,000
Secured by a 375,752 sq ft. office of $30,000.
building in St. Louis, MO
TEXAS GLENN.......................... 10.0% 06/03 Interest only payments 5,003 1,500
Secured by an apartment in Dallas, of $12,500.
TX
SENDERA RANCH........................ 15.0% 07/03 Interest only payments 7,000 3,547
Secured by 1,714.16 acres of of $44,338. ------- -------
unimproved land in Tarrant County,
TX
$50,812 $25,279
======= =======
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
KELLER HICKS......................... $ 1,700 $110
Secured by 44.6 acres of unimproved
land in Fort Worth, TX
EXECUTIVE COURT...................... 1,970 --
Secured by a 41,840 sq. ft office
building in Memphis, TN
WRAPAROUND MORTGAGE LOANS
PINEMONT............................. 352 --
Secured by an office building in
Houston, TX
JUNIOR MORTGAGE LOANS
COUNTRY ELMS......................... 155 --
Secured by mobile home park in
Galesburg, IL
ACLP PARK TEN........................ 2,250 --
Secured by an office building and
industrial warehouse in Carrollton,
TX
LINCOLN COURT APARTMENTS............. 1,369 --
Secured by apartment building in
Dallas, TX
PORTOFINO............................ 3,500 --
Secured by a retail center in
Montgomery County, TX
DALLAS FUND XVII..................... 1,738 --
Secured by an office building in
Dallas, TX
MADISON AT BEAR CREEK................ 608 --
Secured by an apartment in Houston,
TX
ONE CITY CENTER...................... 4,000 --
Secured by a 375,752 sq ft. office
building in St. Louis, MO
TEXAS GLENN.......................... 1,500 --
Secured by an apartment in Dallas,
TX
SENDERA RANCH........................ 3,547 --
Secured by 1,714.16 acres of ------- ----
unimproved land in Tarrant County,
TX
22,689 $ --
====
Interest............................. 178
Allowance for estimated losses....... (818)
-------
$22,049
=======

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

(1) The aggregate cost for federal income tax purposes is $22.9 million.

F-108

TRANSCONTINENTAL REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE -- (CONTINUED)

2001 2000 1999
------- ------- -------
(DOLLARS IN THOUSANDS)

Balance at January 1,....................................... $ 8,668 $12,061 $ 2,379
Additions
New mortgage loans........................................ 20,063 17,500 9,680
CMET merger............................................... -- -- 631
Deductions
Collections of principal.................................. (6,042) (20,531) (37)
Foreclosed properties and deeds-in-lieu of foreclosure.... -- (356) --
Write off of uncollectible mortgage loans................. -- -- (575)
Write off of principal due to discount for early payoff... -- (6) (17)
------- ------- -------
Balance at December 31,..................................... $22,689 $ 8,668 $12,061
======= ======= =======

F-109

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS
Real estate held for investment............................. $ 86,319 $ 95,190
Less -- accumulated depreciation............................ (6,745) (7,875)
-------- --------
79,574 87,315
Notes and interest receivable (including $5,109 in 2002 from
related parties).......................................... 7,614 505
Allowance for loss.......................................... (767) --
-------- --------
6,847 505
Investment in real estate partnerships...................... 103 142
Cash and cash equivalents................................... 59 66
Other assets (including $108 in 2002 from affiliates)....... 3,173 3,805
-------- --------
$ 89,756 $ 91,833
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and interest payable.................................. $ 47,552 $ 54,426
Other liabilities (including $447 in 2002 and $593 in 2001
to affiliates)............................................ 1,909 2,185
-------- --------
49,461 56,611
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,438,945 shares in 2002 and
2001...................................................... 14 14
Paid-in capital............................................. 63,459 63,459
Accumulated distributions in excess of accumulated
earnings.................................................. (23,178) (28,251)
-------- --------
40,295 35,222
-------- --------
$ 89,756 $ 91,833
======== ========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-110

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

Property revenue
Rents..................................................... $ 2,800 $ 3,251
Property expense
Property operations (including $51 in 2002 and $74 in 2001
to affiliates and related parties)..................... 1,641 1,479
---------- ----------
Operating income..................................... 1,159 1,772
Other income
Interest.................................................. 37 72
Equity in income/(loss) of equity partnerships............ (17) 9
Gain on sale of real estate............................... 7,105 --
---------- ----------
7,125 81
Other expense
Interest.................................................. 1,062 1,517
Depreciation.............................................. 500 585
Advisory fee to affiliate................................. 186 157
Net income fee to affiliate............................... 411 --
Provision for loss........................................ 767 --
General and administrative (including $81 in 2002 and $93
in 2001 to affiliates and related parties)............. 285 311
---------- ----------
3,211 2,570
---------- ----------
Net income (loss)........................................... $ 5,073 $ (717)
========== ==========
Earnings (loss) per share
Net income (loss)......................................... $ 3.53 $ (.47)
========== ==========
Weighted average Common shares used in computing earnings
per share................................................. 1,438,945 1,514,045
========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-111

