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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003



Commission File Number 1-9240



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Transcontinental Realty Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)



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



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



The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the
closing sales price of the Common Stock on the New York Stock Exchange as of June 30, 2003 (the last business day of the Registrants most recently completed second fiscal quarter) was $24,546,325 based upon a total of 1,669,818 shares held as
of June 30, 2003 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if
made as of a date within sixty days of this filing would yield a different value. As of March 19, 2004, there were 8,113,669 shares of common stock outstanding.



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



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##### Table of Contents

INDEX TO

ANNUAL REPORT ON FORM 10-K



|               |  |                                                                                       |  |     
|-------------- |  | ------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                       |  | Page
|PART I         |  |                                                                                      
|               |  |                                                                                      
|Item 1.        |  | Business                                                                              |  | 3   
|Item 2.        |  | Properties                                                                            |  | 5   
|Item 3.        |  | Legal Proceedings                                                                     |  | 15  
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                   |  | 15  
|               | 
|PART II        |  |                                                                                      
|               |  |                                                                                      
|Item 5.        |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 16  
|Item 6.        |  | Selected Financial Data                                                               |  | 17  
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|Item 7A.       |  | Quantitative and Qualitative Disclosures Regarding Market Risk                        |  | 23  
|Item 8.        |  | Financial Statements and Supplementary Data                                           |  | 25  
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 62  
|Item 9A.       |  | Controls and Procedures                                                               |  | 62  
|               | 
|PART III       |  |                                                                                      
|               |  |                                                                                      
|Item 10.       |  | Directors, Executive Officers and Advisor of the Registrant                           |  | 63  
|Item 11.       |  | Executive Compensation                                                                |  | 68  
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 69  
|Item 13.       |  | Certain Relationships and Related Transactions                                        |  | 71  
|Item 14.       |  | Principal Accounting Fees and Services                                                |  | 73  
|               | 
|PART IV        |  |                                                                                      
|               |  |                                                                                      
|Item 15.       |  | Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K        |  | 74  
|Signature Page |  | 76                                                                                   



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##### Table of Contents

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, 2003, consisted of 120 properties held for investment, one partnership property and 13 properties held for sale. In 2003, TCI purchased 10 properties held for investment. TCIs mortgage notes receivable portfolio at December 31, 2003,
consisted of 12 mortgage loans. TCIs real estate and mortgage notes receivable portfolios are more fully discussed in ITEM 2. PROPERTIES.



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



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 (the Olive
Litigation). In February 2002, the court granted final approval of the proposed settlement (the Olive Settlement). Under the Olive Settlement, ARI agreed to either (i) acquire all of the outstanding shares of TCI and IORI not
currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding shares of TCI and IORI not currently owned by ARI. On November 15, 2002, ARI commenced the tender offer for the TCI and
IORI shares. The tender offer was completed on March 18, 2003. ARI paid $19.00 cash per IORI share and $17.50 cash per TCI share for the stock tendered by non-affiliated stockholders. Pursuant to the tender offers, ARI acquired 1,213,226 TCI shares
and 265,036 IORI shares. The completion of the tender offers fulfilled the obligations under the Olive Settlement and the Olive Litigation, originally filed in February 1990, was dismissed with prejudice. TCI has the same board and the same advisor
as ARI. Two of the directors of TCI are also directors of IORI.



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 has four operating segments, Apartments, Commercial Properties, Hotels and land ownership.



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 has also considered the development of apartment properties in selected markets primarily in
Texas. 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 2004. 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.



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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 were performed by Basic Capital Management, Inc. (BCM), a contractual advisor under the supervision of the Board. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by Prime Asset
Management, Inc., (PAMI) under the same terms as BCMs advisory agreement. PAMI is owned by Realty Advisors (79%) and Syntek West, Inc. (21%), related parties. Syntek West, Inc. is owned by Gene Phillips. Effective August 18, 2003,
PAMI changed its name to Prime Income Asset Management, Inc., (PIAMI). On October 1, 2003, Prime Income Asset Management, LLC (Prime), which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. The duties of Prime
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. Prime also serves as a consultant in connection with
TCIs business plan and investment decisions made by the Board.



Prime is indirectly owned by a trust for the children of Gene E. Phillips, and Syntek West, Inc. (which is owned by Mr. Phillips), owns 21% of Prime. Mr. Phillips is not an officer or director of Prime, but serves as a representative of the
trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Primes business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.
Prime is more fully described in ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANTThe Advisor.



BCM had provided advisory services to TCI from March 28, 1989 until June 30, 2003, when Prime replaced BCM as the contractual advisor to TCI. Prime also
serves as advisor to ARI. The Directors of TCI are also directors of ARI. The officers of TCI also serve as officers of ARI, BCM and Prime. As of March 19, 2003 and after completion of the tender offer, TCI owned approximately 24.0% of IORIs
outstanding shares of common stock. ARI owned approximately 64.5% and Prime owned approximately 14.5% of the outstanding shares of TCIs common stock.



Since February 1, 1990, affiliates of BCM and Prime 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 Highland
Realty Services, Inc. (Highland) a related party. Until December 2002, Triad subcontracted the property-level management and leasing of 39 of TCIs commercial properties to Regis Realty, Inc. (Regis), a related party,
which was a company owned by GS Realty Services, Inc. Regis was 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 was
entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Since January 1, 2003, Regis Realty I, LLC (Regis I), has provided these services. Regis I is owned by Highland.
Regis Hotel Corporation, a related party, managed TCIs five hotels, until December 2002. Since January 1, 2003, Regis Hotel I, LLC, has managed TCIs five hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. See ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANTThe Advisor.



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



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.



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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 Prime, 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 Prime 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, Prime 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 and
Prime. 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.



|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, 2003, 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, 2003, none of TCIs properties, mortgage notes
receivable or investment in partnerships exceeded 10% of total assets. At December 31, 2003, 81% of TCIs assets consisted of properties held for investment, 7% consisted of properties held for sale, 4% consisted of mortgage notes and interest
receivable and 2% consisted of investments in partnerships. The remaining 6% 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, 2003, 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, 2003, TCI held mortgage notes receivable secured by apartments and commercial properties in the Southwest and Southeast regions of the continental United States, as shown more specifically in the table under Mortgage Loans below.



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##### Table of Contents

Geographic Regions





LOGO



Excluded from the above
are 35 parcels of unimproved land and one hotel in Wroclaw, Poland, as described below.



Real Estate



At December 31, 2003,
approximately 88% 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s real estate portfolio consists of 134 owned properties. Of the
134 properties, 12 apartments were sold to partnerships controlled by Metra Capital, LLC (Metra). See NOTE 7. NOTES AND INTEREST PAYABLE. Because the Metra sales transaction was accounted for as a finance transaction, TCI
continues to account for the 12 properties as owned properties.



TCI typically invests in developed real estate. However, TCI has recently invested in unimproved land and 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.



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At December 31, 2003, TCI had the following properties under construction:



|                        |  |                 |  |           |  |                |        |                           |   |                         |  |   |       
|----------------------- |  | --------------- |  | --------- |  | -------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------
|Property                |  | Location        |  | Units     |  | AmountExpended |        | AdditionalAmountto Expend |   | ConstructionLoanFunding
|Bluffs at Vista Ridge   |  | Lewisville, TX  |  | 272 Units |  | $              | 2,201  |                           | $ | 18,385                  |  | $ | 15,500
|Breakwater Bay          |  | Beaumont, TX    |  | 176 Units |  |                | 1,691  |                           |   | 7,776                   |  |   | 9,545 
|Capitol Hill            |  | Little Rock, AR |  | 156 Units |  |                | 3,303  |                           |   | 7,276                   |  |   | 9,500 
|DeSoto Ranch            |  | DeSoto, TX      |  | 248 Units |  |                | 16,184 |                           |   | 2,036                   |  |   | 16,273
|Echo Valley             |  | Dallas, TX      |  | 216 Units |  |                | 10,848 |                           |   | 3,371                   |  |   | 12,715
|Heather Creek           |  | Mesquite, TX    |  | 200 Units |  |                | 3,658  |                           |   | 9,644                   |  |   | 12,079
|Kingsland Ranch         |  | Houston, TX     |  | 398 Units |  |                | 14,206 |                           |   | 11,449                  |  |   | 23,000
|Verandas at City View   |  | Fort Worth, TX  |  | 314 Units |  |                | 14,339 |                           |   | 8,505                   |  |   | 19,393
|Vistas at Pinnacle Park |  | Dallas, TX      |  | 332 Units |  |                | 3,261  |                           |   | 17,921                  |  |   | 19,149



In 2002, TCI completed
the 252 unit Limestone Ranch in Lewisville, Texas, the 284 unit Falcon Lakes Apartments in Arlington, Texas, the 190 unit Tivoli Apartments in Dallas, Texas, the 80 unit Waters Edge IV Apartments in Gulfport, Mississippi and the 161 room Hotel
Akademia in Wroclaw, Poland. In 2003, TCI completed 186 unit Blue Lake Villas in Waxahachie, Texas, the 284 unit Falcon Lakes in Arlington, Texas, the 180 unit River Oaks Apartments in Wiley, Texas, the 384 unit Sendero Ridge Apartments in San
Antonio, Texas, the 256 unit Spyglass Apartments in Mansfield, Texas and the 188 unit Windsong Apartments in Fort Worth, Texas.



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 35 parcels of unimproved land, as described below) at December 31, 2003.



|          |  |            |   |  |                       |  
|--------- |  | ---------- | - |  | --------------------- | -
|Region    |  | Apartments |   |  | Commercial Properties |  
|Pacific   |  |           | % |  | .90                   | %
|Midwest   |  | .70        |   |  | 16.31                 |  
|Southwest |  | 94.87      |   |  | 55.33                 |  
|Southeast |  | 4.43       |   |  | 23.24                 |  
|Mountain  |  |           |   |  | 4.22                  |  
|          |  |            |   |  |                       |  
|          |  | 100.00     | % |  | 100.00                | %
|          |  |            |   |  |                       |  



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 35 parcels of unimproved land, two parcels for a total of 22.16 acres in the
Southeast region and 33 parcels for a total of 1,025.38 acres 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.



During 2003, the activity
in TCIs owned real estate portfolio was:



|                                                    |  |     |  
|--------------------------------------------------- |  | --- | -
|Owned properties at January 1, 2003                 |  | 140 |  
|Properties purchased                                |  | 10  |  
|Properties added from consolidation of partnerships |  | 1   |  
|Properties sold                                     |  | (17 | )
|                                                    |  |     |  
|Owned properties at December 31, 2003               |  | 134 |  
|                                                    |  |     |  



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##### Table of Contents

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, 2003,
2002 and 2001, for apartments and commercial properties and average occupancy during 2003, 2002 and 2001 for hotels:



|                          |  |                    |  |                           |  |                      |       |             |   |       |  |      |       |      |     |      |     |  |    
|------------------------- |  | ------------------ |  | ------------------------- |  | -------------------- | ----- | ----------- | - | ----- |  | ---- | ----- | ---- | --- | ---- | --- |  | ---
|                          |  |                    |  |                           |  | Rent Per Square Foot |       | Occupancy %
|Property                  |  | Location           |  | Units/Square Footage      |  | 2003                 |       | 2002        |   | 2001  |  | 2003 |       | 2002 |     | 2001
|Apartments                |  |                    |  |                           |  |                      |       |             |   |       |  |      |       |      |     |      |     |  |    
|4400                      |  | Midland, TX        |  | 92 Units/94,472 Sq. Ft.   |  | $                    | .49   |             | $ | .49   |  | $    | .49   |      | 86  |      | 86  |  | 95 
|Apple Lane                |  | Lawrence, KS       |  | 75 Units/30,000 Sq. Ft.   |  |                      | 1.05  |             |   | 1.04  |  |      | 1.04  |      | 100 |      | 93  |  | 99 
|Arbor Point               |  | Odessa, TX         |  | 195 Units/178,920 Sq. Ft. |  |                      | .45   |             |   | .43   |  |      | .41   |      | 95  |      | 87  |  | 91 
|Ashton Way                |  | Midland, TX        |  | 178 Units/138,964 Sq. Ft. |  |                      | .43   |             |   | .43   |  |      | .43   |      | 87  |      | 82  |  | 89 
|Autumn Chase              |  | Midland, TX        |  | 64 Units/58,652 Sq. Ft.   |  |                      | .55   |             |   | .54   |  |      | .53   |      | 98  |      | 98  |  | 94 
|Bay Walk                  |  | Galveston, TX      |  | 192 Units/153,120 Sq. Ft. |  |                      | .75   |             |   | .74   |  |      | .74   |      | 95  |      | 95  |  | 92 
|Bluelake Villas           |  | Waxahachie, TX     |  | 186 Units/169,746 Sq. Ft. |  |                      | .91   |             |   | **    |  |      | **    |      | 93  |      | **  |  | ** 
|Bluffs at Vista Ridge     |  | Lewisville, TX     |  | 272 Units/257,432 Sq. Ft. |  |                      | **    |             |   | **    |  |      | **    |      | **  |      | **  |  | ** 
|Breakwater Bay            |  | Beaumont, TX       |  | 176 Units/145,688 Sq. Ft. |  |                      | **    |             |   | **    |  |      | **    |      | **  |      | **  |  | ** 
|By the Sea                |  | Corpus Christi, TX |  | 153 Units/123,945 Sq. Ft. |  |                      | .88   |             |   | .86   |  |      | .83   |      | 91  |      | 88  |  | 93 
|Capitol Hill              |  | Little Rock, AR    |  | 156 Units/151,116 Sq. Ft. |  |                      | **    |             |   | **    |  |      | **    |      | **  |      | **  |  | ** 
|Cliffs of Eldorado        |  | McKinney, TX       |  | 208 Units/182,288 Sq. Ft. |  |                      | .85   |             |   | .85   |  |      | .84   |      | 89  |      | 86  |  | 94 
|Courtyard                 |  | Midland, TX        |  | 133 Units/111,576 Sq. Ft. |  |                      | .46   |             |   | .45   |  |      | .43   |      | 99  |      | 93  |  | 89 
|Coventry                  |  | Midland, TX        |  | 120 Units/105,608 Sq. Ft. |  |                      | .44   |             |   | .43   |  |      | .43   |      | 84  |      | 91  |  | 77 
|DeSoto Ranch              |  | DeSoto, TX         |  | 248 Units/240,718 Sq. Ft. |  |                      | .94   |             |   | **    |  |      | *     |      | 98  |      | **  |  | *  
|Echo Valley               |  | Dallas, TX         |  | 216 Units/199,656 Sq. Ft. |  |                      | .89   |             |   | **    |  |      | *     |      | 97  |      | **  |  | *  
|El Chapparal              |  | San Antonio, TX    |  | 190 Units/174,220 Sq. Ft. |  |                      | .73   |             |   | .72   |  |      | .72   |      | 96  |      | 79  |  | 92 
|Fairway View Estates      |  | El Paso, TX        |  | 264 Units/204,000 Sq. Ft. |  |                      | .64   |             |   | .63   |  |      | .62   |      | 96  |      | 92  |  | 86 
|Fairways                  |  | Longview, TX       |  | 152 Units/134,176 Sq. Ft. |  |                      | .58   |             |   | .56   |  |      | .54   |      | 93  |      | 92  |  | 93 
|Falcon Lakes              |  | Arlington, TX      |  | 284 Units/207,960 Sq. Ft. |  |                      | .96   |             |   | .97   |  |      | **    |      | 94  |      | 11  |  | ** 
|Fountain Lake             |  | Texas City, TX     |  | 166 Units/161,220 Sq. Ft. |  |                      | .62   |             |   | .62   |  |      | .59   |      | 96  |      | 89  |  | 96 
|Fountains of Waterford    |  | Midland, TX        |  | 172 Units/129,200 Sq. Ft. |  |                      | .53   |             |   | .53   |  |      | .53   |      | 99  |      | 85  |  | 94 
|Harpers Ferry            |  | Lafayette, LA      |  | 122 Units/112,500 Sq. Ft. |  |                      | .60   |             |   | .59   |  |      | .58   |      | 90  |      | 83  |  | 91 
|Heather Creek             |  | Mesquite, TX       |  | 200 Units/170,212 Sq. Ft. |  |                      | **    |             |   | **    |  |      | **    |      | **  |      | **  |  | ** 
|Hunters Glen              |  | Midland, TX        |  | 212 Units/174,180 Sq. Ft. |  |                      | .39   |             |   | .38   |  |      | .38   |      | 94  |      | 81  |  | 91 
|In the Pines              |  | Gainesville, FL    |  | 242 Units/294,860 Sq. Ft. |  |                      | .54   |             |   | .54   |  |      | .54   |      | 96  |      | 93  |  | 96 
|Island Bay                |  | Galveston, TX      |  | 458 Units/374,784 Sq. Ft. |  |                      | .83   |             |   | .81   |  |      | .81   |      | 91  |      | 90  |  | 87 
|Kingsland Ranch           |  | Houston, TX        |  | 398 Units/350,574 Sq. Ft. |  |                      | **    |             |   | **    |  |      | **    |      | **  |      | **  |  | ** 
|Limestone Canyon          |  | Austin, TX         |  | 260 Units/216,000 Sq. Ft. |  |                      | 1.06  |             |   | 1.06  |  |      | 1.06  |      | 91  |      | 88  |  | 91 
|Limestone Ranch           |  | Lewisville, TX     |  | 252 Units/219,600 Sq. Ft. |  |                      | .94   |             |   | .94   |  |      | **    |      | 91  |      | 91  |  | ** 
|Marina Landing            |  | Galveston, TX      |  | 256 Units/205,504 Sq. Ft. |  |                      | .83   |             |   | .82   |  |      | .87   |      | 95  |      | 96  |  | 90 
|Mountain Plaza            |  | El Paso, TX        |  | 188 Units/220,710 Sq. Ft. |  |                      | .52   |             |   | .51   |  |      | .49   |      | 94  |      | 97  |  | 95 
|Oak Park IV               |  | Clute, TX          |  | 108 Units/78,708 Sq. Ft.  |  |                      | .56   |             |   | .56   |  |      | .54   |      | 91  |      | 95  |  | 94 
|Paramount Terrace         |  | Amarillo, TX       |  | 181 Units/123,840 Sq. Ft. |  |                      | .60   |             |   | .59   |  |      | .57   |      | 93  |      | 91  |  | 94 
|Plantation                |  | Tulsa, OK          |  | 138 Units/103,500 Sq. Ft. |  |                      | .61   |             |   | .61   |  |      | .59   |      | 92  |      | 90  |  | 93 
|Quail Oaks                |  | Balch Springs, TX  |  | 131 Units/72,848 Sq. Ft.  |  |                      | .83   |             |   | .83   |  |      | .81   |      | 95  |      | 85  |  | 93 
|River Oaks                |  | Wiley, TX          |  | 180 Units/164,604 Sq. Ft. |  |                      | .86   |             |   | **    |  |      | **    |      | 98  |      | **  |  | ** 
|Sendero Ridge             |  | San Antonio, TX    |  | 384 Units/340,880 Sq. Ft. |  |                      | 1.01  |             |   | **    |  |      | **    |      | 80  |      | **  |  | ** 
|Somerset                  |  | Texas City, TX     |  | 200 Units/163,368 Sq. Ft. |  |                      | .68   |             |   | .68   |  |      | .66   |      | 88  |      | 87  |  | 91 
|Southgate                 |  | Odessa, TX         |  | 180 Units/151,656 Sq. Ft. |  |                      | .43   |             |   | .43   |  |      | .42   |      | 93  |      | 90  |  | 95 
|Spy Glass                 |  | Mansfield, TX      |  | 256 Units/239,264 Sq. Ft. |  |                      | .95   |             |   | **    |  |      | *     |      | 97  |      | **  |  | *  
|Sunchase                  |  | Odessa, TX         |  | 300 Units/223,048 Sq. Ft. |  |                      | .49   |             |   | .49   |  |      | .44   |      | 96  |      | 91  |  | 96 
|Terrace Hills             |  | El Paso, TX        |  | 310 Units/233,192 Sq. Ft. |  |                      | .70   |             |   | .69   |  |      | .67   |      | 96  |      | 93  |  | 91 
|Tivoli                    |  | Dallas, TX         |  | 190 Units/168,862 Sq. Ft. |  |                      | .95   |             |   | .96   |  |      | **    |      | 92  |      | 27  |  | ** 
|Timbers                   |  | Tyler, TX          |  | 180 Units/101,666 Sq. Ft. |  |                      | .60   |             |   | .59   |  |      | .57   |      | 92  |      | 93  |  | 92 
|Verandas at City View     |  | Fort Worth, TX     |  | 314 Units/295,170 Sq. Ft. |  |                      | .60   |             |   | **    |  |      | **    |      | 92  |      | **  |  | ** 
|Vistas at Pinnacle Park   |  | Dallas, TX         |  | 332 Units/276,928 Sq. Ft. |  |                      | **    |             |   | **    |  |      | *     |      | **  |      | **  |  | *  
|Waters Edge IV            |  | Gulfport, MS       |  | 80 Units/76,400 Sq. Ft.   |  |                      | .76   |             |   | .76   |  |      | **    |      | 94  |      | 74  |  | ** 
|Westwood                  |  | Odessa, TX         |  | 79 Units/49,001 Sq. Ft.   |  |                      | .44   |             |   | .49   |  |      | .48   |      | 100 |      | 80  |  | 92 
|Willow Creek              |  | El Paso, TX        |  | 112 Units/103,140 Sq. Ft. |  |                      | .57   |             |   | .55   |  |      | .54   |      | 96  |      | 94  |  | 94 
|Willo-Wick Gardens        |  | Pensacola, FL      |  | 152 Units/153,360 Sq. Ft. |  |                      | .55   |             |   | .54   |  |      | .54   |      | 91  |      | 84  |  | 91 
|Windsong                  |  | Fort Worth, TX     |  | 188 Units/169,464 Sq. Ft. |  |                      | **    |             |   | **    |  |      | *     |      | **  |      | **  |  | *  
|Woodview                  |  | Odessa, TX         |  | 232 Units/165,840 Sq. Ft. |  |                      | .52   |             |   | .51   |  |      | .48   |      | 94  |      | 85  |  | 95 
|                          |  |                    |  |                           |  |                      |       |            
|Office Buildings          |  |                    |  |                           |  |                      |       |             |   |       |  |      |       |      |     |      |     |  |    
|1010 Common               |  | New Orleans, LA    |  | 494,579 Sq. Ft.           |  |                      | 13.63 |             |   | 12.77 |  |      | 11.28 |      | 82  |      | 74  |  | 36 
|225 Baronne               |  | New Orleans, LA    |  | 416,834 Sq. Ft.           |  |                      | 10.63 |             |   | 9.89  |  |      | 9.77  |      | 65  |      | 76  |  | 75 
|4135 Beltline Road        |  | Addison, TX        |  | 90,000 Sq. Ft.            |  |                      | 10.01 |             |   | 9.00  |  |      | 10.33 |      | 14  |      |    |  |   
|9033 Wilshire             |  | Los Angeles, CA    |  | 44,253 Sq. Ft.            |  |                      | 30.16 |             |   | 29.24 |  |      | 27.67 |      | 70  |      | 63  |  | 88 
|Ambulatory Surgery Center |  | Sterling, VA       |  | 33,832 Sq. Ft.            |  |                      | 23.32 |             |   | 23.12 |  |      | 20.37 |      | 100 |      | 100 |  | 100
|Amoco                     |  | New Orleans, LA    |  | 378,244 Sq. Ft.           |  |                      | 13.37 |             |   | 12.73 |  |      | 12.07 |      | 78  |      | 79  |  | 79 
|Atrium                    |  | Palm Beach, FL     |  | 74,603 Sq. Ft.            |  |                      | 10.68 |             |   | 12.73 |  |      | 12.69 |      | 63  |      | 64  |  | 82 
|Bay Plaza                 |  | Tampa, FL          |  | 75,780 Sq. Ft.            |  |                      | 14.98 |             |   | 15.85 |  |      | 15.96 |      | 80  |      | 86  |  | 99 
|Bay Plaza II              |  | Tampa, FL          |  | 78,882 Sq. Ft.            |  |                      | 13.23 |             |   | 13.01 |  |      | 13.03 |      | 78  |      | 72  |  | 91 
|Brandeis                  |  | Omaha, NE          |  | 319,234 Sq. Ft.           |  |                      | 14.16 |             |   | 12.98 |  |      | 10.88 |      | 73  |      | 76  |  | 89 
|Centura                   |  | Farmers Branch, TX |  | 410,901 Sq. Ft.           |  |                      | 23.79 |             |   | 24.02 |  |      | *     |      | 61  |      | 52  |  | *  
|Corporate Pointe          |  | Chantilly, VA      |  | 65,918 Sq. Ft.            |  |                      | 20.85 |             |   | 20.24 |  |      | 19.72 |      | 100 |      | 100 |  | 100



