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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004



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



FOR THE TRANSITION PERIOD FROM  TO



Commission File Number 1-09240



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TRANSCONTINENTAL REALTY INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 94-6565852                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|1800 Valley View Lane, Suite 300, Dallas, Texas                |  | 75234                               
|(Address of Principal Executive Office)                        |  | (Zip Code)                          



(469) 522-4200

(Registrants Telephone Number, Including Area Code)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes ̈No  x



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 |  | 8,113,669                         
|(Class)                      |  | (Outstanding at November 12, 2004)



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



The accompanying Consolidated Financial Statements 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 balance sheets, 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

(Dollars in thousands, except per share)



|                                                                                                |  |                    |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                |  | September 30, 2004 |         |   | December 31, 2003 |  
|                                                                                                |  |                    |         |   | As Restated       |  
|Assets                                                                                          |  |                    |         |   |                   |   |         |  
|Real estate held for investment                                                                 |  | $                  | 800,244 |   |                   | $ | 807,371 |  
|Lessaccumulated depreciation                                                                   |  |                    | (81,408 | ) |                   |   | (86,501 | )
|                                                                                                |  |                    |         |   |                   |   |         |  
|                                                                                                |  |                    | 718,836 |   |                   |   | 720,870 |  
|                                                                                                |  |                   
|Real estate held for sale                                                                       |  |                    | 100,407 |   |                   |   | 61,457  |  
|                                                                                                |  |                   
|Notes and interest receivable:                                                                  |  |                    |         |   |                   |   |         |  
|Performing (including $21,340 in 2004 and $18,793 in 2003 from affiliates and related parties)  |  |                    | 40,709  |   |                   |   | 27,894  |  
|Nonperforming, nonaccruing                                                                      |  |                    | 4,303   |   |                   |   | 4,303   |  
|                                                                                                |  |                    |         |   |                   |   |         |  
|                                                                                                |  |                    | 45,012  |   |                   |   | 32,197  |  
|Lessallowance for estimated losses                                                             |  |                    | (1,456  | ) |                   |   | (1,456  | )
|                                                                                                |  |                    |         |   |                   |   |         |  
|                                                                                                |  |                    | 43,556  |   |                   |   | 30,741  |  
|                                                                                                |  |                   
|Investment in real estate entities                                                              |  |                    | 14,322  |   |                   |   | 14,271  |  
|Marketable equity securities, at market value                                                   |  |                    | 5,782   |   |                   |   | 5,000   |  
|Cash and cash equivalents                                                                       |  |                    | 7,830   |   |                   |   | 6,434   |  
|Other assets (including $11,196 in 2004 and $4,819 in 2003 from affiliates and related parties) |  |                    | 53,803  |   |                   |   | 44,011  |  
|                                                                                                |  |                    |         |   |                   |   |         |  
|                                                                                                |  | $                  | 944,536 |   |                   | $ | 882,784 |  
|                                                                                                |  |                    |         |   |                   |   |         |  



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



2



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETSContinued

(Dollars in thousands, except per share)



|                                                                                                                                   |  |                    |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                   |  | September 30, 2004 |         |   | December 31, 2003 |  
|                                                                                                                                   |  |                    |         |   | As Restated       |  
|Liabilities and Stockholders Equity                                                                                               |  |                    |         |   |                   |   |         |  
|Liabilities:                                                                                                                       |  |                    |         |   |                   |   |         |  
|Notes and interest payable                                                                                                         |  | $                  | 599,364 |   |                   | $ | 608,240 |  
|Liabilities related to assets held for sale                                                                                        |  |                    | 92,898  |   |                   |   | 18,225  |  
|Other liabilities (including $1,158 in 2004 and $607 in 2003 to related parties)                                                   |  |                    | 42,486  |   |                   |   | 34,688  |  
|                                                                                                                                   |  |                    |         |   |                   |   |         |  
|                                                                                                                                   |  |                    | 734,748 |   |                   |   | 661,153 |  
|                                                                                                                                   |  |                   
|Commitments and contingencies                                                                                                      |  |                    |        |   |                   |   |        |  
|                                                                                                                                   |  |                   
|Minority interest                                                                                                                  |  |                    | 852     |   |                   |   | (126    | )
|                                                                                                                                   |  |                   
|Stockholders equity:                                                                                                              |  |                    |         |   |                   |   |         |  
|Preferred Stock                                                                                                                    |  |                    |         |   |                   |   |         |  
|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 8,113,669 shares in 2004 and 8,072,594 in
2003 |  |                    | 81      |   |                   |   | 81      |  
|Paid-in capital                                                                                                                    |  |                    | 256,756 |   |                   |   | 256,914 |  
|Accumulated deficit                                                                                                                |  |                    | (46,124 | ) |                   |   | (34,622 | )
|Accumulated other comprehensive loss                                                                                               |  |                    | (1,777  | ) |                   |   | (616    | )
|                                                                                                                                   |  |                    |         |   |                   |   |         |  
|                                                                                                                                   |  |                    | 208,936 |   |                   |   | 221,757 |  
|                                                                                                                                   |  |                    |         |   |                   |   |         |  
|                                                                                                                                   |  | $                  | 944,536 |   |                   | $ | 882,784 |  
|                                                                                                                                   |  |                    |         |   |                   |   |         |  



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



3



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share)



|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- | ------- | - | -------------------------------------- | - | ------ | ---- |  | - | ----------- | - |  | - | ------- | -
|                                                                                                                                           |  | For the Three MonthsEnded September 30, |         |   | For the Nine MonthsEnded September 30, |  
|                                                                                                                                           |  | 2004                                    |         |   | 2003                                   |   |        | 2004 |  |   | 2003        |  
|                                                                                                                                           |  |                                         |         |   | As Restated                            |   |        |      |  |   | As Restated |  
|Property revenue:                                                                                                                          |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Rents                                                                                                                                      |  | $                                       | 26,375  |   |                                        | $ | 23,113 |      |  | $ | 75,851      |   |  | $ | 62,299  |  
|Property expense:                                                                                                                          |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Property operations (including $3,563 for nine months of 2004 and $3,323 for nine months of 2003 to affiliates and related
parties)        |  |                                         | 17,643  |   |                                        |   | 16,191 |      |  |   | 49,361      |   |  |   | 43,499  |  
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Operating income                                                                                                                           |  |                                         | 8,732   |   |                                        |   | 6,922  |      |  |   | 26,490      |   |  |   | 18,800  |  
|                                                                                                                                           |  |                                         |         |  
|Land Operations:                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Sales                                                                                                                                      |  |                                         | 2,600   |   |                                        |   | 2,600  |      |  |   | 32,550      |   |  |   | 4,599   |  
|Cost of Sales                                                                                                                              |  |                                         | 2,546   |   |                                        |   | 1,983  |      |  |   | 24,828      |   |  |   | 3,598   |  
|Deferred Gain on Sale                                                                                                                      |  |                                         | 54      |   |                                        |   |       |      |  |   | 4,869       |   |  |   |        |  
|Recognition of previously deferred gains                                                                                                   |  |                                         | 747     |   |                                        |   |       |      |  |   |            |   |  |   |        |  
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Gain on Sales                                                                                                                              |  |                                         | 747     |   |                                        |   | 617    |      |  |   | 2,853       |   |  |   | 1,001   |  
|                                                                                                                                           |  |                                         |         |  
|Other income (loss):                                                                                                                       |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Interest (including $1,090 for nine months of 2004 and $632 for nine months of 2003 from affiliates and related parties)                   |  |                                         | 921     |   |                                        |   | 486    |      |  |   | 2,180       |   |  |   | 1,994   |  
|Gain (loss) on foreign currency transaction                                                                                                |  |                                         | 543     |   |                                        |   | (966   | )    |  |   | 1,791       |   |  |   | (966    | )
|Equity in loss of equity investees                                                                                                         |  |                                         | (197    | ) |                                        |   | (1,174 | )    |  |   | (1,707      | ) |  |   | (2,766  | )
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|                                                                                                                                           |  |                                         | 1,267   |   |                                        |   | (1,654 | )    |  |   | 2,264       |   |  |   | (1,738  | )
|                                                                                                                                           |  |                                         |         |  
|Other expense:                                                                                                                             |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Interest                                                                                                                                   |  |                                         | 8,490   |   |                                        |   | 7,058  |      |  |   | 24,734      |   |  |   | 18,025  |  
|Depreciation                                                                                                                               |  |                                         | 4,357   |   |                                        |   | 3,725  |      |  |   | 13,118      |   |  |   | 10,783  |  
|Provision for asset impairment                                                                                                             |  |                                         | 4,477   |   |                                        |   |       |      |  |   | 4,477       |   |  |   |        |  
|Advisory fee to affiliates                                                                                                                 |  |                                         | 1,700   |   |                                        |   | 1,743  |      |  |   | 4,943       |   |  |   | 5,067   |  
|General and administrative (including $1,798 for nine months of 2004 and $1,226 for nine months of 2003 to affiliates and related
parties) |  |                                         | 1,592   |   |                                        |   | 3,371  |      |  |   | 5,551       |   |  |   | 6,357   |  
|Discount on sale of note receivable                                                                                                        |  |                                         |        |   |                                        |   |       |      |  |   |            |   |  |   | 104     |  
|Minority interest                                                                                                                          |  |                                         | 155     |   |                                        |   | (232   | )    |  |   | 867         |   |  |   | (332    | )
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|                                                                                                                                           |  |                                         | 20,771  |   |                                        |   | 15,665 |      |  |   | 53,690      |   |  |   | 40,004  |  
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Net loss from continuing operations                                                                                                        |  |                                         | (10,025 | ) |                                        |   | (9,780 | )    |  |   | (22,083     | ) |  |   | (21,941 | )
|                                                                                                                                           |  |                                         |         |  
|Discontinued operations:                                                                                                                   |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Income (loss) from operations                                                                                                              |  |                                         | (902    | ) |                                        |   | (2,193 | )    |  |   | (1,813      | ) |  |   | (4,983  | )
|Gain on sale of operations                                                                                                                 |  |                                         | 127     |   |                                        |   | 9,948  |      |  |   | 10,708      |   |  |   | 18,025  |  
|Equity in investees gain on sale of real estate                                                                                            |  |                                         | 222     |   |                                        |   | 1,217  |      |  |   | 1,686       |   |  |   | 2,970   |  
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|                                                                                                                                           |  |                                         | (553    | ) |                                        |   | 8,972  |      |  |   | 10,581      |   |  |   | 16,012  |  
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Net income (loss)                                                                                                                          |  |                                         | (10,578 | ) |                                        |   | (808   | )    |  |   | (11,502     | ) |  |   | (5,929  | )
|Preferred dividend requirement                                                                                                             |  |                                         | (53     | ) |                                        |   | (45    | )    |  |   | (158        | ) |  |   | (135    | )
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  
|Net income (loss) applicable to common shares                                                                                              |  | $                                       | (10,631 | ) |                                        | $ | (853   | )    |  | $ | (11,660     | ) |  | $ | (6,064  | )
|                                                                                                                                           |  |                                         |         |   |                                        |   |        |      |  |   |             |   |  |   |         |  



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



4



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONSContinued



|                                                                     |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|-------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | --------------------------------------- | - | --------- | ---- |  | - | ----------- | - |  | - | --------- | -
|                                                                     |  | For the Three Months Ended September 30, |           |   | For the Nine Months Ended September 30, |  
|                                                                     |  | 2004                                     |           |   | 2003                                    |   |           | 2004 |  |   | 2003        |  
|                                                                     |  |                                          |           |   | As Restated                             |   |           |      |  |   | As Restated |  
|Basic earnings per share:                                            |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|Net loss from continuing operations (before prior period adjustment) |  | $                                        | (1.23     | ) |                                         | $ | (1.28     | )    |  | $ | (2.72       | ) |  | $ | (2.88     | )
|Correction of accounting error in prior period (See Note 11.)        |  |                                          |          |   |                                         |   | .07       |      |  |   |            |   |  |   | .16       |  
|Discontinued operations                                              |  |                                          | (.07      | ) |                                         |   | 1.11      |      |  |   | 1.30        |   |  |   | 1.98      |  
|                                                                     |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|Net income (loss) applicable to common shares                        |  | $                                        | (1.30     | ) |                                         | $ | (.10      | )    |  | $ | (1.42       | ) |  | $ | (.74      | )
|                                                                     |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|Diluted earnings per share:                                          |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|Net loss from continuing operations (before prior period adjustment) |  | $                                        | (1.23     | ) |                                         | $ | (1.28     | )    |  | $ | (2.72       | ) |  | $ | (2.88     | )
|Correction of accounting error in prior period (See Note 11.)        |  |                                          |          |   |                                         |   | .07       |      |  |   |            |   |  |   | .16       |  
|Discontinued operations                                              |  |                                          | (.07      | ) |                                         |   | 1.11      |      |  |   | 1.30        |   |  |   | 1.98      |  
|                                                                     |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|Net income (loss) applicable to common shares                        |  | $                                        | (1.30     | ) |                                         | $ | (.10      | )    |  | $ | (1.42       | ) |  | $ | (.74      | )
|                                                                     |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|Weighted average common shares used in computing earnings per share: |  |                                          |           |   |                                         |   |           |      |  |   |             |   |  |   |           |  
|Basic                                                                |  |                                          | 8,113,669 |   |                                         |   | 8,072,594 |      |  |   | 8,113,669   |   |  |   | 8,072,594 |  
|Diluted                                                              |  |                                          | 8,113,669 |   |                                         |   | 8,072,594 |      |  |   | 8,113,669   |   |  |   | 8,072,594 |  



Convertible Series C Preferred Stock
(259,808 shares) and options to purchase 30,000 shares of TCIs common stock were excluded from the computation of diluted earnings per share for the nine months ended September 30, 2004, because the effect of their inclusion would be
antidilutive.



