<PAGE>

================================================================================

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

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

                                   FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                     For The Year Ended December 31, 2001

                         Commission File Number 1-9240

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

                    Transcontinental Realty Investors, Inc.
            (Exact Name of Registrant as Specified in Its Charter)

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

                1800 Valley View Lane
              Suite 300, Dallas, Texas                   75234
       (Address of Principal Executive Office)        (Zip Code)

                                (469) 522-4200
             (Registrant's Telephone Number, Including Area Code)

          Securities Registered Pursuant to Section 12(b) of the Act:

         Title of each class      Name of each exchange on which registered
     Common Stock, $.01 par value          New York Stock Exchange

          Securities Registered Pursuant to Section 12(g) of the Act:

                                     NONE

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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

   As of March 4, 2002, the Registrant had 8,042,594 shares of Common Stock
outstanding. Of the total shares outstanding 2,858,143 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $47,445,174
based on the last trade as reported on the New York Stock Exchange on March 4,
2002. The basis of this calculation does not constitute a determination by the
Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.

                     Documents Incorporated by Reference:

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc.
                          Commission File No. 1-14784
     Consolidated Financial Statements of American Realty Investors, Inc.
                         Commission File No. 001-15663

================================================================================

<PAGE>

                                   INDEX TO
                          ANNUAL REPORT ON FORM 10-K

<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>                                                                                           <C>
                                           PART I

Item 1. Business.............................................................................   3
Item 2. Properties...........................................................................   6
Item 3. Legal Proceedings....................................................................  16
Item 4. Submission of Matters to a Vote of Security Holders..................................  17

                                           PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............  18
Item 6. Selected Financial Data..............................................................  19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations  20
Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk......................  27
Item 8. Financial Statements and Supplementary Data..........................................  28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  68

                                          PART III

Item 10. Directors, Executive Officers and Advisor of the Registrant.........................  68
Item 11. Executive Compensation..............................................................  73
Item 12. Security Ownership of Certain Beneficial Owners and Management......................  75
Item 13. Certain Relationships and Related Transactions......................................  75

                                           PART IV

Item 14. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K......  77
Signature Page...............................................................................  79
</TABLE>


                                      2

<PAGE>

                                    PART I

ITEM 1.  BUSINESS

   Transcontinental Realty Investors, Inc. ("TCI"), a Nevada corporation, is
the successor to a California business trust that was organized on September 6,
1983 and commenced operations on January 31, 1984. On November 30, 1999, TCI
acquired all of the outstanding shares of beneficial interest of Continental
Mortgage and Equity Trust ("CMET"), a real estate company, in a tax-free
exchange of shares, issuing 1.181 shares of its Common Stock for each
outstanding CMET share.

   Prior to January 1, 2000, TCI elected to be treated as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"). During the third quarter of
2000, due to a concentration of ownership TCI no longer met the requirement for
tax treatment as a REIT. Under the Code, TCI cannot re-qualify for REIT tax
status for at least five years.

   TCI's real estate at December 31, 2001, consisted of 136 properties held for
investment, three partnership properties and three properties held for sale
that were primarily obtained through foreclosure. In 2001, TCI purchased 17
properties held for investment. TCI's mortgage notes receivable portfolio at
December 31, 2001, consisted of ten mortgage loans. In addition, TCI has an
interest in a partnership that holds a wraparound mortgage note receivable.
TCI's real estate and mortgage notes receivable portfolios are more fully
discussed in ITEM 2. "PROPERTIES."

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

Business Plan and Investment Policy

   TCI's business is investing in real estate through direct equity ownership
and partnerships and financing real estate and real estate related activities
through investments in mortgage loans, including first, wraparound and junior
mortgage loans. TCI's real estate is located throughout the continental United
States and one property is located in Poland. Information regarding TCI's real
estate and mortgage notes receivable portfolios is set forth in ITEM 2.
"PROPERTIES", and in Schedules III and IV to the Consolidated Financial
Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

   TCI's business is not seasonal. Management has determined to continue to
pursue a balanced investment policy, seeking both current income and capital
appreciation. With respect to new real estate investments, management's plan of
operation is to consider all types of real estate with an emphasis on
properties generating current cash flow. Management expects to invest in and
improve these properties to maximize both their immediate and long-term value.
Management will also consider the development of apartment properties in
selected markets primarily in Texas.

                                      3

<PAGE>

   Management also expects to consider property sales opportunities for
properties in stabilized real estate markets where TCI's properties have
reached their potential. Management also expects to be an opportunistic seller
of properties in markets that have become overheated, i.e. an abundance of
buyers.

   Management's operating strategy with regard to TCI's properties is to
maximize each property's operating income by aggressive property management
through closely monitoring expenses while at the same time making property
renovations and/or improvements where appropriate. While such expenditures
increase the amount of revenue required to cover operating expenses, management
believes that such expenditures are necessary to maintain or enhance the value
of the properties.

   Management does not expect that TCI will seek to fund or acquire new
mortgage loans in 2002. However, TCI may originate mortgage loans in
conjunction with providing purchase money financing of a property sale.
Management intends to service and hold for investment the mortgage notes in
TCI's portfolio. However, TCI may borrow against its mortgage notes, using the
proceeds from such borrowings for property acquisitions or for general working
capital needs. Management also intends to pursue TCI's rights vigorously with
respect to mortgage notes that are in default. TCI's Articles of Incorporation
impose no limitations on its investment policy with respect to mortgage loans
and does not prohibit it from investing more than a specified percentage of its
assets in any one mortgage loan.

Management of the Company

   Although the Board of Directors is directly responsible for managing the
affairs of TCI and for setting the policies which guide it, its day-to-day
operations are performed by Basic Capital Management, Inc. ("BCM"), a
contractual advisor under the supervision of the Board. The duties of BCM
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities,
as well as financing and refinancing sources. BCM also serves as a consultant
in connection with TCI's business plan and investment decisions made by the
Board.

   BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips serves as a representative of his children's trust,
which owns BCM and in such capacity, has substantial contact with the
management of BCM and input with respect to its performance of advisory
services to TCI. BCM is more fully described in ITEM 10. "DIRECTORS, EXECUTIVE
OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor."

   BCM has been providing advisory services to TCI since March 28, 1989. BCM
also serves as advisor to IORI and ARI. The Directors of TCI are also directors
of IORI. The officers of TCI also serve as officers of ARI, IORI, and BCM. As
of March 4, 2002, TCI owned approximately 24.0% of IORI's outstanding shares of
common stock and ARI owned approximately 50.0% and BCM owned approximately
14.5% of the outstanding shares of TCI's Common Stock.

   Since February 1, 1990, affiliates of BCM have provided property management
services to TCI. Currently, Triad Realty Services, Ltd. ("Triad") provides such
property management services. Triad subcontracts with other entities for the
provision of property-level management services to TCI. The general partner of
Triad is BCM. The limited partner of Triad is GS Realty Services, Inc. ("GS
Realty"), a related party. Triad subcontracts the property-level management and
leasing of 51 of TCI's commercial properties and the two commercial properties
owned by real estate partnerships in which TCI and IORI are partners to Regis
Realty, Inc. ("Regis"), a related party, which is a company owned by GS Realty.
Regis is entitled to receive property and construction management fees and
leasing commissions in accordance with the terms of its property-level
management agreement with Triad. Regis also is entitled to receive real estate
brokerage commissions in accordance with the terms of a non-exclusive brokerage
agreement. Regis Hotel Corporation, a related party, manages TCI's five hotels.
See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The
Advisor."

   TCI has no employees. Employees of BCM render services to TCI.

                                      4

<PAGE>

Competition

   The real estate business is highly competitive and TCI competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related
Party Transactions"), some of which have greater financial resources than those
of TCI. Management believes that success against such competition is dependent
upon the geographic location of the property, the performance of property-level
managers in areas such as marketing, collections and control of operating
expenses, the amount of new construction in the area and the maintenance and
appearance of the property. Additional competitive factors with respect to
commercial properties are the ease of access to the property, the adequacy of
related facilities, such as parking, and sensitivity to market conditions in
setting rent levels. With respect to apartments, competition is also based upon
the design and mix of units and the ability to provide a community atmosphere
for the tenants. Management believes that beyond general economic circumstances
and trends, the rate at which properties are renovated or the rate new
properties are developed in the vicinity of each of TCI's properties also are
competitive factors.

   To the extent that TCI seeks to sell any of its properties, the sales prices
for such properties may be affected by competition from other real estate
entities and financial institutions also attempting to sell their properties
located in areas in which TCI's properties are located, as well as by
aggressive buyers attempting to penetrate or dominate a particular market.

   As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Related Party Transactions," the officers and Directors of TCI
also serve as officers or directors of certain other entities, also advised by
BCM, and which have business objectives similar to those of TCI. TCI's
Directors, officers and advisor owe fiduciary duties to such other entities as
well as to TCI under applicable law. In determining to which entity a
particular investment opportunity will be allocated, the officers, Directors
and advisor consider the respective investment objectives of each such entity
and the appropriateness of a particular investment in light of each such
entity's existing real estate portfolio. To the extent that any particular
investment opportunity is appropriate to more than one of the entities, the
investment opportunity will be allocated to the entity which has had funds
available for investment for the longest period of time or, if appropriate, the
investment may be shared among all or some of the entities.

   In addition, as also described in ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--Certain Business Relationships," TCI also competes with
other entities which are affiliates of BCM and which have investment objectives
similar to TCI's and that may compete with it in purchasing, selling, leasing
and financing of real estate and real estate related investments. In resolving
any potential conflicts of interest which may arise, BCM has informed
management that it intends to continue to exercise its best judgment as to what
is fair and reasonable under the circumstances in accordance with applicable
law.

Certain Factors Associated with Real Estate and Related Investments

   TCI is subject to all the risks incident to ownership and financing of real
estate and interests therein, many of which relate to the general illiquidity
of real estate investments. These risks include, but are not limited to,
changes in general or local economic conditions, changes in interest rates and
the availability of permanent mortgage financing which may render the purchase,
sale or refinancing of a property difficult or unattractive and which may make
debt service burdensome, changes in real estate and zoning laws, increases in
real estate taxes, federal or local economic or rent controls, floods,
earthquakes, hurricanes and other acts of God and other factors beyond the
control of management or BCM. The illiquidity of real estate investments may
also impair the ability of management to respond promptly to changing
circumstances. Management believes that such risks are partially mitigated by
the diversification by geographic region and property type of TCI's real estate
and mortgage notes receivable portfolios. However, to the extent new property
investments or mortgage lending is concentrated in any particular region or
property type, the advantages of diversification may be mitigated.

                                      5

<PAGE>

ITEM 2.  PROPERTIES

   TCI's principal offices are located at 1800 Valley View Lane, Suite 300,
Dallas, Texas 75234 and are, in the opinion of management, suitable and
adequate for TCI's present operations.

   Details of TCI's real estate and mortgage notes receivable portfolios at
December 31, 2001, are set forth in Schedules III and IV to the Consolidated
Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA." The discussions set forth below under the headings "Real
Estate" and "Mortgage Loans" provide certain summary information concerning
TCI's real estate and mortgage notes receivable portfolios.

   TCI's real estate portfolio consists of properties held for investment,
properties held for sale, which were primarily obtained through foreclosure of
the collateral securing mortgage notes receivable, and investments in
partnerships. The discussion set forth below under the heading "Real Estate"
provides certain summary information concerning TCI's real estate and further
summary information with respect to its properties held for investment,
properties held for sale and its investment in partnerships.

   At December 31, 2001, none of TCI's properties, mortgage notes receivable or
investment in partnerships exceeded 10% of total assets. At December 31, 2001,
88% of TCI's assets consisted of properties held for investment, less than 1%
consisted of properties held for sale, 3% consisted of mortgage notes and
interest receivable and 2% consisted of investments in partnerships. The
remaining 7% of TCI's assets were invested in cash, cash equivalents and other
assets. The percentage of TCI's assets invested in any one category is subject
to change and no assurance can be given that the composition of TCI's assets in
the future will approximate the percentages listed above.

   TCI's real estate is geographically diverse. At December 31, 2001, TCI held
investments in apartments and commercial properties in each of the geographic
regions of the continental United States, although its apartments and
commercial properties were concentrated in the Southeast and Southwest regions,
as shown more specifically in the table under "Real Estate" below. At December
31, 2001, TCI held mortgage notes receivable secured by apartments and
commercial properties in the Southwest and Midwest regions of the continental
United States, as shown more specifically in the table under "Mortgage Loans"
below.

                                      6

<PAGE>

Geographic Regions

   TCI has divided the continental United States into the following geographic
regions.

                            [GEOGRAPHIC REGION MAP]

Northeast region comprised of the states of Connecticut, Delaware, Maryland,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island
and Vermont, and the District of Columbia. TCI owns a commercial property in
this region.

Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. TCI owns 8
apartments and 19 commercial properties in this region.

Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New
Mexico, Oklahoma and Texas. TCI owns 45 apartments and 22 commercial properties
in this region.

Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota, West Virginia and Wisconsin. TCI owns 2 apartments, 4 commercial
properties and 3 hotels in this region.

Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada,
Utah and Wyoming. TCI owns 3 commercial properties in this region.

Pacific region comprised of the states of California, Oregon and Washington.
TCI owns 2 apartments, a hotel and 2 commercial properties in this region.



   Excluded from the above are 26 parcels of unimproved land and one hotel in
Wroclaw, Poland, as described below.

Real Estate

   At December 31, 2001, approximately 93% of TCI's assets were invested in
real estate. TCI invests primarily in real estate located throughout the
continental United States, either on a leveraged or nonleveraged basis. TCI's
real estate portfolio consists of properties held for investment, investments
in partnerships and properties held for sale (which were primarily obtained
through foreclosure of the collateral securing mortgage notes receivable).

   Types of Real Estate Investments.  TCI's real estate consists of commercial
properties (office buildings, industrial warehouses and shopping centers),
hotels and apartments having established income-producing capabilities. In
selecting real estate for investment, the location, age and type of property,
gross rents, lease terms, financial and business standing of tenants, operating
expenses, fixed charges, land values and physical condition are among the
factors considered. TCI may acquire properties subject to or assume existing
debt and may mortgage, pledge or otherwise obtain financing for its properties.
The Board of Directors may alter the types of and criteria for selecting new
real estate investments and for obtaining financing without a vote of
stockholders.

   TCI typically invests in developed real estate. However, TCI has recently
invested in apartment development and construction. To the extent that TCI
continues to invest in development and construction projects, it will be
subject to business risks, such as cost overruns and construction delays,
associated with such higher risk projects.

                                      7

<PAGE>

   At December 31, 2001, TCI had the following properties under construction:

<TABLE>
<CAPTION>
                                                         Additional Construction
                                       Units/    Amount    Amount       Loan
Property                 Location      Rooms    Expended to Expend    Funding
--------              --------------- --------- -------- ---------- ------------
<S>                   <C>             <C>       <C>      <C>        <C>
Apartments
Falcon Lakes......... Arlington, TX   284 Units $ 1,688   $14,057     $13,469
Limestone Ranch...... Lewisville, TX  252 Units   8,225     6,396      13,000
River Oaks........... Wiley, TX       180 Units   2,228     9,763      10,023
Sendero Ridge........ San Antonio, TX 384 Units   6,561    22,100      24,420
Tivoli............... Dallas, TX      190 Units   4,299     9,135      11,000
Verandas at City View Fort Worth, TX  314 Units   2,570    20,380      19,000
Waters Edge IV....... Gulfport, MS     80 Units   1,979     2,104          --

Hotel
Akademia............. Wroclaw, Poland 165 Rooms  11,761     6,974      14,240
</TABLE>

   In the opinion of management, the properties owned by TCI are adequately
covered by insurance.

   The following table sets forth the percentages, by property type and
geographic region, of TCI's real estate (other than four hotels in the Pacific
and Midwest regions, one hotel in Poland and 26 parcels of unimproved land, as
described below) at December 31, 2001.

<TABLE>
<CAPTION>
                                             Commercial
                        Region    Apartments Properties
                        ------    ---------- ----------
                        <S>       <C>        <C>
                        Pacific..      2%         1%
                        Midwest..      2         11
                        Northeast     --          1
                        Southwest     83         51
                        Southeast     13         31
                        Mountain.     --          5
                                     ---        ---
                                     100%       100%
                                     ===        ===
</TABLE>

   The foregoing table is based solely on the number of apartment units and
amount of commercial square footage and does not reflect the value of TCI's
investment in each region. TCI owns 26 parcels of unimproved land, 1 parcel of
4.66 acres in the Southeast region and 25 parcels of .67 acres, .68 acres,
14.39 acres, 2.89 acres, 2.14 acres, 4.7 acres, 6.8 acres, 18.99 acres, 34.58
acres, 36.38 acres, 97.97 acres, 55.8 acres, 160.38 acres, 97.0 acres, 101.94
acres, 16.16 acres, 18 acres, 17.07 acres, 9.96 acres, 108.9 acres, 6.07 acres,
10.5 acres, 5.36 acres, 7.11 acres, and 18,000 sq. ft. in the Southwest region.
See Schedule III to the Consolidated Financial Statements included at ITEM 8.
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a detailed description of
TCI's real estate portfolio.

   A summary of activity in TCI's owned real estate portfolio during 2001 is as
follows:

<TABLE>
                   <S>                                   <C>
                   Owned properties at January 1, 2001.. 144
                   Properties purchased.................  17
                   Properties sold...................... (22)
                                                         ---
                   Owned properties at December 31, 2001 139
                                                         ===
</TABLE>

                                      8

<PAGE>

   Properties Held for Investment.  Set forth below are TCI's properties held
for investment and the monthly rental rate for apartments, the average annual
rental rate for commercial properties and the average daily room rate and room
revenue divided by total available rooms for hotels and occupancy at December
31, 2001, 2000 and 1999, for apartments and commercial properties and average
occupancy during 2001, 2000 and 1999 for hotels:

<TABLE>
<CAPTION>
                                                                        Rent Per
                                                                      Square Foot     Occupancy %
                                                   Units/           ---------------- --------------
Property                    Location           Square Footage       2001  2000  1999 2001 2000 1999
--------               ------------------ ------------------------- ----- ----- ---- ---- ---- ----
<S>                    <C>                <C>                       <C>   <C>   <C>  <C>  <C>  <C>
Apartments
4242 Cedar Springs.... Dallas, TX           76 Units/60,600 Sq. Ft. $ .89 $ .87 $.84  90   92   99
4400.................. Midland, TX          92 Units/94,472 Sq. Ft.   .49   .49  .49  95   91   85
Apple Lane............ Lawrence, KS         75 Units/30,000 Sq. Ft.  1.04  1.00    *  99   97    *
Arbor Point........... Odessa, TX         195 Units/178,920 Sq. Ft.   .41   .39  .37  91   95   95
Ashton Way............ Midland, TX        178 Units/138,964 Sq. Ft.   .43   .41  .41  89   95   78
Autumn Chase.......... Midland, TX          64 Units/58,652 Sq. Ft.   .53   .52    *  94   97    *
Bay Walk.............. Galveston, TX      192 Units/153,120 Sq. Ft.   .74     *    *  92    *    *
By the Sea............ Corpus Christi, TX 153 Units/123,945 Sq. Ft.   .83     *    *  93    *    *
Camelot............... Largo, FL          120 Units/141,024 Sq. Ft.   .56   .54  .53  92   99   92
Cliffs of Eldorado.... McKinney, TX       208 Units/182,288 Sq. Ft.   .84   .84  .84  94   95   91
Country Crossing...... Tampa, FL          227 Units/199,952 Sq. Ft.   .61   .58  .56  93   94   95
Courtyard............. Midland, TX        133 Units/111,576 Sq. Ft.   .43     *    *  89    *    *
Coventry.............. Midland, TX        120 Units/105,608 Sq. Ft.   .43   .42  .42  77   98   78
El Chapparal.......... San Antonio, TX    190 Units/174,220 Sq. Ft.   .72   .69  .67  92   93   99
Fairway View Estates.. El Paso, TX        264 Units/204,000 Sq. Ft.   .62   .61  .57  86   83   76
Fairways.............. Longview, TX       152 Units/134,176 Sq. Ft.   .54   .53  .53  93   95   78
Falcon Lakes.......... Arlington, TX      284 Units/207,960 Sq. Ft.    **     *    *  **    *    *
Fountain Lake......... Texas City, TX     166 Units/161,220 Sq. Ft.   .59   .56  .55  96   86   85
Fountains of Waterford Midland, TX        172 Units/129,200 Sq. Ft.   .53   .53  .53  94   88   52
Gladstell Forest...... Conroe, TX         168 Units/121,536 Sq. Ft.   .72   .72  .72  95   90   90
Grove Park............ Plano, TX          188 Units/143,556 Sq. Ft.   .86   .81  .77  94   95   95
Harper's Ferry........ Lafayette, LA      122 Units/112,500 Sq. Ft.   .58   .58  .57  91   94   75
Heritage on the River. Jacksonville, FL   301 Units/289,490 Sq. Ft.   .65   .63  .63  97   98   92
Hunters Glen.......... Midland, TX        212 Units/174,180 Sq. Ft.   .38   .37  .37  91   91   86
In the Pines.......... Gainesville, FL    242 Units/294,860 Sq. Ft.   .54   .54  .52  96   97   98
Island Bay............ Galveston, TX      458 Units/374,784 Sq. Ft.   .81     *    *  87    *    *
Limestone Canyon...... Austin, TX         260 Units/216,000 Sq. Ft.  1.06  1.00  .97  91   96   83
Limestone Ranch....... Lewisville, TX     252 Units/219,600 Sq. Ft.    **     *    *  **    *    *
Marina Landing........ Galveston, TX      256 Units/205,504 Sq. Ft.   .87     *    *  90    *    *
Mountain Plaza........ El Paso, TX        188 Units/220,710 Sq. Ft.   .49   .49  .48  95   94   94
Oak Park IV........... Clute, TX           108 Units/78,708 Sq. Ft.   .54   .52  .51  94   88   84
Paramount Terrace..... Amarillo, TX       181 Units/123,840 Sq. Ft.   .57   .55    *  94   94    *
Plantation............ Tulsa, OK          138 Units/103,500 Sq. Ft.   .59   .56  .54  93   95   91
Primrose.............. Bakersfield, CA    162 Units/144,836 Sq. Ft.   .59   .56    *  97   93    *
Quail Creek........... Lawrence, KS        95 Units/113,416 Sq. Ft.   .57   .55    *  98   97    *
Quail Oaks............ Balch Springs, TX   131 Units/72,848 Sq. Ft.   .81   .77  .73  93   97   96
River Oaks............ Wiley, TX          180 Units/164,604 Sq. Ft.    **     *    *  **    *    *
Sandstone............. Mesa, AZ           238 Units/146,320 Sq. Ft.   .90   .90  .88  88   91   93
Sendero Ridge......... San Antonio, TX    384 Units/340,880 Sq. Ft.    **     *    *  **    *    *
Somerset.............. Texas City, TX     200 Units/163,368 Sq. Ft.   .66   .64  .63  91   91   85
Southgate............. Odessa, TX         180 Units/151,656 Sq. Ft.   .42   .41  .41  95   96   86
Southgreen............ Bakersfield, CA      80 Units/66,000 Sq. Ft.   .80   .77  .70  96   95   92
Stone Oak............. San Antonio, TX    252 Units/187,686 Sq. Ft.   .68   .65  .63  91   94   85
Summerfield........... Orlando, FL        224 Units/204,116 Sq. Ft.   .75   .70  .67  93   95   86
Sunchase.............. Odessa, TX         300 Units/223,048 Sq. Ft.   .44   .43  .43  96   95   87
Terrace Hills......... El Paso, TX        310 Units/233,192 Sq. Ft.   .67   .66  .63  91   93   94
Tivoli................ Dallas, TX         190 Units/168,862 Sq. Ft.    **     *    *  **    *    *
Timbers............... Tyler, TX          180 Units/101,666 Sq. Ft.   .57   .55  .54  92   98   93
Trails at Windfern.... Houston, TX        240 Units/173,376 Sq. Ft.   .73   .71  .68  96   97   96
Treehouse............. Irving, TX         160 Units/153,072 Sq. Ft.   .78   .75  .71  94   94   93
Verandas at City View. Fort Worth, TX     314 Units/295,170 Sq. Ft.    **     *    *  **    *    *
</TABLE>

                                      9

<PAGE>

<TABLE>
<CAPTION>
                                                                               Rent Per
                                                                             Square Foot       Occupancy %
                                                        Units/           -------------------- --------------
Property                        Location            Square Footage        2001   2000   1999  2001 2000 1999
--------                  -------------------- ------------------------- ------ ------ ------ ---- ---- ----
<S>                       <C>                  <C>                       <C>    <C>    <C>    <C>  <C>  <C>
Apartments (continued)
Waters Edge IV........... Gulfport, MS           80 Units/76,400 Sq. Ft. $   ** $    * $    *  **    *    *
Westwood................. Odessa, TX             79 Units/49,001 Sq. Ft.    .48    .43    .41  92  100   91
Willow Creek............. El Paso, TX          112 Units/103,140 Sq. Ft.    .54    .50    .49  94   97   77
Willo-Wick Gardens....... Pensacola, FL        152 Units/153,360 Sq. Ft.    .54    .56    .53  91   89   80
Willow Wick.............. North Augusta, SC     104 Units/94,128 Sq. Ft.    .56    .56    .55  97   91   96
Woodview................. Odessa, TX           232 Units/165,840 Sq. Ft.    .48    .46    .45  95   96   91

Office Buildings
1010 Common.............. New Orleans, LA                494,579 Sq. Ft.  11.28  10.83  10.45  36   32   21
225 Baronne.............. New Orleans, LA                416,834 Sq. Ft.   9.77   9.61   9.32  75   76   77
4135 Beltline Road....... Addison, TX                     90,000 Sq. Ft.  10.33  10.17  10.00  --   33    *
9033 Wilshire............ Los Angeles, CA                 44,253 Sq. Ft.  27.67  26.08      *  88   90    *
Ambulatory Surgery Center Sterling, VA                    33,832 Sq. Ft.  20.37  34.26      * 100  100    *
Amoco.................... New Orleans, LA                378,244 Sq. Ft.  12.07  11.54  11.23  79   80   78
Atrium................... Palm Beach, FL                  74,603 Sq. Ft.  12.69  11.55  11.31  82   84   96
Bay Plaza................ Tampa, FL                       75,780 Sq. Ft.  15.96  15.60  15.14  99   95   85
Bay Plaza II............. Tampa, FL                       78,882 Sq. Ft.  13.03  12.80      *  91   93    *
Bonita Plaza............. Bonita, CA                      47,777 Sq. Ft.  19.50  18.66  18.78  93   92   88
Brandeis................. Omaha, NE                      319,234 Sq. Ft.  10.88  15.87      *  89  100    *
Corporate Pointe......... Chantilly, VA                   65,918 Sq. Ft.  19.72  18.31  16.85 100  100  100
Countryside Retail Center Sterling, VA                   133,422 Sq. Ft.  16.02  18.02      *  89   89    *
Durham Center............ Durham, NC                     207,171 Sq. Ft.  17.65  17.79  17.93  94   95   78
Eton Square.............. Tulsa, OK                      222,654 Sq. Ft.  11.27  10.52   9.78  63   60   86
Forum.................... Richmond, VA                    79,791 Sq. Ft.  15.99  15.65  15.34  70   84   88
Harmon................... Sterling, VA                    72,062 Sq. Ft.  19.72  19.50      *  70   85    *
Hartford................. Dallas, TX                     174,513 Sq. Ft.  11.08  10.78  10.68  47   50   57
Institute Place.......... Chicago, IL                    144,915 Sq. Ft.  16.23  14.99  14.47  95  100   95
Jefferson................ Washington, DC                  71,877 Sq. Ft.  31.65  31.94  30.94  91   89  100
Lexington Center......... Colorado Springs, CO            74,603 Sq. Ft.  12.88  12.26  11.71  83   54   97
Mimado................... Sterling, VA                    35,127 Sq. Ft.  19.97  19.55      *  73   89    *
NASA..................... Clear Lake, TX                  78,159 Sq. Ft.  11.86  11.74  11.44  68   66   66
One Steeplechase......... Sterling, VA                   103,376 Sq. Ft.  17.19  16.64  16.26 100  100  100
Parkway North............ Dallas, TX                      71,041 Sq. Ft.  17.00  14.77   7.82  73   76   85
Plaza Towers............. St. Petersburg, FL             186,281 Sq. Ft.  15.54  14.54  14.03  97   95   95
Remington Tower.......... Tulsa, OK                       90,009 Sq. Ft.  11.61  11.34  10.89  88   86   76
Savings of America....... Houston, TX                     68,634 Sq. Ft.  12.63  11.68  11.28  85   79   71
Venture Center........... Atlanta, GA                     38,272 Sq. Ft.  17.85  17.16  16.62 100  100  100
Westgrove Air Plaza...... Addison, TX                     78,326 Sq. Ft.  13.54  12.91  12.69  81   90   89
Windsor Plaza............ Windcrest, TX                   80,522 Sq. Ft.  13.72  13.70  13.43  66   63   62

