<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q


             [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997
                                                             -------------


                         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.)




         10670 North Central Expressway, Suite 300, Dallas, Texas   75231
    -----------------------------------------------------------------------
            (Address of Principal Executive Office)              (Zip Code)



                                 (214) 692-4700
                        --------------------------------
                        (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                                 3,899,487
----------------------------                    -------------------------------
          (Class)                               (Outstanding at August 1, 1997)



                                       1

<PAGE>   2

                         PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants, but in the opinion of the management
of Transcontinental Realty Investors, Inc. (the "Company"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company'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,
                                                          1997         1996
                                                       ---------    ---------
                                                       (dollars in thousands)
<S>                                                    <C>          <C>      
                      Assets                          
Notes and interest receivable
   Performing ......................................   $   7,057    $   9,075
   Nonperforming, nonaccruing ......................         427          457
                                                       ---------    ---------
                                                           7,484        9,532

Less - allowance for estimated losses ..............        (891)        (926)
                                                       ---------    ---------
                                                           6,593        8,606

Foreclosed real estate held for sale ...............           -          910

Real estate held for sale, net of accumulated
   depreciation ($76 in 1996) ......................         281        2,089
                                                       ---------    ---------
                                                             281        2,999
Real estate held for investment, net of
   accumulated depreciation ($54,876 in 1997 and
   $50,310 in 1996) ................................     236,845      217,410
Investment in real estate entities .................       5,670        4,578
Cash and cash equivalents ..........................       4,973          960
Other assets (including $344 in 1997 and $960 in
   1996 from affiliates) ...........................      10,158       10,818
                                                       ---------    ---------
                                                       $ 264,520    $ 245,371
                                                       =========    =========

       Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable .........................   $ 175,282    $ 158,692
Other liabilities (including $84 in 1997 and $535
   in 1996 to affiliates) ..........................      11,910        7,320
                                                       ---------    ---------
                                                         187,192      166,012
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
   shares; issued and outstanding, 3,899,487 shares
   in 1997 and 3,926,445 shares in 1996 ............          39           39
Paid-in capital ....................................     217,831      218,133
Accumulated distributions in excess of
   accumulated earnings ............................    (140,542)    (138,813)
                                                       ---------    ---------
                                                          77,328       79,359
                                                       ---------    ---------
                                                       $ 264,520    $ 245,371
                                                       =========    =========
</TABLE>

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


                                      2

<PAGE>   3
                    TRANSCONTINENTAL REALTY INVESTORS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                 For the Three Months            For the Six Months
                                                    Ended June 30,                 Ended June 30,
                                               --------------------------    --------------------------
                                                   1997           1996           1997           1996
                                               -----------    -----------    -----------    -----------
                                                     (dollars in thousands, except per share)
<S>                                            <C>            <C>            <C>            <C>        
Income
   Rents ...................................   $    13,310    $    10,988    $    25,424    $    22,146
   Interest ................................           364            353            773            765
                                               -----------    -----------    -----------    -----------
                                                    13,674         11,341         26,197         22,911

Expenses
   Property operations .....................         7,749          6,915         15,025         14,332
   Interest ................................         3,938          3,669          7,762          7,423
   Depreciation ............................         2,350          2,098          4,605          4,165
   Advisory fee to affiliate ...............           491            468            956            946
   General and administrative ..............           647            567          1,264          1,147
   Provision for loss ......................          --            1,579           --            1,579
                                               -----------    -----------    -----------    -----------

                                                    15,175         15,296         29,612         29,592
                                               -----------    -----------    -----------    -----------

(Loss) from operations .....................        (1,501)        (3,955)        (3,415)        (6,681)

Equity in income (losses) of
   investees ...............................           429             (1)           777            (46)
Gain on sale of real estate ................            55           --            1,455          1,650
                                               -----------    -----------    -----------    -----------

(Loss) before extraordinary
   gain ....................................        (1,017)        (3,956)        (1,183)        (5,077)
Extraordinary gain .........................          --             --             --               48
                                               -----------    -----------    -----------    -----------
Net (loss) .................................   $    (1,017)   $    (3,956)   $    (1,183)   $    (5,029)
                                               ===========    ===========    ===========    ===========

