##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 30, 2008

or



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

For the transition period from              to

Commission File Number 001-09240





TRANSCONTINENTAL REALTY INVESTORS, INC.

(Exact Name of Registrant as
Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 95-6565852                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

1800 Valley View Lane, Suite 300

Dallas, Texas 75234

(Address of principal executive offices)

(Zip Code)

(469) 522-4200

(Registrants telephone number, including area code)





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

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



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

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

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



|                             |  |                                  
|---------------------------- |  | ---------------------------------
|Common Stock, $.01 par value |  | 8,113,669                        
|(Class)                      |  | (Outstanding at October 31, 2008)









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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.

FORM 10-Q

TABLE OF CONTENTS



|           |  |                                                                                                                   |  |   
|---------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --
|           |  | PAGE                                                                                                             
|PART I:    |  | FINANCIAL INFORMATION                                                                                             |  |   
|           |  |                                                                                                                  
|Item 1.    |  | Financial Statements                                                                                              |  |   
|           |  | Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007                               |  | 3 
|           |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited) |  | 4 
|           |  | Consolidated Statement of Shareholders Equity for the nine months ended September 30, 2008 (unaudited)           |  | 5 
|           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)           |  | 6 
|           |  | Notes to Consolidated Financial Statements                                                                        |  | 8 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 22
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 31
|Item 4T.   |  | Controls and Procedures                                                                                           |  | 31
|           |  |                                                                                                                  
|PART II.   |  | OTHER INFORMATION                                                                                                 |  |   
|           |  |                                                                                                                  
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                       |  | 31
|Item 6.    |  | Exhibits                                                                                                          |  | 32
|SIGNATURES |  | 33                                                                                                               



2



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PART I. FINANCIAL INFORMATION



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

TRANSCONTINENTAL REALTY INVESTORS INC

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                    |  | September 30,2008      |           |   | December 31,2007 |  
|                                                                                                                                                                    |  | (dollars in thousands) |          
|Assets                                                                                                                                                              |  |                        |           |   |                  |   |           |  
|Real Estate held for investment                                                                                                                                     |  | $                      | 1,507,114 |   |                  | $ | 1,327,913 |  
|Less-accumulated depreciation                                                                                                                                       |  |                        | (108,428  | ) |                  |   | (97,368   | )
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                    |  |                        | 1,398,686 |   |                  |   | 1,230,545 |  
|                                                                                                                                                                    |  |                       
|Real estate held for sale                                                                                                                                           |  |                        | 3,285     |   |                  |   | 69,561    |  
|Real estate subject to sales contracts                                                                                                                              |  |                        | 63,030    |   |                  |   | 64,320    |  
|                                                                                                                                                                    |  |                       
|Notes and interest receivable performing (including $11,674 in 2008 and $4,339 in 2007 from affiliates and related parties)                                         |  |                        | 48,499    |   |                  |   | 34,677    |  
|Allowance for losses                                                                                                                                                |  |                        | (1,978    | ) |                  |   | (1,978    | )
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                    |  |                        | 46,521    |   |                  |   | 32,699    |  
|Cash and cash equivalents                                                                                                                                           |  |                        | 3,114     |   |                  |   | 11,239    |  
|Marketable equity securities, at market value                                                                                                                       |  |                        | 1,405     |   |                  |   | 13,157    |  
|Investment in equity investees                                                                                                                                      |  |                        | 26,396    |   |                  |   | 27,569    |  
|Other Assets (including $252 in 2008 and $151 in 2007 from affiliates and related parties)                                                                          |  |                        | 87,614    |   |                  |   | 72,099    |  
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                    |  | $                      | 1,630,051 |   |                  | $ | 1,521,189 |  
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|Liabilities and Shareholders Equity                                                                                                                                |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                    |  |                       
|Liabilities:                                                                                                                                                        |  |                        |           |   |                  |   |           |  
|Notes and interest payable (including $9,018 in 2008 and $8,270 in 2007 from affiliates and related parties)                                                        |  | $                      | 1,077,734 |   |                  | $ | 1,007,226 |  
|Liabilities related to assets held for sale                                                                                                                         |  |                        | 4,884     |   |                  |   | 107,847   |  
|Liabilities related to assets subject to sales contract                                                                                                             |  |                        | 60,848    |   |                  |   | 62,513    |  
|Other Liabilities (including $87,150 in 2008 and $2,807 in 2007 from affiliates and related parties)                                                                |  |                        | 140,330   |   |                  |   | 56,501    |  
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                    |  |                        | 1,283,796 |   |                  |   | 1,234,087 |  
|                                                                                                                                                                    |  |                       
|Commitments and contingencies                                                                                                                                       |  |                        |          |   |                  |   |          |  
|Minority Interest                                                                                                                                                   |  |                        | 2,522     |   |                  |   | 1,621     |  
|                                                                                                                                                                    |  |                       
|Shareholders equity:                                                                                                                                               |  |                        |           |   |                  |   |           |  
|Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 8,113,669 and 8,078,966 shares at 2008 and
2007.                                |  |                        | 81        |   |                  |   | 81        |  
|Preferred Stock                                                                                                                                                     |  |                        |           |   |                  |   |           |  
|Series C: $.01 par value; authorized 10,000,000 shares; issued and outstanding 30,000 shares at 2008 and 2007 respectively (liquidation
preference $100 per share). |  |                        |          |   |                  |   |          |  
|Series D: $.01 par value; authorized, issued and outstanding 100,000 shares at 2008 and 2007 (liquidation preference $100 per
share)                                |  |                        | 1         |   |                  |   | 1         |  
|Paid-in capital                                                                                                                                                     |  |                        | 283,244   |   |                  |   | 274,733   |  
|Treasury stock                                                                                                                                                      |  |                        |          |   |                  |   | (577      | )
|Accumulated distributions in excess of accumulated earnings                                                                                                         |  |                        | 59,202    |   |                  |   | 12,771    |  
|Other Comprehensive Income (loss)                                                                                                                                   |  |                        | 1,205     |   |                  |   | (1,528    | )
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                    |  |                        | 343,733   |   |                  |   | 285,481   |  
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                    |  | $                      | 1,630,051 |   |                  | $ | 1,521,189 |  
|                                                                                                                                                                    |  |                        |           |   |                  |   |           |  

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



3



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                                                                                                    |  | For the Three Months EndedSeptember 30, |           |   | For the Nine Months EndedSeptember 30, |  
|                                                                                                                                                                                                    |  | 2008                                    |           |   | 2007                                   |   |           | 2008 |  |   | 2007      |  
|                                                                                                                                                                                                    |  | (dollars in thousands)                  |           |   | (dollars in thousands)                 |  
|Revenue:                                                                                                                                                                                            |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Rental and other property revenues (including $205 and $96 for the three months ended, $574 and $798 for the nine months ended 2008 and 2007
respectively from affiliates and related parties)      |  | $                                       | 36,641    |   |                                        | $ | 30,793    |      |  | $ | 105,127   |   |  | $ | 93,632    |  
|                                                                                                                                                                                                    |  |                                         |           |  
|Expenses:                                                                                                                                                                                           |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Property operating expenses (including $1,843 and $1,822 for the three months ended, $5,306 and $5,294 for the nine months ended 2008 and 2007
respectively from affiliates and related parties)    |  |                                         | 23,619    |   |                                        |   | 19,437    |      |  |   | 66,100    |   |  |   | 54,523    |  
|Depreciation and amortization                                                                                                                                                                       |  |                                         | 5,039     |   |                                        |   | 5,573     |      |  |   | 17,020    |   |  |   | 15,917    |  
|General and administrative (including $1,368 and $824 for the three months ended, $3,297 and $2,412 for the nine months ended 2008 and 2007
respectively from affiliates and related parties)       |  |                                         | 2,208     |   |                                        |   | 2,201     |      |  |   | 6,886     |   |  |   | 7,406     |  
|Advisory fee to affiliate                                                                                                                                                                           |  |                                         | 2,894     |   |                                        |   | 2,773     |      |  |   | 8,857     |   |  |   | 7,869     |  
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total operating expenses                                                                                                                                                                            |  |                                         | 33,760    |   |                                        |   | 29,984    |      |  |   | 98,863    |   |  |   | 85,715    |  
|Operating income                                                                                                                                                                                    |  |                                         | 2,881     |   |                                        |   | 809       |      |  |   | 6,264     |   |  |   | 7,917     |  
|                                                                                                                                                                                                    |  |                                         |           |  
|Other income (expense):                                                                                                                                                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Interest income (including $401 and $55 for the three months ended, $633 and $743 for the nine months ended 2008 and 2007 respectively from
affiliates and related parties)                         |  |                                         | 688       |   |                                        |   | 526       |      |  |   | 1,990     |   |  |   | 1,917     |  
|Other income                                                                                                                                                                                        |  |                                         | 2,410     |   |                                        |   | 251       |      |  |   | 3,206     |   |  |   | 1,069     |  
|Mortgage and loan interest expense (including $1,188 and $183 for the three months ended, $1,610 and $546 for the nine months ended 2008 and
2007 respectively from affiliates and related parties) |  |                                         | (16,621   | ) |                                        |   | (17,476   | )    |  |   | (51,639   | ) |  |   | (48,591   | )
|Provision for allowance on notes receivables and impairment                                                                                                                                         |  |                                         |          |   |                                        |   | (2,683    | )    |  |   | (7,000    | ) |  |   | (2,683    | )
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total other income (expense)                                                                                                                                                                        |  |                                         | (13,523   | ) |                                        |   | (19,382   | )    |  |   | (53,443   | ) |  |   | (48,288   | )
|Loss before gain on land sales, minority interest and equity in earnings (loss) of investee                                                                                                         |  |                                         | (10,642   | ) |                                        |   | (18,573   | )    |  |   | (47,179   | ) |  |   | (40,371   | )
|Gain on land sales                                                                                                                                                                                  |  |                                         | 696       |   |                                        |   | 5,754     |      |  |   | 4,551     |   |  |   | 6,875     |  
|Net income fee to affiliate                                                                                                                                                                         |  |                                         |          |   |                                        |   |          |      |  |   |          |   |  |   | 704       |  
|Minority interest                                                                                                                                                                                   |  |                                         |          |   |                                        |   | 19        |      |  |   |          |   |  |   | 22        |  
|Equity in income (loss) of investees                                                                                                                                                                |  |                                         | (1,863    | ) |                                        |   |          |      |  |   | 2,681     |   |  |   |          |  
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Loss from continuing operations before income tax expense                                                                                                                                           |  |                                         | (11,809   | ) |                                        |   | (12,800   | )    |  |   | (39,947   | ) |  |   | (32,770   | )
|Income tax benefit                                                                                                                                                                                  |  |                                         | 1,807     |   |                                        |   | 2,931     |      |  |   | 30,232    |   |  |   | 3,135     |  
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net loss from continuing operations                                                                                                                                                                 |  |                                         | (10,002   | ) |                                        |   | (9,869    | )    |  |   | (9,715    | ) |  |   | (29,635   | )
|                                                                                                                                                                                                    |  |                                         |           |  
|Income from discontinued operations before income taxes                                                                                                                                             |  |                                         | 5,162     |   |                                        |   | 8,374     |      |  |   | 86,378    |   |  |   | 8,958     |  
|Income tax expense                                                                                                                                                                                  |  |                                         | (1,807    | ) |                                        |   | (2,931    | )    |  |   | (30,232   | ) |  |   | (3,135    | )
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net income from discontinuing operations                                                                                                                                                            |  |                                         | 3,355     |   |                                        |   | 5,443     |      |  |   | 56,146    |   |  |   | 5,823     |  
|                                                                                                                                                                                                    |  |                                         |           |  
|Net income (loss)                                                                                                                                                                                   |  |                                         | (6,647    | ) |                                        |   | (4,426    | )    |  |   | 46,431    |   |  |   | (23,812   | )
|Preferred dividend requirement                                                                                                                                                                      |  |                                         | (239      | ) |                                        |   | (228      | )    |  |   | (718      | ) |  |   | (684      | )
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net income (loss) applicable to common shares                                                                                                                                                       |  | $                                       | (6,886    | ) |                                        | $ | (4,654    | )    |  | $ | 45,713    |   |  | $ | (24,496   | )
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Earnings per share                                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Basic earning per share:                                                                                                                                                                            |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net income (loss) from continued operations                                                                                                                                                         |  |                                         | (1.27     | ) |                                        |   | (1.27     | )    |  |   | (1.29     | ) |  |   | (3.83     | )
|Discontinued operations                                                                                                                                                                             |  |                                         | 0.42      |   |                                        |   | 0.69      |      |  |   | 6.95      |   |  |   | 0.74      |  
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net income (loss) applicable to common shares                                                                                                                                                       |  | $                                       | (0.85     | ) |                                        | $ | (0.58     | )    |  | $ | 5.66      |   |  | $ | (3.09     | )
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Diluted earnings per share:                                                                                                                                                                         |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net income (loss) from continued operations                                                                                                                                                         |  | $                                       | (1.27     | ) |                                        | $ | (1.27     | )    |  | $ | (1.29     | ) |  | $ | (3.83     | )
|Discontinued operations                                                                                                                                                                             |  |                                         | 0.42      |   |                                        |   | 0.69      |      |  |   | 6.95      |   |  |   | 0.74      |  
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net income (loss) applicable to common shares                                                                                                                                                       |  | $                                       | (0.85     | ) |                                        | $ | (0.58     | )    |  | $ | 5.66      |   |  | $ | (3.09     | )
|                                                                                                                                                                                                    |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Weighted average common shares used in computing earnings per share:                                                                                                                                |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Basic                                                                                                                                                                                               |  |                                         | 8,083,882 |   |                                        |   | 7,942,089 |      |  |   | 8,077,663 |   |  |   | 7,910,111 |  
|Diluted                                                                                                                                                                                             |  |                                         | 8,083,882 |   |                                        |   | 7,942,089 |      |  |   | 8,077,663 |   |  |   | 7,910,111 |  