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



5



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(Dollars in thousands)



|                                                              |  |              |  |                |    |  |                     |         |   |                                               |   |         |                     |  |   |        |   |  |   |         |  
|------------------------------------------------------------- |  | ------------ |  | -------------- | -- |  | ------------------- | ------- | - | --------------------------------------------- | - | ------- | ------------------- |  | - | ------ | - |  | - | ------- | -
|                                                              |  | Common Stock |  | Paid-inCapital |    |  | Accumulated Deficit |         |   | Accumulated Other Comprehensive Income/(Loss) |   |         | StockholdersEquity | 
|                                                              |  | Shares       |  | Amount         |    |  |                     |        
|Balance at December 31, 2003 as previously reported           |  | 8,113,669    |  | $              | 81 |  | $                   | 256,914 |   |                                               | $ | (36,416 | )                   |  | $ | (616   | ) |  | $ | 219,963 |  
|                                                              |  |              |  |                |    | 
|Correction of accounting error in prior period (See Note 11.) |  |             |  |                |   |  |                     |        |   |                                               |   | 1,794   |                     |  |   |       |   |  |   | 1,794   |  
|                                                              |  |              |  |                |    |  |                     |         |   |                                               |   |         |                     |  |   |        |   |  |   |         |  
|Adjusted balance at January 1, 2004                           |  | 8,113,669    |  | $              | 81 |  | $                   | 256,914 |   |                                               | $ | (34,622 | )                   |  | $ | (616   | ) |  | $ | 221,757 |  
|                                                              |  |              |  |                |    | 
|Comprehensive income:                                         |  |              |  |                |    |  |                     |         |   |                                               |   |         |                     |  |   |        |   |  |   |         |  
|Unrealized loss on foreign currency translation               |  |             |  |                |   |  |                     |        |   |                                               |   |        |                     |  |   | (1,943 | ) |  |   | (1,943  | )
|Unrealized gain on marketable securities                      |  |             |  |                |   |  |                     |        |   |                                               |   |        |                     |  |   | 782    |   |  |   | 782     |  
|Net loss                                                      |  |             |  |                |   |  |                     |        |   |                                               |   | (11,502 | )                   |  |   |       |   |  |   | (11,502 | )
|                                                              |  |              |  |                |    |  |                     |         |   |                                               |   |         |                     |  |   |        |   |  |   |         |  
|                                                              |  |              |  |                |    |  |                     |         |   |                                               |   |         |                     |  |   |        |   |  |   | (12,663 | )
|Series C Preferred Stock cash dividend ($7.00 per share)      |  |             |  |                |   |  |                     | (158    | ) |                                               |   |        |                     |  |   |       |   |  |   | (158    | )
|                                                              |  |              |  |                |    |  |                     |         |   |                                               |   |         |                     |  |   |        |   |  |   |         |  
|Balance, September 30, 2004                                   |  | 8,113,669    |  | $              | 81 |  | $                   | 256,756 |   |                                               | $ | (46,124 | )                   |  | $ | (1,777 | ) |  | $ | 208,936 |  
|                                                              |  |              |  |                |    |  |                     |         |   |                                               |   |         |                     |  |   |        |   |  |   |         |  



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



6



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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



|                                                                                                  |  |                                         |          |   |             |   |         |  
|------------------------------------------------------------------------------------------------- |  | --------------------------------------- | -------- | - | ----------- | - | ------- | -
|                                                                                                  |  | For the Nine Months Ended September 30, |         
|                                                                                                  |  | 2004                                    |          |   | 2003        |  
|                                                                                                  |  |                                         |          |   | As Restated |  
|Cash Flows from Operating Activities:                                                             |  |                                         |          |   |             |   |         |  
|Net loss                                                                                          |  | $                                       | (11,502  | ) |             | $ | (5,929  | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |  |                                         |          |   |             |   |         |  
|Depreciation and amortization                                                                     |  |                                         | 16,041   |   |             |   | 15,193  |  
|Amortization of deferred borrowing costs                                                          |  |                                         | 2,763    |   |             |   | 2,264   |  
|Gain on sale of real estate                                                                       |  |                                         | (15,250  | ) |             |   | (21,996 | )
|Equity in loss of equity investees                                                                |  |                                         | 1,707    |   |             |   | 2,766   |  
|(Gain)/loss on foreign currency transaction                                                       |  |                                         | (1,791   | ) |             |   | 966     |  
|Provision for asset impairment                                                                    |  |                                         | 4,477    |   |             |   |        |  
|(Gain)/loss allocated to minority interest                                                        |  |                                         | 867      |   |             |   | (333    | )
|Increase in interest receivable                                                                   |  |                                         | (1,179   | ) |             |   | (1,345  | )
|Decrease (increase) in other assets                                                               |  |                                         | 6,099    |   |             |   | (586    | )
|Decrease in interest payable                                                                      |  |                                         | (764     | ) |             |   | (709    | )
|(Decrease) increase in other liabilities                                                          |  |                                         | 10,467   |   |             |   | (336    | )
|                                                                                                  |  |                                         |          |   |             |   |         |  
|Net cash provided by (used in) operating activities                                               |  |                                         | 11,935   |   |             |   | (10,045 | )
|                                                                                                  |  |                                        
|Cash Flows from Investing Activities:                                                             |  |                                         |          |   |             |   |         |  
|Collections on notes receivable                                                                   |  |                                         | 2,361    |   |             |   | 2,711   |  
|Funding of notes receivable                                                                       |  |                                         | (55      | ) |             |   | (685    | )
|Acquisition of real estate                                                                        |  |                                         | (20,004  | ) |             |   | (13,132 | )
|Real estate improvements                                                                          |  |                                         | (5,456   | ) |             |   | (6,486  | )
|Payments made under interest rate swap agreement                                                  |  |                                         |         |   |             |   | (87     | )
|Real estate construction                                                                          |  |                                         | (127,168 | ) |             |   | (28,733 | )
|Proceeds from sale of real estate                                                                 |  |                                         | 72,159   |   |             |   | 45,745  |  
|Distributions from (to) equity investees, net                                                     |  |                                         | 47       |   |             |   | (50     | )
|Payments received from (made to) affiliates                                                       |  |                                         | (21,361  | ) |             |   | 9,586   |  
|Deposits on pending purchases and financings                                                      |  |                                         | (4,145   | ) |             |   | (8,571  | )
|Purchase of marketable equity securities                                                          |  |                                         |         |   |             |   | (5,000  | )
|                                                                                                  |  |                                         |          |   |             |   |         |  
|Net cash used in investing activities                                                             |  |                                         | (103,622 | ) |             |   | (4,702  | )
|                                                                                                  |  |                                        
|Cash Flows from Financing Activities:                                                             |  |                                         |          |   |             |   |         |  
|Payments on notes payable                                                                         |  |                                         | (170,483 | ) |             |   | (54,791 | )
|Proceeds from notes payable                                                                       |  |                                         | 266,564  |   |             |   | 65,574  |  
|Dividends paid to preferred shareholders                                                          |  |                                         | (105     | ) |             |   | (21     | )
|Deferred financing costs                                                                          |  |                                         | (2,893   | ) |             |   | (1,385  | )
|                                                                                                  |  |                                         |          |   |             |   |         |  
|Net cash provided by financing activities                                                         |  |                                         | 93,083   |   |             |   | 9,377   |  
|                                                                                                  |  |                                        
|Net increase (decrease) in cash and cash equivalents                                              |  |                                         | 1,396    |   |             |   | (5,370  | )
|Cash and cash equivalents, beginning of period                                                    |  |                                         | 6,434    |   |             |   | 10,558  |  
|                                                                                                  |  |                                         |          |   |             |   |         |  
|Cash and cash equivalents, end of period                                                          |  | $                                       | 7,830    |   |             | $ | 5,188   |  
|                                                                                                  |  |                                         |          |   |             |   |         |  



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



7



---

TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWSContinued

(Dollars in thousands)



|                                                                    |  |                                         |        |      |   |       
|------------------------------------------------------------------- |  | --------------------------------------- | ------ | ---- | - | ------
|                                                                    |  | For the Nine Months Ended September 30,
|                                                                    |  | 2004                                    |        | 2003
|Supplemental Disclosures of Cash Flow Information:                  |  |                                         |        |      |   |       
|                                                                    |  |                                        
|Cash paid for interest                                              |  | $                                       | 31,422 |      | $ | 33,197
|                                                                    |  |                                        
|Schedule of noncash investing and financing activities:             |  |                                         |        |      |   |       
|Notes payable assumed on purchase of real estate                    |  |                                         | 5,027  |      |   | 2,650 
|Notes payable assumed by buyer on sale of real estate               |  |                                         | 13,148 |      |   | 18,696
|Funds collected by affiliate on sale of note receivable             |  |                                         |       |      |   | 2,700 
|Notes receivable provided on sale of real estate                    |  |                                         | 9,925  |      |   | 4,267 
|Note payable proceeds used by affiliate for purchase of real estate |  |                                         | 1,000  |      |   |      
|Note payable proceeds used by affiliate for payment of debt         |  |                                         | 1,851  |      |   |      
|Real estate received from related party as payment of debt          |  |                                         | 5,000  |      |   | 10,700
|Real estate purchased from affiliate increasing affiliate payable   |  |                                         | 7,059  |      |   |      
|Real estate received as paydown of note receivable                  |  |                                         |       |      |   | 1,059 
|Note payable paid by affiliate                                      |  |                                         | 10,823 |      |   | 757   
|Cash received by affiliate on sale of real estate                   |  |                                         |       |      |   | 4,599 



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



8



---

NOTE 1. BASIS OF PRESENTATION



Transcontinental Realty Investors, Inc. (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
accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 2003 have been reclassified to conform
to the 2004 presentation.



Operating results for the nine month period ended
September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003 (the 2003 Form 10-K).



Effective March 31, 2003, TCI financial results have been consolidated in the American Realty Investors, Inc. (ARI) Form 10-Q and related consolidated financial statements. As of September 30, 2004, ARI owned 80.0% of the
outstanding TCI common shares.



TCI provides stock options to certain
directors. TCI accounts for these stock options using the intrinsic method pursuant to the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. In
December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148), which amended SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends
the disclosure requirements of SFAS 123 to require prominent disclosures in the annual and interim financial statements for fiscal years ending after December 15, 2002. In compliance with SFAS No. 148, TCI has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by APB 25. If TCI had elected to recognize compensation cost for the issuance of options to directors of TCI based on the fair value at the grant
dates for awards consistent with the fair value method prescribed by SFAS No. 123, net income (loss) and income (loss) per share would have been impacted as follows:



|                                          |  |                                          |         |   |                                         |   |      |      |  |   |         |   |  |   |        |  
|----------------------------------------- |  | ---------------------------------------- | ------- | - | --------------------------------------- | - | ---- | ---- |  | - | ------- | - |  | - | ------ | -
|                                          |  | For the Three Months Ended September 30, |         |   | For the Nine Months Ended September 30, |  
|                                          |  | 2004                                     |         |   | 2003                                    |   |      | 2004 |  |   | 2003    |  
|Net income (loss):                        |  |                                          |         |   |                                         |   |      |      |  |   |         |   |  |   |        |  
|As reported                               |  | $                                        | (10,578 | ) |                                         | $ | (808 | )    |  | $ | (11,502 | ) |  | $ | (5,929 | )
|Proforma compensation expense, net of tax |  |                                          |        |   |                                         |   |     |      |  |   | 137     |   |  |   | 268    |  
|                                          |  |                                          |         |   |                                         |   |      |      |  |   |         |   |  |   |        |  
|Proforma                                  |  | $                                        | (10,578 | ) |                                         | $ | (808 | )    |  | $ | (11,639 | ) |  | $ | (6,197 | )
|                                          |  |                                          |         |   |                                         |   |      |      |  |   |         |   |  |   |        |  
|Basic earnings (loss) per share:          |  |                                          |         |   |                                         |   |      |      |  |   |         |   |  |   |        |  
|As reported                               |  | $                                        | (1.30   | ) |                                         | $ | (.10 | )    |  | $ | (1.42   | ) |  | $ | (.74   | )
|Proforma                                  |  | $                                        | (1.30   | ) |                                         | $ | (.10 | )    |  | $ | (1.43   | ) |  | $ | (.77   | )
|Diluted earnings (loss) per share:        |  |                                          |         |   |                                         |   |      |      |  |   |         |   |  |   |        |  
|As reported                               |  | $                                        | (1.30   | ) |                                         | $ | (.10 | )    |  | $ | (1.42   | ) |  | $ | (.74   | )
|Proforma                                  |  | $                                        | (1.30   | ) |                                         | $ | (.10 | )    |  | $ | (1.43   | ) |  | $ | (.77   | )