Earnings Per Share
(Loss) before extraordinary
   gain ....................................   $      (.26)   $      (.99)   $      (.30)   $     (1.27)
Extraordinary gain .........................          --             --             --              .01
                                               -----------    -----------    -----------    -----------
Net (loss) .................................   $      (.26)   $      (.99)   $      (.30)   $     (1.26)
                                               ===========    ===========    ===========    ===========


Weighted average Common shares
   used in computing earnings
   per share ...............................     3,907,344      4,012,275      3,916,838      4,012,275
                                               ===========    ===========    ===========    ===========
</TABLE>






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

                                       3

<PAGE>   4

                    TRANSCONTINENTAL REALTY INVESTORS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     For the Six Months Ended June 30, 1997






<TABLE>
<CAPTION>
                                                                             Accumulated
                                                                             Distributions
                                                                             in Excess of
                                           Common Stock          Paid-in      Accumulated   Stockholders'
                                       Shares        Amount      Capital       Earnings       Equity
                                     ----------    ----------   ----------    ----------    ----------
                                                 (dollars in thousands, except per share)
<S>                                   <C>          <C>          <C>           <C>           <C>       
Balance, January 1, 1997 .........    3,926,445    $       39   $  218,133    $ (138,813)   $   79,359



Fractional shares ................          (18)         --           --            --            --


Repurchase of Common Stock .......      (26,940)         --           (302)         --            (302)


Dividends ($.14 per share)  ......         --            --           --            (546)         (546)


Net (loss) .......................         --            --           --          (1,183)       (1,183)
                                     ----------    ----------   ----------    ----------    ----------



Balance, June 30, 1997 ...........    3,899,487    $       39   $  217,831    $ (140,542)   $   77,328
                                     ==========    ==========   ==========    ==========    ==========
</TABLE>


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


                                       4

<PAGE>   5



                    TRANSCONTINENTAL REALTY INVESTORS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                        For the Six Months
                                                         Ended June 30,
                                                    ------------------------
                                                       1997          1996
                                                    ----------    ----------
                                                     (dollars in thousands)
<S>                                                 <C>           <C>       
Cash Flows from Operating Activities
   Rents collected ..............................   $   27,936    $   22,321
   Interest collected ...........................          653           645
   Interest paid ................................       (7,391)       (7,046)
   Payments for property operations .............      (20,429)      (14,598)
   Advisory fee paid to affiliate ...............         (904)         (959)
   General and administrative expenses paid .....       (1,313)       (1,194)
   Distributions from equity investees' operating
      cash flow .................................           74            43
   Insurance settlement .........................        9,529          --
   Other ........................................         (321)       (3,406)
                                                    ----------    ----------

      Net cash provided by (used in) operating
         activities .............................        7,834        (4,194)


Cash Flows from Investing Activities
   Acquisition of real estate ...................       (8,608)         (891)
   Real estate improvements .....................       (2,991)       (1,542)
   Proceeds from sale of real estate ............        3,710         1,754
   Collections on notes receivable ..............        2,134           864
   Contributions to equity investees ............         (389)         (140)
                                                    ----------    ----------

      Net cash provided by (used in) investing
         activities .............................       (6,144)           45


Cash Flows from Financing Activities
   Payments on notes payable ....................      (24,473)       (2,934)
   Proceeds from notes payable ..................       29,367         1,825
   Deferred borrowing costs .....................       (1,222)          (74)
   Reimbursements to advisor ....................         (501)         (156)
   Repurchase of Common Stock ...................         (302)         --
   Dividends to stockholders ....................         (546)         (561)
                                                    ----------    ----------

      Net cash provided by (used in) financing
         activities .............................        2,323        (1,900)


Net increase (decrease) in cash and cash
   equivalents ..................................        4,013        (6,049)
Cash and cash equivalents, beginning of period ..          960         9,620
                                                    ----------    ----------

Cash and cash equivalents, end of period ........   $    4,973    $    3,571
                                                    ==========    ==========
</TABLE>



