----

**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 SEPTEMBER 30, 2005**

**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**                                                                                              |                                                          | **94-6565852**                                                                |
|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------|-------------------------------------------------------------------------------|
| **(State                  or Other Jurisdiction of****Incorporation                  or Organization)** |                                                          | **(I.R.S.                  Employer****Identification                  No.)** |
|                                                                                                    |                                                          |                                                                          |
| **1800                  Valley View Lane, Suite 300****Dallas,                  Texas**                 |
|                                                                                                    | **(Address                  of principal executive offices)** |                                                                          |
|                                                                                                    |                                                          |                                                                          |
|                                                                                                    | **75234**                                                     |                                                                          |
|                                                                                                    | **(Zip                  Code)**                               |                                                                          |
|                                                                                                    |                                                          |                                                                          |
|                                                                                                    | **(469)                  522-4200**                           |                                                                          |
|                                                                                                    |                                                          |                                                                          |

**APPLICABLE        ONLY TO CORPORATE ISSUERS: **

| **Common                  Stock, $.01 par value** | **7,900,869**                                           |
|---------------------------------------------------|---------------------------------------------------------|
|                                                   |
|                                              |
| **(Class)**                                       | **(Outstanding                  at November 11, 2005)** |

----

**PART        I. FINANCIAL INFORMATION **

**ITEM 1.        FINANCIAL STATEMENTS**

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        BALANCE SHEETS**

|                                                                                                                                               |   | **September                  30,****2005**  |      | **December                  31,****2004** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|-------------------------------------------|--------|
|                                                                                                                                               |   | **(dollars                  in thousands)** |      |
| **Assets**                                                                                                                                         |   |                                        |      |
| Real                  estate held for investment                                                                                                   |   | $                                           | 821,760   |                                      | $      | 730,584 |   |
| Less—accumulated                  depreciation                                                                                               |   |                                        | (74,343   | )                                         |   | (72,284 | ) |
|                                                                                                                                               |   |                                        | 747,417   |                                      |   | 658,300 |   |
|                                                                                                                                               |   |                                        |      |                                      |   |   |   |
| Real                  estate held for sale                                                                                                         |   |                                        | 57,386    |                                      |   | 49,878 |   |
| Real                  estate subject to sales contract                                                                                             |   |                                        | 69,141    |                                      |   | 70,350 |   |
|                                                                                                                                               |   |                                        |      |                                      |   |   |   |
| Notes                  and interest receivable                                                                                                     |   |                                        |      |                                      |   |   |   |
| Performing                  (including $33,964 in 2005 and $21,340 in 2004 from affiliates                  and related                  parties)  |   |                                        | 50,415    |                                      |   | 56,630 |   |
| Non-performing,                  non-accruing                                                                                                      |   |                                        | 4,896     |                                      |   | — |   |
|                                                                                                                                               |   |                                        | 55,311    |                                      |   | 56,630 |   |
| Less—allowance                  for estimated losses                                                                                         |   |                                        | —   |                                      |   | — |   |
|                                                                                                                                               |   |                                        | 55,311    |                                      |   | 56,630 |   |
|                                                                                                                                               |   |                                        |      |                                      |   |   |   |
| Investment                  in real estate entities                                                                                                |   |                                        | 20,282    |                                      |   | 17,582 |   |
| Marketable                  equity securities, at market value                                                                                     |   |                                        | 7,508     |                                      |   | 6,580 |   |
| Cash                  and cash equivalents                                                                                                         |   |                                        | 6,282     |                                      |   | 21,845 |   |
| Other                  assets (including $1,161 in 2005 and $11,196 in 2004 from affiliates                  and                  related parties) |   |                                        | 44,892    |                                      |   | 39,146 |   |
|                                                                                                                                               |   | $                                           | 1,008,219 |                                      | $      | 920,311 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        BALANCE SHEETS-Continued**

|                                                                                                                                                 |   | **September                  30,****2005**  |      | **December                  31,****2004** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|-------------------------------------------|--------|
|                                                                                                                                                 |   | **(dollars                  in thousands)** |      |
|                                                                                                                                                 |   |                                        |      |
| **Liabilities                  and Stockholders’ Equity**                                                                                      |   |                                        |      |                                      |   |
|                                                                                                                                                 |   |                                        |      |                                      |   |
| Liabilities:                                                                                                                                         |   |                                        |      |                                      |   |
| Notes                  and interest payable (including $6,769 in 2005 to affiliates and                  related                  parties)           |   | $                                           | 591,348   |                                      | $      | 524,670 |   |
| Liabilities                  related to assets held for sale                                                                                         |   |                                        | 73,252    |                                      |   | 59,424 |   |
| Liabilities                  related to assets subject to sales contract                                                                             |   |                                        | 59,488    |                                      |   | 59,977 |   |
| Other                  liabilities (including $8,088 in 2005 and $1,158 in 2004 to affiliates                  and                  related parties) |   |                                        | 43,923    |                                      |   | 34,840 |   |
|                                                                                                                                                 |   |                                        | 768,011   |                                      |   | 678,911 |   |
| Commitments                  and contingencies                                                                                                       |   |                                        |      |                                      |   |   |   |
|                                                                                                                                                 |   |                                        |      |                                      |   |   |   |
| Minority                  interest                                                                                                                   |   |                                        | 1,060     |                                      |   | 881 |   |
|                                                                                                                                                 |   |                                        |      |                                      |   |   |   |
| Stockholders’                  equity:                                                                                                         |   |                                        |      |                                      |   |   |   |
| Preferred                  Stock                                                                                                                     |   |                                        |      |                                      |   |   |   |
| Series                  C; $.01 par value; authorized, issued and outstanding 30,000 shares;                  (liquidation preference                |   |                                        |      |                                      |   |   |   |
| $3,000)                                                                                                                                              |   |                                        | —   |                                      |   | — |   |
| Common                  Stock, $.01 par value; authorized, 10,000,000 shares; issued and                  outstanding 7,900,869                      |   |                                        |      |                                      |   |   |   |
| in                  2005 and 7,900,869 shares in 2004                                                                                                |   |                                        | 81        |                                      |   | 81 |   |
| Paid-in                  capital                                                                                                                     |   |                                        | 256,547   |                                      |   | 256,704 |   |
| Treasury                  stock                                                                                                                      |   |                                        | (3,086    | )                                         |   | (3,086 | ) |
| Accumulated                  deficit                                                                                                                 |   |                                        | (13,862   | )                                         |   | (10,915 | ) |
| Accumulated                  other comprehensive loss                                                                                                |   |                                        | (532      | )                                         |   | (2,265 | ) |
|                                                                                                                                                 |   |                                        | 239,148   |                                      |   | 240,519 |   |
|                                                                                                                                                 |   | $                                           | 1,008,219 |                                      | $      | 920,311 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF OPERATIONS**

