----

**FORM      10-Q**

**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**WASHINGTON,        D.C. 20549**

**  QUARTERLY        REPORT UNDER SECTION 13 OR 15(d) OF THE **

**SECURITIES        EXCHANGE ACT OF 1934 **

**FOR        THE QUARTER ENDED MARCH 31, 2006 **

**Or**

**  TRANSITION        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE **

**SECURITIES        EXCHANGE ACT OF 1934**

**FOR        THE TRANSITION PERIOD FROM     TO**

**Commission        File Number 001-09240**

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**(Exact        Name of Registrant as Specified in Its Charter) **

| **Nevada**                                                                                                               |                                                                                         | **95-6565852**                                                                |
|--------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|
| **(State                  or Other Jurisdiction of****Incorporation                  or Organization)**                  |                                                                                         | **(I.R.S.                  Employer****Identification                  No.)** |
|                                                                                                                     |                                                                                         |                                                                          |
| **1800                  Valley View Lane, Suite 300****Dallas,                  Texas 75234**                            |
|                                                                                                                     | **(Address                  of principal executive offices)****(Zip                  Code)** |                                                                          |
|                                                                                                                     |                                                                                         |                                                                          |
|                                                                                                                     | **(469)                  522-4200**                                                          |                                                                          |
|                                                                                                                     | **(Registrant’s                  telephone number, including area code)**              |                                                                          |
|                                                                                                                     |                                                                                         |                                                                          |
| ___________________________________________________________________________________________                              |
| **(Former                  name, former address and former fiscal year, if changed since last                  report)** |

**Large        accelerated filer  ̈  Accelerated        filer  ̈   Non-accelerated        filer x**

**APPLICABLE        ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE**

**PRECEDING        FIVE YEARS:**

**APPLICABLE        ONLY TO CORPORATE ISSUERS: **

| **Common                    Stock, $.01 par value** | **7,900,869**                                                             |
|-----------------------------------------------------|---------------------------------------------------------------------------|
| **(Class)**                                         | **(Outstanding                    at March 31,                    2006)** |

----

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**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**FORM        10-Q**

**TABLE        OF CONTENTS**

| **PART                  I:** **FINANCIAL                  INFORMATION**                                                                                | **PAGE** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                        |     |
| Item                  1. Financial                  Statements                                                                                         |     |
| Consolidated                  Balance Sheets at March 31, 2006 (unaudited) and December 31,                  2005                                           | 3        |
| Consolidated                  Statements of Operations for the three months ended March 31, 2006                  and                  2005 (unaudited)     | 5        |
| Consolidated                  Statement of Shareholders’ Equity for the three months ended March 31,                  2006 (unaudited)                | 7        |
| Consolidated                  Statements of Cash Flows for the three months ended March 31, 2006                  and                  2005 (unaudited)     | 8        |
| Notes                  to Consolidated Financial Statements                                                                                                 | 10       |
| Item                  2. Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations | 19       |
| Item                  3. Quantitative                  and Qualitative Disclosures About Market Risk                                                   | 24       |
| Item                  4. Controls                  and Procedures                                                                                      | 24       |
|                                                                                                                                                        |     |
|                                                                                                                                                        |     |
| **PART                  II.** **OTHER                  INFORMATION**                                                                                   |     |
|                                                                                                                                                        |     |
| Item                  2. Unregistered                  Sales of Equity Securities and Use of Proceeds                                                  | 25       |
| Item                  6. Exhibits                                                                                                                      | 26       |
| SIGNATURE                  PAGES                                                                                                                            | 27       |

----

**PART        I. FINANCIAL INFORMATION **

**ITEM 1.        FINANCIAL STATEMENTS**

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        BALANCE SHEETS**

|                                                                                                                                              |   | **March                  31,****2006**      |      | **December                  31,****2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|-------------------------------------------|--------|
|                                                                                                                                              |   | **(dollars                  in thousands)** |      |
|                                                                                                                                              |   | **(unaudited)**                             |      |                                      |   |
| **Assets**                                                                                                                                        |   |                                        |      |
| Real                  estate held for investment                                                                                                  |   | $                                           | 976,679   |                                      | $      | 911,981 |   |
| Less—accumulated                  depreciation                                                                                              |   |                                        | (82,713   | )                                         |   | (78,096 | ) |
|                                                                                                                                              |   |                                        | 893,966   |                                      |   | 833,885 |   |
|                                                                                                                                              |   |                                        |      |                                      |   |   |   |
| Real                  estate held-for-sale                                                                                                        |   |                                        | 40,287    |                                      |   | 40,446 |   |
| Real                  estate subject to sales contract                                                                                            |   |                                        | 68,326    |                                      |   | 68,738 |   |
|                                                                                                                                              |   |                                        |      |                                      |   |   |   |
| Notes                  and interest receivable                                                                                                    |   |                                        |      |                                      |   |   |   |
| Performing                  (including $33,947 in 2006 and $34,370 in 2005 from affiliates                  and related                  parties) |   |                                        | 49,764    |                                      |   | 59,922 |   |
| Non-performing,                  non-accruing                                                                                                     |   |                                        | 4,896     |                                      |   | 4,896 |   |
|                                                                                                                                              |   |                                        | 54,660    |                                      |   | 64,818 |   |
|                                                                                                                                              |   |                                        |      |                                      |   |   |   |
| Less—allowance                  for estimated losses                                                                                        |   |                                        | —   |                                      |   | — |   |
|                                                                                                                                              |   |                                        | 54,660    |                                      |   | 64,818 |   |
|                                                                                                                                              |   |                                        |      |                                      |   |   |   |
| Investment                  in real estate entities                                                                                               |   |                                        | 24,764    |                                      |   | 24,659 |   |
| Marketable                  equity securities, at market value                                                                                    |   |                                        | 7,936     |                                      |   | 7,446 |   |
| Cash                  and cash equivalents                                                                                                        |   |                                        | 5,047     |                                      |   | 5,462 |   |
| Other                  assets (including $1,085 in 2006 and $1,103 in 2005 from affiliates                  and                  related parties) |   |                                        | 50,529    |                                      |   | 43,625 |   |
|                                                                                                                                              |   | $                                           | 1,145,515 |                                      | $      | 1,089,079 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        BALANCE SHEETS-Continued**