Industrial Warehouses
5360 Tulane.............. Atlanta, GA                     30,000 Sq. Ft.   2.75   2.60   2.55 100  100  100
5700 Tulane.............. Atlanta, GA                     67,850 Sq. Ft.   2.93   2.83   2.63   7   77    9
Addison Hanger........... Addison, TX                     23,650 Sq. Ft.  10.07  11.08  11.29  86   51   50
Addison Hanger II........ Addison, TX                     29,000 Sq. Ft.   7.21      *      *  12    *    *
Central Storage.......... Dallas, TX                     216,035 Sq. Ft.   2.40   1.48   1.48 100  100  100
Encon.................... Fort Worth, TX                 256,410 Sq. Ft.   3.08   2.00   2.00 100  100  100
Kelly.................... Dallas, TX                     294,899 Sq. Ft.   3.61   3.85   3.74  94  100   98
McLeod................... Orlando, FL                    110,914 Sq. Ft.   8.01   7.86   7.62  92   88   91
Ogden Industrial......... Ogden, UT                      107,112 Sq. Ft.   2.94   3.32   3.79 100   86  100
Space Center............. San Antonio, TX                101,500 Sq. Ft.   3.18   3.09   2.97  89  100   83
Texstar.................. Arlington, TX                   97,846 Sq. Ft.   2.11   2.11   2.11 100  100  100
Tricon................... Atlanta, GA                    570,877 Sq. Ft.   3.87   3.75   3.21  93   91   96

Shopping Centers
Dunes Plaza.............. Michigan City, IN              223,869 Sq. Ft.   5.81   5.61   5.54  62   63   64
K-Mart................... Cary, NC                        92,033 Sq. Ft.   3.28   3.28   3.28 100  100  100
Parkway Center........... Dallas, TX                      28,374 Sq. Ft.  15.08  14.67  13.60  86  100  100
Plaza on Bachman Creek... Dallas, TX                      80,278 Sq. Ft.  12.11  11.13  11.70  88   79   65
Promenade................ Highland Ranch, CO             133,558 Sq. Ft.  13.06  10.57  10.34  75   73   93
</TABLE>

                                      10

<PAGE>

<TABLE>
<CAPTION>
                                                                  Rent Per
                                                                 Square Foot     Occupancy %
                                                   Units/     ----------------- --------------
Property                         Location      Square Footage 2001  2000  1999  2001 2000 1999
--------                     ----------------- -------------- ----- ----- ----- ---- ---- ----
<S>                          <C>               <C>            <C>   <C>   <C>   <C>  <C>  <C>
Shopping Centers (continued)
Sadler Square............... Amelia Island, FL 70,295 Sq. Ft. $7.21 $7.15 $6.99  93   95   96
Sheboygan................... Sheboygan, WI     74,532 Sq. Ft.  2.36  1.99  1.99 100  100  100

Other
Signature Athletic Club..... Dallas, TX        56,532 Sq. Ft.
</TABLE>

<TABLE>
<CAPTION>
                                                                                 Total Room Revenues
                                                                                     Divided By
                                            Average Room Rate      Occupied %   Total Available Rooms
                                         ----------------------- -------------- ---------------------

Property         Location        Rooms    2001    2000    1999   2001 2000 1999 2001   2000    1999
--------     ----------------- --------- ------- ------- ------- ---- ---- ---- ----- ------- -------
<S>          <C>               <C>       <C>     <C>     <C>     <C>  <C>  <C>  <C>   <C>     <C>
Hotels
Willows..... Chicago, IL        52 Rooms $130.37 $131.78 $115.12  53   52   60  69.65 $ 69.10 $ 79.24
City Suites. Chicago, IL        45 Rooms  131.16  125.32  111.45  61   74   71  81.13   92.40   69.23
Majestic Inn San Francisco, CA  57 Rooms  174.85  170.08  162.58  41   79   79  79.10  133.65  128.76
The Majestic Chicago, IL        55 Rooms  129.63  120.67  105.27  55   65   63  71.52   77.89   66.62
Akademia.... Wroclaw, Poland   165 Rooms      **       *       *  **    *    *     **       *       *
</TABLE>

<TABLE>
<CAPTION>
                                                       Square
             Property                 Location      Footage/Acres
             --------            ------------------ --------------
             <S>                 <C>                <C>
             Land
             1013 Common........ New Orleans, LA    18,000 Sq. Ft.
             Alamo Springs...... Dallas, TX             .678 Acres
             Dominion........... Dallas, TX            14.39 Acres
             Eagle Crest........ Farmers Branch, TX    18.99 Acres
             Folsom............. Dallas, TX            36.38 Acres
             Lamar/Parmer....... Austin, TX            17.07 Acres
             Las Colinas........ Las Colinas, TX         4.7 Acres
             Lemmon Carlisle.... Dallas, TX             2.14 Acres
             Limestone Canyon II Austin, TX             9.96 Acres
             Manhattan.......... Farmers Branch, TX    108.9 Acres
             McKinney 36........ Collin County, TX     34.58 Acres
             Mira Lago.......... Farmers Branch, TX     8.88 Acres
             Pac Trust.......... Farmers Branch, TX     7.11 Acres
             Red Cross.......... Dallas, TX             2.89 Acres
             Sandison........... Collin County, TX     97.97 Acres
             Seminary West...... Fort Worth, TX         5.36 Acres
             Solco--Allen....... Collin County, TX      55.8 Acres
             Solco--Valley Ranch Dallas, TX             6.07 Acres
             Stacy Road......... Allen, TX            160.38 Acres
             State Highway 121.. Collin County, TX    101.94 Acres
             Watters Road....... Collin County, TX     97.00 Acres
             West End........... Dallas, TX              6.8 Acres
             Whisenant.......... Collin County, TX     16.16 Acres
</TABLE>
--------
*  Property was either purchased or under construction in 2000 or 2001.
** Property was under construction in 2001.

   Occupancy presented here and throughout this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.

                                      11

<PAGE>

   In 2001, TCI purchased the following properties:

<TABLE>
<CAPTION>
                                                                  Net
                                              Units/    Purchase  Cash    Debt   Interest Maturity
Property                      Location      Rooms/Acres  Price    Paid  Incurred   Rate     Date
--------                 ------------------ ----------- -------- ------ -------- -------- --------
<S>                      <C>                <C>         <C>      <C>    <C>      <C>      <C>
Apartments
Baywalk................. Galveston, TX       192 Units  $ 6,590  $  390 $ 5,856    7.45%   02/11
By the Sea.............. Corpus Christi, TX  153 Units    6,175     862   5,538    7.07    05/09
Courtyard............... Midland, TX         133 Units    1,425     425   1,051    9.25    04/06
Falcon Lakes(1)......... Arlington, TX       284 Units    1,435   1,437      --      --       --
Island Bay.............. Galveston, TX       458 Units   20,360   3,225  16,232    7.40    07/11
Limestone Ranch(1)...... Lewisville, TX      252 Units      505      --      --      --      -- (2)
Marina Landing.......... Galveston, TX       256 Units   12,050     518  10,912    5.30    01/02
River Oaks(1)........... Wiley, TX           180 Units      531     578      --      --       --
Sendero Ridge(1)........ San Antonio, TX     384 Units    1,850   2,635      --      --       --
Tivoli(1)............... Dallas, TX          190 Units    3,000   2,475   1,000   12.00    12/02
Verandas at City View(1) Fort Worth, TX      314 Units    2,544     276   2,197    4.75    03/02
Waters Edge IV(1)....... Gulfport, MS         80 Units      441     441      --      --       --

Hotel
Akademia(3)............. Wroclaw, Poland     165 Rooms    2,184   2,669      --      --       --

Land
Mira Lago............... Farmers Branch, TX 8.88 Acres      541      --      --      --      -- (2)
Pac Trust............... Farmers Branch, TX 7.11 Acres    1,175   1,231      --      --       --
Seminary West........... Fort Worth, TX     5.36 Acres      222     232      --      --       --
Solco-Valley Ranch...... Dallas, TX         6.07 Acres    1,454   1,525      --      --       --
</TABLE>
--------
(1) Land purchased for apartment construction.
(2) Land was received from ARI, a related party, in exchange for the Glenwood
    Apartments.
(3) Land purchased for hotel construction.

   In 2001, TCI sold the following properties:

<TABLE>
<CAPTION>
                                                               Net
                                      Units/Sq.Ft./   Sales    Cash      Debt     Gain/(Loss)
Property                 Location         Acres       Price  Received Discharged    on Sale
--------              --------------- -------------- ------- -------- ----------  -----------
<S>                   <C>             <C>            <C>     <C>      <C>         <C>
Apartments
Bent Tree Gardens.... Addison, TX          204 Units $ 9,000  $2,669   $ 6,065(1)   $  601
Carseka.............. Los Angeles, CA       54 Units   4,000   2,138     1,466       1,352
Fontenelle Hills..... Bellevue, NE         338 Units  16,500   3,680    12,454(1)    4,565
Forest Ridge......... Denton, TX            56 Units   2,000     682     1,151       1,014
Glenwood............. Addison, TX          168 Units   3,659      --     2,537(1)      -- (2)
Heritage............. Tulsa, OK            136 Units   2,286     206     1,948       1,575
Madison at Bear Creek Houston, TX          180 Units   5,400     828     3,442(1)    1,162(4)
McCallum Glen........ Dallas, TX           275 Units   8,450   2,633     5,004(1)    1,375(3)
McCallum Crossing.... Dallas, TX           322 Units  11,500   1,841     8,101(1)    4,486
Oak Run.............. Pasadena, TX         160 Units   5,800   1,203     4,364       2,227
Park Lane............ Dallas, TX            97 Units   2,750   1,526     1,103       1,827
Park at Colonade..... San Antonio, TX      211 Units   5,800     927     4,066       1,592
South Cochran........ Los Angeles, CA       64 Units   4,650   1,897     1,873       1,660
Summerstone.......... Houston, TX          242 Units   7,225   1,780     5,180(1)    1,884
Sunset Lakes......... Waukegan, IL         414 Units  15,000   6,089     7,243       7,316

Office Buildings
Chesapeake Center.... San Diego, CA    57,493 Sq.Ft.   6,575   3,111     2,844         204
Daley................ San Diego, CA    64,425 Sq.Ft.   6,211   2,412     3,346         836
Valley Rim........... San Diego, CA    54,194 Sq.Ft.   5,500   1,367     3,516        (138)
Viewridge............ San Diego, CA    25,062 Sq.Ft.   2,010     701     1,272           4
Waterstreet.......... Boulder, CO     106,257 Sq.Ft.  22,250   7,126    12,949       9,154

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

                                      12

<PAGE>

<TABLE>
<CAPTION>
                                                         Net
                                  Units/Sq.Ft./ Sales    Cash      Debt    Gain/(Loss)
Property            Location          Acres     Price  Received Discharged   on Sale
--------       ------------------ ------------- ------ -------- ---------- -----------
<S>            <C>                <C>           <C>    <C>      <C>        <C>

Land
Eagle Crest... Farmers Branch, TX   4.41 Acres  $  300  $  291     $ --        (215)
McKinney 36... McKinney, TX        1.822 Acres     476     476       --         355
Moss Creek.... Greensboro, NC       4.79 Acres      15      13       --         (71)
Round Mountain Austin, TX          110.0 Acres   2,560   2,455       --       1,047
</TABLE>
--------
(1) Debt assumed by purchaser.
(2) The Glenwood Apartments were exchanged with ARI, a related party, for two
    parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago.
(3) Excludes $1.5 million deferred gain from seller financing. See Note 4.
    "Notes and Interest Receivable.")
(4) Excludes $608,000 deferred gain from seller financing. (See Note 4. "Notes
    and Interest Receivable.")

   In 2001, TCI financed/refinanced the following property:

<TABLE>
<CAPTION>
                                   Debt      Debt    Net Cash Interest Maturity
 Property   Location    Acres    Incurred Discharged Received   Rate     Date
 --------  ---------- ---------- -------- ---------- -------- -------- --------
                                    (dollars in thousands)
 <S>       <C>        <C>        <C>      <C>        <C>      <C>      <C>
 Land
 Red Cross Dallas, TX 2.89 Acres  $4,500     $ --     $4,328    12.5%   10/02
</TABLE>

   Properties Held for Sale.  Set forth below are TCI's properties held for
sale, primarily obtained through foreclosure.

<TABLE>
<CAPTION>
                 Property            Location         Acres
                 --------       ------------------ -----------
                 <S>            <C>                <C>
                 Land
                 Fiesta........ San Angelo, TX     .6657 Acres
                 Fruitland..... Fruitland Park, FL  4.66 Acres
                 Round Mountain Austin, TX            18 Acres
</TABLE>

   Partnership Properties.  TCI accounts for partnership properties using the
equity method. Set forth below are the properties owned by partnerships, the
monthly rental rate for apartments, the average annual rental rate for
commercial properties, and occupancy rates at December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                   Rent Per
                                                                 Square Foot       Occupancy %
                                                             -------------------- --------------
Property               Location       Units/Square Footage    2001   2000   1999  2001 2000 1999
--------          ------------------ ----------------------- ------ ------ ------ ---- ---- ----
<S>               <C>                <C>                     <C>    <C>    <C>    <C>  <C>  <C>
Apartment
Lincoln Court.... Dallas, TX         55 Units/40,063 Sq. Ft. $ 1.20 $ 1.16 $ 1.14  98   94   92

Office Building
Prospect Park #29 Rancho Cordova, CA          40,807 Sq. Ft.  19.52  20.42  16.56  72  100  100

Shopping Center
Chelsea Square... Houston, TX                 70,275 Sq. Ft.   9.63   9.31   8.95  79   77   85
</TABLE>

   TCI owns a noncontrolling combined 55% limited and general partnership
interest in Jor-Trans Investors Limited Partnership ("Jor-Trans") which owns
the Lincoln Court Apartments.

   TCI is a 30% general partner in Sacramento Nine ("SAC 9"), which owns the
Prospect Park #29 Office Building. In 2001, TCI received no operating
distributions from SAC 9.

   TCI is a 63.7% limited partner and IORI is a 36.3% general partner in the
Tri-City Limited Partnership ("Tri-City") which owns the Chelsea Square
Shopping Center. In 2001, TCI received $32,000 in operating distributions from
Tri-City. In February 2000, the Chelsea Square Shopping Center was financed in
the amount of $2.1 million. Tri-City received net cash of $2.0 million after
the payment of various closing costs. The

                                      13

<PAGE>

mortgage bore interest at a fixed rate of 10.24% per annum until February 2001,
and a variable rate thereafter, currently 10% per annum, requires monthly
payments of principal and interest of $20,601 and matures in February 2005. TCI
received a distribution of $1.3 million of the net financing proceeds. See ITEM
13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party
Transactions."

Mortgage Loans

   In addition to investments in real estate, a portion of TCI's assets are
invested in mortgage notes receivable, principally secured by real estate. TCI
may originate mortgage loans in conjunction with providing purchase money
financing of property sales. Management intends to service and hold for
investment the mortgage notes in TCI's portfolio. TCI's mortgage notes
receivable consist of first, wraparound and junior mortgage loans.

   Types of Mortgage Activity.  TCI has originated its own mortgage loans, as
well as acquired existing mortgage notes either directly from builders,
developers or property owners, or through mortgage banking firms, commercial
banks or other qualified brokers. BCM, in its capacity as a mortgage servicer,
services TCI's mortgage notes. TCI's investment policy is described in ITEM 1.
"BUSINESS--Business Plan and Investment Policy."

   Types of Properties Securing Mortgage Notes.  The properties securing TCI's
mortgage notes receivable portfolio at December 31, 2001, consisted of three
apartments, five office buildings, a shopping center, and a mobile home park
and unimproved land. The Board of Directors may alter the types of properties
securing or collateralizing mortgage loans in which TCI invests without a vote
of stockholders. TCI's Articles of Incorporation impose certain restrictions on
transactions with related parties, as discussed in ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."

   At December 31, 2001, TCI's mortgage notes receivable portfolio included
nine mortgage loans with an aggregate principal balance of $17.4 million
secured by income-producing real estate located in the Midwest, Southeast and
Southwest regions of the continental United States, and two non-performing
loans with an aggregate principal balance of $5.2 million secured by unimproved
land. At December 31, 2001, 3% of TCI's assets were invested in notes and
interest receivable.

   The following table sets forth the percentages (based on the mortgage note
principal balance) by property type and geographic region, of the income
producing properties that serve as collateral for TCI's mortgage notes
receivable at December 31, 2001. See Schedule IV to the Consolidated Financial
Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
for further details of TCI's mortgage notes receivable portfolio.

<TABLE>
<CAPTION>
                                          Commercial
                     Region    Apartments Properties Total
                     ------    ---------- ---------- -----
                     <S>       <C>        <C>        <C>
                     Southwest    19.9%      45.0%    64.9%
                     Southeast      --       11.3     11.3
                     Midwest..      --       23.8     23.8
                                  ----       ----    -----
                                  19.9%      80.1%   100.0%
                                  ====       ====    =====
</TABLE>

   A summary of the activity in TCI's mortgage notes receivable portfolio
during 2001 is as follows:

<TABLE>
               <S>                                            <C>
               Mortgage notes receivable at January 1, 2001..  6
               Loans paid off................................ (2)
               Loans funded..................................  8
                                                              --
               Mortgage notes receivable at December 31, 2001 12
                                                              ==
</TABLE>

                                      14

<PAGE>

   During 2001, $3.7 million was collected in full payment of two mortgage
notes and $2.3 million in principal payments were received on other mortgage
notes. At December 31, 2001, less than 1% of TCI's assets were invested in
mortgage notes secured by non-income producing real estate, comprised of a
first lien mortgage note secured by 44.6 acres of unimproved land in Fort
Worth, Texas, and a second lien mortgage note secured by 1,714.6 acres of
unimproved land in Tarrant County, Texas.

   First Mortgage Loans.  TCI invests in first mortgage notes with short,
medium or long-term maturities. First mortgage loans generally provide for
level periodic payments of principal and interest sufficient to substantially
repay the loan prior to maturity, but may involve interest-only payments or
moderate amortization of principal and a "balloon" principal payment at
maturity. With respect to first mortgage loans, the borrower is required to
provide a mortgagee's title policy or an acceptable legal title opinion as to
the validity and the priority of the mortgage lien over all other obligations,
except liens arising from unpaid property taxes and other exceptions normally
allowed by first mortgage lenders in the relevant area. TCI may grant
participations in first mortgage loans that it originates to other lenders.

   In July 2001, TCI funded a $1.7 million mortgage loan secured by a first
lien on 44.6 acres of unimproved land in Fort Worth, Texas, and a 100% interest
in a partnership. The note receivable bears interest at 16.0% per annum,
requires monthly interest only payments and matures in June 2002.

   The following discussion briefly describes events that affected previously
funded first mortgage loans during 2001.

   In December 1999, TCI provided $1.2 million of purchase money financing in
conjunction with the sale of the Town and Country Office Building in Houston,
Texas. The note receivable bore interest at 8.5% per annum, required monthly
payments of interest only, matured in 2001 and was secured by a first lien on
the property sold. In December 2001, the note was paid in full and a previously
deferred gain on the sale of $819,000 was recognized.

   Junior Mortgage Loans.  TCI may invest in junior mortgage loans, which are
secured by mortgages that are subordinate to one or more prior liens either on
the fee or a leasehold interest in real estate. Recourse on such loans
ordinarily includes the real estate on which the loan is made, other collateral
and personal guarantees by the borrower. The Board of Directors restricts
investment in junior mortgage loans, excluding wraparound mortgage loans, to
not more than 10% of TCI's assets. At December 31, 2001, 3% of TCI's assets
were invested in junior and wraparound mortgage loans.

   The following discussion briefly describes the junior mortgage loans that
TCI originated as well as events that affected previously funded junior
mortgage loans during 2001.

   In March 2001, TCI funded a $3.5 million mortgage loan secured by a second
lien on a retail center in Montgomery County, Texas. In June 2001, an
additional $1.5 million was funded. The note receivable bears interest at 16.0%
per annum, requires monthly interest only payments of $67,000 and matured in
September 2001. In October 2001, TCI extended the loan until February 2002,
receiving $100,000 as an extension fee. In December 2001, TCI received a $1.5
million principal payment. In February 2002, TCI sold a $2.0 million senior
participation interest in the loan to IORI, a related party. TCI and IORI will
receive 43% and 57%, respectively, of the remaining principal and interest
payments. Also in February 2002, TCI extended the loan until April 2002,
receiving $23,000 as an extension fee.

   In June 2001, in conjunction with the sale of 275 unit McCallum Glen
Apartments in Dallas, Texas, TCI funded a $1.5 million mortgage loan secured by
a second lien on the apartments. The note receivable bears interest at 10% per
annum, requires monthly interest only payments and matures in June 2003.

                                      15

<PAGE>

   In July 2001, TCI agreed to fund a $4.4 million line of credit secured by a
second lien on 1,714.16 acres of unimproved land in Tarrant County, Texas. The
note receivable bears interest at 15% per annum, requires monthly interest only
payments beginning in September 2001 and matures in July 2003. As of March
2002, TCI has funded $3.8 million of the line of credit.

   In August 2001, TCI agreed to fund up to $5.6 million secured by an office
building in Dallas, Texas. The note receivable bears interest at a variable
rate, currently 9.0% per annum, requires monthly interest only payments and
matures in January 2003. As of March 2002, TCI has funded a total of $2.3
million.

   In December 2001, TCI purchased 100% of the outstanding common shares of
National Melrose, Inc. ("NM"), a wholly-owned subsidiary of ARI, a related
party, for $2.0 million cash. NM owns the 41,840 sq. ft. Executive Court Office
Building in Memphis, Tennessee. ARI has guaranteed that the asset shall produce
at least a 12% return annually of the purchase price for a period of three
years from the purchase date. If the asset fails to produce the 12% return, ARI
shall pay TCI any shortfall. In addition, if the asset fails to produce 12%
return for a calendar year, TCI may require ARI to repurchase the shares of NM
for the purchase price. Management has classified this related party
transaction as a note receivable from ARI.

   In December 2000, TCI funded a $2.5 million mortgage loan secured by a
second lien on unimproved land: 442 acres in Tarrant County, Texas, 1,130 acres
in Denton County, Texas, and 26 acres in Collin County, Texas. The note
receivable bore interest at 18.0% per annum, required monthly interest only
payments of $37,500 and matured in June 2001. In June 2001, the loan and all
accrued but unpaid interest was paid off.

   Also in December 2000, TCI funded a $3.0 million mortgage loan secured by a
second lien on four office buildings in San Antonio, Texas. The note receivable
bore interest at 16.0% per annum, required monthly interest only payments of
$40,000 and matured in June 2001. The note was extended until November 2001
with a $750,000 loan principal paydown. With this paydown, the note was
renegotiated to replace the existing collateral with new collateral consisting
of a 120,000 sq. ft. office building and industrial warehouse in Carrollton,
Texas. The note bears interest at 16.0% per annum, requires monthly payments of
interest only and matures in May 2002.

   In October 2001, TCI funded a $4.0 million loan secured by a 375,152 sq.ft.
office building in St. Louis, Missouri. The note receivable bears interest at
9.0% per annum, requires monthly interest only payments of $30,000 and matured
in February 2002. In February 2002, TCI extended the loan maturity to February
2003.

   Partnership mortgage loans.  TCI owns a 60% general partner interest and
IORI owns a 40% general partner interest in Nakash Income Associates ("NIA"),
which owns a wraparound mortgage note receivable secured by a building occupied
by a Wal-Mart in Maulden, Missouri. TCI advanced $33,000 to the partnership.

ITEM 3.   LEGAL PROCEEDINGS

Olive Litigation

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

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

                                      16

<PAGE>

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

   In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this provision
of the Olive Amendment. In January 2000, the Board engaged another management
compensation consultant to perform the required evaluation again. The
evaluation was completed in April 2000 and was provided to plaintiffs' counsel.
The Board believes that any alleged breach of the Olive Amendment has been
fully remedied by the Board's engagement of this second consultant. Although
several status conferences on this matter were held, there has been no court
order resolving whether there was any breach of the Olive Amendment.

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

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

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

   Not applicable.

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

                                      17

<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   TCI's Common Stock is traded on the New York Stock Exchange ("NYSE") using
the symbol "TCI". The following table sets forth the high and low sales prices
as reported in the consolidated reporting system of the NYSE.

<TABLE>
<CAPTION>
              Quarter Ended                           High   Low
              -------------                          ------ ------
              <S>                                    <C>    <C>
              March 31, 2002 (through March 4, 2002) $16.82 $15.50

              March 31, 2001........................  12.60   8.19
              June 30, 2001.........................  16.00   8.95
              September 30, 2001....................  14.75  11.70
              December 31, 2001.....................  16.85  11.80

              March 31, 2000........................  13.00  10.81
              June 30, 2000.........................  13.50   2.88
              September 30, 2000....................  16.00  11.50
              December 31, 2000.....................  16.00   8.88
</TABLE>

   As of March 4, 2002, the closing price of TCI's Common Stock as reported in
the consolidated reporting system of the NYSE was $16.60 per share.

   As of March 4, 2002, TCI's Common Stock was held by 6,757 holders of record.

   TCI paid no dividends in 2001. In December 2000, the Board of Directors
determined not to pay a fourth quarter dividend to holders of TCI's Common
Stock. The non-payment decision was based on the Board determining that TCI
needed to retain cash for acquisitions that were anticipated in 2001 and 2002.
TCI paid dividends in 2000 as follows:

<TABLE>
<CAPTION>
                                                                Amount
       Date Declared        Record Date        Payable Date    Per Share
       -------------     ------------------ ------------------ ---------
       <S>               <C>                <C>                <C>
       February 10, 2000 March 15, 2000     March 31, 2000       $.18
       June 6, 2000..... June 15, 2000      June 30, 2000         .18
       September 8, 2000 September 19, 2000 September 29, 2000    .18
</TABLE>

   TCI reported to the Internal Revenue Service that 100% of the dividends paid
in 2000 represented ordinary income.

   In December 1989, the Board of Directors approved a share repurchase
program, authorizing the repurchase of a total of 687,000 shares of TCI's
Common Stock. In October 2000, the Board increased this authorization to
1,409,000 shares. Through December 31, 2001, a total of 409,765 shares had been
repurchased at a cost of $3.3 million. No shares were repurchased in 2001. In
September 2001, the Board approved a private block purchase of 593,200 shares
of Common Stock for a total cost of $9.5 million.

                                      18

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                  For the Years Ended December 31,
                                     ----------------------------------------------------------
                                        2001        2000        1999        1998        1997
                                     ----------  ----------  ----------  ----------  ----------
                                              (dollars in thousands, except per share)
<S>                                  <C>         <C>         <C>         <C>         <C>
EARNINGS DATA
Rents............................... $  134,911  $  139,662  $   82,101  $   69,829  $   54,462
Property expense....................     80,562      78,170      44,514      38,282      32,424
                                     ----------  ----------  ----------  ----------  ----------
Operating income....................     54,349      61,492      37,587      31,547      22,038
Other income........................     (3,002)      1,814         555         739       2,311
Other expense.......................     85,806      84,074      48,440      38,320      33,154
Gain on sale of real estate.........     54,270      50,550      40,517      12,940      21,404
                                     ----------  ----------  ----------  ----------  ----------
Net income (loss)...................     19,811      29,782      30,219       6,906      12,599
Preferred dividend requirement......       (172)        (22)        (30)         (1)         --
                                     ----------  ----------  ----------  ----------  ----------
Net income (loss) applicable to
  Common shares..................... $   19,639  $   29,760  $   30,189  $    6,905  $   12,599
                                     ==========  ==========  ==========  ==========  ==========

Basic and Diluted Earnings Per Share
 Basic.............................. $     2.32  $     3.45  $     7.05  $     1.78  $     3.22
 Diluted............................       2.28        3.45        7.05        1.78        3.22

Dividends per Common share.......... $       --  $      .54  $      .60  $      .60  $      .28*

Weighted Average Common Shares
  Outstanding
 Basic..............................  8,478,377   8,631,621   4,283,574   3,876,797   3,907,221
 Diluted............................  8,615,465   8,637,290   4,283,574   3,876,797   3,907,221
</TABLE>
--------
*  Does not include a special dividend of $1.00 per share.

<TABLE>
<CAPTION>
                                           For the Years Ended December 31,
                                     --------------------------------------------
                                       2001     2000     1999     1998     1997
                                     -------- -------- -------- -------- --------
                                       (dollars in thousands, except per share)
<S>                                  <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA
Real estate held for investment, net $622,171 $639,040 $599,746 $347,389 $269,845
Real estate held for sale, net......
   Foreclosed.......................      516    1,824    1,790    1,356    1,356
   Other............................       --       --       --       --    3,630
Notes and interest receivable, net..   22,049    8,172   11,530    1,493    3,947
Total assets........................  709,152  731,885  714,195  382,203  319,135
Notes and interest payable..........  461,037  501,734  503,406  282,688  222,029
Stockholders' equity................  216,768  200,560  179,112   91,132   86,133
Book value per share................ $  26.95 $  23.22 $  20.76 $  23.35 $  22.15
</TABLE>

   TCI purchased 17 properties for a total of $62.5 million in 2001, 18
properties for a total of $103.9 million in 2000, 10 properties for a total of
$51.2 million and obtained an additional 64 properties through merger with CMET
in 1999, purchased 22 properties in 1998 for a total of $91.0 million, and 15
properties in 1997 for a total of $60.0 million. TCI sold 22 properties, one
warehouse in the Kelly portfolio and three partial land parcels in 2001 for a
total of $161.5 million, 20 properties in 2000 for a total of $113.5 million,
11 properties in 1999 for a total of $117.4 million, five properties in 1998
for a total of $31.8 million, and five properties in 1997 for a total $29.1
million. See ITEM 2. "PROPERTIES--Real Estate" and ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA."