|                                                                                                                                                                                             |   | **For                  the Three Months****Ended                  September 30,** |    | **For                  the Nine Months****Ended                  September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                             |   | **2005**                                                                          |    | **2004**                                                                         |   | **2005** |   | **2004** |   |
|                                                                                                                                                                                             |   | **(dollars                  in thousands)**                                       |    |
|                                                                                                                                                                                             |   |                                                                              |    |
| Property                  revenue:                                                                                                                                                               |   |                                                                              |    |                                                                             |   |   |   |   |   |
| Rents                  and other property revenues                                                                                                                                               |   | $                                                                                 | 28,029  |                                                                             | $      | 22,143 |   | $ | 76,239 |   | $ | 62,898 |   |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Expenses:                                                                                                                                                                                        |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Property                  operations (including $3,867 for nine months of 2005 and                   $3,563                  for nine months of 2004 to affiliates and related parties)     |   |                                                                              | 17,677  |                                                                             |   | 14,326 |   |   | 48,349 |   |   | 40,487 |   |
| Depreciation                  and amortization                                                                                                                                                   |   |                                                                              | 3,121   |                                                                             |   | 3,744 |   |   | 10,896 |   |   | 11,250 |   |
| General                  and administrative (including $1,650 for nine months of 2005                  and $1,798 for nine months of 2004 to affiliates and related                  parties)    |   |                                                                              | 1,724   |                                                                             |   | 1,623 |   |   | 5,099 |   |   | 5,552 |   |
| Advisory                  Fees                                                                                                                                                                   |   |                                                                              | 1,768   |                                                                             |   | 1,700 |   |   | 5,305 |   |   | 4,943 |   |
| Total                  operating expenses                                                                                                                                                        |   |                                                                              | 24,290  |                                                                             |   | 21,393 |   |   | 69,649 |   |   | 62,232 |   |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Operating                  income                                                                                                                                                                |   |                                                                              | 3,739   |                                                                             |   | 750 |   |   | 6,590 |   |   | 666 |   |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Other                  income/(expense):                                                                                                                                                         |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Interest                  income (including $1,668 for nine months of 2005 and   $1,090                  for nine months of 2004 from affiliates and related                  parties) |   |                                                                              | 792     |                                                                             |   | 625 |   |   | 2,688 |   |   | 2,180 |   |
| Gain                  on foreign currency transaction                                                                                                                                            |   |                                                                              | 37      |                                                                             |   | 543 |   |   | 265 |   |   | 1,791 |   |
| Mortgage                  and loan interest (including $64 for nine months of 2005 to                  affiliates and related parties)                                                      |   |                                                                              | (10,409 | )                                                                                |   | (7,164 | ) |   | (28,585 | ) |   | (21,259 | ) |
| Provision                  for asset impairment                                                                                                                                                  |   |                                                                              | (1,840  | )                                                                                |   | — |   |   | (1,840 | ) |   | — |   |
| Other                  income/ (expense)                                                                                                                                                         |   |                                                                              | 485     |                                                                             |   | — |   |   | 719 |   |   | — |   |
| Total                  other income/(expense)                                                                                                                                                    |   |                                                                              | (10,935 | )                                                                                |   | (5,996 | ) |   | (26,753 | ) |   | (17,288 | ) |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Loss                  before gain on land sales, equity in earnings of investees and                     minority                  interest                                       |   |                                                                              | (7,196  | )                                                                                |   | (5,246 | ) |   | (20,163 | ) |   | (16,622 | ) |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Gain                  on land sales                                                                                                                                                              |   |                                                                              | 2,332   |                                                                             |   | 747 |   |   | 4,735 |   |   | 2,854 |   |
| Equity                  in earnings of investees                                                                                                                                                 |   |                                                                              | (170    | )                                                                                |   | (197 | ) |   | 976 |   |   | (1,707 | ) |
| Minority                  interests                                                                                                                                                              |   |                                                                              | 32      |                                                                             |   | (155 | ) |   | 7 |   |   | (867 | ) |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Loss                  from continuing operations                                                                                                                                                 |   |                                                                              | (5,002  | )                                                                                |   | (4,851 | ) |   | (14,445 | ) |   | (16,342 | ) |
| Add:                  income tax benefit (expense)                                                                                                                                               |   |                                                                              | 481     |                                                                             |   | (2,004 | ) |   | 4,024 |   |   | 1,694 |   |
| Net                  loss from continuing operations                                                                                                                                             |   |                                                                              | (4,521  | )                                                                                |   | (6,855 | ) |   | (10,421 | ) |   | (14,648 | ) |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Income                  (loss) from discontinued operations (See Note 10)                                                                                                                        |   |                                                                              | 1,375   |                                                                             |   | (5,727 | ) |   | 11,498 |   |   | 4,840 |   |
| Less:                  Income tax benefit (expense)                                                                                                                                              |   |                                                                              | (481    | )                                                                                |   | 2,004 |   |   | (4,024 | ) |   | (1,694 | ) |
| Net                  income (loss) from discontinued operations                                                                                                                                  |   |                                                                              | 894     |                                                                             |   | (3,723 | ) |   | 7,474 |   |   | 3,146 |   |
|                                                                                                                                                                                             |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Net                  loss                                                                                                                                                                        |   |                                                                              | (3,627  | )                                                                                |   | (10,578 | ) |   | (2,947 | ) |   | (11,502 | ) |
| Preferred                  dividend requirement                                                                                                                                                  |   |                                                                              | (53     | )                                                                                |   | (53 | ) |   | (157 | ) |   | (158 | ) |
| Net                  loss applicable to common shares                                                                                                                                            |   | $                                                                                 | (3,680  | )                                                                                | $      | (10,631 | ) | $ | (3,104 | ) | $ | (11,660 | ) |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF OPERATIONS - Continued**

|                                                                                                   |   | **For                  the Three Months****Ended                  September 30,** |      | **For                  the Nine Months****Ended                  September 30,** |   |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|-----------|----------------------------------------------------------------------------------|--------|
|                                                                                                   |   | **2005**                                                                          |      | **2004**                                                                         |   | **2005** |   | **2004** |   |
|                                                                                                   |   | **(dollars                  in thousands)**                                       |      |
|                                                                                                   |   |                                                                              |      |                                                                             |   |   |   |   |   |
| Basic                  earnings per share:                                                             |   |                                                                              |      |                                                                             |   |   |   |   |   |
| Net                  loss from continuing operations                                                   |   | $                                                                                 | (.58      | )                                                                                | $      | (.85 | ) | $ | (1.34 | ) | $ | (1.83 | ) |
| Discontinued                  operations                                                               |   |                                                                              | .11       |                                                                             |   | (.46 | ) |   | .95 |   |   | .39 |   |
| Net                  income (loss) applicable to common shares                                         |   | $                                                                                 | (.47      | )                                                                                | $      | (1.31 | ) | $ | (.39 | ) | $ | (1.44 | ) |
|                                                                                                   |   |                                                                              |      |                                                                             |   |   |   |   |   |   |   |   |   |
| Diluted                  earnings per share:                                                           |   |                                                                              |      |                                                                             |   |   |   |   |   |   |   |   |   |
| Net                  loss from continuing operations                                                   |   | $                                                                                 | (.58      | )                                                                                | $      | (.85 | ) | $ | (1.34 | ) | $ | (1.83 | ) |
| Discontinued                  operations                                                               |   |                                                                              | .11       |                                                                             |   | (.46 | ) |   | .95 |   |   | .39 |   |
| Net                  income (loss) applicable to common shares                                         |   | $                                                                                 | (.47      | )                                                                                | $      | (1.31 | ) | $ | (.39 | ) | $ | (1.44 | ) |
|                                                                                                   |   |                                                                              |      |                                                                             |   |   |   |   |   |   |   |   |   |
| Weighted                  average common shares used in computing earnings per                  share: |   |                                                                              |      |                                                                             |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                  |   |                                                                              | 7,900,869 |                                                                             |   | 8,113,669 |   |   | 7,900,869 |   |   | 8,113,669 |   |
| Diluted                                                                                                |   |                                                                              | 7,900,869 |                                                                             |   | 8,113,669 |   |   | 7,900,869 |   |   | 8,113,669 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF STOCKHOLDERS’ EQUITY**

**For        the Nine Months Ended September 30, 2005**

|                                                                              |   |                              |      |         |   |      |   |   **Paid-in****Capital** |   |   **Accumulated****Deficit** |   | **Accumulated****Other****Comprehensive****Income** |   |   **Stockholders’****Equity** |    |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|-----------|--------------|--------|-----------|--------|------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                              |   |                              |      |         |   |      |   |
|                                                                              |   | **Common                  Stock** |      | **Treasury** |   |
|                                                                              |   | **Shares**                        |      | **Amount**   |   | **Stock** |   |
|                                                                              |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |
| Balance,                  January 1, 2005                                         |   |                              | 7,900,869 |         | $      | 81        |   | $                                  | (3,086 | )                                      | $      | 256,704                                             |   | $                                             | (10,915 | ) | $ | (2,265 | ) | $ | 240,519 |   |
|                                                                              |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Comprehensive                  income                                             |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Unrealized                  gain on foreign currency                  translation |   |                              | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | 3⁄4                                              |   |                                          | 3⁄4  |   |   | 805 |   |   | 805 |   |
|                                                                                   |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Unrealized                  gain on marketable securities                         |   |                              | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | 3⁄4                                              |   |                                          | 3⁄4  |   |   | 928 |   |   | 928 |   |
|                                                                                   |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
|                                                                              |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Net                  income                                                       |   |                              | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | 3⁄4                                              |   |                                          | (2,947  | ) |   | 3⁄4 |   |   | (2,947 | ) |
|                                                                              |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   | 239,305 |   |
|                                                                              |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Series                  C Preferred Stock cash                                    |   |                              | 3⁄4    |         |   | 3⁄4    |   |                               | 3⁄4 |                                   |   | (157                                                | )      |                                          | 3⁄4  |   |   | 3⁄4 |   |   | (157 | ) |
| Dividends                  ($7.00 per share)                                      |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
|                                                                              |   |                              |      |         |   |      |   |                               |   |                                   |   |                                                |   |                                          |    |   |   |   |   |   |   |   |
| Balance,                  September 30, 2005                                      |   |                              | 7,900,869 |         | $      | 81        |   | $                                  | (3,086 | )                                      | $      | 256,547                                             |   | $                                             | (13,862 | ) | $ | (532 | ) | $ | 239,148 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF CASH FLOWS**