8



---

##### Table of Contents

|                             |  |                      |  |                      |  |                      |  |             |  |       |  |      |  |      |  |     
|---------------------------- |  | -------------------- |  | -------------------- |  | -------------------- |  | ----------- |  | ----- |  | ---- |  | ---- |  | ----
|                             |  |                      |  |                      |  | Rent Per Square Foot |  | Occupancy %
|Property                     |  | Location             |  | Units/Square Footage |  | 2003                 |  | 2002        |  | 2001  |  | 2003 |  | 2002 |  | 2001
|Office Buildings (continued) |  |                      |  |                      |  |                      |  |             |  |       |  |      |  |      |  |     
|Durham Center                |  | Durham, NC           |  | 207,171 Sq. Ft.      |  | 17.73                |  | 17.79       |  | 17.65 |  | 83   |  | 98   |  | 94  
|Eton Square                  |  | Tulsa, OK            |  | 222,654 Sq. Ft.      |  | 11.60                |  | 11.35       |  | 11.27 |  | 38   |  | 42   |  | 63  
|Forum                        |  | Richmond, VA         |  | 79,791 Sq. Ft.       |  | 14.23                |  | 15.32       |  | 15.99 |  | 61   |  | 60   |  | 70  
|Institute Place              |  | Chicago, IL          |  | 144,915 Sq. Ft.      |  | 17.21                |  | 17.13       |  | 16.23 |  | 83   |  | 88   |  | 95  
|Lexington Center             |  | Colorado Springs, CO |  | 74,603 Sq. Ft.       |  | 12.33                |  | 13.41       |  | 12.88 |  | 70   |  | 84   |  | 83  
|Mimado                       |  | Sterling, VA         |  | 35,127 Sq. Ft.       |  | 19.98                |  | 19.77       |  | 19.97 |  | 64   |  | 79   |  | 73  
|One Steeplechase             |  | Sterling, VA         |  | 103,376 Sq. Ft.      |  | 18.35                |  | 17.76       |  | 17.19 |  | 100  |  | 100  |  | 100 
|Parkway North                |  | Dallas, TX           |  | 71,041 Sq. Ft.       |  | 18.08                |  | 17.41       |  | 17.00 |  | 64   |  | 72   |  | 73  
|Venture Center               |  | Atlanta, GA          |  | 38,272 Sq. Ft.       |  | 17.87                |  | 18.53       |  | 17.85 |  | 28   |  | 71   |  | 100 
|Westgrove Air Plaza          |  | Addison, TX          |  | 78,326 Sq. Ft.       |  | 13.26                |  | 13.96       |  | 13.54 |  | 94   |  | 66   |  | 81  
|                             |  |                      |  |                      |  |                      |  |            
|Industrial Warehouses        |  |                      |  |                      |  |                      |  |             |  |       |  |      |  |      |  |     
|5360 Tulane                  |  | Atlanta, GA          |  | 30,000 Sq. Ft.       |  | 2.80                 |  | 2.75        |  | 2.75  |  | 65   |  | 100  |  | 100 
|5700 Tulane                  |  | Atlanta, GA          |  | 67,850 Sq. Ft.       |  | 2.14                 |  | 2.45        |  | 2.93  |  | 65   |  | 12   |  | 7   
|Addison Hanger               |  | Addison, TX          |  | 23,650 Sq. Ft.       |  | 7.94                 |  | 8.12        |  | 10.07 |  | 100  |  | 98   |  | 86  
|Addison Hanger II            |  | Addison, TX          |  | 29,000 Sq. Ft.       |  | 9.64                 |  | 9.33        |  | 7.21  |  | 92   |  | 97   |  | 12  
|Encon                        |  | Fort Worth, TX       |  | 256,410 Sq. Ft.      |  | 3.17                 |  | 3.17        |  | 3.08  |  | 100  |  | 100  |  | 100 
|Space Center                 |  | San Antonio, TX      |  | 101,500 Sq. Ft.      |  | 3.43                 |  | 3.46        |  | 3.18  |  | 84   |  | 84   |  | 89  
|Texstar                      |  | Arlington, TX        |  | 97,846 Sq. Ft.       |  | 2.28                 |  | 2.19        |  | 2.11  |  | 100  |  | 100  |  | 100 
|                             |  |                      |  |                      |  |                      |  |            
|Shopping Centers             |  |                      |  |                      |  |                      |  |             |  |       |  |      |  |      |  |     
|Bridgeview Plaza             |  | LaCrosse, WI         |  | 116,008 Sq. Ft.      |  | 7.25                 |  | *           |  | *     |  | 90   |  | *    |  | *   
|Cullman                      |  | Cullman, AL          |  | 92,466 Sq. Ft.       |  | 3.53                 |  | *           |  | *     |  | 95   |  | *    |  | *   
|Dunes Plaza                  |  | Michigan City, IN    |  | 223,869 Sq. Ft.      |  | 5.51                 |  | 5.83        |  | 5.81  |  | 61   |  | 69   |  | 62  
|K-Mart                       |  | Cary, NC             |  | 92,033 Sq. Ft.       |  | 3.28                 |  | 3.28        |  | 3.28  |  | 100  |  | 100  |  | 100 
|Promenade                    |  | Highland Ranch, CO   |  | 133,558 Sq. Ft.      |  | 10.94                |  | 12.41       |  | 13.06 |  | 79   |  | 81   |  | 75  
|Sadler Square                |  | Amelia Island, FL    |  | 70,295 Sq. Ft.       |  | 7.64                 |  | 7.41        |  | 7.21  |  | 94   |  | 92   |  | 93  
|                             |  |                      |  |                      |  |                      |  |            
|Other                        |  |                      |  |                      |  |                      |  |             |  |       |  |      |  |      |  |     
|Signature Athletic Club      |  | Dallas, TX           |  | 56,532 Sq. Ft.       |  |                      |  |             |  |       |  |      |  |      |  |     



|             |  |                   |  |           |  |                   |        |             |   |                                                      |  |      |        |      |    |      |    |      |    |      |   |       |  |   |       |  |   |      
|------------ |  | ----------------- |  | --------- |  | ----------------- | ------ | ----------- | - | ---------------------------------------------------- |  | ---- | ------ | ---- | -- | ---- | -- | ---- | -- | ---- | - | ----- |  | - | ----- |  | - | -----
|             |  |                   |  |           |  | Average Room Rate |        | Occupancy % |   | Total Room Revenues Divided By Total Available Rooms
|Property     |  | Location          |  | Rooms     |  | 2003              |        | 2002        |   | 2001                                                 |  | 2003 |        | 2002 |    | 2001 |    | 2003 |    | 2002 |   | 2001 
|Hotels       |  |                   |  |           |  |                   |        |             |   |                                                      |  |      |        |      |    |      |    |      |    |      |   |       |  |   |       |  |   |      
|Willows      |  | Chicago, IL       |  | 52 Rooms  |  | $                 | 121.24 |             | $ | 129.76                                               |  | $    | 130.37 |      | 53 |      | 49 |      | 53 |      | $ | 69.54 |  | $ | 63.35 |  | $ | 69.65
|City Suites  |  | Chicago, IL       |  | 45 Rooms  |  |                   | 120.16 |             |   | 131.46                                               |  |      | 131.16 |      | 58 |      | 56 |      | 61 |      |   | 76.78 |  |   | 73.38 |  |   | 81.13
|Majestic Inn |  | San Francisco, CA |  | 57 Rooms  |  |                   | 107.67 |             |   | 141.62                                               |  |      | 174.85 |      | 52 |      | 37 |      | 41 |      |   | 66.68 |  |   | 52.25 |  |   | 79.10
|The Majestic |  | Chicago, IL       |  | 55 Rooms  |  |                   | 124.47 |             |   | 133.79                                               |  |      | 129.63 |      | 48 |      | 52 |      | 55 |      |   | 57.86 |  |   | 64.31 |  |   | 71.52
|Akademia     |  | Wroclaw, Poland   |  | 161 Rooms |  |                   | 47.78  |             |   | 48.92                                                |  |      | **     |      | 51 |      | 33 |      | ** |      |   | 46.86 |  |   | 15.97 |  |   | **   



|                    |  |                    |  |              
|------------------- |  | ------------------ |  | -------------
|Property            |  | Location           |  | Acres        
|Land                |  |                    |  |              
|1013 Common         |  | New Orleans, LA    |  | .413 Acres   
|2301 Valley Branch  |  | Farmers Branch, TX |  | 23.763 Acres 
|Alamo Springs       |  | Dallas, TX         |  | .678 Acres   
|Centura             |  | Farmers Branch, TX |  | 8.753 Acres  
|Dominion            |  | Farmers Branch, TX |  | 14.39 Acres  
|Fiesta              |  | San Angelo, TX     |  | .6657 Acres  
|Fruitland           |  | Fruitland Park, FL |  | 4.66 Acres   
|Folsom              |  | Farmers Branch, TX |  | 36.777 Acres 
|Hollywood Casino    |  | Farmers Branch, TX |  | 42.815 Acres 
|Lakeshore Villas    |  | Humble, TX         |  | 16.89 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   
|Manhatten           |  | Farmers Branch, TX |  | 108.892 Acres
|Marine Creek        |  | Ft. Worth, TX      |  | 54 Acres     
|Mason Park          |  | Houston, TX        |  | 18 Acres     
|Maumelle            |  | Maumelle, AR       |  | 10.8 Acres   
|Mira Lago           |  | Farmers Branch, TX |  | 8.88 Acres   
|Nashville           |  | Nashville, TN      |  | 16.57 Acres  
|Pac Trust           |  | Farmers Branch, TX |  | 7.07 Acres   
|Pulaski             |  | Pulaski County, AR |  | 21.9 Acres   
|Rasor               |  | Plano, TX          |  | 24.5 Acres   
|Round Mountain      |  | Austin, TX         |  | 18 Acres     
|Seminary West       |  | Ft. Worth, TX      |  | 5.36 Acres   
|Sheffield Village   |  | Grand Prairie, TX  |  | 13.9 Acres   
|West End            |  | Dallas, TX         |  | 6.8 Acres    

---

|* | Property was purchased in 2002 or 2003.
|- | ---------------------------------------

|** | Property was under construction.
|-- | --------------------------------



9



---

##### Table of Contents

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



In 2003, TCI purchased the
following properties:



|                    |  |                    |  |                     |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|------------------- |  | ------------------ |  | ------------------- |  | ------------- | ------ | ------------ | - | ------------ |  | - | ------------ | --- |  | ------------ | --- |  | ----- | ---
|Property            |  | Location           |  | Units/Sq. Ft./Acres |  | PurchasePrice |        | Net CashPaid |   | DebtIncurred |  |   | InterestRate |     |  | MaturityDate |    
|Apartments          |  |                    |  |                     |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|Breakwater Bay(1)   |  | Beaumont, TX       |  | 176 Units           |  | $             | 1,979  |              | $ | 383          |  | $ | 1,554        |     |  | %            |     |  |      |    
|Capitol Hill(1)     |  | Little Rock, AR    |  | 156 Units           |  |               | 1,904  |              |   | 615          |  |   | 1,289        |     |  |             |     |  |      |    
|Heather Creek(1)    |  | Mesquite, TX       |  | 200 Units           |  |               | 2,523  |              |   | 449          |  |   | 2,074        |     |  |             |     |  |      |    
|Kingsland Ranch(1)  |  | Houston, TX        |  | 398 Units           |  |               | 3,300  |              |   |             |  |   | 3,300        |     |  |             |     |  |      |    
|Windsong            |  | Fort Worth, TX     |  | 188 Units           |  |               | 11,939 |              |   | 1,194        |  |   | 10,745       |     |  | 7.20         |     |  | 10/43 |    
|                    |  |                    |  |                     |  |               |       
|Shopping Center     |  |                    |  |                     |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|Bridgeview Plaza(2) |  | LaCrosse, WI       |  | 116,008 Sq. Ft.     |  |               | 8,700  |              |   |             |  |   |             |     |  |             |     |  |      |    
|Cullman(2)          |  | Cullman, AL        |  | 92,433 Sq. Ft.      |  |               | 2,000  |              |   |             |  |   | 2,650        | (4) |  | 16.75        |     |  | 3/03  | (3)
|                    |  |                    |  |                     |  |               |       
|Land                |  |                    |  |                     |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|Maumelle            |  | Maumelle, AR       |  | 10.8 Acres          |  |               | 1,100  |              |   | 412          |  |   | 640          |     |  | 5.75         |     |  | 07/04 |    
|Pulaski             |  | Pulaski County, AR |  | 21.9 Acres          |  |               | 2,000  |              |   | 695          |  |   | 1,400        |     |  | 6.50         |     |  | 05/05 |    
|Sheffield Village   |  | Grand Prairie, TX  |  | 13.899 Acres        |  |               | 1,500  |              |   | 464          |  |   | 975          |     |  | 5.50         | (5) |  | 09/04 |    

---

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

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

|(3) | Debt was paid off in April refinance. See NOTE 7. NOTES AND INTEREST PAYABLE.
|--- | -------------------------------------------------------------------------------

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

|(5) | Variable interest rate.
|--- | -----------------------



In 2003, TCI sold the following properties:



|                                   |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|---------------------------------- |  | ----------------- |  | ------------------- |  | ---------- | ------ | ---------------- | - | ----- | -------------- |  | - | ------------------ | ---- |  | - | ------ | ----
|Property                           |  | Location          |  | Units/Sq. Ft./Acres |  | SalesPrice |        | Net CashReceived |   |       | DebtDischarged |  |   | Gain/(Loss)on Sale |     
|Apartments                         |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Lincoln Court                      |  | Dallas, TX        |  | 55 Units            |  | $          | 3,038  |                  | $ | 1,834 |                |  | $ | 1,208              | (1)  |  | $ | 1,654  |     
|Quail Creek                        |  | Lawrence, KS      |  | 96 Units            |  |            | 4,700  |                  |   | 1,188 |                |  |   | 3,260              |      |  |   | 1,358  |     
|Stone Oak                          |  | San Antonio, TX   |  | 252 Units           |  |            | 6,930  |                  |   | 3,670 |                |  |   | 2,699              |      |  |   | 4,193  |     
|Summerfield                        |  | Orlando, FL       |  | 224 Units           |  |            | 9,415  |                  |   | 4,845 |                |  |   | 4,476              |      |  |   | 3,684  |     
|Treehouse(5)                       |  | Irving, TX        |  | 160 Units           |  |            | 7,500  |                  |   |      |                |  |   | 5,083              | (12) |  |   |       | (6) 
|Willow Wick                        |  | North Augusta, NC |  | 104 Units           |  |            | 2,707  |                  |   | 255   |                |  |   | 1,943              |      |  |   | 999    |     
|                                   |  |                   |  |                     |  |           
|Office Building                    |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Bonita Plaza                       |  | Bonita, CA        |  | 47,777 Sq. Ft.      |  |            | 8,034  |                  |   | 1,647 |                |  |   | 5,944              |      |  |   | 2,139  |     
|Remington Tower                    |  | Tulsa, OK         |  | 90,009 Sq. Ft.      |  |            | 3,360  |                  |   | (80   | )              |  |   | 3,360              | (1)  |  |   | (1,056 | )   
|Industrial Warehouse               |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Kelly (301 Hilltop)                |  | Dallas, TX        |  | 76,946 Sq. Ft.      |  |            | 1,800  |                  |   |      |                |  |   | 1,712              |      |  |   | 639    |     
|Kelly (108th Street)               |  | Dallas, TX        |  | 20,871 Sq. Ft.      |  |            | 675    |                  |   |      |                |  |   | 634                |      |  |   | 357    |     
|McLeod                             |  | Orlando, FL       |  | 110,914 Sq. Ft.     |  |            | 5,450  |                  |   | 2,980 |                |  |   | 1,902              |      |  |   | 2,490  |     
|Tricon                             |  | Atlanta, GA       |  | 570,877 Sq. Ft.     |  |            | 13,084 |                  |   | 3,364 |                |  |   | 9,395              |      |  |   | 4,587  |     
|Shopping Center                    |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|K-Mart                             |  | Sheboygan, WI     |  | 74,532 Sq. Ft.      |  |            | 1,225  |                  |   | 669   |                |  |   | 569                |      |  |   | 12     |     
|Oak Tree Village                   |  | Lubbock, TX       |  | 45,623 Sq. Ft.      |  |            | 3,366  |                  |   |      | (4)            |  |   | 1,328              |      |  |   | 590    |     
|Parkway Centre(7)                  |  | Dallas, TX        |  | 28,374 Sq. Ft.      |  |            | 4,000  |                  |   |      |                |  |   | 1,640              | (12) |  |   |       | (8) 
|                                   |  |                   |  |                     |  |           
|Land                               |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Eagle Crest(9)                     |  | Dallas, TX        |  | 19.99 Acres         |  |            | 4,000  |                  |   |      |                |  |   |                   |      |  |   |       | (10)
|Palm Desert                        |  | Palm Desert, CA   |  | 25.06 Acres         |  |            | 2,800  |                  |   |      | (3)            |  |   |                   |      |  |   | 617    |     
|Sendero Ranch                      |  | Fort Worth, TX    |  | 14 Acres            |  |            | 300    |                  |   | 292   |                |  |   |                   |      |  |   | (770   | )   
|Solco-Valley Ranch                 |  | Dallas, TX        |  | 6.0693 Acres        |  |            | 1,999  |                  |   |      | (2)            |  |   |                   |      |  |   | 384    |     
|State Highway 121/Watters Road(11) |  | Collin County, TX |  | 37.08 Acres         |  |            | 2,188  |                  |   | 1,197 |                |  |   | 912                |      |  |   | 1,410  |     

---

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

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

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

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



10



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##### Table of Contents

|(5) | Property sold to IORI, a related party, for assumption of debt and reduction of $2.4 million in affiliate receivables.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(6) | Excludes a $4.4 million deferred gain from seller financing. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|--- | ---------------------------------------------------------------------------------------------------------

|(7) | Property sold to IORI, a related party, for assumption of debt and reduction of $2.3 million in affiliate receivables.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(8) | Excludes a $2.3 million deferred gain from seller financing. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|--- | ---------------------------------------------------------------------------------------------------------

|(9) | Property sold to IORI, a related party, for forgiveness of debt.
|--- | ----------------------------------------------------------------

|(10) | Excludes a $1.7 million deferred gain from a related party sale. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|---- | -------------------------------------------------------------------------------------------------------------

|(11) | Approximately 20 acres of Watters Road and 17.08 acres of State Highway 121 were sold together in a single transaction.
|---- | -----------------------------------------------------------------------------------------------------------------------

|(12) | Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------



In 2003, TCI financed/refinanced the following property:



|                          |  |                 |  |                     |  |              |        |                |   |                        |  |   |              |     |  |              |      |  |      
|------------------------- |  | --------------- |  | ------------------- |  | ------------ | ------ | -------------- | - | ---------------------- |  | - | ------------ | --- |  | ------------ | ---- |  | -----
|Property                  |  | Location        |  | Sq. Ft./Units/Acres |  | DebtIncurred |        | DebtDischarged |   | NetCashReceived/(Paid) |  |   | InterestRate |     |  | MaturityDate
|Apartments                |  |                 |  |                     |  |              |        |                |   |                        |  |   |              |     |  |              |      |  |      
|Mountain Plaza            |  | El Paso, TX     |  | 188 Units           |  | $            | 4,350  |                | $ | 4,034                  |  | $ | 15           |     |  | 6.63         | %(1) |  | 03/06
|Plantation                |  | Tulsa, OK       |  | 138 Units           |  |              | 2,320  |                |   | 1,924                  |  |   | 173          |     |  | 5.60         |      |  | 01/10
|Stone Oak                 |  | San Antonio, TX |  | 252 Units           |  |              | 2,500  |                |   | 2,699                  |  |   | 2,500        |     |  | 5.00         |      |  | 04/03
|Tree House                |  | Irving, TX      |  | 160 Units           |  |              | 5,100  |                |   | 2,518                  |  |   | 2,183        |     |  | 5.00         | (1)  |  | 08/13
|                          |  |                 |  |                     |  |              |       
|Office Building           |  |                 |  |                     |  |              |        |                |   |                        |  |   |              |     |  |              |      |  |      
|1010 Common               |  | New Orleans, LA |  | 494,579 Sq. Ft.     |  |              | 5,574  |                |   | 7,876                  |  |   | 1,320        |     |  | 5.50         | (1)  |  | 12/06
|225 Baronne               |  | New Orleans, LA |  | 416,834 Sq. Ft.     |  |              | 6,286  |                |   | 7,108                  |  |   |             |     |  | 5.50         | (1)  |  | 12/06
|Ambulatory Surgery Center |  | Sterling, VA    |  | 33,832 Sq. Ft.      |  |              | 3,425  |                |   | 6,269                  |  |   |             |     |  | 5.25         | (1)  |  | 12/06
|Amoco                     |  | New Orleans, LA |  | 378,244 Sq. Ft.     |  |              | 10,140 |                |   | 14,408                 |  |   |             |     |  | 5.50         | (1)  |  | 12/06
|Bonita Plaza              |  | Bonita, CA      |  | 47,777 Sq. Ft.      |  |              | 6,000  |                |   | 4,824                  |  |   | 1,134        |     |  | 5.25         | (1)  |  | 01/10
|Countryside Retail Center |  | Sterling, VA    |  | 133,422 Sq. Ft.     |  |              | 17,342 |                |   | 16,102                 |  |   | 101          |     |  | 5.25         | (1)  |  | 12/06
|Harmon                    |  | Sterling, VA    |  | 72,062 Sq. Ft.      |  |              | 8,869  |                |   | 7,569                  |  |   |             |     |  | 5.25         | (1)  |  | 12/06
|Mimado                    |  | Sterling, VA    |  | 35,127 Sq. Ft.      |  |              | 4,790  |                |   | 4,486                  |  |   |             |     |  | 5.25         | (1)  |  | 12/06
|                          |  |                 |  |                     |  |              |       
|Industrial Warehouse      |  |                 |  |                     |  |              |        |                |   |                        |  |   |              |     |  |              |      |  |      
|Ogden Industrial          |  | Ogden, UT       |  | 107,112 Sq. Ft.     |  |              | 1,800  |                |   |                       |  |   | 1,722        |     |  | 6.25         | (1)  |  | 04/05
|                          |  |                 |  |                     |  |              |       
|Shopping Center           |  |                 |  |                     |  |              |        |                |   |                        |  |   |              |     |  |              |      |  |      
|Bridgeview                |  | LaCrosse, WI    |  | 116,008 Sq. Ft.     |  |              | 6,500  |                |   |                       |  |   | 6,152        |     |  | 6.25         | (1)  |  | 04/05
|Cullman                   |  | Cullman, AL     |  | 92,433 Sq. Ft.      |  |              | 1,700  |                |   | 2,650                  |  |   | 1,048        |     |  | 6.25         | (1)  |  | 04/05
|                          |  |                 |  |                     |  |              |       
|Land                      |  |                 |  |                     |  |              |        |                |   |                        |  |   |              |     |  |              |      |  |      
|Rasor                     |  | Plano, TX       |  | 24.5 Acres          |  |              | 1,260  |                |   |                       |  |   |             | (2) |  | 7.00         | (1)  |  | 11/04

---

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

|(2) | Funds received by an affiliate increasing the affiliate receivable balance by $1,226.
|--- | -------------------------------------------------------------------------------------



Properties Held for Sale.    Set forth below are TCIs properties held for sale.



|                          |  |                   |  |               
|------------------------- |  | ----------------- |  | --------------
|Property                  |  | Location          |  | Acres         
|Apartments                |  |                   |  |               
|Sandstone                 |  | Mesa, AZ          |  | 238 Units     
|                          |  |                  
|Land                      |  |                   |  |               
|McKinney 36               |  | Collin County, TX |  | 34.58 Acres   
|Red Cross                 |  | Dallas, TX        |  | 2.89 Acres    
|Sandison                  |  | Collin County, TX |  | 97.97 Acres   
|SolcoAllen               |  | Collin County, TX |  | 55.8 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   
|Whisenant                 |  | Collin County, TX |  | 16.16 Acres   
|                          |  |                  
|                          |  |                   |  | Square Feet   
|Office Buildings          |  |                   |  |               
|Countryside Retail Center |  | Sterling, VA      |  | 133,422 Sq.Ft.
|Harmon                    |  | Sterling, VA      |  | 72,062 Sq.Ft. 
|                          |  |                  
|Industrial Warehouses     |  |                   |  |               
|Kelly Warehouses          |  | Dallas, TX        |  | 197,150 Sq.Ft.
|Ogden Industrial          |  | Ogden, UT         |  | 107,112 Sq.Ft.



11



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##### Table of Contents

Partnership Properties.    TCI accounts for partnership properties using the
equity method. Set forth below are the properties owned by partnerships, the average annual rental rate for commercial properties, and occupancy rates at December 31, 2003, 2002 and 2001:



|                  |  |                    |      |                |      |                      |      |             |      |   |      |   |       |  |   |  |   |  |    |  
|----------------- |  | ------------------ | ---- | -------------- | ---- | -------------------- | ---- | ----------- | ---- | - | ---- | - | ----- |  | - |  | - |  | -- | -
|Property          |  | Location           |      | Square Footage |      | Rent Per Square Foot |      | Occupancy % |     
|                  |  |                    | 2003 |                | 2002 |                      | 2001 |             | 2003 |   | 2002 |   | 2001  | 
|Office Building   |  |                    |      |                |      |                      |      |             |      |   |      |   |       |  |   |  |   |  |    |  
|Prospect Park #29 |  | Rancho Cordova, CA |      | 40,807 Sq. Ft. |      | $                    |     |             | $    |  |      | $ | 19.52 |  |  |  |  |  | 72 | %



TCI is a 30% general
partner in Sacramento Nine (SAC 9), which owns the Prospect Park #29 Office Building.



TCI recorded asset impairments of $4.7 million in 2003 and $2.6 million for 2002, representing the write down of certain operating properties to current
estimated fair value. The assets for 2003 include the following properties:



|                |  |            |  |                 |  |           |       |               |   |              |  |            |       |  |   |      
|--------------- |  | ---------- |  | --------------- |  | --------- | ----- | ------------- | - | ------------ |  | ---------- | ----- |  | - | -----
|Property        |  | Location   |  | Sq. Feet/ Acres |  | FairValue |       | PropertyBasis |   | Costs toSell |  | Impairment
|Office Building |  |            |  |                 |  |           |       |               |   |              |  |            |       |  |   |      
|Brandeis        |  | Omaha, NE  |  | 319,234 Sq. Ft. |  | $         | 8,821 |               | $ | 13,630       |  | $          |      |  | $ | 4,515
|                |  |            |  |                 |  |          
|Land            |  |            |  |                 |  |           |       |               |   |              |  |            |       |  |   |      
|Red Cross       |  | Dallas, TX |  | 2.89 Acres      |  |           | 8,500 |               |   | 7,679        |  |            | 1,019 |  |   | 198  



Brandeis was returned
to the lien holder via a Deed in Lieu of Foreclosure on February 27, 2004 and the outstanding debt and accrued interest was used as the fair value. The gross impairment for Brandeis was $4.9 million but was reduced by $452,000 for the minority
interest portion. Red Cross land was sold on January 30, 2004 and the actual sales price less selling costs was used as the fair value.



The assets for 2002 include the following properties:



|                       |  |              |  |              |  |           |       |               |   |              |  |            |     |  |   |    
|---------------------- |  | ------------ |  | ------------ |  | --------- | ----- | ------------- | - | ------------ |  | ---------- | --- |  | - | ---
|Property               |  | Location     |  | Units/ Acres |  | FairValue |       | PropertyBasis |   | Costs toSell |  | Impairment
|Apartments             |  |              |  |              |  |           |       |               |   |              |  |            |     |  |   |    
|Apple Lane             |  | Lawrence, KS |  | 75 Units     |  | $         | 1,580 |               | $ | 1,593        |  | $          | 238 |  | $ | 251
|Fairway View           |  | El Paso, TX  |  | 264 Units    |  |           | 5,700 |               |   | 5,242        |  |            | 863 |  |   | 405
|Fountains of Waterford |  | Midland, TX  |  | 172 Units    |  |           | 1,900 |               |   | 2,006        |  |            | 285 |  |   | 391
|Plantation             |  | Tulsa, OK    |  | 138 Units    |  |           | 2,545 |               |   | 3,100        |  |            | 145 |  |   | 700
|Sunchase               |  | Odessa, TX   |  | 300 Units    |  |           | 4,100 |               |   | 3,479        |  |            | 746 |  |   | 125
|                       |  |              |  |              |  |          
|Land                   |  |              |  |              |  |           |       |               |   |              |  |            |     |  |   |    
|Red Cross              |  | Dallas, TX   |  | 2.89 Acres   |  |           | 8,400 |               |   | 8,348        |  |            | 758 |  |   | 707



The Red Cross land was
under contract to sell in 2002 and the sales price was used as fair value. The fair value determined for four apartments above were agreed upon purchase prices as part of the refinancing transaction with Metra Capital, LLC. The costs to sell were
actual fees paid to refinance the properties. TCI refinanced the Plantation Apartments in May 2003, incurring a new note for $2.3 million and discharging debt of $1.9 million. See NOTE 7. NOTES AND INTEREST PAYABLE.