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



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

For the Nine Months Ended September 30, 2008

(dollars in thousands)

(unaudited)



|                                                 |  |                       |  |                         |    |                |         |        |                         |   |        |                                      |         |                                     |  |         |              |  |   |      |   |  |   |        |  |   |        |   |  |   |         |  
|------------------------------------------------ |  | --------------------- |  | ----------------------- | -- | -------------- | ------- | ------ | ----------------------- | - | ------ | ------------------------------------ | ------- | ----------------------------------- |  | ------- | ------------ |  | - | ---- | - |  | - | ------ |  | - | ------ | - |  | - | ------- | -
|                                                 |  | SHARES OF COMMONSTOCK |  | SHARES OFPREFERREDSTOCK |    | PAID-INCAPITAL |         |        | SHARES OFTREASURY STOCK |   |        | ACCUMULATED(DEFICIT)RETAINEDEARNINGS |         | ACCUMULATEDOTHERCOMPREHENSIVEINCOME |  |         | TOTALCAPITAL | 
|                                                 |  | SHARES                |  | AMOUNT                  |    | SHARES         |         | AMOUNT |                         |   | SHARES |                                      |         | AMOUNT                              |  |         |              | 
|Balance, December 31, 2007                       |  | 8,113,669             |  | $                       | 81 |                | 130,000 |        | $                       | 1 |        | $                                    | 274,733 |                                     |  | 34,703  |              |  | $ | (577 | ) |  | $ | 12,771 |  | $ | (1,528 | ) |  | $ | 285,481 |  
|Unrealized gain on foreign currency translation  |  |                       |  |                         |    |                |         |        |                         |   |        |                                      |         |                                     |  |         |              |  |   |      |   |  |   |        |  |   | 9,685  |   |  |   | 9,685   |  
|Unrealized gain on marketable securities         |  |                       |  |                         |    |                |         |        |                         |   |        |                                      |         |                                     |  |         |              |  |   |      |   |  |   |        |  |   | (6,952 | ) |  |   | (6,952  | )
|Net income                                       |  |                       |  |                         |    |                |         |        |                         |   |        |                                      |         |                                     |  |         |              |  |   |      |   |  |   | 46,431 |  |   |        |   |  |   | 46,431  |  
|Series C preferred stock dividends               |  |                       |  |                         |    |                |         |        |                         |   |        |                                      | (159    | )                                   |  |         |              |  |   |      |   |  |   |        |  |   |        |   |  |   | (159    | )
|Series D preferred stock dividends (7% per year) |  |                       |  |                         |    |                |         |        |                         |   |        |                                      | (559    | )                                   |  |         |              |  |   |      |   |  |   |        |  |   |        |   |  |   | (559    | )
|Acquisition of minority interest                 |  |                       |  |                         |    |                |         |        |                         |   |        |                                      | 9,229   |                                     |  |         |              |  |   |      |   |  |   |        |  |   |        |   |  |   | 9,229   |  
|Repurchase/sale of treasury shares, net          |  |                       |  |                         |    |                |         |        |                         |   |        |                                      |         |                                     |  | (34,703 | )            |  |   | 577  |   |  |   |        |  |   |        |   |  |   | 577     |  
|                                                 |  |                       |  |                         |    |                |         |        |                         |   |        |                                      |         |                                     |  |         |              |  |   |      |   |  |   |        |  |   |        |   |  |   |         |  
|Balance, September 30, 2008                      |  | 8,113,669             |  | $                       | 81 |                | 130,000 |        | $                       | 1 |        | $                                    | 283,244 |                                     |  |        |              |  | $ |     |   |  | $ | 59,202 |  | $ | 1,205  |   |  | $ | 343,733 |  
|                                                 |  |                       |  |                         |    |                |         |        |                         |   |        |                                      |         |                                     |  |         |              |  |   |      |   |  |   |        |  |   |        |   |  |   |         |  

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



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                          |  |                                        |          |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | -------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                          |  | For the Nine Months EndedSeptember 30, |         
|                                                                                          |  | 2008                                   |          |   | 2007 |  
|                                                                                          |  | (dollars in thousands)                 |         
|Cash Flows from Operating Activities:                                                     |  |                                        |          |   |      |   |          |  
|Reconciliation of net income (loss) to net cash used by operating activities              |  |                                        |          |   |      |   |          |  
|Net income (loss) applicable to common shares                                             |  | $                                      | 45,713   |   |      | $ | (24,496  | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                        |          |   |      |   |          |  
|Depreciation and amortization                                                             |  |                                        | 17,310   |   |      |   | 18,993   |  
|Amortization of deferred borrowing costs                                                  |  |                                        | 3,995    |   |      |   | 3,572    |  
|Gain on sale of land                                                                      |  |                                        | (4,551   | ) |      |   | (6,875   | )
|Gain on sale of income producing properties                                               |  |                                        | (100,218 | ) |      |   | (12,175  | )
|Provision of impairment                                                                   |  |                                        |         |   |      |   | 2,683    |  
|Equity in earnings of investees                                                           |  |                                        | (5,579   | ) |      |   |         |  
|Loss on foreign currency translation                                                      |  |                                        |         |   |      |   | 37       |  
|Allowance for impairment reserve                                                          |  |                                        | 7,000    |   |      |   |         |  
|(Gain) loss allocated to minority interest                                                |  |                                        |         |   |      |   | (22      | )
|(Increase) decrease in assets:                                                            |  |                                        |          |   |      |   |          |  
|Prepaid expense                                                                           |  |                                        | (352     | ) |      |   | (2,436   | )
|Interest receivable                                                                       |  |                                        | (714     | ) |      |   | (215     | )
|Escrows                                                                                   |  |                                        | (12,072  | ) |      |   | (8,720   | )
|Rents receivables                                                                         |  |                                        | (3,539   | ) |      |   | (795     | )
|Other assets                                                                              |  |                                        | (209     | ) |      |   | 6,598    |  
|Earnest money                                                                             |  |                                        | 10       |   |      |   | 4,597    |  
|Increase (decrease) in liabilities:                                                       |  |                                        |          |   |      |   |          |  
|Accrued interest payable                                                                  |  |                                        | (1,034   | ) |      |   |         |  
|Intercompany change                                                                       |  |                                        | 83,197   |   |      |   |         |  
|Other liabilities                                                                         |  |                                        | 633      |   |      |   | 12,306   |  
|                                                                                          |  |                                        |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                                       |  |                                        | 29,590   |   |      |   | (6,948   | )
|                                                                                          |  |                                       
|Cash Flows from Investing Activities:                                                     |  |                                        |          |   |      |   |          |  
|Change in notes receivable                                                                |  |                                        | (11,608  | ) |      |   | 13,582   |  
|Proceeds from sale of land                                                                |  |                                        | 14,558   |   |      |   | 58,145   |  
|Acquisition of land held for development                                                  |  |                                        | (49,987  | ) |      |   | (24,940  | )
|Acquisition of income producing properties                                                |  |                                        | (62,455  | ) |      |   | (112,180 | )
|Construction and development of new properties                                            |  |                                        | (103,949 | ) |      |   | (165,871 | )
|Proceeds from sale of real estate                                                         |  |                                        | 155,009  |   |      |   | 40,203   |  
|Improvement of land held for development                                                  |  |                                        | (1,444   | ) |      |   | (352     | )
|Improvement of income producing properties                                                |  |                                        | (7,829   | ) |      |   | (8,834   | )
|Investment in marketable securities                                                       |  |                                        | 11,752   |   |      |   | (731     | )
|Acquisition of minority interest                                                          |  |                                        | 901      |   |      |   | 2,884    |  
|Investment in unconsolidated real estate entities                                         |  |                                        | 8,173    |   |      |   | (6,095   | )
|                                                                                          |  |                                        |          |   |      |   |          |  
|Net cash used in investing activities                                                     |  |                                        | (46,879  | ) |      |   | (204,189 | )
|                                                                                          |  |                                       
|Cash Flows from Financing Activities:                                                     |  |                                        |          |   |      |   |          |  
|Payments on notes payable                                                                 |  |                                        | (17,244  | ) |      |   | (104,030 | )
|Change in due from affiliates                                                             |  |                                        | (1,440   | ) |      |   | 10,724   |  
|Proceeds from notes payable                                                               |  |                                        | 178,097  |   |      |   | 385,365  |  
|Repurchase of common stock                                                                |  |                                        | 577      |   |      |   | (470     | )
|Payment on notes from sold income producing properties                                    |  |                                        | (153,558 | ) |      |   | (65,497  | )
|Deferred borrowing costs                                                                  |  |                                        | 2,732    |   |      |   | (12,558  | )
|                                                                                          |  |                                        |          |   |      |   |          |  
|Net cash provided by financing activities                                                 |  |                                        | 9,164    |   |      |   | 213,534  |  
|                                                                                          |  |                                        |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                                        | (8,125   | ) |      |   | 2,397    |  
|Cash and cash equivalents, beginning of year                                              |  |                                        | 11,239   |   |      |   | 4,803    |  
|                                                                                          |  |                                        |          |   |      |   |          |  
|Cash and cash equivalents, end of year                                                    |  | $                                      | 3,114    |   |      | $ | 7,200    |  
|                                                                                          |  |                                        |          |   |      |   |          |  