|                                                                                                                                                 |   | **For                  the Nine Months****Ended                  September 30,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|---------|
|                                                                                                                                                 |   | **2005**                                                                         |    | **2004** |   |
|                                                                                                                                                 |   | **(dollars                  in thousands)**                                      |    |
|                                                                                                                                                 |   |                                                                             |    |   |   |
| Cash                  Flows from Operating Activities                                                                                                |   |                                                                             |    |   |   |
| Reconciliation                  of net income (loss) to net cash provided by (used in) operating                  activities                         |   |                                                                             |    |   |   |
| Net                  income (loss)                                                                                                                   |   | $                                                                                | (2,947  | ) | $ | (11,502 | ) |
| Adjustments                  to reconcile net income (loss) to net cash provided by (used in)                  operating                  activities |   |                                                                             |    |   |   |   |   |
| Depreciation                  and amortization                                                                                                       |   |                                                                             | 11,250  |   |   | 16,041 |   |
| Amortization                  of deferred borrowing costs                                                                                            |   |                                                                             | 2,969   |   |   | 2,763 |   |
| Gain                  on sale of real estate                                                                                                         |   |                                                                             | (19,870 | ) |   | (15,250 | ) |
| Equity                  in earnings of investees                                                                                                     |   |                                                                             | (976    | ) |   | 1,707 |   |
| Gain                  on foreign currency transaction                                                                                                |   |                                                                             | (265    | ) |   | (1,791 | ) |
| Provision                  for asset impairment                                                                                                      |   |                                                                             | 3,420   |   |   | 4,477 |   |
| (Income)                  loss allocated to minority interest                                                                                        |   |                                                                             | (7      | ) |   | 867 |   |
| Decrease                  (increase) in interest receivable                                                                                          |   |                                                                             | 1,337   |   |   | (1,179 | ) |
| (Increase)                  decrease in other assets                                                                                                 |   |                                                                             | (90     | ) |   | 6,099 |   |
| Increase                  (decrease) in interest payable                                                                                             |   |                                                                             | 292     |   |   | (764 | ) |
| Increase                  in other liabilities                                                                                                       |   |                                                                             | 6,343   |   |   | 10,467 |   |
| Net                  cash provided by operating activities                                                                                           |   |                                                                             | 1,456   |   |   | 11,935 |   |
|                                                                                                                                                 |   |                                                                             |    |   |   |   |   |
| Cash                  Flows from Investing Activities                                                                                                |   |                                                                             |    |   |   |   |   |
| Collections                  on notes receivable                                                                                                     |   |                                                                             | 3,984   |   |   | 2,361 |   |
| Funding                  of notes receivable                                                                                                         |   |                                                                             | (3,117  | ) |   | (55 | ) |
| Acquisition                  of real estate (including $498 in 2004 from affiliates and related                  parties)                            |   |                                                                             | (91,639 | ) |   | (20,004 | ) |
| Real                  estate improvements                                                                                                            |   |                                                                             | (2,917  | ) |   | (5,456 | ) |
| Real                  estate construction                                                                                                            |   |                                                                             | (29,562 | ) |   | (127,168 | ) |
| Proceeds                  from sale of real estate                                                                                                   |   |                                                                             | 42,553  |   |   | 72,159 |   |
| Distributions                  from equity investees, net                                                                                            |   |                                                                             | 318     |   |   | 47 |   |
| Deposits                  on pending purchases and financings                                                                                        |   |                                                                             | (5,154  | ) |   | (4,145 | ) |
| Net                  cash used in investing activities                                                                                               |   |                                                                             | (85,534 | ) |   | (82,261 | ) |
|                                                                                                                                                 |   |                                                                             |    |   |   |   |   |
| Cash                  Flows from Financing Activities                                                                                                |   |                                                                             |    |   |   |   |   |
| Payments                  on notes payable                                                                                                           |   |                                                                             | (51,666 | ) |   | (170,483 | ) |
| Proceeds                  from notes payable                                                                                                         |   |                                                                             | 123,085 |   |   | 266,564 |   |
| Dividends                  paid to preferred shareholders                                                                                            |   |                                                                             | (105    | ) |   | (105 | ) |
| Payments                  to advisor                                                                                                                 |   |                                                                             | (1,176  | ) |   | (21,361 | ) |
| Deferred                  financing costs                                                                                                            |   |                                                                             | (1,623  | ) |   | (2,893 | ) |
| Net                  cash provided by financing activities                                                                                           |   |                                                                             | 68,515  |   |   | 71,722 |   |
|                                                                                                                                                 |   |                                                                             |    |   |   |   |   |
| Net                  decrease in cash and cash equivalents                                                                                           |   |                                                                             | (15,563 | ) |   | 1,396 |   |
| Cash                  and cash equivalents, beginning of period                                                                                      |   |                                                                             | 21,845  |   |   | 6,434 |   |
| Cash                  and cash equivalents, end of period                                                                                            |   | $                                                                                | 6,282   |   | $ | 7,830 |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**CONSOLIDATED        STATEMENTS OF CASH FLOWS-Continued**

|                                                                                                   |   | **For                  the Nine Months****Ended                  September 30,** |    |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|---------|
|                                                                                                   |   | **2005**                                                                         |    | **2004** |   |
|                                                                                                   |   | **(dollars                  in thousands)**                                      |    |
|                                                                                                   |   |                                                                             |    |
| Supplemental                  Disclosures of Cash Flow Information:                                    |   |                                                                             |    |   |   |
|                                                                                                   |   |                                                                             |    |   |   |
| Cash                  paid for interest                                                                |   | $                                                                                | 30,448  |   | $ | 31,422 |   |
|                                                                                                   |   |                                                                             |    |   |   |   |   |
| Schedule                  of noncash investing and financing activities:                               |   |                                                                             |    |   |   |   |   |
| Notes                  payable assumed on purchase of real estate                                      |   |                                                                             | 13,006  |   |   | 5,027 |   |
| Notes                  payable assumed by buyer on sale of real estate                                 |   |                                                                             | 738     |   |   | 13,148 |   |
| Notes                  receivable provided on sale of real estate                                      |   |                                                                             | 1,125   |   |   | 9,925 |   |
| Note                  payable proceeds used by affiliate for purchase of real                  estate  |   |                                                                             | — |   |   | 1,000 |   |
| Note                  payable proceeds used by affiliate for payment of debt                           |   |                                                                             | — |   |   | 1,851 |   |
| Real                  estate purchased from affiliate decreasing affiliate                  receivable |   |                                                                             | 1,631   |   |   | 7,059 |   |
| Real                  estate received from affiliate as payment of debt                                |   |                                                                             | — |   |   | 5,000 |   |
| Subsidiary                  purchased from affiliate decreasing affiliate receivable                   |   |                                                                             | 4,101   |   |   | — |   |
| Acquisition                  of real estate to satisfy note receivable                                 |   |                                                                             | 4,207   |   |   | — |   |
| Unrealized                  foreign currency translation gain                                          |   |                                                                             | 804     |   |   | — |   |
| Unrealized                  gain on marketable securities                                              |   |                                                                             | 928     |   |   | 397 |   |
| Unrealized                  foreign currency translation loss                                          |   |                                                                             | — |   |   | 1,153 |   |
| Asset                  impairment write-down                                                           |   |                                                                             | 3,420   |   |   | — |   |
| Note                  payable paid by affiliate                                                        |   |                                                                             | — |   |   | 10,823 |   |

----

*Stock-based        employee compensation*

|                                                       |   | **For                  the Three Months** |    | **For                  the Nine Months** |   |
|------------------------------------------------------------|--------|-------------------------------------------|---------|------------------------------------------|--------|
|                                                       |   | **Ended                  September 30,**  |    | **Ended                  September 30**, |   |
|                                                       |   | **2005**                                  |    | **2004**                                 |   | **2005** |   | **2004** |   |
|                                                       |   |                                      |    |                                     |   |   |   |   |   |
| Net                  income (loss):                        |   |                                      |    |                                     |   |   |   |   |   |
| As                  reported                               |   | $                                         | (3,680  | )                                        | $      | (10,631 | ) | $ | (3,104 | ) | $ | (11,660 | ) |
| Proforma                  compensation expense, net of tax |   |                                      | — |                                     |   | — |   |   | 154 |   |   | 137 |   |
| Proforma                                                   |   | $                                         | (3,680  | )                                        | $      | (10,631 | ) | $ | (3,258 | ) | $ | (11,797 | ) |
| Basic                  earnings (loss) per share:          |   |                                      |    |                                     |   |   |   |   |   |   |   |   |   |
| As                  reported                               |   | $                                         | (0.47   | )                                        | $      | (1.31 | ) | $ | (0.39 | ) | $ | (1.44 | ) |
| Proforma                                                   |   | $                                         | (0.47   | )                                        | $      | (1.31 | ) | $ | (0.41 | ) | $ | (1.45 | ) |
| Diluted                  earnings (loss) per share:        |   |                                      |    |                                     |   |   |   |   |   |   |   |   |   |
| As                  reported                               |   | $                                         | (0.47   | )                                        | $      | (1.31 | ) | $ | (0.39 | ) | $ | (1.44 | ) |
| Proforma                                                   |   | $                                         | (0.47   | )                                        | $      | (1.31 | ) | $ | (0.41 | ) | $ | (1.45 | ) |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS**