                                      19

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Introduction

   TCI invests in real estate through acquisitions, leases and partnerships and
in mortgage loans on real estate, including first, wraparound and junior
mortgage loans. TCI is the successor to a California business trust organized
on September 6, 1983, which commenced operations on January 31, 1984. On
November 30, 1999, TCI acquired all of the outstanding shares of beneficial
interest of CMET, a real estate company, in a tax-free exchange of shares,
issuing 1.181 shares of its Common Stock for each outstanding CMET share. TCI
accounted for the merger as a purchase.

   Prior to January 1, 2000, TCI elected to be treated as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"). During the third quarter of
2000, TCI no longer met the requirement for tax treatment as a REIT due to a
concentration of ownership.

Liquidity and Capital Resources

   Cash and cash equivalents at December 31, 2001, totaled $10.3 million
compared with $22.3 million at December 31, 2000. The principal reasons for the
decrease in cash are discussed in the paragraphs below.

   TCI's principal sources of cash have been and will continue to be from
property operations, proceeds from property sales, the collection of mortgage
notes receivable, borrowings and to a lesser extent, distributions from
partnerships. Management anticipates that TCI's cash at December 31, 2001, and
cash that will be generated in 2002 from property operations, will not be
sufficient to meet all of TCI's cash requirements. Management intends to
selectively sell income producing real estate, refinance or extend real estate
debt and seek additional borrowings against real estate to meet its cash
requirements. Management is uncertain that it can refinance its real estate
debt or rely on additional borrowings. However, management has been successful
at extending its current maturity obligations.

   2001 compared to 2000.  Net cash used in operations was $895,000 in 2001
compared to $1.1 million in 2000. The primary factors contributing to TCI's use
of cash in its operations are discussed in the following paragraphs.

   Cash flow from property operations (rents collected less payments for
property operating expenses) decreased to $56.0 million in 2001 from $56.6
million in 2000. Decreases in cash flow of $8.6 million were due to the sale of
29 apartments in 2001 and 2000, and $2.7 million was due to the sale of eight
commercial properties and one industrial warehouse in the Kelly portfolio in
2001 and 2000. These decreases were offset by increases in cash flow from
property operations of which $900,000 and $2.7 million were from the purchase
of 10 existing apartments and seven commercial properties in 2001 and 2000, and
$2.5 million and $4.5 million were due to increases in rents at TCI's
apartments and commercial properties, respectively. Management believes that
this trend of decreased cash flow from property operations will continue as a
result of TCI's selling of income producing properties to meet its cash
requirements.

   Interest collected increased to $1.6 million in 2001 from $1.0 million in
2000. This increase was due to loans funded in 2001. Interest collected is
expected to decrease in 2002 due to six loans maturing in 2002.

   Interest paid decreased to $39.5 million in 2001 from $45.1 million in 2000.
A decrease of $6.8 million was due to the sale of 40 properties subject to debt
in 2001 and 2000, $1.3 million was due to lower variable interest rates, and
$1.5 million was due to principal paydowns. These decreases were offset by
increases of $3.8 million due to the purchase of 18 properties subject to debt
in 2001 and 2000 and $200,000 was due to the refinancing of 14 properties in
2001 and 2000. Interest paid will continue to decrease as TCI sells properties
subject to debt.

                                      20

<PAGE>

   Advisory and net income fees paid to affiliate decreased to $7.9 million in
2001 from $10.5 million in 2000. The decrease is due to a decrease in net
income. Advisory fees are expected to decrease as additional properties are
sold.

   TCI paid incentive fees of $2.9 million to an affiliate in 2001. No such fee
was paid in 2000. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF
THE REGISTRANT." Incentive fees are expected to increase in 2002 as TCI
selectively sells income producing properties.

   General and administrative expenses paid increased to $10.9 million in 2001
from $7.9 million in 2000. Increases of $1.8 million, $615,000, $249,000, and
$219,000 were due to increases in consulting fees, legal fees, taxes, and
insurance, respectively.

   Distributions were received from equity investees operating cash flow of
$646,000 in 2001 and $172,000 in 2000. See NOTE 7. "INVESTMENT IN EQUITY METHOD
REAL ESTATE ENTITIES."

   Management expects that funds from existing cash resources, selective sales
of income producing properties, refinancing of real estate, and additional
borrowings against real estate will be sufficient to meet TCI's cash
requirements associated with its current and anticipated level of operations,
maturing debt obligations and existing commitments. To the extent that TCI's
liquidity permits or financing sources are available, management intends to
make new real estate investments.

   In 2001, TCI received cash of $3.7 million from the collection of two
mortgage notes receivable, $2.3 million in mortgage receivable principal
payments, net cash of $29.1 million from new mortgage borrowings and
refinancings and an additional $100.8 million from property sales. In 2001,
$19.7 million in cash was expended on property purchases, $24.5 million in cash
was expended on construction projects, $9.1 million was expended on capital
improvements, and a total of $66.1 million in principal payments were made on
mortgage debt.

   In 2001, TCI repurchased 593,200 shares of Common Stock in a private block
purchase for a total cost of $9.5 million.

   Scheduled principal payments on notes payable of $152.8 million are due in
2002. For those mortgages that mature in 2002, management intends to either
seek to extend the due dates one or more years, or refinance the debt on a
long-term basis. Management also intends to sell income producing properties to
retire mortgage debt as it becomes due. Management believes it will continue to
be successful in obtaining loan extensions or refinancings.

   TCI paid dividends to its Common stockholders totaling $4.7 million or $.54
per share in 2000.

   2000 compared to 1999.  Cash and cash equivalents at December 31, 2000,
totaled $22.3 million compared with $41.3 million at December 31, 1999. The
principal reasons for the decrease in cash are discussed in the paragraphs
below.

   Net cash used in operations was $1.1 million in 2000 compared to $4.1
million provided by operations in 1999. The primary factors contributing to
TCI's use of cash in its operations are discussed in the following paragraphs.

   Cash flow from property operations (rents collected less payments for
property operating expenses) increased to $56.7 million in 2000 from $37.2
million in 1999. An increase of $4.3 million was due to the purchase of 15
income producing properties in 2000 and seven income producing properties in
1999, an increase of $24.5 million was due to the properties obtained in the
acquisition of CMET and an increase of $1.9 million was due to increased
apartment and commercial property occupancy and rental rates, and control of
operating expenses. These increases were partially offset by a decrease of $6.8
million due to the sale of 18 income producing properties in 2000 and 1999 and
a decrease of $4.3 million from the hotel operations.

                                      21

<PAGE>

   Interest collected increased to $1.0 million in 2000 from $449,000 in 1999.
This increase was due to loans funded in 2000.

   Interest paid increased to $45.1 million in 2000 from $25.5 million in 1999.
An increase of $5.4 million was due to 37 properties being purchased on a
leveraged basis in 2000 and 1999 and refinancings and financings of
unencumbered properties during 2000 and 1999. An additional increase of $17.5
million was due to the acquisition of CMET. These increases were partially
offset by a decrease of $3.3 million due to properties sold in 2000 and 1999.

   Advisory and net income fees paid to affiliate increased to $10.5 million in
2000 from $4.0 million in 1999. The increase is due to the increase in assets
from the merger with CMET and accrued net income fees in 1999 and paid in 2000.

   General and administrative expenses paid increased to $7.9 million in 2000
from $3.5 million in 1999. This increase was due to increased legal fees,
insurance and taxes.

   Distributions were received from equity investees operating cash flow of
$172,000 in 2000 and $331,000 in 1999. See NOTE 7. "INVESTMENT IN EQUITY METHOD
REAL ESTATE ENTITIES."

   In 2000, TCI received cash of $20.4 million from the collection of four
mortgage notes receivable, $131,000 in mortgage receivable principal payments,
net cash of $63.0 million from new mortgage borrowings and refinancings and an
additional $80.0 million from property sales. In 2000, $32.5 million in cash
was expended on property purchases and a total of $107.5 million in principal
payments on mortgage debt.

   TCI paid dividends to its Common stockholders totaling $4.7 million or $.54
per share in 2000 and $3.0 million or $.60 per share in 1999.

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

Results of Operations

   2001 compared to 2000.  TCI had net income of $19.8 million in 2001,
including gains on sale of real estate totaling $54.3 million, as compared to
$29.8 million in 2000, including gains on sale of real estate totaling $50.6
million. Fluctuations in the components of revenues and expense between 2001
and 2000 are discussed below.

   Rents decreased to $134.9 million in 2001 from $139.7 million in 2000. Of
this decrease, $20.6 million was due to the sale of 29 apartments in 2001 and
2000 and $3.2 million was due to the sale of eight commercial properties and
one industrial warehouse in the Kelly portfolio in 2001 and 2000. These
decreases were offset by increases of $3.0 million due to the purchase of 10
operating apartments in 2001 and 2000 and $8.2 million was due to the purchase
of eight commercial properties in 2001 and 2000. Decreases in rents of $91,000
also was due to decreased parking revenues for TCI's land properties. Rental
rates increased by $1.5 million for TCI's apartments and by $2.1 million for
TCI's commercial properties. In 2000, TCI leased its four U.S. hotels to Regis

                                      22

<PAGE>

Hotel Corporation, an affiliate of Basic Capital Management, Inc., at an annual
base rent totaling $503,477 per year plus 30% of the hotel's gross revenues.
Beginning January 1, 2001, TCI no longer leased the hotels and recognized
revenues based on the operations of the hotels. From this change, rents
increased at TCI's hotels by $4.4 million. Rents are expected to decrease in
2002 as TCI selectively sells income producing properties in 2002.

   Property operations expenses increased to $80.6 million in 2001 from $78.2
million in 2000. Of this increase, $1.9 million was due to the purchase of 10
operating apartments, $4.4 million was due to the purchase of eight commercial
properties and $400,000 was due to the purchase of eight land properties in
2001 and 2000. An increase of $3.0 million was due to increased leasing,
utility and maintenance costs at TCI's commercial properties. Hotel operating
expenses increased by $4.3 million and increases of $300,000 were due to
increases in maintenance and taxes for TCI's land parcels. These increases were
offset by decreases of $10.9 million due to the sale of 29 apartments in 2001
and 2000 and $1.1 million due to the sale of eight commercial properties and
one industrial warehouse in the Kelly portfolio in 2001 and 2000. Property
operating expenses are expected to decrease as TCI selectively sells properties
in 2002.

   Interest and other income increased to $2.9 million in 2001, compared to
$2.4 million in 2000. The increase was primarily due to TCI funding two loans
in the fourth quarter of 2000 and eight loans in 2001. Interest income in 2002
is expected to decrease due to six of TCI's twelve loans maturing in 2002.

   Prior to the first quarter of 2001, TCI accounted for its investment in ARI,
an affiliate, as an available for sale marketable security. In the first
quarter of 2001, TCI began accounting for its investment in ARI using the
equity method. Equity losses of investees increased to $6.0 million in 2001,
from $556,000 in 2000. The losses from equity investees are primarily
attributed to increased operating losses for IORI and TCI's accounting for its
investment in ARI. Equity losses are expected to increase with decreases in
operating income from ARI and IORI as ARI and IORI continue to sell income
producing properties.

   In 2001, gains on sale of real estate totaling $54.3 million were
recognized. The gains included $1.6 million on the sale of the Heritage
Apartments, $167,000 on the sale of Zodiac Warehouse, $355,000 on the sale of a
tract of the McKinney 36 land parcel, $1.0 million on the sale of Forest Ridge
Apartments, $1.6 million on the sale of Park at Colonade Apartments, $1.0
million on the sale of a tract of the Round Mountain land parcel, $4.6 million
on the sale of Fontenelle Apartments, $601,000 on the sale of Bent Tree Gardens
Apartments, $9.1 million on the sale of Waterstreet Office Building, $4.2
million on the sale of Technology Trading Center, $1.4 million on the sale of
McCallum Glen Apartments, $836,000 on the sale of Daley Office Plaza, $204,000
on the sale of Chesapeake Office Center, $4.5 million on the sale of McCallum
Crossing Apartments, $1.3 million on the sale of Carseka Apartments, $7.3
million on the sale of Sunset Lake Apartments, $2.2 million on the sale of Oak
Run Manor Apartments, $1.8 million on the sale of Park Lane Apartments, $4,000
on the sale of Viewridge Office Building, $1.7 million on the sale of South
Cochran Apartments, $1.2 million on the sale of Madison at Bear Creek
Apartments, $1.9 million on the sale of Summerstone Apartments, a $819,000
previously deferred gain on the sale of the Town and Country Shopping Center,
and $5.3 million in gains on sale of real estate from ARI, an equity investee.
These gains were partially offset by a loss of $71,000 on the Moss Creek land
parcel, a loss of $138,000 on the sale of the Valley Rim Office Building, and a
loss of $215,000 on the sale of a tract of the Eagle Crest land parcel.

   In 2000, gains on sale of real estate totaling $50.6 million were realized;
$572,000 on the sale of Hunters Bend Apartments, a $4.8 million previously
deferred gain on the sale of McKinney land, TCI's share of gains recognized by
an equity affiliate of $4.6 million, $3.6 million on the sale of Westgate of
Laurel Apartments, $3.2 million on the sale of Apple Creek Apartments, $1.2
million on the sale of Villas at Fair Park Apartments, $633,000 on the sale of
Chateau Charles Hotel, $1.5 million on the sale of Brookfield Warehouses, $1.5
million on the sale of Villas at Countryside Apartments, $706,000 on the sale
of Ashley Crest Apartments, $206,000 on the sale of Shady Trail Warehouse, $1.0
million on the sale of Eagle Rock Apartments, $184,000 on the sale of a portion
of the Allen land parcel, $3.8 million on the sale of Woodbridge Apartments,
$2.1 million on the sale of

                                      23

<PAGE>

the McKinney land, $3.1 million on the sale of a portion of the Watters
Road/Highway 121 land parcel, $5.4 million on the sale of Shadow Run
Apartments, $3.0 million on the sale of Parkwood Knoll Apartments, $2.6 million
on the sale of Villa Piedra Apartments, $1.1 million on the sale of Country
Bend Apartments, $5.1 million on the sale of Fountain Village Apartments, and
$793,000 on the sale of Crescent Place Apartments. See NOTE 3. "REAL ESTATE."

   Interest expense decreased to $41.0 million in 2001 from $48.1 million in
2000. Of this decrease, $6.0 million was due to the sale of 29 apartments in
2001 and 2000, $1.3 million was due to the sale of eight commercial properties
and one industrial warehouse in the Kelly portfolio in 2001 and 2000, and
$316,000 was due to the sale of two land parcels subject to debt in 2000. A
decrease of $252,000 was due to the refinancing of six commercial properties in
2000, and an increase of $18,000 was due to the refinancing of three apartment
properties in 2000, and decreases of $1.1 million were due to land loan payoffs
and principal paydowns in 2001 and 2000. Of the remaining decrease, $248,000
was due to lower variable interest rates at TCI's apartments, $1.6 million was
due to lower variable interest rates at TCI's commercial properties and
$278,000 was due to lower variable interest rates at TCI's hotels. These
decreases were offset by increases of $817,000 due to the purchase of 10
operating apartments in 2001 and 2000, and $3.2 million due to the purchase of
eight commercial properties in 2001 and 2000. Interest expense is expected to
decrease as TCI sells properties.

   Depreciation expense of $19.7 million in 2001, approximated the $19.7
million in 2000.

   Advisory fee expense of $5.3 million in 2001, approximated the $5.3 million
in 2000. Advisory fees are expected to decrease as TCI sells properties.

   Net income fee to affiliate was $1.9 million in 2001, as compared to $2.4
million in 2000. The net income fee is payable to TCI's advisor based on 7.5%
of TCI's net income.

   Incentive fee to affiliate was $3.2 million in 2001. The incentive fee is
payable to TCI's advisor based on 10% of aggregate sales consideration less
TCI's cost of all properties sold during the year.

   Incentive fees are expected to increase as TCI selectively sells properties.
No incentive fee was paid in 2000.

   General and administrative expenses increased to $11.4 million in 2001, from
$8.5 million in 2000. Increases of $1.8 million, $615,000, $249,000, and
$219,000 were due to increases in consulting fees, legal fees, taxes, and
insurance, respectively. General and administrative expenses are expected to
remain constant or decrease from decreased litigation and consulting fees.

   Realized losses on investments of $3.1 million were recognized in 2001. TCI
recognized a previously unrealized loss on ARI's marketable equity securities
of $3.1 million in 2001.

   2000 Compared to 1999.  TCI had net income of $29.8 million in 2000, as
compared to $30.2 million in 1999. Net income for 2000 included gains on the
sale of real estate of $50.6 million. Net income for 1999 included gains on the
sale of real estate of $40.5 million. Fluctuations in the components of revenue
and expense between 2000 and 1999 are discussed below.

   Rents increased to $139.7 million in 2000 from $82.1 million in 1999. Of the
increase, $2.5 million was due to the completion of the Limestone Canyon
Apartments in December 1999; $8.5 million was due to properties purchased or
obtained through foreclosure in 2000 and 1999; $57.4 million was due to the
properties obtained in the acquisition of CMET and the remaining $2.1 million
was primarily due to increased apartment and commercial property occupancy and
rental rates. These increases were partially offset by a decrease of
$10.6 million due to properties sold in 2000 and 1999, and a decrease of $2.5
million from the four hotels.

                                      24

<PAGE>

   Property operating expenses increased to $78.2 million in 2000 from $44.5
million in 1999. Of the increase, $4.3 million was due to properties purchased
in 2000 and 1999 and $32.8 million was due to the properties obtained in the
acquisition of CMET. These increases were partially offset by a decrease of
$3.8 million due to properties sold in 2000 and 1999.

   Interest and other income increased to $2.4 million in 2000 from $453,000 in
1999. The increase in interest income was due to the funding of notes
receivable in 2000. See NOTE 4. "NOTES AND INTEREST RECEIVABLE."

   Interest expense increased to $48.1 million in 2000 from $27.7 million in
1999. Of this increase, $4.5 million was due to properties purchased in 2000
and 1999, $17.5 million was due to the properties obtained in the acquisition
of CMET and $843,000 was due to property financings and refinancings during
2000 and 1999. These increases were partially offset by a decrease of $3.3
million due to properties sold and mortgages paid off in 2000 and 1999.

   Depreciation expense increased to $19.7 million in 2000 from $11.7 million
in 1999. Of the increase, $1.6 million was due to properties purchased in 2000
and 1999, $7.4 million was due to properties obtained in the acquisition of
CMET and the remainder from property additions and tenant improvements. These
increases were partially offset by a decrease of $1.7 million due to properties
sold in 2000 and 1999.

   Advisory and net income fees increased to $7.7 million in 2000 from $5.7
million in 1999. The increase was due to an increase in the advisory fee from
an increase in gross assets, the basis for the fee. The increase in gross
assets was due in part to the assets obtained in the acquisition of CMET. Net
income fees of $2.4 million in 2000 approximated $2.5 million in 1999. See NOTE
13. "ADVISORY AGREEMENT."

   General and administrative expenses increased to $8.5 million in 2000 from
$3.3 million in 1999. The increase was primarily due to legal fees incurred on
litigation related matters, taxes and an increase in advisor cost
reimbursements.

   Equity losses from investees were $556,000 in 2000 compared to income of
$102,000 in 1999. The decrease was primarily due to increased operating
expenses of IORI, an equity investee. See NOTE 7. "INVESTMENT IN EQUITY METHOD
REAL ESTATE ENTITIES."

   In 2000, gains on sale of real estate totaling $50.6 million were realized;
$572,000 on the sale of Hunters Bend Apartments, a $4.8 million previously
deferred gain on the sale of McKinney land, TCI's share of gains recognized by
an equity affiliate of $4.6 million, $3.6 million on the sale of Westgate of
Laurel Apartments, $3.2 million on the sale of Apple Creek Apartments, $1.2
million on the sale of Villas at Fair Park Apartments, $633,000 on the sale of
Chateau Charles Hotel, $1.5 million on the sale of Brookfield Warehouses, $1.5
million on the sale of Villas at Countryside Apartments, $706,000 on the sale
of Ashley Crest Apartments, $206,000 on the sale of Shady Trail Warehouse, $1.0
million on the sale of Eagle Rock Apartments, $184,000 on the sale of a portion
of the Allen land parcel, $3.8 million on the sale of Woodbridge Apartments,
$2.1 million on the sale of the McKinney land, $3.1 million on the sale of a
portion of the Watters Road/Highway 121 land parcel, $5.4 million on the sale
of Shadow Run Apartments, $3.0 million on the sale of Parkwood Knoll
Apartments, $2.6 million on the sale of Villa Piedra Apartments, $1.1 million
on the sale of Country Bend Apartments, $5.1 million on the sale of Fountain
Village Apartments, and $793,000 on the sale of Crescent Place Apartments. See
NOTE 3. "REAL ESTATE."

   In 1999, gains on sale of real estate totaling $40.5 million were realized;
$1.9 million on the sale of Mariner's Pointe Apartments, $8.3 million on the
sale of 74 New Montgomery Office Building, $675,000 on the sale of Republic
land, $5.2 million on the sale of Parke Long Industrial Warehouse, $153,000 on
the sale of a portion of the Moss Creek land parcel, $5.3 million on the sale
of Corporate Center Industrial Warehouse, $747,000 on the sale of Laws land,
$4.4 million on the sale of Sullyfield Industrial Warehouse, $5.6 million on

                                      25

<PAGE>

the sale of Spa Cove Apartments, $4.7 million on the sale of Woods Edge
Apartments and $3.6 million, TCI's share of the gains realized by three equity
investees on the sale of two shopping centers and two office buildings. See
NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT IN EQUITY METHOD REAL ESTATE
ENTITIES."

Environmental Matters

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

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

Inflation

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

Tax Matters

   For the year 1999, TCI elected and in the opinion of management, qualified
to be taxed as a REIT as defined under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. During the third quarter of 2000, due to a
concentration in ownership, TCI no longer met the requirements for tax
treatment as a REIT under the Code. Under the Code, TCI is prohibited from
re-qualifying for REIT tax status for at least five years.

                                      26

<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

   TCI's future operations, cash flow and fair values of financial instruments
are partially dependent upon the then existing market interest rates and market
equity prices. Market risk is the changes in the market rates and prices, and
the effect of the changes on future operations. Market risk is managed by
matching a property's anticipated net operating income to an appropriate
financing.

   The following table contains only those exposures that existed at December
31, 2001. Anticipation of exposures or risk on positions that could possibly
arise was not considered. TCI's ultimate interest rate risk and its effect on
operations will depend on future capital market exposures, which cannot be
anticipated with a probable assurance level. Dollars in thousands.

<TABLE>
<S>                             <C>      <C>      <C>      <C>      <C>      <C>        <C>
Assets
Notes receivable
   Variable interest rate-fair
     value.....................                                                         $  2,932

                                 2002     2003     2004     2005     2006    Thereafter  Total
                                -------  -------  -------  -------  -------  ---------- --------
   Instrument's maturities..... $    --  $ 1,738  $ 1,369  $    --  $    --   $    --   $  3,107
   Instrument's amortization...      --       --       --       --       --        --         --
     Interest..................     213       90       39       --       --        --        342
     Average rate..............     7.0%     6.0%     5.8%      --       --        --

Fixed interest rate-fair value.                                                         $ 20,378

                                 2002     2003     2004     2005     2006    Thereafter  Total
                                -------  -------  -------  -------  -------  ---------- --------
   Instrument's maturities..... $12,206  $ 5,047  $ 1,970  $    --  $    --   $    --   $ 19,223
   Instrument's amortization...      48       45       49       56       62        99        359
     Interest..................   1,493      684      262       20       14         8      2,481
     Average rate..............    13.9%    13.2%    11.8%    10.4%    10.4%     10.4%

Liabilities
Non-trading Instruments-Equity
  Price Risk
Notes payable
   Variable interest rate-fair
     value.....................                                                         $142,097

                                 2002     2003     2004     2005     2006    Thereafter  Total
                                -------  -------  -------  -------  -------  ---------- --------
   Instrument's maturities..... $71,956  $18,739  $24,194  $ 9,510  $ 1,636   $ 9,877   $135,912
   Instrument's amortization...   1,453    1,014      905      680      409     6,081     10,542
     Interest..................   6,168    3,487    2,650    1,541    1,032     9,159     24,037
     Average rate..............     6.3%     6.2%     5.6%     5.9%     6.3%      6.3%

Fixed interest rate-fair value.                                                         $319,778

                                 2002     2003     2004     2005     2006    Thereafter  Total
                                -------  -------  -------  -------  -------  ---------- --------
   Instrument's maturities..... $75,187  $17,818  $48,826  $15,864  $14,530   $97,937   $270,162
   Instrument's amortization...   4,159    3,526    3,565    3,130    3,106    23,930     41,416
     Interest..................  23,125   18,651   17,296   13,733   12,445    55,671    140,921
     Average rate..............     8.5%     8.3%     8.0%     7.8%     7.8%      7.8%
</TABLE>

                                      27

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>                                                                                           <C>
Report of Independent Certified Public Accountants...........................................  29
Consolidated Balance Sheets--December 31, 2001 and 2000......................................  30
Consolidated Statements of Operations--Years Ended December 31, 2001, 2000 and 1999..........  31
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2001, 2000 and 1999  32
Consolidated Statements of Cash Flows--Years Ended December 31, 2001, 2000 and 1999..........  33
Notes to Consolidated Financial Statements...................................................  36
Schedule III--Real Estate and Accumulated Depreciation.......................................  59
Schedule IV--Mortgage Loans on Real Estate...................................................  66
</TABLE>

   All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Consolidated
Financial Statements or the notes thereto.

                                      28

<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
Transcontinental Realty Investors, Inc.

   We have audited the accompanying consolidated balance sheets of
Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31,
2001 and 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. We have also audited the schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedules. We believe our audits
provide a reasonable basis for our opinion.

   As described in Note 20, Transcontinental Realty Investors, Inc.'s
management has indicated its intent to both sell income producing properties
and refinance or extend debt secured by real estate, to meet its liquidity
needs.

   As discussed in Note 1, TCI adopted the provisions of SFAS. 144, Accounting
for Impairment of Long Lived Assets, in 2001.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America.

   Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.