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, 2003, consisted of two apartments, five office buildings, unimproved land, a partnership interest, an assignment of
claims from litigation and two unsecured loans. 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, 2003, TCIs mortgage notes receivable portfolio included seven mortgage loans with an aggregate principal balance of $23.6 million
secured by income-producing real estate located in the Southeast and Southwest regions of the continental



12



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##### Table of Contents

United States, one mortgage loan with an aggregate principal balance of $2.4 million secured by unimproved land in the
Southwest region of the continental United States, one loan with a principal balance of $300,000 secured by a partnership interest, one loan with a principal balance of $4.3 million secured by an assignment of litigation proceeds and two unsecured
loans with a principal balance of $64,000. At December 31, 2003, 3.6% 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, 2003. 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.



|          |  |            |   |  |                      |   |  |       |  
|--------- |  | ---------- | - |  | -------------------- | - |  | ----- | -
|Region    |  | Apartments |   |  | CommercialProperties |   |  | Total |  
|Southwest |  | 3.8        | % |  | 83.2                 | % |  | 87.0  | %
|Southeast |  | 4.6        |   |  | 8.4                  |   |  | 13.0  |  
|          |  |            |   |  |                      |   |  |       |  
|          |  | 8.4        | % |  | 91.6                 | % |  | 100.0 | %
|          |  |            |   |  |                      |   |  |       |  



A summary of the
activity in TCIs mortgage notes receivable portfolio during 2003 is as follows:



|                                               |  |    |  
|---------------------------------------------- |  | -- | -
|Mortgage notes receivable at January 1, 2003   |  | 13 |  
|Loans paid off                                 |  | (5 | )
|Loans funded                                   |  | 4  |  
|                                               |  |    |  
|Mortgage notes receivable at December 31, 2003 |  | 12 |  
|                                               |  |    |  



During 2003, $4.5
million was collected in full payment of five mortgage notes and $141,000 in principal payments were received on other mortgage notes. At December 31, 2003, 1% of TCIs assets were invested in mortgage notes secured by non-income producing real
estate, comprised of a second lien mortgage note secured by 33 acres of unimproved land in Travis County, Texas and a loan secured by a partnership interest.



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 matured in June 2002. In September 2002, TCI received
$1.3 million on the note. With this payment, TCI agreed to release the lien on the 44.6 acres substituting a second lien on 21.61 acres of unimproved land in Tarrant County, Texas, from the borrower to secure the remaining $689,000 in debt. TCI has
extended the maturity to November 2002. In May 2003, the loan was paid off, including accrued but unpaid interest.



In December 2003, TCI purchased a note receivable secured by a second lien on 33 acres of raw land in Travis County, Texas at par value from ARI for $2.4
million as a paydown on an affiliate loan balance. This note bears interest at 10%, requires interest only payments in November 2007 and matures in October 2008.



Junior Mortgage Loans.    TCI may invest in junior mortgage loans, 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, 2003, 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 2003.



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 bore interest at 16.0% per annum, required 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



13



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##### Table of Contents

sold a $2.0 million senior participation interest in the loan to IORI, a related party. TCI and IORI received 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 April 2002, the loan was extended until July 2002. In July 2002, the loan
was extended until September 2002. In August 2002, the loan was paid off, including accrued but unpaid interest.



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 bore interest at 10% per annum, required monthly interest only payments and matured in June 2003. In May 2002, the loan was paid off. TCI agreed to a 5% discount on the note and recognized a loss of
$75,000 from the note. TCI also recognized a previously deferred gain on $1.5 million on the sale of the property.



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. In March 2002, TCI received a $1.8 million principal payment. As of April 2003, TCI had funded $2.9
million of the line of credit and it was classified as nonperforming. In May 2003, TCI received a $433,000 principal paydown. Also during May 2003, TCI received 14.373 acres of unimproved land in Tarrant County, Texas, valued at $1.1 million, as a
principal paydown. As of July 2003, the loan has been paid in full.



In August 2001, TCI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments
and matured in January 2003. As of March 2004, TCI has funded a total of $4.3 million. On January 22, 2003, TCI agreed to extend the maturity date until May 1, 2003. No payments have been received and this note is considered nonperforming. The
collateral used to secure TCIs second lien was seized by the first lien holder. On March 11, 2004, TCI agreed to accept an assignment of claims in litigation as security for the note. TCI is also working on securing additional collateral for
this note and restructuring the terms of the note. The agreement requires interest to accrue at the default rate of 18%.



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 bore interest at 16.0% per annum, required monthly payments of interest only and matured in May 2002.
In July 2002, the note was paid off, including accrued but unpaid interest.



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 bore interest at 9.0% per annum, required monthly interest only payments of
$30,000 and matured in February 2002. In February 2002, TCI extended the loan maturity to February 2003. In August 2002, the note was paid off including accrued but unpaid interest.



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 Centre 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 and ARI fails to pay the shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the purchase price. Because ARI has guaranteed the 12% return and TCI has the option of requiring ARI to repurchase the entities, management has
classified this related party transaction as a note receivable from ARI. In June 2002, the asset was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI.



Also in January 2002, a mortgage loan with a principal balance of $608,000
was paid off, including accrued but unpaid interest. With the payoff of the note, TCI recognized a previously deferred gain on the sale of the property of $608,000.



In March 2002, TCI sold the 174,513 sq.ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0
million purchase price as seller financing and an additional $1.4 million line of credit for leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 6.0% per annum, requires
monthly interest only payments of $14,667 and matures in March 2007. As of February 2004, TCI has funded $323,000 of the additional line of credit.



In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation (One Hickory), Garden Confederate Point, LP
(Confederate Point), Garden Foxwood, LP (Foxwood), and Garden Woodsong, LP (Woodsong), all wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One Hickory owns the 120,615 sq. ft. One Hickory
Centre Office Building in Farmers Branch, Texas. Confederate Point owns the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit Woodsong Apartments
in



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##### Table of Contents

Smyrna, Georgia. ARI has guaranteed that these assets shall produce at least a 12% return annually of the purchase price
for a period of three years from the purchase date. If the assets fail to produce the 12% return, ARI shall pay TCI any shortfall. In addition, if the assets fail to produce the 12% return for a calendar year and ARI fails to pay the shortfall, TCI
may require ARI to repurchase the entities for the purchase price. Because ARI has guaranteed the 12% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note
receivable from ARI. In October 2003, TCI sold One Hickory to IORI for a $12.2 million, less prorations, for a wrap-round promissory note of $12.0 million. This note bears interest at 5.49% interest, requires monthly interest and principal payments
and mature in June 2006. This transaction effectively discharged the note receivable TCI had from ARI for the financing of One Hickory. Also, in November 2003, Confederate Point sold the Confederate Apartments and paid $2.1 million to TCI to pay off
the loan and accrued but unpaid interest.



Also in April 2002,
a mortgage loan with a principal balance of $155,000 was paid off, including accrued but unpaid interest.



In July 2002, a mortgage loan with a principal balance of $2.2 million was paid off, including accrued but unpaid interest.



In July 2002, the Woodsong Apartments were sold. ARI received $2.6 million
from the proceeds as payment of principal and accrued but unpaid interest on the note receivable. The funds were received by ARI and the affiliate receivable balance was increased.



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



In September 2002, TCI sold a 36 acre tract of the Palm Desert land parcel
for $3.6 million and provided $2.7 million as seller financing in the form of a first lien mortgage note. The note bears interest at 8.0% per annum, requires quarterly interest only payments of $54,000 and matures in September 2004. In March 2003,
the note was sold to a financial institution for $2.6 million.



In June 2003, TCI sold the 104 unit Willow Wick Apartments in North Augusta, South Carolina, for $2.7 million and provided $42,000 of the purchasers closing costs as seller financing. The note bears interest at a fixed rate of 5% and
requires all interest and principal payments be paid at maturity on December 2003. This loan was extended until February 2004 and $10,000 was received in March 2004. Current negotiations are ongoing to extend the loan or collect payment.



In December 2003, TCI purchased a note receivable secured by 33 acres of
raw land in Travis County, Texas from ARI for $2.4 million, which reduced ARIs affiliate payable to Prime and TCI. The note bears interest at 10% per annum, requires interest only payments beginning in November 2007 and matures in October
2008.



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.



|ITEM 3. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



Olive Litigation



During May 2003, the class and derivative action originally filed in February 1999 entitled Olive, et al. v. National Income Realty Trust, et al.
(the Olive Litigation), relating to the operation and management of five entities, was dismissed with prejudice. The Olive Litigation had been the subject to a settlement on April 23, 1990, various amendments thereto and amendments to
the Modifications. Although during the course and progress of the Olive Litigation over more than 13 years, several status conferences on this matter were held, there were no court orders or findings on any of the plaintiffs allegations in its
Original Complaint or any amendments. On October 23, 2001, TCI, IORI and ARI jointly announced a preliminary agreement with the plaintiffs legal counsel for complete settlement of all disputes in the lawsuit. For further information, see Item
1 Legal Proceedings included in TCIs Second Quarter Report on Form 10-Q for the six months ended June 30, 2002.



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



Not applicable.



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##### Table of Contents

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.



|                                        |  |      |       |     |   |      
|--------------------------------------- |  | ---- | ----- | --- | - | -----
|Quarter Ended                           |  | High |       | Low
|March 31, 2004 (through March 19, 2004) |  | $    | 17.33 |     | $ | 14.60
|                                        |  |     
|March 31, 2003                          |  |      | 18.55 |     |   | 16.43
|June 30, 2003                           |  |      | 18.92 |     |   | 13.99
|September 30, 2003                      |  |      | 16.70 |     |   | 11.79
|December 31, 2003                       |  |      | 16.73 |     |   | 11.79
|                                        |  |     
|March 31, 2002                          |  |      | 16.82 |     |   | 15.50
|June 30, 2002                           |  |      | 20.55 |     |   | 16.27
|September 30, 2002                      |  |      | 21.82 |     |   | 16.20
|December 31, 2002                       |  |      | 18.00 |     |   | 15.80



As of March 19, 2004,
the closing price of TCIs Common Stock as reported in the consolidated reporting system of the NYSE was $15.00 per share.



As of March 19, 2004, TCIs Common Stock was held by 4,616 holders of record.



TCI paid no dividends in 2003, 2002 or 2001, and management believes no dividends will be paid in 2004. 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.



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. 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. No shares were repurchased in 2002 or 2003.



16



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##### Table of Contents

|ITEM 6. |  | SELECTED FINANCIAL DATA
|------- |  | -----------------------



|                                              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------------- |  | ---------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                              |  | For the Years Ended December 31,         |          
|                                              |  | 2003                                     |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                              |  | (dollars in thousands, except per share) |          
|EARNINGS DATA                                 |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Rents                                         |  | $                                        | 114,422   |   |      | $ | 95,794    |      |  | $ | 115,439   |   |  | $    | 133,173   |   |  | $ | 73,469    |  
|Property expense                              |  |                                          | 73,603    |   |      |   | 64,362    |      |  |   | 68,510    |   |  |      | 74,608    |   |  |   | 38,959    |  
|                                              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Operating income                              |  |                                          | 40,819    |   |      |   | 31,432    |      |  |   | 46,929    |   |  |      | 58,565    |   |  |   | 34,510    |  
|Other income                                  |  |                                          | 11,584    |   |      |   | 313       |      |  |   | 2,924     |   |  |      | 1,814     |   |  |   | 555       |  
|Gain on real estate                           |  |                                          |          |   |      |   |          |      |  |   | 48,333    |   |  |      | 50,550    |   |  |   | 40,517    |  
|                                              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total other income                            |  |                                          | 11,584    |   |      |   | 313       |      |  |   | 51,257    |   |  |      | 52,364    |   |  |   | 41,072    |  
|Other expense                                 |  |                                          | 80,122    |   |      |   | 71,225    |      |  |   | 79,078    |   |  |      | 81,594    |   |  |   | 45,324    |  
|                                              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income (loss) from continuing operations      |  |                                          | (27,719   | ) |      |   | (39,480   | )    |  |   | 19,108    |   |  |      | 29,335    |   |  |   | 30,258    |  
|Discontinued operations                       |  |                                          | 26,597    |   |      |   | 44,331    |      |  |   | 703       |   |  |      | 447       |   |  |   | (39       | )
|                                              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss)                             |  |                                          | (1,122    | ) |      |   | 4,851     |      |  |   | 19,811    |   |  |      | 29,782    |   |  |   | 30,219    |  
|Preferred dividend requirement                |  |                                          | (126      | ) |      |   | (190      | )    |  |   | (172      | ) |  |      | (22       | ) |  |   | (30       | )
|                                              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss) applicable to Common shares |  | $                                        | (1,248    | ) |      | $ | 4,661     |      |  | $ | 19,639    |   |  | $    | 29,760    |   |  | $ | 30,189    |  
|                                              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic and Diluted Earnings Per Share          |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                         |  | $                                        | (.16      | ) |      | $ | .58       |      |  | $ | 2.32      |   |  | $    | 3.45      |   |  | $ | 7.05      |  
|Diluted                                       |  | $                                        | (.16      | ) |      | $ | .58       |      |  | $ | 2.28      |   |  | $    | 3.45      |   |  | $ | 7.05      |  
|                                              |  |                                          |           |   |     
|Dividends per Common share                    |  | $                                        |          |   |      | $ |          |      |  | $ |          |   |  | $    | .54       |   |  | $ | .60       |  
|                                              |  |                                          |           |   |     
|Weighted Average Common Shares Outstanding    |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                         |  |                                          | 8,078,108 |   |      |   | 8,057,361 |      |  |   | 8,478,377 |   |  |      | 8,631,621 |   |  |   | 4,283,574 |  
|Diluted                                       |  |                                          | 8,078,108 |   |      |   | 8,057,361 |      |  |   | 8,615,465 |   |  |      | 8,637,290 |   |  |   | 4,283,574 |  
|                                              | 
|                                              |  | For the Years Ended December 31,         |          
|                                              |  | 2003                                     |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                              |  | (dollars in thousands, except per share) |          
|BALANCE SHEET DATA                            |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Real estate held for investment, net          |  | $                                        | 719,076   |   |      | $ | 736,977   |      |  | $ | 622,171   |   |  | $    | 639,040   |   |  | $ | 599,746   |  
|Real estate held for sale                     |  |                                          | 61,457    |   |      |   | 22,510    |      |  |   | 516       |   |  |      | 1,824     |   |  |   | 1,790     |  
|Notes and interest receivable, net            |  |                                          | 30,741    |   |      |   | 27,953    |      |  |   | 22,049    |   |  |      | 8,172     |   |  |   | 11,530    |  
|Total assets                                  |  |                                          | 880,990   |   |      |   | 858,489   |      |  |   | 709,152   |   |  |      | 731,885   |   |  |   | 714,195   |  
|Notes and interest payable                    |  |                                          | 608,240   |   |      |   | 586,628   |      |  |   | 461,037   |   |  |      | 501,734   |   |  |   | 503,406   |  
|Stockholders equity                          |  |                                          | 219,963   |   |      |   | 222,394   |      |  |   | 216,768   |   |  |      | 200,560   |   |  |   | 179,112   |  
|Book value per share                          |  | $                                        | 27.11     |   |      | $ | 27.55     |      |  | $ | 26.95     |   |  | $    | 23.22     |   |  | $ | 20.76     |  



TCI purchased 10
properties for a total of $36.9 million in 2003, 16 properties for a total of $107.7 million in 2002, 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. TCI sold 13 properties, two warehouses in the Kelly portfolio and 5 parcels of land for $86.6 million in 2003, 18 properties and a partial land parcel for a total of $117.6
million in 2002, 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, and 11 properties in 1999 for a total of $117.4 million.
See ITEM 2. PROPERTIESReal Estate and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



|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.



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Critical Accounting Policies



Critical accounting policies are those that are both important to the presentation of TCIs financial condition and
results of operations and require managements most difficult, complex or subjective judgments. TCIs critical accounting policies relate to the evaluation of impairment of long-lived assets and the evaluation of the collectibility of
accounts and notes receivable.



If events or changes in
circumstances indicate that the carrying value of a rental property to be held and used or land held for development may be impaired, management performs a recoverability analysis based on estimated undiscounted cash flows to be generated from the
property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows the property is written down to estimated fair value and an impairment loss is recognized. If management decides to sell rental
properties or land held for development, management evaluates the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written
down to estimated fair value less costs to sell and an impairment loss is recognized within income from continuing operations. TCIs estimates of cash flow and fair values of the properties are based on current market conditions and consider
matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. TCIs estimates are
subject to revision as market conditions and TCIs assessments of them change. In the fourth quarter of 2003, TCI recognized $4.4 million and $192,000 as impairment losses, and in the second and third quarter of 2002, TCI recognized $1.9
million and $700,000 as impairment losses.



TCIs
allowance for doubtful accounts receivable and notes receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past due accounts. Management considers such information as the
nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant or other debtor and TCIs assessment of its ability to meet its lease or interest obligations. TCIs estimate of the
required allowance, which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions.



TCIs management periodically discusses criteria for estimates and disclosure of its estimates with the audit committee
of TCIs Board of Directors.



Obligations and Commitments



TCI has contractual obligations and commitments primarily
with regards to the payment of mortgages.



The following table
aggregates TCIs expected contractual obligations and commitments subsequent to December 31, 2003. (Dollars in thousands)



|                            |  |                        |         |                  |   |           |  |           |         |                   |   |        |  |   |        
|--------------------------- |  | ---------------------- | ------- | ---------------- | - | --------- |  | --------- | ------- | ----------------- | - | ------ |  | - | -------
|                            |  | PAYMENTS DUE BY PERIOD
|                            |  | Total                  |         | Less than 1 Year |   | 1-3 Years |  | 3-5 Years |         | More than 5 Years
|Long Term Debt (1)          |  | $                      | 621,516 |                  | $ | 178,386   |  | $         | 115,612 |                   | $ | 75,444 |  | $ | 252,074
|Capital Lease Obligations   |  |                        |        |                  |   |          |  |           |        |                   |   |       |  |   |       
|Operating Leases            |  |                        |        |                  |   |          |  |           |        |                   |   |       |  |   |       
|Purchase Obligations        |  |                        |        |                  |   |          |  |           |        |                   |   |       |  |   |       
|Other Long-Term Liabilities |  |                        | 2,305   |                  |   | 2,305     |  |           |        |                   |   |       |  |   |       

---

|(1) | TCIs long-term debt may contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the note to
become due immediately.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other long-term
liabilities represent TCIs intentions to purchase the interests of general and limited partners formed to construct residential properties.



Liquidity and Capital Resources



Cash and cash equivalents were $6.4 million, $10.6 million and $10.3 million at December 31, 2003, 2002 and 2001, respectively. The principal reasons for
the change 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, and the collection of mortgage notes receivable, borrowings and to a lesser extent, distributions from
partnerships. Management anticipates that TCIs cash at December 31, 2003, along with cash that will be generated in 2004 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. Historically, management has been successful at extending its current maturity
obligations. Management also anticipates funding ongoing real estate construction projects and the acquisition of new real estate from cash generated by property sales, debt refinancings or extensions, and additional borrowings.



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Net cash provided by operations was $3.7 million in 2003 compared to net cash used in operations of $9.1
million in 2002 and $895,000 in 2001. Cash flow from property operations is rents collected less payment for property operating expenses or net rental income. The increase in operating cash from 2002 to 2003 was due to an increase in net rental
income from new apartments that finished construction in 2002 and 2003 and an increase in commercial net rental income due to Centura Tower, which was purchased in June 2002. Cash also increased due to less spending on general and administrative
expenses from 2002 to 2003. These gains were offset by the sales of real estate during 2002 and 2003 and from higher interest expense paid during 2003. Net cash used in property operations decreased from 2001 to 2002 due lower net rental income from
the sale of commercial properties and apartments in 2002 and 2001 and an increase in interest paid in 2002. These decreases in 2002 were offset by lower spending on general and administrative expenses and advisory fees, as well as an increase in
interest income collected. Management believes that cash flow may decrease from property operations as a result of selling of income producing properties.



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.



Net cash used in investing activities was $26.9 million in 2003 compared to $67.0 million in 2002 and net cash provided of $36.1 million in 2001. Cash
from investing activities increased in 2003 due to TCI spending less on real estate construction and improvements and an increase in payments received from TCIs advisor. These cash increases were offset by cash decreases due to less collected
on notes receivable, less real estate sold, the purchase of marketable securities and increases in deposits on pending real estate purchases. Cash from investing activities decreased from 2001 to 2002 due to a substantial increase in real estate
construction in 2002 and an increase in payments made to TCIs advisor. These decreases in cash were offset by an increase in cash due to higher collections on notes receivable during 2002.



Net cash provided by financing activities was $19.1 million in 2003 compared
to $76.3 million in 2002 and net cash used of $47.1 million in 2001. Cash from financing activities decreased in 2003 due to higher payments on notes payable and lower proceeds from notes payable refinancings and property sales as compared to 2002.
Cash from financing activities decreased from 2001 to 2002 due to higher proceeds from notes payable, offset by higher payments on notes payable in 2002. 2001 was also lower due to the repurchase of common stock in a private block purchase.



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



TCI had a net loss of
$1.2 million in 2003, including gains on sale of real estate totaling $28.1 million, net income of $4.9 million in 2002, including gains on sale of real estate totaling $43.9 million and net income of $19.8 million in 2001, including gains on sale
of real estate totaling $48.9 million. Fluctuations in the components of revenues and expense between 2003, 2002 and 2001 are discussed below.



Rents were $114.4 million in 2003, $95.8 million in 2002, and $115.4 million in 2001. Of the increase in rents from 2002 to 2003, $11.7 million was due to
the completion and rental income coming from properties under construction in 2002 and 2003, $3.4 million was due to Centura Tower, which TCI purchased from ARI in June 2002, $1.6 million was from increased rents at TCIs New Orleans office
buildings, and $1.6 million was from increased revenues from Hotel Akademia in Poland. The decrease in rents from 2001 to 2002 is primarily due to decreased rents of $3.9 million and $10.8 million due to the sale of six commercial properties and 15
apartments, respectively, in 2001, and $608,000 and $1.5 million was due to lower occupancies at TCIs apartments and hotels, respectively. These decreases were offset by increases of $3.0 million and $5.4 million from the purchase of two
commercial properties and five apartments, respectively in 2002 and 2001, $1.9 million and $1.0 million was due to the completion of four apartments and one hotel, respectively in 2002, and $623,000 was due to increased rents at TCIs
commercial properties. Rents are expected to increase in 2004 as TCI completes the properties under construction.



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Property operations expenses were $ 73.6 million in 2003, $64.4 million in 2002 and $68.5 million in
2001. Of the increase in property operations from 2002 to 2003 $7.5 million was due to the properties under construction, $1.6 million was due to Centura Tower, which TCI purchased from ARI in June 2002 and $400,000 was due to an increase at
TCIs hotels. The decrease in property operations from 2001 to 2002 is mostly due to 15 apartments being sold in 2001, offset by new construction properties in 2002, and a reduction in property expenses at TCIs hotels in 2002. Property
operating expenses are expected to increase as TCI continues to construct apartments in 2004.



Interest and other income was $6.7 million in 2003, $4.1 million in 2002 and $2.9 million in 2001. The increase in 2003 was due to a $3.8 million litigation settlement TCI received, offset by the pay off of seven of
TCIs loans in 2002. The increase in 2002 was due to TCI funding seven loans in 2002. Interest income in 2004 is expected to decrease due to seven notes maturing in 2004.



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 was $4.3 million in 2003, $3.8 million in 2002 and $628,000 in 2001. The losses from equity
investees are primarily attributed to increased operating losses for IORI and ARI. Equity losses may continue with decreases in operating income due to selling of income producing properties.



Interest expense was $38.9 million in 2003, $36.2 million in 2002 and $36.8
million in 2001. Of the increase in interest expense from 2002 to 2003, $3.8 million was due to new loans on construction properties and two new loans on commercial properties. A $3.0 million increase in 2003 due to Centura Tower was offset by
interest expense reductions due to the sale of 17 commercial properties in 2002 and 2003. The decrease in interest expense from 2001 to 2002 is due to the sale of six commercial properties and 15 apartments, respectively in 2001, and to principal
paydowns and lower variable rates for TCIs land, commercial and apartment properties, respectively. These decreases were offset by an increase in interest expense due to the purchase of six land parcels, two commercial properties, five
apartments and one hotel, respectively subject to debt in 2002 and 2001, the financing and refinancing of four land parcels held for investment, three commercial properties and 17 apartments in 2002, an increase in the interest rate at TCIs
Chicago hotels, and payments for an interest swap agreement TCI entered into in 2002. Interest expense is expected to increase or remain constant as TCI completes construction projects and increases its debt by refinancings.



Depreciation expense was $21.2 million in 2003, $17.1 million in 2002 and
$17.1 million in 2001. Of the increase in depreciation expense from 2002 to 2003, $700,000 was due to Centura Tower, which was purchased in June 2002, $600,000 was from completed construction properties in 2002 and 2003, $300,000 was from an
increase in TCIs hotels and $2.4 million was from two commercial properties purchased in 2003. Depreciation expense from 2001 to 2002 was relatively the same, with increases in 2002 due to the purchase of two commercial properties and five
apartments in 2002 and 2001, the completion of four apartments and one hotel in 2002, and higher tenant and building improvements at TCIs commercial properties during 2002. These increases were offset by decreases due to the sale of six
commercial properties and 15 apartments in 2001. Depreciation expense is expected to increase or remain constant as TCI completes construction projects during 2004.



TCI recorded asset impairments of $4.7 million in 2003 and $2.6 million for 2002, representing the write down of certain
operating properties to current estimated fair value.



The
assets for 2003 include the following properties:



|                |  |            |  |                 |  |           |       |                |   |              |  |            |       |  |   |      
|--------------- |  | ---------- |  | --------------- |  | --------- | ----- | -------------- | - | ------------ |  | ---------- | ----- |  | - | -----
|Property        |  | Location   |  | Sq. Feet/Acres  |  | FairValue |       | Property Basis |   | Costs toSell |  | Impairment
|Office Building |  |            |  |                 |  |           |       |                |   |              |  |            |       |  |   |      
|Brandeis        |  | Omaha, NE  |  | 319,234 Sq. Ft. |  | $         | 8,821 |                | $ | 13,630       |  | $          |      |  | $ | 4,515
|                |  |            |  |                 |  |          
|Land            |  |            |  |                 |  |           |       |                |   |              |  |            |       |  |   |      
|Red Cross       |  | Dallas, TX |  | 2.89 Acres      |  |           | 8,500 |                |   | 7,679        |  |            | 1,019 |  |   | 198  



Brandeis was returned
to the lien holder via a Deed in Lieu of Foreclosure on February 27, 2004 and the outstanding debt and accrued interest were used as the fair value. The gross impairment for Brandeis was $4.9 million but was reduced by $452,000 for the minority
interest portion. Red Cross land was sold on January 30, 2004 and the actual sales price less selling costs was used as the fair value.