|                                                                                                                                                                                            |   | **March                  31,****2006**      |      | **December                  31,****2005** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|-------------------------------------------|--------|
|                                                                                                                                                                                            |   | **(dollars                  in thousands)** |      |
|                                                                                                                                                                                            |   | **(unaudited)**                             |      |                                      |   |
| **Liabilities                  and Stockholders’ Equity**                                                                                                                                 |   |                                        |      |                                      |   |
|                                                                                                                                                                                            |   |                                        |      |                                      |   |
| Liabilities:                                                                                                                                                                                    |   |                                        |      |                                      |   |
| Notes                  payable (including $6,769 in 2006 and $6,769 in 2005 to affiliates                  and                  related parties)                                                |   | $                                           | 701,255   |                                      | $      | 654,882 |   |
| Interest                  payable (including $377 in 2006 and $218 in 2005 to affiliates                  and related                  parties)                                                 |   |                                        | 3,475     |                                      |   | 3,510 |   |
| Liabilities                  related to assets held-for-sale                                                                                                                                    |   |                                        | 48,706    |                                      |   | 53,084 |   |
| Liabilities                  related to assets subject to sales contract                                                                                                                        |   |                                        | 58,516    |                                      |   | 58,685 |   |
| Other                  liabilities (including $16,595 in 2006 and $15,669 in 2005 to affiliates                  and related parties)                                                           |   |                                        | 74,557    |                                      |   | 66,500 |   |
|                                                                                                                                                                                            |   |                                        | 886,509   |                                      |   | 836,661 |   |
|                                                                                                                                                                                            |   |                                        |      |                                      |   |   |   |
| Commitments                  and contingencies                                                                                                                                                  |   |                                        |      |                                      |   |   |   |
|                                                                                                                                                                                            |   |                                        |      |                                      |   |   |   |
| Minority                  interest                                                                                                                                                         |   |                                        | 16,074    |                                      |   | 1,239 |   |
|                                                                                                                                                                                            |   |                                        |      |                                      |   |   |   |
| Stockholders’                  equity:                                                                                                                                                    |   |                                        |      |                                      |   |   |   |
| Preferred                  Stock                                                                                                                                                                |   |                                        |      |                                      |   |   |   |
| Series                  C Cumulative Convertible; $.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 7,900,869 shares                  at March 31, 2006 and December 31, 2005 |   |                                        | 81        |                                      |   | 81 |   |
| Additional                  paid-in capital                                                                                                                                                     |   |                                        | 256,441   |                                      |   | 256,494 |   |
| Treasury                  stock                                                                                                                                                                 |   |                                        | (3,086    | )                                         |   | (3,086 | ) |
| Accumulated                  deficit                                                                                                                                                            |   |                                        | (10,337   | )                                         |   | (1,846 | ) |
| Accumulated                  other comprehensive loss                                                                                                                                           |   |                                        | (167      | )                                         |   | (464 | ) |
|                                                                                                                                                                                            |   |                                        | 242,932   |                                      |   | 251,179 |   |
|                                                                                                                                                                                            |   | $                                           | 1,145,515 |                                      | $      | 1,089,079 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF OPERATIONS**

**(unaudited)**

|                                                                                                                                                   |   | **For                  the Three Months****Ended                  March 31,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|---------|
|                                                                                                                                                   |   | **2006**                                                                      |    | **2005** |   |
| Property                  revenue:                                                                                                                     |   |                                                                          |    |   |   |
| Rents                  and other property revenues                                                                                                     |   | $                                                                             | 30,303  |   | $ | 22,597 |   |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Expenses:                                                                                                                                              |   |                                                                          |    |   |   |   |   |
| Property                  operations (including $1,491 in 2006 and $1,240 in 2005 to affiliates                  and                  related parties) |   |                                                                          | 18,351  |   |   | 14,455 |   |
| Depreciation                  and amortization                                                                                                         |   |                                                                          | 5,029   |   |   | 3,812 |   |
| General                  and administrative (including $0 in 2006 and $475 in 2005 to affiliates                  and related parties)            |   |                                                                          | 1,372   |   |   | 1,465 |   |
| Advisory                  fees                                                                                                                         |   |                                                                          | 2,026   |   |   | 1,752 |   |
| Total                  operating expenses                                                                                                              |   |                                                                          | 26,778  |   |   | 21,484 |   |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Operating                  income                                                                                                                 |   |                                                                          | 3,525   |   |   | 1,113 |   |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Other                  income (expense):                                                                                                               |   |                                                                          |    |   |   |   |   |
| Interest                  income (including $424 in 2006 and $550 in 2005 from affiliates                  and                  related parties)       |   |                                                                          | 875     |   |   | 845 |   |
| Gain                  on foreign currency transaction                                                                                                  |   |                                                                          | 2       |   |   | — |   |
| Mortgage                  and loan interest                                                                                                            |   |                                                                          | (12,723 | ) |   | (8,412 | ) |
| Net                  income fee                                                                                                                        |   |                                                                          | — |   |   | (325 | ) |
| Other                  income (expense)                                                                                                                |   |                                                                          | 257     |   |   | — |   |
| Total                  other income (expense)                                                                                                          |   |                                                                          | (11,589 | ) |   | (7,892 | ) |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Loss                  before gain on land sales, equity in earnings of investees and                  minority                  interest               |   |                                                                          | (8,064  | ) |   | (6,779 | ) |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Gain                  on land sales                                                                                                                    |   |                                                                          | 331     |   |   | 14 |   |
| Equity                  in earnings of investees                                                                                                       |   |                                                                          | 103     |   |   | 1,191 |   |
| Minority                  interest                                                                                                                     |   |                                                                          | (172    | ) |   | 155 |   |
|                                                                                                                                                   |   |                                                                          | 262     |   |   | 1,360 |   |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Loss                  from continuing operations                                                                                                       |   |                                                                          | (7,802  | ) |   | (5,419 | ) |
| Add:                  income tax benefit (expense)                                                                                                     |   |                                                                          | 2,731   |   |   | 1,897 |   |
| Net                  loss from continuing operations                                                                                              |   |                                                                          | (5,071  | ) |   | (3,522 | ) |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Income                  (loss) from discontinued operations (See NOTE 9)                                                                               |   |                                                                          | (689    | ) |   | 9,767 |   |
| Less:                  income tax benefit (expense)                                                                                                    |   |                                                                          | (2,731  | ) |   | (1,897 | ) |
| Net                  income (loss) from discontinued operations                                                                                        |   |                                                                          | (3,420  | ) |   | 7,870 |   |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Net                  income (loss)                                                                                                                |   |                                                                          | (8,491  | ) |   | 4,348 |   |
|                                                                                                                                                   |   |                                                                          |    |   |   |   |   |
| Preferred                  dividend requirement                                                                                                        |   |                                                                          | (53     | ) |   | (52 | ) |
| Net                  income applicable to common shares                                                                                                |   | $                                                                             | (8,544  | ) | $ | 4,296 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF OPERATIONS - Continued**