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



6



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

(unaudited)



|                                                        |  |                                        |        |   |      |   |        |  
|------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | For the Nine Months EndedSeptember 30, |       
|                                                        |  | 2008                                   |        |   | 2007 |  
|                                                        |  | (dollars in thousands)                 |       
|Supplemental disclosure of cash flow information        |  |                                        |        |   |      |   |        |  
|Cash paid for interest                                  |  | $                                      | 57,835 |   |      | $ | 57,864 |  
|                                                        |  |                                       
|Schedule of noncash investing and financing activities: |  |                                        |        |   |      |   |        |  
|Unrealized foreign currency translation gain            |  | $                                      | 9,685  |   |      | $ | 4,427  |  
|Unrealized loss on marketable securities                |  | $                                      | (6,952 | ) |      | $ | (1,596 | )
|Notes receivable allowance                              |  | $                                      | (1,500 | ) |      | $ |       |  
|Notes receivable for treasury stock                     |  | $                                      |       |   |      | $ | 3,353  |  
|Land exchanged with non-affiliated party                |  | $                                      |       |   |      | $ | (900   | )



7



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

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

The Company is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange under the symbol TCI. American Realty Investors,
Inc. owns approximately 83.0% of the Companys common stock (NYSE: ARL). Prime Income Asset Management, LLC (Prime) is the Companys external advisor. Regis Realty I, LLC, an affiliate of Prime, manages the Companys
commercial properties. Regis Hotel I, LLC, another Prime affiliate, manages the Companys hotel investments. TCI engages four third-party companies to lease and manage its apartment properties. TCI is a C Corporation for U.S.
federal income tax purposes and files an annual consolidated income tax return with ARL. TCI does not qualify as a Real Estate Investment Trust (REIT) for federal income tax purposes primarily due to ARLs majority ownership of the
Company.

Properties

The Company owned or had
interests in a total property portfolio of 80 and 89 properties as of September 30, 2008 and December 31, 2007, respectively. The commercial properties aggregate approximately 5.1 million and 4.8 million net rentable square feet
as of September 30, 2008 and December 31, 2007, respectively.

At September 30, 2008, the properties consisted of:



| |  |  | 29 commercial buildings, which consists of 20 office buildings, five commercial warehouses, and four retail centers;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | 51 apartment communities; inclusive of development properties in the lease up phase, excluding apartments being developed;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | 7,425 acres of developed and undeveloped land.
| | - |  | ----------------------------------------------

The
Company is involved in the construction of nine apartment development projects as of September 30, 2008. In addition, the Company invests in several tracts of land and is at several stages of predevelopment on many of these properties. The
Company partners with various third-party developers to construct residential projects. The third-party developer typically takes a general partner interest in the development partnership while the Company takes a limited partner (and majority)
interest. The Company is required to fund the equity contributions. The third-party developer is responsible for obtaining financing, hiring a general contractor and for the overall management and delivery of the project, and is compensated with a
fee equal to a certain percentage of the construction costs.

The accompanying interim financial statements are unaudited; however, the financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair
presentation of the financial statements for these periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The
year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be
read in conjunction with the Companys financial statement and notes thereto contained in the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 2007.

Newly issued accounting standards

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



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



8



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##### Table of Contents

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



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

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

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

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

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



9



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##### Table of Contents

NOTE 2. REAL ESTATE ACTIVITY

For the nine month period ended September 30, 2008, we sold 23 income producing properties for an aggregate sales price of $155.0 million. We received $55.4 million in cash after paying off $89.1 million in existing debt and we
recorded a gain on sale of $100.0 million before minority interest. We purchased six buildings at an aggregate cost of $62.4 million. The buildings were financed with $17.4 million cash and $42.6 million in new debt, plus accrued closing costs. We
sold 128.8 acres of land located in Texas for an aggregate sales price of $14.6 million. We received $4.2 million in cash and provided $2.2 million in seller financing after paying off existing mortgages of $6.1 million. We recorded a $4.6 million
gain on land sales before minority interest. We purchased 1,128.9 acres of land located in Texas for an aggregate purchase price of $50.0 million. The land purchases were financed with $15.2 million in cash and $33.4 million in new debt.



|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |         |               |   |         |                   |  |                                        |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|------------------------------------- |  | -------------------- | --------- | ------------ | - | ------------------- |  | ---------------- | ----- | --------------------- | - | ------- | ------------- | - | ------- | ----------------- |  | -------------------------------------- | -------- | - | ------------- | - | -------------------------------- |  | - | ------- | - |  | - | --------- |  | - | -------
|                                      |  | CostBeginningof Year |           | Acquisitions |   | CapitalImprovements |  | DevelopmentCosts |       | CompletedDevelopments |   |         | PropertySales |   |         | ImpairmentCharges |  | Reclassificationsand OtherAdjustments* |          |   | Cost9/30/2008 |   | AccumulatedDepreciation9/30/2008
|Apartments                            |  | $                    | 394,848   |              | $ | 20,875              |  | $                | 2,659 |                       | $ |        |               | $ | 61,384  |                   |  | $                                      |         |   |               | $ |                                 |  | $ | 101,594 |   |  | $ | 581,360   |  | $ | 42,908 
|Apartments under construction         |  |                      | 153,144   |              |   |                    |  |                  |      |                       |   | 68,681  |               |   | (61,384 | )                 |  |                                        |         |   |               |   |                                 |  |   | (57,437 | ) |  |   | 103,004   |  |   |       
|Other developments in progress        |  |                      | 99,513    |              |   | 16,425              |  |                  |      |                       |   | 35,268  |               |   |        |                   |  |                                        |         |   |               |   |                                 |  |   | 61,344  |   |  |   | 212,550   |  |   |       
|Commercial properties                 |  |                      | 302,386   |              |   | 41,580              |  |                  | 5,170 |                       |   |        |               |   |        |                   |  |                                        |         |   |               |   |                                 |  |   | 55,085  |   |  |   | 404,221   |  |   | 65,333 
|Hotels                                |  |                      | 35,358    |              |   |                    |  |                  |      |                       |   |        |               |   |        |                   |  |                                        |         |   |               |   |                                 |  |   | (35,358 | ) |  |   |          |  |   |       
|Land held for development             |  |                      | 245,296   |              |   | 33,562              |  |                  | 1,444 |                       |   |        |               |   |        |                   |  |                                        | (14,558  | ) |               |   |                                 |  |   | (59,765 | ) |  |   | 205,979   |  |   | 187    
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |         |               |   |         |                   |  |                                        |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|Real estate held for investment       |  | $                    | 1,230,545 |              | $ | 112,442             |  | $                | 9,273 |                       | $ | 103,949 |               | $ |        |                   |  | $                                      | (14,558  | ) |               | $ |                                 |  | $ | 65,463  |   |  | $ | 1,507,114 |  | $ | 108,428
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |         |               |   |         |                   |  |                                        |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|Real estate held for sale             |  | $                    | 69,561    |              | $ |                    |  | $                |      |                       | $ |        |               | $ |        |                   |  | $                                      | (155,009 | ) |               | $ |                                 |  | $ | 89,771  |   |  | $ | 4,323     |  | $ | 1,038  
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |         |               |   |         |                   |  |                                        |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|Real estate subject to sales contract |  | $                    | 64,320    |              | $ |                    |  | $                |      |                       | $ |        |               | $ |        |                   |  | $                                      |         |   |               | $ |                                 |  | $ | 8,713   |   |  | $ | 73,033    |  | $ | 10,003 
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |         |               |   |         |                   |  |                                        |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        



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



10



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##### Table of Contents

A summary of some of the significant transactions are discussed below:

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

On January 25, 2008, we sold 14 apartment complexes in a single transaction for an aggregate sales price of $89.9 million and recorded a gain on sale of $65.5
million. We received cash of $25.8 million after paying off existing mortgages of $56.6 million, and $7.5 million in commissions and other closing costs.

The properties consisted of:



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

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

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



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



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



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

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

On April 2, 2008, we acquired the Bridgewood Ranch apartments, a
106-unit complex located in Kaufman, Texas for $7.6 million. We financed the purchase with a new mortgage (secured by the property) of $5.1 million, cash of $1.3 million, and $1.2 million in liabilities. The mortgage accrues interest at the higher
rate of 6.75% or Prime plus 0.25% and matures in March 31, 2019.

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



11



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##### Table of Contents

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

On June 26, 2008, we purchased the Stanford Centre, a 274,684 square foot commercial building located in Dallas, Texas including 3.1 acres of land, for $38.8
million. We financed the transaction with $11.5 million in cash and a $26.1 million mortgage from a commercial bank. In addition, we incurred $1.2 million in accruals and credits at closing. The note accrues interest at LIBOR plus 3.75% and matures
on July 1, 2011.

On July 23, 2008, we purchased 24.1 acres of land known as Las Colinas land located in Irving, Texas for $6.7 million. We
financed the transaction with $2.2 million in cash and a $4.5 million mortgage secured by the property. The note accrues interest at Prime plus 4.00% and matures on July 23, 2010.

On July 23, 2008, we purchased 246.0 acres of land known as Windmill Farms Harlan land located in Kaufman County, Texas for $6.8 million. We financed the transaction with $1.3 million cash and seller financing of
$5.5 million. The note accrues interest at 2.00% for the first year, 4.00% for the second year and 6.00% for the third year and each year thereafter and matures on July 23, 2013.

On August 12, 2008, we purchased 833.4 acres of land in Forney, Texas known as Travis Ranch land for $18.7 million. We financed the transaction with $2.2 million cash, a $5.8 million loan with a commercial lender
and a $7.5 million loan provided by the seller. In addition, we accrued $3.2 million in commissions and closing costs. The commercial note and seller financing both accrue interest at 5.00% and are due upon demand.