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The assets for 2002 include the following properties:



|                       |  |              |  |             |  |           |       |                |   |              |  |            |     |  |   |    
|---------------------- |  | ------------ |  | ----------- |  | --------- | ----- | -------------- | - | ------------ |  | ---------- | --- |  | - | ---
|Property               |  | Location     |  | Units/Acres |  | FairValue |       | Property Basis |   | Costs toSell |  | Impairment
|Apartments             |  |              |  |             |  |           |       |                |   |              |  |            |     |  |   |    
|Apple Lane             |  | Lawrence, KS |  | 75 Units    |  | $         | 1,580 |                | $ | 1,593        |  | $          | 238 |  | $ | 251
|Fairway View           |  | El Paso, TX  |  | 264 Units   |  |           | 5,700 |                |   | 5,242        |  |            | 863 |  |   | 405
|Fountains of Waterford |  | Midland, TX  |  | 172 Units   |  |           | 1,900 |                |   | 2,006        |  |            | 285 |  |   | 391
|Plantation             |  | Tulsa, OK    |  | 138 Units   |  |           | 2,545 |                |   | 3,100        |  |            | 145 |  |   | 700
|Sunchase               |  | Odessa, TX   |  | 300 Units   |  |           | 4,100 |                |   | 3,479        |  |            | 746 |  |   | 125
|                       |  |              |  |             |  |          
|Land                   |  |              |  |             |  |           |       |                |   |              |  |            |     |  |   |    
|Red Cross              |  | Dallas, TX   |  | 2.89 Acres  |  |           | 8,400 |                |   | 8,348        |  |            | 758 |  |   | 707



The Red Cross land was
under contract to sell in 2002 and the sales price was used as fair value. The fair value determined for four apartments above were agreed upon purchase prices as part of the refinancing transaction with Metra Capital, LLC. The costs to sell were
actual fees paid to refinance the properties. TCI refinanced the Plantation Apartments In May 2003, incurring a new note for $2.3 million and discharging debt of $1.9 million. See NOTE 7. NOTES AND INTEREST PAYABLE.



Advisory fee expense was $4.9 million in 2003, $4.5 million in 2002, and $5.3
million in 2001. The increase in 2003 was due to higher average gross assets during the year. The decrease in 2002 was due to a $1.4 million operating expense refund from BCM. See NOTE 12. ADVISORY AGREEMENT. This decrease was offset by
an increase in advisor fees due to a 20% increase in gross assets, the basis of the fee. Advisory fees are expected to decrease as TCI sells properties.



Net income fee to affiliate was $0 in 2003, $374,000 in 2002, and $1.9 million in 2001. The net income fee is payable to TCIs advisor based on 7.5%
of TCIs net income. TCI had a net loss for 2003, so no net income fee is due.



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. No
incentive fee was paid in 2002 or 2003.



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.



General and administrative expenses were $9.1 million in 2003, $8.8 million in 2002 and $11.5 million in 2001. The increase
in 2003 was due to higher state income taxes offset by decreases in consulting and professional fees and cost reimbursements to the advisor, offset by higher legal costs and franchise taxes. The decrease from 2001 to 2002 was mainly due to decreases
in consulting fees, taxes and cost reimbursements to the advisor. General and administrative expenses are expected to remain constant or decrease from decreased litigation and consulting fees.



Loss on foreign currency transaction was $3.3 million and $2.5 million in
2003 and 2002 , respectively. Loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated in Euros, into the functional currency, the Polish Zloty. The Euro has strengthened against the Zloty
over the past two years, which has resulted in TCI recognizing this charge.



Income from discontinued operations was $26.6 million in 2003, $44.3 million in 2002 and $703,000 in 2001. Income from discontinued operations relates to 15 properties and 5 parcels of land that TCI sold during 2003,
18 properties that TCI sold during 2002, and eight parcels of land, one apartment, two office buildings and two warehouses designated as held for sale. The following table summarizes revenue and expense information for these properties sold and
held-for-sale.



|                                                                                   |  |                                 |        |   |      |   |        |  |   |       
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ |  | - | ------
|                                                                                   |  | For the Year Ended December 31,
|                                                                                   |  | 2003                            |        |   | 2002 |   | 2001  
|Revenue                                                                            |  |                                 |        |   |      |   |        |  |   |       
|Rental                                                                             |  | $                               | 9,753  |   |      | $ | 26,996 |  | $ | 20,719
|Property operations                                                                |  |                                 | 5,716  |   |      |   | 15,813 |  |   | 12,552
|                                                                                   |  |                                 |        |   |      |   |        |  |   |       
|                                                                                   |  |                                 | 4,037  |   |      |   | 11,183 |  |   | 8,167 
|                                                                                   |  |                                 |       
|Expenses                                                                           |  |                                 |        |   |      |   |        |  |   |       
|Interest                                                                           |  |                                 | 4,128  |   |      |   | 7,287  |  |   | 4,639 
|Depreciation                                                                       |  |                                 | 1,456  |   |      |   | 3,523  |  |   | 2,825 
|                                                                                   |  |                                 |        |   |      |   |        |  |   |       
|                                                                                   |  |                                 | 5,584  |   |      |   | 10,810 |  |   | 7,464 
|                                                                                   |  |                                 |        |   |      |   |        |  |   |       
|Net income (loss) from discontinued operations before gains on sale of real estate |  |                                 | (1,547 | ) |      |   | 373    |  |   | 703   
|Gain on sale of operations                                                         |  |                                 | 23,291 |   |      |   | 38,945 |  |   |      
|Equity in investees gain on sale of real estate                                    |  |                                 | 4,853  |   |      |   | 5,013  |  |   |      
|                                                                                   |  |                                 |        |   |      |   |        |  |   |       
|Net income from discontinued operations                                            |  | $                               | 26,597 |   |      | $ | 44,331 |  | $ | 703   
|                                                                                   |  |                                 |        |   |      |   |        |  |   |       



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Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore,
amounts for certain captions will not agree with respective consolidated statements of operations.



In 2003, 2002 and 2001, gains on sale of real estate totaling $28.1 million, $44.0 million and $48.9 million were recognized. See NOTE 2. REAL
ESTATE.



Related Party Transactions



Historically, TCI, ARI, IORI, and others have each 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 parties.



Operating Relationships



TCI received rents of
$175,000 in 2003, $88,000 in 2002 and $120,000 in 2001 from BCM for BCMs lease at Addison Hanger. BCM owns a corporate jet that is housed at the hanger and TCI has available space at the hanger.



Property Transactions



In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation from ARI, for $4.4
million. See NOTE 3. NOTES AND INTEREST RECEIVABLE. The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of net operating income (cap rate) of 7.0%. The
business purpose of the transaction was for TCI to make an equity investment in Two Hickory anticipating a profitable return.



In February 2002, TCI sold a $2.0 million senior participation interest in a loan to IORI. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
Management determined that TCI could benefit from the increase in cash and decrease its notes receivable outstanding portfolio.



In March 2002, TCI paid cash of $600,000 and received from ARI two parcels of land, a 24.5 acre tract of Rasor land, a 16.89 acre tract of Lakeshore
Villas land, and the 45,623 sq. ft. Oaktree Village Shopping Center in exchange for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The exchange value prices for the shopping centers were determined based on a cap rate of 10.5% and the
value for the Rasor and Lakeshore Villas land was determined on appraised rates of $3.36 and $1.29, respectively, per square foot. The business purpose of the transaction was for TCI to construct apartments on the Rasor and Lakeshore Villas land and
to give ample value for the property TCI exchanged, the Oaktree Shopping Center was added to the transaction.



In April 2002, TCI purchased 100% of the following entities from ARI: Garden Confederate Point, L.P., Garden Foxwood, L.P., Garden Woodsong, L.P. and ART
One Hickory Corporation for $10.0 million. See NOTE 3. NOTES AND INTEREST RECEIVABLE. The purchase price for these entities was determined based on a cap rate of 8.41% for the partnerships and 7.0% for ART One Hickory Corporation. The
business purpose of the transaction was for TCI to make an equity investment in the entities anticipating a profitable return.



In June 2002, TCI purchased Centura Tower, Ltd. partnership, which owns the Centura Tower Office Building from ARI for $50.0 million. See NOTE 2.
REAL ESTATE. The purchase price for the Centura Tower was determined based on appraised value and replacement cost. The business purpose of the transaction was for TCI to acquire a Class A office building with significant upside
potential anticipating a profitable return.



Also in June 2002,
TCI purchased five parcels of unimproved land from ARI: the Hollywood Casino, Marine Creek, Mason Park, Nashville and Palm Desert land parcels. See NOTE 2. REAL ESTATE. The purchase price of the Hollywood Casino land was determined based
on an appraised rate of $9.10 per square foot. The business purpose of the transaction was for TCI to consolidate its holdings within the Mercer Crossing development. The purchase price for the Marine Creek, Mason Park, Nashville and Palm Desert
land parcels was determined based on appraised rates of $2.00, $3.56, $4.00 and $1.48 per square foot, respectively. The business purpose of the transaction was for TCI to develop apartments on these four tracts of land.



In December 2002, TCI purchased NLP/CH, Ltd. partnership, which owns the
Centura land parcel from ARI. See NOTE 2. REAL ESTATE. The purchase price was determined based on an appraised rate of $34.89 per square foot. The business purpose of the transaction was for TCI to construct apartments on the land
adjacent to its Centura Tower office building.



In March 2003,
TCI sold 4135 Beltline to a related party for $4.4 million, including the assumption of debt. Due to the sale being to a related party to TCI and TCI having continued involvement and control of this entity, this transaction has not been recorded as
a sale. This property and corresponding debt will continue to be consolidated by TCI.



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In March 2003, TCI purchased 100% of EQK Cullman, Inc. and EQK Bridgeview Plaza, Inc., which own Cullman
Shopping Center and Bridgeview Plaza shopping center, respectively, from ARI with a net purchase price of $10.7 million, including the assumption of debt. The purchase price was determined on cap rates of 10.2% and 10.8%, respectively. The business
purpose of the transaction was to pay down an affiliate receivable balance.



In December 2003, TCI sold Transcontinental Parkway Corporation, which owns Parkway Centre shopping center to IORI for $4.0 million, including the assumption of debt. The business purpose of this transaction was to
pay down TCIs payable balance to an affiliate.



In
December 2003, TCI sold Transcontinental Brewery, Inc., which owns Eagle Crest land to IORI for $4.0 million. The business purpose of this transaction was to pay down IORIs receivable from TCI.



In December 2003, TCI sold Transcontinental Treehouse Corporation, which owns
Treehouse Apartments, to IORI for $7.5 million, including the assumption of debt. The business purpose of the transaction was to pay down TCIs payable balance to an affiliate.



In December 2003, TCI sold six properties to subsidiaries of United Housing Foundation, Inc. (UHF), a Texas
Non-Profit 501(c)3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, Limestone at Vista Ridge apartments for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone Canyon apartments for $18.0
million, the Sendero Ridge apartments for $29.4 million and the Tivoli apartments for $16.1 million. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis Realty I, LLC, an affiliate, is
President of UHF. Due to UHF being considered a related party to TCI and TCI having continued involvement and control of these entities, these transactions have not been recorded as sales. Instead, these transactions will be accounted for on the
deposit method and the properties and corresponding debt will continue to be consolidated by TCI. Management is seeking lender approval on the transfer of the notes associated with these property transactions.



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



Prior to the year 2000, 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.



|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.



TCI is exposed to interest
rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. TCI does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its



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##### Table of Contents

portfolio of real estate assets. TCIs interest rate sensitivity position is managed by TCIs finance
department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. TCIs earnings are affected as changes in short-term interest rates impact
its cost of variable rate debt and maturing fixed rate debt. A large portion of TCIs market risk is exposure to short-term interest rates from variable rate borrowings. The impact on TCIs financial statements of refinancing fixed debt
that matured during 2003 was not material. As permitted, management intends to convert a significant portion of those borrowings from variable rates to fixed rates in 2004. If market interest rates for variable rate debt average 100 basis points
more in 2004 than they did during 2003, TCIs interest expense would increase, and income would decrease by $1.3 million. This amount is determined by considering the impact of hypothetical interest rates on TCIs borrowing cost. This
analysis did not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its
exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in TCIs financial structure.



The following table contains only those exposures that existed at December
31, 2003. 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.



|                                          |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  |   |        
|----------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | ----- |  | - | ------- | - |  | - | -------
|Assets                                    |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  |   |        
|Notes receivable                          |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  |   |        
|Variable interest rate-fair value         |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  | $ | 4,303  
|                                          |  |      |         |   |      |   |       
|                                          |  | 2004 |         |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |        |   | Thereafter |   |        | Total
|Instruments maturities                   |  | $    | 4,303   |   |      | $ |       |      |  | $ |       |   |  | $    |       |   |            | $ |       |       |  | $ |        |   |  | $ | 4,303  
|Instruments amortization                 |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |        |   |  |   |       
|Interest                                  |  |      | 65      |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |        |   |  |   | 65     
|Average rate                              |  |      | 18.00   | % |      |   |       | %    |  |   |       | % |  |      |       |   |            |   |       |       |  |   |        |   |  |   |        
|Fixed interest rate-fair value            |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  | $ | 25,850 
|                                          |  |      |         |   |      |   |       
|                                          |  | 2004 |         |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |        |   | Thereafter |   |        | Total
|Instruments maturities                   |  | $    | 18,024  |   |      | $ | 1,392  |      |  | $ |       |   |  | $    | 4,299  |   |            | $ | 2,387  |       |  | $ |        |   |  | $ | 26,102 
|Instruments amortization                 |  |      | 50      |   |      |   | 55     |      |  |   | 62     |   |  |      | 68     |   |            |   | 31     |       |  |   |        |   |  |   | 266    
|Interest                                  |  |      | 2,557   |   |      |   | 1,567  |      |  |   | 311    |   |  |      | 287    |   |            |   | 71     |       |  |   |        |   |  |   | 4,793  
|Average rate                              |  |      | 10.14   | % |      |   | 10.26  | %    |  |   | 6.99   | % |  |      | 6.60   | % |            |   | 6.55   | %     |  |   |        |   |  |   |        
|                                          |  |      |         |   |      |   |       
|Liabilities                               |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  |   |        
|Non-trading Instruments-Equity Price Risk |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  |   |        
|Notes payable                             |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  |   |        
|Variable interest rate-fair value         |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  | $ | 116,919
|                                          |  |      |         |   |      |   |       
|                                          |  | 2004 |         |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |        |   | Thereafter |   |        | Total
|Instruments maturities                   |  | $    | 62,273  |   |      | $ | 29,217 |      |  | $ | 733    |   |  | $    | 26,108 |   |            | $ |       |       |  | $ | 10,565  |   |  | $ | 128,896
|Instruments amortization                 |  |      | 3,629   |   |      |   | 4,559  |      |  |   | 2,245  |   |  |      | 2,345  |   |            |   | 555    |       |  |   | 10,186  |   |  |   | 23,519 
|Interest                                  |  |      | 6,154   |   |      |   | 3,559  |      |  |   | 2,218  |   |  |      | 1,642  |   |            |   | 1,508  |       |  |   | 11,800  |   |  |   | 26,881 
|Average rate                              |  |      | 5.80    | % |      |   | 4.80   | %    |  |   | 4.70   | % |  |      | 5.00   | % |            |   | 4.90   | %     |  |   | 5.00    | % |  |   |        
|Fixed interest rate-fair value            |  |      |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |         |   |  | $ | 499,169
|                                          |  |      |         |   |      |   |       
|                                          |  | 2004 |         |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |        |   | Thereafter |   |        | Total
|Instruments maturities                   |  | $    | 105,220 |   |      | $ | 26,895 |      |  | $ | 36,388 |   |  | $    | 23,736 |   |            | $ | 11,725 |       |  | $ | 67,419  |   |  | $ | 271,383
|Instruments amortization                 |  |      | 7,264   |   |      |   | 7,791  |      |  |   | 7,785  |   |  |      | 5,563  |   |            |   | 5,412  |       |  |   | 163,903 |   |  |   | 197,718
|Interest                                  |  |      | 27,808  |   |      |   | 24,170 |      |  |   | 22,107 |   |  |      | 21,329 |   |            |   | 19,117 |       |  |   | 288,411 |   |  |   | 402,942
|Average rate                              |  |      | 8.60    | % |      |   | 7.40   | %    |  |   | 7.20   | % |  |      | 7.20   | % |            |   | 7.20   | %     |  |   | 7.00    | % |  |   |        



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##### Table of Contents

|ITEM 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                             |  |     
|-------------------------------------------------------------------------------------------- |  | ----
|                                                                                             |  | Page
|Financial Statements                                                                         |  |     
|Report of Independent Certified Public Accountants                                           |  | 26  
|Consolidated Balance SheetsDecember 31, 2003 and 2002                                       |  | 27  
|Consolidated Statements of OperationsYears Ended December 31, 2003, 2002 and 2001           |  | 28  
|Consolidated Statements of Stockholders EquityYears Ended December 31, 2003, 2002 and 2001 |  | 29  
|Consolidated Statements of Cash FlowsYears Ended December 31, 2003, 2002 and 2001           |  | 30  
|Notes to Consolidated Financial Statements                                                   |  | 32  
|                                                                                             | 
|Financial Statement Schedules                                                                |  |     
|Schedule IIIReal Estate and Accumulated Depreciation                                        |  | 56  
|Schedule IVMortgage Loans on Real Estate                                                    |  | 61  



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.



25



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##### Table of Contents

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors of

Transcontinental Realty Investors, Inc.

Dallas, Texas



We have audited the accompanying consolidated balance sheets of
Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders equity, other comprehensive income/(loss) and cash flows for each of the three years
in the period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. 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 that our audits provide a reasonable basis for our opinion.



As described in Note 22, 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.



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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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.



As discussed in Note 19, in 2002 the Company changed its method of accounting for discontinued operations.





BDO SEIDMAN, LLP









Dallas, Texas

March 30, 2004



26



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TRANSCONTINENTAL REALTY INVESTORS, INC.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                 |  | December 31,                            |        
|                                                                                                                                                 |  | 2003                                    |         |   | 2002 |  
|                                                                                                                                                 |  | (dollars in thousands,except per share) |        
|Assets                                                                                                                                           |  |                                         |         |   |      |   |         |  
|Real estate held for investment                                                                                                                  |  | $                                       | 807,371 |   |      | $ | 818,636 |  
|Lessaccumulated depreciation                                                                                                                    |  |                                         | (88,295 | ) |      |   | (81,659 | )
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  |                                         | 719,076 |   |      |   | 736,977 |  
|Real estate held for sale                                                                                                                        |  |                                         | 61,457  |   |      |   | 22,510  |  
|Notes and interest receivable                                                                                                                    |  |                                         |         |   |      |   |         |  
|Performing (including $18,793 in 2003 and $12,574 in 2002 from related parties)                                                                  |  |                                         | 27,894  |   |      |   | 26,608  |  
|Nonperforming, nonaccruing                                                                                                                       |  |                                         | 4,303   |   |      |   | 2,682   |  
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  |                                         | 32,197  |   |      |   | 29,290  |  
|Lessallowance for estimated losses                                                                                                              |  |                                         | (1,456  | ) |      |   | (1,337  | )
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  |                                         | 30,741  |   |      |   | 27,953  |  
|Investment in real estate entities                                                                                                               |  |                                         | 14,271  |   |      |   | 13,757  |  
|Marketable equity securities, at market value                                                                                                    |  |                                         | 5,000   |   |      |   |        |  
|Cash and cash equivalents                                                                                                                        |  |                                         | 6,434   |   |      |   | 10,558  |  
|Other assets (including $4,819 in 2003 and $19,187 in 2002 from affiliates and related parties)                                                  |  |                                         | 44,011  |   |      |   | 46,734  |  
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  | $                                       | 880,990 |   |      | $ | 858,489 |  
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|Liabilities and Stockholders Equity                                                                                                             |  |                                         |         |   |      |   |         |  
|Liabilities                                                                                                                                      |  |                                         |         |   |      |   |         |  
|Notes and interest payable                                                                                                                       |  | $                                       | 608,240 |   |      | $ | 586,628 |  
|Liabilities related to assets held for sale                                                                                                      |  |                                         | 18,225  |   |      |   | 15,724  |  
|Other liabilities (including $ 607 in 2003 and $5,272 in 2002 to affiliates and related parties)                                                 |  |                                         | 34,688  |   |      |   | 31,099  |  
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  |                                         | 661,153 |   |      |   | 633,451 |  
|                                                                                                                                                 |  |                                        
|Commitments and contingencies                                                                                                                    |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  |                                        
|Minority interest                                                                                                                                |  |                                         | (126    | ) |      |   | 2,644   |  
|Stockholders equity                                                                                                                             |  |                                         |         |   |      |   |         |  
|Preferred Stock                                                                                                                                  |  |                                         |         |   |      |   |         |  
|Series A; $.01 par value; authorized, 6,000 shares; issued and outstanding 0 shares in 2003 and 5,829 shares in 2002 (liquidation preference
$0) |  |                                         |        |   |      |   |        |  
|Series C; $.01 par value; authorized, issued and outstanding 30,000 shares; (liquidation preference $3,000)                                      |  |                                         |        |   |      |   |        |  
|Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 8,113,669 shares in 2003 and 8,072,594 shares in
2002        |  |                                         | 81      |   |      |   | 81      |  
|Paid-in capital                                                                                                                                  |  |                                         | 256,914 |   |      |   | 257,040 |  
|Accumulated deficit                                                                                                                              |  |                                         | (36,416 | ) |      |   | (35,294 | )
|Accumulated other comprehensive income (loss)                                                                                                    |  |                                         | (616    | ) |      |   | 567     |  
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  |                                         | 219,963 |   |      |   | 222,394 |  
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  
|                                                                                                                                                 |  | $                                       | 880,990 |   |      | $ | 858,489 |  
|                                                                                                                                                 |  |                                         |         |   |      |   |         |  



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



27



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TRANSCONTINENTAL REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                    |  | For the Years Ended December 31,         |          
|                                                                    |  | 2003                                     |           |   | 2002 |   |           | 2001 | 
|                                                                    |  | (dollars in thousands, except per share) |          
|Property revenue                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Rents                                                               |  | $                                        | 114,422   |   |      | $ | 95,794    |      |  | $ | 115,439   |  
|Property operations                                                 |  |                                          | 73,603    |   |      |   | 64,362    |      |  |   | 68,510    |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Operating income                                                    |  |                                          | 40,819    |   |      |   | 31,432    |      |  |   | 46,929    |  
|                                                                    |  |                                          |          
|Other income                                                        |  |                                          |           |   |      |   |           |      |  |   |           |  
|Interest and other income                                           |  |                                          | 6,683     |   |      |   | 4,131     |      |  |   | 2,924     |  
|Equity loss of equity investees                                     |  |                                          | (4,291    | ) |      |   | (3,818    | )    |  |   | (628      | )
|Gain on debt extinguishment                                         |  |                                          | 4,392     |   |      |   |          |      |  |   |          |  
|Gain on condemnation award                                          |  |                                          | 4,800     |   |      |   |          |      |  |   |          |  
|Gain on sale of real estate                                         |  |                                          |          |   |      |   |          |      |  |   | 48,961    |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|                                                                    |  |                                          | 11,584    |   |      |   | 313       |      |  |   | 51,257    |  
|Other expense                                                       |  |                                          |           |   |      |   |           |      |  |   |           |  
|Interest                                                            |  |                                          | 38,943    |   |      |   | 36,159    |      |  |   | 36,809    |  
|Depreciation                                                        |  |                                          | 21,199    |   |      |   | 17,143    |      |  |   | 17,136    |  
|Provision for asset impairment                                      |  |                                          | 4,713     |   |      |   | 2,579     |      |  |   |          |  
|Provision for losses                                                |  |                                          |          |   |      |   | 169       |      |  |   | 281       |  
|Discount on sale of note receivables                                |  |                                          | 104       |   |      |   |          |      |  |   |          |  
|Advisory fees                                                       |  |                                          | 4,935     |   |      |   | 4,465     |      |  |   | 5,346     |  
|Net income fee                                                      |  |                                          |          |   |      |   | 374       |      |  |   | 1,850     |  
|Incentive fees                                                      |  |                                          |          |   |      |   |          |      |  |   | 3,167     |  
|General and administrative                                          |  |                                          | 9,149     |   |      |   | 8,774     |      |  |   | 11,496    |  
|Realized loss on investments                                        |  |                                          |          |   |      |   |          |      |  |   | 3,059     |  
|Loss on foreign currency transactions                               |  |                                          | 3,309     |   |      |   | 2,455     |      |  |   |          |  
|Minority interest                                                   |  |                                          | (2,230    | ) |      |   | (893      | )    |  |   | (66       | )
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|                                                                    |  |                                          | 80,122    |   |      |   | 71,225    |      |  |   | 79,078    |  
|                                                                    |  |                                          |          
|Net income (loss) from continuing operations                        |  |                                          | (27,719   | ) |      |   | (39,480   | )    |  |   | 19,108    |  
|                                                                    |  |                                          |          
|Discontinued Operations                                             |  |                                          |           |   |      |   |           |      |  |   |           |  
|Income (loss) from operations                                       |  |                                          | (1,547    | ) |      |   | 373       |      |  |   | 703       |  
|Gain on sale of operations                                          |  |                                          | 23,291    |   |      |   | 38,945    |      |  |   |          |  
|Equity in investees gain on sale of real estate                     |  |                                          | 4,853     |   |      |   | 5,013     |      |  |   |          |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|                                                                    |  |                                          | 26,597    |   |      |   | 44,331    |      |  |   | 703       |  
|Net income (loss)                                                   |  |                                          | (1,122    | ) |      |   | 4,851     |      |  |   | 19,811    |  
|Preferred dividend requirement                                      |  |                                          | (126      | ) |      |   | (190      | )    |  |   | (172      | )
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Net income (loss) applicable to Common shares                       |  | $                                        | (1,248    | ) |      | $ | 4,661     |      |  | $ | 19,639    |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Basic earnings (loss) per share                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Net income (loss) from continuing operations                        |  | $                                        | (3.45     | ) |      | $ | (4.92     | )    |  | $ | 2.24      |  
|Discontinued operations                                             |  |                                          | 3.29      |   |      |   | 5.50      |      |  |   | .08       |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Net income (loss) applicable to Common shares                       |  | $                                        | (.16      | ) |      | $ | .58       |      |  | $ | 2.32      |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Diluted earnings                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Net income (loss) from continuing operations                        |  | $                                        | (3.45     | ) |      | $ | (4.92     | )    |  | $ | 2.20      |  
|Discontinued operations                                             |  |                                          | 3.29      |   |      |   | 5.50      |      |  |   | .08       |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Net income (loss) applicable to Common shares                       |  | $                                        | (.16      | ) |      | $ | .58       |      |  | $ | 2.28      |  
|                                                                    |  |                                          |           |   |      |   |           |      |  |   |           |  
|Weighted average Common shares used in computing earnings per share |  |                                          |           |   |      |   |           |      |  |   |           |  
|Basic                                                               |  |                                          | 8,078,108 |   |      |   | 8,057,361 |      |  |   | 8,478,377 |  
|Diluted                                                             |  |                                          | 8,078,108 |   |      |   | 8,057,361 |      |  |   | 8,615,465 |  



