<PAGE>

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


                                   FORM 10-Q/A
                                 AMENDMENT NO. 1


              [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2002


                          Commission File Number 1-9240


                     TRANSCONTINENTAL REALTY INVESTORS, INC.
         --------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


             Nevada                                          94-6565852
---------------------------------                      ---------------------
(State or Other Jurisdiction of                          (I.R.S. Employer
 Incorporation or Organization)                         Identification No.)


1800 Valley View Lane, Suite 300, Dallas, Texas                     75234
--------------------------------------------------------------------------------
   (Address of Principal Executive Office)                       (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 ___.
    ---


                      APPLICABLE ONLY TO CORPORATE ISSUERS:


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                                8,072,594
----------------------------                    --------------------------------
          (Class)                                (Outstanding at July 31, 2002)

                                        1

<PAGE>

This Form 10-Q/A Amendment No. 1 amends the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 as follows:



ITEM 1. FINANCIAL STATEMENTS

        Consolidated Statements of Operations - pages 4, 5

        NOTE 1. "BASIS OF PRESENTATION" - pages 9, 10
        NOTE 7. "OPERATING SEGMENTS" - page 17 - 19
        NOTE 8. "DISCONTINUED OPERATIONS" - page 19 - 20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

        "Results of Operations" - pages 24 - 28


This amendment is made pursuant to the SEC Staff comment letter dated January 7,
2003, to revise the presentation of discontinued operations, pursuant to
Statement of Financial Accounting Standards No. 144. See NOTE 1. "BASIS OF
PRESENTATION."

<PAGE>

                          PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements as of and for the three and
six month periods ended June 30, 2002, have not been audited by independent
certified public accountants, but in the opinion of the management of
Transcontinental Realty Investors, Inc. ("TCI"), all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of TCI's
consolidated financial position, consolidated results of operations and
consolidated cash flows at the dates and for the periods indicated, have been
included.

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               June 30,   December 31,
                                                                 2002         2001
                                                             ------------ ------------
                                                               (dollars in thousands,
                                                                  except per share)
<S>                                                          <C>          <C>
                             Assets

Real estate held for investment ..........................    $  769,673   $  712,832
Less - accumulated depreciation ..........................       (94,114)     (90,661)
                                                             ------------ ------------
                                                                 675,559      622,171

Real estate held for sale ................................        29,143          516

Notes and interest receivable
  Performing (including $15,085 in 2002 and $1,970 in 2001
    from related parties) ................................        33,786       17,620
  Nonperforming, nonaccruing .............................         1,772        5,247
                                                             ------------ ------------
                                                                  35,558       22,867

Less--allowance for estimated losses .....................        (1,012)        (818)
                                                             ------------ ------------
                                                                  34,546       22,049

Investment in real estate entities .......................        14,512       14,230

Cash and cash equivalents ................................         1,394       10,346
Other assets (including $3,694 in 2002 and
  $14,170 in 2001 from affiliates and related
  parties) ...............................................        29,939       39,840
                                                             ------------ ------------
                                                              $  785,093   $  709,152
                                                             ============ ============
</TABLE>

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

                                        2

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                     CONSOLIDATED BALANCE SHEETS - Continued

<TABLE>
<CAPTION>
                                                                                  June 30,     December 31,
                                                                                    2002           2001
                                                                                ------------   ------------
                                                                                   (dollars in thousands,
                                                                                      except per share)
<S>                                                                             <C>            <C>
               Liabilities and Stockholders' Equity

Liabilities
Notes and interest payable ...................................................   $  524,272     $  461,037
Liabilities related to assets held for sale ..................................       16,734             --
Other liabilities (including $4,309 in 2002 and $1,068 in
  2001 to affiliates and related parties) ....................................       26,040         25,966
                                                                                ------------   ------------
                                                                                    567,046        487,003

Commitments and contingencies

Minority interest ............................................................        5,609          5,381

Stockholders' equity
Preferred Stock
  Series A; $.01 par value; authorized, 6,000
    shares; issued and outstanding 5,829
    shares (liquidation preference $583) .....................................           --             --
  Series C; $.01 par value; authorized, issued
    and outstanding 30,000 shares (liquidation
    preference $3,000) .......................................................           --             --
Common Stock, $.01 par value; authorized, 10,000,000
  shares; issued and outstanding 8,042,594 shares in 2002
  and 2001 ...................................................................           80             80
Paid-in capital ..............................................................      271,761        271,761
Accumulated deficit ..........................................................      (58,352)       (55,073)
Accumulated other comprehensive loss .........................................       (1,051)            --
                                                                                ------------   ------------

                                                                                    212,438        216,768
                                                                                ------------   ------------

                                                                                 $  785,093     $  709,152
                                                                                ============   ============
</TABLE>

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

                                        3

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        For the Three Months    For the Six Months
                                                           Ended June 30,          Ended June 30,
                                                      ----------------------- -----------------------
                                                         2002         2001       2002         2001
                                                      ----------   ---------- ----------   ----------
                                                          (dollars in thousands, except per share)
<S>                                                   <C>          <C>        <C>          <C>
Property revenue
  Rents (including $34 in 2002 and 2001
     from related parties) .........................   $  29,960    $  33,533  $  58,476    $  67,939

Property expense
  Property operations (including $1,947
     in 2002 and $1,391 in 2001 to
     affiliates and related parties) ...............      18,916       18,401     36,276       38,254
                                                      ----------   ---------- ----------   ----------
Operating income ...................................      11,044       15,132     22,200       29,685

Other income
  Interest and other ...............................         984          670      2,051        1,308
  Equity in (loss) of equity investees .............        (291)         624     (1,567)         524
  Gain on sale of real estate ......................          --       20,623         --       25,833
                                                      ----------   ---------- ----------   ----------
                                                             693       21,917        484       27,665

Other expense
  Interest .........................................       9,631       10,254     17,989       21,257
  Depreciation .....................................       4,889        4,513      9,779        9,454
  Provision for asset impairment ...................       1,879           --      1,879           --
  Advisory fee to affiliates .......................       1,279        1,439      2,694        2,941
  Net income fee to affiliate ......................          --        1,103         --        1,129
  Incentive fee paid to affiliate ..................          --        1,577         --        1,577
  General and administrative (including
     $1,854 in 2002 and $1,603 in 2001 to
     affiliates and related parties) ...............       2,212        3,678      4,414        5,924

  Provision for loss ...............................         349           --        349           --
  Minority interest ................................         (26)          24        (84)          43
                                                      ----------   ---------- ----------   ----------
                                                          20,213       22,588     37,020       42,325

Net income (loss) from continuing operations .......      (8,476)      14,461    (14,336)      15,025

Discontinued operations:
  Loss from operations .............................        (645)        (130)    (1,550)        (378)
  Gain on sale of operations .......................       7,085           --      9,593           --
  Equity in investees gain on sale of
     real estate ...................................         183           --      3,104           --
                                                      ----------   ---------- ----------   ----------
                                                           6,623         (130)    11,147         (378)

Net income (loss) ..................................      (1,853)      14,331     (3,189)      14,647
Preferred dividend requirement .....................         (45)          (8)       (90)         (15)
                                                      ----------   ---------- ----------   ----------
Net income (loss) applicable to Common
  shares ...........................................   $  (1,898)   $  14,323  $  (3,279)   $  14,632
                                                      ==========   ========== ==========   ==========
</TABLE>

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

                                        4

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        For the Three Months      For the Six Months
                                                           Ended June 30,            Ended June 30,
                                                      -----------------------   -----------------------
                                                         2002         2001         2002         2001
                                                      ----------   ----------   ----------   ----------
                                                           (dollars in thousands, except per share)
<S>                                                   <C>          <C>          <C>          <C>
Basic earnings per share
   Net income (loss) from continued
      operations ..................................   $    (1.05)  $     1.67   $    (1.78)  $     1.73

   Discontinued operations ........................          .82         (.02)        1.39         (.04)
                                                      ----------   ----------   ----------   ----------

Net income (loss) applicable to Common
   shares .........................................   $     (.24)  $     1.65   $     (.41)  $     1.69
                                                      ==========   ==========   ==========   ==========

Diluted earnings per share
   Net income (loss) from continued
      operations ..................................   $    (1.05)  $     1.65   $    (1.78)  $     1.72

   Discontinued operations ........................          .80         (.01)        1.34         (.04)
                                                      ----------   ----------   ----------   ----------

Net income (loss) applicable to Common
   shares .........................................   $     (.24)  $     1.64   $     (.41)  $     1.68
                                                      ==========   ==========   ==========   ==========



Weighted average Common shares used in
   computing earnings per share
   Basic ..........................................    8,042,594    8,661,091    8,042,594    8,661,217
   Diluted ........................................    8,291,884    8,734,388    8,296,082    8,734,514
</TABLE>