                                          BDO SEIDMAN, LLP

Dallas, Texas
March 11, 2002

                                      29

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                         ---------------------
                                                                                            2001        2000
                                                                                         ----------   --------
                                                                                         (dollars in thousands,
                                                                                           except per share)
<S>                                                                                      <C>          <C>
                                         Assets
Real estate held for investment......................................................... $  712,832   $727,227
Less--accumulated depreciation..........................................................    (90,661)   (88,187)
                                                                                         ----------   --------
                                                                                            622,171    639,040
Foreclosed real estate held for sale....................................................        516      1,824
Notes and interest receivable
 Performing (including $1,970 from related parties in 2001).............................     17,620      8,709
 Nonperforming, nonaccruing.............................................................      5,247         --
                                                                                         ----------   --------
                                                                                             22,867      8,709
Less--allowance for estimated losses....................................................       (818)      (537)
                                                                                         ----------   --------
                                                                                             22,049      8,172
Investment in real estate entities......................................................     14,230      5,287
Investment in marketable equity securities of affiliate, at market......................         --     10,177
Cash and cash equivalents...............................................................     10,346     22,323
Other assets (including $14,170 in 2001 and $14,058 in 2000 from affiliates
  and related parties)..................................................................     39,840     45,062
                                                                                         ----------   --------
                                                                                         $  709,152   $731,885
                                                                                         ==========   ========
                          Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable.............................................................. $  461,037   $501,734
Other liabilities (including $1,068 in 2001 and $1,580 in 2000 to affiliates and
  related parties)......................................................................     25,966     23,722
                                                                                         ----------   --------
                                                                                            487,003    525,456
Commitments and contingencies

Minority interest.......................................................................      5,381      4,369
 Series B; $.01 par value; authorized, 300,000 shares; issued and outstanding
   300,000 shares (liquidation preference $1,500).......................................         --      1,500
Stockholders' equity
Preferred Stock
 Series A; $.01 par value; authorized, 6,000 shares; issued and outstanding 5,829 shares
   (liquidation preference $583)........................................................         --         --
 Series C; $.01 par value; authorized, issued and outstanding 30,000 shares;
   (liquidation preference $3,000)......................................................         --         --
Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding
  8,042,594 shares in 2001 and 8,636,354 shares in 2000.................................         80         86
Paid-in capital.........................................................................    271,761    278,245
Accumulated distributions in excess of accumulated earnings.............................    (55,073)   (74,712)
Unrealized (loss) gain on marketable equity securities of affiliate.....................         --     (3,059)
                                                                                         ----------   --------
                                                                                            216,768    200,560
                                                                                         ----------   --------
                                                                                         $  709,152   $731,885
                                                                                         ==========   ========
</TABLE>

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

                                      30

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      For the Years Ended December 31,
                                                                  ---------------------------------------
                                                                      2001           2000          1999
                                                                  ------------    ----------    ----------
                                                                  (dollars in thousands, except per share)
<S>                                                               <C>             <C>           <C>
Property revenue
 Rents (including $120 in 2001, $2,263 in 2000 and $1,653 in 1999
   from affiliates and related parties).......................... $    134,911    $  139,662    $   82,101

Property expense
 Property operations (including $2,599 in 2001, $4,321 in 2000,
   and $2,864 in 1999 to affiliates and related parties).........       80,562        78,170        44,514
                                                                  ------------    ----------    ----------
 Operating income................................................       54,349        61,492        37,587

Other income
 Interest and other income.......................................        2,948         2,370           453
 Income (loss) from equity investees.............................       (5,950)         (556)          102
 Gain on sale of real estate.....................................       54,270        50,550        40,517
                                                                  ------------    ----------    ----------
                                                                        51,268        52,364        41,072
Other expense
 Interest........................................................       41,058        48,114        27,720
 Depreciation....................................................       19,705        19,749        11,702
 Provision for loss..............................................          281            --            --
 Advisory fee to affiliate.......................................        5,346         5,258         3,219
 Net income fee to affiliate.....................................        1,850         2,415         2,450
 Incentive fee to affiliate......................................        3,167            --            --
 General and administrative (including $2,582 in 2001, $2,146
   in 2000 and $1,367 in 1999 to affiliates).....................       11,412         8,506         3,335
 Realized loss on investments....................................        3,059            --            --
 Minority interest...............................................          (72)           32            14
                                                                  ------------    ----------    ----------
                                                                        85,806        84,074        48,440
                                                                  ------------    ----------    ----------
Net income.......................................................       19,811        29,782        30,219

Preferred dividend requirement...................................         (172)          (22)          (30)
                                                                  ------------    ----------    ----------
Net income applicable to Common shares........................... $     19,639    $   29,760    $   30,189
                                                                  ============    ==========    ==========
Basic and diluted earnings per share
Net income applicable to Common shares...........................
 Basic........................................................... $       2.32    $     3.45    $     7.05
 Diluted......................................................... $       2.28    $     3.45    $     7.05

Weighted average Common shares used in computing earnings
  per share
 Basic...........................................................    8,478,377     8,631,621     4,283,574
 Diluted.........................................................    8,615,465     8,637,290     4,283,574
</TABLE>


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

                                      31

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                               Accumulated
                                                              Distributions  Accumulated
                                    Common Stock              in Excess of      Other
                                  ----------------  Paid-in    Accumulated  Comprehensive Stockholders'
                                   Shares    Amount Capital     Earnings       Income        Equity
                                  ---------  ------ --------  ------------- ------------- -------------
                                                  (dollars in thousands, except shares)
<S>                               <C>        <C>    <C>       <C>           <C>           <C>
Balance, January 1, 1999......... 3,878,463   $39   $218,087    $(126,994)     $    --      $ 91,132
Comprehensive income
Unrealized gain on marketable
  equity securities of affiliate.        --    --         --           --          718           718
Net income.......................        --    --         --       30,219           --        30,219
                                                                                            --------
                                                                                              30,937
Sale of Common Stock under
  dividend reinvestment plan.....     4,578    --         53           --           --            53
Shares issued in conjunction with
  acquisition of Continental
  Mortgage and Equity Trust...... 4,743,570    47     59,979           --           --        60,026
Common dividends ($.60 per
  share).........................        --    --         --       (3,006)          --        (3,006)
Preferred dividends ($5.00 per
  share).........................        --    --         --          (30)          --           (30)
                                  ---------   ---   --------    ---------      -------      --------
Balance, December 31, 1999....... 8,626,611    86    278,119      (99,811)         718       179,112

Comprehensive income
Unrealized (loss) on marketable
  equity securities of affiliate.        --    --         --           --       (3,777)       (3,777)
Net income.......................        --    --         --       29,782           --        29,782
                                                                                            --------
                                                                                              26,005
Sale of Common Stock under
  dividend reinvestment plan.....     9,743    --        126           --           --           126
Common dividends ($.54 per
  share).........................        --    --         --       (4,661)          --        (4,661)
Preferred dividends ($3.77 per
  share).........................        --    --         --          (22)          --           (22)
                                  ---------   ---   --------    ---------      -------      --------
Balance, December 31, 2000....... 8,636,354    86    278,245      (74,712)      (3,059)      200,560

Issuance of Series C Preferred
  Stock, 30,000 shares                   --    --      3,000           --           --         3,000
Comprehensive income
 Realized (loss) on marketable
   equity securities of affiliate        --    --         --           --        3,059         3,059
Net income.......................        --    --         --       19,811           --        19,811
                                                                                            --------
                                                                                              22,870

Fractional shares................      (560)
Repurchase of Common Stock.......  (593,200)   (6)    (9,484)          --           --        (9,490)
Series A Preferred Stock cash
  dividend ($5.00 per share).....        --    --         --          (29)          --           (29)
Series B Preferred Stock cash
  dividend ($.38 per share)......        --    --         --         (115)          --          (115)
Series C Preferred Stock cash
  dividends ($.95 per share).....        --    --         --          (28)          --           (28)
                                  ---------   ---   --------    ---------      -------      --------
Balance, December 31, 2001....... 8,042,594   $80   $271,761    $ (55,073)     $    --      $216,768
                                  =========   ===   ========    =========      =======      ========
</TABLE>

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

                                      32

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       For the Years Ended December 31,
                                                                       -------------------------------
                                                                         2001         2000      1999
                                                                       --------     --------  --------
                                                                            (dollars in thousands)
<S>                                                                    <C>          <C>       <C>
Cash Flows from Operating Activities
 Rents collected (including $359 in 2001 and $1,040 in 1999
   from affiliates)................................................... $136,076     $136,767  $ 81,244
 Interest collected (including $411 in 2000 from affiliates)..........    1,645        1,008       449
 Interest paid........................................................  (39,452)     (45,142)  (25,543)
 Payments for property operations (including $2,599 in 2001, $4,321
   in 2000 and $2,864 in 1999 to affiliates and related parties)......  (80,113)     (80,148)  (44,039)
 Advisory and net income fee paid to affiliate........................   (7,881)     (10,486)   (3,958)
 Incentive fee paid to affiliate......................................   (2,903)          --        --
 General and administrative expenses paid (including $2,582 in 2001,
   $2,146 in 2000 and $1,367 in 1999 to affiliates)...................  (10,877)      (7,936)   (3,488)
 Distributions from operating cash flow of equity investees...........      646          172       331
 Other................................................................    1,964        4,676      (905)
                                                                       --------     --------  --------
   Net cash (used in) provided by operating activities................     (895)      (1,089)    4,091

Cash Flows from Investing Activities
 Collections on notes receivable (including $12,000 in 2000
   from affiliates)...................................................    6,042       20,532        37
 Funding of notes receivable (including $1,970 in 2001 and $12,000
   in 2000 to affiliates).............................................  (19,455)     (17,500)       --
 Real estate improvements and construction............................  (33,617)     (14,664)  (21,826)
 Proceeds from sale of real estate....................................  100,818       79,869   104,210
 Refunds/(deposits) on pending purchase...............................     (724)       1,887    (2,912)
 Acquisitions of real estate (including $1,998 in 2001, $2,741 in 2000
   and $1,815 in 1999 to affiliates and related parties)..............  (19,669)     (32,450)  (45,510)
 Distributions from investing cash flow of equity investees...........       --        1,296     4,709
 Contributions to equity investees....................................     (151)      (3,974)     (111)
                                                                       --------     --------  --------
   Net cash provided by investing activities..........................   33,244       34,996    38,597
</TABLE>



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

                                      33

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued

<TABLE>
<CAPTION>
                                                                         For the Years Ended December 31,
                                                                         -------------------------------
                                                                           2001         2000      1998
                                                                         --------    ---------  --------
                                                                              (dollars in thousands)
<S>                                                                      <C>         <C>        <C>
Cash Flows from Financing Activities
 Payments on notes payable.............................................. $(66,063)   $(107,547) $(99,163)
 Proceeds from notes payable............................................   29,094       63,009    91,959
 Reimbursements from/to advisor.........................................    3,368       (2,634)       --
 Advance to affiliate...................................................     (553)          --        --
 Dividends paid.........................................................     (172)      (4,683)   (3,036)
 Shares of Common Stock repurchased.....................................   (9,490)          --        --
 Deferred financing costs (including ($45 in 2001, $464 in
   2000 and $422 in 1999 to affiliates).................................     (510)      (1,121)   (1,740)
 Sale of Common Stock under dividend reinvestment plan..................       --          126        53
                                                                         --------    ---------  --------
   Net cash used in financing activities................................  (44,326)     (52,850)  (11,927)
                                                                         --------    ---------  --------
Net increase (decrease) in cash and cash equivalents....................  (11,977)     (18,943)   30,761
Cash and cash equivalents, beginning of year............................   22,323       41,266    10,505
                                                                         --------    ---------  --------
Cash and cash equivalents, end of year.................................. $ 10,346    $  22,323  $ 41,266
                                                                         ========    =========  ========
Reconciliation of net income to net cash provided by (used in) operating
  activities
 Net income............................................................. $ 19,811    $  29,782  $ 30,219
 Adjustments to reconcile net income to net cash provided
   by (used in) operating activities....................................
 Depreciation and amortization..........................................   19,705       19,702    13,470
 Equity in (income) loss of equity investees............................    5,950          556      (102)
 Realized loss on investments...........................................    3,059           --        --
 Gain on sale of real estate............................................  (54,270)     (50,550)  (40,517)
 Distributions from operating cash flow of equity.......................      646          172       331
 Increase in interest receivable........................................     (137)         (28)       (1)
 (Increase) decrease in other assets....................................    2,283       (1,463)   (7,093)
 Increase (decrease) in interest payable................................     (185)         299       375
 Increase in other liabilities..........................................    2,243          441     7,409
                                                                         --------    ---------  --------
   Net cash (used in) provided by operating activities.................. $   (895)   $  (1,089) $  4,091
                                                                         ========    =========  ========
Schedule of noncash investing and financing activities
 Carrying value of real estate acquired through foreclosure in
   satisfaction of notes receivable..................................... $     --    $     318  $     --
 Notes payable from purchase of real estate.............................   37,776       58,949     6,848
 Series B Preferred Stock issued in conjunction with purchase
   of real estate.......................................................   (1,500)       1,500        --
 Series C Preferred Stock, issued in conjunction with purchase
   of real estate.......................................................    3,000           --        --
 Debt assumed from sales of real estate.................................   42,784       16,798     9,680
 Limited partnership interest received on sale of real estate...........    1,500           --        --
</TABLE>

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

                                      34

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued

<TABLE>
<CAPTION>
                                                                               For the Years
                                                                             Ended December 31,
                                                                           ---------------------
                                                                           2001  2000    1999
                                                                           ----  ----  ---------
                                                                           (dollars in thousands)
<S>                                                                        <C>   <C>   <C>
Acquisition of Continental Mortgage and Equity Trust
 Carrying value of notes and interest receivable.......................... $ --  $ --  $     390
 Carrying value of real estate............................................   --    --    258,787
 Carrying value of equity investees.......................................   --    --        267
 Carrying value of investment in marketable equity securities of affiliate   --    --     13,236
 Carrying value of other assets...........................................   --    --     20,640
 Carrying value of notes and interest payable.............................   --    --   (220,860)
 Carrying value of other liabilities......................................   --    --    (13,242)
</TABLE>






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

                                      35

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   The accompanying Consolidated Financial Statements of Transcontinental
Realty Investors, Inc. and consolidated entities have been prepared in
conformity with generally accepted accounting principles, the most significant
of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES."
These, along with the remainder of the Notes to Consolidated Financial
Statements, are an integral part of the Consolidated Financial Statements. The
data presented in the Notes to Consolidated Financial Statements are as of
December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables are in thousands, except per share amounts.

   Certain balances for 2000 and 1999 have been reclassified to conform to the
2001 presentation.

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Organization and company business.  Transcontinental Realty Investors, Inc.
("TCI"), a Nevada corporation, is successor to a California business trust
which was organized on September 6, 1983, and commenced operations on January
31, 1984. TCI invests in real estate through direct ownership, leases and
partnerships and it also invests in mortgage loans on real estate. In October
2001, TCI announced a preliminary agreement for the acquisition of TCI by
American Realty Investors, Inc. ("ARI"). See ITEM 1. "BUSINESS" and NOTE 20.
"COMMITMENTS AND CONTINGENCIES AND LIQUIDITY."

   Basis of consolidation.  The Consolidated Financial Statements include the
accounts of TCI and controlled subsidiaries and partnerships. All significant
intercompany transactions and balances have been eliminated.

   Accounting estimates.  In the preparation of Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
necessary for management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expense for the year then ended. Actual
results could differ from those estimates.

   Interest recognition on notes receivable.  It is TCI's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.

   Allowance for estimated losses.  Valuation allowances are provided for
estimated losses on notes receivable considered to be impaired. Impairment is
considered to exist when it is probable that all amounts due under the terms of
the note will not be collected. Valuation allowances are provided for estimated
losses on notes receivable to the extent that the Company's investment in the
note exceeds the estimated fair value of the collateral securing such note.

   Accounting pronouncements.  In June 2001, the Financial Accounting Standards
Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that TCI recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001. It also requires, upon adoption of SFAS 142, that TCI reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.

   SFAS 142 requires, among other things that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that TCI identify reporting units in order to
assess potential future impairment of goodwill, reassess the useful lives of
other existing recognized

                                      36

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

intangible assets, and cease amortization of intangible assets with an
indefinite useful life. SFAS 142 requires that an intangible asset with an
indefinite useful life be tested for impairment in accordance with specified
guidelines. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at
that date, regardless of when those assets were initially recognized. SFAS 142
requires TCI to complete a transitional goodwill impairment test six months
from the date of adoption. TCI is also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
142. Currently, TCI does not believe that the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.

   SFAS 143 requires that the fair value for an asset retirement obligation be
recognized in the period in which it is incurred, if a reasonable estimate of
fair value can be made, and that the carrying value of the asset, including
capitalized asset retirement costs, be tested for impairment. SFAS 143, is
effective for fiscal years beginning after June 15, 2002. Management does not
believe this statement will have a material effect on TCI's financial position
or results of operations.

   Real estate held for investment and depreciation.  Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
144 ("SFAS No. 144") requires that a property be considered impaired, if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the property. If impairment
exists, an impairment loss is recognized, by a charge against earnings, equal
to the amount by which the carrying amount of the property exceeds the fair
value less cost to sell of the property. If impairment of a property is
recognized, the carrying amount of the property is reduced by the amount of the
impairment, and a new cost for the property is established. Such new cost is
depreciated over the property's remaining useful life. Depreciation is provided
by the straight-line method over estimated useful lives, which range from five
to 40 years.

   Real estate held for sale.  Foreclosed real estate is initially recorded at
new cost, defined as the lower of original cost or fair value minus estimated
costs of sale. SFAS No. 144 also requires that properties held for sale be
reported at the lower of carrying amount or fair value less costs of sale. If a
reduction in a held for sale property's carrying amount to fair value less
costs of sale is required, a provision for loss is recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale property's estimated fair value less costs of sale is recorded as an
adjustment to the property's carrying amount, but not in excess of the
property's carrying amount when originally classified as held for sale. A
corresponding charge against or credit to earnings is recognized. Properties
held for sale are not depreciated.

   Revenue recognition on the sale of real estate.  Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment, the cost recovery or the financing method, whichever is
appropriate.

   Investment in noncontrolled equity investees.  The equity method is used to
account for investments in partnerships which TCI does not control and for its
investment in the shares of common stock of Income Opportunity Realty
Investors, Inc., ("IORI") and ARI. Under the equity method, an initial
investment, recorded at cost, is increased by a proportionate share of the
investee's operating income and any additional advances and decreased by a
proportionate share of the investee's operating losses and distributions
received.

   Operating segments.  Management has determined reportable operating segments
to be those that are used for internal reporting purposes, which disaggregates
operations by type of real estate.

   Fair value of financial instruments.  The following assumptions were used in
estimating the fair value of notes receivable and notes payable. For performing
notes receivable, the fair value was estimated by discounting

                                      37

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

future cash flows using current interest rates for similar loans. For
nonperforming notes receivable, the estimated fair value of TCI's interest in
the collateral property was used. For notes payable, the fair value was
estimated using current rates for mortgages with similar terms and maturities.

   Cash equivalents.  For purposes of the Consolidated Statements of Cash
Flows, all highly liquid debt instruments purchased with an original maturity
of three months or less were considered to be cash equivalents.

   Earnings per share.  Income per share is presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Income per share is computed based upon the weighted average number of shares
of Common Stock outstanding during each year. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the year. Dilutive common equivalent
shares consist of stock options and convertible preferred stock. The weighted
average common shares used to calculate diluted earnings per share for the
years ended December 31, 2001 and 2000 include 301,548 and 25,000 shares,
respectively, to reflect the dilutive effect of options and convertible
preferred stock to purchase shares of common stock.

   Employee stock option plans.  Employee stock options are presented in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees." Compensation cost is limited to the excess of the
quoted market price. No compensation cost is recorded if the quoted market
price is below the exercise price. See NOTE 11. "STOCK OPTIONS."

NOTE 2.  ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST

   On November 30, 1999, TCI acquired all of the outstanding shares of
beneficial interest of Continental Mortgage and Equity Trust ("CMET") in a tax
free exchange of shares. TCI issued 1.181 shares of its Common Stock for each
outstanding CMET share. The acquisition was accounted for as a purchase.

   The consolidation of TCI's accounts with those of CMET resulted in an
increase in TCI's net real estate of $258.8 million. This amount was allocated
to the individual real estate assets based on their relative individual fair
market values.

   Pro forma operating results for 1999, as if CMET had been acquired on
January 1, would have been:
<TABLE>
<CAPTION>
                                                       1999
                                                     --------
                 <S>                                 <C>
                 Revenues........................... $143,579
                 Property operating expenses........  (79,295)
                 Interest...........................  (47,273)
                 Depreciation.......................  (19,150)
                 Advisory fee.......................   (4,952)
                 Net income fee.....................   (3,083)
                 General and administrative expenses   (5,442)
                 Provision for losses...............       --
                                                     --------
                 (Loss) from operations.............  (15,616)
                 Equity in income of investees......      302
                 Gains on sale of real estate.......   47,117
                                                     --------
                 Net income......................... $ 31,803
                                                     ========
</TABLE>

                                      38

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 3.  REAL ESTATE

   In 2001, TCI purchased the following properties:

<TABLE>
<CAPTION>
                                              Units/    Purchase Net Cash   Debt   Interest Maturity
Property                      Location      Rooms/Acres  Price     Paid   Incurred   Rate     Date
--------                 ------------------ ----------- -------- -------- -------- -------- --------
<S>                      <C>                <C>         <C>      <C>      <C>      <C>      <C>
Apartments
Baywalk................. Galveston, TX       192 Units  $ 6,590   $  390  $ 5,856    7.45%   02/11
By the Sea.............. Corpus Christi, TX  153 Units    6,175      862    5,538    7.07    05/09
Courtyard............... Midland, TX         133 Units    1,425      425    1,051    9.25    04/06
Falcon Lakes(1)......... Arlington, TX       284 Units    1,435    1,437       --      --       --
Island Bay.............. Galveston, TX       458 Units   20,360    3,225   16,232    7.40    07/11
Limestone Ranch(1)...... Lewisville, TX      252 Units      505       --       --      --      -- (2)
Marina Landing.......... Galveston, TX       256 Units   12,050      518   10,912    5.30    01/02
River Oaks(1)........... Wiley, TX           180 Units      531      578       --      --       --
Sendero Ridge(1)........ San Antonio, TX     384 Units    1,850    2,635       --      --       --
Tivoli(1)............... Dallas, TX          190 Units    3,000    2,475    1,000   12.00    12/02
Verandas at City View(1) Fort Worth, TX      314 Units    2,544      276    2,197    4.75    03/02
Waters Edge IV(1)....... Gulfport, MS         80 Units      441      441       --      --       --

Hotel
Akademia(3)............. Wroclaw, Poland     165 Rooms    2,184    2,669       --      --       --

Land
Mira Lago............... Farmers Branch, TX 8.88 Acres      541       --       --      --      -- (2)
Pac Trust............... Farmers Branch, TX 7.11 Acres    1,175    1,231       --      --       --
Seminary West........... Fort Worth, TX     5.36 Acres      222      232       --      --       --
Solco-Valley Ranch...... Dallas, TX         6.07 Acres    1,454    1,525       --      --       --
</TABLE>
--------
(1) Land purchased for apartment construction.
(2) Land was received from ARI, a related party, in exchange for the Glenwood
    Apartments.
(3) Land purchased for hotel construction.

   In 2000, TCI purchased the following properties:

<TABLE>
<CAPTION>
                                                Units/     Purchase Net Cash   Debt   Interest  Maturity
Property                      Location       Sq.Ft./Acres   Price     Paid   Incurred   Rate      Date
--------                 ------------------ -------------- -------- -------- -------- --------  --------
<S>                      <C>                <C>            <C>      <C>      <C>      <C>       <C>
Apartments
Apple Lane..............       Lawrence, KS       75 Units $ 1,575   $  595  $ 1,005    8.63%    05/07
Autumn Chase............        Midland, TX       64 Units   1,338      458      936    9.45(1)  04/05
Paramount Terrace.......       Amarillo, TX      181 Units   3,250      561    2,865    9.38     09/01(2)
Primrose................    Bakersfield, CA      162 Units   4,100    1,189    3,000    9.25(1)  03/07
Quail Creek.............       Lawrence, KS       95 Units   3,250    1,088    2,254    7.44     07/03

Office Building
9033 Wilshire...........    Los Angeles, CA  44,253 Sq.Ft.   9,225    2,536    6,861    8.07     08/09
Bay Plaza II............          Tampa, FL  78,882 Sq.Ft.   4,825    4,786       --      --        --
Brandeis................          Omaha, NE 319,234 Sq.Ft.  14,000    4,052    8,750     9.5     11/03
Countryside Portfolio(3)       Sterling, VA 265,718 Sq.Ft.  44,940    4,825   36,297    7.75     12/02

Land
DF Fund.................  Collin County, TX     79.5 Acres   2,545    1,047    1,545   10.00     03/01(4)
Folsom..................         Dallas, TX    36.38 Acres   1,750    1,738       --      --        --
Lamar/Parmer............         Austin, TX    17.07 Acres   1,500      517    1,030   10.00     12/00(5)
Limestone Canyon II.....         Austin, TX     9.96 Acres     504      424       --      --        --
Manhattan............... Farmers Branch, TX    108.9 Acres  10,743    6,144    5,000   14.00     02/01(6)
Netzer..................  Collin County, TX       20 Acres     400      418       --      --        --
</TABLE>
--------

                                      39

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(1) Variable interest rate.
(2) The loan was extended to March 2002.
(3) The Countryside Portfolio consisted of four commercial buildings: the
    133,422 sq. ft. Countryside Retail Center, the 72,062 sq. ft. Harmon Office
    Building, the 35,127 sq. ft. Mimado Office Building and the 25,107 sq. ft.
    Ambulatory Surgical Center.
(4) The DF Fund land was sold in September 2000.
(5) The mortgage loan was paid off in March 2001.
(6) The mortgage loan was paid off in June 2000.

   In 2001, TCI sold the following properties:

<TABLE>
<CAPTION>
                                            Units/       Sales  Net Cash    Debt     Gain/(Loss)
Property                   Location      Sq.Ft./ Acres   Price  Received Discharged    on Sale
--------              ------------------ -------------- ------- -------- ----------  -----------
<S>                   <C>                <C>            <C>     <C>      <C>         <C>
Apartments
Bent Tree Gardens.... Addison, TX             204 Units $ 9,000  $2,669   $ 6,065(1)   $  601
Carseka.............. Los Angeles, CA          54 Units   4,000   2,138     1,466       1,352
Fontenelle Hills..... Bellevue, NE            338 Units  16,500   3,680    12,454(1)    4,565
Forest Ridge......... Denton, TX               56 Units   2,000     682     1,151       1,014
Glenwood............. Addison, TX             168 Units   3,659      --     2,537(1)      -- (2)
Heritage............. Tulsa, OK               136 Units   2,286     206     1,948       1,575
Madison at Bear Creek Houston, TX             180 Units   5,400     828     3,442(1)    1,162(4)
McCallum Glen........ Dallas, TX              275 Units   8,450   2,633     5,004(1)    1,375(3)
McCallum Crossing.... Dallas, TX              322 Units  11,500   1,841     8,101(1)    4,486
Oak Run.............. Pasadena, TX            160 Units   5,800   1,203     4,364       2,227
Park at Colonade..... San Antonio, TX         211 Units   5,800     927     4,066       1,592
Park Lane............ Dallas, TX               97 Units   2,750   1,526     1,103       1,827
South Cochran........ Los Angeles, CA          64 Units   4,650   1,897     1,873       1,660
Summerstone.......... Houston, TX             242 Units   7,225   1,780     5,180(1)    1,884
Sunset Lakes......... Waukegan, IL            414 Units  15,000   6,089     7,243       7,316

Office Buildings
Chesapeake Center.... San Diego, CA       57,493 Sq.Ft.   6,575   3,111     2,844         204
Daley................ San Diego, CA       64,425 Sq.Ft.   6,211   2,412     3,346         836
Valley Rim........... San Diego, CA       54,194 Sq.Ft.   5,500   1,367     3,516        (138)
Viewridge............ San Diego, CA       25,062 Sq.Ft.   2,010     701     1,272           4
Waterstreet.......... Boulder, CO        106,257 Sq.Ft.  22,250   7,126    12,949       9,154

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

Land
Eagle Crest.......... Farmers Branch, TX     4.41 Acres     300     291        --        (215)
McKinney 36.......... McKinney, TX          1.822 Acres     476     476        --         355
Moss Creek........... Greensboro, NC         4.79 Acres      15      13        --         (71)
Round Mountain....... Austin, TX            110.0 Acres   2,560   2,455        --       1,047
</TABLE>
--------
(1) Debt assumed by purchaser.
(2) The Glenwood Apartments were exchanged with ARI, a related party, for two
    parcels of land; the 10.5 acre Limestone Ranch and the 8.88 acre Mira Lago.
(3) Excludes $1.5 million deferred gain from seller financing. See Note 4.
    "Notes and Interest Receivable.")
(4) Excludes a $608,000 deferred gain from seller financing. (See Note 4.
    "Notes and Interest Receivable.")

                                      40

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In 2000, TCI sold the following properties:

<TABLE>
<CAPTION>
                                              Units/Sq.Ft.   Sales  Net Cash    Debt     Gain on
Property                        Location      Rooms/Acres    Price  Received Discharged   Sale
--------                    ----------------- ------------- ------- -------- ----------  -------
<S>                         <C>               <C>           <C>     <C>      <C>         <C>
Apartments
Apple Creek................ Dallas, TX            216 Units $ 4,300  $2,155    $1,723    $3,240
Ashley Crest............... Houston, TX           168 Units   3,950   1,102     2,812(1)    706
Country Bend............... Fort Worth, TX        166 Units   4,700   1,894     2,445     1,097
Crescent Place............. Houston, TX           120 Units   3,485   1,034     2,151       793
Eagle Rock................. Los Angeles, CA        99 Units   5,600   1,967     3,246     1,021
Fountain Village........... Tucson, AZ            410 Units  11,700   3,088     7,569     5,086
Hunters Bend............... San Antonio, TX        96 Units   1,683     418     1,127(1)    572
Parkwood Knoll............. San Bernadino, CA     178 Units   9,100   3,007     5,491     2,967
Shadow Run................. Pinellas Park, FL     276 Units  12,350   2,521     8,653     5,367
Villa Piedra............... Los Angeles, CA       132 Units   7,400   2,348     4,686     2,588
Villas at Countryside...... Sterling, VA          102 Units   8,100   2,686     5,334(1)  1,520
Villas at Fairpark......... Los Angeles, CA        49 Units   3,435     792     2,386     1,188
Westgate of Laurel......... Laurel, MD            218 Units  11,290   2,599     7,525(1)  3,575
Woodbridge................. Denver, CO            194 Units   6,856   3,328     2,845     3,796

Office Building
Brookfield Corporate Center Chantilly, VA     63,504 Sq.Ft.   4,850   1,729     2,838     1,455

Industrial Warehouse
Shady Trail................ Dallas, TX        42,900 Sq.Ft.     900     340       521       206

Hotel
Chateau Charles............ Lake Charles, LA      245 Rooms   1,000     928        --       633

Land
Allen(2)................... Allen, TX            5.49 Acres     370      86       281       184
McKinney(3)................ McKinney, TX          255 Acres   8,783   5,035     4,423     2,091
Watters/Hwy. 121(4)........ McKinney, TX        24.06 Acres   3,620   3,620        --     3,089
</TABLE>
--------
(1) Debt assumed by purchaser.
(2) The Allen sale consisted of tracts of three land parcels: a 2.62 acre tract
    of the Stacy Road land parcel; a 2.23 acre tract of the Sandison land
    parcel; and a .64 acre tract of the Whisenant land parcel.
(3) The McKinney sale included three land parcels: the 20 acre Netzer land
    parcel; the 79.54 acre DF Fund land parcel; and the 156.19 acre OPUBCO land
    parcel.
(4) The Watters/Highway 121 sale consisted of a six acre tract of the Watters
    land parcel and an 18.061 acre tract of the State Highway 121 land parcel.