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002

ACCUMULATED
DISTRIBUTIONS
COMMON STOCK IN EXCESS OF
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ------- ------------- -------------
(DOLLARS IN THOUSANDS)

Balance, January 1, 2002............... 1,438,945 $14 $63,459 $(28,251) $35,222
Net income............................. -- -- -- 5,073 5,073
--------- --- ------- -------- -------
Balance, March 31, 2002................ 1,438,945 $14 $63,459 $(23,178) $40,295
========= === ======= ======== =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-112

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)

Cash flows from Operating Activities
Rents collected........................................... $ 2,842 $ 3,119
Payments for property operations (including $51 in 2002
and $74 in 2001 to affiliates and related parties)..... (1,682) (2,633)
Interest collected........................................ 8 72
Interest paid............................................. (974) (1,124)
Advisory and net income fee to affiliate.................. (186) (157)
General and administrative expenses paid (including $81 in
2002 and $93 in 2001 to affiliates).................... (361) (317)
Distributions from equity partnerships' operating cash
flow................................................... 25 --
Other..................................................... 30 --
------- -------
Net cash used in operating activities................ (298) (1,040)
Cash Flows from Investing Activities
Funding of notes receivable (including $7,109 in 2002 to
related parties)....................................... (7,109) --
Funding of equity partnerships............................ (4) (1)
Real estate improvements.................................. (229) (364)
Proceeds from sale of real estate......................... 14,575 --
------- -------
Net cash provided by (used in) investing
activities.......................................... 7,233 (365)
Cash Flows from Financing Activities
Payments on notes payable................................. (6,834) (216)
Proceeds from notes payable............................... -- 2,974
Deferred financing costs.................................. -- (76)
Advances from/payments (to) advisor....................... (108) 1,953
------- -------
Net cash (used in) provided by financing
activities.......................................... (6,942) 4,635
Net increase in cash and cash equivalents................... (7) 3,230
Cash and cash equivalents, beginning of period.............. 66 2,087
------- -------
Cash and cash equivalents, end of period.................... $ 59 $ 5,317
======= =======
Reconciliation of net income (loss) to net cash used in
operating activities
Net income (loss)........................................... $ 5,073 $ (717)
Adjustments to reconcile net income (loss) to net cash used
in operating activities
Depreciation and amortization............................. 500 585
Gain on sale of real estate............................... (7,105) --
Loss of equity partnerships............................... 17 (9)
Distributions from equity partnerships' operating cash
flow................................................... 25 --
Provision for loss........................................ (767) --
(Increase) decrease in other assets....................... 1,644 (1,406)
Increase in interest payable.............................. 40 309
Increase in other liabilities............................. 275 198
------- -------
Net cash used in operating activities................ $ (298) $(1,040)
======= =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-113

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 three month period ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001 (the "2001 Form 10-K").

Certain balances for 2001 have been reclassified to conform to the 2002
presentation.

NOTE 2. REAL ESTATE

In January 2002, IORI sold the 124,059 sq.ft. Daley Corporate Center in San
Diego, California, for $15.5 million, receiving net cash of $8.1 million after
paying off $6.6 million in mortgage debt and the payment of various closing
costs. A gain of $7.1 million was recognized on the sale.

NOTE 3. NOTES RECEIVABLE

In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty
Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owns
the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI
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
asset fails to produce the 12% return, ARI shall pay IORI any shortfall. In
addition, if the asset fails to produce the 12% return for a calendar year, IORI
may require ARI to repurchase the shares of Rosedale for the purchase price.
Management has classified this related party transaction as a note receivable
from ARI. After reviewing the property's fair value after costs to sell, even
though ARI has guaranteed the 12% return, IORI recognized a provision for loss
on the note receivable of $767,000.

In February 2002, IORI funded a $2.0 million mortgage loan as a
participation agreement with Transcontinental Realty Investors, Inc. ("TCI"), a
related party. The loan is secured by a second lien on a retail center in
Montgomery County, Texas. The note receivable bears interest at 16.0% per annum,
requires monthly interest only payments of $47,000 and matured in February 2002.
In February 2002, the loan was extended until April 2002. In April 2002, IORI
extended the loan until July 2002, receiving $8,500 as an extension fee. IORI
and TCI will receive 57% and 43%, respectively, on the remaining principal and
interest payments.

In April 2002, a mortgage loan with a principal balance of $500,000 was
paid off, including accrued but unpaid interest.