**(unaudited)**

|                                                                                                   |   | **For                  the Three Months****Ended                  March 31,** |      |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|-----------|
|                                                                                                   |   | **2006**                                                                      |      | **2005** |   |
| Basic                  earnings per share:                                                             |   |                                                                          |      |   |   |
| Net                  loss from continuing operations                                                   |   | $                                                                             | (0.65     | ) | $ | (0.45 | ) |
| Discontinued                  operations                                                               |   |                                                                          | (0.44     | ) |   | 0.99 |   |
| Net                  income (loss) applicable to common shares                                         |   | $                                                                             | (1.09     | ) | $ | 0.54 |   |
|                                                                                                   |   |                                                                          |      |   |   |   |   |
| Diluted                  earnings per share:                                                           |   |                                                                          |      |   |   |   |   |
| Net                  loss from continuing operations                                                   |   | $                                                                             | (0.65     | ) | $ | (0.45 | ) |
| Discontinued                  operations                                                               |   |                                                                          | (0.44     | ) |   | 0.99 |   |
| Net                  income (loss) applicable to common shares                                         |   | $                                                                             | (1.09     | ) | $ | 0.54 |   |
|                                                                                                   |   |                                                                          |      |   |   |   |   |
| Weighted                  average common shares used in computing earnings per                  share: |   |                                                                          |      |   |   |   |   |
| Basic                                                                                                  |   |                                                                          | 7,900,869 |   |   | 7,900,869 |   |
| Diluted                                                                                                |   |                                                                          | 7,900,869 |   |   | 7,900,869 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF STOCKHOLDERS’ EQUITY**

**For        the Three Months Ended March 31, 2006**

**(dollars        in thousands)**

**(unaudited)**

|                                                                                                                                               |   |                                |      |         |   |      |   |   **Paid-in****Capital** |   |   **Accumulated****Deficit** |   | **Accumulated****Other****Comprehensive****Income** |   |   **Stockholders’****Equity** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|--------------|--------|-----------|--------|------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                                                               |   |                                |      |         |   |      |   |
|                                                                                                                                               |   | **Common                    Stock** |      | **Treasury** |   |
|                                                                                                                                               |   | **Shares**                          |      | **Amount**   |   | **Stock** |   |
|                                                                                                                                               |   |                                |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |
| Balance,                    January 1, 2006                                                                                                        |   |                                | 7,900,869 |         | $      | 81        |   | $                                  | (3,086 | )                                      | $      | 256,494                                             |   | $                                             | (1,846  | ) | $ | (464 | ) | $ | 251,179 |   |
|                                                                                                                                               |   |                                |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Comprehensive                    income                                                                                                            |   |                                |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Unrealized                    gain on foreign                                                                                                      |   |                                | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | 3⁄4                                              |   |                                          | 3⁄4  |   |   | (193 | ) |   | (193 | ) |
| currency                    translation                                                                                                            |   |                                |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Unrealized                    gain on marketable securities                                                                                        |   |                                | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | 3⁄4                                              |   |                                          | 3⁄4  |   |   | 490 |   |   | 490 |   |
|                                                                                                                                               |   |                                |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Net                    income (loss)                                                                                                               |   |                                | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | 3⁄4                                              |   |                                          | (8,491  | ) |   | 3⁄4 |   |   | (8,491 | ) |
|                                                                                                                                               |   |                                |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Series                    C Cumulative Convertible Preferred                    Stock cash dividends ($7.00                    per share per year) |   |                                | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | (53                                                 | )      |                                          | 3⁄4  |   |   | 3⁄4 |   |   | (53 | ) |
|                                                                                                                                               |   |                                |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Balance,                    March 31, 2006                                                                                                    |   |                                | 7,900,869 |         | $      | 81        |   | $                                  | (3,086 | )                                      | $      | 256,441                                             |   | $                                             | (10,337 | ) | $ | (167 | ) | $ | 242,932 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF CASH FLOWS**

**(unaudited)**

|                                                                                                                                                 |   | **For                  the Three Months****Ended                  March 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|---------|
|                                                                                                                                                 |   | **2006**                                                                      |    | **2005** |   |
|                                                                                                                                                 |   | **(dollars                  in thousands)**                                   |    |
| **Cash                  Flows from Operating Activities**                                                                                            |   |                                                                          |    |   |   |
| Reconciliation                  of net income (loss) to net cash provided by (used in) operating                  activities                         |   |                                                                          |    |   |   |
| Income                  (loss) from continuing operations                                                                                            |   | $                                                                             | (5,071  | ) | $ | (3,522 | ) |
| Adjustments                  to reconcile net income (loss) to net cash provided by (used in)                  operating                  activities |   |                                                                          |    |   |   |   |   |
| Depreciation                  and amortization                                                                                                       |   |                                                                          | 5,029   |   |   | 3,813 |   |
| Amortization                  of deferred borrowing costs                                                                                            |   |                                                                          | 716     |   |   | 1,121 |   |
| Income                  tax (benefit) expense                                                                                                        |   |                                                                          | (2,731  | ) |   | (1,897 | ) |
| Gain                  on sale of real estate                                                                                                         |   |                                                                          | (331    | ) |   | (14 | ) |
| Equity                  in earnings of investees                                                                                                |   |                                                                          | (103    | ) |   | (1,191 | ) |
| Gain                  on foreign currency transaction                                                                                                |   |                                                                          | (2      | ) |   | — |   |
| (Income)                  loss allocated to minority interest                                                                                        |   |                                                                          | 172     |   |   | (155 | ) |
| Decrease                  (increase) in interest receivable                                                                                          |   |                                                                          | (208    | ) |   | 37 |   |
| (Increase)                  decrease in other assets                                                                                                 |   |                                                                          | (5,258  | ) |   | 2,464 |   |
| Increase                  (decrease) in interest payable                                                                                             |   |                                                                          | (35     | ) |   | (818 | ) |
| Increase                  in other liabilities                                                                                                       |   |                                                                          | 7,864   |   |   | 1,089 |   |
| Net                  cash provided (used) by operating activities                                                                                    |   |                                                                          | 42      |   |   | 927 |   |
|                                                                                                                                                 |   |                                                                          |    |   |   |   |   |
| **Cash                  Flows from Investing Activities**                                                                                            |   |                                                                          |    |   |   |   |   |
| Collections                  on notes receivable                                                                                                |   |                                                                          | 8,686   |   |   | 1,374 |   |
| Funding                  of notes receivable                                                                                                         |   |                                                                          | (2,670  | ) |   | (647 | ) |
| Acquisition                  of real estate                                                                                                          |   |                                                                          | (49,239 | ) |   | (7,806 | ) |
| Real                  estate improvements and construction                                                                                           |   |                                                                          | (3,532  | ) |   | (15,031 | ) |
| Proceeds                  from sale of real estate                                                                                                   |   |                                                                          | 3,067   |   |   | 1,003 |   |
| Distributions                  from equity investees, net                                                                                            |   |                                                                          | — |   |   | 406 |   |
| Deposits                  on pending purchases and financings                                                                                        |   |                                                                          | (660    | ) |   | (671 | ) |
| Net                  cash used in investing activities                                                                                          |   |                                                                          | (44,348 | ) |   | (21,372 | ) |
|                                                                                                                                                 |   |                                                                          |    |   |   |   |   |
| **Cash                  Flows from Financing Activities**                                                                                            |   |                                                                          |    |   |   |   |   |
| Payments                  on notes payable                                                                                                           |   |                                                                          | (9,666  | ) |   | (26,569 | ) |
| Proceeds                  from notes payable                                                                                                         |   |                                                                          | 55,842  |   |   | 31,688 |   |
| Dividends                  paid to preferred shareholders                                                                                            |   |                                                                          | (53     | ) |   | (52 | ) |
| Payments                  to advisor                                                                                                                 |   |                                                                          | — |   |   | (8,470 | ) |
| Deferred                  financing costs                                                                                                            |   |                                                                          | (1,702  | ) |   | (308 | ) |
| Net                  cash provided by financing activities                                                                                           |   |                                                                          | 44,421  |   |   | (3,711 | ) |
|                                                                                                                                                 |   |                                                                          |    |   |   |   |   |
| **Discontinued                  Operations**                                                                                                         |   |                                                                          |    |   |   |   |   |
| Cash                  used in operating activities                                                                                                   |   |                                                                          | (530    | ) |   | (491 | ) |
| Cash                  provided by investing activities - proceeds from sale of real                  estate                                          |   |                                                                          | — |   |   | 12,635 |   |
| Net                  cash provided (used) by discontinued operations                                                                                 |   |                                                                          | (530    | ) |   | 12,144 |   |
|                                                                                                                                                 |   |                                                                          |    |   |   |   |   |
| Net                  decrease in cash and cash equivalents                                                                                           |   |                                                                          | (415    | ) |   | (12,012 | ) |
| Cash                  and cash equivalents, beginning of period                                                                                      |   |                                                                          | 5,462   |   |   | 21,845 |   |
| Cash                  and cash equivalents, end of period                                                                                            |   | $                                                                             | 5,047   |   | $ | 9,833 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF CASH FLOWS-Continued**