| **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 | (8) |
| Mandahl                  Bay (Gilmore)                 | US                  Virgin Islands  | 1.02                  Acres                  | 96                    | 104                                                  |                 | —              |                 | — |   | — |   |
| Mandahl                  Bay (Chung)                   | US                  Virgin Islands  | .75                  Acres                   | 95                    | 101                                                  |                 | —              |                 | — |   | — |   |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| ***Second                  Quarter***                  |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| **Apartments**                                         |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| Foxwood(3)                                             | Memphis,                  TN        | 220                  Units                   | 6,988                 | —                                              |                 | 5,609                | (1)                  | 6.54 |   | 01/08 |   |
| Parc                  at Metro Center(4)               | Nashville,                  TN      | 144                  Units                   | 817                   | (378                                                 | )                    | 817                  |                 | 5.65 |   | 09/46 |   |
| Mission                  Oaks(4)                       | San                  Antonio, TX    | 228                  Units                   | 573                   | 573                                                  |                 | —              |                 | 5.30 |   | 09/46 |   |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| **Office                  Buildings**                  |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| Park                  West                             | Farmers                  Branch, TX | 243,416                  Sq. Ft.             | 10,000                | 4,715                                                |                 | 6,500                |                 | 7.50 | (2) | 05/06 |   |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| **Land**                                               |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| Alliance                  Airport (formerly Centurion) | Tarrant                  County, TX | 12.724                  Acres                | 850                   | 892                                                  |                 | —              |                 | — |   | — |   |
| Mandahl                  Bay (Marina)                  | US                  Virgin Islands  | 24.02                  Acres                 | 2,000                 | 2,101                                                |                 | —              |                 | — |   | — |   |
| Southwood(5)                                           | Tallahassee,                  FL    | 12.95                  Acres                 | 525                   | 555                                                  |                 | —              |                 | — |   | — |   |
| West                  End(6)                           | Dallas,                  TX         | .158                  Acres                  | 49                    | 52                                                   |                 | —              |                 | — |   | — |   |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| ***Third                  Quarter***                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| **Apartments**                                         |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| Legends                  of El Paso(4)                 | El                  Paso, TX        | 240                  Units                   | 2,247                 | 464                                                  |                 | 1,774                |                 | 5.50 |   | 01/47 |   |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| **Office                  Buildings**                  |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| 600                  Las Colinas                       | Las                  Colinas, TX    | 509,829                  Sq. Ft.             | 56,000                | 17,663                                               |                 | 40,487               | (9)                  | 6.16 | (9) | 01/13 | (9) |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| **Land**                                               |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| Luna                                                   | Farmers                  Branch, TX | 2.606                  Acres                 | 250                   | 257                                                  |                 | —              |                 | — |   | — |   |
| Mansfield                                              | Mansfield,                  TX      | 21.892                  Acres                | 1,450                 | 577                                                  |                 | 943                  |                 | 7.50 | (2) | 03/07 |   |
| Senlac                                                 | Farmers                  Branch, TX | 11.94                  Acres                 | 625                   | 643                                                  | (7)                  | —              |                 | — |   | — |   |
| Whorton                                                | Benton                  County, AR  | 79.68                  Acres                 | 4,332                 | 702                                                  |                 | 3,828                |                 | 6.08 |   | 01/07 |   |
| Wilmer                  88                             | Dallas,                  TX         | 87.62                  Acres                 | 638                   | 668                                                  |                 | —              |                 | — |   | — |   |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| ***Fourth                  Quarter***                  |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| **Land**                                               |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| Alliance                  8                            | Tarrant                  County, TX | 8                  Acres                     | 657                   | 332                                                  |                 | 408                  |                 | 7.75 |   | 05/06 |   |
| Alliance                  52                           | Tarrant                  County, TX | 51.887                  Acres                | 2,538                 | 1,054                                                |                 | 1,610                |                 | 7.75 |   | 05/06 |   |
| Denton                                                 | Denton,                  TX         | 25.928                  Acres                | 2,100                 | 862                                                  |                 | 1,365                |                 | 7.75 | (2) | 04/07 |   |
| Pantaze                                                | Dallas,                  TX         | 5.997                  Acres                 | 265                   | 276                                                  |                 | —              |                 | — |   | — |   |
| Payne(10)                                              | Las                  Colinas, TX    | 109.85                  Acres                | 1,000                 | 1,066                                                |                 | —              |                 | — |   | — |   |
| TuTu                                                   | US                  Virgin Islands  | 19.5                  Acres                  | 1,350                 | 1,401                                                |                 | —              |                 | — |   | — |   |
| Woodmont-Bailey                                        | Addison,                  TX        | 1.93                  Acres                  | 1,475                 | 381                                                  |                 | 1,180                |                 | — |   | — |   |
| Woodmont-Town                  Center                  | Addison,                  TX        | 1.2381                  Acres                | 400                   | 102                                                  |                 | 320                  |                 | — |   | — |   |
| Woodmont-Veladi                                        | Addison,                  TX        | 2.132                  Acres                 | 383                   | 99                                                   |                 | 306                  |                 | — |   | — |   |
|                                                   |                                |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

| **Property**                          | **Location**                   | **Units/****Sq.                  Ft./Acres** | **Purchase****Price** | **Net                  Cash****Paid/****(Received)** | **Debt****Incurred** | **Interest****Rate** | **Maturity****Date** |
|---------------------------------------|--------------------------------|----------------------------------------------|-----------------------|------------------------------------------------------|----------------------|----------------------|----------------------|
| **Shopping                  Centers** |                           |                                         |                  |                                                 |                 |                 |                 |   |   |   |   |
| Willowbrook                           | Coldwater,                  MI | 117,689                  Sq. Ft.             | $8,200                | $2,223                                               |                 | $6,495               |                 | 7.28 | % | 02/13 |   |

| **Property**                                                          | **Location**                     | **Units/Acres**               | **Purchase****Price** | **Net                  Cash****Paid/****(Received)** |   | **Debt****Incurred** |   | **Interest****Rate** |   | **Maturity****Date** |   |
|-----------------------------------------------------------------------|----------------------------------|-------------------------------|-----------------------|------------------------------------------------------|--------|----------------------|--------|----------------------|--------|----------------------|--------|
| ***First                  Quarter***                                  |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| **Apartments**                                                        |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| Blue                  Lake Villas II(1)                               | Waxahachie,                  TX  | 70                  Units     | $729                  | $(164                                                | )      | $729                 |   | 5.80                 | %      | 04/45                |   |
| Bridges                  on Kinsey(1)                                 | Tyler,                  TX       | 232                  Units    | 2,291                 | 596                                                  |   | 1,687                |   | 5.74                 |   | 08/45                |   |
| Dakota                  Arms(1)                                       | Lubbock,                  TX     | 208                  Units    | 2,472                 | 681                                                  |   | 1,791                |   | 5.85                 |   | 06/45                |   |
| Lake                  Forest(1)                                       | Houston,                  TX     | 240                  Units    | 2,316                 | (470                                                 | )      | 2,316                |   | 5.60                 |   | 03/45                |   |
| Stonebridge                  at City Park (formerly 288 City Park)(1) | Houston,                  TX     | 240                  Units    | 3,056                 | 612                                                  |   | 2,444                |   | 5.95                 |   | 04/45                |   |
| Vistas                  of Vance Jackson(1)                           | San                  Antonio, TX | 240                  Units    | 3,550                 | 771                                                  |   | 2,779                |   | 5.78                 |   | 06/45                |   |
|                                                                  |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| **Land**                                                              |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| Lubbock                                                               | Lubbock,                  TX     | 2.866                  Acres  | 224                   | 224                                                  |   | —              |   | —              |   | —              |   |
| Railroad                                                              | Dallas,                  TX      | .293                  Acres   | 708                   | 704                                                  |   | —              |   | —              |   | —              |   |
| Vista                  Ridge(2)                                       | Lewisville,                  TX  | 14.216                  Acres | 2,585                 | —                                              |   | —              |   | —              |   | —              |   |
|                                                                  |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| ***Second                  Quarter***                                 |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| **Apartments**                                                        |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| Wildflower                  Villas(1)                                 | Temple,                  TX      | 220                  Units    | 2,045                 | 79                                                   |   | 1,966                |   | 5.99                 |   | 10/45                |   |
| Treehouse(3)                                                          | Irving,                  TX      | 160                  Units    | 8,017                 | (498                                                 | )      | 5,027                | (5)    | 5.00                 |   | 08/13                |   |
|                                                                  |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| **Land**                                                              |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| Rogers                  land                                          | Rogers,                  AR      | 20.08                  Acres  | 1,390                 | 619                                                  |   | 1,130                |   | 10.50                |   | 04/05                | (6)    |
| Cooks                  Lane land                                      | Ft.                  Worth, TX   | 23.242                  Acres | 1,000                 | 1,034                                                |   | —              |   | —              |   | —              |   |
| Lacy                  Longhorn land(4)                                | Rogers,                  AR      | 17.115                  Acres | 4,474                 | —                                              |   | —              |   | —              |   | —              |   |
|                                                                  |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| ***Third                  Quarter***                                  |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| **Land**                                                              |                             |                          |                  |                                                 |   |                 |   |                 |   |                 |   |
| Granbury                  Station                                     | Ft.                  Worth, TX   | 15.696                  Acres | 923                   | 236                                                  |   | 738                  |   | 7.00                 |   | 09/07                |   |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