NOTE 4. NOTES AND INTEREST PAYABLE

In the second quarter of 2002, IORI sold all of its residential properties
to Metra Capital, LLC ("Metra"). These properties include: the 60 unit Brighton
Court, the 92 unit Del Mar, the 68 unit Enclave, the 280 unit Meridian, the 57
unit Signature, the 114 unit Sinclair, located in Midland, Texas, and the 106
unit Treehouse, located in San Antonio, Texas. Two of the members of Metra are
Third Millennium Partners, LLC and Innovo Realty, Inc., a subsidiary of Innovo
Group, Inc. ("Innovo"). Joseph Mizrachi, a director of ARI, a related party, has
a beneficial interest in Third Millennium Partners, LLC and owns 15.5% of the
outstanding common stock of Innovo. The sale constituted 23.39% of the total
assets of IORI as of December 31, 2001. The sales price for the properties
totaled $26.2 million. IORI
F-114

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

received $5.4 million in cash after the payoff of $16.1 million in debt and
various closing costs including $262,000 in brokerage commissions to Third
Millennium. Due to IORI's relationship with ARI and Mr. Mizrachi, management has
determined to treat this sale as a refinancing transaction. The new debt on the
properties totals $21.4 million, bears interest at 7.57% per annum, requires
monthly interest only payments of $135,000 and matures in May 2012. IORI also
received $4.0 million of 8% non-recourse, non-convertible Series A Preferred
Stock ("Preferred Shares") of Innovo.

The Preferred Shares have a mandatory redemption feature, and are
redeemable from the cash proceeds received by Innovo from the operation and sale
of the properties. All member distributions that are in excess of current and
accrued 8% dividends, must be used by Innovo to redeem the Preferred Shares.

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, and
income (loss) of equity partnerships which totaled $20,000 for the first quarter
of 2002, and $81,000 in the first quarter of 2001. Expenses that are not
reflected in the segments are general and administrative expenses, advisory
fees, provision for losses and net income fees which totaled $1.6 million for
the first quarter 2002, and $468,000 for the first quarter of 2001. Excluded
from operating segment assets are assets of $10.2 million at March 31, 2002, and
$12.2 million at March 31, 2001, 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 months ended March 31, and each segment's assets at March 31.

THREE MONTHS ENDED COMMERCIAL
MARCH 31, 2002 PROPERTIES APARTMENTS LAND TOTAL
------------------ ---------- ---------- ------- -------

Rents....................................... $ 1,491 $1,309 $ -- $ 2,800
Property operating expenses................. 1,027 550 64 1,641
------- ------ ------- -------
Operating income............................ 464 759 (64) 1,159
Depreciation................................ 373 127 -- 500
Interest.................................... 520 260 282 1,062
Real estate improvements.................... 41 -- 188 229
Assets...................................... 33,411 21,483 24,680 79,574
PROPERTY SALE:
Sale price.................................. $15,500 $15,500
Cost of sale................................ 8,395 8,395
------- -------
Gain on sale................................ $ 7,105 $ 7,105
======= =======

F-115

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THREE MONTHS ENDED COMMERCIAL
MARCH 31, 2001 PROPERTIES APARTMENTS LAND TOTAL
------------------ ---------- ---------- ------- -------

Rents....................................... $ 1,892 $ 1,216 $ 143 $ 3,251
Property operating expenses................. 839 639 1 1,479
------- ------- ------- -------
Operating income............................ $ 1,053 $ 577 $ 142 $ 1,772
======= ======= ======= =======
Depreciation................................ $ 457 $ 128 $ -- $ 585
Interest.................................... 675 369 473 1,517
Real estate improvements.................... 364 -- -- 364
Assets...................................... 39,170 21,994 24,892 86,056

NOTE 6. COMMITMENTS AND CONTINGENCIES

Liquidity. Although management anticipates that IORI will generate excess
cash from commercial operations in 2002 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. IORI has sold all of
its residential properties and management intends to refinance real estate and
incur additional borrowings against real estate to meet IORI's 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.

F-116

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, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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.

As discussed in Note 1, IORI adopted the provisions of SFAS 144, Accounting
for Impairment of Long Lived Assets, in 2001.

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,
2001 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.

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 11, 2002

F-117

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
----------------------
2001 2000
---------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)

ASSETS

Real estate held for investment............................. $ 95,190 $91,837
Less -- accumulated depreciation............................ (7,875) (5,560)
-------- -------
87,315 86,277
Notes receivable............................................ 505 1,500
Investment in real estate partnerships...................... 142 141
Cash and cash equivalents................................... 66 2,087
Other assets (including $3,862 in 2000 from affiliates)..... 3,805 6,514
-------- -------
$ 91,833 $96,519
======== =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities Notes and interest payable...................... $ 54,426 $54,206
Other liabilities (including $593 in 2001 to affiliates).... 2,185 2,315
-------- -------
56,611 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 shares in 2000.................................. 14 15
Paid-in capital............................................. 63,459 64,772
Accumulated distributions in excess of accumulated
earnings.................................................. (28,251) (24,789)
-------- -------
35,222 39,998
-------- -------
$ 91,833 $96,519
======== =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-118