**(unaudited)**

|                                                                                                         |   | **For                  the Three Months****Ended                  March 31,** |    |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|---------|
|                                                                                                         |   | **2006**                                                                      |    | **2005** |   |
|                                                                                                         |   | **(dollars                  in thousands)**                                   |    |
| **Supplemental                  Disclosures of Cash Flow Information:**                                      |   |                                                                          |    |   |   |
| Cash                  paid for interest                                                                      |   | $                                                                             | 12,758  |   | $ | 10,780 |   |
|                                                                                                         |   |                                                                          |    |   |   |   |   |
| **Schedule                  of Non-Cash Investing and Financing Activities:**                                |   |                                                                          |    |   |   |   |   |
| Notes                  payable assumed on purchase of real estate                                       |   |                                                                          | — |   |   | 7,430 |   |
| Increase                  in minority interest related to acquisition of real estate                         |   |                                                                          | 14,835  |   |   | — |   |
| Notes                  payable assumed by buyer on sale of real estate                                       |   |                                                                          | — |   |   | 738 |   |
| Real                  estate purchased from affiliate decreasing affiliate                  receivable  |   |                                                                          | — |   |   | 4,072 |   |
| Note                  payable assumed by affiliate                                                           |   |                                                                          | 4,000   |   |   | — |   |

----

**TRANSCONTINENTAL            REALTY INVESTORS, INC.**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS **

**NOTE 1.        BASIS OF PRESENTATION**

*Stock-based        employee compensation.*

**NOTE 2.        REAL ESTATE**

| **Property**                              | **Location**                        | **Sq.                  Ft./Acres** | **Purchase****Price** |   | **Net                  Cash****Paid** | **Debt****Incurred** | **Interest****Rate** | **Maturity****Date** |
|-------------------------------------------|-------------------------------------|------------------------------------|-----------------------|--------|---------------------------------------|----------------------|----------------------|----------------------|
| ***First                  Quarter***      |                                |                               |                  |   |                                  |                 |                 |                 |   |   |   |   |
| **Land**                                  |                                |                               |                  |   |                                  |                 |                 |                 |   |   |   |   |
| Circle                  C Ranch           | Austin,                  TX         | 1,092                  Acres       | $21,000               |   | $—                              |                 | $21,000              |                 | 8.75% | (1) | 03/08 |   |
| Pioneer                  Crossing         | Austin,                  TX         | 38.542                  Acres      | 614                   | (2)    | 614                                   |                 | 1,515                |                 | 8.75 | (1) | 06/08 |   |
| Southwood                  1394           | Tallahassee,                  FL    | 14.52                  Acres       | 1,150                 |   | 477                                   |                 | 748                  |                 | 8.50 | (1) | 02/08 |   |
| Valley                  Ranch 20          | Farmers                  Branch, TX | 20                  Acres          | 4,673                 |   | 1,892                                 |                 | 3,038                |                 | 8.50 | (1) | 02/08 |   |
| Woodmont                  Fairway Office  | Dallas,                  TX         | 5.866                  Acres       | 3,833                 |   | 1,014                                 |                 | 3,000                |                 | 8.25 | (1) | 01/07 |   |
| Woodmont                  Merit Drive     | Dallas,                  TX         | 9.28                  Acres        | 4,560                 |   | 1,868                                 |                 | 2,964                |                 | 8.00 |   | 03/07 |   |
|                                      |                                |                               |                  |   |                                  |                 |                 |                 |   |   |   |   |
| **Apartments**                            |                                |                               |                  |   |                                  |                 |                 |                 |   |   |   |   |
| Anderson                  Estates Apts    | Oxford,                  MS         | 48                  Units          | 1,144                 | (3)    | 148                                   |                 | 996                  |                 | 9.50 | (1) | 12/20 |   |
| David                  Jordan Phase II    | Greenwood,                  MS      | 32                  Units          | 743                   | (3)    | 98                                    |                 | 645                  |                 | 8.50 | (1) | 04/19 |   |
| David                  Jordan Phase III   | Greenwood,                  MS      | 40                  Units          | 812                   | (3)    | 122                                   |                 | 690                  |                 | 8.75 | (1) | 07/22 |   |
| Leflore                  Estates / Curtis |                                |                               |                  |   |                                  |                 |                 |                 |   |   |   |   |
| Moore                  Apartments         | Greenwood,                  MS      | 104                  Units         | 2,114                 | (3)    | 337                                   |                 | 1,777                |                 | 7.00 |   | 02/22 |   |
| Monticello                  III Estates   | Monticello,                  AR     | 32                  Units          | 644                   | (3)    | 96                                    |                 | 548                  |                 | 7.00 |   | 01/22 |   |
| Riverwalk                  Phase I        | Greenwood,                  MS      | 32                  Units          | 455                   | (3)    | 99                                    |                 | 356                  |                 | 8.50 |   | 02/19 |   |
| Riverwalk                  Phase II       | Greenwood,                  MS      | 72                  Units          | 1,584                 | (3)    | 226                                   |                 | 1,358                |                 | 8.25 | (1) | 02/19 |   |