9



---

NOTE 2. REAL ESTATE



In 2004, TCI purchased the following property:



|                           |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|-------------------------- |  | ------------------ |  | ------------ |  | -------------- | ----- | ----------------------- | - | ----- | ------------ |  | - | ------------- | --- |  | ------------- | - |  | -----
|Property                   |  | Location           |  | Units/Acres  |  | Purchase Price |       | Net CashPaid/(Received) |   |       | DebtIncurred |  |   | Interest Rate |     |  | Maturity Date
|First Quarter              |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Apartments                 |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|288 City Park(1)           |  | Houston, TX        |  | 240 Units    |  | $              | 3,056 |                         | $ | 612   |              |  | $ | 2,444         |     |  | 5.95          | % |  | 04/45
|Blue Lake Villas II(1)     |  | Waxahachie, TX     |  | 70 Units     |  |                | 729   |                         |   | (164  | )            |  |   | 729           |     |  | 5.80          |   |  | 04/45
|Bridges on Kinsey(1)       |  | Tyler, TX          |  | 232 Units    |  |                | 2,291 |                         |   | 596   |              |  |   | 1,687         |     |  | 5.74          |   |  | 08/45
|Dakota Arms(1)             |  | Lubbock, TX        |  | 208 Units    |  |                | 2,472 |                         |   | 681   |              |  |   | 1,791         |     |  | 5.85          |   |  | 06/45
|Lake Forest(1)             |  | Houston, TX        |  | 240 Units    |  |                | 2,316 |                         |   | (470  | )            |  |   | 2,316         |     |  | 5.60          |   |  | 03/45
|Vistas of Vance Jackson(1) |  | San Antonio, TX    |  | 240 Units    |  |                | 3,550 |                         |   | 771   |              |  |   | 2,779         |     |  | 5.78          |   |  | 06/45
|                           |  |                    |  |              |  |                |      
|Land                       |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Lubbock land               |  | Lubbock, TX        |  | 2.866 Acres  |  |                | 224   |                         |   | 224   |              |  |   |              |     |  |              |   |  |     
|Railroad land              |  | Dallas, TX         |  | .293 Acres   |  |                | 708   |                         |   | 704   |              |  |   |              |     |  |              |   |  |     
|Vista Ridge land(2)        |  | Lewisville, TX     |  | 14.216 Acres |  |                | 2,585 |                         |   |      |              |  |   |              |     |  |              |   |  |     
|                           |  |                    |  |              |  |                |      
|Second Quarter             |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Apartments                 |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Treehouse(3)               |  | Irving, TX         |  | 160 Units    |  |                | 7,519 |                         |   | (498  | )            |  |   | 5,027         | (5) |  | 5.00          |   |  | 08/13
|Wildflower Villas(1)       |  | Temple, TX         |  | 220 Units    |  |                | 2,045 |                         |   | 79    |              |  |   | 1,966         |     |  | 5.99          |   |  | 10/45
|                           |  |                    |  |              |  |                |      
|Land                       |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Cooks Lane land            |  | Ft. Worth, TX      |  | 23.242 Acres |  |                | 1,000 |                         |   | 1,034 |              |  |   |              |     |  |              |   |  |     
|Lacy Longhorn land(4)      |  | Farmers Branch, TX |  | 17.115 Acres |  |                | 4,474 |                         |   |      |              |  |   |              |     |  |              |   |  |     
|Rogers land                |  | Rogers, AR         |  | 20.08 Acres  |  |                | 1,390 |                         |   | 619   |              |  |   | 1,130         |     |  | 10.50         |   |  | 04/05
|                           |  |                    |  |              |  |                |      
|Third Quarter              |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Land                       |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Granbury Station           |  | Ft. Worth, TX      |  | 15.696 Acres |  |                | 923   |                         |   | 236   |              |  |   | 738           |     |  | 7.00          |   |  | 09/07
|                           |  |                    |  |              |  |                |      
|Fourth Quarter             |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Land                       |  |                    |  |              |  |                |       |                         |   |       |              |  |   |               |     |  |               |   |  |      
|Denton-Coonrod             |  | Denton, TX         |  | 82.203 Acres |  |                | 1,644 |                         |   | 1,046 |              |  |   | 840           |     |  | 6.25          |   |  | 11/06
|DeSoto                     |  | DeSoto, TX         |  | 21.897 Acres |  |                | 2,516 |                         |   | 1,364 |              |  |   | 1,265         |     |  | 6.25          |   |  | 11/06
|West End                   |  | Dallas, TX         |  | .158 Acres   |  |                | 71    |                         |   | 71    |              |  |   |              |     |  |              |   |  |     

---

|(1) | Land purchased for apartment construction.
|--- | ------------------------------------------

|(2) | Property received from ARI, a related party, for an increase of $2.6 million to TCIs affiliate payable with Prime.
|--- | -------------------------------------------------------------------------------------------------------------------

|(3) | Purchased from IORI, a related party, for assumption of debt and a note receivable, less $498,000 in cash received.
|--- | -------------------------------------------------------------------------------------------------------------------

|(4) | Property received from ARI, a related party, for an increase of $4.5 million to TCIs affiliate payable with Prime.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Assumed debt.
|--- | -------------



10



---

In 2003, TCI purchased the following property:



|                    |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|------------------- |  | ------------------ |  | ------------------ |  | ------------- | ----- | ------------ | - | ------------ |  | - | ------------- | --- |  | ------------- | --- |  | ----- | ---
|Property            |  | Location           |  | Units/Sq.Ft./Acres |  | PurchasePrice |       | Net CashPaid |   | DebtIncurred |  |   | Interest Rate |     |  | Maturity Date |    
|First Quarter       |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Apartments          |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Capitol Hill(1)     |  | Little Rock, AR    |  | 156 Units          |  | $             | 1,904 |              | $ | 615          |  | $ | 1,289         |     |  | 5.50          | %   |  | 10/44 |    
|Heather Creek(1)    |  | Mesquite, TX       |  | 200 Units          |  |               | 2,523 |              |   | 449          |  |   | 2,074         |     |  | 6.15          |     |  | 06/44 |    
|Kingsland Ranch(1)  |  | Houston, TX        |  | 398 Units          |  |               | 3,300 |              |   |             |  |   | 3,300         |     |  | 6.12          |     |  | 03/45 |    
|                    |  |                    |  |                    |  |               |      
|Land                |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Maumelle            |  | Maumelle, AR       |  | 10.8 Acres         |  |               | 1,100 |              |   | 412          |  |   | 640           |     |  | 5.75          |     |  | 07/04 | (7)
|                    |  |                    |  |                    |  |               |      
|Shopping Centers    |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Bridgeview Plaza(2) |  | LaCrosse, WI       |  | 116,008 Sq.Ft.     |  |               | 8,700 |              |   |             |  |   |              |     |  |              |     |  |      |    
|Cullman(2) (5)      |  | Cullman, AL        |  | 92,433 Sq.Ft.      |  |               | 2,000 |              |   |             |  |   | 2,650         | (4) |  | 16.75         |     |  | 03/03 | (3)
|                    |  |                    |  |                    |  |               |      
|Second Quarter      |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Apartments          |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Breakwater Bay(1)   |  | Beaumont, TX       |  | 176 Units          |  |               | 1,979 |              |   | 383          |  |   | 1,554         |     |  | 5.50          |     |  | 08/44 |    
|                    |  |                    |  |                    |  |               |      
|Land                |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Pulaski             |  | Pulaski County, AR |  | 21.9 Acres         |  |               | 2,000 |              |   | 695          |  |   | 1,400         |     |  | 6.50          |     |  | 05/05 |    
|                    |  |                    |  |                    |  |               |      
|Third Quarter       |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Land                |  |                    |  |                    |  |               |       |              |   |              |  |   |               |     |  |               |     |  |       |    
|Sheffield Village   |  | Grand Prairie, TX  |  | 13.899 Acres       |  |               | 1,643 |              |   | 632          |  |   | 975           |     |  | 5.50          | (6) |  | 09/04 | (8)

---

|(1) | Land purchased for apartment construction.
|--- | ------------------------------------------

|(2) | Property received from a related party for forgiveness of debt.
|--- | ---------------------------------------------------------------

|(3) | Debt was paid off in April 2003 refinance.
|--- | ------------------------------------------

|(4) | Assumed debt.
|--- | -------------

|(5) | TCI assumed $2.65 million of debt along with receiving property valued at $2.0 million and a note receivable valued at $650,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(6) | Variable interest rate.
|--- | -----------------------

|(7) | This loan was extended in August 2004 to July 2005.
|--- | ---------------------------------------------------

|(8) | This loan matured in September 2004 and negotiations with the lender to extend the loan are ongoing.
|--- | ----------------------------------------------------------------------------------------------------



In 2004, TCI sold the following property:



|                      |  |                   |  |                    |  |             |        |                   |   |                   |  |   |                     |        |  |   |       |    
|--------------------- |  | ----------------- |  | ------------------ |  | ----------- | ------ | ----------------- | - | ----------------- |  | - | ------------------- | ------ |  | - | ----- | ---
|Property              |  | Location          |  | Units/Sq.Ft./Acres |  | Sales Price |        | Net Cash Received |   | Debt Extinguished |  |   | Gain/(Loss) on Sale |       
|First Quarter         |  |                   |  |                    |  |             |        |                   |   |                   |  |   |                     |        |  |   |       |    
|Industrial Warehouses |  |                   |  |                    |  |             |        |                   |   |                   |  |   |                     |        |  |   |       |    
|Kelly (Pinewood)      |  | Dallas, TX        |  | 100,000 Sq. Ft.    |  | $           | 1,650  |                   | $ | 65                |  | $ | 1,376               |        |  | $ | 153   |    
|Ogden Industrial      |  | Ogden, UT         |  | 107,112 Sq. Ft.    |  |             | 2,600  |                   |   | 668               |  |   | 1,775               |        |  |   | 1,374 |    
|Texstar Warehouse(2)  |  | Arlington, TX     |  | 97,846 Sq. Ft.     |  |             | 2,400  |                   |   |                  |  |   | 1,148               | (1)(6) |  |   |      | (3)
|                      |  |                   |  |                    |  |            
|Land                  |  |                   |  |                    |  |             |        |                   |   |                   |  |   |                     |        |  |   |       |    
|Allen                 |  | Collin County, TX |  | 492.531 Acres      |  |             | 19,962 |                   |   | 7,956             |  |   | 4,088               |        |  |   | 2,853 | (5)
|Marine Creek(7)       |  | Ft. Worth, TX     |  | 10.73 Acres        |  |             | 1,488  |                   |   | 1,198             |  |   | 991                 |        |  |   |      | (8)
|Red Cross             |  | Dallas, TX        |  | 2.89 Acres         |  |             | 8,500  |                   |   | 2,842             |  |   | 4,450               |        |  |   |      |    
|                      |  |                   |  |                    |  |            
|Office Buildings      |  |                   |  |                    |  |             |        |                   |   |                   |  |   |                     |        |  |   |       |    
|Brandeis(9)           |  | Omaha, NE         |  | 319,234 Sq. Ft.    |  |             |       |                   |   |                  |  |   | 8,750               | (1)    |  |   | (92   | )  
|Countryside Harmon    |  | Sterling, VA      |  | 5,000 Sq. Ft.      |  |             | 2,650  |                   |   | 216               |  |   | 2,200               |        |  |   | 1,861 |    
|Countryside Retail    |  | Sterling, VA      |  | 133,422 Sq. Ft.    |  |             | 27,100 |                   |   | 3,408             |  |   | 22,800              |        |  |   | 5,475 |    



11



---

In 2004, TCI sold the following property (continued):



|                          |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|------------------------- |  | --------------- |  | ------------------- |  | ----------- | ------ | ----------------- | - | ----- | ----------------- |  | - | ------------------- | ------ |  | - | ----- | ----
|Property                  |  | Location        |  | Units/Sq. Ft./Acres |  | Sales Price |        | Net Cash Received |   |       | Debt Extinguished |  |   | Gain/(Loss) on Sale |       
|Shopping Centers          |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|K-Mart(2)                 |  | Cary, NC        |  | 92,033 Sq. Ft.      |  | $           | 3,200  |                   | $ |      |                   |  | $ | 1,677               | (1)(6) |  | $ |      | (4) 
|                          |  |                 |  |                     |  |            
|Second Quarter            |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|Apartments                |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|Cliffs of El Dorado(10)   |  | McKinney, TX    |  | 208 Units           |  |             | 13,442 |                   |   | 10    |                   |  |   | 10,323              | (1)    |  |   |      | (11)
|Sandstone                 |  | Mesa, AZ        |  | 238 Units           |  |             | 8,650  |                   |   | 2,687 |                   |  |   | 5,531               |        |  |   | 1,136 |     
|Waters Edge IV(12)        |  | Gulfport, MS    |  | 80 Units            |  |             | 5,000  |                   |   |      |                   |  |   |                    |        |  |   |      | (13)
|                          |  |                 |  |                     |  |            
|Office Buildings          |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|4135 Beltline             |  | Addison, TX     |  | 90,000 Sq. Ft.      |  |             | 4,900  |                   |   | 2,472 |                   |  |   | 2,009               |        |  |   | 345   |     
|Atrium                    |  | Palm Beach, FL  |  | 74,603 Sq. Ft.      |  |             | 5,775  |                   |   | 1,667 |                   |  |   | 3,772               |        |  |   | 328   |     
|                          |  |                 |  |                     |  |            
|Third Quarter             |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|Industrial Warehouses     |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|Kelly (Cash Road)         |  | Dallas, TX      |  | 97,150 Sq. Ft.      |  |             | 1,500  |                   |   | 1,077 |                   |  |   | 422                 |        |  |   | 127   |     
|                          |  |                 |  |                     |  |            
|Land                      |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|Rasor                     |  | Plano, TX       |  | 24.5 Acres          |  |             | 2,600  |                   |   | 2,600 |                   |  |   |                    |        |  |   |      | (14)
|                          |  |                 |  |                     |  |            
|Fourth Quarter            |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|Apartments                |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|In The Pines              |  | Gainesville, FL |  | 242 Units           |  |             | 11,300 |                   |   | 3,247 | (15)              |  |   | 5,201               |        |  |   | 5,136 |     
|                          |  |                 |  |                     |  |            
|Office Buildings          |  |                 |  |                     |  |             |        |                   |   |       |                   |  |   |                     |        |  |   |       |     
|Ambulatory Surgery Center |  | Sterling, VA    |  | 33,832 Sq. Ft.      |  |             | 8,675  |                   |   | 5,448 |                   |  |   | 2,899               |        |  |   | 202   |     
|Durham Centre(16)         |  | Durham, NC      |  | 207,171 Sq. Ft.     |  |             | 21,300 |                   |   | 6,703 |                   |  |   | 14,536              |        |  |   |      | (17)
|One Steeplechase          |  | Sterling, VA    |  | 103,376 Sq. Ft.     |  |             | 11,900 |                   |   | 3,743 |                   |  |   | 7,654               |        |  |   | 5,627 |     

---

|(1) | Assumed debt.
|--- | -------------

|(2) | Property sold to Basic Capital Management (BCM), a related party, for assumption of debt and a note receivable. See Note 3. NOTES AND INTEREST RECEIVABLE.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Excludes a $1.0 million deferred gain from a related party sale.
|--- | ----------------------------------------------------------------

|(4) | Excludes $355,000 deferred gain from a related party sale.
|--- | ----------------------------------------------------------

|(5) | Excludes a $5.0 million deferred gain due to a portion of the land sold on a contingent basis for a note receivable of $7.2 million. TCI recognized deferred gain of $747,000 in
September 2004 due to the receipt of a $1.1 million principal payment on the note receivable. See Note 3. NOTES AND INTEREST RECEIVABLE.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt assumed by the purchaser.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Property sold to United Housing Foundation (UHF), a related party, for cash and a note receivable. See Note 6. RELATED PARTIES
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(8) | Excludes a $581,000 deferred gain from a related party sale.
|--- | ------------------------------------------------------------

|(9) | Brandeis was returned to lender via a deed in lieu of foreclosure process. See Note 7. NOTES AND INTEREST PAYABLE.
|--- | --------------------------------------------------------------------------------------------------------------------

|(10) | Property sold to UHF, a related party, in 2003. See Note 6. RELATED PARTIES.
|---- | ------------------------------------------------------------------------------

|(11) | Excludes a $1.7 million deferred gain from a related party sale.
|---- | ----------------------------------------------------------------

|(12) | Property sold to ARI, a related party, for a reduction of $5.0 million to the affiliate payable balance.
|---- | --------------------------------------------------------------------------------------------------------

|(13) | Excludes a $494,000 deferred gain from a related party sale.
|---- | ------------------------------------------------------------

|(14) | Excludes a $54,000 deferred gain from a related party sale.
|---- | -----------------------------------------------------------

|(15) | Excludes a $1.0 million secured note receivable provided by TCI as seller financing. See Note 3. NOTES AND INTEREST RECEIVABLE.
|---- | ---------------------------------------------------------------------------------------------------------------------------------

|(16) | Property sold to Edina Park Plaza Associates, L.P., of which the managing general partner is a subsidiary of ARI, a related party, for a wrap-around note of $14.5 million and cash.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) | Excludes a $4.0 million deferred gain from a related party sale.
|---- | ----------------------------------------------------------------