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Property revenue
Rents................................................... $ 13,001 $ 13,731 $ 15,968
Property expense
Property operations (including $312 in 2001, $602 in
2000 and $618 in 1999 to affiliates and related
parties)............................................. 6,591 6,969 6,768
---------- ---------- ----------
Operating income.......................................... 6,410 6,762 9,200
Other income
Interest................................................ 194 319 29
Income (loss) from equity partnerships.................. (9) (61) 148
Gain on sale of real estate............................. -- 20,878 1,525
---------- ---------- ----------
185 21,136 1,702
Other expense
Interest................................................ 6,074 5,079 5,658
Depreciation............................................ 2,427 2,450 2,723
Advisory fee to affiliate............................... 817 664 371
Net income fee to affiliate............................. -- 1,362 81
General and administrative (including $323 in 2001, $287
in 2000 and $260 in 1999 to affiliate)............... 739 1,549 747
---------- ---------- ----------
10,057 11,104 9,580
---------- ---------- ----------
Net income (loss)......................................... $ (3,462) $ 16,794 $ 1,322
========== ========== ==========
Earnings per share Net income (loss)...................... $ (2.32) $ 11.03 $ .87
========== ========== ==========
Weighted average shares of Common Stock used in computing
earnings per share...................................... 1,493,675 1,522,510 1,527,386
========== ========== ==========

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-119

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

BALANCE, JANUARY 1, 1999............... 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
Repurchase of Common Stock............. (75,100) (1) (1,313) -- (1,314)
Net (loss)............................. -- -- -- (3,462) (3,462)
--------- --- ------- -------- -------
BALANCE, DECEMBER 31, 2001............. 1,438,945 $14 $63,459 $(28,251) $35,222
========= === ======= ======== =======

The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-120

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------
(DOLLARS IN THOUSANDS)

Cash Flows from Operating Activities
Rents collected........................................... $ 12,966 $ 13,638 $16,065
Interest collected........................................ 148 310 29
Interest paid............................................. (5,528) (5,036) (5,458)
Payments for property operations (including $312 in 2001,
$602 in 2000 and $618 in 1999 to affiliate and related
party)................................................. (6,981) (7,068) (6,325)
Advisory and net income fee paid to affiliate............. (1,054) (2,576) (388)
General and administrative expenses paid (including $323
in 2001, $287 in 2000 and $260 in 1999 to affiliate)... (1,618) (1,185) (793)
Distributions from equity partnerships' operating cash
flow................................................... 18 25 155
Other..................................................... 20 -- 34
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... (2,029) (1,892) 3,319
Cash Flows from Investing Activities
Acquisition of interest in equity partnership............. -- -- (384)
Funding of equity partnerships............................ (28) (58) (39)
Real estate improvements.................................. (3,466) (1,947) (2,199)
Acquisition of real estate (including $1,514 in 2000 and
$337 in 1999 to affiliate and related party)........... -- (37,334) (5,287)
Deposits on pending purchases and financings.............. (25) -- --
Proceeds from sale of real estate......................... -- 43,393 2,673
Distributions from equity partnership's investing cash
flow................................................... -- -- 2,027
Funding of note receivable................................ -- (1,500)
Collection of note receivable............................. 1,000 -- --
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... (2,519) 2,554 (3,209)
Cash Flows from Financing Activities
Proceeds from notes payable............................... 14,900 22,875 10,778
Payments on notes payable................................. (14,783) (18,153) (8,681)
Deferred financing costs (including $99 in 2001 to
affiliate)............................................. (911) 172 (258)
Distributions from equity partnership's financing cash
flow................................................... -- 739 --
Sale of Common Stock under dividend reinvestment plan..... -- 32 17
Dividends to stockholders................................. -- (685) (908)
Repurchase of Common Stock................................ (1,314) (134) --
Payments from (to) advisor................................ 4,635 (4,143) (439)
-------- -------- -------
Net cash provided by financing activities......... 2,527 703 509
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (2,021) 1,365 619
Cash and cash equivalents, beginning of year................ 2,087 722 103
-------- -------- -------
Cash and cash equivalents, end of year...................... $ 66 $ 2,087 $ 722
======== ======== =======

F-121

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------
(DOLLARS IN THOUSANDS)

Reconciliation of net income (loss) to net cash provided by
(used in) operating activities
Net income (loss)........................................... $ (3,462) $ 16,794 $ 1,322
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization............................. 2,930 2,450 2,967
Gain on sale of real estate............................... -- (20,878) (1,525)
Equity in (income) loss of partnerships................... 9 61 (148)
Distributions from equity partnerships' operating cash
flow................................................... 18 25 155
Decrease in interest receivable........................... -- -- --
(Increase) decrease in other assets....................... (1,554) 338 127
(Decrease) in interest payable............................ (103) (87) (44)
Increase (decrease) in other liabilities.................. 133 (595) 465
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... $ (2,029) $ (1,892) $ 3,319
======== ======== =======
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-122

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 2000 and 1999 have been reclassified to conform to the
2001 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.