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



28



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TRANSCONTINENTAL REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------- | - |  | -------------- | -- | - | ------------------- | - | ------- | -------------------------------------- |  | - | -------------------- | - |  | - | ------ | - |  | - | ------- | -
|                                                               |  | Common Stock                          |   |  | Paid-inCapital |    |   | Accumulated Deficit |   |         | Accumulated Other Comprehensive Income |  |   | Stockholders Equity |  
|                                                               |  | Shares                                |   |  | Amount         |    |   |                     |   |        
|                                                               |  | (dollars in thousands, except shares) |  
|Balance, January 1, 2001                                       |  | 8,636,354                             |   |  | $              | 86 |   |                     | $ | 263,489 |                                        |  | $ | (59,956              | ) |  | $ | (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 |   |                     |   | 256,833 |                                        |  |   | (40,145              | ) |  |   |       |   |  |   | 216,768 |  
|Comprehensive income                                           |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  
|Unrealized (loss) on foreign currency translation              |  |                                      |   |  |                |   |   |                     |   |        |                                        |  |   |                     |   |  |   | 567    |   |  |   | 567     |  
|Net income                                                     |  |                                      |   |  |                |   |   |                     |   |        |                                        |  |   | 4,851                |   |  |   |       |   |  |   | 4,851   |  
|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  
|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   | 5,418   |  
|Issuance of Common Stock upon exercise of stock options        |  | 30,000                                |   |  |                | 1  |   |                     |   | 397     |                                        |  |   |                     |   |  |   |       |   |  |   | 398     |  
|Series A Preferred Stock cash dividend ($5.00 per share)       |  |                                      |   |  |                |   |   |                     |   | (29     | )                                      |  |   |                     |   |  |   |       |   |  |   | (29     | )
|Series C Preferred Stock cash dividends ($5.00 per share)      |  |                                      |   |  |                |   |   |                     |   | (161    | )                                      |  |   |                     |   |  |   |       |   |  |   | (161    | )
|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2002                                     |  | 8,072,594                             |   |  |                | 81 |   |                     |   | 257,040 |                                        |  |   | (35,294              | ) |  |   | 567    |   |  |   | 222,394 |  
|Comprehensive income                                           |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  
|Unrealized (loss) on foreign currency translation              |  |                                      |   |  |                |   |   |                     |   |        |                                        |  |   |                     |   |  |   | (1,183 | ) |  |   | (1,183  | )
|Net loss                                                       |  |                                      |   |  |                |   |   |                     |   |        |                                        |  |   | (1,122               | ) |  |   |       |   |  |   | (1,122  | )
|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  
|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   | (2,305  | )
|Series A Preferred Stock cash dividend ($5.00 per share)       |  |                                      |   |  |                |   |   |                     |   | (29     | )                                      |  |   |                     |   |  |   |       |   |  |   | (29     | )
|Series C Preferred Stock cash dividends ($5.00 per share)      |  |                                      |   |  |                |   |   |                     |   | (97     | )                                      |  |   |                     |   |  |   |       |   |  |   | (97     | )
|Conversion of 5,829 Series A Preferred Stock into Common Stock |  | 41,075                                |   |  |                |   |   |                     |   |        |                                        |  |   |                     |   |  |   |       |   |  |   |        |  
|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2003                                     |  | 8,113,669                             |   |  | $              | 81 |   |                     | $ | 256,914 |                                        |  | $ | (36,416              | ) |  | $ | (616   | ) |  | $ | 219,963 |  
|                                                               |  |                                       |   |  |                |    |   |                     |   |         |                                        |  |   |                      |   |  |   |        |   |  |   |         |  



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



29



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                              |  |                                  |          |   |      |   |          |      |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                              |  | For the Years Ended December 31, |         
|                                                                                              |  | 2003                             |          |   | 2002 |   |          | 2001 | 
|                                                                                              |  | (dollars in thousands)           |         
|Cash Flows from Operating Activities                                                          |  |                                  |          |   |      |   |          |      |  |   |         |  
|Reconciliation of net loss to net cash used by operating activities                           |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net Income/(Loss)                                                                             |  | $                                | (1,122   | ) |      | $ | 4,851    |      |  | $ | 19,811  |  
|Adjustments to reconcile net loss to net cash provided by <used in> operating activities      |  |                                  |          |   |      |   |          |      |  |   |         |  
|Depreciation and amortization                                                                 |  | $                                | 22,655   |   |      | $ | 20,666   |      |  | $ | 19,705  |  
|Provision for loss                                                                            |  |                                  | 104      |   |      |   | 169      |      |  |   |        |  
|Amortization of deferred borrowing costs                                                      |  |                                  | 3,134    |   |      |   | 3,253    |      |  |   | 1,478   |  
|Gain on sale of real estate                                                                   |  |                                  | (28,144  | ) |      |   | (43,958  | )    |  |   | (54,270 | )
|Provision for asset impairment                                                                |  |                                  | 4,713    |   |      |   | 2,579    |      |  |   |        |  
|Equity in loss of equity investees                                                            |  |                                  | 4,291    |   |      |   | 3,818    |      |  |   | 5,950   |  
|Realized loss on investments                                                                  |  |                                  |         |   |      |   |         |      |  |   | 3,059   |  
|Distributions from operating cash flow of equity investees                                    |  |                                  |         |   |      |   |         |      |  |   | 646     |  
|Gain on extinguishment of debt                                                                |  |                                  | (4,392   | ) |      |   |         |      |  |   |        |  
|Gain on condemnation award                                                                    |  |                                  | (4,800   | ) |      |   |         |      |  |   |        |  
|Loss on foreign currency transaction                                                          |  |                                  | 3,309    |   |      |   | 2,455    |      |  |   |        |  
|Loss allocated to minority interest                                                           |  |                                  | (2,230   | ) |      |   | (893     | )    |  |   | (66     | )
|Increase in interest receivable                                                               |  |                                  | (683     | ) |      |   | (665     | )    |  |   | (137    | )
|<Increase> decrease in other assets                                                           |  |                                  | 1,670    |   |      |   | (4,940   | )    |  |   | 805     |  
|Increase <decrease> in interest payable                                                       |  |                                  | 311      |   |      |   | 1,397    |      |  |   | (185    | )
|Increase in other liabilities                                                                 |  |                                  | 4,880    |   |      |   | 2,156    |      |  |   | 2,309   |  
|                                                                                              |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net cash provided by <used in> operating activities                                           |  |                                  | 3,696    |   |      |   | (9,112   | )    |  |   | (895    | )
|                                                                                              |  |                                  |         
|Cash Flows from Investing Activities                                                          |  |                                  |          |   |      |   |          |      |  |   |         |  
|Collections on notes receivable (including $1,241 in 2003 and $1,333 in 2002 from affiliates) |  |                                  | 4,651    |   |      |   | 16,193   |      |  |   | 6,042   |  
|Funding of notes receivable (including $14,481 in 2002 and $1,970 in 2001 from affiliates)    |  |                                  | (736     | ) |      |   | (18,337  | )    |  |   | (19,455 | )
|Acquisitions of real estate                                                                   |  |                                  | (14,250  | ) |      |   | (12,688  | )    |  |   | (19,669 | )
|Real estate improvements                                                                      |  |                                  | (4,462   | ) |      |   | (7,001   | )    |  |   | (9,139  | )
|Real estate construction (including $4,050 in 2003 and $4,678 in 2002 to affiliates)          |  |                                  | (59,055  | ) |      |   | (104,235 | )    |  |   | (24,478 | )
|Proceeds from sale of real estate                                                             |  |                                  | 56,635   |   |      |   | 106,085  |      |  |   | 100,818 |  
|Payments made under interest rate swap agreement                                              |  |                                  | (87      | ) |      |   | (272     | )    |  |   |        |  
|Purchase of marketable equity securities                                                      |  |                                  | (5,000   | ) |      |   |         |      |  |   |        |  
|Refunds/(deposits) on pending purchase                                                        |  |                                  | (9,784   | ) |      |   | (716     | )    |  |   | (724    | )
|Payments (to) from advisor                                                                    |  |                                  | 5,264    |   |      |   | (39,739  | )    |  |   | 3,368   |  
|Net advance to affiliates                                                                     |  |                                  |         |   |      |   | (6,232   | )    |  |   | (553    | )
|Contributions to equity investees                                                             |  |                                  | (48      | ) |      |   | (15      | )    |  |   | (151    | )
|                                                                                              |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net cash provided by (used in) investing activities                                           |  |                                  | (26,872  | ) |      |   | (66,957  | )    |  |   | 36,059  |  
|                                                                                              |  |                                  |         
|Cash Flows from Financing Activities                                                          |  |                                  |          |   |      |   |          |      |  |   |         |  
|Payments on notes payable                                                                     |  |                                  | (124,659 | ) |      |   | (95,731  | )    |  |   | (66,063 | )
|Proceeds from notes payable                                                                   |  |                                  | 146,072  |   |      |   | 176,069  |      |  |   | 29,094  |  
|Payments to minority interests                                                                |  |                                  |         |   |      |   | (704     | )    |  |   |        |  
|Dividends paid                                                                                |  |                                  |         |   |      |   | (104     | )    |  |   | (172    | )
|Repurchase of Common Stock                                                                    |  |                                  |         |   |      |   |         |      |  |   | (9,490  | )
|Deferred financing costs                                                                      |  |                                  | (2,361   | ) |      |   | (3,647   | )    |  |   | (510    | )
|Proceeds from exercise of stock options                                                       |  |                                  |         |   |      |   | 398      |      |  |   |        |  
|                                                                                              |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net cash provided by (used in) financing activities                                           |  |                                  | 19,052   |   |      |   | 76,281   |      |  |   | (47,141 | )
|                                                                                              |  |                                  |          |   |      |   |          |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                          |  |                                  | (4,124   | ) |      |   | 212      |      |  |   | (11,977 | )
|Cash and cash equivalents, beginning of year                                                  |  |                                  | 10,558   |   |      |   | 10,346   |      |  |   | 22,323  |  
|                                                                                              |  |                                  |          |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents, end of year                                                        |  | $                                | 6,434    |   |      | $ | 10,558   |      |  | $ | 10,346  |  
|                                                                                              |  |                                  |          |   |      |   |          |      |  |   |         |  



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



30



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWSContinued



|                                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                          |  | For the Years Ended December 31, |        
|                                                                                          |  | 2003                             |         |   | 2002 |   |         | 2001 | 
|                                                                                          |  | (dollars in thousands)           |        
|Supplemental Disclosures of Cash Flow Information:                                        |  |                                  |         |   |      |   |         |      |  |   |         |  
|Cash paid for interest                                                                    |  | $                                | (43,016 | ) |      | $ | (41,379 | )    |  | $ | (39,452 | )
|                                                                                          |  |                                  |        
|Notes payable assumed on purchase of real estate                                          |  |                                  | 2,650   |   |      |   | 63,555  |      |  |   | 37,776  |  
|Notes payable assumed by buyer on sale of real estate                                     |  |                                  | 11,291  |   |      |   | 12,110  |      |  |   | 42,784  |  
|Series B Preferred Stock issued in conjunction with purchase of real estate               |  |                                  |        |   |      |   |        |      |  |   | (1,500  | )
|Series C Preferred Stock issued in conjunction with purchase of real estate               |  |                                  |        |   |      |   |        |      |  |   | 3,000   |  
|Limited partnership interest received on sale of real estate                              |  |                                  |        |   |      |   |        |      |  |   | 1,500   |  
|Funds collected by affiliate on sale of note receivable                                   |  |                                  | 2,633   |   |      |   |        |      |  |   |        |  
|Notes receivable provided on sale of real estate                                          |  |                                  | 4,760   |   |      |   | 6,700   |      |  |   |        |  
|Real estate refinancing proceeds received by affiliate                                    |  |                                  | 1,226   |   |      |   |        |      |  |   |        |  
|Real estate received on exchange with related party                                       |  |                                  |        |   |      |   | 4,145   |      |  |   |        |  
|Real estate received from related party as payment of debt                                |  |                                  | 10,700  |   |      |   | 46,200  |      |  |   |        |  
|Notes receivable payments received by affiliate and added to affiliate receivable balance |  |                                  |        |   |      |   | 2,544   |      |  |   |        |  
|Issuance of note payable for which cash proceeds were received by the advisor             |  |                                  | 6,239   |   |      |   | 4,000   |      |  |   |        |  



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



31



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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 accounting principles generally accepted in the United States of America, the most significant
of which are described in NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. 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.



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



Certain balances for 2002 and 2001 have been reclassified to conform to the 2003 presentation.



|NOTE 1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|------- |  | ------------------------------------------



Organization and 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 NOTE 22. 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 accounting principles generally accepted in the United States of America it is 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.



Recent Accounting
pronouncements.





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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which disclosures are effective for financial statements issued after December 15, 2002. While the Company has various guarantees included in
contracts in the normal course of business, these guarantees would not represent significant commitments or contingent liabilities of the indebtedness of entities outside of the consolidated company.



In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be issued by the Company after 2003; however, disclosures are
required currently if TCI expects to consolidate any variable interest entities. TCI does not currently believe that any entities will be consolidated as a result of FIN 46.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires the issuer to classify a financial instrument
that is within the scope of the standard as a liability if such financial instrument embodies an obligation of the issuer. The adoption of SFAS No. 150 is not expected to require TCI to reclass any financial instruments currently on our balance
sheet.



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 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.



Foreign Currency Translation.    Foreign currency denominated assets and liabilities of subsidiaries with local functional currencies are translated to United States dollars at year-end exchange rates. The effects
of translation are recorded in the cumulative translation component of shareholders equity. Subsidiaries with a United States dollar functional currency remeasure monetary assets and liabilities at year-end exchange rates and non-monetary
assets and liabilities at historical exchange rates. The effects of remeasurement are included in income. Exchange gains and losses arising from transactions denominated in foreign currencies are translated at average exchange rates. The effects of
these exchange adjustments resulted in losses of $3.3 million in 2003 and $2.5 million in 2002.



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), as amended by SFAS No. 144. 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.



33



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Investment in noncontrolled equity investees.    The equity method is used
to account for investments in partnerships which TCI does not control but for which significant influence can be exerted, 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 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 investments purchased with an original maturity of three months or less are considered to be cash equivalents.



Earnings per share.    Income (loss) per share is presented in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Income (loss) 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 include 301,548 shares to reflect the dilutive effect of options and convertible preferred stock to purchase shares of common stock. For the year ended December 31, 2003 and 2002,
251,886 and 223,784 weighted average shares, respectively, were excluded from the calculation of dilutive earnings per share because the effect of their inclusion would be antidilutive.



Stock-based employee compensation.    TCI accounts for stock-based compensation utilizing the
intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no compensation expense is
recognized for fixed option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant.



The following table represents the effect on net income and earnings per share if TCI had applied the fair value based
method and recognition provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation, to stock-based employee compensation:



|                                                                                                                                       |  |                                                  |        |   |      |   |       |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                                                       |  | 2003                                             |        |   | 2002 |   |       | 2001 | 
|                                                                                                                                       |  | (dollars in thousands, except per share amounts) |       
|Net income (loss) applicable to common shares, as reported                                                                             |  | $                                                | (1,248 | ) |      | $ | 4,661 |      |  | $ | 19,639 |  
|Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax
effects |  |                                                  | (109   | ) |      |   | (105  | )    |  |   | (190   | )
|                                                                                                                                       |  |                                                  |        |   |      |   |       |      |  |   |        |  
|Proforma net income applicable to common shares                                                                                        |  | $                                                | (1,357 | ) |      | $ | 4,556 |      |  | $ | 19,449 |  
|                                                                                                                                       |  |                                                  |        |   |      |   |       |      |  |   |        |  
|Net income (loss) per share                                                                                                            |  |                                                  |        |   |      |   |       |      |  |   |        |  
|Basic, as reported                                                                                                                     |  | $                                                | (.16   | ) |      | $ | .58   |      |  | $ | 2.32   |  
|Basic, pro forma                                                                                                                       |  | $                                                | (.17   | ) |      | $ | .57   |      |  | $ | 2.30   |  
|                                                                                                                                       |  |                                                  |       
|Diluted, as reported                                                                                                                   |  | $                                                | (.16   | ) |      | $ | .58   |      |  | $ | 2.28   |  
|Diluted, pro forma                                                                                                                     |  | $                                                | (.17   | ) |      | $ | .57   |      |  | $ | 2.26   |  



34



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|NOTE 2. |  | REAL ESTATE
|------- |  | -----------



In 2003, TCI purchased the following properties:



|                    |  |                    |  |                      |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|------------------- |  | ------------------ |  | -------------------- |  | ------------- | ------ | ------------ | - | ------------ |  | - | ------------ | --- |  | ------------ | --- |  | ----- | ---
|Property            |  | Location           |  | Units/ Sq. Ft./Acres |  | PurchasePrice |        | NetCash Paid |   | DebtIncurred |  |   | InterestRate |     |  | MaturityDate |    
|Apartments          |  |                    |  |                      |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|Breakwater Bay(1)   |  | Beaumont, TX       |  | 176 Units            |  | $             | 1,979  |              | $ | 383          |  | $ | 1,554        |     |  | %            |     |  |      |    
|Capitol Hill(1)     |  | Little Rock, AR    |  | 156 Units            |  |               | 1,904  |              |   | 615          |  |   | 1,289        |     |  |             |     |  |      |    
|Heather Creek(1)    |  | Mesquite, TX       |  | 200 Units            |  |               | 2,523  |              |   | 449          |  |   | 2,074        |     |  |             |     |  |      |    
|Kingsland Ranch(1)  |  | Houston, TX        |  | 398 Units            |  |               | 3,300  |              |   |             |  |   | 3,300        |     |  |             |     |  |      |    
|Windsong            |  | Fort Worth, TX     |  | 188 Units            |  |               | 11,939 |              |   | 1,194        |  |   | 10,745       |     |  | 7.20         |     |  | 10/43 |    
|                    |  |                    |  |                      |  |               |       
|Shopping Center     |  |                    |  |                      |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|Bridgeview Plaza(2) |  | LaCrosse, WI       |  | 116,008 Sq. Ft.      |  |               | 8,700  |              |   |             |  |   |             |     |  |             |     |  |      |    
|Cullman(2)          |  | Cullman, AL        |  | 92,433 Sq. Ft.       |  |               | 2,000  |              |   |             |  |   | 2,650        | (4) |  | 16.75        |     |  | 3/03  | (3)
|                    |  |                    |  |                      |  |               |       
|Land                |  |                    |  |                      |  |               |        |              |   |              |  |   |              |     |  |              |     |  |       |    
|Maumelle            |  | Maumelle, AR       |  | 10.8 Acres           |  |               | 1,100  |              |   | 412          |  |   | 640          |     |  | 5.75         |     |  | 07/04 |    
|Pulaski             |  | Pulaski County, AR |  | 21.9 Acres           |  |               | 2,000  |              |   | 695          |  |   | 1,400        |     |  | 6.50         |     |  | 05/05 |    
|Sheffield Village   |  | Grand Prairie, TX  |  | 13.899 Acres         |  |               | 1,500  |              |   | 464          |  |   | 975          |     |  | 5.50         | (5) |  | 09/04 |    

---

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

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

|(3) | Debt was paid off in April refinance. See NOTE 7. NOTES AND INTEREST PAYABLE.
|--- | -------------------------------------------------------------------------------

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

|(5) | Variable interest rate.
|--- | -----------------------



In 2002, TCI purchased the following properties:



|                           |  |                    |  |                      |  |                |        |               |   |              |  |   |              |     |  |              |     |  |       |    
|-------------------------- |  | ------------------ |  | -------------------- |  | -------------- | ------ | ------------- | - | ------------ |  | - | ------------ | --- |  | ------------ | --- |  | ----- | ---
|Property                   |  | Location           |  | Units/ Sq. Ft./Acres |  | Purchase Price |        | Net Cash Paid |   | DebtIncurred |  |   | InterestRate |     |  | MaturityDate |    
|Apartments                 |  |                    |  |                      |  |                |        |               |   |              |  |   |              |     |  |              |     |  |       |    
|Blue Lakes Villas(1)       |  | Waxahachie, TX     |  | 186 Units            |  | $              | 1,012  |               | $ | 1,048        |  | $ |             |     |  |             | %   |  |      |    
|DeSoto Ranch(1)            |  | DeSoto, TX         |  | 248 Units            |  |                | 1,364  |               |   | 1,489        |  |   | 2,246        |     |  | 7.18         |     |  | 12/43 |    
|Echo Valley(1)             |  | Dallas, TX         |  | 216 Units            |  |                | 787    |               |   | 788          |  |   |             |     |  |             |     |  |      |    
|Spy Glass(1)               |  | Mansfield, TX      |  | 256 Units            |  |                | 1,280  |               |   | 1,042        |  |   | 2,303        |     |  | 7.50         |     |  | 08/43 |    
|Vistas at Pinnacle Park(1) |  | Dallas, TX         |  | 382 Units            |  |                | 3,202  |               |   | 414          |  |   | 2,788        |     |  | 6.25         |     |  | 07/44 |    
|                           |  |                    |  |                      |  |                |       
|Office Building            |  |                    |  |                      |  |                |        |               |   |              |  |   |              |     |  |              |     |  |       |    
|Centura(2)                 |  | Farmers Branch, TX |  | 410,901 Sq. Ft.      |  |                | 50,000 |               |   |             |  |   | 43,739       | (3) |  | 13.00        | (4) |  | 07/03 |    
|                           |  |                    |  |                      |  |                |       
|Shopping Center            |  |                    |  |                      |  |                |        |               |   |              |  |   |              |     |  |              |     |  |       |    
|Oak Tree Village(5)        |  | Lubbock, TX        |  | 45,623 Sq. Ft.       |  |                | 1,467  |               |   | 196          |  |   | 1,389        | (3) |  | 8.48         |     |  | 11/07 |    
|                           |  |                    |  |                      |  |                |       
|Land                       |  |                    |  |                      |  |                |        |               |   |              |  |   |              |     |  |              |     |  |       |    
|2301 Valley Branch         |  | Farmers Branch, TX |  | 23.76 Acres          |  |                | 4,165  |               |   | 1,000        |  |   | 3,124        |     |  | 4.00         |     |  | 08/05 |    
|Centura(2)                 |  | Farmers Branch, TX |  | 8.75 Acres           |  |                | 13,300 |               |   |             |  |   | 7,150        | (3) |  | 13.50        |     |  | 03/03 |    
|Hollywood Casino(2)        |  | Dallas, TX         |  | 42.64 Acres          |  |                | 16,987 |               |   |             |  |   | 6,222        | (3) |  | 9.50         |     |  | 03/03 |    
|Lakeshore Villas(5)        |  | Humble, TX         |  | 16.89 Acres          |  |                | 947    |               |   | 127          |  |   |             |     |  |             |     |  |      |    
|Marine Creek(2)            |  | Ft. Worth, TX      |  | 54 Acres             |  |                | 3,700  |               |   |             |  |   | 1,500        | (3) |  | 9.00         |     |  | 01/03 |    
|Mason Park(2)              |  | Houston, TX        |  | 18 Acres             |  |                | 2,790  |               |   |             |  |   | 2,600        | (3) |  | 14.00        |     |  | 02/03 | (5)
|Nashville(2)               |  | Nashville, TN      |  | 16.57 Acres          |  |                | 1,890  |               |   |             |  |   | 955          | (3) |  | 15.50        |     |  | 07/03 |    
|Palm Desert(2)             |  | Palm Desert, CA    |  | 61 Acres             |  |                | 4,625  |               |   |             |  |   |             |     |  |             |     |  |      |    
|Rasor(5)                   |  | Plano, TX          |  | 24.5 Acres           |  |                | 2,319  |               |   | 310          |  |   |             |     |  |             |     |  |      |    

---

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

|(2) | Property received from ARI, a related party, for payment of debt.
|--- | -----------------------------------------------------------------

|(3) | Assumed debt.
|--- | -------------

|(4) | Weighted average. The Centura Tower is encumbered by two loans, one for $28.7 million at 10.5% and the other for $15.0 million at 17.9%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(5) | Property exchanged with American Realty Investors, Inc. (ARI), a related party, for the Plaza on Bachman Creek Retail Center and the reduction of $600,000 in affiliate
receivables.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2003, TCI sold the following properties:



|                                   |  |                   |  |                      |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|---------------------------------- |  | ----------------- |  | -------------------- |  | ---------- | ------ | ---------------- | - | ----- | -------------- |  | - | ------------------ | ---- |  | - | ------ | ----
|Property                           |  | Location          |  | Units/ Sq. Ft./Acres |  | SalesPrice |        | Net CashReceived |   |       | DebtDischarged |  |   | Gain/(Loss)on Sale |     
|Apartments                         |  |                   |  |                      |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Lincoln Court                      |  | Dallas, TX        |  | 55 Units             |  | $          | 3,038  |                  | $ | 1,834 |                |  | $ | 1,208              | (1)  |  | $ | 1,654  |     
|Quail Creek                        |  | Lawrence, KS      |  | 96 Units             |  |            | 4,700  |                  |   | 1,188 |                |  |   | 3,260              |      |  |   | 1,358  |     
|Stone Oak                          |  | San Antonio, TX   |  | 252 Units            |  |            | 6,930  |                  |   | 3,670 |                |  |   | 2,699              |      |  |   | 4,193  |     
|Summerfield                        |  | Orlando, FL       |  | 224 Units            |  |            | 9,415  |                  |   | 4,845 |                |  |   | 4,476              |      |  |   | 3,684  |     
|Treehouse(5)                       |  | Irving, TX        |  | 160 Units            |  |            | 7,500  |                  |   |      |                |  |   | 5,083              | (12) |  |   |       | (6) 
|Willow Wick                        |  | North Augusta, NC |  | 104 Units            |  |            | 2,707  |                  |   | 255   |                |  |   | 1,943              |      |  |   | 999    |     
|                                   |  |                   |  |                      |  |           
|Office Building                    |  |                   |  |                      |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Bonita Plaza                       |  | Bonita, CA        |  | 47,777 Sq. Ft.       |  |            | 8,034  |                  |   | 1,647 |                |  |   | 5,944              |      |  |   | 2,139  |     
|Remington Tower                    |  | Tulsa, OK         |  | 90,009 Sq. Ft.       |  |            | 3,360  |                  |   | (80   | )              |  |   | 3,360              | (1)  |  |   | (1,056 | )   
|                                   |  |                   |  |                      |  |           
|Industrial Warehouse               |  |                   |  |                      |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Kelly (301 Hilltop)                |  | Dallas, TX        |  | 76,946 Sq. Ft.       |  |            | 1,800  |                  |   |      |                |  |   | 1,712              |      |  |   | 639    |     
|Kelly (108thStreet)                |  | Dallas, TX        |  | 20,871 Sq. Ft.       |  |            | 675    |                  |   |      |                |  |   | 634                |      |  |   | 357    |     
|McLeod                             |  | Orlando, FL       |  | 110,914 Sq. Ft.      |  |            | 5,450  |                  |   | 2,980 |                |  |   | 1,902              |      |  |   | 2,490  |     
|Tricon                             |  | Atlanta, GA       |  | 570,877 Sq. Ft.      |  |            | 13,084 |                  |   | 3,364 |                |  |   | 9,395              |      |  |   | 4,587  |     
|                                   |  |                   |  |                      |  |           
|Shopping Center                    |  |                   |  |                      |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|K-Mart                             |  | Sheboygan, WI     |  | 74,532 Sq. Ft.       |  |            | 1,225  |                  |   | 669   |                |  |   | 569                |      |  |   | 12     |     
|Oak Tree Village                   |  | Lubbock, TX       |  | 45,623 Sq. Ft.       |  |            | 3,366  |                  |   |      | (4)            |  |   | 1,328              |      |  |   | 590    |     
|Parkway Centre(7)                  |  | Dallas, TX        |  | 28,374 Sq. Ft.       |  |            | 4,000  |                  |   |      |                |  |   | 1,640              | (12) |  |   |       | (8) 
|                                   |  |                   |  |                      |  |           
|Land                               |  |                   |  |                      |  |            |        |                  |   |       |                |  |   |                    |      |  |   |        |     
|Eagle Crest(9)                     |  | Dallas, TX        |  | 19.99 Acres          |  |            | 4,000  |                  |   |      |                |  |   |                   |      |  |   |       | (10)
|Palm Desert                        |  | Palm Desert, CA   |  | 25.06 Acres          |  |            | 2,800  |                  |   |      | (3)            |  |   |                   |      |  |   | 617    |     
|Sendero Ranch                      |  | Fort Worth, TX    |  | 14 Acres             |  |            | 300    |                  |   | 292   |                |  |   |                   |      |  |   | (770   | )   
|Solco-Valley Ranch                 |  | Dallas, TX        |  | 6.0693 Acres         |  |            | 1,999  |                  |   |      | (2)            |  |   |                   |      |  |   | 384    |     
|State Highway 121/Watters Road(11) |  | Collin County, TX |  | 37.08 Acres          |  |            | 2,188  |                  |   | 1,197 |                |  |   | 912                |      |  |   | 1,410  |     