                                      41

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 4.  NOTES AND INTEREST RECEIVABLE

   Notes and interest receivable consisted of the following:

<TABLE>
<CAPTION>
                                            2001              2000
                                      ----------------- ----------------
                                      Estimated         Estimated
                                        Fair     Book     Fair    Book
                                        Value    Value    Value   Value
                                      --------- ------- --------- ------
       <S>                            <C>       <C>     <C>       <C>
       Notes receivable
          Performing.................  $17,680  $17,442  $8,664   $8,668
          Nonperforming, nonaccruing.    5,630    5,247      --       --
                                       -------  -------  ------   ------
                                       $23,310   22,689  $8,664    8,668
                                       =======           ======
       Interest receivable...........               178               41
                                                -------           ------
                                                $22,867           $8,709
                                                =======           ======
</TABLE>

   Interest income is not recognized on nonperforming notes receivable. For the
years 2001 and 1999, unrecognized interest income on nonperforming notes
totaled $192,500 and $26,000, respectively.

   Notes receivable at December 31, 2001, mature from 2002 through 2008 with
interest rates ranging from 5.8% to 16.0% per annum, with a weighted average
rate of 12.2%. Notes receivable are generally nonrecourse and are generally
collateralized by real estate. Scheduled principal maturities of $12.2 million
are due in 2002.

   In March 2001, TCI funded a $3.5 million mortgage loan secured by a second
lien on a retail center in Montgomery County, Texas. In June 2001, an
additional $1.5 million was funded. The note receivable bears interest at 16.0%
per annum, requires monthly interest only payments of $67,000 and matured in
September 2001. In October 2001, TCI extended the loan until February 2002,
receiving $100,000 as an extension fee. In December 2001, TCI received a $1.5
million principal payment. In February 2002, TCI sold a $2.0 million senior
participation interest in the loan to IORI, a related party. TCI and IORI will
receive 43% and 57%, respectively, of the remaining principal and interest
payments. Also in February 2002, TCI received $23,000 as an extension fee and
the loan was extended until April 2002.

   In June 2001, in conjunction with the sale of 275 unit McCallum Glen
Apartments in Dallas, Texas, TCI funded a $1.5 million mortgage loan secured by
a second lien on the apartments. The note receivable bears interest at 10% per
annum, requires monthly interest only payments and matures in June 2003.

   In July 2001, TCI agreed to fund a $4.4 million line of credit secured by
1,714.16 acres of unimproved land in Tarrant County, Texas. The note receivable
bears interest at 15% per annum, requires monthly interest only payments
beginning in September 2001 and matures in July 2003. As of March 2002, TCI has
funded $3.8 million of the line of credit, and received no interest payments.

   Also in July 2001, TCI funded a $1.7 million mortgage loan secured by a
second lien on 44.6 acres of unimproved land in Fort Worth, Texas. The note
receivable bears interest at 16.0% per annum, requires monthly payments of
accrued interest beginning September 2001 and each month thereafter and matures
January 2002. In January 2002, the note was extended until April 2002. As of
March 2002, TCI has received no interest payments.

   In August 2001, TCI agreed to fund up to $5.6 million secured by an office
building in Dallas, Texas. The note receivable bears interest at a variable
rate, currently 9.0% per annum, requires monthly interest only payments and
matures in January 2003. As of March 2002, TCI has funded a total of $2.3
million.

                                      42

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In October 2001, TCI funded a $4.0 million loan secured by a second lien on
a 375,752 sq. ft. office building in St. Louis, Missouri. The note receivable
bears interest at 9.0% per annum, requires monthly interest only payments of
$30,000 and matured in February 2002. In February 2002, TCI extended the loan
maturity to February 2003.

   In December 2001, TCI provided $608,000 of purchase money financing in
conjunction with the sale of the Madison at Bear Creek Apartments in Houston,
Texas. The note receivable bore interest at 7% per annum, required payment of
the entire outstanding principal and all accrued and unpaid interest in January
2002. The loan was secured by a second lien on the property. The note was paid
in full according to the terms in January 2002.

   In February 2000, a mortgage loan with a principal balance of $28,000 was
paid off, including accrued but unpaid interest.

   In December 2000, TCI funded a $2.5 million mortgage loan secured by a
second lien on unimproved land, 442 acres in Tarrant County, Texas, 1,130 acres
in Denton County, Texas, and 26 acres in Collin County, Texas. The note
receivable bore interest at 18.0% per annum, required monthly payments interest
only and matured in June 2001. In June 2001, the loan and all accrued but
unpaid interest was paid in full.

   Also in December 2000, TCI funded a $3.0 million mortgage loan secured by a
second lien on four office buildings in San Antonio, Texas. The note receivable
bore interest at 16.0% per annum, required monthly payments of interest only
and matured in June 2001. In June 2001, the note was extended until November
2001 with a $750,000 loan principal paydown. With the paydown, the note was
renegotiated to replace the existing collateral with new collateral consisting
of a 120,000 sq.ft. office building and industrial warehouse in Carrollton,
Texas. The renegotiated note originally was to mature in May 2002. In February
2002, the maturity date on the loan was extended to July 2002.

   At December 31, 1999, mortgage notes receivable with a combined principal
balance of $4.6 million and a carrying value of $356,000, secured by first and
second liens on a closed hotel in Lake Charles, Louisiana were in default.
Title to the collateral property was obtained in February 2000 through
foreclosure. No loss was incurred on foreclosure as the estimated fair value of
the property, less estimated costs of sale, exceeded the carrying value of the
mortgage notes receivable. In June 2000, the property was sold for an amount in
excess of its carrying value.

   In December 1999, TCI provided $1.2 million of purchase money financing in
conjunction with the sale of the Town and Country Office Building in Houston,
Texas. The note receivable bore interest at 8.5% per annum, requires monthly
payments of interest only, matured in December 2001 and was secured by a first
lien on the property sold. In December 2001, the note and all accrued but
unpaid interest was paid in full. In conjunction with the loan payoff, a
previously deferred gain of $819,000 on the sale of the property was recognized.

   Also in December 1999, TCI provided $8.5 million of purchase money financing
in conjunction with the sale of 253 acres of unimproved land in McKinney and
Collin County, Texas. The note receivable bore interest at 8.5% per annum,
required a $1.0 million principal paydown in February 2000, required payment of
all accrued interest in June 2000 and required payment of all principal and
accrued interest at maturity in September 2000. The loan was repaid in
accordance with its terms. The sale had originally been recorded under the cost
recovery method with the gain being deferred until the note receivable was
collected. In conjunction with the loan payoff, TCI recognized a previously
deferred gain on the sale of $4.8 million.

   Related Party.  In December 2001, TCI purchased 100% of the outstanding
common shares of National Melrose, Inc. ("NM"), a wholly-owned subsidiary of
ARI, a related party, for $2.0 million cash. NM owns the

                                      43

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

41,840 sq. ft. Executive Court Office Building in Memphis, Tennessee. ARI has
guaranteed that the asset will produce at least a 12% annual return of the
purchase price for a period of three years from the purchase date. If the asset
fails to produce the 12% annual return, ARI will pay TCI any shortfall. In
addition, if the asset fails to produce 12% return for a calendar year, TCI may
require ARI to repurchase the shares of NM for the purchase price. Management
has classified this related party transaction as a note receivable from ARI.

   In June 2000, TCI funded a $3.0 million loan to Basic Capital Management,
Inc. ("BCM"), TCI's advisor. The loan was secured by 108,802 shares of IORI
Common Stock. IORI is also advised by BCM. The loan bore interest at 15.0% per
annum and matured in October 2000. All principal and interest were due at
maturity. The loan and all accrued but unpaid interest was paid off in August
2000.

   Also in June 2000, TCI funded a $9.0 million loan to American Realty Trust,
Inc. ("ART"), an affiliate of BCM. The loan was secured by 409,934 shares of
IORI Common Stock. The loan bore interest at 15.0% per annum and matured in
October 2000. All principal and interest were due at maturity. The loan and all
accrued but unpaid interest was paid off in October 2000.

NOTE 5.  ALLOWANCE FOR ESTIMATED LOSSES

   Activity in the allowance for estimated losses was as follows:

<TABLE>
<CAPTION>
                                           2001 2000  1999
                                           ---- ----  -----
                   <S>                     <C>  <C>   <C>
                   Balance January 1,..... $537 $543  $ 886
                      Provision for loss..  281   --     --
                      Amounts charged off.   --   (6)  (593)
                      CMET allowance......   --   --    250
                                           ---- ----  -----
                   Balance December 31,... $818 $537  $ 543
                                           ==== ====  =====
</TABLE>

NOTE 6.  INVESTMENT IN MARKETABLE EQUITY SECURITIES

   Marketable equity securities consist of 746,972 shares of common stock of
ARI, approximately 6.5% of ARI's outstanding shares. ARI is a publicly held
real estate company.

<TABLE>
<CAPTION>
                                    2001  2000
                                    ---- -------
                                <S> <C>  <C>
                                ARI $ -- $10,177
                                    ==== =======
</TABLE>

   Prior to the first quarter of 2001, TCI accounted for its investment in ARI,
a related party, as an available for sale marketable security. In the first
quarter of 2001, TCI began accounting for its investment in ARI on the equity
method.


                                      44

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 7.  INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES

   Investment in equity method real estate entities consisted of the following:

<TABLE>
<CAPTION>
                                                          2001     2000
                                                         -------  ------
      <S>                                                <C>      <C>
      American Realty Investors, Inc. ("ARI")........... $10,182  $   --
      Income Opportunity Realty Investors, Inc. ("IORI")   3,501   4,326
      Tri-City Limited Partnership ("Tri-City").........     531     524
      Nakash Income Associates ("NIA")..................    (553)   (650)
      Sacramento Nine ("SAC 9").........................     539     490
      Other.............................................      30     597
                                                         -------  ------
                                                         $14,230  $5,287
                                                         =======  ======
</TABLE>

   TCI owns an approximate 6.5% interest in ARI, a publicly held real estate
company, having a market value of $112.3 million at December 31, 2001. At
December 31, 2001, ARI had total assets of $757.5 million and owned 52
apartments, 17 commercial properties, nine hotels and 54 parcels of unimproved
land. In 2001, ARI sold 17 apartments, one commercial property and 26 parcels
of unimproved land for a total of $187.3 million, receiving net cash of $52.4
million after paying off $110.2 million in mortgage debt and the payment of
various closing costs. ARI recognized gains of $83.4 million on the sales of
which TCI's equity share was $5.3 million.

   TCI owns an approximate 24.0% interest in IORI, a publicly held Real Estate
Investment Trust ("REIT"), having a market value of $25.9 million at December
31, 2001. At December 31, 2001, IORI had total assets of $91.8 million and
owned seven apartments in Texas, seven office buildings (four in California,
two in Texas and one in Virginia) and two parcels of unimproved land in Texas.
In 2000, IORI sold three apartments, two office buildings and two parcels of
unimproved land for a total of $66.0 million, receiving net cash of $30.4
million after paying off $33.6 million in mortgage debt and the payment of
various closing costs. IORI recognized gains of $19.6 million on the sales of
which TCI's equity share was $4.3 million. IORI also recognized a previously
deferred gain on a prior year's sale of $1.2 million of which TCI's equity
share was $225,000. In 1999, IORI sold a shopping center in Boca Raton,
Florida, for $3.2 million, receiving net cash of $1.5 million after paying off
$1.3 million in mortgage debt and the payment of various closing costs. IORI
recognized a gain of $490,000 on the sale of which TCI's equity share was
$111,000.

   TCI owns a 63.7% limited partner interest and IORI owns a 36.3% general
partner interest in Tri-City, which at December 31, 2001, owned a shopping
center in Houston, Texas. In February 2000, the Chelsea Square Shopping Center
was financed in the amount of $2.1 million. Tri-City received net cash of $2.0
million after the payment of various closing costs. The mortgage bore interest
at a fixed rate of 10.24% per annum until February 2001, and a variable rate
thereafter, currently 9.44% per annum, requires monthly payments of principal
and interest of $20,601 and matures in February 2005. TCI received a
distribution of $1.3 million of the net financing proceeds. In 1999, Tri-City
sold a shopping center in Ft. Worth, Texas, and an office building in
Carrollton, Texas, for a total of $7.2 million, receiving net cash of $5.4
million after paying off $1.3 million in mortgage debt and the payment of
various closing costs. TCI received a distribution of $3.5 million of the net
cash. Tri-City recognized gains of $2.9 million on the sales of which TCI's
equity share was $1.8 million.

   TCI owns a non-controlling 60% general partner interest and IORI owns a 40%
general partner interest in NIA, which owns a wraparound mortgage note
receivable. The NIA partnership agreement requires the consent of both partners
for any material changes in the operations of NIA.

   TCI is a non-controlling 30% general partner in SAC 9, which at December 31,
2001, owned an office building in Rancho Cordova, California. In 1999, SAC 9
sold an office building in Rancho Cordova, California,

                                      45

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

for $7.4 million, receiving net cash of $4.0 million after paying off $3.2
million in mortgage debt and the payment of various closing costs. TCI received
a distribution of $1.2 million of the net cash. SAC 9 recognized a gain of $4.7
million on the sale of which TCI's equity share was $1.4 million.

   In March 2001, in conjunction with the sale of the 211 unit Park at Colonade
Apartments in San Antonio, Texas, TCI received a 23% limited partner interest
in the acquiring partnership. TCI is to receive payments of $5,000 monthly from
the partnership, a $50,000 distribution in June 2001 which was received and its
remaining investment in March 2002. In July 2001, TCI assigned its limited
partnership interest to the general partner, receiving a discounted payoff of
$490,000. In conjunction with this assignment, TCI recognized a previously
deferred gain on the sale of the apartments of $540,000.

   Set forth below are summarized financial data for the entities accounted for
using the equity method:

<TABLE>
<CAPTION>
                                                                 2001       2000
                                                               ---------  --------
<S>                                                            <C>        <C>
Real estate, net of accumulated depreciation ($137,407 in 2001
  and $9,540 in 2000)......................................... $ 692,747  $ 93,170
Notes receivable..............................................    31,892     2,402
Other assets..................................................   132,665     8,973
Notes payable.................................................  (651,328)  (59,485)
Other liabilities.............................................   (85,858)   (1,815)
                                                               ---------  --------
Shareholders/partners' capital................................ $ 120,118  $ 43,245
                                                               =========  ========
</TABLE>

   TCI's share of the above equity investee capital accounts was $15.0 million
in 2001 and $10.3 million in 2000.

<TABLE>
<CAPTION>
                                                    2001       2000     1999
                                                  ---------  --------  -------
 <S>                                              <C>        <C>       <C>
 Rents and interest income....................... $ 181,570  $ 16,245  $20,675
 Depreciation....................................   (19,930)   (2,917)  (3,152)
 Operating expenses..............................  (153,557)  (10,835)  (8,123)
 Interest expense................................   (83,154)   (5,559)  (7,609)
                                                  ---------  --------  -------
 Income (loss) before gain on sale of real estate   (75,071)   (3,066)   1,791
 Gain on sale of real estate.....................    83,414    20,878    8,020
                                                  ---------  --------  -------
 Net income...................................... $   8,343  $ 17,812  $ 9,811
                                                  =========  ========  =======
</TABLE>

   TCI's equity share of:

<TABLE>
<CAPTION>
                                                     2001      2000     1999
                                                   --------  --------  -------
  <S>                                              <C>       <C>       <C>
  Income (loss) before gain on sale of real estate $ (5,950) $   (556) $   102
  Gain on sale of real estate.....................    5,310     4,572    3,569
                                                   --------  --------  -------
  Net income (loss)............................... $   (640) $  4,016  $ 3,671
                                                   ========  ========  =======
</TABLE>

NOTE 8.  NOTES AND INTEREST PAYABLE

   Notes and interest payable consisted of the following:

<TABLE>
<CAPTION>
                                    2001                2000
                             ------------------- -------------------
                             Estimated   Book    Estimated   Book
                             Fair Value  Value   Fair Value  Value
                             ---------- -------- ---------- --------
            <S>              <C>        <C>      <C>        <C>
            Notes payable...  $461,875  $458,032  $484,445  $498,914
                              ========            ========
            Interest payable               3,005               2,820
                                        --------            --------
                                        $461,037            $501,734
                                        ========            ========
</TABLE>

                                      46

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Scheduled principal payments are due as follows:

<TABLE>
                              <S>        <C>
                              2002...... $152,755
                              2003......   41,097
                              2004......   77,490
                              2005......   29,184
                              2006......   19,681
                              Thereafter  137,825
                                         --------
                                         $458,032
                                         ========
</TABLE>

   Notes payable at December 31, 2001, bore interest at rates ranging from 3.9%
to 12.5% per annum, and mature between 2002 and 2043. The mortgages were
collateralized by deeds of trust on real estate having a net carrying value of
$632.8 million.

   In 2001, TCI financed the following property:

<TABLE>
<CAPTION>
                                  Debt      Debt    Net Cash Interest   Maturity
Property   Location    Acres    Incurred Discharged Received   Rate       Date
--------  ---------- ---------- -------- ---------- -------- --------   --------
<S>       <C>        <C>        <C>      <C>        <C>      <C>        <C>
Land.....
Red Cross Dallas, TX 2.89 Acres  $4,500     $ --     $4,328    12.5%(1)  10/02
</TABLE>
--------
(1) Variable rate.

   In 2000, TCI financed/refinanced the following properties:

<TABLE>
<CAPTION>
                                                       Debt        Debt    Net Cash Interest   Maturity
Property                 Location      Units/Sq.Ft.  Incurred   Discharged Received   Rate       Date
--------              --------------- -------------- --------   ---------- -------- --------   --------
<S>                   <C>             <C>            <C>        <C>        <C>      <C>        <C>
Apartments
Camelot.............. Largo, FL            120 Units  $3,800      $   --    $3,100    8.85%(1)  12/05
Country Crossing..... Tampa, FL            227 Units   3,825       2,645       985    9.65(1)   06/03
Crescent Place....... Houston, TX          120 Units   2,165       1,722       370    7.04(1)   03/30
Fontenelle Hills..... Bellevue, NE         338 Units   2,010(2)       --     1,967    8.51      06/10
Madison @ Bear Creek. Houston, TX          180 Units   3,500       2,625       730    7.04(1)   03/30

Office Buildings
Bay Plaza II......... Tampa, FL        78,882 Sq.Ft.   3,600          --     3,400    8.44(1)   01/06
Jefferson............ Washington, DC   71,876 Sq.Ft.   9,875       8,955       557    9.50      07/25
Technology Trading... Sterling, VA    197,659 Sq.Ft.   6,300       3,881     2,065    8.26(1)   05/05
Venture Center....... Atlanta, GA      38,772 Sq.Ft.   2,700       1,113     1,592    8.75      03/10
Westgrove Air Plaza.. Addison, TX      78,326 Sq.Ft.   2,087       1,180       742    9.02(1)   01/05

Industrial Warehouses
5360 Tulane.......... Atlanta, GA      67,850 Sq.Ft.     375         208       134    9.65(1)   04/03
Kelly................ Dallas, TX      330,406 Sq.Ft.   5,000       2,173     2,628    9.50(1)   10/03
Space Center......... San Antonio, TX 101,500 Sq.Ft.   1,125         691       402    9.65(1)   04/03
</TABLE>
--------
(1) Variable interest rate.
(2) Second lien on property.

NOTE 9.  PREFERRED STOCK

   TCI's Series A Cumulative Convertible Preferred Stock consists of a maximum
of 6,000 shares with a par value of $.01 per share and a liquidation preference
of $100.00 per share. Dividends are payable at the rate of $5.00 per year or
$1.25 per quarter to stockholders of record on the 15th day of each March,
June, September and

                                      47

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December when and as declared by the Board of Directors. The Series A Preferred
Stock may be converted after November 1, 2003, into Common Stock at the daily
average closing price of the Common Stock for the prior five trading days. At
December 31, 2001 and 2000, 5,829 shares of Series A Preferred Stock were
issued and outstanding.

   TCI's Series B Cumulative Convertible Preferred Stock consisted of a maximum
300,000 shares with a par value of $.01 per share and a liquidation preference
of $5.00 per share. Dividends were payable at the rate of $.38 per share
annually or $.095 per quarter to stockholders of record on the tenth day of
each March, June, September and December when and as declared by the Board of
Directors. After October 25, 2001, the Series B Preferred Stock could be
converted into Common Stock at the daily average closing price of the Common
Stock for the prior five trading days or redeemed for cash at the option of the
holder. At December 31, 2000, 300,000 shares of Series B Preferred Stock were
issued and outstanding. In November 2001, the holder redeemed its shares. TCI
paid $1.6 million in cash of which $115,000 was accrued dividends.

   In conjunction with the purchase of the Baywalk, Island Bay and Marina
Landing Apartments, TCI issued 30,000 shares of Series C Preferred Stock. TCI's
Series C Cumulative Convertible Preferred Stock consists of a maximum of 30,000
shares with a liquidation preference of $100.00 per share. Dividends are
payable at the annual rate of $5.00 per share or $1.25 per quarter through
September 2002, then $6.00 per share annually or $1.50 per quarter through
September 2003, then $7.00 per share annually or $1.75 per quarter thereafter.
After September 30, 2006, the Series C Preferred Stock may be converted into
Common Stock at 90% of the daily average closing price of the Common Stock for
the prior five trading days. The Series C Preferred Stock is redeemable for
cash at any time at the option of TCI. At December 31, 2001, 30,000 shares of
Series C Preferred Stock were issued and outstanding.

NOTE 10.  DIVIDENDS

   TCI paid dividends on its Common Stock of $4.7 million ($.54 per share) in
2000 and $3.0 million ($.60 per share) in 1999.

   TCI reported to the Internal Revenue Service that 100% of the dividends paid
in 2000 represented ordinary income and that 100% of the dividends paid in 1999
represented capital gains.

   In December 2000, the Board of Directors determined not to pay a fourth
quarter dividend to holders of TCI's Common Stock. The non-payment decision was
based on the Board determining that TCI needed to retain cash for acquisitions
that were anticipated in 2001 and 2002.

NOTE 11.  STOCK OPTIONS

   In October 2000, TCI's stockholders approved the 2000 Stock Option Plan
("2000 Plan"). The 2000 Plan is administered by the Stock Option Committee,
which currently consists of two Independent Directors of TCI. The exercise
price per share of an option will not be less than 100% of the fair market
value per share on the date of grant thereof. As of December 31, 2001, TCI had
300,000 shares of Common Stock reserved for issuance under the 2000 Plan. No
options have been granted under the 2000 Plan.

   In October 2000, TCI's stockholders approved the Director's Stock Option
Plan (the "Director's Plan") which provides for options to purchase up to
140,000 shares of TCI's Common Stock. Options granted pursuant to the
Director's Plan are immediately exercisable and expire on the earlier of the
first anniversary of the date on which a Director ceases to be a Director or 10
years from the date of grant. Each Independent Director was

                                      48

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

granted an option to purchase 5,000 Common shares at an exercise price of
$14.875 per share on October 10, 2000, the date stockholders approved the plan.
On January 1, 2001, each Independent Director was granted an option to purchase
5,000 Common shares at an exercise price of $8.875 per Common share. Each
Independent Director will be awarded an option to purchase an additional 5,000
shares on January 1 of each year.

<TABLE>
<CAPTION>
                                          2001               2000
                                   ------------------ ------------------
                                    Number   Exercise  Number   Exercise
                                   of Shares  Price   of Shares  Price
                                   --------- -------- --------- --------
       <S>                         <C>       <C>      <C>       <C>
       Outstanding at January 1,..  25,000   $14.875       --   $    --
       Granted....................  25,000     8.875   25,000    14.875
       Canceled...................      --        --       --        --
                                    ------             ------
       Outstanding at December 31,  50,000             25,000   $14.875
                                    ======             ======
</TABLE>

   At December 31, 2001, 50,000 options were exercisable at an average exercise
price of $11.875 per Common share.

   TCI applies Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its option
plans. All share options issued by TCI have exercise prices equal to the market
price of the shares at the dates of grant. Accordingly, no compensation cost
has been recognized for its option plans. Had compensation cost for TCI's
option plans been determined based on the fair value at the grant dates
consistent with the method of Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation," TCI's net income (loss) and net
income (loss) per share would have been the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                        2001             2000
                                                  ---------------- ----------------
                                                     As      Pro      As      Pro
                                                  Reported  forma  Reported  forma
                                                  -------- ------- -------- -------
<S>                                               <C>      <C>     <C>      <C>
Net income applicable to Common shares........... $19,811  $19,217 $29,760  $29,537
Net income applicable to Common shares, per share    2.28     2.23    3.45     3.42
</TABLE>

   The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                              2001   2000
                                              -----  -----
                    <S>                       <C>    <C>
                    Dividend yield...........    --   6.08%
                    Expected volatility...... 65.00% 65.00%
                    Risk-free interest rate..  1.25%  5.75%
                    Expected lives (in years)     9      9
                    Forfeitures.............. 10.00% 10.00%
</TABLE>

   The weighted average fair value per share of options granted in 2001 and
2000 was $7.60 and $8.93, respectively.

                                      49

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 12.  RENTS UNDER OPERATING LEASES

   Operations include the leasing of commercial properties (office buildings,
industrial warehouses and shopping centers). The leases thereon expire at
various dates through 2020. The following is a schedule of minimum future rents
on non-cancelable operating leases at December 31, 2001:

<TABLE>
                              <S>        <C>
                              2002...... $ 45,856
                              2003......   36,380
                              2004......   27,551
                              2005......   19,499
                              2006......   10,726
                              Thereafter   18,365
                                         --------
                                         $158,377
                                         ========
</TABLE>

NOTE 13.  ADVISORY AGREEMENT

   Basic Capital Management, Inc. ("BCM"), an affiliate, has served as TCI's
advisor since March 28, 1989. BCM is a company owned by a trust for the benefit
of the children of Gene E. Phillips. Mr. Phillips serves as a representative of
his children's trust which owns BCM and, in such capacity, has substantial
contact with the management of BCM and input with respect to its performance of
advisory services to TCI.

   Under the Advisory Agreement, BCM is required to annually formulate and
submit for Board approval a budget and business plan containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales and
purchases, lending, foreclosure and borrowing activity and other investments.
BCM is required to report quarterly to the Board on TCI's performance against
the business plan. In addition, all transactions require prior Board approval
unless they are explicitly provided for in the approved business plan or are
made pursuant to authority expressly delegated to BCM by the Board.

   The Advisory Agreement also requires prior Board approval for the retention
of all consultants and third party professionals, other than legal counsel. The
Advisory Agreement provides that BCM shall be deemed to be in a fiduciary
relationship to the stockholders and contains a broad standard governing BCM's
liability for losses incurred by TCI.

   The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations and to receive an advisory fee comprised of a gross asset fee of
..0625% per month (.75% per annum) of the average of the gross asset value
(total assets less allowance for amortization, depreciation or depletion and
valuation reserves) and an annual net income fee equal to 7.5% of net income.

   The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is to receive an acquisition commission
for supervising the purchase or long-term lease of real estate. BCM or an
affiliate of BCM is to receive a mortgage or loan acquisition fee with respect
to the purchase of any existing mortgage loan. BCM or an affiliate of BCM is
also to receive a mortgage brokerage and equity refinancing fee for obtaining
loans to or refinancing of TCI's properties. In addition, BCM receives
reimbursement of certain expenses incurred by it in the performance of advisory
services for TCI.

   The Advisory Agreement requires BCM or any affiliate of BCM to pay to TCI
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by TCI.

                                      50

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Under the Advisory Agreement, all or a portion of the annual advisory fee
must be refunded if the Operating Expenses of TCI (as defined in the Advisory
Agreement) exceed certain limits specified in the Advisory Agreement. BCM was
not required to refund any of its 1999, 2000 or 2001 advisory fee.

   Additionally, if management were to request that BCM render services other
than those required by the Advisory Agreement, BCM or an affiliate of BCM would
be separately compensated for such additional services on terms to be agreed
upon from time to time. As discussed in NOTE 14. "PROPERTY MANAGEMENT," Triad
Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property
management services and as discussed in NOTE 15. "REAL ESTATE BROKERAGE," Regis
Realty, Inc. ("Regis"), a related party, provides, on a non-exclusive basis,
brokerage services.

NOTE 14.  PROPERTY MANAGEMENT

   Triad provides property management services for a fee of 5% or less of the
monthly gross rents collected on residential properties and 3% or less of the
monthly gross rents collected on commercial properties under its management.
Triad subcontracts with other entities for property-level management services
at various rates. The general partner of Triad is BCM. The limited partner of
Triad is GS Realty Services, Inc. ("GS Realty"), a related party. Triad
subcontracts to Regis, a related party, which is a company owned by GS Realty,
the property-level management and leasing of 51 of TCI's commercial properties,
its five hotels and the commercial property owned by Tri-City. Regis is
entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Triad.

NOTE 15.  REAL ESTATE BROKERAGE

   Regis also provides brokerage services on a non-exclusive basis. Regis is
entitled to receive a commission for property purchases and sales, in
accordance with a sliding scale of total brokerage fees to be paid by TCI.