NOTE 3. NOTES AND INTEREST RECEIVABLE



|                                     |  |              |  |               |  |        |        |   |          |                                             
|------------------------------------ |  | ------------ |  | ------------- |  | ------ | ------ | - | -------- | --------------------------------------------
|Borrower                             |  | MaturityDate |  | Interest Rate |  | Amount |        |   | Security
|Performing loans:                    |  |              |  |               |  |        |        |   |          |                                             
|400 St. Paul                         |  | Oct-2008     |  | 9.25%         |  | $      | 3,612  |   |          | Office Building, Dallas, TX                 
|Atlantic Hotels, LLC                 |  | Aug-2009     |  | 8.50%         |  |        | 2,000  |   |          | Atlantic Sands Hotel, Virginia Beach, VA    
|Basic Capital Management(1)          |  | Oct-2011     |  | 7.00%         |  |        | 1,252  |   |          | Industrial building, Arlington, TX          
|Basic Capital Management(1)          |  | Oct-2011     |  | 7.00%         |  |        | 1,523  |   |          | Retail building, Cary, NC                   
|CTMGT Travis Ranch, LLC              |  | Aug-2014     |  | 6.00%         |  |        | 7,598  |   |          | Unsecured                                   
|CTMGT Travis Ranch, LLC              |  | Demand       |  | 5.00%         |  |        | 7,542  |   |          | Unsecured                                   
|Dallas Fund XVII LP                  |  | Oct-2009     |  | 9.00%         |  |        | 5,296  |   |          | Assignment of partnership interests         
|Garden Centura LP                    |  | N/A          |  | 7.00%         |  |        | 4,901  |   |          | Excess cash flow from partnership           
|Miscellaneous related party notes(1) |  | Various      |  | Various       |  |        | 2,266  |   |          | Various security interests                  
|Ocean Beach Partners(1)              |  | Dec-2009     |  | 7.00%         |  |        | 3,279  |   |          | Folsom Land (36 acres in Farmers Branch, TX)
|Pioneer Austin Development           |  | Oct-2008     |  | 10.00%        |  |        | 2,407  |   |          | 33 acres undeveloped land, Austin, TX       
|Syntek Acquisition Corp(1)           |  | Aug-2010     |  | Prime + 1.00% |  |        | 3,354  |   |          | Unsecured                                   
|Thornwood Wrap Note, ICC Surfwood    |  | Jul-2009     |  | 7.50%         |  |        | 1,638  |   |          | Unsecured                                   
|Accrued interest                     |  |              |  |               |  |        | 1,831  |   |          |                                            
|Allowance for estimated losses       |  |              |  |               |  |        | (1,978 | ) |          |                                            
|                                     |  |              |  |               |  |        |        |   |          |                                             
|Total                                |  |              |  |               |  | $      | 46,521 |   |          |                                             
|                                     |  |              |  |               |  |        |        |   |          |                                             



|(1) | Related Party
|--- | -------------



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NOTE 4. INVESTMENT IN EQUITY INVESTEES

We have equity investments in various entities. We account for these investees based on our ownership and controlling interest. ARL is our parent company and owns approximately 83% of our common shares. ARL
consolidates our financial statements. The table below lists our equity holdings. Investments less than $500,000 are aggregated in the other account, (amounts in thousands except for percentages).



|                     |  |                                                  |   |  |                                                 |        |  
|-------------------- |  | ------------------------------------------------ | - |  | ----------------------------------------------- | ------ | -
|Investee             |  | Percentage ofTCIs Ownershipat September 30,2008 |   |  | Carrying Value ofInvestment atSeptember 30,2008 |       
|IOT                  |  | 24.92                                            | % |  | $                                               | 12,757 |  
|ARL                  |  | 2.53                                             | % |  |                                                 | 5,372  |  
|Garden Centura, L.P. |  | 5.00                                             | % |  |                                                 | 2,024  |  
|Other                |  |                                                  |   |  |                                                 | 13,243 |  
|Allowance            |  |                                                  |   |  |                                                 | (7,000 | )
|                     |  |                                                  |   |  |                                                 |        |  
|                     |  |                                                  |   |  | $                                               | 26,396 |  
|                     |  |                                                  |   |  |                                                 |        |  

Set forth below is summarized results of operations of the equity method investments for the first nine months of
2008 and 2007.



|                                                                            |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                            |  | 2008 |         |   | 2007 |  
|Revenues                                                                    |  | $    | 46,140  |   |      | $ | 66,698  |  
|Property operating expenses                                                 |  |      | (37,272 | ) |      |   | (49,747 | )
|Depreciation                                                                |  |      | (4,678  | ) |      |   | (5,986  | )
|Interest expense                                                            |  |      | (19,801 | ) |      |   | (28,857 | )
|Involuntary conversion                                                      |  |      | 7,434   |   |      |   |        |  
|Income tax benefit                                                          |  |      | 9,166   |   |      |   |        |  
|                                                                            |  |      |         |   |      |   |         |  
|Gain (loss) before gains on sale of real estate and discontinued operations |  |      | 989     |   |      |   | (17,892 | )
|Gain on sale of real estate                                                 |  |      | 1,459   |   |      |   | 3,504   |  
|Income (loss) from discontinued operations                                  |  |      | 26,378  |   |      |   | (24     | )
|                                                                            |  |      |         |   |      |   |         |  
|Net income (loss)                                                           |  | $    | 28,826  |   |      | $ | (14,412 | )
|                                                                            |  |      |         |   |      |   |         |  

On September 9, 2008, we transferred 470,000 shares of ARL stock, representing 5.00% of our ownership in ARL,
to Syntek Acquisition Corporation, an affiliated entity, for $9.2 million.

NOTE 5. MARKETABLE EQUITY SECURITIES

TCI owns approximately 9.24% of the common stock of Realty Korea CR-REIT Co., Ltd. No. 1(CR REIT). In April 2008, in accordance with the corporate
restructuring REIT regulation in Korea, the CR REIT common stock was delisted from the Korean Stock Exchange (KOSPI) and is in the process of liquidation. We have received $4.8 million in dividend payouts for the partial liquidation of the CR REIT.

NOTE 6. RELATED PARTY TRANSACTIONS

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



|                                          |  |   |          
|----------------------------------------- |  | - | ---------
|Balance, December 31, 2007                |  | $ | (2,564)  
|Cash transfers                            |  |   | 59,209   
|Cash repayments                           |  |   | (108,534)
|Fees and commissions payable to affiliate |  |   | (29,477) 
|Payables through Prime                    |  |   | (1,831)  
|                                          |  |   |          
|Balance, September 30, 2008               |  | $ | (83,197) 
|                                          |  |   |          

During the ordinary course of business, we have related party transactions that include, but are not limited to
rent income, interest income, interest expense, general and administrative costs, commissions, management fees, and property expenses. In addition, we have assets and liabilities that include related party amounts. The affiliated amounts included in
assets and liabilities, and the affiliated revenues and expense received/paid are shown on the face of the financial statements



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On September 5, 2008, we sold 40,902 shares of our treasury stock to Syntek Acquisition Corporation, an affiliated
entity for $673,000. The proceeds were used to pay down the affiliated receivables.



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NOTE 7. NOTES PAYABLE



|                                      |  |                         |              |                       |              |            |              |   |                                        |  |   |                  |  |   |              |   |  |   |          |   |  |   |        |   |  |   |         |   |  |   |          
|------------------------------------- |  | ----------------------- | ------------ | --------------------- | ------------ | ---------- | ------------ | - | -------------------------------------- |  | - | ---------------- |  | - | ------------ | - |  | - | -------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ---------
|                                      |  | BalanceBeginningof Year |              | Additional Borrowings |              | Repayments |              |   | Reclassificationsand OtherAdjustments* |  |   | Balance9/30/2008
|                                      |  |                         | Acquisitions |                       | Developments |            | Refinancings |   | Amortization                           |  |   | Property Sales   |  |   | Refinancings |   |  |  
|Apartments                            |  | $                       | 338,033      |                       | $            | 16,536     |              | $ |                                       |  | $ |                 |  | $ | (4,096       | ) |  | $ |         |   |  | $ | (2,882 | ) |  | $ | 28,176  |   |  | $ | 375,767  
|Apartments under construction         |  |                         | 130,699      |                       |              |           |              |   | 54,348                                 |  |   |                 |  |   |             |   |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 185,047  
|Other developments in progress        |  |                         | 135,755      |                       |              | 13,366     |              |   | 16,112                                 |  |   |                 |  |   | (1,886       | ) |  |   |         |   |  |   | (4,777 | ) |  |   | (39,807 | ) |  |   | 118,763  
|Commercial properties                 |  |                         | 231,804      |                       |              | 26,075     |              |   |                                       |  |   | 4,000            |  |   | (2,667       | ) |  |   |         |   |  |   |       |   |  |   | (3,836  | ) |  |   | 255,376  
|Hotels                                |  |                         | 42,917       |                       |              |           |              |   |                                       |  |   |                 |  |   |             |   |  |   |         |   |  |   |       |   |  |   | (42,917 | ) |  |   |         
|Land held for development             |  |                         | 119,294      |                       |              | 40,402     |              |   |                                       |  |   | 7,258            |  |   | (6,216       | ) |  |   | (30,086  | ) |  |   |       |   |  |   | (3,824  | ) |  |   | 126,828  
|Corporate and other                   |  |                         | 4,425        |                       |              |           |              |   |                                       |  |   |                 |  |   | (207         | ) |  |   | (3,902   | ) |  |   |       |   |  |   | 9,967   |   |  |   | 10,283   
|Accrued interest                      |  |                         | 4,299        |                       |              |           |              |   |                                       |  |   |                 |  |   |             |   |  |   |         |   |  |   |       |   |  |   | 1,371   |   |  |   | 5,670    
|                                      |  |                         |              |                       |              |            |              |   |                                        |  |   |                  |  |   |              |   |  |   |          |   |  |   |        |   |  |   |         |   |  |   |          
|Real estate held for investment       |  | $                       | 1,007,226    |                       | $            | 96,379     |              | $ | 70,460                                 |  | $ | 11,258           |  | $ | (15,072      | ) |  | $ | (33,988  | ) |  | $ | (7,659 | ) |  | $ | (50,870 | ) |  | $ | 1,077,734
|                                      |  |                         |              |                       |              |            |              |   |                                        |  |   |                  |  |   |              |   |  |   |          |   |  |   |        |   |  |   |         |   |  |   |          
|Real estate held for sale             |  | $                       | 107,847      |                       | $            |           |              | $ |                                       |  | $ |                 |  | $ | (249         | ) |  | $ | (111,911 | ) |  | $ |       |   |  | $ | 9,197   |   |  | $ | 4,884    
|                                      |  |                         |              |                       |              |            |              |   |                                        |  |   |                  |  |   |              |   |  |   |          |   |  |   |        |   |  |   |         |   |  |   |          
|Real estate subject to sales contract |  | $                       | 62,513       |                       | $            |           |              | $ |                                       |  | $ |                 |  | $ | (1,923       | ) |  | $ |         |   |  | $ |       |   |  | $ | 258     |   |  | $ | 60,848   
|                                      |  |                         |              |                       |              |            |              |   |                                        |  |   |                  |  |   |              |   |  |   |          |   |  |   |        |   |  |   |         |   |  |   |          



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

With respect to the additional notes payable due to the acquisition of properties, a summary of some of the more significant transactions are discussed below:

Apartments

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

In connection with the purchase
of Bridgewood apartments in Kaufman, Texas on April 2, 2008, we financed the acquisition with a new mortgage loan of $5.1 million collateralized by the apartment complex purchased. The note accrues interest at Prime plus 0.25%. The note is
payable in monthly installments of interest and principal through maturity on January 1, 2019, at which time all accrued unpaid interest and principal are due.

In connection with the purchase of Quail Hollow apartments in Holland, Ohio on April 16, 2008, we financed the acquisition with a new mortgage loan of $11.5 million collateralized by the apartment complex
purchased. The note accrues interest at 7.00%. The note is payable in monthly installments of interest and principal through maturity on October 1, 2011, at which time all accrued unpaid interest and principal are due.