---

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

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

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

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

|(5) | Property sold to IORI, a related party, for assumption of debt and reduction of $2.4 million in affiliate receivables.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(6) | Excludes a $4.4 million deferred gain from seller financing. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|--- | ---------------------------------------------------------------------------------------------------------

|(7) | Property sold to IORI, a related party, for assumption of debt and reduction of $2.3 million in affiliate receivables.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(8) | Excludes a $2.3 million deferred gain from seller financing. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|--- | ---------------------------------------------------------------------------------------------------------

|(9) | Property sold to IORI, a related party, for forgiveness of debt.
|--- | ----------------------------------------------------------------

|(10) | Excludes a $1.7 million deferred gain from a related party sale. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|---- | -------------------------------------------------------------------------------------------------------------

|(11) | Approximately 20 acres of Watters Road and 17.08 acres of State Highway 121 were sold together in a single transaction.
|---- | -----------------------------------------------------------------------------------------------------------------------

|(12) | Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------



36



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2002, TCI sold the following properties:



|                          |  |                    |  |                      |  |            |        |                   |   |                |  |                    |       |  |   |       |    
|------------------------- |  | ------------------ |  | -------------------- |  | ---------- | ------ | ----------------- | - | -------------- |  | ------------------ | ----- |  | - | ----- | ---
|Property                  |  | Location           |  | Units/ Sq. Ft./Acres |  | SalesPrice |        | Net Cash Received |   | DebtDischarged |  | Gain/(Loss)on Sale |      
|Apartments                |  |                    |  |                      |  |            |        |                   |   |                |  |                    |       |  |   |       |    
|4242 Cedar Springs        |  | Dallas, TX         |  | 76 Units             |  | $          | 2,600  |                   | $ | 971            |  | $                  | 1,288 |  | $ | 1,252 |    
|Camelot                   |  | Largo, FL          |  | 120 Units            |  |            | 5,263  |                   |   | 1,616          |  |                    | 3,298 |  |   | 1,517 |    
|Country Crossing          |  | Tampa, FL          |  | 227 Units            |  |            | 5,800  |                   |   | 1,836          |  |                    | 3,726 |  |   | 3,142 |    
|Gladstell Forest          |  | Conroe, TX         |  | 168 Units            |  |            | 4,875  |                   |   | 1,713          |  |                    | 2,360 |  |   | 2,050 |    
|Grove Park                |  | Plano, TX          |  | 188 Units            |  |            | 7,425  |                   |   | 2,498          |  |                    | 4,504 |  |   | 3,341 |    
|Heritage on the River     |  | Jacksonville, FL   |  | 301 Units            |  |            | 12,475 |                   |   | 4,317          |  |                    | 7,606 |  |   | 5,162 |    
|Primrose                  |  | Bakersfield, CA    |  | 162 Units            |  |            | 5,000  |                   |   | 1,722          |  |                    | 2,920 |  |   | 659   |    
|Southgreen                |  | Bakersfield, CA    |  | 80 Units             |  |            | 3,600  |                   |   | 1,011          |  |                    | 2,381 |  |   | (72   | )  
|Trails of Windfern        |  | Houston, TX        |  | 240 Units            |  |            | 7,350  |                   |   | 2,379          |  |                    | 3,654 |  |   | 2,453 |    
|                          |  |                    |  |                      |  |           
|Office Building           |  |                    |  |                      |  |            |        |                   |   |                |  |                    |       |  |   |       |    
|Hartford                  |  | Dallas, TX         |  | 174,513 Sq. Ft.      |  |            | 4,000  |                   |   |               |  |                    |      |  |   |      | (1)
|Jefferson                 |  | Washington, DC     |  | 71,877 Sq. Ft.       |  |            | 16,550 |                   |   | 5,957          |  |                    | 9,679 |  |   | 3,421 |    
|NASA                      |  | Clear Lake, TX     |  | 78,159 Sq. Ft.       |  |            | 2,600  |                   |   | 2,341          |  |                    |      |  |   | 1,341 |    
|Plaza Tower               |  | St. Petersburg, FL |  | 186,281 Sq. Ft.      |  |            | 17,100 |                   |   | 8,313          |  |                    | 6,909 |  |   | 8,093 |    
|Savings of America        |  | Houston, TX        |  | 68,634 Sq. Ft.       |  |            | 2,800  |                   |   | 1,104          |  |                    | 1,185 |  |   | 621   |    
|Windsor Plaza             |  | Windcrest, TX      |  | 80,522 Sq. Ft.       |  |            | 4,250  |                   |   | 3,813          |  |                    |      |  |   | 895   |    
|                          |  |                    |  |                      |  |           
|Industrial Warehouse      |  |                    |  |                      |  |            |        |                   |   |                |  |                    |       |  |   |       |    
|Central Storage           |  | Dallas, TX         |  | 216,035 Sq. Ft.      |  |            | 4,000  |                   |   | 2,095          |  |                    | 1,063 |  |   | 1,241 |    
|                          |  |                    |  |                      |  |           
|Shopping Center           |  |                    |  |                      |  |            |        |                   |   |                |  |                    |       |  |   |       |    
|Chelsea Square            |  | Houston, TX        |  | 70,275 Sq. Ft.       |  |            | 4,200  |                   |   | 1,940          |  |                    | 1,986 |  |   | 1,056 |    
|Plaza on Bachman Creek(2) |  | Dallas, TX         |  | 80,278 Sq. Ft.       |  |            | 4,707  |                   |   |               |  |                    |      |  |   |      |    
|                          |  |                    |  |                      |  |           
|Land                      |  |                    |  |                      |  |            |        |                   |   |                |  |                    |       |  |   |       |    
|Palm Desert               |  | Palm Desert, CA    |  | 36 Acres             |  |            | 3,600  |                   |   | 685            |  |                    |      |  |   | 666   |    

---

|(1) | Excludes a $920,000 deferred gain from seller financing. See NOTE 3. NOTES AND INTEREST RECEIVABLE.
|--- | -----------------------------------------------------------------------------------------------------

|(2) | Property was exchanged with ARI, a related party, for the Oak Tree Village Shopping Center and two parcels of land; the Rasor land parcel and Lakeshore Villas land parcel. TCI also
reduced the affiliate receivable from ARI by $600,000.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|NOTE 3. |  | NOTES AND INTEREST RECEIVABLE
|------- |  | -----------------------------



Notes and interest receivable consisted of the following:



|                           |  |                    |        |           |   |                    |  |           |        |  |   |       
|-------------------------- |  | ------------------ | ------ | --------- | - | ------------------ |  | --------- | ------ |  | - | ------
|                           |  | 2003               |        | 2002     
|                           |  | EstimatedFairValue |        | BookValue |   | EstimatedFairValue |  | BookValue
|Notes receivable           |  |                    |        |           |   |                    |  |           |        |  |   |       
|Performing                 |  | $                  | 25,850 |           | $ | 26,368             |  | $         | 26,295 |  | $ | 25,765
|Nonperforming, nonaccruing |  |                    | 4,303  |           |   | 4,303              |  |           | 2,682  |  |   | 2,682 
|                           |  |                    |        |           |   |                    |  |           |        |  |   |       
|                           |  | $                  | 30,153 |           |   | 30,671             |  | $         | 28,977 |  |   | 28,447
|                           |  |                    |        |           |   |                    |  |           |        |  |   |       
|Interest receivable        |  |                    |        |           |   | 1,526              |  |           |        |  |   | 843   
|                           |  |                    |        |           |   |                    |  |           |        |  |   |       
|                           |  |                    |        |           | $ | 32,197             |  |           |        |  | $ | 29,290
|                           |  |                    |        |           |   |                    |  |           |        |  |   |       



Interest income is not
recognized on nonperforming notes receivable. For the year 2001, unrecognized interest income on nonperforming notes totaled $192,500.



Notes receivable at December 31, 2003, mature from 2004 through 2008 with interest rates ranging from 4.25% to 18.0% per annum, with a weighted average
rate of 10.88%. Notes receivable are generally nonrecourse and are generally collateralized by real estate. Scheduled principal maturities of $22.3 million are due in 2004.



In June 2003, TCI sold the 104 unit Willow Wick Apartments in North Augusta, South Carolina, for $2.7 million and provided
$42,000 of the purchasers closing costs as seller financing. The note bears interest at a fixed rate of 5% and requires all interest and principal payments be paid at maturity on December 2003. This loan was extended until February 2004 and
$10,000 was received in March 2004. Current negotiations are ongoing to extend the loan or collect payment.



37



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In July 2003, an unsecured loan of $22,000 was made to an individual. The note bears interest at a
fixed rate of 12% and requires all interest and principal payments be paid at maturity in January 2004. This note, including accrued and unpaid interest, was paid in full in March 2004.



In January 2002, a mortgage loan with a principal balance of $608,000 was paid off, including accrued but unpaid interest.
With the payoff of the note, TCI recognized a previously deferred gain on the sale of the property of $608,000.



In March 2002, TCI sold the 174,513 sq.ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as
seller financing and an additional $1.4 million line of credit for leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 6.0% per annum, requires monthly interest only
payments of $14,667 and matures in March 2007. As of February 2004, TCI has funded $323,000 of the additional line of credit.



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



In September 2002, TCI sold a 36 acre tract of the Palm Desert land parcel
for $3.6 million and provided $2.7 million as seller financing in the form of a first lien mortgage note. The note bears interest at 8.0% per annum, requires quarterly interest only payments of $54,000 and matures in September 2004. In March 2003,
the note was sold to a financial institution for $2.6 million.



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 bore interest at 16.0% per annum,
required 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 received 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 April 2002, the loan was extended until July 2002. In July 2002, the loan was extended until September 2002. In August 2002, the loan was paid off, including accrued but unpaid
interest.



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 bore interest at 10% per annum, required monthly interest only payments and matured in June 2003.
In May 2002, the loan was paid off. TCI agreed to a 5% discount on the note and recognized a loss of $75,000 from the note. TCI also recognized a previously deferred gain of $1.5 million on the sale of the property.



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 16.0% per annum, requires monthly interest only payments beginning in September 2001 and matures in July 2003. In March 2002, TCI
received a $1.8 million principal payment. In July 2003, this loan was paid off, including accrued but unpaid interest.



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 matured January 2002. In January 2002, the note was extended until November 2002. In May 2003, the
loan was paid off, including accrued but unpaid interest.



In
August 2001, TCI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matured
in January 2003. As of March 2004, TCI has funded a total of $4.3 million. On January 22, 2003, TCI agreed to extend the maturity date until May 1, 2003. No payments have been received and this note is considered nonperforming. The collateral used
to secure TCIs second lien was seized by the first lien holder. On March 11, 2004, TCI agreed to accept an assignment of claims in litigation as security for the note. TCI is also working on securing additional collateral for this note and
restructuring the terms of the note. The agreement requires interest to accrue at the default rate of 18%.



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
bore interest at 9.0% per annum, required monthly interest only payments of $30,000 and matured in February 2002. In February 2002, TCI extended the loan maturity to February 2003. In August 2002, the loan was paid off, including accrued but unpaid
interest.



38



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.



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. In July 2002, the loan was paid
off, including accrued but unpaid interest.



Related
Party.    In December 2003, TCI purchased a note receivable secured by a second lien on 33 acres of raw land in Travis County, Texas at par value from ARI for $2.4 million as a paydown on an affiliate loan balance. This note
bears interest at 10%, requires interest only payments in November 2007 and matures in October 2008.



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 Centre 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 and ARI fails to pay the shortfall, TCI
may require ARI to repurchase the shares of Two Hickory for the purchase price. Because ARI has guaranteed the 12% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as
a note receivable from ARI. In June 2002, the asset was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI.



In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation (One Hickory), Garden
Confederate Point, LP (Confederate Point), Garden Foxwood, LP (Foxwood), and Garden Woodsong, LP (Woodsong), all wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One Hickory owns the 120,615
sq. ft. One Hickory Centre Office Building in Farmers Branch, Texas. Confederate Point owns the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit
Woodsong Apartments in Smyrna, Georgia. ARI has guaranteed that these assets shall produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the assets fail to produce the 12% return, ARI
shall pay TCI any shortfall. In addition, if the assets fail to produce the 12% return for a calendar year and ARI fails to pay the shortfall, TCI may require ARI to repurchase the entities for the purchase price. Because ARI has guaranteed the 12%
return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In October 2003, TCI sold One Hickory to IORI for $12.2 million, less prorations, for
a wrap-round promissory note of $12.0 million. This note bears interest at 5.49% interest, requires monthly interest and principal payments and matures in June 2006. This transaction effectively discharged the note receivable TCI had from ARI for
the financing of One Hickory. Also, in November 2003, Confederate Point sold the Confederate Apartments and paid $2.1 million to TCI to pay off the loan and accrued but unpaid interest.



In July 2002, the Woodsong Apartments were sold. ARI received $2.8 million from the proceeds as payment of principal and
accrued but unpaid interest on the note receivable. The $2.6 million received by ARI is included in other assets on the accompanying balance sheet.



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 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.



39



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|NOTE 4. |  | ALLOWANCE FOR ESTIMATED LOSSES
|------- |  | ------------------------------



Activity in the allowance for estimated losses was as follows:



|                                |  |      |       |      |   |       |  |   |    
|------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ---
|                                |  | 2003 |       | 2002 |   | 2001 
|Balance January 1,              |  | $    | 1,337 |      | $ | 818   |  | $ | 537
|Provision for loss              |  |      |      |      |   | 169   |  |   | 281
|Fully reserved notes receivable |  |      | 119   |      |   | 350   |  |   |   
|                                |  |      |       |      |   |       |  |   |    
|Balance December 31,            |  | $    | 1,456 |      | $ | 1,337 |  | $ | 818
|                                |  |      |       |      |   |       |  |   |    



|NOTE 5. |  | INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES
|------- |  | ------------------------------------------------



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



|                                                   |  |      |        |   |      |   |       
|-------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------
|                                                   |  | 2003 |        |   | 2002
|American Realty Investors, Inc. (ARI)            |  | $    | 9,654  |   |      | $ | 9,468 
|Income Opportunity Realty Investors, Inc. (IORI) |  |      | 4,423  |   |      |   | 3,983 
|Sacramento Nine (SAC 9)                          |  |      | 219    |   |      |   | 285   
|Other                                              |  |      | (25    | ) |      |   | 21    
|                                                   |  |      |        |   |      |   |       
|                                                   |  | $    | 14,271 |   |      | $ | 13,757
|                                                   |  |      |        |   |      |   |       



TCI owns an
approximate 6.5% interest in ARI, a publicly held real estate company, having a market value of $104.0 million at December 31, 2003. At December 31, 2003, ARI had total assets of $558.7 million and owned 24 apartments, 10 commercial properties,
seven hotels and 39 parcels of unimproved land. In 2003, ARI sold 12 apartments, five commercial properties, two hotels and 18 parcels of unimproved land for a total of $197.5 million, receiving net cash of $37.8 million after paying off $96.5
million in mortgage debt and the payment of various closing costs. ARI recognized gains of $63.0 million on the sales of which TCIs equity share was $4.1 million. In 2002, ARI sold 18 apartments, five commercial properties and 13 parcels of
unimproved land for a total of $287.4 million, receiving net cash of $22.2 million after paying off $155.0 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $50.5 million on the sales of which TCIs
equity share was $3.3 million.



Based on the ownership
percentage of TCIs investment in ARI and ARIs market value, TCIs investment in ARI has a market value of approximately $6.8 million at December 31, 2003. The carrying value of this investment is approximately $9.7 million at
December 31, 2003. Management continues to believe that the market value of ARI temporarily undervalues its assets and therefore, no impairment of TCIs investment in ARI has been recorded.



TCI owns an approximate 24.0% interest in IORI, a publicly held real estate
investment company. At December 31, 2003, IORI had total assets of $101.1 million and owned eight apartments in Texas, four office buildings (three in Texas and one in Virginia), one industrial warehouse in Texas, and one parcel of unimproved land
in Texas. In 2003, IORI sold three office buildings and a parcel of unimproved land for a total of $55.7 million, receiving net cash of $10.1 million after paying off $9.5 million in mortgage debt and the payment of various closing costs. IORI
recognized gains of $3.0 million on the sales of which TCIs equity share was $715,000. In 2002, IORI sold two office buildings for a total of $19.2 million, receiving net cash of $8.6 million after paying off $9.3 million in mortgage debt and
the payment of various closing costs. IORI recognized gains of $6.8 million on the sales of which TCIs equity share was $1.6 million.



Prior to the first quarter of 2002, TCI accounted for its investments in Tri-City, Nakash and Jor-Trans on the equity method. TCI was a 63.7% limited
partner and IORI was a 36.3% general partner in Tri-City, and TCI is a 60% general partner and IORI is a 40% limited partner in Nakash. TCI owns a 55% limited and general partnership interest in Jor-Trans. TCI makes all partnership operating and
policy decisions of the partnerships and TCI has the right to approve the sale or refinancing of principal assets, or approve the acquisition of partnership assets. For Tri-City, IORI as general partner only had protective rights in the partnership.
TCI and IORI share two of the same members of the Board of Directors. Consequently, because TCI has a greater than 50% ownership over the operations of Tri- City, Nakash and Jor-Trans, the operations of the partnership have been consolidated. In the
first quarter of 2002, TCI began accounting for its investment in Tri-City, Nakash and Jor-Trans using a consolidated basis. The effect of these consolidations increased TCIs assets, liabilities, and minority interest in 2002 by $5.4 million,
$3.9 million and $1.5 million, respectively. In November 2002, Tri-City sold its only asset, a shopping center, for $4.2 million. Tri-City received net cash of $1.9 million after the payment of various closing costs. TCI received a
distribution of $1.2 million of the net proceeds and recognized a gain of $431,000 on its investment in Tri-City. Also, in July 2003, TCI sold the Jor-Trans partnership and the Lincoln Court Apartments to the 45% limited partner in Jor-Trans for
$1.8 million. TCI recognized a gain of $1.7 million on this transaction and has withdrawn from the partnership.



40



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



TCI is a non-controlling 30% general partner in SAC 9, which at December 31, 2003 owned an office
building in Rancho Cordova, California.



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:



|                                                                                    |  |      |          |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                    |  | 2003 |          |   | 2002 |  
|Real estate, net of accumulated depreciation ($97,270 in 2003 and $111,029 in 2002) |  | $    | 402,309  |   |      | $ | 548,446  |  
|Notes receivable                                                                    |  |      | 91,992   |   |      |   | 82,197   |  
|Other assets                                                                        |  |      | 165,559  |   |      |   | 170,990  |  
|Notes payable                                                                       |  |      | (448,930 | ) |      |   | (414,914 | )
|Other liabilities                                                                   |  |      | (84,269  | ) |      |   | (268,181 | )
|                                                                                    |  |      |          |   |      |   |          |  
|Shareholders/partners capital                                                      |  | $    | 126,661  |   |      | $ | 118,538  |  
|                                                                                    |  |      |          |   |      |   |          |  



|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------ |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                 |  | 2003 |          |   | 2002 |   |          | 2001 | 
|Rents and interest income                        |  | $    | 125,880  |   |      | $ | 145,759  |      |  | $ | 181,570  |  
|Depreciation                                     |  |      | (10,964  | ) |      |   | (12,182  | )    |  |   | (19,930  | )
|Operating expenses                               |  |      | (137,100 | ) |      |   | (154,764 | )    |  |   | (153,557 | )
|Interest expense                                 |  |      | (43,747  | ) |      |   | (62,650  | )    |  |   | (83,154  | )
|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Income (loss) before gain on sale of real estate |  |      | (65,931  | ) |      |   | (83,837  | )    |  |   | (75,071  | )
|Gain on sale of real estate                      |  |      | 68,411   |   |      |   | 82,077   |      |  |   | 83,414   |  
|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net income (loss)                                |  | $    | 2,480    |   |      | $ | (1,760   | )    |  | $ | 8,343    |  
|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|TCIs equity share of:                           |  |      |          |   |      |   |          |      |  |   |          |  
|                                                 |  |      |         
|                                                 |  | 2003 |          |   | 2002 |   |          | 2001 | 
|Income (loss) before gain on sale of real estate |  | $    | (4,291   | ) |      | $ | (3,818   | )    |  | $ | (5,938   | )
|Gain on sale of real estate                      |  |      | 4,853    |   |      |   | 5,013    |      |  |   | 5,310    |  
|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net income (loss)                                |  | $    | 562      |   |      | $ | 1,195    |      |  | $ | (628     | )
|                                                 |  |      |          |   |      |   |          |      |  |   |          |  



|NOTE 6. |  | MARKETABLE EQUITY SECURITIES
|------- |  | ----------------------------



In March 2003, TCI obtained a loan in the amount of $5.0 million to acquire equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 representing
approximately a 9.2% ownership interest. As of May 2003, the loan was paid in full. This investment is considered an available-for-sale security. The change in market value between the date of purchase and December 31, 2003 was not material.



41



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|NOTE 7. |  | NOTES AND INTEREST PAYABLE
|------- |  | --------------------------



Notes and interest payable consisted of the following:



|                 |  |                      |         |            |   |                      |  |            |         |  |   |        
|---------------- |  | -------------------- | ------- | ---------- | - | -------------------- |  | ---------- | ------- |  | - | -------
|                 |  | 2003                 |         | 2002      
|                 |  | Estimated Fair Value |         | Book Value |   | Estimated Fair Value |  | Book Value
|Notes payable    |  | $                    | 616,088 |            | $ | 621,516              |  | $          | 637,071 |  | $ | 598,085
|                 |  |                      |         |            |   |                      |  |            |         |  |   |        
|Interest payable |  |                      |         |            |   | 4,949                |  |            |         |  |   | 4,267  
|                 |  |                      |         |            |   |                      |  |            |         |  |   |        
|                 |  |                      |         |            | $ | 626,465              |  |            |         |  | $ | 602,352
|                 |  |                      |         |            |   |                      |  |            |         |  |   |        



Scheduled principal
payments are due as follows:



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 178,386
|2005       |  |   | 68,461 
|2006       |  |   | 47,151 
|2007       |  |   | 57,752 
|2008       |  |   | 17,692 
|Thereafter |  |   | 252,074
|           |  |   |        
|           |  | $ | 621,516
|           |  |   |        



Notes payable at
December 31, 2003, bore interest at rates ranging from 3.3% to 17.9% per annum, and mature between 2004 and 2044. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of $773.0 million.