NOTE 16.  ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

   Revenue, fees and cost reimbursements to BCM and its affiliates:

<TABLE>
<CAPTION>
                                                        2001    2000   1999
                                                       ------- ------ -------
  <S>                                                  <C>     <C>    <C>
  Fees
     Advisory......................................... $ 5,346 $5,258 $ 3,219
     Net income.......................................   1,850  2,415   2,450
     Incentive fees...................................   3,167     --      --
     Property acquisition.............................     774  1,024   1,815
     Real estate brokerage............................      --    331   2,727
     Mortgage brokerage and equity refinancing........      45    464     422
     Property and construction management and leasing
       commissions*...................................      --     --   3,608
                                                       ------- ------ -------
                                                       $11,182 $9,492 $14,241
                                                       ======= ====== =======
  Cost reimbursements................................. $ 2,582 $2,146 $ 1,367
                                                       ======= ====== =======
  Hotel lease revenue................................. $    -- $2,237 $ 1,653
                                                       ======= ====== =======
</TABLE>

                                      51

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Fees paid to GS Realty, a related party:

<TABLE>
<CAPTION>
                                                           2001    2000
                                                          ------- ------
     <S>                                                  <C>     <C>
     Fees
        Property acquisition............................. $ 1,668 $2,326
        Real estate brokerage............................   3,760  3,250
        Property and construction management and leasing
          commissions....................................   2,599  4,321
                                                          ------- ------
                                                          $ 8,027 $9,897
                                                          ======= ======
</TABLE>
--------
*  Net of property management fees paid to subcontractors, other than Regis and
   affiliates of BCM.

NOTE 17.  INCOME TAXES

   For the year 1999, TCI had elected and qualified to be treated as a Real
Estate Investment Trust ("REIT"), as defined in Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"), and as such, it was not
taxed for federal income tax purposes on that portion of its taxable income
which was distributed to stockholders. During the third quarter of 2000, due to
a concentration of ownership, TCI no longer met the requirements for tax
treatment as a REIT under the Code, and is prohibited for re-qualifying for
REIT tax status for at least five years.

   TCI had a loss for federal income tax purposes (after utilization of
operating loss carryforwards) in 2001, 2000 and 1999; therefore, it recorded no
provision for income taxes. TCI's tax basis in its net assets differs from the
amount at which its net assets are reported for financial statement purposes,
principally due to the accounting for gains and losses on property sales, the
difference in the allowance for estimated losses, depreciation on owned
properties and investments in equity method real estate entities. At December
31, 2001, TCI's tax basis in its net assets exceeded their basis for financial
statement purposes by $50.1 million. As a result, aggregate future income for
income tax purposes will be less than such amount for financial statement
purposes. Additionally, at December 31, 2001, TCI had tax net operating loss
carryforwards of approximately $47.2 million expiring through the year 2018.
The use of such loss carryforwards are subject to certain limitations under the
Internal Revenue Code.

   At December 31, 2001, TCI had a net deferred tax asset of $33.1 million due
to tax deductions available to it in future years. However, as management
cannot determine that it is more likely than not that TCI will realize the
benefit of the deferred tax asset a 100% valuation allowance has been
established.

NOTE 18.  OPERATING SEGMENTS

   Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of general and administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow. Items
of income that are not reflected in the segments are interest, equity in
partnerships, and gains on sale of real estate totaling $3.1 million,
$11.2 million and $555,000 for 2001, 2000 and 1999, respectively. Expenses that
are not reflected in the segments are general and administrative expenses,
minority interest, non-segment interest expense, advisory, incentive sales and
net income fees totaling $25.0 million, $16.2 million and $9.0 million for
2001, 2000 and 1999, respectively. Excluded from operating segment assets are
assets of $86.5 million at December 31, 2001, and $91.0 million at December 31,
2000, which are not identifiable with an operating segment. There are no
intersegment revenues and expenses. See "NOTE 3. "REAL ESTATE" and NOTE 4.
"NOTES AND INTEREST RECEIVABLE."

                                      52

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Presented below is the operating income of each operating segment and each
segments' assets for the years 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                      Commercial
                              Land    Properties Apartments Hotels    Total
                             -------  ---------- ---------- ------- ---------
<S>                          <C>      <C>        <C>        <C>     <C>
2001
Rents....................... $   633   $ 68,676   $ 58,991  $ 6,611 $ 134,911
Property operating expenses.   1,756     38,266     35,947    4,593    80,562
                             -------   --------   --------  ------- ---------
Segment operating income.... $(1,123)  $ 30,410   $ 23,044  $ 2,018 $  54,349
                             =======   ========   ========  ======= =========
Depreciation................ $    --   $ 12,753   $  5,817  $ 1,135 $  19,705
Interest....................   1,845     21,996     15,887    1,330    41,058
Real estate improvements and
  construction..............   1,424      7,365     14,973    9,855    33,617
Asset.......................  62,209    304,657    224,986   30,835   622,687

Property Sales
Sales price................. $ 3,351   $ 54,083   $104,020          $ 161,454
Cost of sales...............  (2,235)   (39,693)   (71,384)          (113,312)
                             -------   --------   --------          ---------
Gain on sale................ $ 1,116   $ 14,390   $ 32,636          $  48,142(1)
                             =======   ========   ========          =========
</TABLE>
--------
(1) Excludes a previously deferred gain on the sale of Town & Country Shopping
    Center of $819,000 as well as TCI's shares of gains recognized by ARI, an
    equity affiliate, of $5.3 million.

<TABLE>
<CAPTION>
                                     Commercial
                             Land    Properties Apartments Hotels    Total
                            -------  ---------- ---------- -------  --------
<S>                         <C>      <C>        <C>        <C>      <C>
2000
Rents...................... $   723   $ 61,496   $ 74,700  $ 2,743  $139,662
Property operating expenses   1,097     31,962     44,898      213    78,170
                            -------   --------   --------  -------  --------
Segment operating income... $  (374)  $ 29,534   $ 29,802  $ 2,530  $ 61,492
                            =======   ========   ========  =======  ========
Depreciation............... $    --   $ 11,358   $  7,395  $   996  $ 19,749
Interest...................   3,342     21,907     21,284    1,581    48,114
Real estate improvements...     117     11,700      1,302    1,545    14,664
Asset......................  59,281    344,657    216,995   19,931   640,864

Property Sales
Sales price................ $12,775   $  5,750   $ 93,949  $ 1,000  $113,474
Cost of sales..............  (7,411)    (4,089)   (60,433)    (367)  (72,300)
                            -------   --------   --------  -------  --------
Gain on sale............... $ 5,364   $  1,661   $ 33,516  $   633  $ 41,174(1)
                            =======   ========   ========  =======  ========
</TABLE>
--------
(1) Excludes a previously deferred gain of $4.8 million on the sale of land as
    well as TCI's share of gains recognized by IORI, an equity affiliate, of
    $4.6 million.

                                      53

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                       Commercial
                             Land      Properties   Apartments Hotels   Total
                            -------    ----------   ---------- ------- --------
<S>                         <C>        <C>          <C>        <C>     <C>
1999
Rents...................... $   855     $ 33,971     $ 42,162  $ 5,113 $ 82,101
Property operating expenses     917       14,600       26,374    2,623   44,514
                            -------     --------     --------  ------- --------
Operating income (loss).... $   (62)    $ 19,371     $ 15,788  $ 2,490 $ 37,587
                            =======     ========     ========  ======= ========
Depreciation............... $    --     $  6,094     $  4,872  $   736 $ 11,702
Interest...................   1,891       11,355       13,032    1,442   27,720
Real estate improvements...      52        6,303        1,758    2,243   10,356
Construction expenditures..      --           --       11,470       --   11,470
Assets.....................  48,253      272,648      261,252   19,383  601,536

Property Sales
Sales price................ $14,544     $ 64,305     $ 37,910          $116,759
Cost of sales..............   8,179       40,251       25,773            74,203
                            -------     --------     --------          --------
Gains on sales............. $ 6,365(1)  $ 24,054(1)  $ 12,137          $ 42,556
                            =======     ========     ========          ========
</TABLE>
--------
(1) Includes deferred gains from a land sale and from a commercial property
    sale accounted for using the cost recovery method. See NOTE 3. "REAL
    ESTATE."

NOTE 19.  QUARTERLY RESULTS OF OPERATIONS

   The following is a tabulation of TCI's quarterly results of operations for
the years 2001 and 2000 (unaudited):

<TABLE>
<CAPTION>
                                                    Three Months Ended
                                       --------------------------------------------
                                       March 31, June 30, September 30, December 31,
                                       --------- -------- ------------- ------------
<S>                                    <C>       <C>      <C>           <C>
2001
Rents.................................  $34,968  $36,074     $32,423      $31,446
Property expense......................   20,247   20,194      19,643       20,478
                                        -------  -------     -------      -------
   Operating income...................   14,721   15,880      12,780       10,968
Interest income.......................      613      645       1,017          673
Income (loss) in equity partnerships..   (1,367)    (999)     (2,164)      (1,420)
Gain on sale of real estate...........    6,484   22,265      18,780        6,741
                                        -------  -------     -------      -------
                                          5,730   21,911      17,633        5,994
Other expense.........................   20,135   23,460      19,297       22,914
                                        -------  -------     -------      -------
Net income (loss).....................      316   14,331      11,116       (5,952)
Preferred dividend requirement........       (7)      (8)         (7)        (150)
                                        -------  -------     -------      -------
Net income applicable to Common shares  $   309  $14,323     $11,109      $(6,102)
                                        =======  =======     =======      =======

Basic and Diluted Earnings Per Share
Net income applicable to Common shares  $   .04  $  1.65     $  1.28      $  (.74)
                                        =======  =======     =======      =======
</TABLE>

   In the first quarter of 2001, gains on sale of real estate totaling $6.5
million were recognized on the sale of Heritage Apartments, Forest Ridge
Apartments, Park at Colonade Apartments, the Zodiac Warehouse, a portion of the
McKinney 36 land parcel, a portion of the Round Mountain land parcel, and TCI's
share of gains

                                      54

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

recognized by ARI, an equity investee. In the second quarter of 2001, gains on
sale of real estate totaling $22.3 million were recognized on the sale of
Glenwood Apartments, Fontenelle Hills Apartments, Bent Tree Gardens Apartments,
McCallum Glen Apartments, Moss Creek lots land parcel, Waterstreet Office
Building, Technology Trading Center, Daley Office Building, and TCI's share of
gains recognized by ARI. In the third quarter of 2001, gains on sale of real
estate totaling $18.8 million were recognized on the sale of Park Lane
Apartments, McCallum Crossing Apartments, Carseka Apartments, Sunset Lakes
Apartments, Oak Run Apartments, a portion of the Eagle Crest land parcel,
Chesapeake Office Building, and TCI's share of gains recognized by ARI. In the
fourth quarter of 2001, gains on sale of real estate totaling $6.7 million were
recognized on the sale of South Cochran Apartments, Madison at Bear Creek
Apartments, Summerstone Apartments, Valley Rim Office Building, a previously
deferred gain on the sale of Town and Country Shopping Center, and TCI's share
of gains recognized by ARI. See NOTE 3. "REAL ESTATE" and NOTE 7. "INVESTMENT
IN EQUITY METHOD REAL ESTATE ENTITIES."

<TABLE>
<CAPTION>
                                                    Three Months Ended
                                       --------------------------------------------
                                       March 31, June 30, September 30, December 31,
                                       --------- -------- ------------- ------------
<S>                                    <C>       <C>      <C>           <C>
2000
Rents.................................  $34,086  $34,605     $35,164      $35,807
Property expense......................   18,419   18,345      19,896       21,510
                                        -------  -------     -------      -------
   Operating income...................   15,667   16,260      15,268       14,297
Interest income.......................      404      588         936          442
Income (loss) in equity partnerships..        7     (299)       (185)         (79)
Gain on sale of real estate...........    8,951    8,856      11,755       20,988
                                        -------  -------     -------      -------
                                          9,362    9,145      12,506       21,351
Other expense.........................   20,673   19,630      20,883       22,888
                                        -------  -------     -------      -------
Net income (loss).....................    4,356    5,775       6,891       12,760
Preferred dividend requirement........       (7)      (7)         (8)          --
                                        -------  -------     -------      -------
Net income applicable to Common shares  $ 4,349  $ 5,768     $ 6,883      $12,760
                                        =======  =======     =======      =======

Basic and Diluted Earnings Per Share
Net income applicable to Common shares  $   .50  $   .67     $   .80      $  1.48
                                        =======  =======     =======      =======
</TABLE>

   In the first quarter of 2000, gains on sale of real estate totaling $9.0
million were recognized on the sale of Hunters Bend Apartments, Westgate of
Laurel Apartments and a previous deferred gain on the sale of McKinney land. In
the second quarter of 2000, gains on sale of real estate totaling $8.9 million
were recognized on the sale of Apple Creek Apartments, Villas at Fairpark
Apartments, Chateau Charles Hotel, and TCI's share of gain recognized by IORI,
an equity investee. In the third quarter of 2000, gains on sale of real estate
totaling $11.8 million were recognized on the sale of Brookfield Corporate
Center, Ashley Crest Apartments, a portion of the Allen land, Eagle Rock
Apartments, Shady Trail Warehouse, McKinney land, Woodbridge Apartments and
Villas at Countryside Apartments. In the fourth quarter of 2000, gains on sale
of real estate totaling $21.0 million were recognized on the sale of Shadow Run
Apartments, a portion of the Watters Road/Highway 121 land, Parkwood Knoll
Apartments, Villa Piedra Apartments, Country Bend Apartments, Fountain Village
Apartments and Crescent Place Apartments. See NOTE 3. "REAL ESTATE" and NOTE 7.
"INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES."

NOTE 20.  COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

   Olive Litigation.  In February 1990, TCI, together with CMET, IORI and
National Income Realty Trust, three real estate entities with, at the time, the
same officers, directors or trustees and advisor as TCI, entered into

                                      55

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

a settlement (the "Settlement") of a class and derivative action entitled Olive
et al. v. National Income Realty Trust et al., relating to the operation and
management of each of the entities. On April 23, 1990, the Court granted final
approval of the terms of the Settlement. The Settlement was modified in 1994
(the "Modification").

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

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

   In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this provision
of the Olive Amendment. In January 2000, the Board engaged another
management/compensation consultant to perform the required evaluation again.
This evaluation was completed in April 2000 and was provided to plaintiffs'
counsel. The Board believes that any alleged breach of the Olive Amendment has
been fully remedied by the Board's engagement of the second consultant.
Although several status conferences have been held on this matter, there has
been no Court order resolving whether there was any breach of the Olive
Amendment.

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

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

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

                                      56

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Other Litigation.  TCI is also involved in various other lawsuits arising in
the ordinary course of business. Management is of the opinion that the outcome
of these lawsuits will have no material impact on TCI's financial condition,
results of operations or liquidity.

NOTE 21.  SUBSEQUENT EVENTS

   In the first quarter of 2002, TCI purchased the following properties:

<TABLE>
<CAPTION>
                                                  Purchase Net Cash   Debt   Interest Maturity
Property                Location    Units/ Acres   Price     Paid   Incurred   Rate     Date
--------             -------------- ------------- -------- -------- -------- -------- --------
<S>                  <C>            <C>           <C>      <C>      <C>      <C>      <C>
Apartments
Blue Lakes Villas(1) Waxahachie, TX     186 Units  $1,012   $1,048   $   --     -- %      --
Echo Valley(1)...... Dallas, TX         216 Units     787      788       --      --       --

Shopping Center
Oak Tree Village(2). Lubbock, TX    45,623 Sq.Ft.   1,734   $  186    1,430    8.48%   11/07

Land
Lakeshore Villas(2). Humble, TX       16.89 Acres     941      294       --      --       --
Rasor(2)............ Plano, TX        24.50 Acres   2,306      120       --      --       --
</TABLE>
--------
(1) Land purchased for apartment construction.
(2) Property exchanged with ARI, a related party, for the Plaza at Bachman
    Retail Center.

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

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

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

Shopping Center
Plaza at Bachman(2). Dallas, TX       80,278 Sq.Ft.  4,707      --        --         --
</TABLE>
--------
(1) Excludes a $920,000 deferred gain from seller financing.
(2) Property was exchanged with ARI, a related party, for two parcels of land;
    the Rasor land parcel and Lakeshore Villas land parcel and the Oak Tree
    Village Shopping Center.

   In the first quarter of 2002, TCI refinanced the following property:

<TABLE>
<CAPTION>
                                                 Debt      Debt    Net Cash Interest   Maturity
Property              Location      Sq.Ft.     Incurred Discharged Received   Rate       Date
--------             ----------- ------------- -------- ---------- -------- --------   --------
<S>                  <C>         <C>           <C>      <C>        <C>      <C>        <C>
Industrial Warehouse
Addison Hanger(1)... Addison, TX 23,650 Sq.Ft.  $2,687    $1,580     $942     6.75%(2)  02/07
</TABLE>
--------
(1) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger
    II in Addison, Texas.
(2) Variable interest rate.

                                      57

<PAGE>

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   In February 2002, TCI sold a $2.0 million senior participation interest in a
$3.5 million loan to IORI, a related party. See ITEM 2. "MORTGAGE LOANS."

                                      58

<PAGE>

                                                                   SCHEDULE III

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 2001

<TABLE>
<CAPTION>

                                                                             Cost Capitalized
                                                                               Subsequent to          Gross Amounts of Which
                                                        Initial Cost            Acquisition           Carried at End of Year
                                                     ------------------- -------------------       -----------------------------
                                                             Building &                                    Building &
Property/Location                       Encumbrances  Land  Improvements Improvements Other         Land  Improvements Total (1)
-----------------                       ------------ ------ ------------ ------------ ------       ------ ------------ ---------
                                                                                                 (dollars in thousands)
Held for Investment:
<S>                                     <C>          <C>    <C>          <C>          <C>          <C>    <C>          <C>
Apartments
4242 Cedar Springs, Dallas, TX.........   $ 1,302    $  372   $ 1,117      $    51    $ (200)/(2)/ $  372   $   968     $ 1,340
4400, Midland, TX......................     1,069       349     1,396           --        --          349     1,396       1,745
Apple Lane, Lawrence, KS...............       953       168     1,510           --        --          168     1,510       1,678
Arbor Point, Odessa, TX................     1,552       321     1,285          526        --          321     1,811       2,132
Ashton Way, Midland, TX................     1,069       384     1,536           52        --          384     1,588       1,972
Autumn Chase, Midland, TX..............       907       141     1,265           --        --          141     1,265       1,406
Baywalk, Galveston, TX.................     5,460       679     6,106           --        --          679     6,106       6,785
By the Sea, Corpus Christi, TX.........     5,519       644     5,797           --        --          644     5,797       6,441
Camelot, Largo, FL.....................     3,747     1,230     2,870          235      (281)/(2)/  1,230     2,825       4,055
Cliffs of Eldorado, McKinney, TX.......    10,500     2,647    10,589           --        --        2,647    10,589      13,236
Country Crossings, Tampa, FL...........     3,758       772     2,444          196      (358)/(2)/    772     2,282       3,054
Courtyard, Midland, TX.................     1,040       151     1,359           --        --          151     1,359       1,510
Coventry, Midland, TX..................     1,228       236       369          184        --          236       553         789
El Chapparal, San Antonio, TX..........     4,203       279     2,821          574      (330)/(2)/    279     3,065       3,344
Fairway View Estates, El Paso, TX......     3,453       548     4,935          260        --          548     5,195       5,744
Fairways, Longview, TX.................     1,908       657     1,532          119      (266)/(2)/    657     1,385       2,042
Falcon Lakes, Arlington, TX............        --     1,437        --          239                  1,437       239       1,676
Fountain Lake, Texas City, TX..........     2,470       861     2,585           19      (254)/(2)/    861     2,350       3,211
Fountains of Waterford, Midland, TX....       436       311     1,243        1,538        --          311     2,781       3,092
Gladstell Forest, Conroe, TX...........     2,402       504     2,015          190        --          504     2,205       2,709
Grove Park, Plano, TX..................     4,554       942     3,767           54      (447)/(2)/    942     3,374       4,316
Harper's Ferry, Lafayette, LA..........     1,751       349     1,398          223        --          349     1,621       1,970
Heritage on the River, Jacksonville, FL     7,675     2,070     6,211          330      (719)/(2)/  2,070     5,822       7,892
Hunters Glen, Midland, TX..............     1,895       519     2,075          321        --          519     2,396       2,915
In the Pines, Gainesville, FL..........     5,514     1,288     5,154          496      (573)/(2)/  1,288     5,077       6,365
Island Bay, Galveston, TX..............    15,334     2,095    18,852           --        --        2,095    18,852      20,947
Limestone Canyon, Austin, TX...........    12,911     1,998        --       12,247     1,895/(4)/   1,998    13,365      16,140
Limestone Ranch, Lewisville, TX........     6,604     1,620        --        6,605        --        1,620     6,605       8,225
Marina Landing, Galveston, TX..........    12,137     1,246    11,161           --        --        1,240    11,161      12,401
Mountain Plaza, El Paso, TX............     4,204       837     3,347          139        --          837     3,486       4,323
</TABLE>
<TABLE>
<CAPTION>
                                                                             Life on
                                                                              Which
                                                                           Depreciation
                                                                            In Latest
                                                                           Statement of
                                        Accumulated    Date of      Date   Operation is
Property/Location                       Depreciation Construction Acquired   Computed
-----------------                       ------------ ------------ -------- ------------

Held for Investment:
<S>                                     <C>          <C>          <C>      <C>
Apartments
4242 Cedar Springs, Dallas, TX.........    $  297        1984      06/92    5-40 years
4400, Midland, TX......................       128        1981      04/98      40 years
Apple Lane, Lawrence, KS...............        76        1989      01/00      40 years
Arbor Point, Odessa, TX................       651        1975      08/96    5-40 years
Ashton Way, Midland, TX................       173        1978      04/98    5-40 years
Autumn Chase, Midland, TX..............        56        1985      04/00      40 years
Baywalk, Galveston, TX.................        51        1979      09/01      40 years
By the Sea, Corpus Christi, TX.........        48        1973      08/01      40 years
Camelot, Largo, FL.....................       740        1975      08/93    5-40 years
Cliffs of Eldorado, McKinney, TX.......       861        1997      10/98      40 years
Country Crossings, Tampa, FL...........       686        1973      04/93    5-40 years
Courtyard, Midland, TX.................        23        1976      05/01      40 years
Coventry, Midland, TX..................       220        1977      08/96    5-40 years
El Chapparal, San Antonio, TX..........     1,524        1963      01/88    5-40 years
Fairway View Estates, El Paso, TX......       458        1977      03/99      40 years
Fairways, Longview, TX.................       432        1980      03/93    5-40 years
Falcon Lakes, Arlington, TX............        --        2001      10/01      40 years
Fountain Lake, Texas City, TX..........       506        1975      12/94    5-40 years
Fountains of Waterford, Midland, TX....     1,001        1977      05/98    5-40 years
Gladstell Forest, Conroe, TX...........       474        1985      06/95    5-40 years
Grove Park, Plano, TX..................       532        1979      06/96    5-40 years
Harper's Ferry, Lafayette, LA..........       520        1972      02/92    5-40 years
Heritage on the River, Jacksonville, FL     1,174        1973      12/95    5-40 years
Hunters Glen, Midland, TX..............       413        1982      01/98    5-40 years
In the Pines, Gainesville, FL..........     1,345        1972      12/94    5-40 years
Island Bay, Galveston, TX..............       157        1973      09/01      40 years
Limestone Canyon, Austin, TX...........       668        1997      07/98      40 years
Limestone Ranch, Lewisville, TX........        --        2001      05/01      40 years
Marina Landing, Galveston, TX..........        93        1985      09/01      40 years
Mountain Plaza, El Paso, TX............       422        1972      01/98    5-40 years
</TABLE>

                                      59

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)
                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 2001


<TABLE>
<CAPTION>

                                                                            Cost Capitalized
                                                                             Subsequent to           Gross Amounts of Which
                                                      Initial Cost            Acquisition            Carried at End of Year
                                                   ------------------- --------------------       -----------------------------
                                                           Building &                                     Building &
Property/Location                     Encumbrances  Land  Improvements Improvements  Other         Land  Improvements Total (1)
-----------------                     ------------ ------ ------------ ------------ -------       ------ ------------ ---------
                                                                                               (dollars in thousands)
<S>                                   <C>          <C>    <C>          <C>          <C>           <C>    <C>          <C>
Oak Park IV, Clute, TX...............    $   --    $  224   $   674      $    27    $   (95)/(2)/ $  224   $   606     $   830
Paramount Terrace, Amarillo, TX......     2,818       340     3,061           --         --          340     3,061       3,402
Plantation, Tulsa, OK................     1,966       344     3,096           --         --          344     3,096       3,440
Primrose, Bakersfield, CA............     2,934       428     3,852           --         --          428     3,852       4,280
Quail Creek, Lawrence, KS............     2,187       343     3,090           --         --          343     3,090       3,434
Quail Oaks, Balch Springs, TX........     1,198        90     2,160          152       (187)/(2)/     90     2,125       2,215
River Oaks, Wiley, TX................     1,188       590        --        1,455         --          590     1,455       2,045
Sandstone, Mesa, AZ..................     5,648     1,656     6,625           95         --        1,656     6,720       8,376
Sendero Ridge, San Antonio, TX.......     3,660     2,635        --        3,926         --        2,635     3,926       6,561
Somerset, Texas City, TX.............     3,000       936     2,811          158       (452)/(2)/    936     2,516       3,452
Southgate, Odessa, TX................     1,788       335     1,338          318         --          335     1,656       1,991
Southgreen, Bakersfield, CA..........     2,401       755     3,021           --         --          755     3,021       3,776
Stone Oak, San Antonio, TX...........     2,847       649     2,598          263       (409)/(2)/    649     2,452       3,101
Summerfield, Orlando, FL.............     4,540     1,175     4,698          136         --        1,175     4,834       6,009
Sunchase, Odessa, TX.................     1,822       742     2,967          458         --          742     3,425       4,167
Terrace Hills, El Paso, TX...........     6,228     1,286     5,145          167         --        1,286     5,312       6,598
Timbers, Tyler, TX...................     1,634       497     1,988           --         --          497     1,988       2,485
Tivoli, Dallas, TX...................     1,865     1,355        --        2,984         --        1,355     2,984       4,339
Trails at Windfern, Houston, TX......     3,695       870     3,479           63       (436)/(2)/    870     3,106       3,976
Treehouse, Irving, TX................     2,604       716     2,865          260         --          716     3,125       3,841
Verandas at City View, Fort Worth, TX     2,197     2,545        --           25         --        2,545        25       2,570
Waters Edge IV, Gulfport, MS.........        --       443        --        1,536         --          443     1,536       1,979
Westwood, Odessa, TX.................        --        85       341          108         --           85       449         534
Willow Creek, El Paso, TX............     1,983       608     1,832           76       (156)/(2)/    608     1,752       2,359
Will-O-Wick, Pensacola, FL...........     3,104       747     2,990          174       (281)/(2)/    747     2,883       1,499
Willow Wick, North Augusta, SC.......     1,696       324     1,305           39       (170)/(2)/    324     1,174       3,630
Woodview, Odessa, TX.................     2,079       716     2,864          102         --          716     2,966       3,682

Office Buildings
1010 Commons, New Orleans, LA........     8,344       143    15,011       17,551     (1,218)/(2)/  2,113    29,374      31,487
225 Baronne, New Orleans, LA.........     7,327     1,162    10,457        6,633     (1,293)/(2)/  1,162    15,797      16,959
</TABLE>
<TABLE>
<CAPTION>
                                                                           Life on
                                                                            Which
                                                                         Depreciation
                                                                          In Latest
                                                                         Statement of
                                      Accumulated    Date of      Date   Operation is
Property/Location                     Depreciation Construction Acquired   Computed
-----------------                     ------------ ------------ -------- ------------

<S>                                   <C>          <C>          <C>      <C>
Oak Park IV, Clute, TX...............    $  148        1981      06/94    5-40 years
Paramount Terrace, Amarillo, TX......       128        1983      05/00      40 years
Plantation, Tulsa, OK................       161        1968      12/99      40 years
Primrose, Bakersfield, CA............       169        1979      04/00      40 years
Quail Creek, Lawrence, KS............       168        1969      01/00      40 years
Quail Oaks, Balch Springs, TX........     1,007        1982      02/87    5-40 years
River Oaks, Wiley, TX................        --        2001      10/01      40 years
Sandstone, Mesa, AZ..................       770        1986      10/97    5-40 years
Sendero Ridge, San Antonio, TX.......        --        2001      11/01      40 years
Somerset, Texas City, TX.............       668        1985      12/93    5-40 years
Southgate, Odessa, TX................       468        1976      08/96    5-40 years
Southgreen, Bakersfield, CA..........       234        1985      12/98      40 years
Stone Oak, San Antonio, TX...........       965        1978      03/90    5-40 years
Summerfield, Orlando, FL.............       971        1971      11/94    5-40 years
Sunchase, Odessa, TX.................       646        1981      10/97    5-40 years
Terrace Hills, El Paso, TX...........       671        1985      03/97    5-40 years
Timbers, Tyler, TX...................       203        1973      12/97      40 years
Tivoli, Dallas, TX...................        --        2001      12/01      40 years
Trails at Windfern, Houston, TX......       428        1975      05/97    5-40 years
Treehouse, Irving, TX................       543        1974      05/97    5-40 years
Verandas at City View, Fort Worth, TX        --        2001      09/01      40 years
Waters Edge IV, Gulfport, MS.........        --        2001      11/01      40 years
Westwood, Odessa, TX.................       147        1977      08/96    5-40 years
Willow Creek, El Paso, TX............       388        1972      05/94    5-40 years
Will-O-Wick, Pensacola, FL...........       225        1974      05/95    5-40 years
Willow Wick, North Augusta, SC.......       618        1968      09/94    5-40 years
Woodview, Odessa, TX.................       322        1974      05/98    5-40 years

Office Buildings
1010 Commons, New Orleans, LA........     2,484        1971      03/98    5-40 years
225 Baronne, New Orleans, LA.........     2,451        1960      03/98    5-40 years
</TABLE>