----

**TRANSCONTINENTAL          REALTY INVESTORS, INC.**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**

| **Property**                         | **Location**                      | **Units/****Sq.                Ft./Acres** | **Purchase****Price** | **Net                Cash****Paid/****(Received)** | **Debt****Incurred** | **Interest****Rate** | **Maturity****Date** |
|--------------------------------------|-----------------------------------|--------------------------------------------|-----------------------|----------------------------------------------------|----------------------|----------------------|----------------------|
| ***First                Quarter***   |                              |                                       |                  |                                               |                 |                 |                 |   |   |   |   |
| **Office                Buildings**  |                              |                                       |                  |                                               |                 |                 |                 |   |   |   |   |
| Two                Hickory(3)        | Farmers                Branch, TX | 96,127                Sq. Ft.              | $11,502               | $                 —                     |                 | $7,430               | (1)                  | 4.90 | %(2) | 05/06 |   |
|                                 |                              |                                       |                  |                                               |                 |                 |                 |   |   |   |   |
| **Land**                             |                              |                                       |                  |                                               |                 |                 |                 |   |   |   |   |
| Mandahl                Bay           | US                Virgin Islands  | 50.8                Acres                  | 7,000                 | 4,101                                              |                 | 3,500                |                 | 7.00 |   | 07/05 |   |
| Mandahl                Bay (Gilmore) | US                Virgin Islands  | 1.02                Acres                  | 96                    | 104                                                |                 | —              |                 | — |   | — |   |
| Mandahl                Bay (Chung)   | US                Virgin Islands  | .75                Acres                   | 95                    | 101                                                |                 | —              |                 | — |   | — |   |

| **Property**                       | **Location**                      | **Units/****Acres/** **Sq.                Ft.** | **Sales****Price** | **Net                Cash****Received** | **Debt****Discharged**         | **Gain****on                Sale** |
|------------------------------------|-----------------------------------|------------------------------------------------------|--------------------|-----------------------------------------|--------------------------------|------------------------------------|
| ***First                Quarter*** |                              |                                                 |               |                                    |                           |                               |   |   |
| **Land**                           |                              |                                                 |               |                                    |                           |                               |   |   |
| Hollywood                Casino    | Farmers                Branch, TX | 10.452                Acres                          | $3,225             | $1,297                                  | $                 — |                               | $331 |   |

| **Property**                            | **Location**                  | **Units/****Acres/** **Sq.                Ft.** | **Sales****Price** | **Net                Cash****Received** | **Debt****Discharged** | **Gain****on                Sale** |
|-----------------------------------------|-------------------------------|------------------------------------------------------|--------------------|-----------------------------------------|------------------------|------------------------------------|
| ***First                Quarter***      |                          |                                                 |               |                                    |                   |                               |   |   |
| **Office                Building**      |                          |                                                 |               |                                    |                   |                               |   |   |
| Institute                Place          | Chicago,                IL    | 144,915                Sq. Ft.                       | $14,460            | $4,843                                  | $7,792                 |                               | $10,061 |   |
|                                    |                          |                                                 |               |                                    |                   |                               |   |   |
| **Industrial                Warehouse** |                          |                                                 |               |                                    |                   |                               |   |   |
| 5700                Tulane              | Atlanta,                GA    | 67,850                Sq. Ft.                        | 816                | 738                                     | —                |                               | 294 |   |
|                                    |                          |                                                 |               |                                    |                   |                               |   |   |
| **Land**                                |                          |                                                 |               |                                    |                   |                               |   |   |
| Granbury                Station         | Fort                Worth, TX | 15.696                Acres                          | 1,003              | 265                                     | 738                    | (1)                                | 10 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**

| **Property**                        | **Location**                      | **Units**                | **Amount****Expended** | **Additional****Amount****to                Expend** | **Construction****Loan****Funding** |
|-------------------------------------|-----------------------------------|--------------------------|------------------------|------------------------------------------------------|-------------------------------------|
|                                |                              |                     |                   |                                                 |                                |
| Laguna                Vista         | Farmers                Branch, TX | 206                Units | $8,662                 | $12,444                                              | $17,741                             |
| Legends                of El Paso   | El                Paso, TX        | 240                Units | 5,793                  | 12,290                                               | 16,040                              |
| Mission                Oaks         | San                Antonio, TX    | 228                Units | 13,458                 | 4,011                                                | 15,636                              |
| Parc                at Maumelle     | Maumelle,                AR       | 240                Units | 12,021                 | 6,678                                                | 16,829                              |
| Parc                at Metro Center | Nashville,                TN      | 144                Units | 3,512                  | 9,103                                                | 11,141                              |

**NOTE 3.      NOTES AND INTEREST RECEIVABLE**

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**

*Related      Party Transactions. *

----

**TRANSCONTINENTAL          REALTY INVESTORS, INC.**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS  -          CONTINUED**

**NOTE      4. INVESTMENT IN UNCONSOLIDATED REAL ESTATE ENTITIES**

*Unconsolidated      real estate entities.*

| **Investee**                        |   | **Percentage                of TCI’s****Ownership                at****March                31, 2006** |   | **Carrying                Value of****Investment                at****March                31, 2006** |   | **Market                Value****(a)****of                Investment at** **March                31, 2006** |   |
|-------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|--------|
|                                |   |                                                                                                         |   |                                                                                                  |   |                                                                                                             |   |
| IORI                                |   |                                                                                                         | 24.9   | %                                                                                                     | $      | 6,302                                                                                                            |   | $ | 7,468 |   |
| ARI                                 |   |                                                                                                         | 6.4    | %                                                                                                     |   | 12,034                                                                                                           |   |   | 6,543 |   |
| Garden                Centura, L.P. |   |                                                                                                         | 5.0    | %                                                                                                     |   | 6,075                                                                                                            |   |   |   |   |
|                                |   |                                                                                                         |   |                                                                                                  |   | 24,411                                                                                                           |   |   |   |   |
| Other                               |   |                                                                                                         |   |                                                                                                  |   | 353                                                                                                              |   |   |   |   |
|                                |   |                                                                                                         |   |                                                                                                  | $      | 24,764                                                                                                           |   |   |   |   |