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

                                        5

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                  Accumulated
                                              Common Stock                       Distributions     Accumulated
                                              ------------
                                                                                  in Excess of        Other
                                                                      Paid-in     Accumulated     Comprehensive   Stockholders'
                                          Shares         Amount       Capital       Earnings          Income         Equity
                                        -----------   -----------   -----------  -------------    -------------   -------------
                                                                 (dollars in thousands, except per share)
<S>                                     <C>           <C>           <C>          <C>              <C>             <C>
Balance, January 1, 2002 ............    8,042,594     $      80     $ 271,761     $ (55,073)        $      --      $ 216,768


Unrealized loss on foreign
  currency translation ..............           --            --            --            --            (1,051)        (1,051)


  Net income ........................           --            --            --        (3,189)               --         (3,189)




Series A Preferred Stock cash
  dividend ($2.50 per share) ........           --            --            --           (15)               --            (15)
Series C Preferred Stock cash
  dividend ($2.50 per share) ........           --            --            --           (75)               --            (75)
                                         ---------     ---------     ---------     ---------         ---------      ---------

Balance, June 30, 2002 ..............    8,042,594     $      80     $ 271,761     $ (58,352)        $  (1,051)     $ 212,438
                                         =========     =========     =========     =========         =========      =========
</TABLE>

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

                                        6

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 For the Six Months
                                                                                    Ended June 30,
                                                                            ------------------------------
                                                                                2002              2001
                                                                            ------------      ------------
                                                                                (dollars in thousands)
<S>                                                                         <C>               <C>
Cash Flows from Operating Activities
   Rents collected (including $133 in 2002 and $70 in
      2001 from related parties) ........................................    $   64,360        $   69,805
   Interest collected ...................................................         1,577               700
   Interest paid ........................................................       (19,633)          (20,643)
   Payments for property operations (including $1,947 in
      2002 and $1,391 in 2001 to affiliates and related
      parties) ..........................................................       (39,184)          (40,775)
   Advisory and net income fee paid to affiliate ........................        (2,733)           (3,480)
   Incentive fee paid to affiliate ......................................            --            (1,577)
   General and administrative expenses paid (including
      $1,217 in 2002 and $1,603 in 2001 to affiliates and
      related parties) ..................................................        (5,557)           (5,917)
   Distributions from operating cash flow of equity
      investees .........................................................            --                50
   Other ................................................................            --               453
                                                                             ----------        ----------
         Net cash used in operating activities ..........................        (1,170)           (1,384)

Cash Flows from Investing Activities
   Collections on notes receivable (including $1,333 in
      2002 from related parties) ........................................         7,340             2,531
   Funding of notes receivable (including $14,480 in 2002
      to related parties) ...............................................       (16,219)           (5,000)
   Acquisition of real estate (including $690 in 2002
      and $130 in 2001 to affiliates and related parties) ...............        (5,317)           (1,815)
   Real estate improvements .............................................        (2,778)           (5,524)
   Real estate construction .............................................       (29,070)               --
   Proceeds from sale of real estate ....................................        35,842            56,530
   Deposits on pending purchases and financings .........................        (1,123)           (3,049)
   Contributions to equity investees ....................................            --            (1,931)
                                                                             ----------        ----------
         Net cash provided by (used in) investing activities ............       (11,325)           41,742

Cash Flows from Financing Activities
   Payments on notes payable ............................................       (45,613)          (34,571)
   Proceeds from notes payable ..........................................        64,642             4,600
   Deferred financing costs (including $54 in 2002 and
      $45 in 2001 to affiliates and related parties) ....................        (1,610)             (524)

   Payments to advisor ..................................................       (18,169)           (2,510)
   Advance from affiliate ...............................................         4,383                56
   Dividends to stockholders ............................................           (90)              (15)
                                                                             ----------        ----------
         Net cash provided by (used in) financing
             activities .................................................         3,543           (32,964)

Net increase (decrease) in cash and cash equivalents ....................        (8,952)            7,394
Cash and cash equivalents, beginning of period ..........................        10,346            22,323
                                                                             ----------        ----------
Cash and cash equivalents, end of period ................................    $    1,394        $   29,717
                                                                             ==========        ==========
</TABLE>

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

                                        7

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

<TABLE>
<CAPTION>

                                                                          For the Six Months
                                                                             Ended June 30,
                                                                       --------------------------
                                                                            2002         2001
                                                                       ------------  ------------
                                                                         (dollars in thousands)
<S>                                                                    <C>           <C>
Reconciliation of net income to net cash used in
   operating activities
Net income .........................................................    $   (3,189)   $   14,647
Adjustments to reconcile net income to net cash
   used in operating activities
   Depreciation and amortization ...................................        10,290        10,049
   Provision for loss ..............................................           349            --
   Gain on sale of real estate .....................................       (12,697)      (28,749)
   Provision for asset impairment ..................................         1,879            --
   Equity in loss of equity investees ..............................         1,567         2,366
   Distributions from operating cash flow of equity
      investees ....................................................            --            50
   Increase in interest receivable .................................          (354)          (55)
   Decrease in other assets ........................................           968         1,376
   Increase (decrease) in interest payable .........................           (58)          221
   Increase (decrease) in other liabilities ........................            75        (1,289)
                                                                       ------------  ------------

      Net cash used in operating activities ........................    $   (1,170)   $   (1,384)
                                                                       ============  ============

Schedule of noncash investing and financing activities

Notes payable assumed on purchase of real estate ...................    $   56,405    $    1,051

Notes payable assumed by buyer on sale of real estate ..............            --       (26,060)

Limited partnership interest received on
   sale of real estate .............................................            --         2,050

Notes receivable provided on sale of real estate ...................         4,000            --

Real estate received on exchange with related party ................         4,145            --

Real estate exchanged with related party ...........................        (4,145)           --

Real estate received from related party as forgiveness
   of debt .........................................................        79,287            --
</TABLE>

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

                                        8

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  BASIS OF PRESENTATION

TCI is a Nevada corporation and successor to a California business trust which
was organized on September 6, 1983. TCI invests in real estate through direct
ownership, leases and partnerships. TCI also invests in mortgage loans on real
estate.

The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 2001 have been reclassified to conform to the 2002
presentation.

Operating results for the six month period ended June 30, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the Consolidated Financial
Statements and notes included in TCI's Annual Report on Form 10-K for the year
ended December 31, 2001 (the "2001 Form 10-K").

On January 1, 2002, TCI adopted Statement 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement superceded
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS No. 121") and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"), for business
segments that are to be disposed. SFAS 144 retains the requirements of SFAS No.
121 relating to the recognition and measurement of an impairment loss and
resolves certain implementation issues resulting from SFAS No. 121. The adoption
of SFAS No. 144 did not have a material impact on the consolidated financial
position or results of operations of TCI.

The financial statements and accompanying footnotes have been amended to revise
the presentation of discontinued operations, pursuant to SFAS No. 144. The
revision had no impact on the net income (loss) for the periods reported.

In April 2002, the FASB issued Statement 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction"
("SFAS No. 145"). Statement 4, "Reporting Gains and Losses from Extinguishment
of Debt" ("SFAS No. 4"), required that gains and losses from the extinguishment
of debt that were included in the determination of net income be aggregated and,
if material, classified as an extraordinary item. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 will require TCI to reclassify prior
period items that do not meet the extraordinary classification. The provisions
of SFAS No. 145 that relate to the rescission of SFAS No.

                                        9

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 1.  BASIS OF PRESENTATION (Continued)

4 become effective in fiscal years beginning after May 15, 2002. The adoption of
SFAS No. 145 is not expected to have a material impact on the consolidated
financial position or results of operations of TCI.

In June 2002, the FASB issued SFAS No. 146, "Accounting for costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force ("EITF") Issue No. 94-3. TCI will adopt
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was recognized at the date of
a company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized.

NOTE 2.  REAL ESTATE

In 2002, TCI purchased the following properties:

<TABLE>
<CAPTION>
                                                       Units/        Purchase   Net Cash      Debt      Interest     Maturity
           Property                Location         Sq.Ft./Acres       Price      Paid      Incurred      Rate         Date
-------------------------  --------------------   ----------------  ----------- --------    --------    --------     --------
<S>                       <C>                     <C>               <C>         <C>         <C>         <C>          <C>
First Quarter
Apartments
Blue Lakes Villas/(1)/    Waxahachie, TX                 186 Units    $   1,012 $   1,048   $    --          --%          --
Echo Valley/(1)/          Dallas, TX                     216 Units          787       788        --          --           --
Spy Glass/(1)/            Mansfield, TX                  256 Units        1,280     1,042       208        7.50        08/43
Rasor/(1)(2)/             Plano, TX                      200 Units        2,319       310        --          --           --

Shopping Center
Oak Tree Village/(2)/     Lubbock, TX                 45,623 Sq.Ft.       1,467       196     1,389/(3)/   8.48        11/07

Land
Lakeshore Villas/(2)/     Humble, TX                   16.89 Acres          947       127        --          --           --

Second Quarter
Apartments
DeSoto Ranch/(1)/         DeSoto, TX                     248 Units        1,364     1,489     2,246        7.18        12/43

Office Building
Centura/(4)/              Farmers Branch, TX         410,901 Sq.Ft.      50,000        --    43,739/(3)/  13.00/(5)/   07/02/(6)/

Land
Hollywood Casino/(4)/     Dallas, TX                   42.64 Acres       16,987        --     6,222/(3)/   9.50        03/03
Marine Creek/(4)/         Ft. Worth, TX                   54 Acres        3,700        --     1,500/(3)/   9.00        01/03
Mason Park/(4)/           Houston, TX                     18 Acres        2,790        --     2,600/(3)/  14.00        04/02/(6)/
Nashville/(4)/            Nashville, TN                16.57 Acres        1,890        --       955/(3)/  15.50        07/03
Palm Desert/(4)/          Palm Desert, CA                 61 Acres        3,920        --        --          --           --
</TABLE>
______________________

(1)  Land purchased for apartment construction.
(2)  Property exchanged with American Realty Investors, Inc. ("ARI"), a related
     party, for the Plaza on Bachman Creek Retail Center.