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

                                       5

<PAGE>   6



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




<TABLE>
<CAPTION>
                                                              For the Six Months
                                                               Ended June 30,
                                                            ----------------------
                                                              1997         1996
                                                            ---------    ---------
                                                            (dollars in thousands)
<S>                                                         <C>          <C>       
Reconciliation of net (loss) to net cash
   provided by (used in) operating activities
Net (loss) ..............................................   $  (1,183)   $  (5,029)
   Adjustments to reconcile net (loss) to net
      cash provided by (used in) operating activities
   Depreciation and amortization ........................       4,755        4,381
   Provision for losses .................................        --          1,579
   Gain on sale of real estate ..........................      (1,455)      (1,650)
   Extraordinary gain ...................................        --            (48)
   Equity in (income) losses of investees ...............        (777)          46
   Distributions from operating cash flow of equity
      investees .........................................          74           43
   (Increase) in interest receivable ....................          (2)          (2)
   (Increase) decrease in other assets ..................       2,177         (746)
   Increase in interest payable .........................         104           43
   Increase (decrease) in other liabilities .............       4,141       (2,811)
                                                            ---------    ---------

      Net cash provided by (used in) operating
         activities .....................................   $   7,834    $  (4,194)
                                                            =========    =========

Schedule of noncash investing and financing
   activities

Notes payable from purchase of real estate ..............   $   5,169    $    --
</TABLE>





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

                                       6
<PAGE>   7



                    TRANSCONTINENTAL REALTY INVESTORS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. BASIS OF PRESENTATION

The Company, a Nevada corporation, is successor to a California business trust
which was organized on September 6, 1983. The Company invests in real estate
through direct equity ownership, leases and partnerships and also has invested
in mortgage loans on real estate, including first, wraparound and junior
mortgage loans. The Company is no longer seeking to fund or acquire new
mortgage loans other than those which it may originate in conjunction with
providing purchase money financing of a property sale.

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. Operating results for the six month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the Consolidated
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K").

NOTE 2. REAL ESTATE

In February 1997, the Company completed the sale of the Fiesta Mart, a 29,000
square foot shopping center in San Angelo, Texas, which was under contract for
sale at December 31, 1996, for $544,000 in cash. The Company received net cash
of $403,000 after the payoff of $90,000 in existing mortgage debt and the
payment of various closing costs associated with the sale. The Company paid a
real estate brokerage commission of $22,000 to Carmel Realty, Inc. ("Carmel
Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Company's
advisor, based on the $544,000 sales price of the property. The Company
recognized no gain or loss on the sale.

Also in February 1997, the Company completed the sale of a .9976 acre parcel of
land in Dallas, Texas, which was under contract for sale at December 31, 1996,
for $2.7 million in cash. The Company received net cash of $2.6 million after
the payment of various closing costs associated with the sale. The Company paid
a real estate brokerage commission of $103,000 to Carmel Realty based on the
$2.7 million sales price of the property. The Company recognized a gain of $1.4
million on the sale.

In March 1997, the Company purchased the Terrace Hills Apartments, a 310 unit
apartment complex in El Paso, Texas, for $6.2 million. The Company paid $1.4
million in cash and obtained new mortgage financing of $4.8 million. The
mortgage bears interest at 8.07% per annum, requires monthly payments of
principal and interest of $35,086 and matures in April 2007. The Company paid a
real estate brokerage commission of $193,000 to Carmel Realty and a real estate
acquisition fee of $62,000 to BCM based on the $6.2 million purchase price of
the property.



                                       7

<PAGE>   8



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


NOTE 2. REAL ESTATE (Continued)

In March 1997, the Company purchased the Crescent Place Apartments, a 120 unit
apartment complex in Houston, Texas, for $2.3 million. The Company paid
$500,000 in cash and obtained new mortgage financing of $1.8 million. The
mortgage bears interest at 8.5% per annum, requires monthly payments of
principal and interest of $13,552 and matures in April 2004. The Company paid a
real estate brokerage commission of $91,000 to Carmel Realty and a real estate
acquisition fee of $24,000 to BCM based on the $2.3 million purchase price of
the property.

Also in March 1997, the Company purchased the Savings of America Building, a
68,634 square foot office building in Houston, Texas, for $1.6 million in cash.
The Company paid a real estate brokerage commission of $64,000 to Carmel Realty
and a real estate acquisition fee of $16,000 to BCM based on the $1.6 million
purchase price of the property.

In April 1997, the Company sold a foreclosed single family residence in
Scottsdale, Arizona, for $778,000 in cash. The Company paid a real estate
brokerage commission of $31,000 to Carmel Realty based on the $778,000 sales
price of the property. The Company recognized a gain of $55,000 on the sale.