**(a)**

|                                                                                                        |   | **2006** |    | **2005** |   |
|-------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                                                        |   |     |    |     |   |
| Revenues                                                                                                    |   | $        | 32,408  |     | $      | 29,204 |   |
| Equity                in earnings of investees                                                              |   |     | — |     |   | (9 | ) |
| Property                operating expenses                                                                  |   |     | (24,113 | )        |   | (25,404 | ) |
| Depreciation                                                                                                |   |     | (2,570  | )        |   | (2,139 | ) |
| Interest                expense                                                                             |   |     | (7,861  | )        |   | (7,991 | ) |
| Income                (loss) before gains on sale of real estate and discontinued                operations |   |     | (2,136  | )        |   | (6,339 | ) |
| Gain                on sale of real estate                                                                  |   |     | 2,409   |     |   | 24,224 |   |
| Income                (loss) from discontinued operations                                                   |   |     | (219    | )        |   | 43 |   |
| Net                income (loss)                                                                       |   | $        | 54      |     | $      | 17,928 |   |

**NOTE 5.        MARKETABLE EQUITY SECURITIES**

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**

**NOTE 6.      RELATED PARTIES**

|                                                  |   | **PRIME** |    | **IORI** |   |
|-------------------------------------------------------|--------|-----------|---------|----------|--------|
|                                                  |   |      |    |     |   |
| Balance,                December 31, 2005             |   | $         | (11,668 | )        | $      | — |   |
| Cash                transfers                         |   |      | 17,376  |     |   | — |   |
| Cash                repayments                        |   |      | (14,885 | )        |   | — |   |
| Repayments                through property transfers  |   |      | (614    | )        |   | — |   |
| Fees                payable to affiliate              |   |      | (527    | )        |   | — |   |
| Insurance                proceeds received by advisor |   |      | 500     |     |   | — |   |
| Payables                clearing through Prime        |   |      | (287    | )        |   | — |   |
| Balance,                March 31, 2006                |   | $         | (10,105 | )        | $      | — |   |

*Returns      on Metra Properties. *

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**

**NOTE 7.      LOANS AND INTEREST PAYABLE**

| **Property**                | **Location**               | **Sq.                Ft./Units/****Rooms/                Acres** | **Debt****Incurred** | **Debt****Discharged** | **Net                Cash****Received** | **Interest****Rate** | **Maturity****Date** |
|-----------------------------|----------------------------|------------------------------------------------------------------|----------------------|------------------------|-----------------------------------------|----------------------|----------------------|
| **Apartments**              |                       |                                                             |                 |                   |                                    |                 |                 |   |
| Hunters                Glen | Midland,                TX | 212                Units                                         | $2,475               | $1,804                 | $421                                    | 7.23                 | %(1)                 | 02/09 |
|                        |                       |                                                             |                 |                   |                                    |                 |                 |   |
| **Land**                    |                       |                                                             |                 |                   |                                    |                 |                 |   |
| West                End     | Dallas,                TX  | 5.34                Acres                                        | 9,000                | 2,000                  | 6,079                                   | 8.00                 | (1)                  | 03/07 |

| **Property**                          | **Location**                     | **Sq.                Ft./Units/****Rooms/                Acres** | **Debt****Incurred** | **Debt****Discharged** | **Net                Cash****Received** | **Interest****Rate** |   | **Maturity****Date** |
|---------------------------------------|----------------------------------|------------------------------------------------------------------|----------------------|------------------------|-----------------------------------------|----------------------|--------|----------------------|
| ***First                Quarter***    |                             |                                                             |                 |                   |                                    |                 |   |                 |
| **Office                Buildings**   |                             |                                                             |                 |                   |                                    |                 |   |                 |
| Bridgeview                Plaza  | LaCrosse,                WI      | 116,008                Sq. Ft.                                   | $7,197               | $6,304                 | $649                                    | 7.25                 | %(1)   | 03/10                |
|                                  |                             |                                                             |                 |                   |                                    |                 |   |                 |
| **Shopping                Centers**   |                             |                                                             |                 |                   |                                    |                 |   |                 |
| Dunes                Plaza       | Michigan                City, IN | 223,869                Sq. Ft.                                   | 3,750                | 2,685                  | 658                                     | 7.50                 | (1)    | 01/10                |

**NOTE 8.        OPERATING SEGMENTS**

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**

|  **Three                Months Ended March 31, 2006** |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|------------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
| Rents                                                      |   | $        | 157     |                         | $      | 9,317          |   | $          | 18,993  |      | $      | 1,836 |   | $ | 30,303 |   |
| Property                operating expenses                 |   |     | 110     |                         |   | 4,954          |   |       | 11,630  |      |   | 1,657 |   |   | 18,351 |   |
| Depreciation                                               |   |     | 7       |                         |   | 2,293          |   |       | 2,358   |      |   | 371 |   |   | 5,029 |   |
| Interest                                                   |   |     | 2,204   |                         |   | 2,793          |   |       | 7,201   |      |   | 525 |   |   | 12,723 |   |
| Gain                on land sales                          |   |     | 331     |                         |   | —        |   |       | — |      |   | — |   |   | 331 |   |
| Segment                income (loss)                       |   | $        | (1,833  | )                            | $      | (723           | )      | $          | (2,196  | )         | $      | (717 | ) | $ | (5,469 | ) |
|                                                       |   |     |    |                         |   |           |   |       |    |      |   |   |   |   |   |   |
| Real                estate improvements and construction   |   |     | 106     |                         |   | 1,542          |   |       | 1,746   |      |   | — |   |   | 3,394 |   |
| Assets                                                     |   |     | 251,259 |                         |   | 181,373        |   |       | 541,759 |      |   | 28,188 |   |   | 1,002,579 |   |