                                      60

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)
                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 2001

<TABLE>
<CAPTION>



                                                           Initial Cost
                                                        -------------------
                                                                Building &
Property/Location                       Encumbrances     Land  Improvements
-----------------                       ------------    ------ ------------

<S>                                     <C>             <C>    <C>
4135 Beltline, Addison, TX.............   $ 3,100       $  476   $ 4,280
9033 Wilshire Blvd., Los Angeles, CA...     6,756          956     8,609
Ambulatory Surgery Center, Sterling, VA     6,682          908      8170
AMOCO, New Orleans, LA.................    14,852          895     3,582
Atrium, Palm Beach, FL.................     3,901        1,147     4,590
Bay Plaza, Tampa, FL...................     2,502          895     3,582
Bay Plaza II, Tampa, FL................     3,599          506     4,550
Bonita Plaza, Bonita, CA...............     4,929        1,168     4,670
Brandeis, Omaha, NE....................     8,750        1,451    13,061
Corporate Point, Chantilly, VA.........     3,799          830     3,321
Countryside Retail Center, Sterling, VA    21,307/(10)/  2,088    18,791
Durham Center, Durham, NC..............    14,246        4,233    16,932
Eton Square, Tulsa, OK.................    10,211        1,469    13,219
Forum, Richmond, VA....................     5,180        1,360     5,439
Harmon, Sterling, VA...................     8,013        1,054     9,487
Hartford, Dallas, TX...................        --          630     2,520
Institute Place Lofts, Chicago, IL.....     5,629          665     7,057
Jefferson, Washington, DC..............     9,731        2,774    11,096
Lexington Center, Colorado Springs, CO.     4,133        1,103     4,413
Mimado, Sterling, VA...................        --          582     5,236
NASA, Houston, TX......................        --          410     3,319
One Steeplechase, Sterling, VA.........     7,905        1,380     5,520
Parkway North, Dallas, TX..............     3,900        1,173     4,692
Plaza Towers, St. Petersburg, FL.......     7,033        1,760    12,617
Remington Tower, Tulsa, OK.............     3,480          480     4,351
Savings of America, Houston, TX........     1,200          338     1,353
Signature Athletic Club, Dallas, TX....     2,613        1,075     2,921
Venture Center, Atlanta, GA............     2,643          411     2,746
Westgrove Air Plaza, Addison, TX.......     3,948          501     2,004
Windsor Plaza, Windcrest, TX...........        --        1,429     4,441
</TABLE>
<TABLE>
<CAPTION>

                                             Cost Capitalized
                                              Subsequent to           Gross Amounts of Which
                                               Acquisition            Carried at End of Year
                                        --------------------       -----------------------------
                                                                           Building &            Accumulated    Date of
Property/Location                       Improvements  Other         Land  Improvements Total (1) Depreciation Construction
-----------------                       ------------ -------       ------ ------------ --------- ------------ ------------

<S>                                     <C>          <C>           <C>    <C>          <C>       <C>          <C>
4135 Beltline, Addison, TX.............    $   --    $    --       $  476   $ 4,280     $ 4,756        335     1981/1982
9033 Wilshire Blvd., Los Angeles, CA...       143         --          956     8,752       9,708        394          1957
Ambulatory Surgery Center, Sterling, VA        --         --          908     8,170       9,078        255          1991
AMOCO, New Orleans, LA.................     6,380     (1,149)/(2)/  1,233     8,475       9,708      3,843          1974
Atrium, Palm Beach, FL.................       166         --        1,147     4,756       5,903        474          1985
Bay Plaza, Tampa, FL...................       508       (384)/(2)/    895     3,706       4,601        560          1988
Bay Plaza II, Tampa, FL................        90         --          506     4,640       5,146        185          1985
Bonita Plaza, Bonita, CA...............     1,011         --        1,168     5,681       6,849        935          1991
Brandeis, Omaha, NE....................       114         --        1,451    13,175      14,626        365          1921
Corporate Point, Chantilly, VA.........       834         --          830     4,155       4,985      1,097          1992
Countryside Retail Center, Sterling, VA        10         --        2,088    18,801      20,889        578          1986
Durham Center, Durham, NC..............     1,408     (1,362)/(2)/  4,233    16,978      21,211      2,229          1988
Eton Square, Tulsa, OK.................       418         --        1,469    13,637      15,106        806          1985
Forum, Richmond, VA....................       958         --        1,360     6,397       7,757      2,018          1987
Harmon, Sterling, VA...................        20         --        1,054     9,507      10,561        306          1987
Hartford, Dallas, TX...................       815         --          630     3,335       3,965        984          1980
Institute Place Lofts, Chicago, IL.....       537         --          665     7,594       8,259      4,351          1910
Jefferson, Washington, DC..............     1,057       (883)/(2)/  2,774    11,270      14,044      1,878          1979
Lexington Center, Colorado Springs, CO.       561         --        1,103     4,974       6,077        755          1986
Mimado, Sterling, VA...................        58         --          582     5,294       5,876        164          1986
NASA, Houston, TX......................      (661)      (272)/(2)/    172     2,624       2,796      1,629          1979
One Steeplechase, Sterling, VA.........     2,807         72/(4)/   1,380     8,399       9,779      3,398          1987
Parkway North, Dallas, TX..............       949         --        1,173     5,641       6,813        802          1980
Plaza Towers, St. Petersburg, FL.......     7,136     (4,379)/(3)/  1,241    15,893      17,134     10,027          1979
Remington Tower, Tulsa, OK.............       214         --          480     4,565       5,045        336          1982
Savings of America, Houston, TX........       722         --          338     2,074       2,412        568          1979
Signature Athletic Club, Dallas, TX....     1,071       (439)/(2)/  1,075     3,553       4,628        566          1985
Venture Center, Atlanta, GA............       407         --          411     3,153       3,564      1,200          1981
Westgrove Air Plaza, Addison, TX.......       626       (945)/(2)/    501     1,684       2,185         45          1982
Windsor Plaza, Windcrest, TX...........      (352)      (257)/(2)/  1,672     3,589       5,261      2,308          1984
</TABLE>
<TABLE>
<CAPTION>
                                                   Life on
                                                    Which
                                                 Depreciation
                                                  In Latest
                                                 Statement of
                                          Date   Operation is
Property/Location                       Acquired   Computed
-----------------                       -------- ------------

<S>                                     <C>      <C>
4135 Beltline, Addison, TX.............  06/99      40 years
9033 Wilshire Blvd., Los Angeles, CA...  04/00    5-40 years
Ambulatory Surgery Center, Sterling, VA  07/00      40 years
AMOCO, New Orleans, LA.................  06/97    5-40 years
Atrium, Palm Beach, FL.................  06/98      40 years
Bay Plaza, Tampa, FL...................  07/97    5-40 years
Bay Plaza II, Tampa, FL................  06/00      40 years
Bonita Plaza, Bonita, CA...............  09/97    5-40 years
Brandeis, Omaha, NE....................  11/00      40 years
Corporate Point, Chantilly, VA.........  10/94    5-40 years
Countryside Retail Center, Sterling, VA  09/00      40 years
Durham Center, Durham, NC..............  07/97    5-40 years
Eton Square, Tulsa, OK.................  09/99    5-40 years
Forum, Richmond, VA....................  10/92    2-40 years
Harmon, Sterling, VA...................  09/00    5-40 years
Hartford, Dallas, TX...................  11/94    2-40 years
Institute Place Lofts, Chicago, IL.....  01/93    2-40 years
Jefferson, Washington, DC..............  02/97    5-40 years
Lexington Center, Colorado Springs, CO.  12/97    3-40 years
Mimado, Sterling, VA...................  09/00      40 years
NASA, Houston, TX......................  10/85    5-40 years
One Steeplechase, Sterling, VA.........  12/92    5-40 years
Parkway North, Dallas, TX..............  02/98    2-40 years
Plaza Towers, St. Petersburg, FL.......  11/85    1-40 years
Remington Tower, Tulsa, OK.............  09/99      40 years
Savings of America, Houston, TX........  03/97    3-40 years
Signature Athletic Club, Dallas, TX....  02/99    5-40 years
Venture Center, Atlanta, GA............  07/89    1-40 years
Westgrove Air Plaza, Addison, TX.......  10/97    5-40 years
Windsor Plaza, Windcrest, TX...........  11/86    5-40 years
</TABLE>

                                      61

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)
                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 2001


<TABLE>
<CAPTION>

                                                                          Cost Capitalized
                                                                            Subsequent to            Gross Amounts of Which
                                                   Initial Cost              Acquisition             Carried at End of Year
                                                ------------------- --------------------          -----------------------------
                                                        Building &                                        Building &
Property/Location                  Encumbrances  Land  Improvements Improvements  Other            Land  Improvements Total (1)
-----------------                  ------------ ------ ------------ ------------ -------          ------ ------------ ---------
                                                                                              (dollars in thousands)
<S>                                <C>          <C>    <C>          <C>          <C>              <C>    <C>          <C>
Industrial Warehouses
5360 Tulane, Atlanta, GA..........    $  375    $   95    $  514       $   50    $   (44)/(2)/    $   95    $  520     $   615
5700 Tulane, Atlanta, GA..........        --        --        --          720       (101)/(2)/        --       619         619
Addison Hangar, Addison, TX.......     1,587       928     1,481           32         --             928     1,513       2,441
Addison Hanger II, Addison, TX....        --        --     1,150          229         --              --     1,379       1,379
Central Storage, Dallas, TX.......     1,070       464     1,856          438       (138)/(2)/       464     2,156       2,620
Encon, Fort Worth, TX.............     3,469       984     3,934           67         --             984     4,001       4,985
Kelly, Dallas, TX.................     4,378     1,136     4,856          473     (1,196)/(2)(9)/  1,136     4,133       5,269
McLeod, Orlando, FL...............     1,994       673     2,693          576       (511)/(2)/       673     2,758       3,431
Ogden, Ogden, UT..................        --        52     1,568          218        (70)/(2)/        52     1,716       1,768
Space Center, San Antonio, TX.....     1,110       247     1,332          112       (131)/(2)/       247     1,313       1,560
Texstar, Arlington, TX............     1,225       333     1,331          216         --             333                 1,880
Tricon, Atlanta, GA...............     9,665     2,761     6,442        1,791         --           2,761     8,234      10,995

Shopping Centers
Dunes Plaza, Michigan City, IN....     3,088     1,230     5,430        2,344       (482)/(5)/     1,343     7,179       8,522
K-Mart, Cary, NC..................     1,803     1,358     1,157          162         --           1,358     1,319       2,677
Parkway Center, Dallas, TX........     1,697       273     1,876          408         --             273     2,283       2,556
Plaza on Bachman Creek, Dallas, TX        --       734     2,935        1,209         --             734     4,144       4,878
Promenade, Highlands Ranch, CO....     7,262     1,749     6,995          105       (679)/(2)/     1,749     6,420       8,169
Sadler Square, Amelia Island, FL..     2,812       679     2,715          134         --             679     2,849       3,528
Sheboygan, Sheboygan, WI..........       484       242     1,371           45         --             242     1,416       1,658

Hotels
Akademia, Wroclaw, Poland.........     7,266     2,184        --        9,577         --           2,184     9,577      11,761
Brompton, Chicago, IL.............     2,302       572     2,365        1,441         --             572     3,806       4,378
City Suites, Chicago, IL..........     3,840       950     3,847        1,061         --             950     4,908       5,858
Majestic Inn, San Francisco, CA...     5,346     1,139     4,555        1,187         --           1,139     5,742       6,881
Surf, Chicago, IL.................     3,814       945     3,851        1,363         --             945     5,215       6,160

Land
1013 Commons, New Orleans, LA.....        --       615        --           46        (36)/(2)/       625        --         625
</TABLE>
<TABLE>
<CAPTION>
                                                                        Life on
                                                                         Which
                                                                      Depreciation
                                                                       In Latest
                                                                      Statement of
                                   Accumulated    Date of      Date   Operation is
Property/Location                  Depreciation Construction Acquired   Computed
-----------------                  ------------ ------------ -------- ------------

<S>                                <C>          <C>          <C>      <C>
Industrial Warehouses
5360 Tulane, Atlanta, GA..........    $  292          1970    11/97    5-40 years
5700 Tulane, Atlanta, GA..........        92          1998    11/97      40 years
Addison Hangar, Addison, TX.......        91          1992    12/99    5-40 years
Addison Hanger II, Addison, TX....        44          2000    12/99    5-40 years
Central Storage, Dallas, TX.......       591          1966    04/96    5-40 years
Encon, Fort Worth, TX.............       402          1958    10/97    5-40 years
Kelly, Dallas, TX.................     1,155     1966/1973    03/95    5-40 years
McLeod, Orlando, FL...............       793          1985    09/94    5-40 years
Ogden, Ogden, UT..................       670          1979    01/86    5-40 years
Space Center, San Antonio, TX.....       737          1970    11/97    5-40 years
Texstar, Arlington, TX............       421          1967    12/93    5-40 years
Tricon, Atlanta, GA...............     2,818          1971    02/93    2-40 years

Shopping Centers
Dunes Plaza, Michigan City, IN....     2,306          1978    03/92    5-40 years
K-Mart, Cary, NC..................        88          1981    08/98      40 years
Parkway Center, Dallas, TX........       964          1979    11/91    5-40 years
Plaza on Bachman Creek, Dallas, TX       682          1986    03/98    5-40 years
Promenade, Highlands Ranch, CO....     1,158          1985    07/96    5-40 years
Sadler Square, Amelia Island, FL..       713          1987    11/93    3-40 years
Sheboygan, Sheboygan, WI..........       338          1977    05/92      40 years

Hotels
Akademia, Wroclaw, Poland.........        --          2001    02/01      40 years
Brompton, Chicago, IL.............       488          1995    12/98    5-40 years
City Suites, Chicago, IL..........       731          1995    12/98    5-40 years
Majestic Inn, San Francisco, CA...     2,137          1902    12/90    5-40 years
Surf, Chicago, IL.................       847          1995    12/98    5-40 years

Land
1013 Commons, New Orleans, LA.....        --            --    08/98            --
</TABLE>

                                      62

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)
                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 2001


<TABLE>
<CAPTION>

                                                                          Cost Capitalized
                                                                           Subsequent to              Gross Amounts of Which
                                                 Initial Cost               Acquisition               Carried at End of Year
                                             --------------------- ---------------------          -------------------------------
                                                       Building &                                           Building &
Property/Location               Encumbrances   Land   Improvements Improvements  Other              Land   Improvements Total (1)
-----------------               ------------ -------- ------------ ------------ --------          -------- ------------ ---------
                                                                                             (dollars in thousands)
<S>                             <C>          <C>      <C>          <C>          <C>               <C>      <C>          <C>
Alamo Springs, Dallas, TX......   $     --   $  1,385   $     --     $     --   $     --          $  1,385   $     --   $  1,385
Dominion, Dallas, TX...........         --      3,931         --           --         --             3,931         --      3,931
Eagle Crest, Farmers Branch, TX         --      2,500         --          134       (505)/(9)/       2,129         --      2,129
Folsom.........................         --      1,781         --          450         --             2,231         --      2,231
Lamar Parmer, Austin, TX.......         --      1,571         --           94         --             1,665         --      1,665
Las Colinas, Las Colinas, TX...         --        995         --            5         --             1,000         --      1,000
Lemon Carlisle, Dallas, TX.....      1,746      3,576         --           30         --             3,606         --      3,606
Limestone Canyon II............         --        428         --          266         38               732         --        732
Manhattan, Farmers Branch, TX..         --     11,186         --          777         44            12,007         --     12,007
McKinney 36, Collin County, TX.        956      2,203         --           --       (230)/(2)/       1,973         --      1,973
Mira Lago, Farmers Branch, TX..         --        541         --           --         41               582         --        582
Pac-Trust, Dallas, TX..........         --      1,232         --           --         --             1,232         --      1,232
Red Cross, Dallas, TX..........      4,500      8,383         --           --         --             8,383         --      8,383
Sandison, Collin County, TX....      1,040      5,021         --           --       (392)/(2)(7)/    4,629         --      4,629
Seminary West, Fort Worth, TX..         --        234         --           --         --               234         --        234
Solco Allen, Collin County, TX.        305      1,388         --           --        (80)/(2)/       1,308         --      1,308
Solco-Valley, Dallas, TX.......         --      1,525         --           --         --             1,525         --      1,525
Stacy Road, Allen, TX..........      1,345      2,665         --           --       (193)/(2)/       2,472         --      2,472
State Highway 121, Collin
 County, TX....................         --      4,354         --           --     (2,581)/(2)(7)/    1,773         --      1,773
Watters Road, Collin County, TX         --      1,787         --           --       (200)/(2)/       1,587         --      1,587
West End, Dallas, TX...........      5,889     11,405         --           77     (4,013)/(8)/       7,469         --      7,469
Whisenant, Collin County, TX...        133        631         --           --        (59)/(2)(7)/      572         --        572
                                  --------   --------   --------     --------   --------          --------   --------   --------
Investment Properties..........    456,845    171,600    453,830      114,375    (26,974)          167,220    545,611    712,832
                                  --------   --------   --------     --------   --------          --------   --------   --------

Properties Held for Sale

Land
Fiesta, San Angelo, TX.........         --         44         --           --         --                44         --         44
Fruitland, Fruitland Park, FL..         --        253         --           --       (100)/(6)/         153         --        153
Round Mt, Austin, TX...........         --      5,740         --           --     (5,421)/(2)(3)/      319         --        319
                                  --------   --------   --------     --------   --------          --------   --------   --------
Properties Held for Sale.......         --      6,037         --           --     (5,521)              516         --        516
                                  --------   --------   --------     --------   --------          --------   --------   --------
                                  $456,845   $177,637   $453,830     $114,375   $(32,495)         $167,736   $545,611   $713,348
                                  ========   ========   ========     ========   ========          ========   ========   ========
</TABLE>
<TABLE>
<CAPTION>
                                                                     Life on
                                                                      Which
                                                                   Depreciation
                                                                    In Latest
                                                                   Statement of
                                Accumulated    Date of      Date   Operation is
Property/Location               Depreciation Construction Acquired   Computed
-----------------               ------------ ------------ -------- ------------

<S>                             <C>          <C>          <C>      <C>
Alamo Springs, Dallas, TX......   $    --         --       09/99        --
Dominion, Dallas, TX...........        --         --       03/99        --
Eagle Crest, Farmers Branch, TX        --         --       05/98        --
Folsom.........................        --         --       10/00        --
Lamar Parmer, Austin, TX.......        --         --       01/00        --
Las Colinas, Las Colinas, TX...        --         --       01/96        --
Lemon Carlisle, Dallas, TX.....        --         --       02/98        --
Limestone Canyon II............        --         --       06/00        --
Manhattan, Farmers Branch, TX..        --         --       02/00        --
McKinney 36, Collin County, TX.        --         --       01/98        --
Mira Lago, Farmers Branch, TX..        --         --       05/01        --
Pac-Trust, Dallas, TX..........        --         --       10/01        --
Red Cross, Dallas, TX..........        --         --       05/99        --
Sandison, Collin County, TX....        --         --       05/98        --
Seminary West, Fort Worth, TX..        --         --       07/01        --
Solco Allen, Collin County, TX.        --         --       05/98        --
Solco-Valley, Dallas, TX.......        --         --       04/01        --
Stacy Road, Allen, TX..........        --         --       04/97        --
State Highway 121, Collin
 County, TX....................        --         --       02/97        --
Watters Road, Collin County, TX        --         --       02/97        --
West End, Dallas, TX...........        --         --       08/97        --
Whisenant, Collin County, TX...        --         --       05/98        --
                                  -------
Investment Properties..........    90,661
                                  -------

Properties Held for Sale

Land
Fiesta, San Angelo, TX.........        --         --       12/91        --
Fruitland, Fruitland Park, FL..        --         --       05/92        --
Round Mt, Austin, TX...........        --         --       12/86        --
                                  -------
Properties Held for Sale.......        --
                                  -------
                                  $90,661
                                  =======
</TABLE>

                                      63

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)
                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 2001

--------
 (1) The aggregate cost for federal income tax purposes is $744.4 million.
 (2) Purchase accounting basis adjustment.
 (3) Writedown of property to estimated net realizable value.
 (4) Construction period interest and taxes.
 (5) Forgiveness of debt and cash received deducted from the basis of the
     property, offset by land acquired in 1992.
 (6) Cash received for easement deducted from the basis of the property.
 (7) The Sandison land is collateralized with the Solco Allen and Whisenant
     land. All of the land in McKinney and Collin County, Texas is
     cross-collateralized and cross defaulted.
 (8) Cash received for condemnation of part of property.
 (9) Sale of portion of property.
(10) The Countryside Retail Center is collateralized with the Mimado Building.

                                      64

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)
                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
                                                 2001       2000      1999
                                               ---------  --------  --------
                                                   (dollars in thousands)
  <S>                                          <C>        <C>       <C>
  Reconciliation of Real Estate
  Balance at January 1,....................... $ 729,051  $686,522  $409,986
   Additions
     Purchases, improvements and construction.    97,703   122,683    76,659
     Foreclosures.............................        --       352        --
     CMET merger..............................        --        --   290,415
   Deductions
     Sale of real estate......................  (111,986)  (80,188)  (89,463)
     Sale of foreclosed properties............    (1,420)     (318)   (1,075)
                                               ---------  --------  --------
  Balance at December 31,..................... $ 713,348  $729,051  $686,522
                                               =========  ========  ========
  Reconciliation of Accumulated Depreciation
  Balance at January 1,....................... $  88,187  $ 84,986  $ 61,241
   Additions
     Depreciation.............................    19,705    19,702    11,702
     CMET merger..............................        --        --    31,628
   Deductions
     Sale of real estate......................   (17,231)  (16,501)  (19,585)
                                               ---------  --------  --------
  Balance at December 31,..................... $  90,661  $ 88,187  $ 84,986
                                               =========  ========  ========
</TABLE>

                                      65

<PAGE>

                                                                    SCHEDULE IV

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                         MORTGAGE LOANS ON REAL ESTATE
                               December 31, 2001

<TABLE>
<CAPTION>




                                                     Final
                                           Interest Maturity
               Description                   Rate     Date         Periodic Payment Terms
               -----------                 -------- -------- -----------------------------------

<S>                                        <C>      <C>      <C>
FIRST MORTGAGE LOANS
Keller Hicks..............................   16.0%   07/02   Interest only payments of $22,667
 Secured by 44.6 acres of unimproved                         due monthly.
 land in Fort Worth, TX

Executive Court...........................   12.0%   12/04   Excess property cash flow payments.
 Secured by a 41,840 sq. ft. office
 building in Memphis, TN

WRAPAROUND MORTGAGE LOANS
Pinemont..................................  10.40%   07/08   Monthly principal and interest
 Secured by an office building in                            payments of $6,281.
 Houston, TX.

JUNIOR MORTGAGE LOANS
Country Elms..............................   8.00%   05/02   Monthly principal and interest
 Secured by mobile home park in                              payments of $3,154.
 Galesburg, IL.

ACLP Park Ten.............................   16.0%   05/02   Interest only payments of $30,000
 Secured by an office building and                           due monthly.
 industrial warehouse in Carrollton, TX.

Lincoln Court Apartments..................  Varies   06/04   Two notes bearing interest at prime
 Secured by apartment building in                            plus 1%. Interest only payments of
 Dallas, TX.                                                 $8,841 due monthly.

Portofino.................................   16.0%   04/02   Interest only payments of $46,667
 Secured by a retail center in                               due monthly.
 Montgomery County, TX.

Dallas Fund XVII..........................  Varies   01/03   One note bearing interest at prime
 Secured by an office building in Dallas,                    plus 3%.
 TX.

Madison at Bear Creek.....................    7.0%   01/02   Principal and interest due January
 Secured by an apartment in Houston,                         2002.
 TX.

One City Center...........................    9.0%   02/02   Interest only payments of $30,000.
 Secured by a 375,752 sq. ft. office
 building in St. Louis, MO.

Texas Glenn...............................
 Secured by an apartment in Dallas, TX.      10.0%   06/03   Interest only payments of $12,500.

Sendera Ranch.............................
 Secured by 1,714.16 acres of
 unimproved land in Tarrant County, TX       15.0%   07/03   Interest only payments of $44,338.




Interest..................................
Allowance for estimated losses............



</TABLE>
<TABLE>
<CAPTION>
                                                                             Principal
                                                                             Amount of
                                                                               Loans
                                                                            Subject to
                                                                 Carrying   Delinquent
                                            Prior  Face Amount  Amounts of   Principal
               Description                  Liens  of Mortgage Mortgage (1) or Interest
               -----------                 ------- ----------- ------------ -----------
                                                      (dollars in thousands)
<S>                                        <C>     <C>         <C>          <C>
FIRST MORTGAGE LOANS
Keller Hicks.............................. $    --   $ 1,700     $ 1,700       $ 110
 Secured by 44.6 acres of unimproved
 land in Fort Worth, TX

Executive Court...........................      --     1,970       1,970          --
 Secured by a 41,840 sq. ft. office
 building in Memphis, TN

WRAPAROUND MORTGAGE LOANS
Pinemont..................................     367       467         352          --
 Secured by an office building in
 Houston, TX.

JUNIOR MORTGAGE LOANS
Country Elms..............................      --       380         155          --
 Secured by mobile home park in
 Galesburg, IL.

ACLP Park Ten.............................  10,750     3,000       2,250          --
 Secured by an office building and
 industrial warehouse in Carrollton, TX.

Lincoln Court Apartments..................   1,255     1,369       1,369          --
 Secured by apartment building in
 Dallas, TX.

Portofino.................................  22,160     5,000       3,500          --
 Secured by a retail center in
 Montgomery County, TX.

Dallas Fund XVII..........................     835     1,738       1,738          --
 Secured by an office building in Dallas,
 TX.

Madison at Bear Creek..................... $ 3,442   $   608     $   608       $  --
 Secured by an apartment in Houston,
 TX.

One City Center...........................      --     4,000       4,000          --
 Secured by a 375,752 sq. ft. office
 building in St. Louis, MO.

Texas Glenn...............................
 Secured by an apartment in Dallas, TX.      5,003     1,500       1,500          --

Sendera Ranch.............................
 Secured by 1,714.16 acres of
 unimproved land in Tarrant County, TX       7,000     3,547       3,547          --
                                           -------   -------     -------       -----
                                           $50,812   $25,279      22,689       $  --
                                           =======   =======                   =====

Interest..................................                           178
Allowance for estimated losses............                          (818)
                                                                 -------
                                                                 $22,049
                                                                 =======
</TABLE>
--------
(1) The aggregate cost for federal income tax purposes is $22.9 million.


                                      66

<PAGE>

                                                                    SCHEDULE IV
                                                                    (Continued)

                    TRANSCONTINENTAL REALTY INVESTORS, INC.

                         MORTGAGE LOANS ON REAL ESTATE

<TABLE>
<CAPTION>
                                                             2001      2000     1999
                                                            -------  --------  -------
                                                              (dollars in thousands)
<S>                                                         <C>      <C>       <C>
Balance at January 1,...................................... $ 8,668  $ 12,061  $ 2,379
Additions
   New mortgage loans......................................  20,063    17,500    9,680
   CMET merger.............................................      --        --      631
Deductions
   Collections of principal................................  (6,042)  (20,531)     (37)
   Foreclosed properties and deeds-in-lieu of foreclosure..      --      (356)      --
   Write off of uncollectible mortgage loans...............      --        --     (575)
   Write off of principal due to discount for early payoff.      --        (6)     (17)
                                                            -------  --------  -------
Balance at December 31,.................................... $22,689  $  8,668  $12,061
                                                            =======  ========  =======
</TABLE>


                                      67

<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

   Not applicable.

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

                                   PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT

Directors

   The affairs of Transcontinental Realty Investors, Inc. ("TCI") are managed
by a Board of Directors. The Directors are elected at the annual meeting of
stockholders or appointed by the incumbent Board and serve until the next
annual meeting of stockholders or until a successor has been elected or
approved.

   The Directors of TCI are listed below, together with their ages, terms of
service, all positions and offices with TCI or its advisor, Basic Capital
Management, Inc. ("BCM"), their principal occupations, business experience and
directorships with other companies during the last five years or more. The
designation "Affiliated", when used below with respect to a Director, means
that the Director is an officer, director or employee of BCM or an officer of
TCI. The designation "Independent", when used below with respect to a Director,
means that the Director is neither an officer of TCI nor a director, officer or
employee of BCM, although TCI may have certain business or professional
relationships with such Director as discussed in ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business Relationships."

   TED P. STOKELY:  Age 68, Director (Independent) (since April 1990) and
Chairman of the Board (since January 1995).

      General Manager (since January 1995) of ECF Senior Housing Corporation, a
   nonprofit corporation; General Manager (since January 1993) of Housing
   Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid
   consultant (since January 1993) and paid consultant (April 1992 to December
   1992) of Eldercare Housing Foundation ("Eldercare"), a nonprofit
   corporation; and Director (since April 1990) and Chairman of the Board
   (since January 1995) of Income Opportunity Realty Investors, Inc. ("IORI").

   HENRY BUTLER:  Age 51, Director (Affiliated) (since December 2001).

      Broker--Land Sales (since 1992) of Basic Capital Management, Inc.
   ("BCM"); Owner/Operator (1989 to 1991) of Butler Interests, Inc.; and
   Director (since December 2001) of IORI.

   EARL D. CECIL:  Age 72, Director (Independent) (since March 2002).