In October 2001, IORI announced a preliminary agreement for the acquisition
of IORI by American Realty Investors, Inc. See Item 13. "Legal Proceedings."

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.

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

SFAS 142 requires, among other things that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that IORI identify reporting units in order to
assess potential future impairment of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. SFAS 142 requires that an
intangible asset with an indefinite useful life be tested for impairment in
accordance with specified guidelines. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires IORI to complete a transitional goodwill
impairment test six months from the date of adoption. IORI is also required to
reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142. Currently, IORI does not believe that the
adoption of SFAS 141 and SFAS 142 will impact its financial position and results
of operations.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

asset, including capitalized asset retirement costs, be tested for impairment.
SFAS 143, is effective for fiscal years beginning after June 15, 2002.
Management does not believe this statement will have a material effect on IORI's
financial position or results of operations.

Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
144 ("SFAS No. 144") requires that a property be considered impaired, if the sum
of the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the property. If impairment exists, an
impairment loss is recognized by a charge against earnings equal to the amount
by which the carrying amount of the property exceeds the fair value 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 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.

F-124

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2. REAL ESTATE

In 2000, the following properties were purchased:

PURCHASE NET CASH DEBT INTEREST MATURITY
PROPERTY LOCATION UNITS/ACRES 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) 10.00 04/01(3)
Fambrough................ Collin County, TX 75.07 Acres 1,877 592 1,408(2) 10.00% 04/01(3)
Frankel.................. Midland County, TX 1.01 Acres 41 43 -- -- --
Travelers................ Farmers Branch, TX 204 Acres 24,848 13,117 12,000 14.00 12/01(4)

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

(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.

(3) The property was sold in September 2000.

(4) The loan was refinanced in December 2001. See Note 5. "Notes and Interest
Payable."

In 2000, the following properties were sold:

UNITS/ SALES NET CASH DEBT GAIN ON
PROPERTY LOCATION SQ.FT./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.

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. In May 2001, IORI received
$1.0 million as a partial principal paydown. The loan bears interest at 18.0%
per annum, requires monthly payments of interest only and

F-125

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

matured in January 2002. In January 2002, the loan was extended to April 2002.
The loan had an estimated fair value at December 31, 2001, equal to its
principal balance of $500,000.

NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS

Investments in equity method partnerships consisted of the following:

2001 2000
----- -----

Tri-City Limited Partnership ("Tri-City")................... $(567) $(572)
Nakash Income Associates ("NIA")............................ 376 343
TCI Eton Square, L.P. ("Eton Square")....................... 333 370
----- -----
$ 142 $ 141
===== =====

IORI owns a 36.3% general partner interest in Tri-City, which at December
31, 2001, 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, 9.44% 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 $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:

2001 2000
-------- --------

Notes receivable............................................ $ 902 $ 902
Real estate, net of accumulated depreciation ($2,795 in 2001
and
$3,342 in 2000)........................................... 17,464 17,788
Other assets................................................ 646 190
Notes payable............................................... (12,748) (12,945)
Other liabilities........................................... (1,211) (652)
-------- --------
Partners' capital........................................... $ 5,053 $ 5,283
======== ========

F-126

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

IORI's share of the equity partnerships' capital was $854,000 in 2001 and
$892,000 in 2000.

2001 2000 1999
------ ------ ------

Rents...................................................... $2,579 $2,561 $1,873
Interest income............................................ 80 156 156
Interest expense........................................... (1,131) (1,165) (375)
Property operations expense................................ (1,230) (1,197) (781)
Depreciation............................................... (586) (570) (371)
------ ------ ------
Income (loss) before gains on sale of real estate.......... (288) (215) 502
Gain on sale............................................... -- -- 2,851
------ ------ ------
Net income (loss).......................................... $ (288) $ (215) $3,353
====== ====== ======

IORI's equity share of:

2001 2000 1999
---- ---- ------

Income (loss) before gains on sale of real estate........... $(9) $(61) $ 148
Gain on sale of real estate................................. -- -- 1,035
--- ---- ------
Net income (loss)........................................... $(9) $(61) $1,183
=== ==== ======

NOTE 5. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

2001 2000
------------------- -------------------
ESTIMATED ESTIMATED
FAIR BOOK FAIR BOOK
VALUE VALUE VALUE VALUE
--------- ------- --------- -------

Notes payable................................. $54,172 $54,048 $53,556 $53,931
======= =======
Interest payable.............................. 378 275
------- =======
$54,426 $54,206
======= =======

Scheduled notes payable principal payments are due as follows:

2002........................................................ $11,996
2003........................................................ 20,772
2004........................................................ 7,808
2005........................................................ 293
2006........................................................ 6,428
Thereafter.................................................. 6,751
-------
$54,048
=======

Notes payable at December 31, 2001, bear interest at rates ranging from
6.25% to 10.5% and mature between 2002 and 2025. The mortgages are
collateralized by deeds of trust on real estate with a net carrying value of
$87.3 million.