| **Three                Months Ended March 31, 2005**           |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|----------------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
| Rents                                                          |   | $        | 134     |                         | $      | 5,843          |   | $          | 15,146  |      | $      | 1,474 |   | $ | 22,597 |   |
| Property                operating expenses                     |   |     | 762     |                         |   | 3,432          |   |       | 9,019   |      |   | 1,242 |   |   | 14,455 |   |
| Depreciation                                                   |   |     | 19      |                         |   | 1,795          |   |       | 1,818   |      |   | 180 |   |   | 3,812 |   |
| Interest                                                       |   |     | 1,288   |                         |   | 1,301          |   |       | 5,480   |      |   | 343 |   |   | 8,412 |   |
| Gain                on land sales                              |   |     | 14      |                         |   | —        |   |       | — |      |   | — |   |   | 14 |   |
| Segment                income (loss)                           |   | $        | (1,921  | )                            | $      | (685           | )      | $          | (1,171  | )         | $      | (290 | ) | $ | (4,068 | ) |
|                                                           |   |     |    |                         |   |           |   |       |    |      |   |   |   |   |   |   |
| Real                estate improvements and construction  |   |     | 148     |                         |   | 1,099          |   |       | 13,774  |      |   | 10 |   |   | 15,031 |   |
| Assets                                                         |   |     | 150,277 |                         |   | 142,116        |   |       | 475,539 |      |   | 34,443 |   |   | 802,375 |   |

| **Property                Sales:** |   |   |   |   |   |   |   |   |    |   |   |
|------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|
| Sales                price         |   | $      | 1,003  |   | $      | 15,276 |   | $      | — |   | $      | — |   | $ | 16,279 |   |
| Cost                of sales       |   |   | 989    |   |   | 4,917  |   |   | — |   |   | — |   |   | 5,906 |   |
| Gain                on sale        |   | $      | 14     |   | $      | 10,359 |   | $      | — |   | $      | — |   | $ | 10,373 |   |

|                                                        |   | **Three                Months Ended** |    |
|-------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                        |   | **March                31,****2006**  |    | **March                31,****2005** |   |
| Segment                operating income (loss)              |   | $                                     | (5,469  | ) | $ | (4,068 | ) |
| Other                non-segment items of income (expense): |   |                                  |    |   |   |   |   |
| General                and administrative                   |   |                                  | (1,372  | ) |   | (1,465 | ) |
| Advisory                fees                                |   |                                  | (2,026  | ) |   | (1,752 | ) |
| Interest                income                              |   |                                  | 875     |   |   | 845 |   |
| Gain                (loss) on foreign currency transaction  |   |                                  | 2       |   |   | — |   |
| Net                income fee                               |   |                                  | 257     |   |   | (325 | ) |
| Other                income (expense)                       |   |                                  | 103     |   |   | 1,191 |   |
| Equity                in earnings of investees              |   |                                  | (172    | ) |   | 155 |   |
| Minority                interest                            |   |                                  | — |   |   | — |   |
| Loss                from continuing operations         |   | $                                     | (7,802  | ) | $ | (5,419 | ) |

**NOTE 9.      DISCONTINUED OPERATIONS**

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**

|                                                                                                          |   | **For                the Three Months****Ended                March 31,** |    |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|---------|
|                                                                                                          |   | **2006**                                                                  |    | **2005** |   |
| Revenue                                                                                                       |   |                                                                      |    |   |   |   |   |
| Rental                                                                                                        |   | $                                                                         | 2,038   |   | $ | 3,927 |   |
| Property                operations                                                                            |   |                                                                      | 1,420   |   |   | 2,795 |   |
|                                                                                                          |   |                                                                      | 618     |   |   | 1,132 |   |
| Expenses                                                                                                      |   |                                                                      |    |   |   |   |   |
| Interest                                                                                                      |   |                                                                      | 1,148   |   |   | 1,623 |   |
| Depreciation                                                                                             |   |                                                                      | 159     |   |   | 96 |   |
|                                                                                                          |   |                                                                      | 1,307   |   |   | 1,719 |   |
|                                                                                                          |   |                                                                      |    |   |   |   |   |
| Net                loss from discontinued operations before gains on sale of real                estate  |   |                                                                      | (689    | ) |   | (587 | ) |
| Gain                on sale of operations                                                                     |   |                                                                      | — |   |   | 10,359 |   |
| Write-down                of assets held-for-sale                                                             |   |                                                                      | — |   |   | — |   |
| Equity                in investees gain on sale of real estate                                                |   |                                                                      | — |   |   | — |   |
| Net                income from discontinued operations                                                        |   | $                                                                         | (689    | ) | $ | 9,767 |   |

**NOTE 10.      COMMITMENTS AND CONTINGENCIES**

*Partnership      Obligations*

*Commitments.      *

*Liquidity*
* *

*Litigation.*

*Guarantees*

**NOTE 11.      SUBSEQUENT EVENTS**

----

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

***WARNING      CONCERNING FORWARD LOOKING STATEMENTS***

***Overview***

----

***Critical        Accounting Policies***

***Real        Estate Held for Investment***

***Real        Estate Held-for-Sale***

***Investments        in Equity Investees***

***Recognition        of Rental Income***

***Revenue        Recognition on the Sale of Real Estate***

----

***Non-performing        Notes Receivable***

***Interest        Recognition on Notes Receivable***

***Allowance        for Estimated Losses***

***Fair        Value of Financial Instruments***

***Liquidity        and Capital Resources***

----

***Related        Party Transactions***

***Commitments        and Contingencies***

***Results        of Operations***

----

|                                                                                                                                  |   | **For                  the Three Months****Ended                  March 31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|---------|
|                                                                                                                                  |   | **2006**                                                                      |    | **2005** |   |
| Revenue                                                                                                                               |   |                                                                          |    |   |   |   |   |
| Rental                                                                                                                                |   | $                                                                             | 2,038   |   | $ | 3,927 |   |
| Property                  operations                                                                                                  |   |                                                                          | 1,420   |   |   | 2,795 |   |
|                                                                                                                                  |   |                                                                          | 618     |   |   | 1,132 |   |
|                                                                                                                                  |   |                                                                          |    |   |   |   |   |
| Expenses                                                                                                                              |   |                                                                          |    |   |   |   |   |
| Interest                                                                                                                              |   |                                                                          | 1,148   |   |   | 1,623 |   |
| Depreciation                                                                                                                          |   |                                                                          | 159     |   |   | 96 |   |
|                                                                                                                                  |   |                                                                          | 1,307   |   |   | 1,719 |   |
|                                                                                                                                  |   |                                                                          |    |   |   |   |   |
| Net                  income (loss) from discontinued operations before gains on sale                  of real                  estate |   |                                                                          | (689    | ) |   | (587 | ) |
| Sale                  of real estate                                                                                                  |   |                                                                          | — |   |   | 10,354 |   |
| Gain                  on sale of operations                                                                                           |   |                                                                          | — |   |   | — |   |
| Write-down                  of assets held for sale                                                                                   |   |                                                                          | — |   |   | — |   |
| Equity                  in investees gain on sale of real estate                                                                      |   |                                                                          | — |   |   | — |   |
| Net                  income (loss) from discontinued operations                                                                       |   | $                                                                             | (689    | ) | $ | 9,767 |   |