In 2003, TCI financed/refinanced the following properties:



|                          |  |                 |  |                      |  |               |        |                 |   |                           |  |   |               |     |  |               |      |  |      
|------------------------- |  | --------------- |  | -------------------- |  | ------------- | ------ | --------------- | - | ------------------------- |  | - | ------------- | --- |  | ------------- | ---- |  | -----
|Property                  |  | Location        |  | Sq. Ft./ Units/Acres |  | Debt Incurred |        | Debt Discharged |   | Net Cash Received/ (Paid) |  |   | Interest Rate |     |  | Maturity Date
|Apartments                |  |                 |  |                      |  |               |        |                 |   |                           |  |   |               |     |  |               |      |  |      
|Mountain Plaza            |  | El Paso, TX     |  | 188 Units            |  | $             | 4,350  |                 | $ | 4,034                     |  | $ | 15            |     |  | 6.63          | %(1) |  | 03/06
|Plantation                |  | Tulsa, OK       |  | 138 Units            |  |               | 2,320  |                 |   | 1,924                     |  |   | 173           |     |  | 5.60          |      |  | 01/10
|Stone Oak                 |  | San Antonio, TX |  | 252 Units            |  |               | 2,500  |                 |   |                           |  |   | 2,500         |     |  | 5.00          |      |  | 04/03
|Tree House                |  | Irving, TX      |  | 160 Units            |  |               | 5,100  |                 |   | 2,518                     |  |   | 2,183         |     |  | 5.00          | (1)  |  | 08/13
|                          |  |                 |  |                      |  |               |       
|Office Building           |  |                 |  |                      |  |               |        |                 |   |                           |  |   |               |     |  |               |      |  |      
|1010 Common               |  | New Orleans, LA |  | 494,579 Sq. Ft.      |  |               | 5,574  |                 |   | 7,876                     |  |   | 1,320         |     |  | 5.50          | (1)  |  | 12/06
|225 Baronne               |  | New Orleans, LA |  | 416,834 Sq. Ft.      |  |               | 6,286  |                 |   | 7,108                     |  |   |              |     |  | 5.50          | (1)  |  | 12/06
|Ambulatory Surgery Center |  | Sterling, VA    |  | 33,832 Sq. Ft.       |  |               | 3,425  |                 |   | 6,269                     |  |   |              |     |  | 5.25          | (1)  |  |      
|Amoco                     |  | New Orleans, LA |  | 378,244 Sq. Ft.      |  |               | 10,140 |                 |   | 14,408                    |  |   |              |     |  | 5.50          | (1)  |  | 12/06
|Bonita Plaza              |  | Bonita, CA      |  | 47,777 Sq. Ft.       |  |               | 6,000  |                 |   | 4,824                     |  |   | 1,134         |     |  | 5.25          | (1)  |  | 01/10
|Countryside Retail Center |  | Sterling, VA    |  | 133,422 Sq. Ft.      |  |               | 17,342 |                 |   | 16,102                    |  |   | 101           |     |  | 5.25          | (1)  |  | 12/06
|Harmon                    |  | Sterling, VA    |  | 72,062 Sq. Ft.       |  |               | 8,869  |                 |   | 7,569                     |  |   |              |     |  | 5.25          | (1)  |  |      
|Mimado                    |  | Sterling, VA    |  | 35,127 Sq. Ft.       |  |               | 4,790  |                 |   | 4,486                     |  |   |              |     |  | 5.25          | (1)  |  |      
|                          |  |                 |  |                      |  |               |       
|Industrial Warehouse      |  |                 |  |                      |  |               |        |                 |   |                           |  |   |               |     |  |               |      |  |      
|Ogden Industrial          |  | Ogden, UT       |  | 107,112 Sq. Ft.      |  |               | 1,800  |                 |   |                          |  |   | 1,722         |     |  | 6.25          | (1)  |  | 04/05
|                          |  |                 |  |                      |  |               |       
|Shopping Center           |  |                 |  |                      |  |               |        |                 |   |                           |  |   |               |     |  |               |      |  |      
|Bridgeview                |  | LaCrosse, WI    |  | 116,008 Sq. Ft.      |  |               | 6,500  |                 |   |                          |  |   | 6,152         |     |  | 6.25          | (1)  |  | 04/05
|Cullman                   |  | Cullman, AL     |  | 92,433 Sq. Ft.       |  |               | 1,700  |                 |   | 2,650                     |  |   | 1,048         |     |  | 6.25          | (1)  |  | 04/05
|                          |  |                 |  |                      |  |               |       
|Land                      |  |                 |  |                      |  |               |        |                 |   |                           |  |   |               |     |  |               |      |  |      
|Rasor                     |  | Plano, TX       |  | 24.5 Acres           |  |               | 1,260  |                 |   |                          |  |   |              | (2) |  | 7.00          | (1)  |  | 11/04

---

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

|(2) | Funds received by an affiliate increasing the affiliate receivable balance by $1,226.
|--- | -------------------------------------------------------------------------------------



42



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##### Table of Contents

TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2002, TCI financed/refinanced the following properties:



|                      |  |                    |  |                      |  |               |        |     |                 |   |                           |  |   |               |   |  |               |     |  |      
|--------------------- |  | ------------------ |  | -------------------- |  | ------------- | ------ | --- | --------------- | - | ------------------------- |  | - | ------------- | - |  | ------------- | --- |  | -----
|Property              |  | Location           |  | Sq. Ft./ Units/Acres |  | Debt Incurred |        |     | Debt Discharged |   | Net Cash Received/ (Paid) |  |   | Interest Rate |   |  | Maturity Date
|Apartments            |  |                    |  |                      |  |               |        |     |                 |   |                           |  |   |               |   |  |               |     |  |      
|Echo Valley           |  | Dallas, TX         |  | 216 Units            |  | $             | 1,639  | (1) |                 | $ |                          |  | $ | 448           |   |  | 6.65          | %   |  | 12/43
|Marina Landing        |  | Galveston, TX      |  | 256 Units            |  |               | 11,348 |     |                 |   | 11,397                    |  |   | (699          | ) |  | 5.80          |     |  | 12/37
|Metra                 |  | See Below (2)      |  | 1,977 Units          |  |               | 30,314 |     |                 |   | 18,822                    |  |   | 10,362        |   |  | 7.57          |     |  | 05/12
|Paramount Terrace     |  | Amarillo, TX       |  | 181 Units            |  |               | 2,700  |     |                 |   | 2,797                     |  |   | (214          | ) |  | 6.63          | (3) |  | 07/04
|Quail Creek           |  | Lawrence, KS       |  | 95 Units             |  |               | 3,300  |     |                 |   | 2,157                     |  |   | 924           |   |  | 6.63          | (3) |  | 09/05
|Verandas at City View |  | Ft. Worth, TX      |  | 314 Units            |  |               | 2,779  | (4) |                 |   | 2,197                     |  |   | (2,224        | ) |  | 7.00          |     |  | 06/42
|                      |  |                    |  |                      |  |               |       
|Office Building       |  |                    |  |                      |  |               |        |     |                 |   |                           |  |   |               |   |  |               |     |  |      
|Institute Place       |  | Chicago, IL        |  | 144,915 Sq. Ft.      |  |               | 8,025  |     |                 |   | 5,225                     |  |   | 2,434         |   |  | 4.75          |     |  | 12/07
|                      |  |                    |  |                      |  |               |       
|Industrial Warehouse  |  |                    |  |                      |  |               |        |     |                 |   |                           |  |   |               |   |  |               |     |  |      
|Addison Hanger (5)    |  | Addison, TX        |  | 23,650 Sq. Ft.       |  |               | 2,687  |     |                 |   | 1,580                     |  |   | 942           |   |  | 6.75          | (3) |  | 02/07
|                      |  |                    |  |                      |  |               |       
|Shopping Center       |  |                    |  |                      |  |               |        |     |                 |   |                           |  |   |               |   |  |               |     |  |      
|Sheboygan             |  | Sheboygan, WI      |  | 74,532 Sq. Ft.       |  |               | 600    |     |                 |   | 387                       |  |   | 63            |   |  | 6.60          |     |  | 10/05
|                      |  |                    |  |                      |  |               |       
|Land                  |  |                    |  |                      |  |               |        |     |                 |   |                           |  |   |               |   |  |               |     |  |      
|Dominion              |  | Dallas, TX         |  | 14.39 Acres          |  |               | 772    |     |                 |   |                          |  |   | 758           |   |  | 13.00         |     |  | 04/03
|Manhatten             |  | Farmers Branch, TX |  | 108.9 Acres          |  |               | 5,846  |     |                 |   |                          |  |   | 5,733         |   |  | 13.00         |     |  | 04/03
|McKinney 36 (6)       |  | Collin County, TX  |  | 34.58 Acres          |  |               | 425    |     |                 |   | 956                       |  |   | (539          | ) |  | 9.50          |     |  | 04/03
|Pac Trust             |  | Farmers Branch, TX |  | 7.11 Acres           |  |               | 382    |     |                 |   |                          |  |   | 370           |   |  | 13.00         |     |  | 04/03
|Red Cross             |  | Dallas, TX         |  | 2.89 Acres           |  |               | 4,000  |     |                 |   |                          |  |   |              |   |  | 5.00          |     |  | 04/04
|Sandison (6)          |  | Collin County, TX  |  | 97.97 Acres          |  |               | 1,199  |     |                 |   | 1,040                     |  |   | 145           |   |  | 9.50          |     |  | 04/03
|Solco-Allen (6)       |  | Collin County, TX  |  | 55.80 Acres          |  |               | 686    |     |                 |   | 305                       |  |   | 374           |   |  | 9.50          |     |  | 04/03
|Stacy Road (6)        |  | Allen, TX          |  | 160.38 Acres         |  |               | 1,979  |     |                 |   | 1,345                     |  |   | 613           |   |  | 9.50          |     |  | 04/03
|State Highway 121 (6) |  | Collin County, TX  |  | 101.94 Acres         |  |               | 1,475  |     |                 |   | 873                       |  |   | 582           |   |  | 9.50          |     |  | 04/03
|Watters Road (6)      |  | Collin County, TX  |  | 97.00 Acres          |  |               | 1,189  |     |                 |   |                          |  |   | 1,180         |   |  | 9.50          |     |  | 04/03
|Whisenant (6)         |  | Collin County, TX  |  | 16.16 Acres          |  |               | 199    |     |                 |   | 133                       |  |   | 64            |   |  | 9.50          |     |  | 04/03

---

|(1) | The Echo Valley Apartments are under construction. The $1.6 million debt incurred was to fund construction to date. The total construction funding for the project is $12.7 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In April 2002, TCI sold 12 residential properties to partnerships controlled by Metra Capital, LLC (Metra). These properties include: the 75 unit Apple Lane Apartments
in Lawrence, Kansas; the 195 unit Arbor Point Apartments in Odessa, Texas; the 264 unit Fairway View Estates Apartments in El Paso, Texas; the 152 unit Fairways Apartments in Longview, Texas; the 166 unit Fountain Lake Apartments in Texas City,
Texas; the 172 unit Fountains of Waterford Apartments in Midland, Texas; the 122 unit Harpers Ferry Apartments in Lafayette, Louisiana; the 108 unit Oak Park IV Apartments in Clute, Texas; the 131 unit Quail Oaks Apartments in Balch Springs,
Texas; the 300 unit Sunchase Apartments in Odessa, Texas; the 180 unit Timbers Apartments in Tyler, Texas; and the 112 unit Willow Creek Apartments in El Paso, Texas. Innovo Group, Inc. (Innovo) is a limited partner in the partnerships
that purchased the properties. Joseph Mizrachi, a director of ARI, a related party, controls approximately 11.67% of the outstanding common stock of Innovo. Management has determined to account for this sale as a refinancing transaction, in
accordance with SFAS No. 66, Accounting for Sales of Real Estate. TCI will continue to report the assets and the new debt incurred by the Metra partnerships on the TCI financial statements. The sales price for the properties totaled
$37.6 million. TCI received net cash of $10.5 million after paying off the existing debt of $18.0 million and various closing costs. The new debt of $30.3 million bears interest at 7.57% per annum, requires monthly interest only payments of $212,000
and matures in May 2012. TCI also received $8.0 million of 8% non-recourse, non-convertible Series A Preferred Stock (Preferred Shares) of Innovo.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Variable interest rate.
|--- | -----------------------

|(4) | The Verandas at City View Apartments are under construction. The $2.8 million debt incurred was to fund construction to date. The total construction funding for the project is $19.4
million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger II in Addison, Texas.
|--- | -------------------------------------------------------------------------------------------------

|(6) | The mortgages are cross-collateralized.
|--- | ---------------------------------------



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|NOTE 8. |  | RELATED PARTY TRANSACTIONS
|------- |  | --------------------------



Throughout the period in which TCI qualified as a REIT for tax purposes, TCI charged rent to Regis Hotel Corporation, a related party, for TCIs four
hotel properties that were managed by Regis Hotel Corporation. As of December 31, 2000, when TCI no longer qualified as a REIT, the receivable from these rents totaled $2.1 million. During 2002 and 2003, this receivable was reduced by management
fees earned by Regis Hotel Corporation. As of December 31, 2003 and 2002, the receivable from Regis Hotel Corporation was $1.7 million and $1.7 million, respectively.



During 2003, ARI sold properties with fair value totaling $10.7 million to TCI. Each of these property sales was approved by
TCIs Board of Directors. TCIs affiliate receivables from ARI and BCM were reduced by $8.1 million as a result of these transfers. See NOTE 2. REAL ESTATE.



In March 2003, TCI sold 4135 Beltline to a related party for $4.4 million, including the assumption of debt. Due to the sale
being to a related party to TCI and TCI having continued involvement and control of this entity, this transaction has not been recorded as a sale. This property and corresponding debt will continue to be consolidated by TCI.



In March 2003, TCI sold a note receivable for $2.6 million to a third party.
The proceeds of this sale were received by BCM. The funds were added to TCIs affiliate receivable from BCM. See NOTE 3. NOTES AND INTEREST RECEIVABLE.



In May 2003, TCI sold a piece of raw land in Texas. The proceeds of the sale were received by BCM. The funds were used to increase TCIs affiliate
receivable from BCM $2.0 million. See NOTE 2. REAL ESTATE.



In
June 2003, TCI received the proceeds from the refinancing of an ARI property. This transaction was used to reduce TCIs affiliate receivables from ARI and BCM by $757,000. See NOTE 7. NOTES AND INTEREST PAYABLE.



In July 2003, TCI paid $1.7 million to BCM for prior years legal fees
incurred by Gene Phillips. Mr. Phillips is a related party and advisor to TCI.



In August 2003, TCI sold three Chicago hotels to a related party for $13.5 million, including the assumption of debt. Due to the sale being to a related party to TCI and TCI having continued involvement and control of
this entity, this transaction has not be been recorded as a sale. These hotels and corresponding debt will continue to be consolidated by TCI.



In September 2003, TCI sold a shopping center to a third party. The proceeds of the sale were received by ARI. The funds were used to increase TCIs
affiliate receivable from Prime and ARI by $1.6 million. See NOTE 2. REAL ESTATE.



In September 2003, TCI sold a piece of raw land in California. The proceeds of the sale were received by an affiliate. The funds were used to increase TCIs affiliate receivable from Prime by $2.6 million. See
NOTE 2. REAL ESTATE.



In November 2003, TCI financed a raw
piece of land in Texas. The proceeds of the financing were received by ARI. The funds were used to increase TCIs affiliate receivable from Prime and ARI by $1.2 million. See NOTE 7. NOTES AND INTEREST PAYABLE.



In November 2003, TCI received the proceeds of the sale of an ARI apartment
complex. $2.1 million was used to pay off TCIs note receivable from ARI and $1.1 million was used to reduce TCIs affiliate receivable from ARI. See NOTE 3. NOTES AND INTEREST RECEIVABLE.



In November 2003, ARI paid $6.3 million in principal, accrued interest and
closing costs on behalf of TCI as payment of the notes payable on five tracts of land in Collin County, Texas. These funds were applied to the affiliate receivable from ARI.



In December 2003, TCI sold Treehouse Apartments and Parkway Centre to IORI for $11.5 million, including the assumption of
debt. This transaction was used to reduce TCIs affiliate payable to Prime by $4.8 million. See NOTE 2. REAL ESTATE.



In December 2003, TCI sold Eagle Crest land to IORI for $4.0 million. This transaction was used to reduce TCIs intercompany payable to IORI by $4.0
million. See NOTE 2. REAL ESTATE.



44



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December 2003, TCI purchased a note receivable secured by a second lien on raw land for $2.4
million. This transaction was approved by TCIs Board of Directors. TCIs affiliate receivables from ARI and Prime were reduced by $2.4 million as a result of this transaction. See NOTE 3. NOTES AND INTEREST RECEIVABLE.



In December 2003, TCIs Board of Directors approved the payment to Regis
of a six percent (6%) construction management fee on all construction projects in process at December 31, 2003, to be applied to all construction costs incurred during 2003 on each project. The resulting calculation of $4.1 million was treated as a
reduction in the affiliate receivable balance from Prime.



In
December 2003, TCI sold six properties to subsidiaries of United Housing Foundation, Inc. (UHF), a Texas Non-Profit 501(c)3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, the Limestone at Vista Ridge apartments
for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone Canyon apartments for $18.0 million, the Sendero Ridge apartments for $29.4 million, and Tivoli apartments for $16.1 million. All of the transactions include the
assumption of debt and notes receivable to TCI for the remainder of the purchase price. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis Realty I, LLC, an affiliate, is President of
UHF. Due to UHF being considered a related party to TCI and TCI having continued involvement and control of these entities, these transactions will not be recorded as sales. Instead, these transactions will be accounted for on the deposit method and
the properties and corresponding debt will continue to be consolidated by TCI. All of these transactions were approved by TCIs Board of Directors. Mr. Stokely abstained from voting on all of these transactions. Management is seeking lender
approval on the transfer of the notes associated with these property transactions.



During 2002, TCIs Board of Directors authorized the Chief Financial Officer of the Company to advance funds either to or from the Company, through BCM, in an amount up to $15.0 million, on the condition that
such advances shall be repaid in cash or transfers of assets within 90 days. Several property transfers from BCM or Prime were made during 2003 and 2002 to reduce the affiliate balance. Each of these transactions was approved by TCIs Board of
Directors.



Affiliate receivable with Prime and Regis Hotel
Corporation are included within Other Assets, and the affiliate payable to ARI and IORI is included within Other Liabilities in the accompanying consolidated balance sheet. Prime replaced BCM as the contractual advisor in July 2003 and assumed all
of BCMs affiliate balances and obligations from TCI. The following table reconciles the beginning and ending balances of affiliate receivables (payables) as of December 31, 2003:



|                                                |  |     |         |   |       |   |         |     |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | --- | ------- | - | ----- | - | ------- | --- |  | - | ------ | - |  | - | ------ | -
|                                                |  | BCM |         |   | Prime |   |         | ARI |  |   | IORI   |  
|Balance, December 31, 2002                      |  | $   | 11,398  |   |       | $ |        |     |  | $ | 6,039  |   |  | $ | (5,260 | )
|Cash transfers                                  |  |     | 29,810  |   |       |   | 34,070  |     |  |   |       |   |  |   |       |  
|Cash repayments                                 |  |     | (31,496 | ) |       |   | (39,647 | )   |  |   |       |   |  |   |       |  
|Advance through property transfers              |  |     |        |   |       |   | 4,760   |     |  |   |       |   |  |   |       |  
|Repayments through property transfers           |  |     | (8,050  | ) |       |   |        |     |  |   |       |   |  |   | 4,000  |  
|Fees payable to Advisor                         |  |     |        |   |       |   | (2,790  | )   |  |   |       |   |  |   |       |  
|Advance through sale of note receivable         |  |     | 2,633   |   |       |   |        |     |  |   |       |   |  |   |       |  
|Repayment through purchase of note receivable   |  |     |        |   |       |   | (2,428  | )   |  |   |       |   |  |   |       |  
|Repayment through affiliate refinance           |  |     | (757    | ) |       |   |        |     |  |   |       |   |  |   |       |  
|Advance through property sale receipts          |  |     | 4,599   |   |       |   | 1,640   |     |  |   |       |   |  |   |       |  
|Repayment through property sale receipts        |  |     |        |   |       |   | (1,080  | )   |  |   |       |   |  |   |       |  
|Advance through receipt of refinancing proceeds |  |     |        |   |       |   | 1,226   |     |  |   |       |   |  |   |       |  
|Repayments through payments on debt             |  |     |        |   |       |   |        |     |  |   | (6,355 | ) |  |   |       |  
|Other additions                                 |  |     | 27,152  |   |       |   | 25,075  |     |  |   |       |   |  |   |       |  
|Other reductions                                |  |     | (35,289 | ) |       |   | (16,435 | )   |  |   | (31    | ) |  |   | 1,000  |  
|                                                |  |     |         |   |       |   |         |     |  |   |        |   |  |   |        |  
|Balance, December 31, 2003                      |  | $   |        |   |       | $ | 4,391   |     |  | $ | (347   | ) |  | $ | (260   | )
|                                                |  |     |         |   |       |   |         |     |  |   |        |   |  |   |        |  



In addition, Other
Assets includes $1.7 million due from Regis Property Management, a related party.



Returns on Metra Properties.    As described in Note 5, TCI sold residential properties during 2002 to partnerships controlled by Metra. The partnership agreement for each of these
partnerships states that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15 percent cumulative compounded annual rate of return on their invested capital, as well as a
cumulative annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these residential properties. These distributions to the Metra Partners have priority over distributions to any of the other
partners.



45



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|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 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, 2002 and 2001, 5,829 shares of Series A Preferred Stock were
issued and outstanding. On November 13, 2003, the 5,829 shares of Series A Preferred Stock outstanding were converted into 41,075 shares of TCI common stock. The Series A Preferred Stock was eliminated on November 21, 2003.



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, 2003, 30,000 shares of Series C Preferred Stock were issued and outstanding.



|NOTE 10.DIVIDENDS |  | 
|----------------- |  | 



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. No dividends were paid on the Common Stock of TCI in 2003, 2002 or 2001.



|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, 2003, 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 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, 2002 2003
and 2004, each Independent Director was granted an option to purchase 5,000 Common shares. The exercise price was $17.64, $16.05 and $8.875 per Common shares for 2003, 2002 and 2001, respectively. Each Independent Director will be awarded an option
to purchase an additional 5,000 shares on January 1 of each year.



|                            |  |                  |  |                |        |                  |         |   |                |   |       
|--------------------------- |  | ---------------- |  | -------------- | ------ | ---------------- | ------- | - | -------------- | - | ------
|                            |  | 2003             |  | 2002          
|                            |  | Number of Shares |  | Exercise Price |        | Number of Shares |         |   | Exercise Price
|Outstanding at January 1,   |  |                 |  | $              |       |                  | 50,000  |   |                | $ | 11.875
|Granted                     |  | 15,000           |  |                | 17.640 |                  | 10,000  |   |                |   | 16.050
|Exercised                   |  |                 |  |                |       |                  | (30,000 | ) |                |   |      
|Canceled                    |  |                 |  |                |       |                  | (30,000 | ) |                |   |      
|                            |  |                  |  |                |        |                  |         |   |                |   |       
|Outstanding at December 31, |  | 15,000           |  |                |        |                  |        |   |                |   |       
|                            |  |                  |  |                |        |                  |         |   |                |   |       



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:



|                          |  |       |   |  |       |  
|------------------------- |  | ----- | - |  | ----- | -
|                          |  | 2003  |   |  | 2002  |  
|Dividend yield            |  |      |   |  |      |  
|Expected volatility       |  | 33.45 | % |  | 54.50 | %
|Risk-free interest rate   |  | 4.04  | % |  | 3.88  | %
|Expected lives (in years) |  | 9     |   |  | 9     |  



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The weighted average fair value per share of options granted in 2003 and 2002 was $11.82 and $10.51,
respectively.



|NOTE 12.ADVISORY |  | AGREEMENT
|---------------- |  | ---------



Basic Capital Management, Inc. (BCM), an affiliate, served as advisor to TCI from March 28, 1989 to June 30, 2003. Effective July 1, 2003, BCM
was replaced as contractual advisor to TCI by Prime Asset Management, Inc., (PAMI). PAMI is owned by Realty Advisors (79%) and Syntek West (21%), related parties. Syntek West is owned by Gene Phillips. Effective August 18, 2003, PIAMI
changed its name to Prime Income Asset Management, Inc., (PIAMI). On October 1, 2003, Prime Income Asset Management, LLC (Prime), which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. Prime is indirectly owned
by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of BCM or PIAMI or Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant
influence over the conduct of Primes business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.



Under the Advisory Agreement, Prime 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. Prime 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 Prime 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 Prime shall be deemed to be in a fiduciary relationship to the stockholders and contains a broad standard governing Primes
liability for losses incurred by TCI.



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



The Advisory Agreement requires Prime or any affiliate of Prime 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.



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. In 2003 and 2002,
Prime and BCM, respectively, were required to refund to TCI $1.3 and $1.4 million of Prime and BCMs respective advisory fees. BCM was not required to refund any of its 2001 advisory fee.



Additionally, if management were to request that Prime render services other
than those required by the Advisory Agreement, Prime or an affiliate of Prime would be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 13. PROPERTY MANAGEMENT, Triad
Realty Services, Ltd. (Triad), an affiliate of Prime, provides property management services and as discussed in NOTE 14. REAL ESTATE BROKERAGE, Regis Realty, Inc. (Regis), a related party, provided, on a
non-exclusive basis, brokerage services until December 2002. Since January 1, 2003, Regis Realty I, LLC, a related party, provided brokerage services.



|NOTE 13.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
Highland Realty Services, Inc. (Highland), a related party. Triad subcontracted to Regis, a related party, which is a company owned by Highland, the property-level management and leasing of 39 of TCIs commercial properties, and its
five hotels until December 2002. Since January 1, 2003, Regis Realty I, LLC, provided property management services. Regis was and Regis Realty I, LLC 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.



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During 2002 and 2003, Regis provided construction management services for TCIs properties under
construction. Regis charged fees of 6% of certain construction costs. Those fees totaled $4.1 million and $4.7 million for 2003 and 2002, respectively.



|NOTE 14.REAL |  | ESTATE BROKERAGE
|------------ |  | ----------------



Regis also provided brokerage services on a non-exclusive basis until December 2003. Regis was and Regis Realty I, LLC 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 15.ADVISORY |  | FEES, PROPERTY MANAGEMENT FEES, ETC.
|---------------- |  | ------------------------------------



Revenue, fees and cost reimbursements to BCM or Prime and their affiliates:



|                                          |  |      |       |      |   |       |  |   |       
|----------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ------
|                                          |  | 2003 |       | 2002 |   | 2001 
|Fees                                      |  |      |       |      |   |       |  |   |       
|Advisory                                  |  | $    | 4,935 |      | $ | 4,465 |  | $ | 5,346 
|Net income                                |  |      |      |      |   | 374   |  |   | 1,850 
|Incentive fees                            |  |      |      |      |   |      |  |   | 3,167 
|Property acquisition                      |  |      | 117   |      |   | 657   |  |   | 774   
|Real estate brokerage                     |  |      | 1,451 |      |   | 3,049 |  |   |      
|Mortgage brokerage and equity refinancing |  |      | 845   |      |   | 806   |  |   | 45    
|                                          |  |      |       |      |   |       |  |   |       
|                                          |  | $    | 7,348 |      | $ | 9,351 |  | $ | 11,182
|                                          |  |      |       |      |   |       |  |   |       
|Cost reimbursements                       |  | $    | 1,630 |      | $ | 1,974 |  | $ | 2,582 
|                                          |  |      |       |      |   |       |  |   |       
|Rent revenue                              |  | $    | 175   |      | $ | 88    |  | $ | 120   
|                                          |  |      |       |      |   |       |  |   |       



Costs incurred by BCM
and Prime related to TCI, ARI and IORI are allocated based on the relative book values of each companys assets.



Fees paid to Regis, a related party:



|                                                             |  |      |       |      |   |        |  |   |      
|------------------------------------------------------------ |  | ---- | ----- | ---- | - | ------ |  | - | -----
|                                                             |  | 2003 |       | 2002 |   | 2001  
|Fees                                                         |  |      |       |      |   |        |  |   |      
|Property acquisition                                         |  | $    | 91    |      | $ | 45     |  | $ | 1,668
|Real estate brokerage                                        |  |      | 1,451 |      |   | 3,007  |  |   | 3,760
|Construction supervision                                     |  |      | 4,050 |      |   | 4,678  |  |   |     
|Property and construction management and leasing commissions |  |      | 2,122 |      |   | 8,176  |  |   | 2,599
|                                                             |  |      |       |      |   |        |  |   |      
|                                                             |  | $    | 7,714 |      | $ | 15,906 |  | $ | 8,027
|                                                             |  |      |       |      |   |        |  |   |      



|NOTE 16.INCOME |  | TAXES
|-------------- |  | -----



During the third quarter of 2000, due to a concentration of ownership, TCI no longer met the requirements for tax treatment as a Real Estate Investment
Trust (REIT), as defined by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code), under the Code, and is prohibited from re-qualifying for REIT tax status for at least five years.