In May 1997, the Company purchased the Treehouse Apartments, a 160 unit
apartment complex in Irving, Texas, for $3.4 million in cash. The Company paid
a real estate brokerage commission of $122,000 to Carmel Realty and a real
estate acquisition fee of $34,000 to BCM based on the $3.4 million purchase
price of the property.

Also in May 1997, the Company purchased the Villas at Countryside Apartments, a
102 unit apartment complex in Sterling, Virginia, for $6.3 million. The Company
paid $1.1 million in cash and assumed the existing mortgage of $5.2 million.
The mortgage bears interest at a variable rate, currently 9.0% per annum,
requires monthly payments of principal and interest of $38,768 and matures in
December 1997. The Company paid a real estate brokerage commission of $183,000
to Carmel Realty and a real estate acquisition fee of $63,000 to BCM based on
the $6.3 million purchase price of the property.

NOTE 3. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES

Set forth below is summarized results of operations for the real estate
entities the Company accounts for using the equity method for the six months
ended June 30, 1997 (dollars in thousands):

<TABLE>
<S>                                                                 <C>      
         Rents and interest income.............................     $  10,678
         Depreciation..........................................            959
         Property operations...................................          4,451
         Interest expense......................................          1,997
                                                                    ----------
         Net income............................................     $    3,271
                                                                    ==========
</TABLE>




                                       8

<PAGE>   9



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


NOTE 4.      NOTES AND INTEREST PAYABLE

In January 1997, the Company refinanced the matured mortgage debt secured by 74
New Montgomery, an office building in San Francisco, California, in the amount
of $6.3 million. The Company received net cash of $1.0 million after the payoff
of $5.2 million in existing mortgage debt. The remainder of the refinancing
proceeds were used to fund a tax escrow and to pay various closing costs
associated with the refinancing. The new mortgage bears interest at a variable
rate, currently 9.25% per annum, requires monthly payments of principal and
interest of $53,996 and matures in January 2004. The Company paid a mortgage
brokerage and equity refinancing fee of $63,000 to BCM based on the $6.3
million refinancing.

Also in January 1997, the Company refinanced the matured mortgage debt secured
by the Woods Edge Apartments in Rockville, Maryland in the amount of $6.2
million. The Company received no net cash. The refinancing proceeds were used
to payoff $5.9 million in existing mortgage debt, fund a tax escrow and pay
various closing costs associated with the refinancing. The new mortgage bears
interest at 8.125% per annum, requires monthly payments of principal and
interest of $46,035 and matures in February 2007. The Company paid a mortgage
brokerage and equity refinancing fee of $62,000 to BCM based on the $6.2
million refinancing.

In February 1997, the Company refinanced the matured mortgage debt secured by
the Spa Cove Apartments in Annapolis, Maryland in the amount of $12.2 million.
The Company received net cash of $245,000 after the payoff of $11.6 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund a tax escrow and pay various closing costs associated with the
refinancing. The new mortgage bears interest at 8.015% per annum, requires
monthly payments of principal and interest of $89,529 and matures in March
2007. The Company paid a mortgage brokerage and equity refinancing fee of
$122,000 to BCM based on the $12.2 million refinancing.

In March 1997, the Company refinanced the mortgage debt scheduled to mature in
December 1997, secured by President's Square, a shopping center in San Antonio,
Texas, in the amount of $1.9 million. The Company received net cash of $600,000
after the payoff of $1.2 million in existing debt and the payment of various
closing costs associated with the refinancing. The new mortgage bears interest
at 9.44% per annum, requires monthly payments of principal and interest of
$16,521 and matures in March 2009. The Company paid a mortgage brokerage and
equity refinancing fee of $19,000 to BCM based on the $1.9 million refinancing.

In May 1997, the mortgage debt secured by the Sheboygan Shopping Center in
Sheboygan, Wisconsin in the amount of $618,000 matured. The Company is in
negotiations with the lender to extend the loan and expects to be successful in
such negotiations, but if not successful, the Company intends to payoff the
loan.