***Tax        Matters***

***Inflation***

***Environmental        Matters***

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**ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET          RISKS**

|                                                             |   | **Balance** |    | **Weighted** **Average** **Interest                  Rate** |   | **Effect                  of 1%****Increase                  In****Base                  Rates** |   |
|------------------------------------------------------------------|--------|-------------|---------|-----------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|--------|
| Notes                  payable:                                  |   |        |    |                                                                  |   |                                                                                             |   |
| Variable                  rate                              |   | $           | 200,902 |                                                                  |   | 7.95                                                                                             | %      | $ | 2,009 |   |
| Total                  decrease in TCI’s annual net income |   |        |    |                                                                  |   |                                                                                             |   | $ | 2,009 |   |
| Per                  share                                       |   |        |    |                                                                  |   |                                                                                             |   | $ | 0.25 |   |

**ITEM 4.        CONTROLS AND PROCEDURES**

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**PART        II. OTHER INFORMATION**

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

| **Period**                                         | **Total                    Number of****Shares Purchased**                                          | **Average                    Price****Paid                    per Share** | **Total                    Number of****Shares                    Purchased****as                    Part of Publicly****Announced                    Program** | **Maximum                    Number of****Shares                    that May****Yet                    be Purchased****Under                    the Program****(a)** |
|----------------------------------------------------|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Balance                    as of December 31, 2005 |                                                                                                |                                                                      |                                                                                                                                                            | 219,090                                                                                                                                                              |
| January                    1-31, 2006              | –                                                                                             | $–                                                                  | –                                                                                                                                                         | 219,090                                                                                                                                                              |
| February                    1-28, 2006             |                                 – | –                                                                   | –                                                                                                                                                         | 219,090                                                                                                                                                              |
| March                    1-31,2006                 | –                                                                                             | –                                                                   | –                                                                                                                                                         | 219,090                                                                                                                                                              |
| Total                                              | –                                                                                             | $–                                                                  | –                                                                                                                                                         |                                                                                                                                                                 |

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**ITEM 6.EXHIBITS**

| **Exhibit****Number** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.0                   | Articles                  of Incorporation of Transcontinental Realty Investors, Inc., (incorporated                  by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form                  10-K for the year ended December 31, 1991).                                                                                                                                                                                                                                                                                        |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1                   | Certificate                  of Amendment to the Articles of Incorporation of Transcontinental                  Realty                  Investors, Inc., (incorporated by reference to the Registrant’s Current                  Report on Form 8-K, dated June 3, 1996).                                                                                                                                                                                                                                                                           |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2                   | Certificate                  of Amendment of Articles of Incorporation of Transcontinental Realty                  Investors, Inc., dated October 10, 2000 (incorporated by reference                  to the                  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September                  30, 2000).                                                                                                                                                                                                               |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.3                   | Articles                  of Amendment to the Articles of Incorporation of Transcontinental                  Realty                  Investors, Inc., setting forth the Certificate of Designations,                  Preferences and Rights of Series A Cumulative Convertible Preferred                  Stock,                  dated October 20, 1998 (incorporated by reference to Exhibit 3.1                  to the                  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September                  30, 1998). |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.4                   | Certificate                  of Designation of Transcontinental Realty Investors, Inc., setting                  for the                  Voting Powers, Designations, References, Limitations, Restriction                  and                  Relative Rights of Series B Cumulative Convertible Preferred Stock,                  dated                  October 23, 2000 (incorporated by reference to the Registrant’s Quarterly                  Report on Form 10-Q for the quarter ended September 30,                  2000).            |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.5                   | Certificate                  of Designation of Transcontinental Realty Investors, Inc., Setting                  for the                  Voting Powers, Designating, Preferences, Limitations, Restrictions                  and                  Relative Rights of Series C Cumulative Convertible Preferred Stock,                  dated                  September 28, 2001 (incorporated by reference to Registrant’s Quarterly                  Report on Form 10-Q for the quarter ended September 30,                  2001).             |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.6                   | Articles                  of Amendment to the Articles of Incorporation of Transcontinental                  Realty                  Investors, Inc. Decreasing the Number of Authorized Shares of and                  Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated                  by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K                  for the year ended December 31, 2001).                                                                                              |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.7                   | By-Laws                  of Transcontinental Realty Investors, Inc. (incorporated by reference                  to                  Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the                  year ended December 31, 1991).                                                                                                                                                                                                                                                                                          |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1                   | Certificate                  of Designations, Preferences and Relative Participating or Optional                  or                  Other Special Rights, and Qualifications, Limitations or Restrictions                  Thereof of Series F Redeemable Preferred Stock of American Realty                  Investors, Inc., dated June 11, 2001 (incorporated by reference                  to Exhibit                  4.1 to the Registrant’s Annual Report on Form 10-K for the year ended                  December 31, 2001).             |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.0                  | Advisory                  Agreement dated as of October 1, 2003, between Transcontinental                  Realty                  Investors, Inc. and Prime Income Asset Management, LLC (incorporated                  by                  reference to Exhibit 10.0 to the registrant’s current report on Form 8-K                  for event occurring October 1, 2003).                                                                                                                                                                        |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.1                  | Certification                  pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange                  Act of                  1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32.1                  | Certification                  pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

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**SIGNATURE        PAGE**

|   |  TRANSCONTINENTAL                  REALTY INVESTORS, INC. |
|--------|----------------------------------------------------------------|
|   |                                                           |   |   |
| Date:  | May                  15, 2006                                  | By: | /s/                  Steven A. Abney     |
|   |                                                           |   | Steven                  A. Abney |
|   |                                                           |   | Executive                  Vice President and Chief Financial Officer |
|   |                                                           |   | (Principal                  Financial and Accounting Officer and |
|   |                                                           |   | Acting                  Principal Executive Officer) |
|   |                                                           |   |   |

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**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**EXHIBITS        TO **

**QUARTERLY        REPORT ON FORM 10-Q **

**For        the Quarter Ended March 31, 2006 **

| **Exhibit****Number** | **Description                  of Exhibits**                                                                                                               |
|-----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |                                                                                                                                                       |
| 31.1*                 | Certification                  pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange                  Act of                  1934, as amended. |
|                  |                                                                                                                                                       |
| 32.1*                 | Certification                  pursuant to 18 U.S.C. 1350.                                                                                                 |
|                  |                                                                                                                                                       |

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