F-127

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2001, IORI refinanced the following properties:

DEBT DEBT NET CASH INTEREST MATURITY
PROPERTY LOCATION SQ.FT./ACRES INCURRED DISCHARGED RECEIVED RATE DATE
-------- -------- ------------- -------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)

OFFICE BUILDING
Chuck Yeager......... Chantilly, VA 60,000 Sq.Ft $5,000 $2,048 $2,898 9.5%(1) 01/04
LAND
Travelers............ Farmers Branch, TX 204 Acres 9,900 9,577 (580) 10.5(1) 06/03

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

(1) Variable rate.

NOTE 6. DIVIDENDS

Dividends of $685,000 ($.45 per share) were paid in 2000 and $908,000 ($.60
per share) in 1999.

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 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 were 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, 2001:

2002........................................................ $ 4,241
2003........................................................ 3,652
2004........................................................ 2,683
2005........................................................ 2,233
2006........................................................ 1,257
Thereafter.................................................. 2,948
-------
$17,014
=======

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, has substantial
contact with the management of BCM and input with respect to its performance of
advisory services to IORI.

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.

F-128

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $256,000 of the 2001
annual advisory fee, and $289,000 of the 1999 annual advisory fee. 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.

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
partner of Triad is GS Realty Services, Inc. ("GS Realty"), a related party.
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.

F-129

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

2001 2000 1999
---- ------ ------

Fees
Advisory.................................................. $817 $ 664 $ 371
Net income................................................ -- 1,362 81
Real estate brokerage..................................... -- -- 337
Property acquisition...................................... -- 417 --
Mortgage brokerage and equity refinancing................. 99 -- 78
Property and construction management and leasing
commissions*........................................... -- -- 618
---- ------ ------
$916 $2,443 $1,485
==== ====== ======
Cost reimbursements......................................... $323 $ 287 $ 260
==== ====== ======

Fees paid to GS Realty, a related party to IORI.

2001 2000
---- ------

Fees
Property acquisition...................................... $ -- $ 925
Real estate brokerage..................................... -- 1,514
Property and construction management and leasing
commissions*........................................... 312 602
---- ------
$312 $3,041
==== ======

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

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

NOTE 12. INCOME TAXES

For the years 2001, 2000 and 1999, 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 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
90% (95% in 2000 and 1999) of its REIT taxable income, plus 90% (95% in 2000 and
1999) of its taxable income from foreclosure property as defined in Section 857
of the Code, is distributed.

IORI had a net loss for federal income tax purposes before the application
of operating loss carryforwards in 2001, had net income for federal income tax
purposes in 2000 and had net losses for federal income tax purposes in 1999.
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, 2001, IORI's tax basis in its net
assets exceeded their net basis for financial statement purposes by
approximately $2.1 million. As a result, aggregate future income for income tax
purposes will be less than such amount for financial statement

F-130

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purposes and IORI would be able to maintain its REIT status without distributing
90% of its financial statement income. Additionally, at December 31, 2001, IORI
has current and prior tax net operating loss carryforwards of $5.8 million
expiring through the year 2021.

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 previously deferred gains on sale of real estate totaling
$185,000 and $1.5 million for 2001 and 2000, 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 $1.6
million and $3.6 million for 2001 and 2000, respectively. Excluded from
operating segment assets are assets of $4.4 million at December 31, 2001, and
$10.2 million at December 31, 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.

COMMERCIAL
2001 LAND PROPERTIES APARTMENTS TOTAL
---- ------- ---------- ---------- -------

Rents....................................... $ -- $ 7,900 $ 5,101 $13,001
Property operating expenses................. 264 3,660 2,667 6,591
------- ------- ------- -------
Operating income (loss)..................... $ (264) $ 4,240 $ 2,434 $ 6,410
======= ======= ======= =======
Depreciation................................ $ -- $ 1,915 $ 512 $ 2,427
Interest.................................... 2,069 2,644 1,361 6,074
Real estate improvements.................... 2,404 1,062 3,466
Assets...................................... 24,492 41,213 21,610 87,315

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-131

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, recognized by IORI upon 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*
======= =======

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

* Excludes IORI's share of gains recognized by Tri-City, an equity affiliate of
$1.1 million.

NOTE 14. QUARTERLY DATA

The following is a tabulation of quarterly results of operations for the
years 2001 and 2000 (unaudited).