| **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                                   |   |
|                                           |                             |                                                   |               |                                      |                   |   |                                 |   |
| ***Second                  Quarter***          |                             |                                                   |               |                                      |                   |   |                                 |   |
| **Office                  Building**           |                             |                                                   |               |                                      |                   |   |                                 |   |
| 9033                  Wilshire                 | Los                  Angeles, CA | 44,253                  Sq. Ft.                        | 12,000             | 4,366                                     | 6,506                  |   | 2,162                                |   |
| Bay                  Plaza I                   | Tampa,                  FL       | 75,780                  Sq. Ft.                        | 4,682              | 3,253                                     | 961                    |   | 919                                  |   |
| Bay                  Plaza II                  | Tampa,                  FL       | 78,882                  Sq. Ft.                        | 4,719              | 1,114                                     | 3,284                  |   | (199                                 | )      |
|                                           |                             |                                                   |               |                                      |                   |   |                                 |   |
| **Land**                                       |                             |                                                   |               |                                      |                   |   |                                 |   |
| Alamo                  Springs/Lemmon Carlisle | Dallas,                  TX      | 2.82                  Acres                            | 7,674              | 5,587                                     | 1,744                  |   | 2,394                                |   |
|                                           |                             |                                                   |               |                                      |                   |   |                                 |   |
| ***Third                  Quarter***           |                             |                                                   |               |                                      |                   |   |                                 |   |
| **Land**                                       |                             |                                                   |               |                                      |                   |   |                                 |   |
| Round                  Mountain(2)             | Lakeway,                  TX     | 10                  Acres                              | 1,500              | 251                                       | —                |   | 1,073                                |   |
| West                  End                      | Dallas,                  TX      | .7978                  Acres                           | 2,259              | 2,099                                     | —                |   | 1,259                                |   |
|                                           |                             |                                                   |               |                                      |                   |   |                                 |   |
| ***Fourth                  Quarter***          |                             |                                                   |               |                                      |                   |   |                                 |   |
| **Apartments**                                 |                             |                                                   |               |                                      |                   |   |                                 |   |
| Terrace                  Hills                 | El                  Paso, TX     | 310                  Units                             | 12,300             | 5,467                                     | 5,890                  |   | 6,527                                |   |

| **Property**                                | **Location**                       | **Units/****Sq.                  Ft./Acres** | **Sales****Price** | **Net                  Cash****Received** | **Debt****Extinguished** |                     | **Gain****on                  Sale** |   |
|---------------------------------------------|------------------------------------|----------------------------------------------|--------------------|-------------------------------------------|--------------------------|--------------------------|--------------------------------------|--------|
| ***First                  Quarter***        |                               |                                         |               |                                      |                     |                     |                                 |   |
| **Industrial                  Warehouse**   |                               |                                         |               |                                      |                     |                     |                                 |   |
| Kelly                  (Pinewood)           | Dallas,                  TX        | 100,000                  Sq. Ft.             | $1,650             | $65                                       | $1,376                   |                     | $153                                 |   |
| Ogden                  Industrial           | Ogden,                  UT         | 107,112                  Sq. Ft.             | 2,600              | 668                                       | 1,775                    |                     | 1,374                                |   |
| Texstar                  Warehouse(2)  | Arlington,                  TX     | 97,846                  Sq. Ft.              | 2,400              | —                                   | 1,148                    | (1)                  (6) | —                              | (3)    |
|                                        |                               |                                         |               |                                      |                     |                     |                                 |   |
| **Land**                                    |                               |                                         |               |                                      |                     |                     |                                 |   |
| Allen                                       | Collin                  County, TX | 492.531                  Acres               | 19,962             | 7,956                                     | 4,088                    |                     | 2,106                                | (5)    |
| Marine                  Creek(7)            | Ft.                  Worth, TX     | 10.73                  Acres                 | 1,488              | 1,198                                     | 991                      |                     | —                              | (8)    |
| Red                  Cross                  | Dallas,                  TX        | 2.89                  Acres                  | 8,500              | 2,842                                     | 4,450                    |                     | —                              |   |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

| **Property**                               | **Location**                    | **Units/****Sq.                  Ft./Acres** | **Sales****Price** | **Net                  Cash****Received** | **Debt****Extinguished** | **Gain****on                  Sale** |
|--------------------------------------------|---------------------------------|----------------------------------------------|--------------------|-------------------------------------------|--------------------------|--------------------------------------|
| **Office                  Building**       |                            |                                         |               |                                      |                     |                                 |   |   |
| Brandeis(9)                                | Omaha,                  NE      | 319,324                  Sq. Ft.             | $—           | $—                                  | $8,750                   | (1)                                  | $(92 | ) |
| Countryside                  Harmon        | Sterling,                  VA   | 72,062                  Sq. Ft.              | 2,650              | 216                                       | 2,200                    |                                 | 1,861 |   |
| Countryside                  Retail        | Sterling,                  VA   | 133,422                  Sq. Ft.             | 27,100             | 3,408                                     | 22,800                   |                                 | 5,475 |   |
|                                       |                            |                                         |               |                                      |                     |                                 |   |   |
| **Shopping                  Center**       |                            |                                         |               |                                      |                     |                                 |   |   |
| K-Mart(2)                             | Cary,                  NC       | 92,033                  Sq. Ft.              | 3,200              | —                                   | 1,677                    | (1)                  (6)             | — | (4) |
|                                       |                            |                                         |               |                                      |                     |                                 |   |   |
| ***Second                  Quarter***      |                            |                                         |               |                                      |                     |                                 |   |   |
| **Apartments**                             |                            |                                         |               |                                      |                     |                                 |   |   |
| Cliffs                  of El Dorado(10)   | McKinney,                  TX   | 208                  Units                   | 13,442             | 10                                        | 10,323                   | (1)                                  | — | (11) |
| Sandstone                                  | Mesa,                  AZ       | 238                  Units                   | 8,650              | 2,687                                     | 5,531                    |                                 | 1,136 |   |
| Waters                  Edge IV(12)        | Gulfport,                  MS   | 80                  Units                    | 5,000              | —                                   | —                  |                                 | 494 | (13) |
|                                       |                            |                                         |               |                                      |                     |                                 |   |   |
| **Office                  Buildings**      |                            |                                         |               |                                      |                     |                                 |   |   |
| 4135                  Beltline             | Addison,                  TX    | 90,000                  Sq. Ft.              | 4,900              | 2,472                                     | 2,009                    |                                 | 345 |   |
| Atrium                                     | Palm                  Beach, FL | 74,603                  Sq. Ft.              | 5,775              | 1,667                                     | 3,772                    |                                 | 328 |   |
|                                       |                            |                                         |               |                                      |                     |                                 |   |   |
| ***Third                  Quarter***       |                            |                                         |               |                                      |                     |                                 |   |   |
| **Industrial                  Warehouses** |                            |                                         |               |                                      |                     |                                 |   |   |
| Kelly                  (Cash Road)         | Dallas,                  TX     | 97,150                  Sq. Ft.              | 1,500              | 1,077                                     | 422                      |                                 | 127 |   |
|                                       |                            |                                         |               |                                      |                     |                                 |   |   |
| **Land**                                   |                            |                                         |               |                                      |                     |                                 |   |   |
| Rasor                                      | Plano,                  TX      | 24.5                  Acres                  | 2,600              | 2,600                                     | —                  |                                 | — | (14) |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

| **Property**                          | **Location**                        | **Units**                  | **Amount****Expended** | **Additional****Amount****to                  Expend** | **Construction****Loan****Funding** |
|---------------------------------------|-------------------------------------|----------------------------|------------------------|--------------------------------------------------------|-------------------------------------|
|                                  |                                |                       |                   |                                                   |                                |
| Laguna                  Vista         | Farmers                  Branch, TX | 206                  Units | $5,688                 | $15,417                                                | $17,741                             |
| Legends                  of El Paso   | El                  Paso, TX        | 240                  Units | 2,723                  | 15,361                                                 | 16,040                              |
| Mission                  Oaks         | San                  Antonio, TX    | 228                  Units | 811                    | 16,658                                                 | 15,636                              |
| Parc                  at Maumelle     | Maumelle,                  AR       | 240                  Units | 6,543                  | 12,156                                                 | 16,829                              |
| Parc                  at Metro Center | Nashville,                  TN      | 144                  Units | 2,522                  | 10,093                                                 | 11,141                              |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