12



---

In 2003, TCI sold the following property:



|                      |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|--------------------- |  | ----------------- |  | ------------------ |  | ----------- | ------ | ----------------- | - | ----- | ----------------- |  | - | ------------ | --- |  | - | -----
|Property              |  | Location          |  | Units/Sq.Ft./Acres |  | Sales Price |        | Net Cash Received |   |       | Debt Extinguished |  |   | Gain on Sale
|Second Quarter        |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|Apartments            |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|Willow Wick           |  | North Augusta, SC |  | 104 Units          |  | $           | 2,707  |                   | $ | 255   |                   |  | $ | 1,943        |     |  | $ | 999  
|                      |  |                   |  |                    |  |            
|Industrial Warehouses |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|McLeod                |  | Orlando, FL       |  | 110,914 Sq. Ft.    |  |             | 5,450  |                   |   | 2,980 |                   |  |   | 1,902        |     |  |   | 2,490
|Tricon                |  | Atlanta, GA       |  | 570,877 Sq. Ft.    |  |             | 13,084 |                   |   | 3,364 |                   |  |   | 9,395        |     |  |   | 4,587
|                      |  |                   |  |                    |  |            
|Land                  |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|Solco-Valley Ranch    |  | Dallas, TX        |  | 6.0693 Acres       |  |             | 1,999  |                   |   |      | (2)               |  |   |             |     |  |   | 384  
|                      |  |                   |  |                    |  |            
|Third Quarter         |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|Apartments            |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|Lincoln Court         |  | Dallas, TX        |  | 55 Units           |  |             | 3,038  |                   |   | 1,834 |                   |  |   | 1,208        | (1) |  |   | 1,650
|Quail Creek           |  | Lawrence, KS      |  | 95 Units           |  |             | 4,700  |                   |   | 1,188 |                   |  |   | 3,260        |     |  |   | 1,358
|Stone Oak             |  | San Antonio, TX   |  | 252 Units          |  |             | 6,930  |                   |   | 3,670 |                   |  |   | 2,699        |     |  |   | 4,193
|                      |  |                   |  |                    |  |            
|Land                  |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|Palm Desert           |  | Palm Desert, CA   |  | 25.06 Acres        |  |             | 2,600  |                   |   |      | (3)               |  |   |             |     |  |   | 617  
|                      |  |                   |  |                    |  |            
|Office Buildings      |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|Bonita Plaza          |  | Bonita, CA        |  | 47,777 Sq. Ft.     |  |             | 8,034  |                   |   | 1,698 |                   |  |   | 5,944        |     |  |   | 2,139
|                      |  |                   |  |                    |  |            
|Shopping Centers      |  |                   |  |                    |  |             |        |                   |   |       |                   |  |   |              |     |  |   |      
|K-Mart                |  | Sheboygen, WI     |  | 74,532 Sq. Ft.     |  |             | 1,225  |                   |   | 669   |                   |  |   | 569          |     |  |   | 12   
|Oak Tree Village      |  | Lubbock, TX       |  | 45,623 Sq. Ft.     |  |             | 3,366  |                   |   |      | (4)               |  |   | 1,328        |     |  |   | 590  

---

|(1) | Debt assumed by purchaser.
|--- | --------------------------

|(2) | Funds received by an affiliate increasing the affiliate receivable balance by $1,999.
|--- | -------------------------------------------------------------------------------------

|(3) | Funds received by an affiliate increasing the affiliate receivable balance by $2,600.
|--- | -------------------------------------------------------------------------------------

|(4) | Funds received by an affiliate increasing the affiliate receivable balance by $1,640.
|--- | -------------------------------------------------------------------------------------



At September 30, 2004, TCI had the following properties under construction:



|                                                  |  |                 |  |           |  |                 |        |                           |   |                          |  |   |       
|------------------------------------------------- |  | --------------- |  | --------- |  | --------------- | ------ | ------------------------- | - | ------------------------ |  | - | ------
|Property                                          |  | Location        |  | Units     |  | Amount Expended |        | AdditionalAmountto Expend |   | ConstructionLoan Funding
|Apartments                                        |  |                 |  |           |  |                 |        |                           |   |                          |  |   |       
|Blue Lake Villas II                               |  | Waxahachie, TX  |  | 76 Units  |  | $               | 3,209  |                           | $ | 1,462                    |  | $ | 4,234 
|Bluffs at Vista Ridge                             |  | Lewisville, TX  |  | 272 Units |  |                 | 16,227 |                           |   | 4,359                    |  |   | 15,500
|Bridges on Kinsey                                 |  | Tyler, TX       |  | 232 Units |  |                 | 6,290  |                           |   | 9,790                    |  |   | 14,477
|Dakota Arms                                       |  | Lubbock, TX     |  | 208 Units |  |                 | 10,858 |                           |   | 3,079                    |  |   | 12,549
|Kingsland Ranch                                   |  | Houston, TX     |  | 398 Units |  |                 | 24,427 |                           |   | 1,227                    |  |   | 23,000
|Lake Forest                                       |  | Houston, TX     |  | 240 Units |  |                 | 11,668 |                           |   | 2,769                    |  |   | 12,815
|Stonebridge at City Park (formerly 288 City Park) |  | Houston, TX     |  | 240 Units |  |                 | 14,971 |                           |   | 1,716                    |  |   | 15,005
|Vistas of Vance Jackson                           |  | San Antonio, TX |  | 240 Units |  |                 | 9,994  |                           |   | 8,108                    |  |   | 16,056
|Wildflower Villas                                 |  | Temple, TX      |  | 220 Units |  |                 | 5,233  |                           |   | 10,364                   |  |   | 14,073



For the nine months ended September
30, 2004, TCI completed the 248 unit DeSoto Ranch Apartments in DeSoto, Texas, the 314 unit Verandas at Cityview Apartments in Fort Worth, Texas, the 216 unit Mariposa Villas (Echo Valley) in Dallas, Texas, the 176 unit Breakwater Bay Apartments in
Beaumont, Texas, the 156 unit Capitol Hill Apartments in Little Rock, Arkansas and the 332 unit Vistas of Pinnacle Park Apartments in Dallas, Texas.



13



---

NOTE 3. NOTES AND INTEREST RECEIVABLE



Unless noted, all of TCIs notes receivables are secured by real estate assets or ownership in or membership rights of the
purchasers entity.



In October 2004, TCI sold the In The Pines apartments
to a third party and provided $1.0 million of the purchase price as seller financing. The note bears interest at 7% per annum, requires monthly interest payments and matures in January 2005. Purchaser is entitled to extend the note 60 days by paying
1.0% of the outstanding principal balance 10 days prior to the maturity date. The purchaser is entitled to extend the note an additional 30 days by paying 0.5% of the outstanding principal balance 10 days prior to the extended maturity date. In the
event of a default, the note is also secured by membership rights in the purchasers entity.



In March 2004, TCI sold 492.531 acres in Collin County, Texas to a third party for $20.0 million. TCI provided $7.2 million of the purchase price as seller financing for a portion of the land on a contingent basis.
The secured note bears interest at 7% and matures in September 2004. The buyer has the option to convey the contingent land back to TCI for cancellation of the note. The purchaser extended the note to December 2004 with a $1.1 million principal
payment in September 2004. TCI also recognized $747,000 of the $5.0 million deferred gain from this sale due to the receipt of this payment.



In June 2003, TCI sold the 104 unit Willow Wick Apartments in North Augusta, South Carolina, for $2.7 million and provided $42,000 of the purchasers closing costs
as seller financing. The secured note bears interest at a fixed rate of 5% and requires all interest and principal payments be paid at maturity in December 2003. This loan was extended until February 2004 and $10,000 was received in March 2004. This
note, including accrued but unpaid interest, was paid in June 2004. TCI agreed to discount the note $2,000 and recognized a loss of $2,000.



In August 2001, TCI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bore interest at a variable
rate, prime rate plus 3%, required monthly interest only payments and matured in January 2003. As of September 2003, TCI has funded a total of $4.3 million and the note is classified as nonperforming. The collateral used to secure TCIs second
lien was seized by the first lien holder. On March 11, 2004, TCI agreed to accept an assignment of claims in litigation as security for the note. In April 2004, TCI received a $125,000 note receivable as partial payment on this note. The note
received as consideration accrues interest at a fixed rate of 12%, requires monthly interest payments and matures in April 2009. TCI is also working on securing additional collateral for this note and restructuring the terms of the note but a new
agreement has not been reached. The current agreement requires interest to accrue at the default rate of 18%.



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 first lien mortgage note. The secured note bears interest at a variable interest rate, currently 7.0% per annum, requires monthly interest only payments and matures in March 2007. As of September 2004, TCI has
funded $354,000 of the additional line of credit.



In July 2002, TCI entered
into an agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum and requires monthly interest only payments, and matures in
June 2005. As of September 2004, TCI has funded $300,000 of the line of credit.



In September 2002, TCI sold a 36 acre tract of the Palm Desert land parcel for $3.6 million and provided $2.7 million as seller financing in the form of a first lien mortgage note. The secured note bears interest at 8.0% per annum, requires
quarterly interest only payments and matures in September 2004. In March 2003, the note was sold to a financial institution for $2.6 million.



Related Party.In October 2004, TCI sold the common stock of TCI Lexington Corporation, which owns the Lexington Center office building in Colorado Springs,
Colorado, to One Realco Office Investors, Inc., a related party, for $5.1 million. One Realco Office Investors, Inc. assumed liabilities of $4.9 million and TCI provided $237,000 as seller financing. The note bears interest at a fixed rate of 6.5%,
requires quarterly interest only payments and matures in October 2006.



Also in
October 2004, TCI sold the Durham Centre in Durham, North Carolina to a partnership, of which the managing general partner is a subsidiary of ARI, for $21.3 million for cash and an all-inclusive wrap-around note of $14.5 million. The note bears
interest at a fixed rate of 7.63%, requires monthly interest payments and matures in September 2007. TCI also made a loan to the partnership for $3.3 million. The note bears interest at a fixed rate of 7.63%, requires monthly interest payments and
matures in September 2017.



In March 2004, TCI sold a K-Mart in Cary, North
Carolina to BCM for $3.2 million, including the assumption of debt. TCI also provided $1.5 million of the purchase price as seller financing. The secured note bears interest at the prime rate plus 2%, which is currently 7.0%, and matures in April
2005.



14



---

In March 2004, TCI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million, including the assumption of
debt. TCI also provided $1.3 million of the purchase price as seller financing. The secured note bears interest at the prime rate plus 2%, which is currently 7.0%, and matures in April 2005.



NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES



Real estate entities. TCIs investment in real estate entities at September 30,
2004 included equity securities of two publicly traded real estate entities, Income Opportunity Realty Investors, Inc. (IORI) and ARI, related parties, and interests in real estate joint venture partnerships. Basic Capital Management,
Inc. (BCM), TCIs advisor until July 1, 2003, also served as advisor to IORI and ARI until July 1, 2003. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by Prime Asset Management, Inc., (PAMI).
Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (PIAMI). On October 1, 2003, Prime Income Asset Management, LLC, (Prime) replaced PIAMI as the advisor to TCI. ARI is a related party
that owns 80% of TCIs common stock and consolidates TCIs financial accounts and operations.



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



TCIs investment in real estate entities, accounted for using the equity method, at September 30, 2004, was as follows:



|         |  |                                                    |   |  |                                                   |        |                                                 |   |       
|-------- |  | -------------------------------------------------- | - |  | ------------------------------------------------- | ------ | ----------------------------------------------- | - | ------
|Investee |  | Percentage of TCIs Ownership atSeptember 30, 2004 |   |  | Carrying Value of Investment atSeptember 30, 2004 |        | Market Valueof Investment at September 30, 2004
|IORI     |  | 24.0                                               | % |  | $                                                 | 5,212  |                                                 | $ | 5,082 
|ARI      |  | 6.6                                                | % |  |                                                   | 8,891  |                                                 |   | 6,372 
|         |  |                                                    |   |  |                                                   |        |                                                 |   |       
|         |  |                                                    |   |  |                                                   | 14,103 |                                                 | $ | 11,454
|         |  |                                                    |   |  |                                                   |        |                                                 |   |       
|Other    |  |                                                    |   |  |                                                   | 219    |                                                 |   |       
|         |  |                                                    |   |  |                                                   |        |                                                 |   |       
|         |  |                                                    |   |  | $                                                 | 14,322 |                                                 |   |       
|         |  |                                                    |   |  |                                                   |        |                                                 |   |       



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 nine months of 2004 and 2003.



|                                         |  |      |         |   |      |   |          |  
|---------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                         |  | 2004 |         |   | 2003 |  
|Revenues                                 |  | $    | 98,006  |   |      | $ | 110,676  |  
|Equity in loss of partnerships           |  |      | (10     | ) |      |   | (4,367   | )
|Property operating expenses              |  |      | (87,029 | ) |      |   | (101,185 | )
|Depreciation                             |  |      | (7,422  | ) |      |   | (8,486   | )
|Interest expense                         |  |      | (27,483 | ) |      |   | (38,234  | )
|                                         |  |      |         |   |      |   |          |  
|Loss before gains on sale of real estate |  |      | (23,938 | ) |      |   | (41,596  | )
|Gain on sale of real estate              |  |      | 15,551  |   |      |   | 47,058   |  
|                                         |  |      |         |   |      |   |          |  
|Net income (loss)                        |  | $    | (8,387  | ) |      | $ | 5,462    |  
|                                         |  |      |         |   |      |   |          |  



NOTE 5. MARKETABLE EQUITY
SECURITIES



In March 2003, TCI obtained a loan in the amount of $5.0
million to acquire equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 representing approximately a 9.2% ownership interest. As of May 2003, the loan was paid in full. This investment is considered an available-for-sale security. TCI
recognized an unrealized gain of $782,000 for the period ending September 30, 2004 due to an increase in market price.