Commercial Properties

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



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Land

In connection
with the purchase of Las Colinas land located in Irving, Texas on July 23, 2008, we financed the acquisition with a new mortgage loan of $4.5 million collateralized by the land property purchased. The note accrues interest at Prime plus
4.00%. The note is payable in monthly installments of interest only with the balance and all unpaid and accrued interest due at maturity on July 23, 2010.

In connection with the purchase of Windmill Farms Harlan land located in Kaufman County, Texas on July 23, 2008, we financed the acquisition with seller financing of $5.5 million. The note accrues interest at
2.00% for the first year, 4.00% for the second year and 6.00% for the third year and each year thereafter. The note is payable in monthly installments of interest only with the balance and all unpaid and accrued interest due at maturity on
July 23, 2013.

In connection with the purchase of Travis Ranch land in Forney, Texas on August 12, 2008, we financed the acquisition with a new
mortgage loan of $5.8 million and seller financing of $7.5 million. The commercial note and seller financing both accrue interest at 5.00%. The balance and all unpaid and accrued interest are due upon demand.



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NOTE 8. OPERATING SEGMENTS

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

Presented below is the Companys reportable segments operating
income for the three months ended September 30, 2008 and 2007, including segment assets and expenditures:



|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|------------------------------- |  | -------------------- | ------- | - | ---------- | - | ------- | ------ |  | ---- | - |  | ----- | ------- | - | ----- | - | ------- | - |  | - | --------- | -
|For three months ended 9/30/08  |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  | Land |   |  | Other |         |   | Total |  
|Operating revenue               |  | $                    | 15,013  |   |            | $ | 21,493  |        |  | $    |  |  | $     | 153     |   |       | $ | (18     | ) |  | $ | 36,641    |  
|Operating expenses              |  |                      | 8,577   |   |            |   | 13,633  |        |  |      |  |  |       | 867     |   |       |   | 542     |   |  |   | 23,619    |  
|Depreciation and amortization   |  |                      | 1,802   |   |            |   | 3,236   |        |  |      |  |  |       | 1       |   |       |   |        |   |  |   | 5,039     |  
|Mortgage and loan interest      |  |                      | 4,273   |   |            |   | 9,030   |        |  |      |  |  |       | 2,173   |   |       |   | 1,145   |   |  |   | 16,621    |  
|Interest income                 |  |                      |        |   |            |   |        |        |  |      |  |  |       |        |   |       |   | 688     |   |  |   | 688       |  
|Gain on land sales              |  |                      |        |   |            |   |        |        |  |      |  |  |       | 696     |   |       |   |        |   |  |   | 696       |  
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Segment operating income (loss) |  | $                    | 361     |   |            | $ | (4,406  | )      |  | $    |  |  | $     | (2,192  | ) |       | $ | (1,017  | ) |  | $ | (7,254    | )
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Capital expenditures            |  |                      | 3,899   |   |            |   | 86      |        |  |      |  |  |       |        |   |       |   |        |   |  |   | 3,985     |  
|Assets                          |  |                      | 338,891 |   |            |   | 652,603 |        |  |      |  |  |       | 407,195 |   |       |   |        |   |  |   | 1,398,689 |  
|                                |  |                      |         |   |            |  
|Property Sales                  |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Sales price                     |  | $                    | 3,586   |   |            | $ |        |        |  | $    |  |  | $     | 2,087   |   |       | $ |        |   |  | $ | 5,673     |  
|Cost of sale                    |  |                      | 3,342   |   |            |   |        |        |  |      |  |  |       | 1,391   |   |       |   |        |   |  |   | 4,733     |  
|Deferred current gain           |  |                      |        |   |            |   |        |        |  |      |  |  |       |        |   |       |   |        |   |  |   |          |  
|Recognized prior deferred gain  |  |                      |        |   |            |   |        |        |  |      |  |  |       |        |   |       |   |        |   |  |   |          |  
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Gain on sale                    |  | $                    | 244     |   |            | $ |        |        |  | $    |  |  | $     | 696     |   |       | $ |        |   |  | $ | 940       |  
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|                                |  |                      |         |   |            |  
|For three months ended 9/30/07  |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  | Land |   |  | Other |         |   | Total |  
|Operating revenue               |  | $                    | 13,190  |   |            | $ | 17,656  |        |  | $    |  |  | $     | 93      |   |       | $ | (146    | ) |  | $ | 30,793    |  
|Operating expenses              |  |                      | 8,350   |   |            |   | 9,934   |        |  |      |  |  |       | 466     |   |       |   | 687     |   |  |   | 19,437    |  
|Depreciation and amortization   |  |                      | 2,654   |   |            |   | 2,917   |        |  |      |  |  |       | 2       |   |       |   |        |   |  |   | 5,573     |  
|Mortgage and loan interest      |  |                      | 4,589   |   |            |   | 7,677   |        |  |      |  |  |       | 3,253   |   |       |   | 1,957   |   |  |   | 17,476    |  
|Interest income                 |  |                      |        |   |            |   |        |        |  |      |  |  |       |        |   |       |   | 526     |   |  |   | 526       |  
|Gain on land sales              |  |                      |        |   |            |   |        |        |  |      |  |  |       | 5,754   |   |       |   |        |   |  |   | 5,754     |  
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Segment operating income (loss) |  | $                    | (2,403  | ) |            | $ | (2,872  | )      |  | $    |  |  | $     | 2,126   |   |       | $ | (2,264  | ) |  | $ | (5,413    | )
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Capital expenditures            |  |                      | 6,179   |   |            |   | 20      |        |  |      |  |  |       |        |   |       |   |        |   |  |   | 6,199     |  
|Assets                          |  |                      | 300,412 |   |            |   | 595,604 |        |  |      |  |  |       | 345,501 |   |       |   | (17,386 | ) |  |   | 1,224,131 |  
|                                |  |                      |         |   |            |  
|Property Sales                  |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Sales price                     |  | $                    | 9,350   |   |            | $ | 3,680   |        |  | $    |  |  | $     | 12,822  |   |       | $ |        |   |  | $ | 25,852    |  
|Cost of sale                    |  |                      | 5,926   |   |            |   | 2,641   |        |  |      |  |  |       | 7,068   |   |       |   |        |   |  |   | 15,635    |  
|Deferred current gain           |  |                      |        |   |            |   |        |        |  |      |  |  |       |        |   |       |   |        |   |  |   |          |  
|Recognized prior deferred gain  |  |                      | 4,061   |   |            |   |        |        |  |      |  |  |       |        |   |       |   |        |   |  |   | 4,061     |  
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  
|Gain on sale                    |  | $                    | 7,485   |   |            | $ | 1,039   |        |  | $    |  |  | $     | 5,754   |   |       | $ |        |   |  | $ | 14,278    |  
|                                |  |                      |         |   |            |   |         |        |  |      |   |  |       |         |   |       |   |         |   |  |   |           |  



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



|                                            |  |           |         |   |           |   |        |  
|------------------------------------------- |  | --------- | ------- | - | --------- | - | ------ | -
|For three months ended                      |  | 9/30/2008 |         |   | 9/30/2007 |  
|Segment operating loss                      |  | $         | (7,254  | ) |           | $ | (5,413 | )
|Other non-segment items of income/(expense) |  |           |         |   |           |   |        |  
|General and administrative                  |  |           | (2,208  | ) |           |   | (2,201 | )
|Advisory fees                               |  |           | (2,894  | ) |           |   | (2,773 | )
|Impairment                                  |  |           |        |   |           |   | (2,683 | )
|Other income (expense)                      |  |           | 2,410   |   |           |   | 251    |  
|Equity in earnings of investees             |  |           | (1,863  | ) |           |   |       |  
|Minority interest                           |  |           |        |   |           |   | 19     |  
|Deferred tax                                |  |           | 1,807   |   |           |   | 2,931  |  
|                                            |  |           |         |   |           |   |        |  
|Loss from continuing operations             |  | $         | (10,002 | ) |           | $ | (9,869 | )
|                                            |  |           |         |   |           |   |        |  

SEGMENT ASSET RECONCILIATION TO TOTAL ASSETS



|                                        |  |           |           |           |   |          
|--------------------------------------- |  | --------- | --------- | --------- | - | ---------
|                                        |  | 9/30/2008 |           | 9/30/2007
|Segment assets                          |  | $         | 1,398,689 |           | $ | 1,224,131
|Investments in real estate partnerships |  |           | 27,801    |           |   | 49,230   
|Other assets                            |  |           | 137,246   |           |   | 109,626  
|Assets held for sale                    |  |           | 66,315    |           |   | 100,487  
|                                        |  |           |           |           |   |          
|Total assets                            |  | $         | 1,630,051 |           | $ | 1,483,474
|                                        |  |           |           |           |   |          



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Presented below is the Companys reportable segments operating income for the nine months ended
September 30, 2008 and 2007, including segment assets and expenditures:



|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|------------------------------ |  | -------------------- | ------- | - | ---------- | - | ------- | ------ |  | ---- | ------ |  | ----- | ------- | - | ----- | - | ------- | - |  | - | --------- | -
|For nine months ended 9/30/08  |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  | Land |        |  | Other |         |   | Total |  
|Operating revenue              |  | $                    | 42,660  |   |            | $ | 61,038  |        |  | $    |       |  | $     | 1,413   |   |       | $ | 16      |   |  | $ | 105,127   |  
|Operating expenses             |  |                      | 25,128  |   |            |   | 37,647  |        |  |      |       |  |       | 3,016   |   |       |   | 309     |   |  |   | 66,100    |  
|Depreciation and amortization  |  |                      | 7,091   |   |            |   | 9,926   |        |  |      |       |  |       | 3       |   |       |   |        |   |  |   | 17,020    |  
|Mortgage and loan interest     |  |                      | 12,822  |   |            |   | 27,088  |        |  |      |       |  |       | 8,306   |   |       |   | 3,423   |   |  |   | 51,639    |  
|Interest income                |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   | 1,990   |   |  |   | 1,990     |  
|Gain on land sales             |  |                      |        |   |            |   |        |        |  |      |       |  |       | 4,551   |   |       |   |        |   |  |   | 4,551     |  
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Segment operating loss         |  | $                    | (2,381  | ) |            | $ | (13,623 | )      |  | $    |       |  | $     | (5,361  | ) |       | $ | (1,726  | ) |  | $ | (23,091   | )
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Capital expenditures           |  |                      | 3,899   |   |            |   | 86      |        |  |      |       |  |       |        |   |       |   |        |   |  |   | 3,985     |  
|Assets                         |  |                      | 338,891 |   |            |   | 652,603 |        |  |      |       |  |       | 407,195 |   |       |   |        |   |  |   | 1,398,689 |  
|                               |  |                      |         |   |            |  
|Property Sales                 |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Sales price                    |  | $                    | 39,383  |   |            | $ | 103,877 |        |  | $    | 11,749 |  | $     | 14,558  |   |       | $ |        |   |  | $ | 169,567   |  
|Cost of sale                   |  |                      | 20,291  |   |            |   | 30,477  |        |  |      | 4,023  |  |       | 9,857   |   |       |   |        |   |  |   | 64,648    |  
|Deferred current gain          |  |                      |        |   |            |   |        |        |  |      |       |  |       | 150     |   |       |   |        |   |  |   | 150       |  
|Recognized prior deferred gain |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   |        |   |  |   |          |  
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Gain on sale                   |  | $                    | 19,092  |   |            | $ | 73,400  |        |  | $    | 7,726  |  | $     | 4,551   |   |       | $ |        |   |  | $ | 104,769   |  
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|                               |  |                      |         |   |            |  
|For nine months ended 9/30/07  |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  | Land |        |  | Other |         |   | Total |  
|Operating revenue              |  | $                    | 41,771  |   |            | $ | 51,683  |        |  | $    |       |  | $     | 302     |   |       | $ | (124    | ) |  | $ | 93,632    |  
|Operating expenses             |  |                      | 23,804  |   |            |   | 27,845  |        |  |      |       |  |       | 2,688   |   |       |   | 186     |   |  |   | 54,523    |  
|Depreciation and amortization  |  |                      | 7,708   |   |            |   | 8,197   |        |  |      |       |  |       | 12      |   |       |   |        |   |  |   | 15,917    |  
|Mortgage and loan interest     |  |                      | 12,575  |   |            |   | 22,821  |        |  |      |       |  |       | 10,024  |   |       |   | 3,171   |   |  |   | 48,591    |  
|Interest income                |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   | 1,917   |   |  |   | 1,917     |  
|Gain on land sales             |  |                      |        |   |            |   |        |        |  |      |       |  |       | 6,875   |   |       |   |        |   |  |   | 6,875     |  
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Segment operating loss         |  | $                    | (2,316  | ) |            | $ | (7,180  | )      |  | $    |       |  | $     | (5,547  | ) |       | $ | (1,564  | ) |  | $ | (16,607   | )
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Capital expenditures           |  |                      | 6,179   |   |            |   | 20      |        |  |      |       |  |       |        |   |       |   |        |   |  |   | 6,199     |  
|Assets                         |  |                      | 300,412 |   |            |   | 595,604 |        |  |      |       |  |       | 345,501 |   |       |   | (17,386 | ) |  |   | 1,224,131 |  
|                               |  |                      |         |   |            |  
|Property Sales                 |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Sales price                    |  | $                    | 9,350   |   |            | $ | 27,741  |        |  | $    |       |  | $     | 17,353  |   |       | $ |        |   |  | $ | 54,444    |  
|Cost of sale                   |  |                      | 5,923   |   |            |   | 23,054  |        |  |      |       |  |       | 10,478  |   |       |   |        |   |  |   | 39,455    |  
|Deferred current gain          |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   |        |   |  |   |          |  
|Recognized prior deferred gain |  |                      | 4,061   |   |            |   |        |        |  |      |       |  |       |        |   |       |   |        |   |  |   | 4,061     |  
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  
|Gain on sale                   |  | $                    | 7,488   |   |            | $ | 4,687   |        |  | $    |       |  | $     | 6,875   |   |       | $ |        |   |  | $ | 19,050    |  
|                               |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |         |   |  |   |           |  



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



|                                            |  |           |         |   |           |   |         |  
|------------------------------------------- |  | --------- | ------- | - | --------- | - | ------- | -
|For nine months ended                       |  | 9/30/2008 |         |   | 9/30/2007 |  
|Segment operating loss                      |  | $         | (23,091 | ) |           | $ | (16,607 | )
|Other non-segment items of income/(expense) |  |           |         |   |           |   |         |  
|General and administrative                  |  |           | (6,886  | ) |           |   | (7,406  | )
|Advisory fees                               |  |           | (8,857  | ) |           |   | (7,869  | )
|Litigation                                  |  |           |        |   |           |   |        |  
|Bad debt and allowance                      |  |           | (7,000  | ) |           |   |        |  
|Net income fee                              |  |           |        |   |           |   | 704     |  
|Impairment                                  |  |           |        |   |           |   | (2,683  | )
|Other income (expense)                      |  |           | 3,206   |   |           |   | 1,069   |  
|Equity in earnings of investees             |  |           | 2,681   |   |           |   |        |  
|Minority interest                           |  |           |        |   |           |   | 22      |  
|Deferred tax                                |  |           | 30,232  |   |           |   | 3,135   |  
|                                            |  |           |         |   |           |   |         |  
|Loss from continuing operations             |  | $         | (9,715  | ) |           | $ | (29,635 | )
|                                            |  |           |         |   |           |   |         |  

SEGMENT ASSET RECONCILIATION TO TOTAL ASSETS



|                                        |  |           |           |           |   |          
|--------------------------------------- |  | --------- | --------- | --------- | - | ---------
|                                        |  | 9/30/2008 |           | 9/30/2007
|Segment assets                          |  | $         | 1,398,689 |           | $ | 1,224,131
|Investments in real estate partnerships |  |           | 27,801    |           |   | 49,230   
|Other assets                            |  |           | 137,246   |           |   | 109,626  
|Assets held for sale                    |  |           | 66,315    |           |   | 100,487  
|                                        |  |           |           |           |   |          
|Total assets                            |  | $         | 1,630,051 |           | $ | 1,483,474
|                                        |  |           |           |           |   |          

NOTE 9. DISCONTINUED OPERATIONS

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

Income from discontinued operations relates to 32 income producing properties consisting of
23 apartments, five commercial properties, and four hotels. During 2008, we sold or disposed of 18 apartments, three commercial buildings, and four hotels.



|                                                                                   |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | For the Three Months EndedSeptember 30, |        |   | For the Nine Months EndedSeptember 30, |  
|                                                                                   |  | 2008                                    |        |   | 2007                                   |   |        | 2008 |  |   | 2007    |  
|Revenue                                                                            |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Rental                                                                             |  | $                                       | 1,401  |   |                                        | $ | 9,640  |      |  | $ | 5,514   |   |  | $ | 27,490  |  
|Property operations                                                                |  |                                         | (247   | ) |                                        |   | 6,176  |      |  |   | 2,372   |   |  |   | 18,304  |  
|                                                                                   |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                                         | 1,648  |   |                                        |   | 3,464  |      |  |   | 3,142   |   |  |   | 9,186   |  
|                                                                                   |  |                                         |        |  
|Expenses                                                                           |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Interest                                                                           |  |                                         | (106   | ) |                                        |   | (2,798 | )    |  |   | (5,568  | ) |  |   | (9,277  | )
|General and administrative                                                         |  |                                         | (17    | ) |                                        |   | (45    | )    |  |   | (616    | ) |  |   | (50     | )
|Depreciation                                                                       |  |                                         | (22    | ) |                                        |   | (771   | )    |  |   | (290    | ) |  |   | (3,076  | )
|                                                                                   |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|                                                                                   |  |                                         | (145   | ) |                                        |   | (3,614 | )    |  |   | (6,474  | ) |  |   | (12,403 | )
|                                                                                   |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss) from discontinued operations before gains on sale of real estate |  |                                         | 1,503  |   |                                        |   | (150   | )    |  |   | (3,332  | ) |  |   | (3,217  | )
|Gain on sale of discontinued operations                                            |  |                                         | 244    |   |                                        |   | 8,524  |      |  |   | 100,218 |   |  |   | 12,175  |  
|Equity in investee                                                                 |  |                                         | 2,898  |   |                                        |   |       |      |  |   | 2,898   |   |  |   |        |  
|Net income fee to affiliate                                                        |  |                                         | 517    |   |                                        |   |       |      |  |   | (4,069  | ) |  |   |        |  
|Net sales fee to affiliate                                                         |  |                                         |       |   |                                        |   |       |      |  |   | (9,337  | ) |  |   |        |  
|                                                                                   |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Income from discontinued operations                                                |  |                                         | 5,162  |   |                                        |   | 8,374  |      |  |   | 86,378  |   |  |   | 8,958   |  
|Tax expense                                                                        |  |                                         | (1,807 | ) |                                        |   | (2,931 | )    |  |   | (30,232 | ) |  |   | (3,135  | )
|                                                                                   |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Income from discontinued operations                                                |  | $                                       | 3,355  |   |                                        | $ | 5,443  |      |  | $ | 56,146  |   |  | $ | 5,823   |  
|                                                                                   |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  



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

NOTE 10. COMMITMENTS AND CONTINGENCIES

In September of 2008, three of our apartment complexes were damaged in the wake of Hurricane Ike. The Island Bay, Marina Landing, and Baywalk apartments consisting of 906
units located in Galveston, Texas all received significant damage. Some of residences at Galveston complexes were asked to vacate and the operations of these units were temporarily ceased. Due to wide spread damage caused by Hurricane Ike and the
limited ability to access the area, the extent of the damage to our apartment complexes has not yet been fully assessed. Managements preliminary assessment places the damages to the four complexes in aggregate to be in excess of $5.0 million.
We anticipate that our insurance coverage will be sufficient to cover the damages. Although we believe that we may need to write down the carrying value of some of these assets due to the damages incurred, we do not feel that we have sufficient
information to make an informed and reasonable estimate as to the extent of any probable write downs. Thus, no impairment has been made to the financial statements as of the quarter ended September 30, 2008 for damages incurred by Hurricane
Ike. Management intends to continue the operations at these complexes once the repairs have been completed, and the operations relating to these apartments will remain in the continuing operations section of our financial statements.

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

Guarantees.We
are a joint guarantor, with Income Opportunity Realty Investors, Inc., an affiliated entity, on a loan with an outstanding balance of $37.3 million as of September 30, 2008. We have $8.7 million of this amount included in the notes and interest
payable section on our balance sheet. As a joint guarantor of the loan, we have joint and several liability of the obligations and liabilities of the loan in its entirety, which include but are not limited to payment of all unpaid and accrued
interest and principal for the entire outstanding loan balance.

Liquidity. Management believes that TCI will generate excess cash from property
operations; such excess, however, will not be sufficient to discharge all of TCIs obligations as they become due. Management intends to sell income producing assets, refinance real estate, and obtain additional borrowings primarily secured by
real estate to meet its liquidity requirements.

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

NOTE 11. SUBSEQUENT EVENTS

On October 15, 2008, we sold the Mountain Plaza apartments, a 188 unit complex,
located in El Paso, Texas for $7.9 million. We received $1.1 million in cash, after providing seller financing of $1.9 million. The buyer assumed the existing mortgage of $4.9 million secured by the property.

NOTE 12. EARNINGS PER SHARE

Earnings per share (EPS)
have been computed pursuant to the provisions of SFAS No. 128 Earnings Per Share. The computation of basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares
outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding. We have issued and outstanding 40,000 shares of stock options. These are considered in the computation of
diluted earnings per share if the effect of applying the treasury stock method is dilutive. We have 30,000 shares of Series C Cumulative Convertible Preferred Stock issued and outstanding. The stock has a liquidation preference of $100.00 per share.
After September 30, 2006, the stock may be converted into Common Stock at 90% of the daily average closing price of the Common Stock for the prior five trading days. The effects of the Series C Cumulative Convertible Preferred Stock are
included in the dilutive earnings per share if applying the if-converted method is dilutive. As of September 30, 2008, the preferred stock and the stock options were anti-dilutive and thus not included in the EPS calculation.



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

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

This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions Business, Risk Factors and
Managements Discussion and Analysis of Financial Condition and Results of Operations. We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are
based on managements beliefs and on assumptions made by, and information currently available to, management. When used, the words anticipate, believe, expect, intend, may,
might, plan, estimate, project, should, will, result and similar expressions which do not relate solely to historical matters are intended to identify
forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our
control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that, while forward-looking
statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our
forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made,
to anticipate future results or trends.