*Related        Party.*

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

*Real        estate entities.*

| **Investee**                          |   | **Percentage                  of TCI’s****Ownership                  at****September                  30, 2005** |   | **Carrying                  Value of****Investment                  at****September                  30, 2005** |   | **Market                  Value****of                  Investment at** **September                  30, 2005** |   |
|---------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|
|                                  |   |                                                                                                                   |   |                                                                                                            |   |                                                                                                                |   |
| IORI                                  |   |                                                                                                                   | 24.9   | %                                                                                                               | $      | 6,048                                                                                                               |   | $ | 7,520 |   |
| ARI                                   |   |                                                                                                                   | 6.4    | %                                                                                                               |   | 11,969                                                                                                              |   |   | 7,134 |   |
| Garden                  Centura, L.P. |   |                                                                                                                   | 5.0    | %                                                                                                               |   | 1,925                                                                                                               |   |   | 3⁄4 |   |
|                                  |   |                                                                                                                   |   |                                                                                                            |   | 19,942                                                                                                              |   | $ | 14,654 |   |
| Other                                 |   |                                                                                                                   |   |                                                                                                            |   | 340                                                                                                                 |   |   |   |   |
|                                  |   |                                                                                                                   |   |                                                                                                            | $      | 20,282                                                                                                              |   |   |   |   |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

|                                                               |   | **2005** |    | **2004** |   |
|--------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Revenues                                                           |   | $        | 115,772 |     | $      | 98,006 |   |
| Equity                  in earnings of investees                   |   |     | (45     | )        |   | (10 | ) |
| Property                  operating expenses                       |   |     | (76,943 | )        |   | (87,029 | ) |
| Depreciation                                                       |   |     | (5,981  | )        |   | (7,422 | ) |
| Interest                  expense                                  |   |     | (20,794 | )        |   | (27,483 | ) |
| Income                  (loss) before gains on sale of real estate |   |     | 12,009  |     |   | (23,938 | ) |
| Gain                  on sale of real estate                       |   |     | 21,817  |     |   | 15,551 |   |
| Net                  income (loss)                                 |   | $        | 33,826  |     | $      | (8,387 | ) |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

|                                                   |   | **PRIME** |    | **IORI** |   |
|--------------------------------------------------------|--------|-----------|---------|----------|--------|
|                                                   |   |      |    |     |   |
| Balance,                  December 31, 2004            |   | $         | (829    | )        | $      | (260 | ) |
| Cash                  transfers                        |   |      | 38,503  |     |   | — |   |
| Cash                  repayments                       |   |      | (37,327 | )        |   | 260 |   |
| Repayments                  through property transfers |   |      | (5,758  | )        |   | — |   |
| Fees                  payable to affiliate             |   |      | (934    | )        |   | — |   |
| Payables                  clearing through Prime       |   |      | (666    | )        |   | — |   |
| Balance,                  September 30, 2005           |   | $         | (7,011  | )        | $      | — |   |

*Returns        on Metra Properties. *

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

| **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                |
|                                  |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| ***Second                  Quarter*** |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| **Apartments**                        |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| Autumn                  Chase         | Midland,                  TX        | 64                  Units                                            | 1,166                | 797                    | 317                                       | 5.88                 | (1)    | 05/35                |
| Courtyard                             | Midland,                  TX        | 133                  Units                                           | 1,342                | 966                    | 266                                       | 5.88                 | (1)    | 05/35                |
| Southgate                             | Odessa,                  TX         | 180                  Units                                           | 1,879                | 1,712                  | 61                                        | 5.88                 | (1)    | 05/35                |
|                                  |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| **Hotel**                             |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| The                  Majestic         | Chicago,                  IL        | 55                  Rooms                                            | 3,225                | —                | 3,066                                     | 6.40                 |   | 06/10                |
|                                  |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| ***Third                  Quarter***  |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| **Land**                              |                                |                                                                 |                 |                   |                                      |                 |   |                 |
| Alliance                  Airport(2)  | Tarrant                  County, TX | 12.724                  Acres                                        | 553                  | —                | 540                                       | 7.25                 | (1)    | 01/07                |
| Centura(3)                            | Farmers                  Branch, TX | 8.753                  Acres                                         | 6,727                | —                | 6,727                                     | 8.50                 | (1)    | 08/07                |
| DeSoto                  Ranch(2)      | DeSoto,                  TX         | 21.879                  Acres                                        | 1,635                | 1,271                  | 336                                       | 7.25                 | (1)    | 01/07                |
| Sheffield                  Village(2) | Grand                  Prairie, TX  | 13.9                  Acres                                          | 975                  | 975                    | 94                                        | 7.75                 | (1)    | 03/07                |
| West                  End(2)          | Dallas,                  TX         | 6.324                  Acres                                         | 2,000                | —                | 1,951                                     | 7.25                 | (1)    | 01/07                |

| **Property**                                                                        | **Location**                        | **Sq.                  Ft./****Acres/Units** | **Debt****Incurred** | **Debt****Discharged** | **Net                  Cash****Received/****(Paid)** | **Interest****Rate** | **Maturity****Date** |
|-------------------------------------------------------------------------------------|-------------------------------------|----------------------------------------------|----------------------|------------------------|------------------------------------------------------|----------------------|----------------------|
| ***First                  Quarter***                                                |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Office                  Building**                                                |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| Centura                  Tower                                                      | Farmers                  Branch, TX | 410,901                  Sq. Ft.             | $34,000              |                   | $36,889                                              | $(4,588              | )                    | 5.50 | %(1) | 04/06 |   |
|                                                                                |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Land**                                                                            |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| Centura                  Land                                                       | Farmers                  Branch, TX | 8.753                  Acres                 | 4,485                |                   | 4,400                                                | (183                 | )                    | 7.00 | (1) | 11/04 | (3) |
| Hollywood,                  Dominion & Mira                  Lago(2)  | Farmers                  Branch, TX | 66.085                  Acres                | 6,985                |                   | 6,222                                                | (67                  | )                    | 7.00 | (1) | 02/05 | (4) |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

| **Property**                                   | **Location**                        | **Sq.                  Ft./****Acres/Units** | **Debt****Incurred** | **Debt****Discharged** | **Net                  Cash****Received/****(Paid)** | **Interest****Rate** | **Maturity****Date** |
|------------------------------------------------|-------------------------------------|----------------------------------------------|----------------------|------------------------|------------------------------------------------------|----------------------|----------------------|
| ***Second                  Quarter***          |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Apartments**                                 |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| Paramount                  Terrace             | Amarillo,                  TX       | 181                  Units                   | 3,176                |                   | 2,663                                                | 323                  |                 | 5.15 |   | 06/37 |   |
| Treehouse                                      | Irving,                  TX         | 160                  Units                   | 5,780                |                   | 5,027                                                | 138                  |                 | 5.06 |   | 07/34 |   |
|                                           |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Office                  Buildings**          |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| 1010                  Common                   | New                  Orleans, LA    | 494,579                  Sq. Ft.             | 16,250               | (5)                    | 8,000                                                | 7,829                |                 | 4.03 | (1) | 07/07 |   |
|                                           |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Land**                                       |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| Marine                  Creek                  | Fort                  Worth, TX     | 28.437                  Acres                | 1,785                | (5)                    | —                                              | 1,746                |                 | 4.03 | (1) | 07/07 |   |
| Lacy                  Longhorn                 | Farmers                  Branch, TX | 17.115                  Acres                | 1,965                | (5)                    | —                                              | 78                   |                 | 4.03 | (1) | 07/07 |   |
|                                           |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| ***Third                  Quarter***           |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Hotels**                                     |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| City                  Suites                   | Chicago,                  IL        | 45                  Rooms                    | 3,640                |                   | —                                              | 3,548                |                 | 6.75 | (1) | 09/09 |   |
| Willows                                        | Chicago,                  IL        | 52                  Rooms                    | 3,500                |                   | —                                              | 3,411                |                 | 6.75 | (1) | 09/09 |   |
|                                           |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Office                  Buildings**          |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| Centura                  Tower                 | Farmers                  Branch, TX | 410,901                  Sq. Ft.             | 50,000               |                   | 37,594                                               | 2,989                |                 | 4.94 |   | 10/09 |   |
| Centura                  Tower(5)              | Farmers                  Branch, TX | 410,901                  Sq. Ft.             | 3,800                |                   | —                                              | 3,737                |                 | 5.75 | (1) | 04/06 |   |
|                                           |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| **Warehouses**                                 |                                |                                         |                 |                   |                                                 |                 |                 |   |   |   |   |
| Addison                  Hangers I & II(6) | Addison,                  TX        | 52,650                  Sq. Ft.              | 4,500                |                   | 2,592                                                | 1,635                |                 | 10.00 |   | 09/14 |   |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

|  **Three                  Months Ended September 30, 2005** |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|------------------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
| Rents                                                            |   | $        | 125     |                         | $      | 7,356          |   | $          | 17,790  |      | $      | 2,758 |   | $ | 28,029 |   |
| Property                  operating expenses                     |   |     | 770     |                         |   | 4,297          |   |       | 11,262  |      |   | 1,348 |   |   | 17,677 |   |
| Depreciation                                                     |   |     | 2       |                         |   | 485            |   |       | 2,140   |      |   | 494 |   |   | 3,121 |   |
| Interest                                                         |   |     | 1,293   |                         |   | 1,939          |   |       | 6,741   |      |   | 436 |   |   | 10,409 |   |
| Provision                  for asset impairment                  |   |     | 1,840   |                         |   | —        |   |       | — |      |   | — |   |   | 1,840 |   |
| Gain                  on land sales                              |   |     | 2,332   |                         |   | —        |   |       | — |      |   | — |   |   | 2,332 |   |
| Segment                  income (loss)                           |   | $        | (1,448  | )                            | $      | 635            |   | $          | (2,353  | )         | $      | 480 |   | $ | (2,686 | ) |
|                                                             |   |     |    |                         |   |           |   |       |    |      |   |   |   |   |   |   |
| Real                  estate improvements                        |   |     | 43      |                         |   | 686            |   |       | — |      |   | — |   |   | 729 |   |
| Real                  estate construction                        |   |     | — |                         |   | —        |   |       | 5,800   |      |   | — |   |   | 5,800 |   |
| Assets                                                           |   |     | 144,206 |                         |   | 189,052        |   |       | 507,448 |      |   | 33,238 |   |   | 873,944 |   |