                                       9

<PAGE>   10



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


NOTE 4. NOTES AND INTEREST PAYABLE (Continued)

In June 1996, the Company obtained mortgage financing of $2.8 million secured
by the previously unencumbered Treehouse Apartments in Irving, Texas. The
Company received net cash of $2.3 million after funding required tax and repair
escrows and the payment of various closing costs associated with the financing.
The mortgage bears interest at 8.28% per annum, requires monthly payments of
principal and interest of $21,994 and matures in July 2007. The Company paid a
mortgage brokerage and equity refinancing fee of $28,000 to BCM based on the
$2.8 million financing.

In August 1996, the Company modified and extended the matured mortgage debt
secured by the Northtown Mall Shopping Center in Dallas, Texas. The Company
paid $450,000 in principal paydowns to extend the loan's maturity date to March
31, 1997. The Company did not payoff the mortgage at maturity. The Company is
in negotiations with the lender to extend the loan and expects to be successful
in such negotiations, but if it is not, the Company intends to payoff the loan.

NOTE 5. COMMITMENTS AND CONTINGENCIES

The Company is involved in various lawsuits arising in the ordinary course of
business. The Company's management is of the opinion that the outcome of these
lawsuits will have no material impact on the Company's financial condition.




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


Introduction

Transcontinental Realty Investors, Inc. (the "Company") invests in real estate
through direct ownership, leases and partnerships and has invested in mortgage
loans, including first, wraparound and junior mortgage loans. The Company is no
longer seeking to fund or acquire new mortgage loans other than those which it
may originate in conjunction with providing purchase money financing of a
property sale. The Company is the successor to a business trust which was
organized on September 6, 1983 and commenced operations on January 31, 1984.

Liquidity and Capital Resources

Cash and cash equivalents aggregated $5.0 million at June 30, 1997 compared
with $960,000 at December 31, 1996. The Company's principal sources of cash
have been and will continue to be from property operations, proceeds from
property sales, the collection of mortgage



                                       10

<PAGE>   11



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


Liquidity and Capital Resources (Continued)

notes receivable and borrowings. The Company anticipates that its cash on hand,
as well as cash generated from the collection of mortgage notes receivable,
sales of properties, borrowings against certain of the Company's unencumbered
properties and refinancing or extensions of certain of its mortgage debt will
be sufficient to meet all of the Company's cash requirements including debt
service obligations and expenditures for property maintenance and improvements.

In the first six months of 1997, the Company paid dividends of $.14 per share,
or a total of $546,000.

The Company's Board of Directors has approved the Company's repurchase of a
total of 458,000 shares of its Common Stock. Through June 30, 1997, the Company
had purchased a total of 377,528 shares, for an aggregate purchase price of
$2.0 million. The Company repurchased 26,940 shares at a total cost of $302,000
during 1997.

In January 1997, the Company received a $10.0 million final payment on an
insurance settlement from the 1995 hail storm and flood damage to the Republic
Towers Office Building in Dallas, Texas. The Company is not currently able to
estimate the amount of such proceeds that will be expended to complete repairs
to the building.

In January 1997, the Company refinanced the mortgage debt secured by 74 New
Montgomery, an office building in San Francisco, California in the amount of
$6.3 million. The Company received net cash of $1.0 million after the payoff of
$5.2 million in existing mortgage debt and the payment of various closing costs
associated with the refinancing.

Also in January 1997, the Company refinanced the mortgage debt secured by the
Woods Edge Apartments in Rockville, Maryland in the amount of $6.2 million. The
Company received no net cash. The refinancing proceeds were used to payoff $5.9
million in existing mortgage debt, fund a tax escrow and to pay various closing
costs associated with the refinancing.

In February 1997, the Company refinanced the mortgage debt secured by the Spa
Cove Apartments in Annapolis, Maryland in the amount of $12.2 million. The
Company received net cash of $245,000 after the payoff of $11.6 million in
existing mortgage debt, funding a tax escrow and the payment of various closing
costs associated with the refinancing.

In February 1997, the Company completed the sale of two properties which were
under contract for sale at December 31, 1996, (i) the Fiesta Mart, a shopping
center in San Angelo, Texas and, (ii) a .9976 acre parcel of land in the
central business district of Dallas, Texas. The Company received net cash of
$3.0 million after the payoff of $90,000 in existing mortgage debt secured by
the Fiesta Mart and the payment of various closing costs associated with the
sales.