                                       10

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 2.  REAL ESTATE (Continued)

(3)  Assumed debt.
(4)  Property received from ARI, a related party, for forgiveness of debt.
(5)  Weighted average. The Centura Tower is encumbered by two loans, one for
     $28.7 million at 10.5% and the other for $15.0 million at 17.9%.
(6)  Extension negotiations are currently under way on these loans.

In the first six months of 2001, TCI purchased the following properties:

<TABLE>
<CAPTION>
                                                       Units/        Purchase     Net Cash      Debt       Interest  Maturity
        Property                 Location           Acres/Sq.Ft.       Price        Paid      Incurred       Rate      Date
-------------------------  --------------------   ---------------   -----------   --------    --------     --------  --------
<S>                       <C>                     <C>               <C>           <C>         <C>          <C>       <C>
Apartments
Courtyard                 Midland, TX                   133 Units     $ 1,425      $   345    $  1,051/(1)/    9.25%   04/06
Limestone Ranch           Lewisville, TX               10.5 Acres         505/(2)/      --          --           --      --

Land
Solco-Valley Ranch        Dallas, TX                   6.07 Acres       1,454        1,525          --           --      --
Mira Lago                 Farmers Branch, TX           8.88 Acres         541/(2)/      --          --           --      --
</TABLE>

___________________

(1)  Assumed debt.

(2)  Land was received from a related party in exchange for the Glenwood
     Apartments.

In 2002, TCI sold the following properties:

<TABLE>
<CAPTION>
                                                                        Sales       Net Cash        Debt        Gain/(Loss)
           Property                Location        Units/Sq.Ft.         Price       Received     Discharged       on Sale
-------------------------  --------------------   --------------     ----------    ----------    ----------     -----------
<S>                       <C>                     <C>                <C>           <C>           <C>            <C>
First Quarter
Apartments
Primrose                  Bakersfield, CA               162 Units     $   5,000     $   1,722     $   2,920      $      659

Office Building
Hartford                  Dallas, TX                174,513 Sq.Ft.        4,000           --            --            --   /(1)/

Industrial Warehouse
Central Storage           Dallas, TX                216,035 Sq.Ft.        4,000          2,095         1,063          1,241

Shopping Center
Plaza on Bachman
 Creek/(2)/               Dallas, TX                 80,278 Sq.Ft.        4,707           --            --             --

Second Quarter
Apartments
Southgreen                Bakersfield, CA                80 Units         3,600          1,011         2,381            (72)

Office Building
Jefferson                 Clear Lake, TX             78,159 Sq.Ft.       16,550          5,957         9,679          3,421
Nasa                      Washington, DC             71,877 Sq.Ft.        2,600          2,341          --            1,341
Windsor Plaza             Windcrest, TX              80,522 Sq.Ft.        4,250          3,813          --              895

Third Quarter
Apartments
4242 Cedar Springs        Dallas, TX                     76 Units         2,600            971         1,288          1,252
Camelot                   Largo, FL                     120 Units         5,263          1,616         3,268          1,517
Country Crossing          Tampa, FL                     227 Units         5,800          1,836         3,726          3,142
</TABLE>

                                       11

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 2.  REAL ESTATE (Continued)

_______________________
(1)  Excludes a $920,000 deferred gain from seller financing. See NOTE 3. "NOTES
     AND INTEREST RECEIVABLE."
(2)  Property was exchanged with ARI, a related party, for the Oak Tree Village
     Shopping Center and two parcels of land; the Rasor land parcel and
     Lakeshore Villas land parcel.

In the first six months of 2001, TCI sold the following properties:

<TABLE>
<CAPTION>
                                                 Units/Sq.Ft./       Sales        Net Cash         Debt       Gain/(Loss)
           Property             Location               Acres         Price        Received     Discharged      on Sale
-------------------------  ------------------- ----------------   -----------   ------------- -------------  -------------
<S>                       <C>                  <C>                <C>           <C>           <C>            <C>
Apartments
Bent Tree Gardens         Addison, TX                204 Units       $9,000          $ 2,669     $ 6,065/(3)/   $   601
Fontenelle Hills          Bellevue, NE               338 Units       16,500            3,680      12,454/(3)/     4,565
Forest Ridge              Denton, TX                  56 Units        2,000              682       1,151          1,014
Glenwood                  Addison, TX                168 Units        3,659/(2)/         --        2,537/(3)/       --
Heritage                  Tulsa, OK                  136 Units        2,286              206       1,948          1,575
McCallum Glen             Dallas, TX                 275 Units        8,450            2,633       5,004/(3)/     1,375/(4)/
Park at Colonade          San Antonio, TX            211 Units        5,800              927       4,066          1,052/(1)/

Industrial Warehouse
Zodiac                    Dallas, TX              35,435 Sq.Ft.         762              183         564            167
Technology Trading        Sterling, VA           197,659 Sq.Ft.      10,775            4,120       6,214          4,163

Office Buildings
Daley                     San Diego, CA           64,425 Sq.Ft.       6,211            2,412       3,346            836
Waterstreet               Boulder, CO            106,257 Sq.Ft.      22,250            7,126      12,949          9,154

Land
McKinney 36               McKinney, TX             1.822 Acres          476              476        --              355
Moss Creek                Greensboro, NC            4.79 Acres           15               13        --              (71)
Round Mountain            Austin, TX               110.0 Acres        2,560            2,455        --            1,047
</TABLE>

______________________
(1)  Excludes a $550,000 deferred gain from a limited partnership interest in
     the sold property.

(2)  The Glenwood Apartments were exchanged with ARI, a related party, for two
     parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago.

(3)  Debt assumed by purchaser.

(4)  Excludes a $1.5 million deferred gain from a limited partnership interest
     in the sold property.

At June 30, 2002, TCI had the following apartment properties under construction:

<TABLE>
<CAPTION>
                                                                                       Additional      Construction
                                                                         Amount          Amount            Loan
             Property                 Location         Units/Rooms      Expended        to Expend          Funding
---------------------------- ------------------------ --------------- -------------   --------------  ---------------
<S>                          <C>                      <C>             <C>             <C>             <C>
Blue Lake Villas             Waxahachie, TX                186 Units   $     5,368     $      7,222    $      10,736
DeSoto Ranch                 DeSoto, TX                    248 Units         1,845           16,663           16,273
Echo Valley                  Dallas, TX                    216 Units         1,084           13,135           12,509
Falcon Lakes                 Arlington, TX                 284 Units         1,850           13,895           13,469
River Oaks                   Wiley, TX                     180 Units         2,736            9,255           10,023
Sendero Ridge                San Antonio, TX               384 Units         6,914           21,747           24,420
Spyglass                     Mansfield, TX                 256 Units         2,786           15,217           16,017
Tivoli                       Dallas, TX                    190 Units         7,254            6,180           11,000
Verandas at City View        Fort Worth, TX                314 Units         5,906           17,049           19,393
Waters Edge IV               Gulfport, MS                   80 Units         3,683              400             --
</TABLE>

                                       12

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 2.  REAL ESTATE (Continued)

In the second quarter of 2002, TCI completed the 252 unit Limestone Ranch in
Lewisville, Texas, and the 165 room Hotel Akademia in Wroclaw, Poland.

NOTE 3.  NOTES AND INTEREST RECEIVABLE

In January 2002, TCI purchased 100% of the outstanding common shares of ART Two
Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARI, a related
party, for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory
Center Office Building in Farmers Branch, Texas. ARI has guaranteed that the
asset shall produce at least a 12% annual return of the purchase price for a
period of three years from the purchase date. If the asset fails to produce the
12% annual return, ARI shall pay TCI any shortfall. In addition, if the asset
fails to produce the 12% return for a calendar year and ARI fails to pay the
shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the
purchase price. Because ARI has guaranteed the 12% return and TCI has the option
of requiring ARI to repurchase the entities, management has classified this
related party transaction as a note receivable from ARI. In June 2002, the asset
was refinanced. TCI received $1.3 million of the proceeds as a principal
reduction on its note receivable from ARI.

Also in January 2002, a mortgage loan with a principal balance of $608,000 was
paid off, including accrued but unpaid interest. With the payoff of the note,
TCI recognized a previously deferred gain on the sale of the property of
$608,000.