15



---

NOTE 6. RELATED PARTIES



In September 2004, TCI sold 9.96 acres of land to an affiliate for a purchase price of $720,000. Due to no cash received and common control,
TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met.



In June 2004, TCI purchased 17.115 acres of land from an affiliate with a net purchase price of $4.5 million, increasing the affiliate payable balance by $4.5 million.



Also in June 2004, TCI sold apartments to an affiliate with a net purchase price of $5.0
million, decreasing the affiliate payable balance by $5.0 million.



Again in
June 2004, TCI refinanced an office building and two parcels of land. TCI paid-off an existing note payable for ARI for $1.9 million, decreasing the affiliate payable balance by $1.9 million.



In May 2004, TCI purchased the Treehouse Apartments from an affiliate with a net purchase
price of $7.5 million for the assumption of debt and a note receivable, less cash received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of
El Dorado Apartments was not recorded as a sale for accounting purposes. TCI recorded the sale of the Cliffs of El Dorado in May 2004 due to payment received for the Cliffs of El Dorado note receivable.



In March 2004, a related party purchased the loans on TCIs three Chicago hotels for
$10.8 million. This amount increased the affiliate payable balance by $10.8 million.



In February 2004, TCI received a loan for $1.0 million used for the purchase of land by ARI, decreasing the affiliate payable balance by $1.0 million.



Also in February 2004, TCI recorded the sale of a tract of Marine Creek land originally sold to a related party in December 2003. This transaction was not recorded as
a sale for accounting purposes in December 2003 and was recorded as a TCI refinancing transaction in February 2004. TCI received $1.2 million in cash from the related party in February 2004 as payment on the land. TCI still has a note receivable
balance of $290,000 remaining that bears interest at 12.00% and matures in April 2009. TCI recorded the sale of the Marine Creek land tract due to the payment received on the note receivable.



In January 2004, TCI purchased 14.216 acres of land from an affiliate with a net purchase
price of $2.6 million, increasing the affiliate payable balance by $2.6 million.



In December 2003, TCI sold 17.06 acres of land to an affiliate for a purchase price of $2.0 million. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale
have been met.



In March 2003, TCI purchased two properties from an affiliate
with a net purchase price of $10.7 million, reducing the affiliate receivable balance by $8.1 million after the assumption of debt of $2.65 million.



On September 19, 2002, TCIs Board of Directors authorized the Chief Financial Officer of TCI to advance funds either to or from TCI, through the advisor, in an
amount up to $15.0 million on the condition that such advances shall be repaid in cash or transfers of assets within 90 days. These advances are unsecured, bear no interest, generally have not had specific repayment terms and have been reflected in
TCIs financial statements as other assets and other liabilities.



16



---

The following table reconciles the beginning and ending Affiliates receivable (payable) balances as of September 30,
2004.



|                                           |  |       |         |   |     |   |      |      |  |   |      |  
|------------------------------------------ |  | ----- | ------- | - | --- | - | ---- | ---- |  | - | ---- | -
|                                           |  | PRIME |         |   | ARI |   |      | IORI | 
|Balance, December 31, 2003                 |  | $     | 4,391   |   |     | $ | (347 | )    |  | $ | (260 | )
|Cash transfers                             |  |       | 59,767  |   |     |   |     |      |  |   |     |  
|Cash repayments                            |  |       | (40,249 | ) |     |   |     |      |  |   |     |  
|Payments through property transfers        |  |       | 5,000   |   |     |   |     |      |  |   |     |  
|Repayments through property transfers      |  |       | (7,059  | ) |     |   |     |      |  |   |     |  
|Repayment through affiliate refinance      |  |       | (10,823 | ) |     |   |     |      |  |   |     |  
|Advance through affiliate refinancing      |  |       | 1,851   |   |     |   |     |      |  |   |     |  
|Advance through receipt of loan obligation |  |       | 1,000   |   |     |   |     |      |  |   |     |  
|Construction fees payable to affiliate     |  |       | (4,156  | ) |     |   |     |      |  |   |     |  
|Payables clearing through Prime            |  |       | (1,908  | ) |     |   |     |      |  |   |     |  
|                                           |  |       |         |   |     |   |      |      |  |   |      |  
|Balance, September 30, 2004                |  | $     | 7,814   |   |     | $ | (347 | )    |  | $ | (260 | )
|                                           |  |       |         |   |     |   |      |      |  |   |      |  



Also reflected in TCIs Other
Assets are advances of $1.8 million to affiliated management companies during 2004 to cover operating shortfalls on residential properties. And, Other Assets also includes $1.5 million due from Regis Property Management, a related party, for rent.



In April 2002, TCI sold 12 apartment properties to partnerships controlled by
Metra Capital, LLC (Metra). Innovo Group, Inc. (Innovo) is a limited partner in the partnerships that purchased the properties. Joseph Mizrachi, then a Director of ARI, a related party, controlled approximately 11.67% of the
outstanding common stock of Innovo. Management determined to treat the sales as financing transactions, and TCI continues to report the assets and the new debt incurred by Metra on its financial statements. The partnership agreements for each of
these partnerships state that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15% cumulative compounded annual rate of return on their invested capital, as well as a
cumulative compounded annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these properties. These distributions to the Metra Partners have priority over distributions to any other partners. At
September 30, 2004, 12 of the properties remained on TCIs balance sheet. As of September 2004, TCI and Metra were involved in a lawsuit concerning certain details of this transaction. See ITEM 1. LEGAL PROCEEDINGS under Part
II. Other Information for more information.



NOTE 7. NOTES AND
INTEREST PAYABLE



In September 2004, the lender on one of TCIs
commercial properties located in Colorado notified TCI that the loan on the property was in default, due to TCIs failure to make timely debt service payments. The balance owed on the loan is $3.9 million. In October 2004, TCI sold this asset
to a related party for assumption of debt and seller financing. At November 2004, negotiations with the lender are ongoing.



In July 2004, TCI received a loan of $2.5 million, less fees, that is secured by TCIs $7.2 million note receivable from the sale of 492 acres of land in Allen,
Texas earlier in 2004. This loan bears interest at the prime rate plus 1.5%, which is currently 6.50%, requires interest only payments, and matures in December 2004. TCI is also required to pay 20% of any funds received on the Allen land sale note
receivable. TCI paid $215,000 on the loan in September 2004 due to receipt of a $1.1 million principal payment on the Allen land sale note receivable.



In March 2004, a related party to TCI purchased the loans on TCIs three Chicago hotels, the City Suites hotel, the Willows hotel and The Majestic hotel. The loans,
including accrued but unpaid interest, were purchased for $10.8 million dollars. The purchased loans were applied as an affiliate payable to the Prime affiliate balance. In August 2004, the City Suites, Willows and Majestic hotels were released from
bankruptcy protection. In September 2004, TCI refinanced the City Suites and Willows hotels.



In February 2004, the Brandeis office building was returned to the lender via a Deed in Lieu of Foreclosure process. The outstanding debt and accrued interest was $8.8 million. TCI recorded a net impairment of $4.4
million in the fourth quarter of 2003 for this transaction.



In February 2004,
TCI received a loan for $1.0 million that is cross defaulted and cross collateralized with ARIs purchase of land in Portage County, Ohio. The loan bears interest at the prime rate plus .5%, which is currently 5.50%, requires monthly principal
and interest payments, and matures in February 2005.



17



---

In 2004, TCI refinanced or financed the following properties:



|                                   |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|---------------------------------- |  | ------------------ |  | -------------------- |  | ------------- | ------ | --- | --------------- | - | ------------------------ |  | - | ------------- | - |  | ------------- | ---- |  | -----
|Property                           |  | Location           |  | Sq. Ft./ Acres/Units |  | Debt Incurred |        |     | Debt Discharged |   | Net Cash Received/(Paid) |  |   | Interest Rate |   |  | Maturity Date
|First Quarter                      |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Land                               |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Centura Land                       |  | Farmers Branch, TX |  | 8.753 Acres          |  | $             | 4,485  |     |                 | $ | 4,400                    |  | $ | (183          | ) |  | 7.00          | %(1) |  | 11/04
|Hollywood, Dominion & Mira Lago(2) |  | Farmers Branch, TX |  | 66.085 Acres         |  |               | 6,985  |     |                 |   | 6,222                    |  |   | (67           | ) |  | 7.00          | (1)  |  | 02/05
|                                   |  |                    |  |                      |  |               |       
|Office Buildings                   |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Centura Tower                      |  | Farmers Branch, TX |  | 410,901 Sq. Ft.      |  |               | 34,000 | (3) |                 |   | 36,889                   |  |   | (4,588        | ) |  | 5.50          | (1)  |  | 04/06
|                                   |  |                    |  |                      |  |               |       
|Second Quarter                     |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Apartments                         |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Treehouse                          |  | Irving, TX         |  | 160 Units            |  |               | 5,780  |     |                 |   | 5,027                    |  |   | 138           |   |  | 5.06          |      |  | 07/34
|Paramount Terrace                  |  | Amarillo, TX       |  | 181 Units            |  |               | 3,176  |     |                 |   | 2,663                    |  |   | 323           |   |  | 5.15          |      |  | 06/37
|                                   |  |                    |  |                      |  |               |       
|Land                               |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Lacy Longhorn                      |  | Farmers Branch, TX |  | 17.115 Acres         |  |               | 1,965  | (4) |                 |   |                         |  |   | 78            |   |  | 4.03          | (1)  |  | 07/07
|Marine Creek                       |  | Fort Worth, TX     |  | 28.437 Acres         |  |               | 1,785  | (4) |                 |   |                         |  |   | 1,746         |   |  | 4.03          | (1)  |  | 07/07
|                                   |  |                    |  |                      |  |               |       
|Office Buildings                   |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|1010 Common                        |  | New Orleans, LA    |  | 494,579 Sq. Ft.      |  |               | 16,250 | (4) |                 |   | 8,000                    |  |   | 7,829         |   |  | 4.03          | (1)  |  | 07/07
|                                   |  |                    |  |                      |  |               |       
|Third Quarter                      |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Hotels                             |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|City Suites                        |  | Chicago, IL        |  | 45 Rooms             |  |               | 3,640  |     |                 |   |                         |  |   | 3,548         |   |  | 6.75          | (1)  |  | 09/09
|Willows                            |  | Chicago, IL        |  | 52 Rooms             |  |               | 3,500  |     |                 |   |                         |  |   | 3,411         |   |  | 6.75          | (1)  |  | 09/09
|                                   |  |                    |  |                      |  |               |       
|Office Buildings                   |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Centura Tower                      |  | Farmers Branch, TX |  | 410,901 Sq. Ft.      |  |               | 50,000 |     |                 |   | 37,594                   |  |   | 2,989         |   |  | 4.94          |      |  | 10/09
|Centura Tower(5)                   |  | Farmers Branch, TX |  | 410,901 Sq. Ft.      |  |               | 3,800  |     |                 |   |                         |  |   | 3,737         |   |  | 5.75          | (1)  |  | 04/06
|                                   |  |                    |  |                      |  |               |       
|Warehouses                         |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Addison Hangers I & II(6)          |  | Addison, TX        |  | 52,650 Sq. Ft.       |  |               | 4,500  |     |                 |   | 2,592                    |  |   | 1,635         |   |  | 10.00         |      |  | 09/14
|                                   |  |                    |  |                      |  |               |       
|Fourth Quarter                     |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Hotels                             |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Majestic Inn                       |  | San Francisco, CA  |  | 57 Rooms             |  |               | 2,000  | (7) |                 |   | 5,138                    |  |   | (1,238        | ) |  | 5.75          | (1)  |  | 10/05
|                                   |  |                    |  |                      |  |               |       
|Land                               |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|Cooks Lane                         |  | Ft. Worth, TX      |  | 23.242 Acres         |  |               | 550    |     |                 |   |                         |  |   | 527           |   |  | 6.25          |      |  | 11/06
|                                   |  |                    |  |                      |  |               |       
|Office Buildings                   |  |                    |  |                      |  |               |        |     |                 |   |                          |  |   |               |   |  |               |      |  |      
|225 Baronne                        |  | New Orleans, LA    |  | 416,834 Sq. Ft.      |  |               | 500    | (7) |                 |   |                         |  |   |              |   |  | 5.75          | (1)  |  | 10/05
|Amoco                              |  | New Orleans, LA    |  | 378,244 Sq. Ft.      |  |               | 1,500  | (7) |                 |   |                         |  |   |              |   |  | 5.75          | (1)  |  | 10/05

---

|(1) | Variable rate.
|--- | --------------

|(2) | The Hollywood Casino, Dominion and Mira Lago tracts are cross collateralized.
|--- | -----------------------------------------------------------------------------

|(3) | Debt was paid off in September 2004 refinancing.
|--- | ------------------------------------------------

|(4) | The 1010 Common office building, certain tracts of Marine Creek land and the Lacy Longhorn land are cross collateralized.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(5) | 2ndlien advance on Centura Tower.
|--- | ---------------------------------

|(6) | The Addison Hangers were sold in September 2004 to a third party but were then leased back for 10 years on a triple net lease basis. This transaction has been recorded as a
financing transaction for accounting purposes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | The Majestic Inn, 225 Baronne Office Building and Amoco Office Building are cross collateralized. The debt incurred on 225 Baronne and Amoco are 2nd lien loans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