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



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



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



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



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



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



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



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



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



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



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



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



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

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

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New
risks emerge from time-to-time and it is not possible for management to predict all such matters: nor can we assess the impact of all such matter on our business or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking



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

Overview

We are an externally advised and managed real estate
investment company that owns a diverse portfolio of income producing properties and land held for development. Our portfolio of income-producing properties includes residential apartment communities, office buildings, and other commercial
properties. Our portfolio of land held for development consists of land tracks primarily located in central Texas. In addition, we have land tracks in Louisiana, Arkansas, Florida, and Mississippi. Our investment strategy includes acquiring existing
income-producing properties as well as developing new properties on land already owned or acquired for a specific development project. We acquire land primarily in urban in-fill locations or high-growth suburban markets. We generate revenues from
rents and lease income on apartments and commercial properties. We receive mineral royalties on certain land holdings. In addition, we receive interest income from affiliated receivables and certain mortgages that we have financed or obtained. In
addition, we generate cash flows through the sale of our assets. We are an active buyer and seller of income producing properties and land. During 2008, we acquired over $112.4 million and sold over $169.6 million of land and income-producing
properties.

We expect the impact of the current state of the economy, including rising unemployment, constrained capital and the dramatic deleveraging of
the financial system, to have a significant impact on the fundamentals of our business, including but not limited to: overall market occupancy, leasing rates, leasing renewals, purchases and dispositions of assets. The continuing loss of market
liquidity is affecting all classes of debt securities, and has translated into a decline of funding availability and increased borrowing costs. Historically, we have been well positioned to reduce our exposure to down turns in the economy. Although
historical results cannot be relied upon to project future results, we anticipate the diversity within our asset portfolio, the continued development of our apartment projects, and continued efforts to obtain non-traditional financing will allow us
to proactively manage our assets.

As of September 30, 2008, the Company owned approximately 10,260 units in 51 residential apartment communities and
29 commercial properties of approximately 5.1 million rentable square feet. In addition, we own over 7,425 acres of land held for development and nine projects under construction.

We finance our acquisitions primarily through proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial
banks and institutional lenders. We financed our development projects principally with short-term, variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed
and occupancy has been stabilized. The Company will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in certain of its wholly owned properties. When the
Company sells assets, it may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. The Company generates operating revenues primarily by leasing apartment units to residents;
leasing office, retail and industrial space to commercial tenants; and renting hotel rooms to guests.

Critical Accounting Policies

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

Real Estate

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



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

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

Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific
characteristics of each tenants lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating
carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar
leases, we consider leasing commissions, legal and other related expenses.

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

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

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

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



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Impairment

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

Investments in Unconsolidated Real Estate Ventures

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

Recognition of Rental Income

Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. In accordance with SFAS No. 141, we recognize rental revenue of acquired in-place above-market and
below-market leases at their fair values over the terms of the respective leases. On our Consolidated Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments actually received pursuant to
the terms of the individual commercial lease agreements.

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

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

Revenues for hotel properties for room sales and guest services are
recognized as rooms are occupied and services are rendered.

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

Revenue Recognition on the Sale of Real Estate

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



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Non-performing Notes Receivable

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

Interest Recognition on Notes Receivable

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

Related Party Transactions

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

Allowance for Estimated Losses

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

Fair Value of Financial Instruments

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

Liquidity and Capital Resources

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



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



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



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



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



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



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

Our principal liquidity needs over the next twelve months include:



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



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



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



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



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

It is important to realize that the current status of the banking industry has had a significant effect on our industry. The banks willingness or lack of willingness to
originate loans affects both our ability to both buy and sell property, and refinance existing debt. We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans.



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

Cash flow summary

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

Cash and cash equivalents were $3.1 million and $7.2 million as of September 30, 2008 and 2007, respectively. Cash
provided by operating activities was $29.6 million, cash used in investing activities was $(46.9) million, and cash provided by financing activities was $9.2 million as of September 30, 2008. As compared to the same period ended September 2007
cash from operating activities increased $36.5 million, cash used in investing activities decreased $157.3 million, and cash used in financing activities decreased $204.4 as discussed below.

Cash provided by operating activities increased $36.5 million from the prior period. Our primary source of cash from operating activities is from rental and lease income
on properties. Our primary use of cash for operations is from daily operating costs, general and administrative, interest expense, and land holding costs. The increase in cash from the prior period is attributable to cash receipts from our
affiliated receivables.

Cash used in investing activities has decreased by $157.3 million as compared to the prior period. The decrease is due to several
factors. One of the main factors is our cash from property sales. Our sale of properties has increased as compared to the prior period. We have sold 17 apartment complexes, three commercial buildings and four hotels within the nine months ending
September 30, 2008. Although these sales have exceeded sales in prior periods, we do not foresee continued significant sales in the fourth quarter. Another major factor is that we have purchased fewer income producing properties. The cash from
the initial sales of income producing properties allowed us to continue to acquire land and income producing properties. However, due to the current state of the banking industry, we have been more selective and have purchased fewer income producing
properties in comparison to the prior period. The other major factor is the decrease in construction draws on projects currently under construction. We have fewer apartments under construction. We currently have nine apartment complexes under
construction as compared to 14 apartment complexes in the prior period.

Cash provided by financing has decreased by $204.4 million as compared to the
prior period. The majority of cash comes from two sources, mortgage loans used to purchase properties and proceeds from the sale of properties. With the current state of the banking industry, we have found it difficult to acquire loans to purchase
new assets, and refinance existing properties. We have used proceeds from our existing sales to finance new acquisitions. Although the sale of properties exceeded our purchase of properties, the cash used to pay off the debt on the property sold has
offset our continued debt obligations as compared to the prior period.

Commitments and Contingencies

TCI has contractual obligations and commitments primarily concerning payment of mortgages.

Results of Operations

The following discussion is based on our Consolidated Statements of Operations for
the three and nine months ended September 30, 2008 and 2007 as included in Part 1, Item 1 Financial Statements of this report. We had or owned interests in a total property portfolio of 80 and 93 properties as of
September 30, 2008 and 2007, respectively.

The discussion of our results of operations is based on managements review of operations, which is
based on our segments. Our segments consist of apartments, commercial buildings, hotels, land and other. For discussion purposes, we break these segments down into the following sub-categories; same property portfolio, newly acquired properties, and
developed properties. The same property portfolio consists of properties that were held by us for the entire period for both years being compared. The newly acquired property portfolio consists of properties that we acquired but have not held for
the entire period for both periods being compared. Developed properties are properties that are in the process of construction. As we complete each phase of the project, we lease up that phase and include those operations in our income. Once a
developed property becomes leased up and is held the entire period for both periods under comparison it is reclassified to the same property portfolio. Income producing properties that we have sold get reclassified to discontinuing operations.



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Results of operations for the three months ended September 30, 2008 as compared to the same period ended 2007

For the three months ended September 30, 2008, TCI reported a net loss applicable to common shares of $(6.9) million or $(0.85) per diluted
earnings per share, as compared to a net loss applicable to common shares of $(4.7) million or $(0.58) per diluted earnings per share.

Revenues

Rental and other property revenues increased by $5.8 million due to increased revenues from within the apartment and commercial property portfolios. The
apartment portfolio accounted for $3.8 million of the increase. We had $2.2 million in revenues from properties acquired in 2008 that we did not own in 2007. In addition, we had an increase of $1.6 million from our properties in the lease up phase.
We continue to lease apartments as we complete each phase of development. Within our commercial portfolio, we had $1.7 million in revenues from properties acquired in 2008 that we did not own in 2007. The remaining $0.3 million increase is due to
various increases within the apartment, commercial and land portfolios.

Expenses

Property operating expense increased by $4.2 million due to increased expenses within the apartment property portfolio. Our overall operating expenses within the same apartment portfolio increase by $1.5 million.
Apartments that we owned in 2008 but not in 2007 accounted for $1.4 million and newly develop properties in the lease up phase accounted for $1.3 million of additional expenses.

Other Income Expense

Mortgage and loan interest expense decreased by $0.9 million. This is due to a decrease in our
commercial portfolio of $0.4 million, a decrease in our land portfolio of $1.1 million, and $0.8 million decrease in corporate interest expense. This was offset by a $1.4 million increase in interest expense within our apartment portfolio. This
increase is mainly due to apartments being reclassified into this portfolio. Once a phase of development is completed, interest which was previously capitalized as a cost of construction is now expensed. We had nine apartments in 2008 that had no
interest expensed in 2007 due to the interest being capitalized while the asset was being constructed.

Other income increased by $2.2 million. The
majority of the increase is due to receiving the dividend distribution from our Korean investment, which was not applicable in the prior period.

The
impairment charges in prior year were due to the write down of a vacant commercial property and an under-performing apartment complex, both located in Memphis, Tennessee.

Gain on land sales has decreased by $5.1 million. In the third quarter of 2008, we sold 7.4 acres of land as compared to 22.0 acres of land in the previous period ended 2007.

Equity income (loss) in investee represents our portion of the losses associated with investments in which we use the equity method of accounting.

Income from discontinued operations relates to 32 income producing properties consisting of 23 apartments, five commercial properties, and four hotels. During the third
quarter ended September 30, 2008, we sold one commercial building.



|                                                                          |  |                                         |        |   |      |   |        |  
|------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                          |  | For the Three Months EndedSeptember 30, |       
|                                                                          |  | 2008                                    |        |   | 2007 |  
|Revenue                                                                   |  |                                         |        |   |      |   |        |  
|Rental                                                                    |  | $                                       | 1,401  |   |      | $ | 9,640  |  
|Property operations                                                       |  |                                         | (247   | ) |      |   | 6,176  |  
|                                                                          |  |                                         |        |   |      |   |        |  
|                                                                          |  |                                         | 1,648  |   |      |   | 3,464  |  
|                                                                          |  |                                        
|Expenses                                                                  |  |                                         |        |   |      |   |        |  
|Interest                                                                  |  |                                         | (106   | ) |      |   | (2,798 | )
|General and administrative                                                |  |                                         | (17    | ) |      |   | (45    | )
|Depreciation                                                              |  |                                         | (22    | ) |      |   | (771   | )
|                                                                          |  |                                         |        |   |      |   |        |  
|                                                                          |  |                                         | (145   | ) |      |   | (3,614 | )
|                                                                          |  |                                         |        |   |      |   |        |  
|Net loss from discontinued operations before gains on sale of real estate |  |                                         | 1,503  |   |      |   | (150   | )
|Gain on sale of discontinued operations                                   |  |                                         | 244    |   |      |   | 8,524  |  
|Equity in investee                                                        |  |                                         | 2,898  |   |      |   |       |  
|Net income fee to affiliate                                               |  |                                         | 517    |   |      |   |       |  
|                                                                          |  |                                         |        |   |      |   |        |  
|Income from discontinued operations                                       |  |                                         | 5,162  |   |      |   | 8,374  |  
|Tax benefit                                                               |  |                                         | (1,807 | ) |      |   | (2,931 | )
|                                                                          |  |                                         |        |   |      |   |        |  
|Income from discontinued operations                                       |  | $                                       | 3,355  |   |      | $ | 5,443  |  
|                                                                          |  |                                         |        |   |      |   |        |  



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##### Table of Contents

Results of operations for the nine months ended September 30, 2008 as compared to the same period ended 2007

For the nine months ended September 30, 2008, TCI reported a net income applicable to common shares of $45.7 million or $5.66 per diluted
earnings per share, as compared to a net loss applicable to common shares of $(24.5) million or $(3.09) per diluted earnings per share.