THREE MONTHS ENDED
-----------------------------------------------
2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------

Rents.................................... $3,251 $ 3,289 $3,219 $ 3,242
Property expense......................... 1,479 1,541 2,272 1,299
------ ------- ------ -------
Operating income....................... 1,772 1,748 947 1,943
Interest income.......................... 72 62 8 53
Income (loss) in equity partnerships..... 9 (6) (30) 19
Gain on sale of real estate.............. -- -- -- --
------ ------- ------ -------
81 56 (22) 72
Other expense............................ 2,570 2,536 2,674 2,269
------ ------- ------ -------
Net income (loss)........................ $ (717) $ (732) $(1,749) $ (254)
====== ======= ====== =======
EARNINGS PER SHARE
Net income (loss)........................ $ (.47) $ (.49) $(1.16) $ (.18)
====== ======= ====== =======

F-132

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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").

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.

F-133

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
an investment fund, 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.

On October 23, 2001, IORI and ARI jointly announced a preliminary agreement
with the plaintiff's legal counsel for complete settlement of all disputes in
the lawsuit. In February 2002, the court granted final approval for a proposed
settlement. Under the proposal, ARI would acquire all of the outstanding shares
of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI
Preferred Stock. ARI will pay $17.50 cash per TCI share and $19.00 cash per IORI
share for the stock held by non-affiliated stockholders. ARI would issue one
share of Series G Preferred Stock with a liquidation value of $20.00 per share
for each share of TCI Common Stock for stockholders who elect to receive ARI
preferred stock in lieu of cash. ARI would issue one share of Series H Preferred
Stock with a liquidation value of $21.50 per share for each share of IORI Common
Stock for stockholders who elect to receive ARI preferred stock in lieu of cash.
Each share of Series H Preferred Stock will be convertible into 2.25 shares of
ARI Common Stock during a 75-day period that commences fifteen days after the
date of the first ARI Form 10-Q filing that occurs after the closing of the
merger transaction. Upon the acquisition of IORI and TCI shares, TCI and IORI
would become wholly-owned subsidiaries of ARI. The transaction is subject to the
negotiation of a definitive merger agreement and a vote of the shareholders of
all three entities. TCI has the same board as IORI and the same advisor as IORI
and ARI.

Liquidity. Although management anticipates that IORI will generate excess
cash from operations in 2001, due to increased rental rates and occupancy at its
properties, however, such excess 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.

NOTE 16. SUBSEQUENT EVENTS

In January 2002, IORI sold the 124,059 sq. ft., Daley Corporate Center, in
San Diego, California, for $15.5 million, receiving net cash of $8.1 million
after paying off $6.6 million in mortgage debt and the payment of various
closing costs. A gain of $7.1 million was recognized on the sale.

Also in January 2002, IORI purchased 100% of the outstanding common shares
of Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of ARI, a
related party, for $5.1 million cash. Rosedale owns the 83,331 sq. ft. Rosedale
Towers Office Building in Roseville, Minnesota. ARI 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, ARI shall pay IORI any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar year, IORI may require

F-134

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ARI to repurchase the shares of Rosedale for the purchase price. Management has
classified this related party transaction as a note receivable from ARI.

In February 2002, IORI funded a $2.0 million mortgage loan as a
participation agreement with TCI. The loan is secured by a second lien on a
retail center in Montgomery County, Texas. The note receivable bears interest at
16.0% per annum, requires monthly interest only payments of $67,000 and matured
in February 2002. IORI and TCI will receive 57% and 43%, respectively, on the
remaining principal and interest payments. In February 2002, the loan was
extended until April 2002.

F-135

SCHEDULE III

INCOME OPPORTUNITY REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001

GROSS AMOUNT
INITIAL COST COST CARRIED AT END OF YEAR(1)
---------------------- CAPITALIZED --------------------------------
BUILDING & 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....... $ 2,456 $ 339 $ 3,051 $ -- $ 339 $ 3,051 $ 3,390
Del Mar, Midland, TX.............. 2,349 324 2,919 -- 324 2,919 3,243
Enclave, Midland, TX.............. 2,349 324 2,919 -- 324 2,919 3,243
Meridian, Midland, TX............. 2,892 1,138 4,552 -- 1,138 4,552 5,690
Signature Place, Midland, TX...... 1,921 265 2,388 -- 265 2,388 2,653
Sinclair Place, Midland, TX....... 1,601 221 1,990 -- 221 1,990 2,211
Treehouse, San Antonio, TX........ 2,615 375 2,124 259 375 2,383 2,758
OFFICE BUILDINGS
2010 Valley View, Farmers Branch,
TX............................... 1,814 120 479 2,981 120 3,460 3,580
5600 Mowry, Newark, CA............ 4,125 1,263 5,054 652 1,263 5,706 6,969
Akard Plaza, Dallas, TX........... 2,040 734 2,936 454 734 3,390 4,124
Chuck Yeager, Chantilly, VA....... 4,939 1,080 4,321 1,566 1,080 5,887 6,967
Daley Plaza, San Diego, CA........ 6,618 1,502 6,008 1,589 1,502 7,597 9,099
La Mesa Village, La Mesa, CA...... 5,655 1,709 6,836 733 1,709 7,569 9,278
Westlake Village, Westlake
Village, CA...................... 2,774 831 3,324 248 831 3,572 4,403
LAND
Frankel, Midland County, TX....... 44 -- -- 44 -- 44
Travelers, Farmers Branch, TX..... 9,900 24,848 -- 2,690 24,848 2,690 27,538
------- ------- ------- ------- ------- ------- -------
$54,048 $35,117 $48,901 $11,172 $35,117 $60,073 $95,190
======= ======= ======= ======= ======= ======= =======