      Financial and business consultant (since January 1994); Division Vice
   President (February 1987 to December 1993) of James Mitchell & Company, a
   financial services marketing organization; Director (since November 2001) of
   ARI; and Director (since March 2002) of IORI.

   MARTIN L. WHITE:  Age 62, Director (Independent) (since January 1995).

      Chief Executive Officer (since 1995) of Builders Emporium, Inc.; Chairman
   and Chief Executive Officer (since 1993) of North American Trading Company
   Ltd.; President and Chief Operating Officer (since 1992) of Community Based
   Developers, Inc.; and Director (since January 1995) of IORI.

Board Committees

      The Board of Directors held 19 meetings during 2001. For such year, no
   incumbent Director attended fewer than 75% of the aggregate of (1) the total
   number of meetings held by the Board during the period for

                                      68

<PAGE>

which he had been a Director and (2) the total number of meetings held by all
committees of the Board on which he served during the period that he served.

   The Board of Directors has an Audit Committee, the function of which is to
review TCI's operating and accounting procedures. The current members of the
Audit Committee, all of whom are Independent Directors, are Messrs. Cecil,
Stokely and White. The Audit Committee met four times during 2001.

   The Board of Directors does not have Nominating or Compensation Committees.

Executive Officers

   The following persons currently serve as executive officers of TCI: Mark
Branigan, Executive Vice President--Residential; Louis J. Corna Executive Vice
President--Tax; Ronald E. Kimbrough, Executive Vice President and Chief
Financial Officer; and David W. Starowicz, Executive Vice
President--Acquisitions, Sales and Construction. Their positions with TCI are
not subject to a vote of stockholders. Their ages, terms of service, all
positions and offices with TCI or BCM, other principal occupations, business
experience and directorships with other companies during the last five years or
more are set forth below.

   MARK W. BRANIGAN:  Age 47, Executive Vice President--Residential (since June
2001), Executive Vice President and Chief Financial Officer (August 2000 to
June 2001), Vice President--Director of Construction (August 1999 to August
2000) and Executive Vice President--Residential Asset Management (January 1992
to October 1997).

      Executive Vice President--Residential (since June 2001), Executive Vice
   President and Chief Financial Officer (August 2000 to June 2001), Vice
   President--Director of Construction (August 1999 to August 2000) and
   Executive Vice President--Residential Management (January 1992 to October
   1997) of BCM, American Realty Trust, Inc. ("ART") and IORI; Executive Vice
   President and Chief Financial Officer (August 2000 to June 2001) and
   Director (September 2000 to June 2001) of ARI; and real estate consultant
   (November 1997 to July 1999).

   LOUIS J. CORNA:  Age 54, Executive Vice President--Tax (since October 2001),
Executive Vice President and Chief Financial Officer (June 2001 to October
2001), and Senior Vice President--Tax (December 2001 to June 2001).

      Executive Vice President--Tax (since October 2001), Executive Vice
   President and Chief Financial Officer (June 2001 to October 2001), and
   Senior Vice President--Tax (December 2000 to June 2001) of BCM, ARI and
   IORI; Private Attorney (January 2000 to December 2000); Vice
   President--Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC
   Global, Inc.; and Vice President--Taxes (July 1991 to February 1998) of
   Whitman Corporation.

   RONALD E. KIMBROUGH:  Age 49, Executive Vice President and Chief Financial
Officer (since January 2002).

      Executive Vice President and Chief Financial Officer (since January 2002)
   of BCM, ARI and IORI; Controller (from September 2000 to January 2002) of
   BCM; Vice President and Treasurer (from January 1998 to September 2000) of
   Syntek West, Inc. and One Realco Corporation; and Consultant (1997).

   DAVID W. STAROWICZ:  Age 46, Executive Vice President--Acquisitions, Sales
and Construction (since March 2001), Executive Vice President--Commercial Asset
Management (September 1999 to March 2001) and Vice President (May 1992 to
September 1999).

      Executive Vice President--Acquisitions, Sales and Construction (since
   March 2001), Executive Vice President--Commercial Asset Management
   (September 1999 to March 2001), Vice President (May 1992 to September 1999)
   and Asset Manager (November 1990 to May 1992) of BCM, ART and IORI;
   Executive Vice President--Commercial Asset Management (since August 2000) of
   ARI.

                                      69

<PAGE>

Officers

   Although not an executive officer, Robert A. Waldman currently serves as
Senior Vice President, Secretary and General Counsel. His position with TCI is
not subject to a vote of stockholders. His age, term of service, all positions
and offices with TCI or BCM, other principal occupations, business experience
and directorships with other companies during the last five years or more is
set forth below.

   ROBERT A. WALDMAN:  Age 49, Senior Vice President and General Counsel (since
January 1995), Vice President (December 1990 to January 1995) and Secretary
(December 1993 to February 1997 and since June 1999).

      Senior Vice President and General Counsel (since January 1995), Vice
   President (December 1990 to January 1995) and Secretary (December 1993 to
   February 1997 and since June 1999) of IORI; Senior Vice President, Secretary
   and General Counsel (since August 2000) of ARI; Senior Vice President and
   General Counsel (since January 1995), Vice President (January 1993 to
   January 1995) and Secretary (since December 1989) of ART; and Senior Vice
   President and General Counsel (since November 1994), Vice President and
   Corporate Counsel (November 1989 to November 1994), and Secretary (since
   November 1989) of BCM.

   In addition to the foregoing officers, TCI has several vice presidents and
assistant secretaries who are not listed herein.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

   Under the securities laws of the United States, the Directors, executive
officers, and any persons holding more than ten percent of TCI's shares of
Common Stock are required to report their share ownership and any changes in
that ownership to the Securities and Exchange Commission (the "Commission").
Specific due dates for these reports have been established and TCI is required
to report any failure to file by these dates during 2001. All of these filing
requirements were satisfied by TCI's Directors and executive officers and ten
percent holders. In making these statements, TCI has relied on the written
representations of its incumbent Directors and executive officers and its ten
percent holders and copies of the reports that they have filed with the
Commission.

The Advisor

   Although the Board of Directors is directly responsible for managing the
affairs of TCI and for setting the policies which guide it, TCI's day-to-day
operations are performed by BCM under the supervision of the Board. The duties
of BCM include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities
as well as financing and refinancing sources. BCM also serves as a consultant
to the Board in connection with the business plan and investment decisions made
by the Board.

   BCM has served as TCI's advisor since March 1989. BCM is a company of which
Messrs. Branigan, Corna, Kimbrough and Starowicz serve as executive officers.
BCM is owned by a trust for the benefit of the children of Gene E. Phillips.
Mr. Phillips serves as a representative of his children's trust which owns BCM
and, in such capacity, has substantial contact with the management of BCM and
input with respect to its performance of advisory services to TCI.

   Under the Advisory Agreement, BCM is required to annually formulate and
submit, for Board approval, a budget and business plan containing a
twelve-month forecast of operations and cash flow, a general plan for asset
sales and purchases, lending, foreclosure and borrowing activity, and other
investments, and BCM is required to report quarterly to the Board on TCI's
performance against the business plan. In addition, all transactions require
prior Board approval, unless they are explicitly provided for in the approved
business plan or are made pursuant to authority expressly delegated to BCM by
the Board.


                                      70

<PAGE>

   The Advisory Agreement also requires prior Board approval for the retention
of all consultants and third party professionals, other than legal counsel. The
Advisory Agreement provides that BCM shall be deemed to be in a fiduciary
relationship to the stockholders; contains a broad standard governing BCM's
liability for losses by TCI; and contains guidelines for BCM's allocation of
investment opportunities as among itself, TCI and other entities it advises.

   The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of TCI and to receive an advisory fee comprised of a gross asset fee
of .0625% per month (.75% per annum) of the average of the gross asset value
(total assets less allowance for amortization, depreciation or depletion and
valuation reserves) and an annual net income fee equal to 7.5% of TCI's net
income.

   The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by TCI during such fiscal year exceeds
the sum of: (1) the cost of each such property as originally recorded in TCI's
books for tax purposes (without deduction for depreciation, amortization or
reserve for losses), (2) capital improvements made to such assets during the
period owned, and (3) all closing costs, (including real estate commissions)
incurred in the sale of such real estate; provided, however, no incentive fee
shall be paid unless (a) such real estate sold in such fiscal year, in the
aggregate, has produced an 8% simple annual return on the net investment
including capital improvements, calculated over the holding period before
depreciation and inclusive of operating income and sales consideration and (b)
the aggregate net operating income from all real estate owned for each of the
prior and current fiscal years shall be at least 5% higher in the current
fiscal year than in the prior fiscal year.

   Additionally, pursuant to the Advisory Agreement BCM or an affiliate of BCM
is to receive an acquisition commission for supervising the acquisition,
purchase or long-term lease of real estate equal to the lesser of (1) up to 1%
of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers or (2) the compensation customarily charged in
arm's-length transactions by others rendering similar property acquisition
services as an ongoing public activity in the same geographical location and
for comparable property, provided that the aggregate purchase price of each
property (including acquisition fees and real estate brokerage commissions) may
not exceed such property's appraised value at acquisition.

   The Advisory Agreement requires BCM or any affiliate of BCM to pay to TCI,
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by TCI; provided, however,
that the compensation retained by BCM or any affiliate of BCM shall not exceed
the lesser of (1) 2% of the amount of the loan commitment or (2) a loan
brokerage and commitment fee which is reasonable and fair under the
circumstances.

   The Advisory Agreement also provides that BCM or an affiliate of BCM is to
receive a mortgage or loan acquisition fee with respect to the acquisition or
purchase of any existing mortgage loan by TCI equal to the lesser of (1) 1% of
the amount of the loan purchased or (2) a brokerage or commitment fee which is
reasonable and fair under the circumstances. Such fee will not be paid in
connection with the origination or funding of any mortgage loan by TCI.

   Under the Advisory Agreement, BCM or an affiliate of BCM also is to receive
a mortgage brokerage and equity refinancing fee for obtaining loans or
refinancing on properties equal to the lesser of (1) 1% of the amount of the
loan or the amount refinanced or (2) a brokerage or refinancing fee which is
reasonable and fair under the circumstances; provided, however, that no such
fee shall be paid on loans from BCM or an affiliate of BCM without the approval
of TCI's Board of Directors. No fee shall be paid on loan extensions.

   Under the Advisory Agreement, BCM receives reimbursement of certain expenses
incurred by it in the performance of advisory services.

   Under the Advisory Agreement, all or a portion of the annual advisory fee
must be refunded by the Advisor if the Operating Expenses of TCI (as defined in
the Advisory Agreement) exceed certain limits specified in the

                                      71

<PAGE>

Advisory Agreement based on the book value, net asset value and net income of
TCI during the fiscal year. BCM was not required to refund any of the 2001
advisory fee under this provision.

   Additionally, if management were to request that BCM render services to TCI
other than those required by the Advisory Agreement, BCM or an affiliate of BCM
separately would be compensated for such additional services on terms to be
agreed upon from time to time. As discussed below, under "Property Management",
TCI has hired Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, to
provide property management services for TCI's properties. Also as discussed
below, under "Real Estate Brokerage" TCI has engaged, on a non-exclusive basis,
Regis Realty, Inc. ("Regis"), a related party, to perform brokerage services
for TCI.

   BCM may assign the Advisory Agreement only with the prior consent of TCI.

   The directors and principal officers of BCM are set forth below.

<TABLE>
<C>                  <S>
Mickey N. Phillips:  Director
Ryan T. Phillips:    Director
Mark W. Branigan:    Executive Vice President--Residential
Louis J. Corna:      Executive Vice President--Tax
Ronald E. Kimbrough: Executive Vice President and Chief Financial Officer
David W. Starowicz:  Executive Vice President--Acquisitions, Sales and Construction
Dan S. Allred:       Senior Vice President--Land Development
Michael E. Bogel:    Senior Vice President--Project Manager
Robert A. Waldman:   Senior Vice President, Secretary and General Counsel
</TABLE>

   Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene
E. Phillips' son. Gene E. Phillips serves as a representative of the trust
established for the benefit of his children which owns BCM and, in such
capacity, has substantial contact with the management of BCM and input with
respect to its performance of advisory services to TCI.

Property Management

   Since February 1, 1990, affiliates of BCM have provided property management
services. Currently, Triad provides such property management services for a fee
of 5% or less of the monthly gross rents collected on residential properties
and 3% or less of the monthly gross rents collected on commercial properties
under its management. Triad subcontracts with other entities for the provision
of the property-level management services to TCI at various rates. The general
partner of Triad is BCM. The limited partner of Triad is GS Realty Services,
Inc.("GS Realty"), a related party. Triad subcontracts the property-level
management and leasing of 51 of TCI's commercial properties, its four hotels
and the commercial property owned by a real estate partnership in which TCI and
IORI are partners to Regis, a related party, which is a company owned by GS
Realty. Regis is entitled to receive property and construction management fees
and leasing commissions in accordance with its property-level management
agreement with Triad.

Real Estate Brokerage

   Regis also provides real estate brokerage services to TCI (on a
non-exclusive basis). Regis is entitled to receive a real estate commission for
property purchases and sales in accordance with the following sliding scale of
total fees to be paid: (1) maximum fee of 4.5% on the first $2.0 million of any
purchase or sale transaction of which no more than 3.5% would be paid to Regis
or affiliates; (2) maximum fee of 3.5% on transaction amounts between $2.0
million-$5.0 million of which no more than 3% would be paid to Regis or
affiliates; (3) maximum fee of 2.5% on transaction amounts between $5.0
million-$10.0 million of which no more than 2% would be paid to Regis or
affiliates; and (4) maximum fee of 2% on transaction amounts in excess of $10.0
million of which no more than 1.5% would be paid to Regis or affiliates.

                                      72

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

   TCI has no employees, payroll or benefit plans and pays no compensation to
its executive officers. The executive officers of TCI, who are also officers or
employees of BCM, TCI's advisor, are compensated by BCM. Such executive
officers perform a variety of services for BCM and the amount of their
compensation is determined solely by BCM. BCM does not allocate the cash
compensation of its officers among the various entities for which it serves as
advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT--The Advisor" for a more detailed discussion of the compensation
payable to BCM.

   The only remuneration paid by TCI is to the Directors who are not officers
or directors of BCM or its affiliated companies. The Independent Directors (1)
review the business plan of TCI to determine that it is in the best interest of
stockholders, (2) review the advisory contract, (3) supervise the performance
of the advisor and review the reasonableness of the compensation paid to the
advisor in terms of the nature and quality of services performed, (4) review
the reasonableness of the total fees and expenses of TCI and (5) select, when
necessary, a qualified independent real estate appraiser to appraise properties
acquired.

   Each Independent Director receives compensation in the amount of $30,000 per
year, plus reimbursement for expenses. The Chairman of the Board receives an
additional fee of $3,000 per year. In addition, each Independent Director
receives an additional fee of $1,000 per day for any special services rendered
by him to TCI outside of his ordinary duties as Director, plus reimbursement of
expenses.

   During 2001, $145,250 was paid to the Independent Directors in total
Directors' fees for all services, including the annual fee for service during
the period January 1, 2001 through December 31, 2001, and 2001 special service
fees as follows: R. Douglas Leonhard, $33,250; Murray Shaw, $15,000; Ted P.
Stokely, $34,500; Martin L. White, $32,000; and Edward G. Zampa, $30,500.

Director's Stock Option Plan

   TCI has established a Director's Stock Option Plan ("Director's Plan") for
the purpose of attracting and retaining Directors who are not officers or
employees of TCI or BCM. The Director's Plan provides for the grant of options
that are exercisable at fair market value of TCI's Common Stock on the date of
grant. The Director's Plan was approved by stockholders at their annual meeting
on October 10, 2000, following which each then-serving Independent Director was
granted options to purchase 5,000 shares of Common Stock of TCI. On January 1
of each year, each Independent Director will receive options to purchase 5,000
shares of Common Stock. The options are immediately exercisable and expire on
the earlier of the first anniversary of the date on which a Director ceases to
be a Director or 10 years from the date of grant.

   As of March 1, 2002, TCI had 140,000 shares of Common Stock reserved for
issuance under the Director's Stock Option Plan of which options for 30,000
shares were outstanding.

                                      73

<PAGE>

Performance Graph

   The following performance graph compares the cumulative total stockholder
return on TCI's shares of Common Stock with the Dow Jones Equity Market Index
("DJ Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real
Estate Index"). The comparison assumes that $100 was invested on December 31,
1996, in TCI's shares of Common Stock and in each of the indices and further
assumes the reinvestment of all distributions. Past performance is not
necessarily an indicator of future performance.

                COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN



                             [GRAPH APPEARS HERE]


<TABLE>
<CAPTION>
                               1996   1997   1998   1999   2000   2001
                              ------ ------ ------ ------ ------ ------
         <S>                  <C>    <C>    <C>    <C>    <C>    <C>
         TCI................. 100.00 158.83 131.83 136.40 100.50 181.76
         DJ Equity Index..... 100.00 131.82 164.63 202.05 183.32 161.47
         DJ Real Estate Index 100.00 118.08  93.15  88.20 112.47 125.74
</TABLE>


                                      74

<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   Security Ownership of Certain Beneficial Owners.  The following table sets
forth the ownership of TCI's Common Stock, both beneficially and of record,
both individually and in the aggregate, for those persons or entities known to
be beneficial owners of more than 5% of the outstanding shares of Common Stock
as of the close of business on March 4, 2002.

<TABLE>
<CAPTION>
                                                  Amount
                                                and Nature
                                                    of      Percent
                                                Beneficial    of
           Name and Address of Beneficial Owner Ownership  Class/(1)/
           ------------------------------------ ---------- ---------
           <S>                                  <C>        <C>
              EQK Holdings, Inc./(2)/.......... 3,994,300    49.7%
              1800 Valley View Lane
              Suite 300
              Dallas, Texas 75234
              Basic Capital Management, Inc.... 1,166,947    14.5%
              1800 Valley View Lane
              Suite 300
              Dallas, Texas 75234
</TABLE>
--------
(1) Percentage is based upon 8,042,594 shares of Common Stock outstanding at
    March 4, 2002.
(2) EQK Holdings, Inc. ("EQK") is a wholly-owned subsidiary of ART, which is a
    wholly-owned subsidiary of ARI.

   Security Ownership of Management.  The following table sets forth the
ownership of TCI's Common Stock, both beneficially and of record, both
individually and in the aggregate, for the Directors and executive officers of
TCI as of the close of business on March 4, 2002.

<TABLE>
<CAPTION>
                                                                  Amount and
                                                                  Nature of     Percent
                                                                  Beneficial      of
Name of Beneficial Owner                                          Ownership    Class/(1)/
------------------------                                        -------------- ---------
<S>                                                             <C>            <C>
Ted P. Stokely.................................................    15,000/(2)/      *
Martin L. White................................................    15,000/(2)/      *
All Directors and Executive Officers as a group (9 individuals) 5,191,247/(3)/   64.5%
</TABLE>
--------
*  Less than 1%
(1) Percentage is based upon 8,042,594 shares of Common Stock outstanding at
    March 4, 2002.
(2) Each of Messrs. Stokely and White have options to purchase 15,000 shares of
    Common Stock of TCI which are exercisable within 60 days of March 2, 2002.
(3) Includes 26,475 shares owned by Syntek Asset Management, L.P., 1,166,947
    shares owned by BCM and 3,994,300 shares owned by EQK. The executive
    officers of TCI disclaim beneficial ownership of such shares. Each of the
    directors of BCM may be deemed to be beneficial owners by virtue of their
    positions as directors of BCM. The directors of ARI and BCM disclaim such
    beneficial ownership. Also includes 30,000 shares which may be acquired by
    the Directors of TCI pursuant to the Director Stock Option Plan.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Business Relationships

   In February 1989, the Board of Directors voted to retain BCM as TCI's
advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO THE
REGISTRANT--The Advisor." BCM is a company of which Messrs. Branigan, Corna,
Kimbrough and Starowicz serve as executive officers. BCM is owned by a trust
for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a
representative of his children's trust which owns BCM and, in such capacity,
has substantial contact with the management of BCM and input with respect to
BCM's performance of advisory services to TCI.

                                      75

<PAGE>

   Since February 1, 1991, affiliates of BCM have provided property management
services to TCI. Currently, Triad provides such property management services.
The general partner of Triad is BCM. The limited partner of Triad is GS Realty,
a related party. Triad subcontracts the property-level management and leasing
of 51 of TCI's commercial properties, its four hotels and the commercial
properties owned by a real estate partnership in which TCI and IORI are
partners and Regis, a related party, which is a company owned by GS Realty.

   Regis also provides real estate brokerage services for TCI, on a
non-exclusive basis, and receives brokerage commissions in accordance with the
brokerage agreement.

   The Directors and officers of TCI also serve as directors and officers of
IORI. The Directors owe fiduciary duties to IORI as well as to TCI under
applicable law. IORI has the same relationship with BCM as TCI. At December 31,
2001, TCI owned approximately 24.0% of the outstanding common shares of IORI.
BCM also serves as advisor to ARI. Messrs. Branigan, Corna, Kimbrough and
Starowicz serve as executive officers of ARI.

   From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
consultant and since January 1, 1993, as a part-time unpaid consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income and
elderly housing. Eldercare had a revolving loan commitment from Syntek West, a
company owned by Gene E. Phillips. The loan commitment expired in 1998.

Related Party Transactions

   Historically, TCI has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties.
Management believes that all of the related party transactions represented the
best investments available at the time and were at least as advantageous to TCI
as could have been obtained from unrelated third parties.

   In 2001, TCI received $120,000 in rent from BCM for BCM's lease at Addison
Hanger.

   In May 2001, TCI exchanged with ARI the 168 unit Glenwood Apartments for two
parcels of land; the 10.5 acre Limestone Ranch land parcel in Lewisville, Texas
and the 8.88 acre Mira Lago land parcel in Farmers Branch, Texas. ARI received
net cash of $3.4 million on the subsequent sale of the apartments.

   In December 2001, TCI purchased 100% of the outstanding common stock of
National Melrose, Inc., a wholly-owned subsidiary of ARI, for $2.0 million in
cash. See NOTE 4. "NOTES AND INTEREST RECEIVABLE."

   In January 2002, TCI purchased 100% of the outstanding common stock of ART
Two Hickory Corporation, a wholly-owned subsidiary of ARI, for $4.4 million in
cash. See NOTE 21. "SUBSEQUENT EVENTS."

   In February 2002, TCI sold a $2.0 million senior participation interest in a
loan to IORI. See NOTE 4. "NOTES AND INTEREST RECEIVABLE."

   In March 2002, TCI paid $600,000 cash and exchanged with ARI the 80,278
sq.ft. Plaza at Bachman Creek Shopping Center in Dallas, Texas for the 24.5
acre Rasor land parcel in Plano, Texas, the 16.89 acre Lakeshore Villas land
parcel in Humble, Texas, and the 45,623 sq.ft. Oak Tree Village Shopping Center
in Lubbock, Texas. ARI received net cash of $4.4 million on the subsequent
financing of the shopping center. See NOTE 21. "SUBSEQUENT EVENTS."

   As more fully described in ITEM 2. "PROPERTIES-Real Estate," TCI is a
partner with IORI in the Tri-City Limited Partnership and Nakash Income
Associates. TCI owns 345,728 shares of IORI's Common Stock, an approximate
24.0% interest. At December 31, 2001, the market value of the IORI common
shares was $6.2 million.

                                      76

<PAGE>

   At December 31, 2001, TCI owned 746,972 shares of ARI common stock which
were primarily purchased in open market transactions in 1990 and 1991 at a
total cost of $1.6 million. The officers of TCI also serve as officers of ARI.
BCM also serves as advisor to ARI and at March 4, 2002, ARI owned approximately
50% of TCI's outstanding Common Stock. At December 31, 2001, the market value
of the ARI common shares was $7.4 million. See ITEM 2. "PROPERTIES--Equity
Investments in Real Estate Entities."

   In 2001, TCI paid BCM, its affiliates and related parties $10.8 million in
advisory, incentive and net income fees, $45,000 in mortgage brokerage and
equity refinancing fees, $2.4 million in property acquisition fees,
$3.8 million in real estate brokerage commissions and $2.6 million in property
and construction management fees and leasing commissions, net of property
management fees paid to subcontractors, other than affiliates of BCM. In
addition, as provided in the Advisory Agreement, BCM received cost
reimbursements of $2.6 million.

   In addition, from time-to-time, TCI and its affiliates have made advances to
each other, which generally have not had specific repayment terms and have been
reflected in TCI's financial statements as other assets or other liabilities.
At December 31, 2001, TCI had receivables of $11.6 million, $1.9 million and
$608,000 from BCM, GS Realty, and ARI, respectively. Also at December 31, 2001,
TCI owed $1.0 million and $39,000 to GS Realty and BCM, respectively. In
January 2002, TCI paid the $1.0 million due to GS Realty and in March 2002, TCI
paid the $39,000 to BCM.

Restrictions on Related Party Transactions

   Article FOURTEENTH of TCI's Articles of Incorporation provides that TCI
shall not, directly or indirectly, contract or engage in any transaction with
(1) any director, officer or employee of TCI, (2) any director, officer or
employee of the advisor, (3) the advisor or (4) any affiliate or associate (as
such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended) of any of the aforementioned persons, unless (a) the material facts
as to the relationship among or financial interest of the relevant individuals
or persons and as to the contract or transaction are disclosed to or are known
by the Board of Directors or the appropriate committee thereof and (b) the
Board of Directors or committee thereof determines that such contract or
transaction is fair to TCI and simultaneously authorizes or ratifies such
contract or transaction by the affirmative vote of a majority of independent
directors of TCI entitled to vote thereon.

   Article FOURTEENTH defines an "Independent Director" as one who is neither
an officer or employee of TCI nor a director, officer or employee of TCI's
advisor.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

   (a) The following documents are filed as part of this Report:

      1. Consolidated Financial Statements

          Report of Independent Certified Public Accountants

          Consolidated Balance Sheets--December 31, 2001 and 2000

          Consolidated Statements of Operations--Years Ended December 31, 2001,
       2000 and 1999

          Consolidated Statements of Stockholders' Equity--Years Ended December
       31, 2001, 2000 and 1999

          Consolidated Statements of Cash Flows--Years Ended December 31, 2001,
       2000 and 1999

          Notes to Consolidated Financial Statements

      2. Financial Statement Schedules

          Schedule III--Real Estate and Accumulated Depreciation

          Schedule IV--Mortgage Loans on Real Estate

                                      77

<PAGE>

   All other schedules are omitted because they are not applicable or because
the required information is shown in the Consolidated Financial Statements or
the Notes thereto.

      3. Incorporated Financial Statements

          Consolidated Financial Statements of Income Opportunity Realty
       Investors, Inc. (incorporated by reference to Item 8 of Income
       Opportunity Realty Investors, Inc.'s Annual Report on Form 10-K for the
       year ended December 31, 2001).

          Consolidated Financial Statements of American Realty Investors, Inc.
       (incorporated by reference to Item 8 of American Realty Investors,
       Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001).

      4. Exhibits

          The following documents are filed as Exhibits to this Report:

<TABLE>
<CAPTION>
Exhibit
Number                                               Description
------                                               -----------
<C>     <S>
 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    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).
 3.4    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).
 3.5    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).
 3.6    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).
 3.7    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, filed herewith.
10.0    Advisory Agreement dated as of October 15, 1998, between Transcontinental Realty Investors, Inc.
        and Basic Capital Management, Inc. (incorporated by reference to Exhibit 10.0 to the Registrant's
        Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
</TABLE>

   (b) Reports on Form 8-K:

      A Current Report on Form 8-K, dated January 29, 2002, was filed with
   respect to Item 5. "Other Events and Regulation FD Disclosures," which
   reports the resignation of R. Douglas Leonhard and Edward G. Zampa as
   Directors of TCI and the election of Henry A. Butler as Director of TCI and
   the execution of the Second Amendment in the Olive Litigation.

                                      78

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S>                   <C> <C>
                          TRANSCONTINENTAL REALTY INVESTORS, INC.

Dated: March 20, 2002 By:          /s/  RONALD E. KIMBROUGH
                          ---------------------------------------
                                      Ronald E. Kimbrough
                                 Executive Vice President and
                                    Chief Financial Officer
                          (Principal Financial and Accounting Officer
                            and Acting Principal Executive Officer)
</TABLE>

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

            Name                          Title             Date
            ----                          -----             ----

     /s/  TED P. STOKELY      Chairman of the Board and     March 20, 2002
-----------------------------   Director
       Ted P. Stokely

    /S/  HENRY A. BUTLER      Director                      March 20, 2002
-----------------------------
       Henry A. Butler

     /S/  EARL D. CECIL       Director                      March 20, 2002
-----------------------------
        Earl D. Cecil

    /S/  MARTIN L. WHITE      Director                      March 20, 2002
-----------------------------
       Martin L. White

  /S/  RONALD E. KIMBROUGH    Executive Vice President and  March 20, 2002
-----------------------------   Chief Financial Officer
     Ronald E. Kimbrough        (Principal Financial and
                                Accounting Officer and
                                Acting Principal Executive
                                Officer)

                                      79

<PAGE>

                          ANNUAL REPORT ON FORM 10-K

                                 EXHIBIT INDEX

                     For the Year Ended December 31, 2001

<TABLE>
<CAPTION>
Exhibit
Number                                             Description
-------                                            -----------
<C>     <S>

  3.7   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.
</TABLE>