                                       11

<PAGE>   12



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


Liquidity and Capital Resources (Continued)

In March 1997, the Company purchased (i) the Crescent Place, an apartment
complex in Houston, Texas for $2.3 million, consisting of $500,000 in cash and
new mortgage financing of $1.8 million, (ii) the Savings of America Building,
an office building in Houston, Texas, for $1.6 million in cash and (iii)
Terrace Hills, an apartment complex in El Paso, Texas, for $6.2 million
consisting of $1.4 million in cash and new mortgage financing of $4.8 million.

Also in March 1997, the Company refinanced the mortgage debt secured by
President's Square, a shopping center in San Antonio, Texas. The Company
received net cash of $600,000 after the payoff of $1.2 million in existing
mortgage debt and the payment of various closing costs associated with the
refinancing.

In April 1997, the Company sold a foreclosed single family residence in
Scottsdale, Arizona, for $778,000 in cash.

In May 1997, the Company purchased (i) the Treehouse Apartments, an apartment
complex in Irving, Texas, for $3.4 million in cash and (ii) the Villas at
Countryside, an apartment complex in Sterling, Virginia, for $6.3 million,
consisting of $1.1 million in cash and the assumption of the existing mortgage
of $5.2 million. Also in May 1997, the Company accepted a discounted early
payoff of $2,075,000 in settlement of a mortgage note receivable with a
principal balance of $2,110,000.

In June 1997, the Company obtained mortgage financing secured by the previously
unencumbered Treehouse Apartments in the amount of $2.8 million. The Company
received net cash of $2.3 million after funding required tax, insurance and
repair escrows and the payment of various closing costs associated with the
financing.

The Company's management reviews the carrying values of the Company'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. In those instances where impairment is found to exist, a provision
for loss is recorded by a charge against earnings. The Company's mortgage note
receivable review includes an evaluation of the collateral property securing
such note. The property review generally includes selective property
inspections, a review of the property's current rents compared to market rents,
a review of the property's expenses, a review of maintenance requirements, a
review of the property's cash flow, discussions with the manager of the
property and a review of properties in the surrounding area.




                                       12

<PAGE>   13



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

Results of Operations

The Company's net loss for the three and six months ended June 30, 1997 was
$1.0 million and $1.2 million as compared to a net loss of $4.0 million and
$5.0 million in the corresponding periods in 1996. Net loss for the three and
six months ended June 30, 1997 includes gains on sale of real estate of $55,000
and $1.5 million, respectively. The 1996 net loss includes an extraordinary
gain of $48,000, gains on sales of real estate of $1.7 million and a provision
for loss of $1.6 million. Fluctuations in these and other components of the
Company's revenues and expenses between the 1996 and 1997 periods are discussed
below.

Rents in the three and six months ended June 30, 1997 were $13.3 million and
$25.4 million compared to $11.0 million and $22.1 million in the corresponding
periods in 1996. Of the increases, $970,000 and $1.8 million for the three and
six months ended June 30, 1997 relates to an increase in rental rates at the
Company's commercial properties, $65,000 and $301,000 relates to a decrease in
discounts and concessions given primarily at the Company's office buildings,
and $1.6 million and $2.2 million is due to the acquisition of ten properties
subsequent to June 30, 1996. These increases are partially offset by decreases
of $235,000 and $695,000 for the three and six months ended June 30, 1997 due
to the sale of three properties subsequent to June 30, 1996. Rents are expected
to continue to increase due to a full year of revenue from properties acquired
in 1996 and 1997.

Interest income for the three and six months ended June 30, 1997 of $364,000
and $773,000 was comparable to the $353,000 and $765,000 for the corresponding
periods in 1996. Interest income for the remaining six months of 1997 is
expected to be comparable to that of the first six months of 1997.

Property operations expense in the three and six months ended June 30, 1997 was
$7.8 million and $15.0 million as compared to $6.9 million and $14.3 million in
the corresponding periods in 1996. Of the increases, $1.1 million and $1.6
million is due to the acquisition of ten properties subsequent to June 30,
1996. These increases are partially offset by decreases of $189,000 and
$487,000 due to the sale of three properties subsequent to June 30, 1996 and
$164,000 and $562,000 is due to a decrease in operating expenses at Republic
Towers. Property operating expenses are expected to increase due to a full year
of operations from properties acquired in 1996 and 1997.