In August 2001, TCI agreed to fund up to $5.6 million under a revolving line of
credit secured by an office building in Dallas, Texas. In 2002, TCI funded an
additional $1.3 million of the line of credit. At June 30, 2002, TCI had funded
a total of $3.1 million of the note.

In February 2002, TCI sold a $2.0 million senior participation interest in a
loan secured by a second lien on a retail center in Montgomery County, Texas to
Income Opportunity Realty Investors, Inc. ("IORI"), a related party. TCI and
IORI will receive 43% and 57%, respectively, of the remaining principal and
interest payments. Also in February 2002, TCI extended the loan until April
2002, receiving $23,000 as an extension fee. In April 2002, TCI extended the
loan until July 2002, receiving $6,500 as an extension fee. In July 2002, the
loan was extended until September 2002 and TCI received $6,500 as an extension
fee.

Also in February 2002, TCI funded an additional $231,000 to Sendera Ranch, under
a loan secured by 1,714.16 acres of unimproved land in Tarrant County, Texas. In
March 2002, TCI received a $2.4 million payment from Sendera Ranch. TCI received
$1.8 million as a principal paydown, $277,000 as accrued interest, and $323,000
as a partnership distribution.

                                       13

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 3.  NOTES AND INTEREST RECEIVABLE (Continued)

In March 2002, TCI sold the 174,513 sq.ft. Hartford Office Building in Dallas,
Texas, for $4.0 million and provided the $4.0 million purchase price as seller
financing and an additional $1.4 million line of credit for leasehold
improvements in the form of a mortgage note. The note bears interest at a
variable interest rate, currently 6.0% per annum, requires monthly interest only
payments of $14,667 and matures in March 2007.

In April 2002, TCI purchased 100% of the following entities: ART One Hickory
Corporation ("One Hickory"), Garden Confederate Point, LP ("Confederate Point"),
Garden Foxwood, LP ("Foxwood"), and Garden Woodsong, LP ("Woodsong"), all
wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One
Hickory owns the 120,615 sq. ft. One Hickory Center Office Building in Farmers
Branch, Texas. Confederate Point owns the 206 unit Confederate Apartments in
Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis,
Tennessee. Woodsong owned the 190 unit Woodsong Apartments in Smyrna, Georgia.
ARI has guaranteed that these assets shall produce at least a 12% return
annually of the purchase price for a period of three years from the purchase
date. If the assets fail to produce the 12% return, ARI shall pay TCI any
shortfall. In addition, if the assets fail to produce the 12% return for a
calendar year and ARI fails to pay the shortfall, TCI may require ARI to
repurchase the entities for the purchase price. Because ARI has guaranteed the
12% return and TCI has the option of requiring ARI to repurchase the entities,
management has classified this related party transaction as a note receivable
from ARI.

In July 2002, the Woodsong Apartments were sold. TCI received $2.6 million from
the proceeds as payment of principal and accrued but unpaid interest on the note
receivable.

In May 2002, a mortgage loan with a principal balance of $1.5 million was paid
off, including accrued but unpaid interest. TCI agreed to a 5% discount on the
note and recognized a loss of $75,000 from the note. TCI also recognized a
previously deferred gain of $1.5 million on the sale of the property.

In July 2002, a mortgage loan with a principal balance of $2.2 million was paid
off, including accrued but unpaid interest.

NOTE 4.  INVESTMENT IN REAL ESTATE ENTITIES

Prior to the first quarter of 2002, TCI accounted for its investments
in Tri-City, Nakash and Jor-Trans on the equity method. TCI is a 63.7% limited
partner and IORI is a 36.3% general partner in Tri-City, and TCI is a 60%
general partner and IORI is a 40% limited partner in Nakash. TCI owns a
non-controlling 55% limited and general partnership interest in Jor-Trans. TCI
and IORI have the same Board of Directors and the same executive officers.
Consequently, because TCI has significant influence and a greater than 50%
ownership over the operations of Tri-

                                       14

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 4.  INVESTMENT IN REAL ESTATE ENTITIES (Continued)

City, Nakash and Jor-Trans, the operations of the partnership have been
consolidated. In the first quarter of 2002, TCI began accounting for its
investment in Tri-City, Nakash and Jor-Trans using a consolidated basis. The
effect of these consolidations increased TCI's assets, liabilities, and minority
interest by $5.4 million, $3.9 million and $1.5 million, respectively.

Real estate entities. TCI's investment in real estate entities at June 30, 2002,
included equity securities of two publicly traded real estate entities, IORI and
ARI, related parties, and interests in real estate joint venture partnerships.
Basic Capital Management, Inc. ("BCM"), TCI's advisor, also serves as advisor to
IORI and ARI.

TCI accounts for its investment in IORI and ARI and the joint venture
partnerships using the equity method.

TCI's investment in real estate entities, accounted for using the equity method,
at June 30, 2002, was as follows:

<TABLE>
<CAPTION>
                     Percentage       Carrying        Equivalent
                      of TCI's        Value of         Investee         Market Value
                    Ownership at    Investment at    Book Value at    of Investment at
     Investee      June 30, 2002    June 30, 2002    June 30, 2002     June 30, 2002
----------------- ---------------  ---------------  ---------------  ------------------
<S>               <C>              <C>              <C>              <C>
IORI ..........        24.0%          $    4,475       $    9,469         $    6,206
ARI ...........         6.5%               9,526            4,949              8,344
                                      ----------       ----------         ----------
                                          14,001       $   14,418         $   14,550
                                                       ==========         ==========

Other .........                              511
                                      ----------
                                      $   14,512
                                      ==========
</TABLE>

Management continues to believe that the market value of each of IORI and ARI
undervalues their assets and, therefore, TCI may continue to increase its
ownership in these entities.

Set forth below is summarized results of operations of equity investees for the
first six months of 2002 and 2001.

<TABLE>
<CAPTION>
                                                                     2002        2001
                                                                  ----------  ----------
      <S>                                                         <C>         <C>
      Revenues ................................................   $   85,675  $   90,650
      Equity in income of partnerships ........................         (923)      5,708
      Property operating expenses .............................      (71,363)    (74,585)
      Depreciation ............................................       (8,551)     (9,437)
      Interest expense ........................................      (38,569)    (40,282)
                                                                  ----------  ----------
      Loss before gains on sale of real estate ................      (33,731)    (27,946)

      Gain on sale of real estate .............................       28,374      46,291
                                                                  ----------  ----------
      Net income (loss) .......................................   $   (5,357) $   18,345
                                                                  ==========  ==========
</TABLE>

                                       15

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 4.  INVESTMENT IN REAL ESTATE ENTITIES (Continued)

TCI's share of equity investees' loss before gains on the sale of real estate
was $291,000 and $1.6 million for the three and six months ended June 30, 2002,
and its share of equity investees' gains on sale of real estate was $183,000 and
$3.1 million for the three and six months ended June 30, 2002.

NOTE 5.  OTHER ASSETS

Related Party. From time-to-time, TCI and its affiliates and related parties
have made advances to each other, which generally have not had specific
repayment terms and have been reflected in TCI's financial statements as other
assets. At June 30, 2002, TCI had receivables of $1.6 million, $1.8 million and
$146,000 from BCM, GS Realty Services, Inc. and ARI, respectively, and payables
of $3.9 million and $389,000 to IORI and GS Realty Services, Inc., respectively.

NOTE 6.  NOTES AND INTEREST PAYABLE

In 2002, TCI refinanced the following properties:

<TABLE>
<CAPTION>
                                                                                               Net Cash
                                                                   Debt           Debt         Received/    Interest     Maturity
        Property               Location        Sq.Ft./Units      Incurred      Discharged       (Paid)        Rate         Date
--------------------------  ----------------   -------------     --------      ----------      ---------    --------     --------
<S>                         <C>                <C>               <C>           <C>             <C>          <C>          <C>
First Quarter
Industrial Warehouse
Addison Hanger/(1)/         Addison, TX        23,650 Sq.Ft.     $ 2,687        $   1,580        $  942       6.75%/(2)/    02/07

Second Quarter
Apartments
Paramount Terrace           Amarillo, TX          181 Units        2,700            2,797          (214)      6.63 /(2)/    07/04
Verandas at City View       Ft. Worth, TX         314 Units        2,779 /(3)/      2,197        (2,224)      7.00          03/44
</TABLE>

___________

(1)  The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger
     II in Addison, Texas.
(2)  Variable interest rate.
(3)  The Verandas at City View Apartments are under construction. The $2.8
     million debt incurred was to fund construction to date. The total
     construction funding for the project is $19.4 million.