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....... $ 121 1983 06/00 40 years
Del Mar, Midland, TX.............. 116 1983 06/00 40 years
Enclave, Midland, TX.............. 116 1983 06/00 40 years
Meridian, Midland, TX............. 237 1983 12/99 40 years
Signature Place, Midland, TX...... 94 1983 06/00 40 years
Sinclair Place, Midland, TX....... 79 1983 06/00 40 years
Treehouse, San Antonio, TX........ 816 1975 09/89 5-40 years
OFFICE BUILDINGS
2010 Valley View, Farmers Branch,
TX............................... 741 1998 09/97 5-40 years
5600 Mowry, Newark, CA............ 1,014 1987 12/97 3-40 years
Akard Plaza, Dallas, TX........... 439 1984 12/97 5-40 years
Chuck Yeager, Chantilly, VA....... 934 1991 01/97 5-40 years
Daley Plaza, San Diego, CA........ 1,627 1987 09/96 2-40 years
La Mesa Village, La Mesa, CA...... 1,113 1991 05/97 5-40 years
Westlake Village, Westlake
Village, CA...................... 428 1982 11/97 5-40 years
LAND
Frankel, Midland County, TX....... -- -- 06/00 40 years
Travelers, Farmers Branch, TX..... -- -- 06/00 40 years
------
$7,875
======

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

(1) The aggregate cost for Federal income tax purposes is $94.0 million.

F-136

INCOME OPPORTUNITY REALTY INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

2001 2000 1999
------- -------- -------
(DOLLARS IN THOUSANDS)

Reconciliation of Real Estate
Balance at January 1,....................................... $91,837 $ 96,051 $91,070
Additions
Acquisitions and Improvements.......................... 3,466 45,577 7,890
Deductions
Retirements............................................ (113) -- --
Sale of real estate.................................... -- (49,791) (2,909)
------- -------- -------
Balance at December 31,..................................... $95,190 $ 91,837 $96,051
======= ======== =======
Reconciliation of Accumulated Depreciation
Balance at January 1,....................................... $ 5,560 $ 9,509 $ 7,379
Additions
Depreciation........................................... 2,427 2,450 2,723
Deductions
Retirements............................................ (112) -- --
Sale of real estate.................................... -- (6,399) (593)
------- -------- -------
Balance at December 31,..................................... $ 7,875 $ 5,560 $ 9,509
======= ======== =======

F-137

SCHEDULE IV

INCOME OPPORTUNITY REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2001

PRINCIPAL AMOUNT
OF LOANS SUBJECT
FINAL FACE CARRYING TO DELINQUENT
INTEREST MATURITY PRIOR AMOUNT OF AMOUNTS OF PRINCIPAL OR
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS MORTGAGE MORTGAGE(1) INTEREST
----------- -------- -------- ------------------------- ------ --------- ----------- ----------------
(DOLLARS IN THOUSANDS)

JUNIOR MORTGAGE LOANS
JNC ENTERPRISES, LTD. .... 18.0% 04/02 Interest only payments of $9,000 $1,500 $ 500 $ --
Secured by 165 acres of $7,500 due monthly ------ ------ ------ ------
land in The Colony, TX
$9,000 $1,500 $ 500 $ 500
====== ====== ====== ======

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

(1) The aggregate cost for federal income tax purposes is $500,000.

F-138

INCOME OPPORTUNITY REALTY INVESTORS, INC.

MORTGAGE LOANS ON REAL ESTATE

2001 2000 1999
------- ------ ----
(DOLLARS IN THOUSANDS)

Balance at January 1,....................................... $ 1,500 $ -- $--
Additions
New mortgage loans........................................ -- 1,500 --
Deductions
Collections of principal.................................. (1,000) -- --
------- ------ ---
Balance at December 31,..................................... $ 500 $1,500 $--
======= ====== ===

F-139

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.

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(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

A-7

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

A-8

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

A-9

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

A-15

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.