Interest expense increased from $3.7 million and $7.4 million in the three and
six months ended June 30, 1996 to $3.9 million and $7.8 million in the three
and six months ended June 30, 1997. Of the increases, $175,000 and $205,000 is
due to the debt incurred on four of ten properties acquired subsequent to June
30, 1996 and $65,000 and $236,000 is due to refinancings and financing obtained
on properties previously unencumbered. These increases are partially offset by
decreases of $3,000 and $68,000 due to properties sold subsequent to June 30,
1996. Interest expense for the remaining six months of 1997 is expected to be
comparable to that of the first six months of 1997.




                                       13

<PAGE>   14



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

Results of Operations (Continued)

Depreciation expense increased to $2.4 million and $4.6 million for the three
and six months ended June 30, 1997 compared to $2.1 million and $4.2 million in
the corresponding periods in 1996. The increases are due to the acquisition of
ten properties subsequent to June 30, 1996 with five of the properties being
acquired in the first six months of 1997. The increases are partially offset by
the sale of three properties in 1997. Depreciation is expected to continue to
increase during the remaining six months of 1997 as a result of a full year of
depreciation on the properties acquired in 1996 and the properties acquired in
1997.

Advisory fees increased to $491,000 and $956,000 for the three and six months
ended June 30, 1997 compared to $468,000 and $946,000 in the corresponding
periods in 1996. Advisory fees are expected to continue to increase with
increases in the Company's gross assets, the basis for such fee, as a result of
property acquisitions in 1997.

General and administrative expenses increased to $647,000 and $1.3 million for
the three and six months ended June 30, 1997 compared to $567,000 and $1.1
million in the corresponding periods in 1996. The increases are mainly due to
legal fees related to Republic Towers litigation and an increase in other
professional fees.

Equity in earnings of investees was income of $429,000 and $777,000 for the
three and six months ended June 30, 1997 compared to a loss of $1,000 and
$46,000 for the corresponding periods in 1996. Included in equity earnings of
investees for the three and six months ended June 30, 1997 are gains on sale of
real estate of $416,000 and $747,000, the Company's equity share of the gains
recognized by Income Opportunity Realty Investors, Inc. ("IORI") on the sale of
two of its apartment complexes. At August 1, 1997, the Company owned
approximately 22.5% of IORI's outstanding shares of common stock.

In the six months ended June 30, 1997, the Company recognized gains totaling
$1.5 million on the sale of (i) the Fiesta Mart, a shopping center, (ii) a
parcel of land in the Dallas central business district, both of which were
under contract for sale at December 31, 1996 and (iii) a foreclosed single
family residence. In the six months ended June 30, 1996, the Company recognized
gains of $1.7 million on the sales of Cheyenne Mountain land and Park Forest
Apartments. In the six months ended June 30, 1996, the Company recognized an
extraordinary gain of $48,000 on the paydown of the mortgage debt secured by
the Dunes Plaza, a shopping center. No such gain was recognized in 1997.

Tax Matters

As more fully discussed in the Company's 1996 Form 10-K, the Company has
elected and, in the opinion of the Company's management, qualified to be taxed
as a Real Estate Investment Trust ("REIT"), as defined under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended, (the "Code"). To
continue to qualify for federal taxation as




                                       14

<PAGE>   15



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

Tax Matters (Continued)

a REIT under the Code, the Company is required to hold at least 75% of the
value of its total assets in real estate assets, government securities, cash
and cash equivalents at the close of each quarter of each taxable year. The
Code also requires a REIT to distribute at least 95% of its REIT taxable
income, plus 95% of its net income from foreclosure property, all as defined in
Section 857 of the Code, on an annual basis to stockholders.

Inflation

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

Environmental Matters

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

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

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

                           PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

Olive Litigation.  In February 1990, the Company, together with
Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty
Investors, Inc. ("IORI") and National Income Realty Trust, three real
estate entities with, at the time, the same officers, directors or
trustees and advisor as the Company, entered into a settlement of a



                                       15

<PAGE>   16



ITEM 1. LEGAL PROCEEDINGS (Continued)

class and derivative action entitled Olive et al. v. National Income
Realty Trust et al. pending before the United States District Court for
the Northern District of California and relating to the operation and
management of each of the entities (the "Olive Litigation").  On April
23, 1990, the court granted final approval of the terms of a Stipulation
of Settlement.