In April 2002, TCI sold 12 residential properties to partnerships controlled by
Metra Capital, LLC ("Metra"). These properties include: the 75 unit Apple Lane
Apartments in Lawrence, Kansas; the 195 unit Arbor Point Apartments in Odessa,
Texas; the 264 unit Fairway View Estates Apartments in El Paso, Texas; the 152
unit Fairways Apartments in Longview, Texas; the 166 unit Fountain Lake
Apartments in Texas City, Texas; the 172 unit Fountains of Waterford Apartments
in Midland, Texas; the 122 unit Harper's Ferry Apartments in Lafayette,
Louisiana; the 108 unit Oak Park IV Apartments in Clute, Texas; the 131 unit
Quail Oaks Apartments in Balch Springs, Texas; the 300 unit Sunchase Apartments
in Odessa, Texas; the 180 unit Timbers Apartments in Tyler, Texas; and the

                                       16

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 6.  NOTES AND INTEREST PAYABLE (Continued)

112 unit Willow Creek Apartments in El Paso, Texas. Innovo Group, Inc.
("Innovo") is a limited partner in the partnerships that purchased the
properties. Joseph Mizrachi, a director of ARI, a related party, controls
approximately 11.67% of the outstanding common stock of Innovo. Management has
determined to account for this sale as a refinancing transaction, in accordance
with SFAS No. 66, "Accounting for Sales of Real Estate." TCI will continue to
report the assets and the new debt incurred by the Metra partnerships on the TCI
financial statements. The sales price for the properties totaled $37.6 million.
TCI received net cash of $10.5 million after paying off the existing debt of
$18.0 million and various closing costs. The new debt of $30.3 million bears
interest at 7.57% per annum, requires monthly interest only payments of $212,000
and matures in May 2012. TCI also received $8.0 million of 8% non-recourse,
non-convertible Series A Preferred Stock ("Preferred Shares") of Innovo.

The dividend on the Preferred Shares will be funded entirely and solely through
member distributions from cash flows generated by the operation and subsequent
sale of the sold properties. In the event the cash flows for the properties are
insufficient to cover the 8% annual dividend, Innovo will have no obligation to
cover any shortfall.

The Preferred Shares have a mandatory redemption feature, and are redeemable
from the cash proceeds received by Innovo from the operation and sale of the
properties. All member distributions that are in excess of current and accrued
8% dividends must be used by Innovo to redeem the Preferred Shares. Since
redemption of these shares is subject to the above future events, management has
elected to record no basis in the Preferred Shares.

NOTE 7.  OPERATING SEGMENTS

Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of administrative expenses. Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their operating income and cash flow. Items of income that are not
reflected in the segments are interest, equity in partnerships and equity gains
on sales of real estate which totaled $876,000 and $3.6 million for the three
and six months ended June 30, 2002, and $1.3 million and $1.8 million for the
three and six months ended June 30, 2001. Expenses that are not reflected in the
segments are general and administrative expenses, minority interest, incentive,
advisory, net income fees and discontinued operations which totaled $4.5 million
and $8.9 million for the three and six months ended June 30, 2002, and $8.7
million and $12.5 million for the three and six months ended June 30, 2001. Also
excluded from segment assets are assets of $81.1 million at June 30, 2002, and
$106.3 million at June 30, 2001, which are not identifiable with an operating
segment. There are no intersegment revenues and expenses.

                                       17

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 7. OPERATING SEGMENTS (Continued)

Presented below is the operating income of each operating segment for the three
and six months ended June 30, 2002 and 2001, and each segment's assets at June
30.

<TABLE>
<CAPTION>
            Three Months Ended                            Commercial
              June 30, 2002                    Land       Properties     Apartments    Hotels     Total
-----------------------------------------    --------     ----------    ------------  --------  ---------
<S>                                          <C>          <C>           <C>           <C>       <C>
Rents ...................................    $    131     $   15,336     $   12,844   $  1,649  $  29,960
Property operating expenses .............         343          8,607          8,451      1,515     18,916
                                             --------     ----------     ----------   --------  ---------
Operating income (loss) .................    $   (212)    $    6,729     $    4,393   $    134  $  11,044
                                             ========     ==========     ==========   ========  =========

Interest ................................    $    191     $    4,442     $    4,312   $    686  $   9,631
Depreciation ............................           7          3,267          1,276        339      4,889
Real estate improvements ................          62          1,093         13,035      2,182     16,372
Provision for asset impairment ..........         707             --          1,172         --      1,879
Assets ..................................      91,931        330,401        246,404     35,966    704,702

<CAPTION>
                                                          Commercial
Property Sales:                                           Properties     Apartments               Total
                                                          ----------    ------------            ---------
<S>                                                       <C>           <C>                     <C>
Sales price .............................                 $   23,400     $    3,600             $  27,000
Cost of sales ...........................                     17,743          2,172                19,915
                                                          ----------     ----------             ---------
Gain on sale ............................                 $    5,657     $    1,428             $   7,085 /(1)/
                                                          ==========     ==========             =========
</TABLE>

___________

(1)  Includes $1.5 million of previously deferred gains on sale of real estate.

<TABLE>
<CAPTION>
             Six Months Ended                             Commercial
              June 30, 2002                    Land       Properties     Apartments    Hotels     Total
-----------------------------------------    --------     ----------    ------------  --------  ---------
<S>                                          <C>          <C>           <C>           <C>       <C>
Rents ...................................    $    288     $   30,482    $    25,169   $  2,537  $  58,476
Property operating expenses .............         710         16,971         16,232      2,363     36,276
                                             --------     ----------    -----------   --------  ---------
Operating income (loss) .................    $   (422)    $   13,511    $     8,937   $    174  $  22,200
                                             ========     ==========    ===========   ========  =========

Interest ................................    $    369     $    8,885    $     7,737   $    998  $  17,989
Depreciation ............................           7          6,576          2,555        641      9,779
Real estate improvements ................         102          2,630         23,344      5,772     31,848
Provisions for asset impairment .........         707             --          1,172         --      1,879
Assets ..................................      91,931        330,401        246,404     35,966    704,702

<CAPTION>
                                                          Commercial
Property Sales:                                           Properties     Apartments               Total
                                                          ----------    ------------            ---------
<S>                                                       <C>           <C>                     <C>
Sales price .............................                 $   36,107    $     8,600             $  44,707
Cost of sales ...........................                     29,209          5,905                35,114
                                                          ----------    -----------             ---------
Gain on sale ............................                 $    6,898    $     2,695             $   9,593 /(2)/
                                                          ==========    ===========             =========
</TABLE>

___________

(2)  Includes $2.1 million of previously deferred gains on sale of real estate.

                                       18

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 7. OPERATING SEGMENTS (Continued)

<TABLE>
<CAPTION>
            Three Months Ended                            Commercial
              June 30, 2002                    Land       Properties     Apartments    Hotels     Total
-----------------------------------------    --------     ----------    ------------  --------  ---------
<S>                                          <C>          <C>           <C>           <C>       <C>
Rents ...................................    $    189     $   16,178     $   15,217   $  1,949   $ 33,533
Property operating expenses .............         183          8,313          8,755      1,150     18,401
                                             --------     ----------     ----------   --------   --------
Operating income ........................    $      6     $    7,865     $    6,462   $    799   $ 15,132
                                             ========     ==========     ==========   ========   ========

Interest ................................    $    196     $    5,945     $    3,776   $    337   $ 10,254
Depreciation ............................          --          2,976          1,256        281      4,513
Real estate improvements ................       2,943          1,033             47         73      4,096
Assets ..................................      60,913        318,983        184,129     19,614    583,639

<CAPTION>
                                                          Commercial
Property Sales:                                Land       Properties     Apartments               Total
                                             --------     ----------    ------------            ---------
<S>                                          <C>          <C>           <C>                     <C>
Sales price .............................    $     15     $   39,236     $   37,609             $  76,860
Cost of sales ...........................          86         25,083         31,068                56,237
                                             --------     ----------     ----------             ---------
Gain (loss) on sale .....................    $    (71)    $   14,153     $    6,541             $  20,623
                                             ========     ==========     ==========             =========

<CAPTION>
             Six Months Ended                             Commercial
              June 30, 2002                    Land       Properties     Apartments    Hotels     Total
-----------------------------------------    --------     ----------    ------------  --------  ---------
<S>                                          <C>          <C>           <C>           <C>       <C>
Rents ...................................    $    325     $   33,329     $   31,006   $  3,279  $  67,939
Property operating expenses .............         565         17,316         18,025      2,348     38,254
                                             --------     ----------     ----------   --------  ---------
Operating income (loss) .................    $   (240)    $   16,013     $   12,981   $    931  $  29,685
                                             ========     ==========     ==========   ========  =========

Interest ................................    $    507     $   11,783     $    8,269   $    698  $  21,257
Depreciation ............................          --          4,533          4,388        533      9,454
Real estate improvements ................       2,943          2,284             81        216      5,524
Assets ..................................      60,913        318,983        184,129     19,614    583,639

<CAPTION>
                                                          Commercial
Property Sales:                                Land       Properties     Apartments               Total
                                             --------     ----------    ------------            ---------
<S>                                          <C>          <C>           <C>                     <C>
Sales price .............................    $  3,051     $   39,998     $   47,695             $  90,744
Cost of sales ...........................       1,720         25,678         37,513                64,911
                                             --------     ----------     ----------             ---------
Gain on sale ............................    $  1,331     $   14,320     $   10,182             $  25,833
                                             ========     ==========     ==========             =========
</TABLE>