| **Property                  Sales:**                      |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|-----------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
| Sales                  price                              |   | $        | 3,759   |                         | $      | —        |   | $          | — |      | $      | — |   | $ | 3,759 |   |
| Cost                  of sales                            |   |     | 1,427   |                         |   | —        |   |       | — |      |   | — |   |   | 1,427 |   |
| Recognition                  of previously deferred gains |   |     | — |                         |   | —        |   |       | 494     |      |   | — |   |   | 494 |   |
| Gain                  on sale                             |   | $        | 2,332   |                         | $      | —        |   | $          | 494     |      | $      | — |   | $ | 2,826 |   |

| **Three                  Months Ended September 30, 2004** |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|------------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
| Rents                                                      |   | $        | 211     |                         | $      | 6,055          |   | $          | 13,524  |      | $      | 2,353 |   | $ | 22,143 |   |
| Property                  operating expenses               |   |     | 680     |                         |   | 3,992          |   |       | 8,253   |      |   | 1,401 |   |   | 14,326 |   |
| Depreciation                                               |   |     | 11      |                         |   | 1,895          |   |       | 1,489   |      |   | 349 |   |   | 3,744 |   |
| Interest                                                   |   |     | 926     |                         |   | 1,282          |   |       | 4,721   |      |   | 235 |   |   | 7,164 |   |
| Gain                  on land sales                        |   |     | 747     |                         |   | —        |   |       | — |      |   | — |   |   | 747 |   |
| Operating                  income (loss)                   |   | $        | (659    | )                            | $      | (1,114         | )      | $          | (939    | )         | $      | 368 |   | $ | (2,344 | ) |
|                                                       |   |     |    |                         |   |           |   |       |    |      |   |   |   |   |   |   |
| Real                  estate improvements                  |   |     | 240     |                         |   | 2,092          |   |       | — |      |   | 492 |   |   | 2,824 |   |
| Real                  estate construction                  |   |     | — |                         |   | —        |   |       | 28,572  |      |   | — |   |   | 28,572 |   |
| Assets                                                     |   |     | 92,309  |                         |   | 228,480        |   |       | 464,899 |      |   | 33,164 |   |   | 819,243 |   |

| **Property                  Sales:**                     |   |   |   |   |   |    |   |   |    |   |   |
|----------------------------------------------------------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|
| Sales                  price                             |   | $      | 2,600  |   | $      | 1,500   |   | $      | — |   | $      | — |   | $ | 4,100 |   |
| Cost                  of sales                           |   |   | 2,546  |   |   | 1,373   |   |   | — |   |   | — |   |   | 3,919 |   |
| Deferred                  current gain                   |   |   | 54     |   |   | — |   |   | — |   |   | — |   |   | 54 |   |
| Recognition                  of previously deferred gain |   |   | 747    |   |   | — |   |   | — |   |   | — |   |   | 747 |   |
| Gain                  on sale                            |   | $      | 747    |   | $      | 127     |   | $      | — |   | $      | — |   | $ | 874 |   |

| **Nine                  Months Ended September 30, 2005** |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|-----------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
| Rents                                                     |   | $        | 407     |                         | $      | 18,641         |   | $          | 50,194  |      | $      | 6,997 |   | $ | 76,239 |   |
| Property                  operating expenses              |   |     | 2,139   |                         |   | 11,458         |   |       | 30,902  |      |   | 3,850 |   |   | 48,349 |   |
| Depreciation                                              |   |     | (1      | )                            |   | 4,023          |   |       | 6,020   |      |   | 854 |   |   | 10,896 |   |
| Interest                                                  |   |     | 3,542   |                         |   | 4,807          |   |       | 19,073  |      |   | 1,163 |   |   | 28,585 |   |
| Provision                  for asset impairment           |   |     | 1,840   |                         |   | —        |   |       | — |      |   | — |   |   | 1,840 |   |
| Gain                  on land sales                       |   |     | 4,735   |                         |   | —        |   |       | — |      |   | — |   |   | 4,735 |   |
| Operating                  income (loss)                  |   | $        | (2,378  | )                            | $      | (1,647         | )      | $          | (5,801  | )         | $      | 1,130 |   | $ | (8,696 | ) |
|                                                      |   |     |    |                         |   |           |   |       |    |      |   |   |   |   |   |   |
| Real                  estate improvements                 |   |     | 457     |                         |   | 2,442          |   |       | — |      |   | 18 |   |   | 2,917 |   |
| Real                  estate construction                 |   |     | — |                         |   | —        |   |       | 29,562  |      |   | — |   |   | 29,562 |   |
| Assets                                                    |   |     | 144,206 |                         |   | 189,052        |   |       | 507,448 |      |   | 33,238 |   |   | 873,944 |   |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

| **Nine                  Months Ended September 30, 2005** |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|-----------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
|                                                      |   |     |    |                         |   |           |   |       |    |      |   |
| **Property                  Sales:**                      |   |     |    |                         |   |           |   |       |    |      |   |
| Sales                  price                              |   | $        | 12,436  |                         | $      | 36,677         |   | $          | — |      | $      | — |   | $ | 49,113 |   |
| Cost                  of sales                            |   |     | 7,701   |                         |   | 23,441         |   |       | — |      |   | — |   |   | 31,142 |   |
| Recognition                  of previously deferred gains |   |     | — |                         |   | —        |   |       | 494     |      |   | — |   |   | 494 |   |
| Gain                  on sale                             |   | $        | 4,735   |                         | $      | 13,236         |   | $          | 494     |      | $      | — |   | $ | 18,465 |   |

| **Nine                  Months Ended September 30, 2004** |   | **Land** |    | **Commercial****Properties** |   | **Apartments** |   | **Hotels** |    | **Total** |   |
|-----------------------------------------------------------|--------|----------|---------|------------------------------|--------|----------------|--------|------------|---------|-----------|--------|
| Rents                                                     |   | $        | 533     |                         | $      | 18,430         |   | $          | 38,064  |      | $      | 5,871 |   | $ | 62,898 |   |
| Property                  operating expenses              |   |     | 1,532   |                         |   | 11,853         |   |       | 23,316  |      |   | 3,786 |   |   | 40,487 |   |
| Depreciation                                              |   |     | 34      |                         |   | 5,694          |   |       | 4,470   |      |   | 1,052 |   |   | 11,250 |   |
| Interest                                                  |   |     | 2,437   |                         |   | 4,223          |   |       | 13,621  |      |   | 978 |   |   | 21,259 |   |
| Gain                  on land sales                       |   |     | 2,854   |                         |   | —        |   |       | — |      |   | — |   |   | 2,854 |   |
| Operating                  income (loss)                  |   | $        | (616    | )                            | $      | (3,340         | )      | $          | (3,343  | )         | $      | 55 |   | $ | (7,244 | ) |
|                                                      |   |     |    |                         |   |           |   |       |    |      |   |   |   |   |   |   |
| Real                  estate improvements                 |   |     | 546     |                         |   | 4,178          |   |       | 222     |      |   | 510 |   |   | 5,456 |   |
| Real                  estate construction                 |   |     | — |                         |   | —        |   |       | 127,168 |      |   | — |   |   | 127,168 |   |
| Assets                                                    |   |     | 92,309  |                         |   | 228,480        |   |       | 464,899 |      |   | 33,555 |   |   | 819,243 |   |

| **Property                  Sales:**   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Sales                  price           |   | $      | 32,550 |   | $      | 51,775 |   | $      | 27,092 |   | $      | — |   | $ | 111,417 |   |
| Cost                  of sales         |   |   | 24,827 |   |   | 40,809 |   |   | 23,783 |   |   | — |   |   | 89,420 |   |
| Deferred                  current gain |   |   | 4,869  |   |   | 1,394  |   |   | 2,173  |   |   | — |   |   | 8,436 |   |
| Gain                  on sale          |   | $      | 2,854  |   | $      | 9,572  |   | $      | 1,136  |   | $      | — |   | $ | 13,561 |   |