On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and that modified certain provisions of the April 1990 settlement.
The Olive Modification was preliminarily approved by the Court on July 1, 1994,
and final court approval was entered on December 12, 1994. The effective date
of the Olive Modification was January 11, 1995.

The Court retained jurisdiction to enforce the Modification, and during August
and September 1996, the Court held evidentiary hearings to assess compliance
with the terms of the Modification by various parties. The Court issued no
ruling or order with respect to the matters addressed at the hearings.

Separately in 1996, legal counsel for the plaintiffs notified the Company's
Board of Directors that he intended to assert that certain actions taken by the
Board of Directors breached the terms of the Modification. On January 27, 1997,
the parties entered into an Amendment to the Modification effective January 9,
1997 (the "Amendment"), which was submitted to the Court for approval on
January 29, 1997. The Amendment provides for the settlement of all matters
raised at the evidentiary hearings and by plaintiffs' counsel in his notices to
the Company's Board of Directors. On May 2, 1997, a hearing was held for the
Court to consider approval of the Amendment. As a result of the hearing, the
parties entered into a revised Amendment. The Court issued an order approving
the Amendment on July 3, 1997.

The Amendment provides for the addition of four new unaffiliated members to the
Company's Board of Directors and sets forth new requirements for the approval
of any transactions with certain affiliates until April 28, 1999. In addition,
the Company, CMET, IORI and their shareholders released the defendants from any
claims relating to the plaintiffs' allegations and matters which were the
subject of the evidentiary hearings. The plaintiffs' allegations of any
breaches of the Modification shall be settled by mutual agreement of the
parties or, lacking such agreement, by an arbitration proceeding.

Under the Amendment, all shares of the Company owned by Gene E. Phillips or any
of his affiliates shall be voted at all stockholders' meetings held until April
28, 1999 in favor of all new Board members added under the Amendment. The
Amendment also requires that, until April 28, 1999, all shares of the Company
owned by Gene E. Phillips or his affiliates in excess of forty percent (40%) of
the Company's outstanding shares shall be voted in proportion to the votes cast
by all non-affiliated shareholders of the Company.



                                       16

<PAGE>   17



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


The Company held its annual meeting of stockholders on May 8, 1997, at which
meeting the Company's stockholders were asked to consider and vote upon (i) the
election of Directors of the Company and (ii) the renewal of the Company's
advisory agreement with Basic Capital Management, Inc.
("BCM").

At such meeting the Company's stockholders elected the following individuals as
Directors of the Company:

<TABLE>
<CAPTION>
                                                 Shares Voting
                                     -------------------------------------
                                                                Withheld
         Trustee                       For                      Authority
         -------                     ---------                 -----------
<S>                                  <C>                         <C>   
         Ted P. Stokely              2,954,683                   53,484
         Edward L. Tixier            2,955,533                   52,634
         Martin L. White             2,954,831                   53,336
         Edward G. Zampa             2,955,758                   52,409
</TABLE>

Also at such meeting the Company's stockholders approved the renewal of the
Company's advisory agreement with BCM until the next annual meeting of the
Company's stockholders with 2,797,625 votes for the proposal, 71,339 votes
against the proposal and 52,990 votes abstaining.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


(a)  Exhibits:


Exhibit
Number                                Description
--------       ---------------------------------------------


 27.0          Financial Data Schedule



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

         None.



                                       17

<PAGE>   18

                                   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:      August 7, 1997                   By:  /s/ Randall M. Paulson
     ---------------------------               --------------------------------
                                                 Randall M. Paulson
                                                 President






Date:      August 7, 1997                   By:  /s/ Thomas A. Holland
     ---------------------------               --------------------------------
                                                 Thomas A. Holland
                                                 Executive Vice President and
                                                 Chief Financial Officer
                                                 (Principal Financial and
                                                  Accounting Officer)




                                       18

<PAGE>   19



                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                                  EXHIBITS TO

                         QUARTERLY REPORT ON FORM 10-Q

                    For the Six Months ended June 30, 1997





Exhibit                                                                 Page
Number                                   Description                    Number
------              --------------------------------------------------  -------

   27.0             Financial Data Schedule                               20




                                       19