In 2003, TCI refinanced or financed the following properties:



|                      |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|--------------------- |  | -------------- |  | --------------- |  | ------------- | ----- | --------------- | - | ------------------------ |  | - | ------------- | - |  | ------------- | ---- |  | ----- | ---
|Property              |  | Location       |  | Sq.Ft./Units    |  | Debt Incurred |       | Debt Discharged |   | Net Cash Received/(Paid) |  |   | Interest Rate |   |  | Maturity Date |     
|First Quarter         |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Apartments            |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Mountain Plaza        |  | El Paso, TX    |  | 188 Units       |  | $             | 4,350 |                 | $ | 4,034                    |  | $ | (29           | ) |  | 6.63          | %(1) |  | 03/06 |    
|Stone Oak             |  | San Antonio,TX |  | 252 Units       |  |               | 2,500 |                 |   |                         |  |   | 2,500         |   |  | 5.00          |      |  | 04/03 | (2)
|                      |  |                |  |                 |  |               |      
|Office Buildings      |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Bonita Plaza          |  | Bonita, CA     |  | 47,777 Sq.Ft.   |  |               | 6,000 |                 |   | 4,824                    |  |   | 1,134         |   |  | 5.25          | (1)  |  | 01/10 |    
|                      |  |                |  |                 |  |               |      
|Second Quarter        |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Apartments            |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Plantation            |  | Tulsa, OK      |  | 138 Units       |  |               | 2,320 |                 |   | 1,924                    |  |   | 173           |   |  | 5.60          |      |  | 06/29 |    
|                      |  |                |  |                 |  |               |      
|Industrial Warehouses |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Ogden Industrial      |  | Ogden, UT      |  | 107,112 Sq.Ft.  |  |               | 1,800 |                 |   |                         |  |   | 1,722         |   |  | 6.25          | (1)  |  | 04/05 |    
|                      |  |                |  |                 |  |               |      
|Shopping Centers      |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Bridgeview            |  | LaCrosse,WI    |  | 116,008 Sq. Ft. |  |               | 6,500 |                 |   |                         |  |   | 6,152         |   |  | 6.25          | (1)  |  | 04/05 |    
|Cullman               |  | Cullman, AL    |  | 92,433 Sq. Ft.  |  |               | 1,700 |                 |   | 2,650                    |  |   | (1,048        | ) |  | 6.25          | (1)  |  | 04/05 |    
|                      |  |                |  |                 |  |               |      
|Third Quarter         |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Apartments            |  |                |  |                 |  |               |       |                 |   |                          |  |   |               |   |  |               |      |  |       |    
|Treehouse             |  | Irving, TX     |  | 160 Units       |  |               | 5,100 |                 |   | 2,518                    |  |   | 2,132         |   |  | 5.00          | (1)  |  | 08/13 |    

---

|(1) | Variable rate.
|--- | --------------

|(2) | Loan paid in full during July 2003.
|--- | -----------------------------------



NOTE 8. OPERATING SEGMENTS



Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation
and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow. Items of income that are not reflected in the segments
are interest, gain on foreign currency transaction, equity in loss of equity investees and equity in investees gains on sales of real estate which totaled $1.5 million and $4.0 million for the three and nine months ended September 30, 2004 and a
loss of $437,000 and a gain of $1.2 million for the three and nine months ended September 30, 2003, respectively. Expenses that are not reflected in the segments are general and administrative expenses, discount on sale of note receivable, minority
interest and advisory fees which totaled $3.4 million and $11.4 million for the three and nine months ended September 30, 2004 and $4.9 million and $11.2 million for the three and nine months ended September 30, 2003, respectively. Also excluded
from segment assets are assets of $125.3 million at September 30, 2004, and $96.0 million at September 30, 2003, which are not identifiable with an operating segment. There are no intersegment revenues and expenses.



19



---

Presented below is the operating income of each operating segment for the three and nine months ended September 30, 2004
and 2003, and each segments assets at September 30.



|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|--------------------------------------- |  | ---- | ------ | - | --------------------- | - | ---------- |  | ------ | ------- | ----- | - | ------ |  | - | -------
|Three Months Ended September 30, 2004   |  | Land |        |   | Commercial Properties |   | Apartments |  | Hotels |         | Total
|Rents                                   |  | $    | 105    |   |                       | $ | 7,693      |  | $      | 15,815  |       | $ | 2,762  |  | $ | 26,375 
|Property operating expenses             |  |      | 590    |   |                       |   | 5,193      |  |        | 10,053  |       |   | 1,807  |  |   | 17,643 
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Operating income (loss)                 |  | $    | (485   | ) |                       | $ | 2,500      |  | $      | 5,762   |       | $ | 955    |  | $ | 8,732  
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Interest                                |  | $    | 871    |   |                       | $ | 1,461      |  | $      | 5,913   |       | $ | 245    |  | $ | 8,490  
|Depreciation                            |  |      | 11     |   |                       |   | 2,187      |  |        | 1,783   |       |   | 376    |  |   | 4,357  
|Provision for asset impairment          |  |      |       |   |                       |   | 4,477      |  |        |        |       |   |       |  |   | 4,477  
|Real estate improvements                |  |      | 240    |   |                       |   | 2,092      |  |        |        |       |   | 492    |  |   | 2,824  
|Real estate construction                |  |      |       |   |                       |   |           |  |        | 28,572  |       |   |       |  |   | 28,572 
|Assets                                  |  |      | 92,309 |   |                       |   | 228,480    |  |        | 464,899 |       |   | 33,555 |  |   | 819,243
|                                        |  |      |        |   |                      
|Property Sales:                         |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|                                        |  |      |        |   |                      
|Sales price                             |  | $    | 2,600  |   |                       | $ | 1,500      |  | $      |        |       | $ |       |  | $ | 4,100  
|Cost of sales                           |  |      | 2,546  |   |                       |   | 1,373      |  |        |        |       |   |       |  |   | 3,919  
|Deferred current gain                   |  |      | 54     |   |                       |   |           |  |        |        |       |   |       |  |   | 54     
|Recognition of previously deferred gain |  |      | 747    |   |                       |   |           |  |        |        |       |   |       |  |   | 747    
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Gain on sale                            |  | $    | 747    |   |                       | $ | 127        |  | $      |        |       | $ |       |  | $ | 874    
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|                                        |  |      |        |   |                      
|Nine Months Ended September 30, 2004    |  | Land |        |   | Commercial Properties |   | Apartments |  | Hotels |         | Total
|Rents                                   |  | $    | 393    |   |                       | $ | 23,497     |  | $      | 44,989  |       | $ | 6,972  |  | $ | 75,851 
|Property operating expenses             |  |      | 1,323  |   |                       |   | 14,914     |  |        | 28,161  |       |   | 4,963  |  |   | 49,361 
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Operating income (loss)                 |  | $    | (930   | ) |                       | $ | 8,583      |  | $      | 16,828  |       | $ | 2,009  |  | $ | 26,490 
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Interest                                |  | $    | 2,315  |   |                       | $ | 5,615      |  | $      | 15,797  |       | $ | 1,007  |  | $ | 24,734 
|Depreciation                            |  |      | 34     |   |                       |   | 6,565      |  |        | 5,354   |       |   | 1,165  |  |   | 13,118 
|Provision for asset impairment          |  |      |       |   |                       |   | 4,477      |  |        |        |       |   |       |  |   | 4,477  
|Real estate improvements                |  |      | 546    |   |                       |   | 4,178      |  |        | 222     |       |   | 510    |  |   | 5,456  
|Real estate construction                |  |      |       |   |                       |   |           |  |        | 127,168 |       |   |       |  |   | 127,168
|Assets                                  |  |      | 92,309 |   |                       |   | 228,480    |  |        | 464,899 |       |   | 33,555 |  |   | 819,243
|                                        |  |      |        |   |                      
|Property Sales:                         |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|                                        |  |      |        |   |                      
|Sales price                             |  | $    | 32,550 |   |                       | $ | 51,775     |  | $      | 27,092  |       | $ |       |  | $ | 111,417
|Cost of sales                           |  |      | 24,828 |   |                       |   | 40,809     |  |        | 23,783  |       |   |       |  |   | 89,420 
|Deferred current gain                   |  |      | 4,869  |   |                       |   | 1,394      |  |        | 2,173   |       |   |       |  |   | 8,436  
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Gain on sale                            |  | $    | 2,853  |   |                       | $ | 9,572      |  | $      | 1,136   |       | $ |       |  | $ | 13,561 
|                                        |  |      |        |   |                       |   |            |  |        |         |       |   |        |  |   |        



20



---

NOTE 8. OPERATING SEGMENTS (Continued)



|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|------------------------------------- |  | ---- | ------- | - | --------------------- | - | ---------- |  | ------ | ------- | ----- | - | ------ |  | - | -------
|Three Months Ended September 30, 2003 |  | Land |         |   | Commercial Properties |   | Apartments |  | Hotels |         | Total
|Rents                                 |  | $    | 126     |   |                       | $ | 8,310      |  | $      | 12,897  |       | $ | 1,780  |  | $ | 23,113 
|Property operating expenses           |  |      | 374     |   |                       |   | 4,875      |  |        | 9,846   |       |   | 1,096  |  |   | 16,191 
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Operating income (loss)               |  | $    | (248    | ) |                       | $ | 3,435      |  | $      | 3,051   |       | $ | 684    |  | $ | 6,922  
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Interest                              |  | $    | 504     |   |                       | $ | 2,104      |  | $      | 4,344   |       | $ | 106    |  | $ | 7,058  
|Depreciation                          |  |      | 11      |   |                       |   | 2,162      |  |        | 1,212   |       |   | 340    |  |   | 3,725  
|Real estate improvements              |  |      | 261     |   |                       |   | 1,768      |  |        |        |       |   | 1,182  |  |   | 3,211  
|Real estate construction              |  |      |        |   |                       |   |           |  |        | 3,278   |       |   |       |  |   | 3,278  
|Assets                                |  |      | 122,263 |   |                       |   | 286,355    |  |        | 321,522 |       |   | 16,543 |  |   | 746,683
|                                      |  |      |         |   |                      
|Property Sales:                       |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|                                      |  |      |         |   |                      
|Sales price                           |  | $    | 2,600   |   |                       | $ | 12,626     |  | $      | 14,669  |       | $ |       |  | $ | 29,895 
|Cost of sales                         |  |      | 1,983   |   |                       |   | 9,884      |  |        | 7,463   |       |   |       |  |   | 19,330 
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Gain on sale                          |  | $    | 617     |   |                       | $ | 2,742      |  | $      | 7,206   |       | $ |       |  | $ | 10,565 
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|                                      |  |      |         |   |                      
|Nine Months Ended September 30, 2003  |  | Land |         |   | Commercial Properties |   | Apartments |  | Hotels |         | Total
|Rents                                 |  | $    | 415     |   |                       | $ | 24,051     |  | $      | 32,872  |       | $ | 4,961  |  | $ | 62,299 
|Property operating expenses           |  |      | 1,163   |   |                       |   | 14,782     |  |        | 24,209  |       |   | 3,345  |  |   | 43,499 
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Operating income (loss)               |  | $    | (748    | ) |                       | $ | 9,269      |  | $      | 8,663   |       | $ | 1,616  |  | $ | 18,800 
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Interest                              |  | $    | 1,547   |   |                       | $ | 6,242      |  | $      | 9,446   |       | $ | 790    |  | $ | 18,025 
|Depreciation                          |  |      | 34      |   |                       |   | 6,563      |  |        | 3,023   |       |   | 1,163  |  |   | 10,783 
|Real estate improvements              |  |      | 382     |   |                       |   | 3,674      |  |        | 549     |       |   | 1,881  |  |   | 6,486  
|Real estate construction              |  |      |        |   |                       |   |           |  |        | 28,733  |       |   |       |  |   | 28,733 
|Assets                                |  |      | 122,263 |   |                       |   | 286,355    |  |        | 321,522 |       |   | 16,543 |  |   | 746,683
|                                      |  |      |         |   |                      
|Property Sales:                       |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|                                      |  |      |         |   |                      
|Sales price                           |  | $    | 4,599   |   |                       | $ | 31,159     |  | $      | 17,376  |       | $ |       |  | $ | 53,134 
|Cost of sales                         |  |      | 3,598   |   |                       |   | 21,340     |  |        | 9,170   |       |   |       |  |   | 34,108 
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        
|Gain on sale                          |  | $    | 1,001   |   |                       | $ | 9,819      |  | $      | 8,206   |       | $ |       |  | $ | 19,026 
|                                      |  |      |         |   |                       |   |            |  |        |         |       |   |        |  |   |        



NOTE 9. PROVISION FOR ASSET
IMPAIRMENT



For the three and nine months ending September 30, 2004, TCI
recorded asset impairments of $4.5 million representing the write down of certain operating properties to current estimated fair value. These assets include the following properties:



|                 |  |              |  |                |  |            |  |               |  |               |  |           
|---------------- |  | ------------ |  | -------------- |  | ---------- |  | ------------- |  | ------------- |  | ----------
|Property         |  | Location     |  | Sq. Ft./Units  |  | Fair Value |  | PropertyBasis |  | Costs to Sell |  | Impairment
|Office Buildings |  |              |  |                |  |            |  |               |  |               |  |           
|Harmon           |  | Sterling, VA |  | 72,062 Sq. Ft. |  | 6,500      |  | 9,080         |  | 320           |  | 2,900     
|Mimado           |  | Sterling, VA |  | 35,127 Sq. Ft. |  | 4,000      |  | 5,367         |  | 210           |  | 1,577     



The Harmon and Mimado buildings are
under contract to sell and the contractual sales price was used as fair value. The costs to sell are estimated closing costs and commission paid by TCI.



21



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NOTE 10. DISCONTINUED OPERATIONS



Effective January 1, 2002, TCI adopted Statement of Financial Accounting Standard 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 properties intended to be sold are to be designated as held-for-sale on the balance sheet. In
the event of a future sale, TCI is required to reclassify portions of previously reported operations to discontinued operations within the Statement of Operations.