NOTE 8. DISCONTINUED OPERATIONS

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

For the three and six months ended June 30, 2002 and 2001, income from
discontinued operations relates to 11 properties that TCI sold during

                                       19

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 8. DISCONTINUED OPERATIONS (Continued)

2002. The following table summarizes revenue and expense information for these
properties sold and held-for-sale.

<TABLE>
<CAPTION>
                                                            For the Three Months      For the Six Months
                                                                 Ended June 30,         Ended June 30,
                                                            --------------------      ------------------
                                                             2002        2001           2002       2001
                                                            -------     -------       -------    -------
<S>                                                         <C>         <C>           <C>        <C>
Revenue
   Rental ................................................  $ 1,509     $ 2,841       $ 3,861    $ 3,698
   Property operations ...................................    1,302       1,929         3,410      2,470
                                                            -------     -------       -------    -------
                                                                207         912           451      1,228

Expenses
   Interest ..............................................      693         500         1,491        885
   Depreciation ..........................................      159         542           510        721
                                                            -------     -------       -------    -------
                                                                852       1,042         2,001      1,606
                                                            -------     -------       -------    -------
Net loss from discontinued operations before
   gains on sale of real estate ..........................     (645)       (130)       (1,550)      (378)

   Gain on sale of operations ............................    7,085          --         9,593         --
   Equity in investees gain on sale of real
     estate ..............................................      183          --         3,104         --
                                                            -------     -------       -------    -------
Net income from discontinued operations ..................  $ 6,623     $  (130)      $11,147    $  (378)
                                                            =======     =======       =======    =======
</TABLE>

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

NOTE 9. COMMITMENTS AND CONTINGENCIES

Liquidity. Management anticipates that TCI will generate excess cash from
operations in 2002 due to increased rental rates and occupancy at its
properties, however, such excess will not be sufficient to discharge all of
TCI's debt obligations as they mature. Management intends to selectively sell
income producing real estate, refinance real estate and incur additional
borrowings against real estate to meet its cash requirements.

Commitments. In January 2001, TCI exercised its option under the loan documents
to extend the maturity date of three loans with a principal balance of $30.6
million secured by three office buildings in New Orleans, Louisiana. The lender
has disputed TCI's right to extend the loans. This dispute is subject to
litigation pending in the United States District Court for the Eastern District
of Louisiana.

Litigation. TCI is involved in various lawsuits arising in the ordinary course
of business. Except for the Olive Litigation (see PART II. OTHER INFORMATION,
ITEM 1. "LEGAL PROCEEDINGS), management is of the opinion that the outcome of
these lawsuits will have no material impact on TCI's financial condition,
results of operations or liquidity.

                                       20

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 10.  INCOME TAXES

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
TCI had a loss for federal income tax purposes in the first two quarters of 2002
and 2001; therefore, it recorded no provision for income taxes.

                           ___________________________

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

Introduction

TCI invests in real estate through acquisitions, leases and partnerships. TCI
also invests in mortgage loans. TCI is the successor to a business trust
organized on September 6, 1983, and commenced operations on January 31, 1984.

Critical Accounting Policies

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

If events or changes in circumstances indicate that the carrying value of a
rental property to be held and used or land held for development may be
impaired, management performs a recoverability analysis based on estimated
undiscounted cash flows to be generated from the property in the future. If the
analysis indicates that the carrying value is not recoverable from future cash
flows the property is written down to estimated fair value and an impairment
loss is recognized. If management decides to sell rental properties or land held
for development, management evaluates the recoverability of the carrying amounts
of the assets. If the evaluation indicates that the carrying value is not
recoverable from estimated net sales proceeds, the property is written down to
estimated fair value less costs to sell and an impairment loss is recognized
within income from continuing operations. TCI's estimates of cash flow and fair
values of the properties are based on current market conditions and consider
matters such as rental rates and occupancies for comparable properties, recent
sales data for comparable properties and, where applicable, contracts or the
results of negotiations with purchasers or prospective purchasers. TCI's
estimates are subject to revision as market conditions and TCI's assessments of
them change. In the second quarter of 2002, TCI recognized $1.9 million as
impairment losses.

                                       21

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies (Continued)

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

Liquidity and Capital Resources

Cash and cash equivalents totaled $1.4 million at June 30, 2002, compared with
$10.3 million at December 31, 2001. TCI's principal sources of cash have been
and will continue to be from property operations, proceeds from property sales,
the collection of mortgage notes receivable and borrowings. Management
anticipates that TCI's cash on hand, as well as cash generated from property
operations, the sale of properties and the refinancing of certain of TCI's
mortgage debt will be sufficient to meet TCI's cash requirements, including debt
service obligations and expenditures for property maintenance and improvements.

Net cash used in operating activities was $1.2 million for the six months ended
June 30, 2002, compared to $1.4 million for the six months ended June 30, 2001.
The primary factors affecting TCI's cash from operations are discussed in the
following paragraphs.

Cash from property operations (rents collected less payments for expenses
applicable to rental income) was $25.2 million in the six months ended June 30,
2002, compared to $29.0 million for the six months ended June 30, 2001.

Rents collected decreased by $5.4 million in the six months ended June 30, 2002
from 2001. Of this decrease, $9.5 million and $3.3 million was due to the sale
of 19 apartments and 13 commercial properties, respectively, in 2002 and 2001.
Increases in rents collected of $4.4 million were due to the purchase of six
properties in 2002 and 2001, and the completion of the Limestone Ranch
Apartments and Hotel Akademia in 2002. Rents collected also increased by
$435,000 due to overall increased rents and stable occupancies at TCI's
apartments and by $2.5 million due to lease buy outs and collections of
outstanding receivables at TCI's commercial properties.

Payments for property operations decreased to $39.2 million in the six months
ended June 30, 2002, compared to $40.8 million in 2001. Of this decrease, $5.5
million and $1.6 million was due to the sale of 19 apartments and 13 commercial
properties, respectively, in 2002 and 2001 and $457,000 was due to decreased
operations at the U.S. hotels. This increase was offset by increases of $455,000
and $687,000 due to the completion of the Limestone Ranch Apartments and Hotel

                                       22

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Akademia, respectively, in the second quarter of 2002. Increases of $2.7 million
were due to the purchase of five existing apartments in 2001 and $88,000 was due
to the purchase of one shopping center in 2002. Payments for property operations
also increased by $1.1 million, $637,000 and $300,000 at TCI's apartments,
commercial and land properties, respectively. These increases were mainly from
increased taxes and insurance payments.

Interest collected increased to $1.6 million in the six months ended June 30,
2002, from $700,000 in 2001. The increase was primarily due TCI funding of seven
loans in 2001 and seven loans in 2002.

Interest paid decreased to $19.6 million in the six months ended June 30, 2002,
from $20.6 million in the six months ended June 30, 2001. Of the decrease, $4.3
million was from the sale of 27 properties in 2002 and 2001 subject to debt, and
$100,000 was from loan payoffs and principal paydowns in 2002 and 2001. These
decreases were offset by increases of $1.6 million from the purchase of seven
properties in 2002 and 2001 subject to debt, and $1.6 million was due to the
refinancing of 14 properties in 2002 and one property in 2001.

Advisory, incentive and net income fees paid decreased to $2.7 million in the
six months ended June 30, 2002, from $5.1 million in the six months ended June
30, 2001. The decrease was primarily due to no incentive or net income fees paid
in 2002. The incentive fee is equal to 10% of the amount by which the aggregate
sales consideration for all TCI's properties sold during the year exceeds the
total cost of the property plus a simple 8% annual return to TCI's net
investment in such property.

General and administrative expenses paid decreased to $5.6 million in the six
months ended June 30, 2002, from $5.9 million in the six months ended June 30,
2001. This decrease was mainly due to a decrease in legal fees and cost
reimbursements to the advisor.

In the first six months of 2002, TCI sold two apartments, one warehouse, one
shopping center and four office buildings for a total of $44.7 million,
receiving net cash of $16.9 million after the payoff of existing debt and the
payment of various closing costs.

Also in the first six months of 2002, TCI financed an industrial warehouse and
14 apartments for a total of $38.5 million, receiving $9.0 million in cash after
the payment of various closing costs.

Further in the first six months of 2002, TCI purchased five parcels of
unimproved land for apartment construction, one shopping center, one office
building and six parcels of unimproved land for a total of
$88.5 million. TCI paid $5.0 million in cash, including various closing costs,
assumed existing mortgage debt of $56.4 million and acquired new debt of $2.5
million for the purchases. TCI also expended $28.5 million

                                       23

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (Continued)


Liquidity and Capital Resources (Continued)

on property construction, of which $21.2 million was funded by debt. For the
remainder of 2002 and the first quarter of 2003, TCI expects to expend an
additional $121.3 million on property construction projects, of which $113.5
million will be funded by debt.

Also in the first six months of 2002, TCI advanced funds to affiliated parties,
including its advisor, for a total of $38.7 million. For this funding, TCI
received 12% return guarantees for $14.4 million, and real estate valued at
$79.3 million and assumed the existing debt of $55.0 million.