Revenues

Rent and other property revenues increased by $11.5 million, which consisted of an increase in the apartment portfolio of $9.4 million, an increase in the
commercial portfolio of $0.9 million, an increase in the land and other portfolios of $1.2 million. Within our same apartment portfolio, we saw a slight increase in occupancies, which increased our revenues by $0.7 million. Our acquired apartments,
complexes that we did not own in 2007, accounted for an increase in revenues of $3.7 million. In addition, we had an increase of $5.0 million from our properties in the lease up phase. We continue to lease up apartments as we complete each phase of
development. Within our commercial portfolio, the same property portfolio increased $0.5 million due to increased occupancies. Newly acquired commercial properties increased revenues by $0.7 million. The increases in the commercial portfolio were
offset by a $0.3 million decrease in revenues from our New Orleans property that is still being refurbished from the hurricane damage. Within our land portfolio, revenues have increased mainly due to receiving mineral royalties on the properties in
the current year.

Expenses

Property operating
expenses have increased by $11.6 million consisting of an increase in the apartment portfolio of $9.8 million, increase in the commercial portfolio of $1.3 million, increase in the land portfolio of $0.3 million and an increase in other portfolio of
$0.2 million. Within our apartments, the same apartment portfolio expenses have increased by $3.5 million. This is due to general overall increase in operating costs across the board. Our newly acquired properties increased, properties that we did
not own in 2007, accounted for $3.4 million increase, and our developed properties that are in the lease up phase accounted for the remaining increase within the apartment portfolio. Within our land and other portfolio, the increase was due to an
overall increase in hold costs, including taxes on properties. We continue to see the taxing authorities raise the estimated value of our properties, and the associated taxes.

Depreciation and amortization expense has increased by $1.1 million, consisting of an increase of $1.7 million in our apartment portfolio, which was offset by a decrease in our commercial portfolio of $0.6 million.
Within the apartments portfolio, the same apartment portfolio increased by $0.7 million due to the depreciation of capital additions, while newly acquired properties increased this amount by $0.6 million, and developed properties increased the
expense by $0.4 million. Within the commercial portfolio, the decrease is mainly due to the New Orleans property in which depreciation has stopped while the property is being rebuilt.

Other Income Expense

Other income increased by $2.1 million. The increase is due to receiving the dividend
distribution from our Korean investment, which was not applicable in the prior period.

Provision for allowance on notes receivables and impairment
increased by $4.3 million for the nine months ended September 30, 2008 as compared to the same period ended 2007. The increase is due to posting an allowance against various investments within our portfolio. Prior year impairment was due to the
write down of a vacant commercial property and an under-performing apartment complex, both located in Memphis, Tennessee.

Mortgage and loan interest
expense increased by $3.0 million consisting of an increase in the apartment portfolio of $4.3 million, and the commercial portfolio of $0.2 million, which was offset by a decrease in our land portfolio of $1.2 million and a decrease in other of
$0.3 million. Within the apartment portfolio, the increase is primarily due to the interest expense from new acquisitions of $2.0 million and the developed properties of $2.0 million, and the same property portfolio increased the expense by another
$0.8 million. Within the commercial portfolio, the same property portfolio increased by $0.4 million and new acquisitions increased by $0.3 million. This was offset by a $0.5 million decrease from our commercial building in New Orleans that we are
still refurbishing due to the hurricane damage. While this project is being refurbished, the interest is being capitalized. The decrease in interest expense of $2.0 million on our land is due to selling the land. When we sell a portion of the land
tract, we also retire the debt associated with the acreage sold, thus reducing our interest expense.

Gain on land sales has decreased by $2.3 million. In
the current year, we sold 87.5 acres of land for an average gain on sale of $52,000 per acre, as compared to 119 acres sold during the same period ended 2007 for an average gain on sale of $58,000 per acre.

Equity income (loss) in investee represents our portion of the income associated with investments in which we use the equity method of accounting.



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Income from discontinued operations relates to 32 income producing properties consisting of 23 apartments, five
commercial properties, and four hotels. During 2008, we sold 18 apartments, three commercial buildings, and four hotels. The income from discontinued operations for the nine months ended September 30, 2008 is shown below net of minority
interest expense.



|                                                                          |  |                                        |         |   |      |   |         |  
|------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                          |  | For the Nine Months EndedSeptember 30, |        
|                                                                          |  | 2008                                   |         |   | 2007 |  
|Revenue                                                                   |  |                                        |         |   |      |   |         |  
|Rental                                                                    |  | $                                      | 5,514   |   |      | $ | 27,490  |  
|Property operations                                                       |  |                                        | 2,372   |   |      |   | 18,304  |  
|                                                                          |  |                                        |         |   |      |   |         |  
|                                                                          |  |                                        | 3,142   |   |      |   | 9,186   |  
|                                                                          |  |                                       
|Expenses                                                                  |  |                                        |         |   |      |   |         |  
|Interest                                                                  |  |                                        | (5,568  | ) |      |   | (9,277  | )
|General and administrative                                                |  |                                        | (616    | ) |      |   | (50     | )
|Depreciation                                                              |  |                                        | (290    | ) |      |   | (3,076  | )
|                                                                          |  |                                        |         |   |      |   |         |  
|                                                                          |  |                                        | (6,474  | ) |      |   | (12,403 | )
|                                                                          |  |                                        |         |   |      |   |         |  
|Net loss from discontinued operations before gains on sale of real estate |  |                                        | (3,332  | ) |      |   | (3,217  | )
|Gain on sale of discontinued operations                                   |  |                                        | 100,218 |   |      |   | 12,175  |  
|Equity in investee                                                        |  |                                        | 2,898   |   |      |   |        |  
|Net income fee to affiliate                                               |  |                                        | (4,069  | ) |      |   |        |  
|Net sales fee to affiliate                                                |  |                                        | (9,337  | ) |      |   |        |  
|                                                                          |  |                                        |         |   |      |   |         |  
|Income from discontinued operations                                       |  |                                        | 86,378  |   |      |   | 8,958   |  
|Tax benefit                                                               |  |                                        | (30,232 | ) |      |   | (3,135  | )
|                                                                          |  |                                        |         |   |      |   |         |  
|Income from discontinued operations                                       |  | $                                      | 56,146  |   |      | $ | 5,823   |  
|                                                                          |  |                                        |         |   |      |   |         |  

Tax Matter

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 nine months of 2008 and a loss, after the use of net operating loss carryforwards, in the first nine months of 2007;
therefore, it recorded no provision for income taxes.

At September 30, 2008, TCI had a net deferred tax asset of $38 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 assets, a 100% valuation allowance has been established.

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, earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected.

Environmental Matters

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

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.



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##### Table of Contents

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

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



|                                          |  |         |         |                              |      |   |                                   |   |      
|----------------------------------------- |  | ------- | ------- | ---------------------------- | ---- | - | --------------------------------- | - | -----
|                                          |  | Balance |         | WeightedAverageInterest Rate |      |   | Effect of 1%Increase inBase Rates
|Notes payable:                            |  |         |         |                              |      |   |                                   |   |      
|Variable rate                             |  | $       | 304,131 |                              | 6.73 | % |                                   |   |      
|                                          |  |         |         |                              |      |   |                                   |   |      
|Total decrease in TCIs annual net income |  |         |         |                              |      |   |                                   | $ | 3,041
|                                          |  |         |         |                              |      |   |                                   |   |      
|Per share                                 |  |         |         |                              |      |   |                                   | $ | 0.38 
|                                          |  |         |         |                              |      |   |                                   |   |      



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



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



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

PART II. OTHER INFORMATION



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

During
the period of time covered by this report, no equity securities of Transcontinental Realty Investors, Incs stock were repurchased. The following table sets forth a summary by month for the quarter of repurchases made and the specified numbers
of shares that may be repurchased under the stock repurchase program as specified below:



|                            |  |                                 |  |                             |   |                                                                     |           |                                                                      |        
|--------------------------- |  | ------------------------------- |  | --------------------------- | - | ------------------------------------------------------------------- | --------- | -------------------------------------------------------------------- | -------
|                            |  | Total Number ofShares Purchased |  | Average PricePaid per Share |   | Total Number ofShares Purchasedas Part of PubliclyAnnounced Program |           | Maximum Number ofShares that MayYet be PurchasedUnder the Program(a)
|Period                      |  |                                 |  |                             |   |                                                                     |           |                                                                      |        
|Balance as of June 30, 2008 |  |                                 |  |                             |   |                                                                     | 1,284,512 |                                                                      | 122,788
|July 31, 2008               |  |                                |  | $                           |  |                                                                     | 1,284,512 |                                                                      | 122,788
|August 31, 2008             |  |                                |  | $                           |  |                                                                     | 1,284,512 |                                                                      | 122,788
|September 30, 2008          |  |                                |  | $                           |  |                                                                     | 1,284,512 |                                                                      | 122,788
|                            |  |                                 |  |                             |   |                                                                     |           |                                                                      |        
|Total                       |  |                                |  |                             |   |                                                                     |           |                                                                      |        
|                            |  |                                 |  |                             |   |                                                                     |           |                                                                      |        



|(a) | On June 23, 2000, the TCI Board of Directors approved a share repurchase program for up to 1,409,000 shares of our common stock. This repurchase program has no termination
date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On September 5, 2008, we sold 40,902 shares of our treasury stock to Syntek Acquisition Corporation, an affiliated entity for
$673,000. The proceeds were used to pay down the affiliated receivables.



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

The following exhibits are filed with this report or
incorporated by reference as indicated;



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                        
|3.0           |  | Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 1991).                                                                                                                                                                                                          
|              | 
|3.1           |  | Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrants Current Report on Form 8-K, dated
June 3, 1996).                                                                                                                                                                                                              
|              | 
|3.2           |  | Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                                                   
|              | 
|3.3           |  | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).                         
|              | 
|3.4           |  | Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B
Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).                                    
|              | 
|3.5           |  | Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C
Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).                                     
|              | 
|3.6           |  | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated
December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001).                                                                   
|              | 
|3.7           |  | By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrants Annual Report on Form 10-K for the year ended December 31, 1991).                                                                                                                                                                                                                             
|              | 
|3.8           |  | Certificate of Designation of Transcontinental Realty Investors, Inc. setting forth the Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series D
Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrants Current Report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof).
|              | 
|10.0          |  | Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management, LLC (incorporated by reference to Exhibit 10.0 to the
registrants current report on Form 8-K for event occurring October 1, 2003).                                                                                                                                             
|              | 
|31.1*         |  | Certification of President and Chief Operating Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                   
|              | 
|31.2*         |  | Certification by the Chief Accounting Officer and Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                            
|              | 
|32.1*         |  | Certification pursuant to 18 U.S.C. 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     



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



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SIGNATURE PAGE

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



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



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TRANSCONTINENTAL REALTY INVESTORS, INC.

EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q

For the Period Ended
September 30, 2008



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



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



34