For the three and nine months ended September 30, 2004 and 2003, income from discontinued operations relates to 20 properties that TCI sold
or are pending sale during 2004 and 12 properties that TCI sold during 2003. The following table summarizes revenue and expense information for these properties sold and held-for-sale.



|                                                                                   |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                   |  | For the Three Months Ended September 30, |       |   | For the Nine Months Ended September 30, |  
|                                                                                   |  | 2004                                     |       |   | 2003                                    |   |        | 2004 |  |   | 2003   |  
|Revenue:                                                                           |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  
|Rental                                                                             |  | $                                        | 4,363 |   |                                         | $ | 8,307  |      |  | $ | 15,809 |   |  | $ | 28,547 |  
|Property operations                                                                |  |                                          | 2,437 |   |                                         |   | 4,653  |      |  |   | 8,334  |   |  |   | 14,748 |  
|                                                                                   |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  
|                                                                                   |  |                                          | 1,926 |   |                                         |   | 3,654  |      |  |   | 7,475  |   |  |   | 13,799 |  
|                                                                                   |  |                                          |       |  
|Expenses:                                                                          |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  
|Interest                                                                           |  |                                          | 2,023 |   |                                         |   | 4,514  |      |  |   | 6,365  |   |  |   | 14,372 |  
|Depreciation                                                                       |  |                                          | 805   |   |                                         |   | 1,333  |      |  |   | 2,923  |   |  |   | 4,410  |  
|                                                                                   |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  
|                                                                                   |  |                                          | 2,828 |   |                                         |   | 5,847  |      |  |   | 9,288  |   |  |   | 18,782 |  
|                                                                                   |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) from discontinued operations before gains on sale of real estate |  |                                          | (902  | ) |                                         |   | (2,193 | )    |  |   | (1,813 | ) |  |   | (4,983 | )
|Gain on sale of operations                                                         |  |                                          | 874   |   |                                         |   | 10,565 |      |  |   | 13,561 |   |  |   | 19,026 |  
|Equity in investees gain on sale of real estate                                    |  |                                          | 222   |   |                                         |   | 1,217  |      |  |   | 1,686  |   |  |   | 2,970  |  
|                                                                                   |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  
|Net income from discontinued operations                                            |  | $                                        | 194   |   |                                         | $ | 9,589  |      |  | $ | 13,434 |   |  | $ | 17,013 |  
|                                                                                   |  |                                          |       |   |                                         |   |        |      |  |   |        |   |  |   |        |  



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 11. CORRECTION OF ACCOUNTING ERROR IN PRIOR PERIOD



Subsequent to March 31, 2004, but prior to filing the Form 10-Q for the quarter ended June 30,2004, TCI discovered an error in the
depreciation calculation for a shopping center TCI had purchased in March 2003 for $8.7 million. The amount subject to depreciation was $7.8 million and was to be depreciated straight-line over 40 years or 480 months. Instead, the property was
depreciated over 40 months instead of 480 months, resulting in depreciation expense being overstated by $1.8 million for 2003 and $1.1 million for 2004. The Consolidated Balance Sheet as of December 31, 2003 has been revised to reflect the
correction of the error through a decrease in accumulated depreciation of $1.8 million and an increase in retained earnings and total stockholders equity of $1.8 million. The unaudited Consolidated Statements of Operations for the three and
nine months ended September 30, 2003, reflect the correction of the impact of this error on depreciation expense of $538,000 and $1.3 million, respectively. The Consolidated Statement of Stockholders Equity for December 31, 2003 has been
revised to reflect the correction of the error through a decrease in the December 31, 2003 balance of accumulated deficit and total stockholders equity of $1.8 million. TCI does not intend to restate any previously issued Form 10-Q or Form
10-K for previous periods because, in the opinion of management, the effect is not material to the results of operations for any period previously reported on.



22



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NOTE 12. SUBSEQUENT EVENTS



Activities subsequent to September 30, 2004 not already reflected elsewhere in this 10-Q are disclosed below.



In November 2004, TCI agreed to swap 69,903 square feet of Centura land with 71,393 square
feet of land TXU Electric Delivery Company (TXU) owns adjacent to Centura land for the relocation of electric transmission and distribution facilities. TCI has agreed to pay the actual costs of relocation, which is estimated at $453,000.
TCI will also pay an additional $36,000 to TXU for the difference in the value of the TCI property and the TXU property.



NOTE 13. COMMITMENTS AND CONTINGENCIES



Liquidity. Management anticipates that TCI will generate excess cash from operations in 2004 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.



Partnership Buyouts. TCI is the
limited partner in 11 partnerships formed to construct residential properties. As permitted in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships
subsequent to the completion of these projects. The amounts paid to buyout the nonaffiliated partners are limited to development fees earned by the nonaffiliated partners, and are set forth in the respective partnership agreements. The total amount
of the expected buyouts as of September 30, 2004 is approximately $2.1 million.



Litigation. TCI is involved in various lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on TCIs financial condition, results of
operations or liquidity. See ITEM 1. LEGAL PROCEEDINGS under Part II. Other Information for information regarding the Innovo and Sunset lawsuits.



Guarantees. In April 2004, TCI guaranteed a $7.5 million note payable for a subsidiary of its parent, ARI. TCI pledged certain tracts
of land as collateral and has guaranteed the payment of 50% of the note balance, all interest accrued and payable, all other costs and fees associated with the note and any future collection expenses.



23



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



WARNING CONCERNING FORWARD LOOKING STATEMENTS



This quarterly report on Form 10-Q and TCIs 2003 Form 10-K, referred to herein,
contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws. These statements concern the intent, belief or expectations of TCIs officers with respect to TCIs
ability to lease its properties, tenants ability to pay rents, purchase of additional properties, ability to pay interest and debt principal and make distributions, policies and plans regarding investments and financings, and other matters.
Also, words such as believe, expect, anticipate, intend, plan, estimate, or similar expressions identify forward looking statements. Actual results may differ materially from
those contained in or implied by the forward looking statements as a result of various factors. Such factors include, without limitation, the impact of changes in the economy and the capital markets on TCI and its tenants, competition within the
real estate industry or those industries in which its tenants operate, and changes in federal, state and local legislation. For example: Some of TCIs tenants may not renew expiring leases and TCI may be unable to locate new tenants to maintain
the historical occupancy rates of the properties; rents which TCI can achieve at its properties may decline; tenants may experience losses and become unable to pay rents; and TCI may be unable to identify or to negotiate acceptable purchase prices
for new properties. These results could occur due to many different circumstances, some of which, such as changes in TCIs tenants financial conditions or needs for leased space, or changes in the capital markets or the economy,
generally, are beyond TCIs control. Forward looking statements are only expressions of TCIs present expectations and intentions. Forward looking statements are not guaranteed to occur, and they may not occur. You should not place undue
reliance upon forward looking statements.



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.



Managements discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and
the related notes in the 2003 Form 10-K.



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 judgments. 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.



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.



TCIs management periodically discusses criteria
for estimates and disclosures of its estimates with the Audit Committee of its Board of Directors.



24



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Liquidity and Capital Resources



TCI reported a net loss of $10.5 million for the three months ended September 30, 2004,
which included the following non-cash charges: depreciation and amortization of $5.2 million, equity loss of equity investees of $197,000, gain on foreign currency transaction of $543,000, provision for asset impairment of $4.5 million, equity
investees gain on sale of real estate of $222,000 and gain on sale of operations of $874,000. For the nine months ended September 30, 2004, TCI reported a net loss of $11.5 million, which included the following non-cash charges: depreciation and
amortization of $18.8 million, equity loss of equity investees of $1.7 million, gain on foreign currency transaction of $1.8 million, equity investees gain on sale of real estate of $1.7 million and gain on sale of operations of $13.6 million.



For the nine months ended September 30, 2004, net cash provided by operating
activities amounted to $11.9 million, interest receivable increased by $1.2 million due to additional notes receivable fundings, other assets decreased by $6.1 million due to lower rent receivables, interest payable decreased by $764,000 due to
notes paid or lower financing rates and other liabilities decreased by $10.5 million due to TCIs affiliated balance being reclassified from a payable to a receivable.



Also for the nine months ended September 30, 2004, net cash used in investing activities was $103.6 million primarily due to real estate
construction and improvements of $132.6 million, payments for real estate acquisitions of $20.0 million, deposits on pending purchases of $4.1 million, payments made to the advisor and affiliates of $21.4 million and additional fundings of notes
receivable of $55,000. These outflows for investing activities were offset by the collection of $2.4 million on notes receivable and proceeds from sale of real estate of $72.2 million.



Net cash provided by financing activities of $93.1 million was due to proceeds received from the funding or refinancing of notes payable of
$266.6 million; offset by cash payments of $170.5 million to paydown existing notes payable, dividends paid to preferred stockholders of $105,000 and $2.9 million for financing costs.



In the first nine months of 2004, TCI sold one shopping center, four industrial warehouses, four land parcels, three apartments and five
office buildings for a total of $111.4 million, receiving $27.1 million in cash and extinguishing debt of $71.3 million after the payment of various closing costs.



Also in the first nine months of 2004, TCI financed or refinanced two office buildings, two warehouses, two apartments, two hotels and six
parcels of land, incurring new debt of $136.1 million and receiving $16.9 million in cash, after paying various closing costs.



Further in the first nine months of 2004, TCI purchased fourteen parcels of unimproved land, seven of which are for apartment construction and one apartment for $35.8
million. TCI paid $4.4 million in cash, including various closing costs and incurred $20.6 million in debt. TCI also incurred $145.1 million on property construction, of which $125.6 million was funded by debt. For the remainder of 2004 and the
first half of 2005, TCI expects to spend an additional $42.9 million on property construction projects, of which $37.7 million will be funded by debt.



Results of Operations



TCI had a net loss of $10.6 million and $11.6 million in the three and nine months ended September 30, 2004, including gains on the sale of real estate totaling $874,000
and $13.6 million, loss from discontinued operations of $902,000 and $1.8 million and gain on the sale of real estate by equity investees of $222,000 and $1.7 million, respectively, compared to net loss of $853,000 and $6.1 million in the
corresponding periods in 2003, which include gains on the sale of real estate totaling $10.6 million and $19.0 million for the three and nine months ending September 2003, losses from discontinued operations of $2.2 million and $5.0 million and gain
on sale of real estate by equity investees of $1.2 million and $3.0 million, respectively. Fluctuations in this and other components of revenues and expense between the 2004 and 2003 periods are discussed below.



Rents in the three months ended September 30, 2004 increased to $26.4 million compared to
$23.1 million in 2003. This increase is mainly due to new rental income from the completion of thirteen apartments in 2004 and 2003 and higher hotel revenues in 2004.



Rents in the nine months ended September 30, 2004 increased to $75.9 million compared to $62.3 million in 2003. This increase is mainly due
to new rental income from the completion of thirteen apartments in 2004 and 2003 and higher hotel revenues in 2004.



Property operations expense increased to $17.6 million in the three months ended September 30, 2004, compared to $16.2 million in 2003. This increase is mainly due to the
completion of thirteen apartments in 2004 and 2003. Property operations expenses for the remaining quarters of 2004 may continue to increase as TCI continues to finish construction of new apartment properties.



25



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Property operations expense increased to $49.4 million in the nine months ended September 30, 2004, compared to $43.5
million in 2003. This increase is mainly due to the completion of thirteen apartments in 2004 and 2003. Property operations expenses for the remaining quarters of 2004 may continue to increase as TCI continues to finish construction of new apartment
properties.



Interest income increased to $921,000 in the three months ended
September 30, 2004, compared to $486,000 in 2003. The increase was primarily due to new notes receivables added in the second half of 2003 and during 2004.



TCI recognized a gain on foreign currency transaction of $543,000 for the three months ending September 2004 compared to a loss on foreign currency transaction of
$966,000 for the three months ending September 2003. The gain on foreign currency transaction is due to a strengthening of the Polish Zloty against the Euro for Hotel Akademia during 2004. The loss on foreign currency transaction is due to a
weakening of the Polish Zloty against the Euro for Hotel Akademia during 2003. Hotel Akademias long-term debt is denominated in Euros and the translation of Euros into Polish Zlotys prior to being translated into US Dollars is recorded as a
gain or loss on TCIs income statement.



TCI recognized a gain on foreign
currency transaction of $1.8 million for the nine months ending September 2004 compared to a loss on foreign currency transaction of $966,000 for the nine months ending September 2003. The gain on foreign currency transaction is due to a
strengthening of the Polish Zloty against the Euro for Hotel Akademia during 2004. The loss on foreign currency transaction is due to a weakening of the Polish Zloty against the Euro for Hotel Akademia during 2003. Hotel Akademias long-term
debt is denominated in Euros and the translation of Euros into Polish Zlotys prior to being translated into US Dollars is recorded as a gain or loss on TCIs income statement.



Equity in losses of investees was $200,000 in the three months ended September 30, 2004 compared to $1.2 million in 2003. ARI and IORI both
had larger operating losses in the third quarter of 2003 as compared to the third quarter of 2004.



Equity in losses of investees was $1.7 million in the nine months ended September 30, 2004 compared to $2.8 million in 2003. ARI and IORI both had larger year to date operating losses in 2003 as compared to 2004.



Interest expense increased to $8.5 million in the three months ended September
30, 2004, from $7.1 million in 2003. This increase is due to the completion of thirteen apartments in 2003 and 2004 and higher land interest, which is offset by lower commercial interest due to sales and refinancings with lower rates in 2003 and
2004.



Interest expense increased to $24.7 million in the nine months ended
September 30, 2004, from $18.0 million in 2003. This increase is due to the completion of thirteen apartments in 2003 and 2004 and higher land interest, which was offset by lower commercial interest due to sales and refinancings with lower rates in
2003 and 2004.



Depreciation expense increased to $4.4 million in the three
months ended September 30, 2004 from $3.7 million in 2003. This increase is due to depreciation from thirteen completed apartments in 2003 and 2004. Depreciation expense for the remaining quarters of 2004 may continue to increase as TCI completes
its apartment construction projects.



Depreciation expense increased to $13.1
million in the nine months ended September 30, 2004 from $10.8 million in 2003. This increase is due to depreciation from thirteen completed apartments in 2003 and 2004. Depreciation expense for the remaining quarters of 2004 may continue to
increase as TCI completes its apartment construction projects.