In the third quarter of 2002, TCI sold three apartments for a total of $16.9
million, receiving net cash of $4.4 million after the payoff of existing debt
and the payment of various closing costs, and received $4.8 million on the
payment of two mortgage loans.

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

Results of Operations

TCI had net losses of $1.9 million and $3.2 million in the three and six months
ended June 30, 2002, including gains on sale of real estate totaling $7.2
million and $12.7 million, compared to net income of $14.3 million and $14.6
million in the corresponding periods in 2001, including gains on sale of real
estate totaling $21.2 million and $26.4 million. Fluctuations in this and other
components of revenues and expenses between the 2002 and 2001 periods are
discussed below.

Rents in the three months ended June 30, 2002, decreased to $30.0 million
compared to $33.5 million in 2001. Of this decrease, $463,000 and $478,000 was
due to decreases in occupancies at TCI's commercial properties and four U.S.
hotels, respectively. Occupancies decreased to 79% in the second quarter of 2002
compared to 86% in the second quarter of 2001 from commercial properties located
in Texas, Georgia, Florida

                                       24

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (Continued)

Results of Operations (Continued)

and Virginia. These properties represented approximately 43% of the revenues in
TCI's commercial portfolio. The remaining difference is primarily due to the
sale of 26 operating properties during 2001.

Rents in the six months ended June 30, 2002, decreased to $58.5 million compared
to $67.9 million in 2001.  Of this decrease, $923,000 was due to decreases in
occupancies at TCI's four U.S. hotels. Overall occupancies for the commercial
portfolio remained constant for the six months ended June 30, 2002. However,
occupancies decreased to 80% from 86% in the six months ended June 30, 2002,
from commercial properties located in Texas, Georgia, Florida and Virginia.
These properties represented approximately 44% of the revenues in TCI's
commercial portfolio. The remaining difference is primarily due to the sale of
26 properties during 2001. Rents are expected to remain constant or decrease in
the remaining quarters of 2002 as commercial occupancies continue to decrease.

Property operations expense increased to $18.9 million and decreased to $36.3
million in the three and six months ended June 30, 2002, compared to $18.4
million and $38.3 million in 2001. Of these three and six month changes,
$455,000 and $487,000 was due to the completion of the Limestone Ranch
Apartments and Hotel Akademia, respectively, in the second quarter of 2002.
Increases of $1.2 million and $2.7 million for the quarter and six months, were
due to the purchase of five existing apartments in 2001 and $74,000 and $88,000
was due to the purchase of one shopping center in 2002. Property operations
expenses for TCI's apartments increased by $881,000 and $1.1 million in the
three and six months ended June 30, 2002. These increases include $301,000 and
$550,000 from taxes and insurance, $247,000 and $293,000 from replacements and
$137,000 and $264,000 from personnel expenses. Property operations expenses for
TCI's commercial properties increased by $559,000 and $1.2 million in the three
and six months ended June 30, 2002. These increases include $314,000 and
$473,000 from taxes and insurance, $155,000 and $405,000 from repairs and
$171,000 and $318,000 from personnel expenses. Property operations expenses for
TCI's land properties increased by $299,000 and $330,000 in the three and six
months ended June 30, 2002, due to increased taxes. These increases were offset
by decreases of $106,000 and $459,000 due to decreases in occupancies from the
U.S. hotels. Property operations expenses for the remaining quarters of 2002 are
expected to increase as TCI continues to upgrade its apartments and improve its
commercial leasing potential.

Interest and other income increased to $984,000 and $2.1 million in the three
and six months ended June 30, 2002, compared to $670,000 and $1.3 million in
2001. The increase was primarily due to TCI funding seven loans in 2001 and
seven loans in 2002. Interest income for the remaining quarters of 2002 are
expected to increase from the additional loans funded in 2002.

                                       25

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (Continued)

Results of Operations (Continued)

Equity in losses of investees increased to $291,000 and $1.6 million in the
three and six months ended June 30, 2002 from gains of $624,000 and $524,000 in
the three and six months ended June 30, 2001. The increase in losses from equity
investees is primarily attributed to increased operating losses at ARI.

Interest expense decreased to $9.6 million in the three months ended June 30,
2002, from $10.3 million in 2001. The decrease is primarily due to lower
variable rates and principal paydowns at TCI's apartments and commercial
properties, respectively.

Interest expense decreased to $18.0 million in the six months ended June 30,
2002, compared to $21.3 million in 2001. The decrease was due to lower variable
interest rates and principal paydowns at TCI's apartments and commercial
properties, respectively. The remaining variance is primarily due to the 26
properties sold during 2001.

Depreciation expense increased to $4.9 million and $9.8 million in the three and
six months ended June 30, 2002, from $4.5 million and $9.4 million in 2001. Of
these increases, $281,000 and $558,000 were due to the purchase of five
apartments in 2002 and 2001. Depreciation expense for the remaining quarters
of 2002 is expected to increase as TCI completes its apartment construction
projects.

For the three and six months ended June 30, 2002, TCI recorded a $1.9 million
provision for asset impairment representing the write down of certain operating
properties to current estimated fair value. These assets include the following
properties:

<TABLE>
<CAPTION>
                                                                      Fair       Property     Costs to
          Property                 Location         Units/Acres       Value        Basis        Sell       Impairment
----------------------------  ------------------   -------------  ------------ ------------  ----------    ----------
<S>                           <C>                  <C>            <C>          <C>           <C>           <C>
Apartments
Apple Lane                    Lawrence, KS              75 Units   $    1,580   $    1,593   $     238      $    251
Fairway View                  El Paso, TX              264 Units        5,700        5,242         863           405
Fountains of Waterford        Midland, TX              172 Units        1,900        2,006         285           391
Sunchase                      Odessa, TX               300 Units        4,100        3,479         746           125

Land
Red Cross                     Dallas, TX              2.89 Acres        8,400        8,348         758           707
</TABLE>

The Red Cross land is under contract to sell and the sales price was used as
fair value. The fair value determined for the four apartments above were agreed
upon purchase prices as part of the refinancing transaction with Metra Capital,
LLC. The costs to sell were actual fees paid to refinance the properties.

Advisory fee decreased to $1.3 million and $2.7 million in the three and six
months ended June 30, 2002, from $1.4 million and $2.9 million in 2001. These
decreases were due to a decrease in TCI's gross assets, the basis for such fee.
Advisory fees are expected to decrease with decreases in TCI's gross assets.

                                       26

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (Continued)

Results of Operations (Continued)

Net income fee to affiliate was $1.1 million in the three and six months ended
June 30, 2001. The net income fee is payable to TCI's advisor based on 7.5% of
TCI's net income. TCI had a net loss for the six months ended June 30, 2002 and
no such fee has been accrued.

Incentive fee to affiliate was $1.6 million in the three and six months ended
June 30, 2001. The incentive fee is payable to TCI's advisor based on 10% of
aggregate sales consideration less TCI's cost of all properties sold during the
year. In the six months ended June 30, 2002, the criteria for the fee has not
been met.

General and administrative expenses decreased to $2.2 million and $4.4 million
in the three and six months ended June 30, 2002, from $3.5 million and $5.9
million in 2001. These decreases were mainly due to a decrease in legal fees and
other professional fees.

In October 2000, TCI's stockholders approved the Director's Stock Option Plan
(the "Director's Plan") which provides for options to purchase up to 140,000
shares of TCI's Common Stock. Options granted pursuant to the Director's Plan
are immediately exercisable and expire on the earlier of the first anniversary
of the date on which a Director ceases to be a Director or 10 years from the
date of grant. Each Independent Director was granted an option to purchase 5,000
Common shares at an exercise price of $14.875 per share on October 10, 2000, the
date stockholders approved the plan. On January 1, 2001 and 2002, each
Independent Director was granted an option to purchase 5,000 Common shares at an
exercise price of $8.875 and $16.05, respectively, per common share. In February
2002, TCI purchased 20,000 options outstanding from retired directors R. Douglas
Leonhard and Edward Zampa for $82,000. In July 2002, Ted Stokely and Martin
White exercised their options for 15,000 shares. As of July 31, 2002, no options
were outstanding.

In the three and six months of 2002, gains on sale of real estate totaling $7.1
million and $9.6 million were recognized, $659,000 on the sale of the Primrose
Apartments, $1.2 million on the sale of the Central Storage Warehouse, a
$608,000 deferred gain on the sale of the Madison at Bear Creek Apartments, $1.3
million on the sale of the NASA Office Building, a $1.5 million deferred gain on
the sale of McCallum Glen Apartments, $3.4 million on the sale of Jefferson
Office Building, $895,000 on the sale of Windsor Office Building and a $72,000
loss on the sale of South Green Apartments.