|                                                          |   | **Three                  Months Ended**    |   | **Nine                  Months Ended**     |   |
|---------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                          |   | **September                  30,****2005** |   | **September                  30,****2004** |   | **September                  30,****2005** |   | **September                  30,****2004** |   |
|                                                          |   |                                       |   |                                       |   |   |   |   |   |
| Segment                  operating income (loss)              |   | $                                          | (2,686 | )                                          | $      | (2,344 | ) | $ | (8,696 | ) | $ | (7,244 | ) |
| Other                  non-segment items of income (expense): |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| General                  and administrative                   |   |                                       | (1,724 | )                                          |   | (1,623 | ) |   | (5,099 | ) |   | (5,552 | ) |
| Advisory                  fees                                |   |                                       | (1,768 | )                                          |   | (1,700 | ) |   | (5,305 | ) |   | (4,943 | ) |
| Interest                  income                              |   |                                       | 792    |                                       |   | 625 |   |   | 2,688 |   |   | 2,180 |   |
| Gain                  (loss) on foreign currency transaction  |   |                                       | 37     |                                       |   | 543 |   |   | 265 |   |   | 1,791 |   |
| Other                  income (expense)                       |   |                                       | 485    |                                       |   | — |   |   | 719 |   |   | — |   |
| Equity                  in earnings of investees              |   |                                       | (170   | )                                          |   | (197 | ) |   | 976 |   |   | (1,707 | ) |
| Minority                  interest                            |   |                                       | 32     |                                       |   | (155 | ) |   | 7 |   |   | (867 | ) |
| Loss                  from continuing operations              |   | $                                          | (5,002 | )                                          | $      | (4,851 | ) | $ | (14,445 | ) | $ | (16,342 | ) |

| **Property**                         | **Location**                        | **Units**                    | **Fair                  Value** | **Property****Basis** | **Costs                  to Sell** | **Impairment** |
|--------------------------------------|-------------------------------------|------------------------------|---------------------------------|-----------------------|------------------------------------|----------------|
| **Apartments**                       |                                |                         |                            |                  |                               |           |
| Bay                  Walk/Island Bay | Galveston,                  TX      | 650                  Units   | $25,000                         | $25,598               | $982                               | $1,580         |
|                                 |                                |                         |                            |                  |                               |           |
| **Land**                             |                                |                         |                            |                  |                               |           |
| Centura                              | Farmers                  Branch, TX | 8.753                  Acres | $12,025                         | $13,865               | —                            | $1,840         |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

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

|                                                                            |   | **For                  the Three Months****Ended                  September 30,** |    | **For                  the Nine Months****Ended                  September 30,** |   |
|---------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------------|--------|
|                                                                            |   | **2005**                                                                          |    | **2004**                                                                         |   | **2005** |   | **2004** |   |
| Revenue                                                                         |   |                                                                              |    |                                                                             |   |   |   |   |   |
| Rental                                                                          |   | $                                                                                 | 3,191   |                                                                             | $      | 8,595 |   | $ | 10,246 |   | $ | 28,761 |   |
| Property                  operations                                            |   |                                                                              | 2,416   |                                                                             |   | 5,723 |   |   | 7,411 |   |   | 17,208 |   |
|                                                                            |   |                                                                              | 775     |                                                                             |   | 2,872 |   |   | 2,835 |   |   | 11,553 |   |
| Expenses                                                                        |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Interest                                                                        |   |                                                                              | 1,186   |                                                                             |   | 3,053 |   |   | 4,539 |   |   | 9,839 |   |
| Depreciation                                                                    |   |                                                                              | 109     |                                                                             |   | 1,418 |   |   | 353 |   |   | 4,791 |   |
|                                                                            |   |                                                                              | 1,295   |                                                                             |   | 4,471 |   |   | 4,892 |   |   | 14,630 |   |
|                                                                            |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) from discontinued operations before gains on |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Sale                  of real estate                                            |   |                                                                              | (520    | )                                                                                |   | (1,599 | ) |   | (2,057 | ) |   | (3,077 | ) |
| Gain                  on sale of operations                                     |   |                                                                              | 494     |                                                                             |   | 127 |   |   | 13,730 |   |   | 10,708 |   |
| Write-down                  of assets held for sale                             |   |                                                                              | — |                                                                             |   | (4,477 | ) |   | (1,580 | ) |   | (4,477 | ) |
| Equity                  in investees gain on sale of real estate                |   |                                                                              | 1,401   |                                                                             |   | 222 |   |   | 1,405 |   |   | 1,686 |   |
| Net                  income from discontinued operations                        |   | $                                                                                 | 1,375   |                                                                             | $      | (5,727 | ) | $ | 11,498 |   | $ | 4,840 |   |

----

**TRANSCONTINENTAL              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED STATEMENTS - CONTINUED**

*Partnership        Obligations*

*Commitments.        *

*Liquidity*
* *

*Litigation.*

*Guarantees*

----

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

**WARNING        CONCERNING FORWARD LOOKING STATEMENTS**

----

| **ITEM 2.** | **MANAGEMENT’S                      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS                      OF                      OPERATIONS****-                      (Continued)** |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **ITEM 2.** | **MANAGEMENT’S                        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS                        OF                        OPERATIONS****- (Continued)** |
|------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **ITEM 2.** | **MANAGEMENT’S                        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS                        OF                        OPERATIONS****-                        (Continued)** |
|------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Property** | **Location**                        | **Units**                    | **Fair                  Value** | **Property                  Basis** | **Costs                  to Sell** | **Impairment** |
|--------------|-------------------------------------|------------------------------|---------------------------------|-------------------------------------|------------------------------------|----------------|
| **Land**     |                                |                         |                            |                                |                               |           |
| Centura      | Farmers                  Branch, TX | 8.753                  Acres | $12,025                         | $13,865                             | —                            | $1,840         |

|                                                                                                                                  |   | **For                  the Three Months****Ended                  September 30,** |    | **For                  the Nine Months****Ended                  September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------------|--------|
|                                                                                                                                  |   | **2005**                                                                          |    | **2004**                                                                         |   | **2005** |   | **2004** |   |
| Revenue                                                                                                                               |   |                                                                              |    |                                                                             |   |   |   |   |   |
| Rental                                                                                                                                |   | $                                                                                 | 3,191   |                                                                             | $      | 8,595 |   | $ | 10,246 |   | $ | 28,761 |   |
| Property                  operations                                                                                                  |   |                                                                              | 2,416   |                                                                             |   | 5,723 |   |   | 7,411 |   |   | 17,208 |   |
|                                                                                                                                  |   |                                                                              | 775     |                                                                             |   | 2,872 |   |   | 2,835 |   |   | 11,553 |   |
| Expenses                                                                                                                              |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Interest                                                                                                                              |   |                                                                              | 1,186   |                                                                             |   | 3,053 |   |   | 4,539 |   |   | 9,839 |   |
| Depreciation                                                                                                                          |   |                                                                              | 109     |                                                                             |   | 1,418 |   |   | 353 |   |   | 4,791 |   |
|                                                                                                                                  |   |                                                                              | 1,295   |                                                                             |   | 4,471 |   |   | 4,892 |   |   | 14,630 |   |
|                                                                                                                                  |   |                                                                              |    |                                                                             |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) from discontinued operations before gains on sale                  of real                  estate |   |                                                                              | (520    | )                                                                                |   | (1,599 | ) |   | (2,057 | ) |   | (3,077 | ) |
| Gain                  on sale of operations                                                                                           |   |                                                                              | 494     |                                                                             |   | 127 |   |   | 13,730 |   |   | 10,708 |   |
| Write-down                  of assets held for sale                                                                                   |   |                                                                              | — |                                                                             |   | (4,477 | ) |   | (1,580 | ) |   | (4,477 | ) |
| Equity                  in investees gain on sale of real estate                                                                      |   |                                                                              | 1,401   |                                                                             |   | 222 |   |   | 1,405 |   |   | 1,686 |   |
| Net                  income (loss) from discontinued operations                                                                       |   | $                                                                                 | 1,375   |                                                                             | $      | (5,727 | ) | $ | 11,498 |   | $ | 4,840 |   |

----

| **ITEM 2.** | **MANAGEMENT’S                        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS                        OF                        OPERATIONS****-                        (Continued)** |
|------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**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                                   | $156,021    | 7.03%                                                                 | $1,560                                                                                           |
| Total                  decrease in TCI’s annual net income |        |                                                                  | $1,560                                                                                           |
| Per                  share                                       |        |                                                                  | $.20                                                                                             |

**ITEM 4.        CONTROLS AND PROCEDURES**

----

**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 June 30, 2005 |                                                     |                                                                  |                                                                                                                                                    | 219,090                                                                                                                                                      |
| July                  1-31, 2005             | ―                                                  | $―                                                              | ―                                                                                                                                                 | 219,090                                                                                                                                                      |
| August                  1-31, 2005           | ―                                                  | ―                                                               | ―                                                                                                                                                 | 219,090                                                                                                                                                      |
| September                  1-30, 2005        | ―                                                  | ―                                                               | ―                                                                                                                                                 | 219,090                                                                                                                                                      |
| Total                                        | ―                                                  | $―                                                              | ―                                                                                                                                                 |                                                                                                                                                         |

----

**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 (incorporation 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).                                                                                                                                                                                                                                                                                          |
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 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. Section 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

----

**SIGNATURE        PAGE**

|   |  TRANSCONTINENTAL                  REALTY INVESTORS, INC. |
|--------|----------------------------------------------------------------|
|   |                                                           |   |   |
| Date:  | November                  14, 2005                             | 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) |
|   |                                                           |   |   |

----

**TRANSCONTINENTAL        REALTY INVESTORS, INC.**

**EXHIBITS        TO **

**QUARTERLY        REPORT ON FORM 10-Q **

**For        the Quarter Ended September 30, 2005 **

| **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.                                                                                                 |
|                  |                                                                                                                                                       |