For the three
and nine months ending September 30, 2004, TCI recorded asset impairments of $4.5 million representing the write down of certain operating properties to current estimated fair value. These assets include the following properties:



|                 |  |              |  |               |  |            |  |               |  |               |  |           
|---------------- |  | ------------ |  | ------------- |  | ---------- |  | ------------- |  | ------------- |  | ----------
|Property         |  | Location     |  | Sq.Ft./Units  |  | Fair Value |  | PropertyBasis |  | Costs to Sell |  | Impairment
|Office Buildings |  |              |  |               |  |            |  |               |  |               |  |           
|Harmon           |  | Sterling, VA |  | 72,062 Sq.Ft. |  | 6,500      |  | 9,080         |  | 320           |  | 2,900     
|Mimado           |  | Sterling, VA |  | 35,127 Sq.Ft. |  | 4,000      |  | 5,367         |  | 210           |  | 1,577     



The Harmon and Mimado buildings are
under contract to sell and the contractual sales price is used as fair value. The costs to sell are estimated closing costs and commission paid by TCI.



General and administrative expenses decreased to $1.6 million in the three months ended September 30, 2004, from $3.4 million in 2003. General and administrative expenses
for 2003 were higher due to TCI reimbursing its then advisor, BCM, $1.7 million for legal fees for Gene Phillips. Mr. Phillips is an advisor to TCI and a related party.



26



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General and administrative expenses decreased to $5.6 million in the nine months ended September 30, 2004, from $6.4
million in 2003. General and administrative expenses for 2003 were higher due to TCI reimbursing its then advisor, BCM, $1.7 million for legal fees for Gene Phillips, a related party.



In the nine months of 2004, gains on sale of real estate totaling $13.6 million were recognized, including $5.5 million on the sale of
Countryside Retail center, $1.9 million on the sale of Countryside Harmon, $1.4 million on the sale of Ogden Industrial Warehouse, $153,000 on the sale of the Pinewood (Kelly) Warehouse, $2.1 million on the sale of the 492.531 acres of Allen land,
$1.1 million on the sale of the Sandstone Apartments, $328,000 on the sale of the Atrium office building, $345,000 on the sale of 4135 Beltline, $127,000 on the sale of Cash Road (Kelly) Warehouse, and $747,000 of deferred gain on the sale of the
492.531 acres of Allen land.



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 after the use of net operating loss carryforwards in the first nine months of 2004 and a loss for federal income tax purposes in the first nine months of 2003; therefore, it recorded no provision for income
taxes.



At September 30, 2004, TCI had a net deferred tax asset of $26.5
million due to tax deductions available to it in future years. However, as management cannot determine that it is more likely than not that TCI will realize the benefit of the deferred tax assets, a 100% valuation allowance has been established.



Inflation



The effects of inflation on TCIs operations are not quantifiable. Revenues from
property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales.
To the extent that inflation affects interest rates, 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.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



At September 30, 2004, TCIs exposure to a change in interest rates on its debt is as follows:



|                                          |  |         |         |                                |      |   |                                    |   |      
|----------------------------------------- |  | ------- | ------- | ------------------------------ | ---- | - | ---------------------------------- | - | -----
|                                          |  | Balance |         | Weighted Average Interest Rate |      |   | Effect of 1%Increase In Base Rates
|Notes payable:                            |  |         |         |                                |      |   |                                    |   |      
|Variable rate                             |  | $       | 153,736 |                                | 5.32 | % |                                    | $ | 1,537
|                                          |  |         |         |                                |      |   |                                    |   |      
|Total decrease in TCIs annual net income |  |         |         |                                |      |   |                                    | $ | 1,537
|                                          |  |         |         |                                |      |   |                                    |   |      
|Per share                                 |  |         |         |                                |      |   |                                    | $ | .19  
|                                          |  |         |         |                                |      |   |                                    |   |      



27



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ITEM 4. CONTROLS AND PROCEDURES



As of the end of the period covered by this report, TCI carried out an evaluation, under the
supervision and with the participation of TCIs Acting Principal Executive Officer and principal accounting officer, of TCIs disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation,
TCIs Acting Principal Executive Officer and principal accounting officer concluded that TCIs disclosure controls and procedures are effective.



There have been no significant changes in TCIs internal controls over financial reporting during the quarter ending September 30, 2004, that have materially
affected, or are reasonably likely to materially affect, TCIs internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



(i) On October 5,
2004, Sunset Management, LLC (Sunset) filed a complaint as a purported stockholders derivative action on behalf of the Company in the United States District Court for the Northern District of Texas, Dallas Division, against
American Realty Investors, Inc. (ARI), Basic Capital Management, Inc. (BCM), Prime Income Asset Management, Inc. (PIAMI), Prime Income Asset Management LLC (Prime), Income Opportunity Realty Investors,
Inc. (IOT), United Housing Foundation, Inc. (United), Regis Realty, Inc. (Regis), Transcontinental Realty Investors, Inc. (the Company), the Companys current directors and officers and others.
Sunsets complaint was instituted as Case No. 304CV20162-B styled Sunset Management, LLC, derivatively on behalf of Transcontinental Realty Investors, Inc. v. American Realty Investors, Inc., et al. Sunsets complaint alleges (i) Sunset is
the owner of ten shares of Common Stock of the Company, and Sunset is the pledgee and beneficial owner of 3,673,115 shares of Common Stock of the Company, (ii) Sunset is a single-member limited liability company, (iii) that all of the defendants
have in their various capacities breached fiduciary duties to the Company, and (iv) unjust enrichment of the various defendants. Sunsets complaint seeks an injunction prohibiting the Company from entering into any related-party transactions
that are not fair to the Company and approved by disinterested directors and/or the stockholders with full knowledge of the common interest of the directors and/or officers, unspecified damages, attorneys fees and costs. Individual directors
and officers of the Company do not believe their interests are adverse to the Company in this matter. All defendants believe the action is not properly brought as a derivative action on behalf of the Company as Sunsets interests are adverse to
the interests of the Company. The current action brought by Sunset contains many of the same allegations raised by Sunset in four other cases which, as rulings have occurred, have resulted in a denial of Sunsets requested relief.



The Defendants intend to vigorously defend the action and have filed a Motion to Dismiss
the case pursuant to Rules 12 and 23.1 of the Federal Rules of Civil Procedure on the basis that Sunsets allegations are insufficient to evade the stringent demand requirement under the futility exception for stockholder derivative actions,
and that Sunset cannot fairly and adequately represent the interests of other stockholders.



The current Sunset complaint is the fifth in a continuing series of actions involving Sunset, certain subsidiaries of ARI, and ARI resulting from a loan in September 2001 to three subsidiaries of ARI in the original
amount of $30 million ($19.5 million of which bore interest at 24% per annum, while the remaining $10.5 million of which bore interest at 20% per annum). In September 2002, $15 million in principal was repaid leaving a $15 million balance, which
Sunset orally agreed to extend the maturity date and accept substitute collateral, an arrangement which Sunset did not honor, resulting in original litigation filed in Texas state court during October 2002 styled American Realty Trust, Inc., ART
Williamsburg, Inc., Basic Capital Management, Inc. and EQK Holdings, Inc. v. Sunset Management, LLC, et al., Cause No. 02-09433-I in the 162nd Judicial District Court of Dallas County, Texas (the Texas Litigation). The Texas Litigation
alleged breach of contract, misrepresentation, breach of duty of good faith and fair dealing and slander of title by Sunset and sought certain declaratory relief against Sunset, as well as a temporary and permanent anti-suit injunction against
Sunset.



During January 2003, without notice to the plaintiffs in the Texas
Litigation, Sunset instituted an action in federal district court in Las Vegas, Nevada against Commonwealth Land Title (Commonwealth) seeking disposition of certain shares of Common Stock of the Company held by Commonwealth as Pledge
Holder. On January 31, 2003 after a Temporary Restraining Order was issued in the Texas Litigation, Sunset instituted a separate lawsuit in state court in Nevada styled Sunset Management, LLC v. American Realty Trust, Inc., et al., Cause No. A462587
pending in District Court of Clark County, Nevada (the Nevada Litigation). On February 12, 2003, the Nevada state court held a hearing on Sunsets request for emergency relief and denied all Sunsets requested relief and
indicated that a stay of the Nevada Litigation may be appropriate, which stay of litigation (including claims against the Company) was granted on May 2, 2003. Notwithstanding the stay of the Nevada Litigation, Sunset has continued to attempt to
re-litigate the underlying fact issues already determined in the Texas Litigation and the Nevada Litigation through cross claims and counterclaims in the Texas Litigation and renewed motions for injunctions and appointment of a receiver in the
Nevada Litigation. During September 2003, the Texas Litigation was removed to the bankruptcy court for the Northern District of Texas and subsequently transferred to the



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Eastern District of Texas. Sunset and the Plaintiffs have filed cross-motions for partial summary judgment in the
bankruptcy court which have been briefed but remain pending at this time. The parties have also filed an agreed motion to withdraw the reference and have the case transferred to a United States District Judge for trial, which has been denied without
prejudice pending the resolution of pretrial motions, including the motions for summary judgment.



On February 10, 2004, Sunset filed yet another lawsuit in Nevada styled Sunset Management, L.L.C. v. Transcontinental Realty Investors, Inc., Case No. CV04-00345 in the Superior Court of Washoe County, seeking to
compel a new election of directors, alleging that Sunset was improperly denied voting rights with respect to certain pledged shares at the 2003 stockholders meeting of the Company. The Company responded to that action by informing the Nevada
Court that the issue of the validity and effectiveness of proxies purportedly held by Sunset in connection with the loan was already pending before the bankruptcy court. On May 12, 2004, the Nevada District Court denied Sunsets motion to
compel an election of corporate directors because of the dispute pending in the Texas bankruptcy court concerning the status of the loan. Subsequently, the Nevada Court denied two motions for reconsideration filed by Sunset. Sunset is currently
appealing the rulings of the Washoe County District Court.



(ii) On August 10,
2004, American Realty Investors, Inc., Transcontinental Realty Investors, Inc. and Income Opportunity Realty Investors, Inc. instituted an action in Texas State District Court as Cause No. 2004-60231-393 styled American Realty Investors, Inc.,
Transcontinental Realty Investors, Inc. and Income Opportunity Realty Investors, Inc., Plaintiffs v. Innovo Realty, Inc. and Innovo Group, Inc., Involuntary Plaintiffs v. Innovo Realty, Metra Capital LLC, Innovo Group, Inc., Joseph Mizrachi, Simon
Mizrachi, Hurbert Guez, Third Millennium Partners LLC, Third Millennium Partners, Inc., Third Millennium Group LLC and Sunridge Management Group, Inc., Defendants. Plaintiffs complaint alleges that Joseph Mizrachi, a former director of ARI and
others, offered a plan to the Plaintiffs to create one or more joint venture arrangements with one or more of the Plaintiffs to pursue alternative forms of financing or refinancing portions of Plaintiffs real estate portfolios, which entailed
the creation of 22 separate limited partnerships to acquire 28 separate apartment complexes in three states (Texas, Florida and Louisiana), the general partners of which are affiliates of, or controlled by, Joseph Mizrachi. Plaintiffs
complaint alleges that the overall transaction required the establishment of a sinking fund by the Defendants and the 22 limited partnerships as a trust for the benefit of certain preferred shareholders of Innovo Group, Inc. and the payment of
certain proceeds to the Plaintiffs. Plaintiffs assert that payments have not been made pursuant to the agreement of the parties. Plaintiffs allege that Defendants conduct constituted a common business enterprise, alleges breach of contract and
derivative claims on behalf of Innovo Group, Inc. against Joseph Mizrachi and others and requests declaratory relief involving the Plaintiffs rights in the partnerships, an accounting of proceeds, and the creation of a constructive trust.
Plaintiffs complaint also alleges that Joseph Mizrachi engaged in fraud, negligent misrepresentation and/or breach of fiduciary duty and seeks unspecified damages, attorneys fees, a constructive trust be established, and other relief.



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



|                     |  |                                  |  |                              |   |                                                                      |   |                                                                        |        
|-------------------- |  | -------------------------------- |  | ---------------------------- | - | -------------------------------------------------------------------- | - | ---------------------------------------------------------------------- | -------
|Period               |  | Total Number of Shares Purchased |  | Average Price Paid per Share |   | Total Number ofShares Purchased asPart of PublicalyAnnounced Program |   | Maximum Number ofShares that May Yet be Purchased Under the Program(a)
|July 1-31, 2004      |  |                                 |  | $                            |  |                                                                      |  |                                                                        | 977,110
|August 1-31, 2004    |  |                                 |  |                              |  |                                                                      |  |                                                                        | 977,110
|September 1-30, 2004 |  |                                 |  |                              |  |                                                                      |  |                                                                        | 977,110
|                     |  |                                  |  |                              |   |                                                                      |   |                                                                        |        
|Total                |  |                                 |  | $                            |  |                                                                      |  |                                                                        |        
|                     |  |                                  |  |                              |   |                                                                      |   |                                                                        |        

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|(a) | On June 23, 2000, the TCI Board of Directors approved a share repurchase program for up to 1,387,000 shares of our common stock. This repurchase program has no termination date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 6. EXHIBITS



|(a) | The following exhibits are filed herewith or incorporated by reference as indicated:
|--- | ------------------------------------------------------------------------------------



|              |  |                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                       
|31.1          |  | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange Act of 1934.
|              | 
|31.2          |  | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange Act of 1934.
|              | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350.                                                 



30



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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: November 15, 2004 |  | By:                                     |  | /s/ J. C. Lowenberg III                                             
|                        |  |                                         |  | J. C. Lowenberg III                                                 
|                        |  |                                         |  | Executive Vice President and Chief Financial Officer                
|                        |  |                                         |  | (Principal Financial Officer and Acting Principal Executive Officer)
|                        |  |                                        
|Date: November 15, 2004 |  | By:                                     |  | /s/ Scott T. Lewis                                                  
|                        |  |                                         |  | Scott T. Lewis                                                      
|                        |  |                                         |  | Vice President and Chief Accounting Officer                         



31



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TRANSCONTINENTAL REALTY INVESTORS, INC.



EXHIBITS TO



QUARTERLY REPORT ON FORM 10-Q



For the Quarter ended September 30, 2004



|              |  |                                                                                                 |  |           
|------------- |  | ----------------------------------------------------------------------------------------------- |  | ----------
|ExhibitNumber |  | Description                                                                                     |  | PageNumber
|31.1          |  | Certification Required by Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934. |  | 33        
|              |  |                                                                                                
|31.2          |  | Certification Required by Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934. |  | 34        
|              |  |                                                                                                
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350.                                               |  | 35        



32