In the three and six months ended June 30, 2001, gains on sale of real estate
totaling $20.6 million and $25.8 million were recognized. The gains included
$1.6 million on the sale of the Heritage Apartments, $167,000 on the sale of
Zodiac Warehouse, $355,000 on the sale of a tract of the McKinney 36 land
parcel, $1.0 million on the sale of Forest Ridge Apartments, $1.0 million on the
sale of Park at Colonade Apartments, $1.0 million on the sale of a tract of the
Round Mountain land parcel, $4.6 million on the sale of Fontenelle Apartments,
$601,000

                                       27

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (Continued)

Results of Operations (Continued)

on the sale of Bent Tree Gardens Apartments, $9.1 million on the sale of
Waterstreet Office Building, $4.2 million on the sale of Technology Trading
Center, $1.4 million on the sale of McCallum Glen Apartments, $836,000 on the
sale of Daley Office Plaza, and a loss of $71,000 on the Moss Creek land parcel.

Tax Matters

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
TCI had a loss for federal income tax purposes in the first six months of 2002
and 2001; therefore, it recorded no provision for income taxes.

Inflation

The effects of inflation on TCI's operations are not quantifiable. Revenues from
property operations tend to fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of inflation
also affect sales values of properties and the ultimate gain to be realized from
property sales. To the extent that inflation affects interest rates, TCI's
earnings from short-term investments and the cost of new financings as well as
the cost of variable interest rate debt, will be affected.

Environmental Matters

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

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

                                       28

<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

At June 30, 2002, TCI's exposure to a change in interest rates on its debt is as
follows:

<TABLE>
<CAPTION>
                                                  Weighted        Effect of 1%
                                                   Average         Increase In
                                   Balance      Interest Rate      Base Rates
                                  ---------    ---------------   --------------
   <S>                            <C>          <C>               <C>
   Notes payable:
     Variable rate .............  $ 160,244          6.20%         $    1,602
                                  =========                        ==========

   Total decrease in TCI's
     annual net income .........                                   $    1,602
                                                                   ==========

   Per share ...................                                   $      .20
                                                                   ==========
</TABLE>
                         ______________________________


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In February 1990, TCI, together with Continental Mortgage and Equity Trust
("CMET"), IORI and National Income Realty Trust, three real estate entities
with, at the time, the same officers, directors or trustees and advisor as TCI,
entered into a settlement (the "Settlement") of a class and derivative action
entitled Olive et al. v. National Income Realty Trust et al., relating to the
operation and management of each of the entities. On April 23, 1990, the Court
granted final approval of the terms of the Settlement. The Settlement was
modified in 1994 (the "Modification").

On January 27, 1997, the parties entered into an Amendment to the Modification
effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided
for the settlement of additional matters raised by plaintiffs' counsel in 1996.
The Court issued an order approving the Olive Amendment on July 3, 1997.

The Olive Amendment provided that TCI's Board retain a management/compensation
consultant or consultants to evaluate the fairness of the BCM advisory contract
and any contract of its affiliates with TCI, CMET and IORI, including, but not
limited to, the fairness to TCI, CMET and IORI of such contracts relative to
other means of administration. In 1998, the Board engaged a
management/compensation consultant to perform the evaluation which was completed
in September 1998.

In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this provision
of the Olive Amendment. In January 2000, the Board engaged another
management/compensation consultant to perform the required evaluation again.
This evaluation was completed in April 2000 and was provided to plaintiffs'
counsel. The Board believes that any

                                       29

<PAGE>

ITEM 1.  LEGAL PROCEEDINGS (Continued)

alleged breach of the Olive Amendment has been fully remedied by the Board's
engagement of the second consultant. Although several status conferences have
been held on this matter, there has been no Court order resolving whether there
was any breach of the Olive Amendment.

In June 2000, plaintiffs' counsel asserted that loans made by TCI to BCM and
American Realty Trust, Inc. breached the provisions of the Modification. The
Board believes that the provisions of the Settlement, the Modification and Olive
Amendment terminated on April 28, 1999. However, the Court has ruled that
certain provisions continue to be effective after the termination date. This
ruling was appealed by TCI and IORI.

On October 23, 2001, TCI, IORI and American Realty Investors, Inc. ("ARI")
jointly announced a preliminary agreement with the plaintiff's legal counsel for
complete settlement of all disputes in the lawsuit. In February 2002, the court
granted final approval of the proposed settlement. Under the proposal, the
pending appeal has been dismissed and ARI will acquire all of the outstanding
shares of IORI and TCI not currently owned by ARI for a cash payment or shares
of ARI Preferred Stock. ARI will pay $17.50 cash per TCI share and $19.00 cash
per IORI share for the stock held by non-affiliated stockholders. ARI would
issue one share of Series G Preferred Stock with a liquidation value of $20.00
per share for each share of TCI Common Stock for stockholders who elect to
receive ARI preferred stock in lieu of cash. ARI would issue one share of Series
H Preferred Stock with a liquidation value of $21.50 per share for each share of
IORI Common Stock for stockholders who elect to receive ARI preferred stock in
lieu of cash. Each share of Series G Preferred Stock will be convertible into
2.5 shares of ARI Common Stock during a 75-day period that commences fifteen
days after the date of the first ARI Form 10-Q filing that occurs after the
closing of the merger transaction. Upon the acquisition of IORI and TCI shares,
TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction is
subject to the negotiation of a definitive merger agreement and a vote of the
shareholders of all three entities. TCI has the same board as IORI and the same
advisor as IORI and ARI. Earl D. Cecil, a Director of TCI and IORI, is also a
Director for ARI.

ITEM 4.  SUBMISSION OF MATTERS TO SECURITY HOLDERS

The annual meeting was held on July 2, 2002, at which meeting stockholders were
asked to consider and vote upon the election of Directors. At the meeting,
stockholders elected the following individuals as Directors:

<TABLE>
<CAPTION>
                                             Shares Voting
                                       --------------------------
                                                       Withheld
                   Director                For         Authority
         ---------------------------   -----------    -----------
         <S>                           <C>            <C>
         Henry A. Butler .........      6,845,106        80,885
         Earl D. Cecil ...........      6,845,372        80,618
         Ted P. Stokely ..........      6,843,907        82,083
         Martin L. White .........      6,845,867        80,124
</TABLE>

                                       30

<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO SECURITY HOLDERS (Continued)

There were no abstentions or broker non-votes on the election of Directors.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

<TABLE>
<CAPTION>
 Exhibit
  Number                               Description
--------- ---------------------------------------------------------------------
<S>       <C>
  99.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

(b)  Reports on Form 8-K as follows:

     None.

                                       31

<PAGE>

                                   SIGNATURES


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:     March 4, 2003                    By:     /s/ Ronald E. Kimbrough
     -------------------------                 --------------------------------
                                               Ronald E. Kimbrough
                                               Executive Vice President
                                               and Chief Financial Officer
                                               (Principal Financial and
                                                Accounting Officer and
                                                Acting Principal Executive
                                                Officer)

                                       32

<PAGE>

                                  CERTIFICATION

I, Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and Acting Principal Executive
Officer) of Transcontinental Realty Investors, Inc. ("TCI"), certify that:

1.   I have reviewed this quarterly report on Form 10-Q/A of TCI;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report;

4.   I am responsible for establishing and maintaining internal controls and
     procedures and have:

     a.  designed such internal controls to insure that material information
         relating to TCI and its consolidated subsidiaries is made known to me
         by others within those entities, particularly for the periods presented
         in this quarterly report;

     b.  evaluated the effectiveness of TCI's internal controls as of a date
         within 90 days prior to the filing date of this quarterly report; and

     c.  presented in this quarterly report my conclusions about the
         effectiveness of the disclosure controls and procedures based on a date
         within 90 days prior to the filing date of this quarterly report;

5.   I have disclosed to TCI's auditors and Audit Committee of the Board of
     Directors (or persons fulfilling the equivalent function):

     a.  all significant deficiencies in the design or operation of internal
         controls which could adversely affect TCI's ability to record, process,
         summarize, and report financial data and have identified for TCI's
         auditors any material weaknesses in internal controls; and

     b.  any fraud, whether or not material, that involves management or other
         employees who have a significant role in TCI's internal controls; and

                                       33

<PAGE>

6.   I have indicated in this quarterly report whether or not there were
     significant changes in internal controls or in other factors that could
     significantly affect internal controls subsequent to the date of my most
     recent evaluation, including corrective actions with regard to significant
     deficiencies and material weaknesses.

Date:     March 4, 2003                         /s/ Ronald E. Kimbrough
     -----------------------                -----------------------------------
                                            Ronald E. Kimbrough
                                            Executive Vice President
                                            and Chief Financial Officer
                                            (Principal Financial and
                                             Accounting Officer and
                                             Acting Principal Executive Officer)

                                       34

<PAGE>

                     TRANSCONTINENTAL REALTY INVESTORS, INC.

                                   EXHIBITS TO

                         QUARTERLY REPORT ON FORM 10-Q/A

                       For the Quarter ended June 30, 2002

<TABLE>
<CAPTION>
  Exhibit                                                                          Page
   Number                                Description                              Number
 --------- --------------------------------------------------------------------- --------
 <S>       <C>                                                                   <C>
    99.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant    36
           to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

                                       35