TCI had net income for federal income tax purposes before the application of
operating loss carryforwards in 2003, 2002 and 2001; therefore, TCI 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, depreciation on owned properties and investments in joint venture partnerships. At December 31, 2003, TCIs tax basis in its net assets was exceeded by their net basis
for financial statement purposes by approximately $87.4 million and TCIs tax basis in its net liabilities was exceeded by their net basis for financial statement purposes by approximately $91.9 million. As a result, aggregate future income for
income tax purposes will be less than such amount for financial statement purposes by approximately $4.5 million. Additionally, at December 31, 2003, TCI has current and prior year tax net operating loss carryforwards of $33.8 million expiring
through the year 2018. Also, TCIs state income tax expense is included in general and administrative expenses on the income statement.



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2003, TCI had a net deferred tax asset of $14.6 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 17.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, 2003:



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 34,028 
|2005       |  |   | 28,459 
|2006       |  |   | 19,949 
|2007       |  |   | 15,200 
|2008       |  |   | 9,592  
|Thereafter |  |   | 25,397 
|           |  |   |        
|           |  | $ | 132,625
|           |  |   |        



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, other income, gain
on debt extinguishment, gain on condemnation award, equity in partnerships, and equity gains on sale of real estate totaling $16.4 million, $5.3 million and $2.3 million for 2003, 2002 and 2001, respectively. Expenses that are not reflected in the
segments are provision for losses, advisory, net income and incentive fees, general and administrative, realized loss on investments, minority interests, foreign currency transaction loss and discontinued operations totaling $13.2 million, $15.7
million and $25.8 million for 2003, 2002 and 2001, respectively. Excluded from operating segment assets are assets of $99.2 million at December 31, 2003 and $100.3 million at December 31, 2002, which are not identifiable with an operating segment.
There are no intersegment revenues and expenses. See NOTE 2. REAL ESTATE and NOTE 3. NOTES AND INTEREST RECEIVABLE.



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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 2003, 2002 and 2001.



|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|----------------------------------------- |  | ---- | ------- | - | --------------------- | - | ------- | ---------- |  | - | ------- | - | ----- | - | ------ |  | - | -------- | -
|                                          |  | Land |         |   | Commercial Properties |   |         | Apartments |  |   | Hotels  |   | Total |  
|2003                                      |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Rents                                     |  | $    | 540     |   |                       | $ | 56,081  |            |  | $ | 49,681  |   |       | $ | 8,120  |  | $ | 114,422  |  
|Property operating expenses               |  |      | 1,565   |   |                       |   | 31,525  |            |  |   | 34,297  |   |       |   | 6,216  |  |   | 73,603   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Segment operating income (loss)           |  | $    | (1,025  | ) |                       | $ | 24,556  |            |  | $ | 15,384  |   |       | $ | 1,904  |  | $ | 40,819   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Depreciation                              |  | $    | 45      |   |                       | $ | 14,558  |            |  | $ | 4,819   |   |       | $ | 1,777  |  | $ | 21,199   |  
|Interest                                  |  |      | 3,564   |   |                       |   | 19,144  |            |  |   | 14,150  |   |       |   | 2,085  |  |   | 38,943   |  
|Real estate improvements and construction |  |      | 322     |   |                       |   | 4,436   |            |  |   | 79,286  |   |       |   | 2,939  |  |   | 86,983   |  
|Provision for asset impairment            |  |      | 198     |   |                       |   | 4,515   |            |  |   |        |   |       |   |       |  |   | 4,713    |  
|Assets                                    |  |      | 144,098 |   |                       |   | 252,319 |            |  |   | 349,904 |   |       |   | 34,211 |  |   | 780,532  |  
|                                          |  |      |         |   |                      
|Property Sales                            |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Sales price                               |  | $    | 11,087  |   |                       | $ | 40,994  |            |  | $ | 34,290  |   |       |   |        |  | $ | 86,371   |  
|Cost of sales                             |  |      | (9,446  | ) |                       |   | (31,232 | )          |  |   | (22,402 | ) |       |   |        |  |   | (63,080  | )
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Gain on sale                              |  | $    | 1,641   |   |                       | $ | 9,762   |            |  | $ | 11,888  |   |       |   |        |  | $ | 23,291   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|                                          |  |      |         |   |                      
|2002                                      |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Rents                                     |  | $    | 521     |   |                       | $ | 51,582  |            |  | $ | 37,425  |   |       | $ | 6,266  |  | $ | 95,794   |  
|Property operating expenses               |  |      | 1,643   |   |                       |   | 30,206  |            |  |   | 26,745  |   |       |   | 5,768  |  |   | 64,362   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Segment operating income (loss)           |  | $    | (1,122  | ) |                       | $ | 21,376  |            |  | $ | 10,680  |   |       | $ | 498    |  | $ | 31,432   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Depreciation                              |  | $    | 30      |   |                       | $ | 11,533  |            |  | $ | 3,952   |   |       | $ | 1,628  |  | $ | 17,143   |  
|Interest                                  |  |      | 3,793   |   |                       |   | 18,192  |            |  |   | 12,162  |   |       |   | 2,012  |  |   | 36,159   |  
|Real estate improvements and construction |  |      | 1,605   |   |                       |   | 4,620   |            |  |   | 100,974 |   |       |   | 5,467  |  |   | 112,666  |  
|Provision for asset impairment            |  |      | 707     |   |                       |   |        |            |  |   | 1,872   |   |       |   |       |  |   | 2,579    |  
|Assets                                    |  |      | 109,427 |   |                       |   | 314,834 |            |  |   | 300,332 |   |       |   | 34,894 |  |   | 759,487  |  
|                                          |  |      |         |   |                      
|Property Sales                            |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Sales price                               |  | $    | 3,600   |   |                       | $ | 60,207  |            |  | $ | 54,388  |   |       |   |        |  | $ | 118,195  |  
|Cost of sales                             |  |      | (2,934  | ) |                       |   | (43,539 | )          |  |   | (32,777 | ) |       |   |        |  |   | (79,250  | )
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Gain on sale                              |  | $    | 666     |   |                       | $ | 16,668  |            |  | $ | 21,611  |   |       |   |        |  | $ | 38,945   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|                                          |  |      |         |   |                      
|2001                                      |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Rents                                     |  | $    | 636     |   |                       | $ | 50,895  |            |  | $ | 61,165  |   |       | $ | 2,743  |  | $ | 115,439  |  
|Property operating expenses               |  |      | 770     |   |                       |   | 25,844  |            |  |   | 41,683  |   |       |   | 213    |  |   | 68,510   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Segment operating income (loss)           |  | $    | (134    | ) |                       | $ | 25,051  |            |  | $ | 19,482  |   |       | $ | 2,530  |  | $ | 46,929   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Depreciation                              |  | $    |        |   |                       | $ | 9,327   |            |  | $ | 6,813   |   |       | $ | 996    |  | $ | 17,136   |  
|Interest                                  |  |      | 1,652   |   |                       |   | 19,268  |            |  |   | 14,308  |   |       |   | 1,581  |  |   | 36,809   |  
|Real estate improvements                  |  |      | 1,424   |   |                       |   | 7,365   |            |  |   | 14,973  |   |       |   | 9,855  |  |   | 33,617   |  
|Assets                                    |  |      | 62,209  |   |                       |   | 304,657 |            |  |   | 224,986 |   |       |   | 30,835 |  |   | 622,687  |  
|                                          |  |      |         |   |                      
|Property Sales                            |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Sales price                               |  | $    | 3,351   |   |                       | $ | 54,083  |            |  | $ | 104,021 |   |       |   |        |  | $ | 161,455  |  
|Cost of sales                             |  |      | (2,235  | ) |                       |   | (38,875 | )          |  |   | (71,384 | ) |       |   |        |  |   | (112,494 | )
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  
|Gain on sale                              |  | $    | 1,116   |   |                       | $ | 15,208  |            |  | $ | 32,637  |   |       |   |        |  | $ | 48,961   |  
|                                          |  |      |         |   |                       |   |         |            |  |   |         |   |       |   |        |  |   |          |  



|NOTE 19.DISCONTINUED |  | OPERATIONS
|-------------------- |  | ----------



Effective January 1, 2002, TCI adopted Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. This statement requires that the operations related to properties that have been sold or properties
that are intended to be sold be presented as discontinued operations in the statement of operations for all periods presented, and properties intended to be sold are to be designated as held-for-sale on the balance sheet.



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For 2003, 2002 and 2001, income (loss) from discontinued operations relates to 17 properties that TCI
sold during 2003 and 18 properties that TCI sold during 2002. The following table summarizes revenue and expense information for these properties sold.



|                                                          |  |      |        |   |      |   |        |  |   |       
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------
|                                                          |  | 2003 |        |   | 2002 |   | 2001  
|Revenue                                                   |  |      |        |   |      |   |        |  |   |       
|Rental                                                    |  | $    | 9,753  |   |      | $ | 26,996 |  | $ | 20,719
|Property operations                                       |  |      | 5,716  |   |      |   | 15,813 |  |   | 12,522
|                                                          |  |      |        |   |      |   |        |  |   |       
|                                                          |  |      | 4,037  |   |      |   | 11,183 |  |   | 8,167 
|                                                          |  |      |       
|Expenses                                                  |  |      |        |   |      |   |        |  |   |       
|Interest                                                  |  |      | 4,128  |   |      |   | 7,287  |  |   | 4,639 
|Depreciation                                              |  |      | 1,456  |   |      |   | 3,523  |  |   | 2,825 
|                                                          |  |      |        |   |      |   |        |  |   |       
|                                                          |  |      | 5,584  |   |      |   | 10,810 |  |   | 7,464 
|                                                          |  |      |       
|Net income (loss) from discontinued operations            |  |      | (1,547 | ) |      |   | 373    |  |   | 703   
|Gain on sale of real estate                               |  |      | 23,291 |   |      |   | 38,945 |  |   |      
|Equity in gain on sale of real estate by equity investees |  |      | 4,853  |   |      |   | 5,013  |  |   |      
|                                                          |  |      |        |   |      |   |        |  |   |       
|Net income (loss) from discontinued operations            |  | $    | 26,597 |   |      | $ | 44,331 |  | $ | 703   
|                                                          |  |      |        |   |      |   |        |  |   |       



|NOTE 20.QUARTERLY |  | RESULTS OF OPERATIONS
|----------------- |  | ---------------------



The following is a tabulation of TCIs quarterly results of operations for the years 2003, 2002, 2001 (unaudited):



|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|--------------------------------------------- |  | ------------------ | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ | - |  | - | ------ | -
|                                              |  | Three Months Ended |       
|                                              |  | March 31,          |        |   | June 30, |   |        | September 30, |  |   | December 31, |  
|2003                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Rents                                         |  | $                  | 25,751 |   |          | $ | 26,684 |               |  | $ | 29,637       |   |  | $ | 32,350 |  
|Property expense                              |  |                    | 17,104 |   |          |   | 16,705 |               |  |   | 19,518       |   |  |   | 20,276 |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Operating income                              |  |                    | 8,647  |   |          |   | 9,979  |               |  |   | 10,119       |   |  |   | 12,074 |  
|Interest income                               |  |                    | 848    |   |          |   | 660    |               |  |   | 486          |   |  |   | 863    |  
|Other income                                  |  |                    |       |   |          |   |       |               |  |   |             |   |  |   | 13,019 |  
|Income (loss) in equity partnerships          |  |                    | (1,296 | ) |          |   | (296   | )             |  |   | (1,174       | ) |  |   | (1,526 | )
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|                                              |  |                    | (448   | ) |          |   | 364    |               |  |   | (688         | ) |  |   | 12,356 |  
|Other expense                                 |  |                    | 17,486 |   |          |   | 17,389 |               |  |   | 21,759       |   |  |   | 23,488 |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Net loss from continuing operations           |  |                    | (9,287 | ) |          |   | (7,046 | )             |  |   | (12,328      | ) |  |   | 942    |  
|Discontinued operations                       |  |                    | 1,883  |   |          |   | 8,612  |               |  |   | 10,983       |   |  |   | 5,119  |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss)                             |  |                    | (7,404 | ) |          |   | 1,566  |               |  |   | (1,345       | ) |  |   | 6,061  |  
|Preferred dividend requirement                |  |                    | (45    | ) |          |   | (14    | )             |  |   | (7           | ) |  |   | (60    | )
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss) applicable to Common shares |  | $                  | (7,449 | ) |          | $ | 1,552  |               |  | $ | (1,352       | ) |  | $ | 6,001  |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Basic and Diluted Earnings (Loss) Per Share   |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss) applicable to Common shares |  | $                  | (.92   | ) |          | $ | .18    |               |  | $ | (.16         | ) |  | $ | .74    |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  



In the first quarter
of 2003, TCI recognized $1.5 million for TCIs share of gains recognized by ARI, equity investee. In the second quarter of 2003, gains on sale of real estate totaling $8.7 million were recognized on the sale of Willow Wick Apartments, McLeod
Industrial, Tricon consolidated warehouses, Solco-Valley Ranch land, and TCIs share of gains recognized by ARI. In the third quarter of 2003, gains on sale of real estate totaling $11.8 million were recognized on the sale of Lincoln Court
Apartments, Quail Creek Apartments, Stone Oak Apartments, Bonita Plaza Office Building, K-Mart Sheboygan, Oak Tree Village shopping center, Palm Desert land, and TCIs share of gains recognized by ARI and IORI. In the fourth quarter of 2003,
gains on sale of real estate totaling $6.1 million were recognized on Summerfield Apartments, Treehouse Apartments, Remington Office Building, Parkway shopping center, Kelly 301 Hilltop, Kelly 108thstreet, Eagle Crest land, Sendero Ranch land, Highway 121/Watters Road land and TCIs share of gains recognized by ARI and IORI. Also in the fourth
quarter of 2003, TCI recognized $3.8 million for a litigation settlement, $4.4 million for gain on extinguishment of debt and $4.8 million for a condemnation award.



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|--------------------------------------------- |  | ------------------ | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                              |  | Three Months Ended |       
|                                              |  | March 31,          |        |   | June 30, |   |        | September 30, |  |   | December 31, |  
|2002                                          |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Rents                                         |  | $                  | 22,197 |   |          | $ | 23,841 |               |  | $ | 25,053       |   |  | $ | 24,703  |  
|Property expense                              |  |                    | 14,177 |   |          |   | 15,561 |               |  |   | 17,909       |   |  |   | 16,715  |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Operating income                              |  |                    | 8,020  |   |          |   | 8,280  |               |  |   | 7,144        |   |  |   | 7,988   |  
|Interest income                               |  |                    | 1,067  |   |          |   | 984    |               |  |   | 756          |   |  |   | 1,324   |  
|Income (loss) in equity partnerships          |  |                    | (1,276 | ) |          |   | (291   | )             |  |   | (1,181       | ) |  |   | (1,070  | )
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|                                              |  |                    | (209   | ) |          |   | 693    |               |  |   | (425         | ) |  |   | 254     |  
|Other expense                                 |  |                    | 14,711 |   |          |   | 18,184 |               |  |   | 19,245       |   |  |   | 19,085  |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net loss from continuing operations           |  |                    | (6,900 | ) |          |   | (9,211 | )             |  |   | (12,526      | ) |  |   | (10,843 | )
|Discontinued operations                       |  |                    | 5,565  |   |          |   | 7,358  |               |  |   | 14,365       |   |  |   | 17,043  |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income (loss)                             |  |                    | (1,335 | ) |          |   | (1,853 | )             |  |   | 1,839        |   |  |   | 6,200   |  
|Preferred dividend requirement                |  |                    | (45    | ) |          |   | (45    | )             |  |   | (45          | ) |  |   | (55     | )
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income (loss) applicable to Common shares |  | $                  | (1,380 | ) |          | $ | (1,898 | )             |  | $ | 1,794        |   |  | $ | 6,145   |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Basic and Diluted Earnings (Loss) Per Share   |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|Net income (loss) applicable to Common shares |  | $                  | (.17   | ) |          | $ | (.24   | )             |  | $ | .22          |   |  | $ | .75     |  
|                                              |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |         |  



In the first quarter
of 2002, gains on sale of real estate totaling $5.4 million were recognized on the sale of the Primrose Apartments, Central Storage Industrial Warehouse, a deferred gain on the sale of Madison at Bear Creek Apartments, and TCIs share of gains
recognized by ARI and IORI, equity investees. In the second quarter of 2002, gains on sale of real estate totaling $7.3 million were recognized on the sale of Southgreen Apartments, Jefferson Office Building, NASA Office Building, Windsor Plaza
Office Building, a deferred gain on the sale of McCallum Glen Apartments, and TCIs share of gains recognized by ARI. In the third quarter of 2002, gains on sale of real estate totaling $13.7 million were recognized on the sale of 4242 Cedar
Springs, Camelot, Country Crossing, Gladstell Forest, and Heritage on the River Apartments, Savings of America Office Building, and TCIs share of gains recognized by ARI. In the fourth quarter of 2002, gains on sale of real estate totaling
$17.5 million were recognized on Grove Park and Trails of Windfern Apartments, Plaza Tower Office Building, Chelsea Square Shopping Center, and TCIs share of gains recognized by ARI.



|                                             |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|-------------------------------------------- |  | ------------------ | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ | - |  | - | ------ | -
|                                             |  | Three Months Ended |       
|                                             |  | March 31,          |        |   | June 30, |   |        | September 30, |  |   | December 31, |  
|2001                                         |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Rents                                        |  | $                  | 34,405 |   |          | $ | 33,533 |               |  | $ | 25,708       |   |  | $ | 21,793 |  
|Property expense                             |  |                    | 19,854 |   |          |   | 18,401 |               |  |   | 15,410       |   |  |   | 14,845 |  
|                                             |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Operating income                             |  |                    | 14,551 |   |          |   | 15,132 |               |  |   | 10,298       |   |  |   | 6,948  |  
|Interest income                              |  |                    | 638    |   |          |   | 670    |               |  |   | 945          |   |  |   | 671    |  
|Income (loss) in equity partnerships         |  |                    | (1,373 | ) |          |   | 624    |               |  |   | (1,040       | ) |  |   | 1,161  |  
|Gain on sale of real estate                  |  |                    | 6,484  |   |          |   | 20,623 |               |  |   | 17,736       |   |  |   | 4,118  |  
|                                             |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|                                             |  |                    | 5,749  |   |          |   | 21,917 |               |  |   | 17,641       |   |  |   | 5,950  |  
|Other expense                                |  |                    | 19,916 |   |          |   | 22,588 |               |  |   | 16,914       |   |  |   | 19,660 |  
|                                             |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss) from continuing operations |  |                    | 384    |   |          |   | 14,461 |               |  |   | 11,025       |   |  |   | (6,762 | )
|Discontinued operations                      |  |                    | (68    | ) |          |   | (130   | )             |  |   | 91           |   |  |   | 810    |  
|                                             |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|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   | )
|                                             |  |                    |        |   |          |   |        |               |  |   |              |   |  |   |        |  



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 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



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 2. REAL ESTATE and NOTE 5. INVESTMENT IN EQUITY METHOD
REAL ESTATE ENTITIES.



|NOTE 21.DERIVATIVE |  | FINANCIAL INSTRUMENTS
|------------------ |  | ---------------------



During the first quarter of 2002, TCI entered into an interest rate swap agreement with a bank. This agreement contains a notional amount of $12.8 million
and requires TCI to pay the bank a fixed rate of 4.3%, and requires the bank to pay to TCI based on the 30 day LIBOR rate. This agreement was entered into in order to effectively fix the rate on TCIs debt associated with the Limestone Canyon
property. The swap agreement expires on December 9, 2004.



TCI
has not designated the interest rate swap agreement as a hedge, as defined within Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and as such, changes in the fair
value of the swap agreement are recognized in earnings during the period of change and reflected in the statement of operations as interest expense.



The fair value of the swap agreement at December 31, 2003 represents a liability to the Company of $370,000 and is included within other liabilities in
the accompanying balance sheet. Amounts paid or received under the swap agreement are settled monthly and are reflected as a reduction in the liability when paid. Interest expense at December 31, 2003, was decreased by $191,000 representing both
amounts paid to the bank under the agreement and decreases in the fair value of the related liability.



|NOTE 22.COMMITMENTS |  | AND CONTINGENCIES AND LIQUIDITY
|------------------- |  | -------------------------------



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. (the Olive Litigation), 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), which was amended on January 27, 1997, by
Amendment to the Modification, effective January 9, 1994 (the First Amendment).



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



On October 23, 2001, TCI, IORI and 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 of the proposed settlement (the Second Amendment). Under the Second Amendment,
the appeal was dismissed with prejudice and ARI agreed to either (i) 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 or (ii) make a tender offer for all of the
outstanding common shares of IORI and TCI not currently owned by ARI. At that time, TCI had the same advisor as ARI and IORI. Two of the directors of IORI also served as directors for ARI and TCI.



On November 15, 2002, ARI commenced, through subsidiaries, a tender offer for
shares of common stock of TCI and IORI. The price per share was $17.50 for TCI shares and $19.00 for IORI shares. The tender offers were completed on March 19, 2003. ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the
tender offer fulfilled the obligations under the Second Amendment and the Olive Litigation was dismissed with prejudice.



Partnership Buyouts.    TCI is the limited partner in 12 partnerships formed to construct residential properties. As permitted
in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to buyout the nonaffiliated partners
are limited to development fees earned by the nonaffiliated partners, and are set forth in the respective partnership agreements. The total amount of the expected buyouts as of December 31, 2003 is approximately $2.3 million.



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Liquidity.    Although management anticipates that TCI will generate
excess cash from operations in 2004, due to increased rental rates 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.



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.



At December 31, 2003, TCI was in default on a second lien note secured by Bay Plaza office building. TCI paid off this second lien note in February 2004.



At December 31, 2003, TCI was in default on a loan secured by
Marine Creek land. TCI refinanced this land in February 2004 and paid off this loan in February 2004.



TCI was in default on loans secured by the three hotels in Chicago. The total principal amount of $9.6 million matured at the end of February 2003 and had
been in default since August 2002 due to the hotels not achieving the necessary debt service coverage ratios. Because of the default, the lender began charging default interest at the rate of 12% per annum. In March 2003, TCI sold the three hotels
to a related party and placed them in bankruptcy. New terms are being negotiated with the lender and TCI expects these hotels to emerge as viable assets. The sale of the hotels was not recorded due to TCI retaining control and having continued
involvement.



In 2002, TCI was in default on a $1.0 million
loan secured by interests in the partnership which owns the Tivoli Apartments in Dallas, Texas. TCI attempted to negotiate an extension for this loan maturing in December 2002. In January 2003, the lender commenced a lawsuit against TCI to collect
the amount. In August 2003, TCI settled with the lender for $1.0 million, which paid off the principal and accrued interest of this note.



TCI was in default on a $5.3 million loan secured by the Majestic Hotel in San Francisco, California. TCI ceased making monthly payments of principal and
interest in May 2002. In March 2003, TCI sold the hotel to a related party, who placed it in bankruptcy. New terms are being negotiated with the lender and TCI expects this hotel to emerge as a viable asset. The sale of the hotel was not recorded
due to TCI retaining control and having continued involvement.



In January 2001, TCI exercised its option under the loan documents to extend the maturity date of three loans with a principal balance of $30.0 million secured by three office buildings in New Orleans, Louisiana. The lender has disputed
TCIs right to extend the loans. This dispute was the subject of litigation pending in the United States District Court for the Eastern District of Louisiana. On September 11, 2003, TCI settled with the lender. On September 18, 2003, TCI paid
$5.0 million to lender, which gave TCI the right to retire the remaining debt outstanding on the three office buildings on or before December 10, 2003 for $20.0 million. TCI paid the remaining $20.0 million on December 10, 2003, which resulted in a
$4.4 million gain on extinguishment of debt.



NOTE 23.SUBSEQUENT EVENTS



In 2004, TCI sold the following property:



|                     |  |              |  |                        |  |             |        |                   |   |                 |  |                     |        |  |   |      
|-------------------- |  | ------------ |  | ---------------------- |  | ----------- | ------ | ----------------- | - | --------------- |  | ------------------- | ------ |  | - | -----
|Property             |  | Location     |  | Units/ Sq. Feet /Acres |  | Sales Price |        | Net Cash Received |   | Debt Discharged |  | Gain/(Loss) on Sale
|Shopping Center      |  |              |  |                        |  |             |        |                   |   |                 |  |                     |        |  |   |      
|Countryside Retail   |  | Sterling, VA |  | 133,422 Sq. Ft.        |  | $           | 27,100 |                   | $ | 3,407           |  | $                   | 22,800 |  | $ | 5,475
|Countryside Harmon   |  | Sterling, VA |  | 72,062 Sq. Ft.         |  | $           | 2,650  |                   | $ | 216             |  | $                   | 2,200  |  | $ | 1,861
|                     |  |              |  |                        |  |            
|Industrial Warehouse |  |              |  |                        |  |             |        |                   |   |                 |  |                     |        |  |   |      
|Ogden Industrial     |  | Ogden, UT    |  | 107,112 Sq. Ft.        |  |             | 2,600  |                   |   | 756             |  |                     | 1,775  |  |   | 1,361
|                     |  |              |  |                        |  |            
|Land                 |  |              |  |                        |  |             |        |                   |   |                 |  |                     |        |  |   |      
|Red Cross            |  | Dallas, TX   |  | 2.89 Acres             |  |             | 8,500  |                   |   | 3,768           |  |                     | 4,450  |  |   |     



In February 2004, TCI
received $1.9 million as a deposit on the Sandstone Apartments in Mesa, Arizona. The buyer has the option to purchase the property within 90 days of receipt of the deposit.



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TRANSCONTINENTAL REALTY INVESTORS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2004, TCI refinanced or financed the following properties:



|                   |  |                    |  |                      |  |               |       |                 |   |                           |  |   |               |   |  |               |      |  |      
|------------------ |  | ------------------ |  | -------------------- |  | ------------- | ----- | --------------- | - | ------------------------- |  | - | ------------- | - |  | ------------- | ---- |  | -----
|Property           |  | Location           |  | Sq. Ft./ Units/Acres |  | Debt Incurred |       | Debt Discharged |   | Net Cash Received/ (Paid) |  |   | Interest Rate |   |  | Maturity Date
|Land               |  |                    |  |                      |  |               |       |                 |   |                           |  |   |               |   |  |               |      |  |      
|Dominion/Hollywood |  | Farmers Branch, TX |  | 57.20 Acres          |  | $             | 6,985 |                 | $ | 6,222                     |  | $ | 33            |   |  | 7.00          | %(1) |  | 02/05
|Marine Creek (2)   |  | Fort Worth, TX     |  | 54 Acres             |  |               | 1,286 |                 |   | 991                       |  |   | (192          | ) |  | 5.75          |      |  | 06/05
|Centura            |  | Farmers Branch, TX |  | 8.75 Acres           |  |               | 4,485 |                 |   | 4,400                     |  |   | (138          | ) |  |               |      |  |      

---

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

|(2) | Construction loan for apartment construction.
|--- | ---------------------------------------------



Also in 2004, TCI guaranteed a $10 million line of credit for its parent, ARI. TCI pledged assets, in the form of securities and partnership interests in
construction properties, as additional collateral for this line of credit.



55



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SCHEDULE III



TRANSCONTINENTAL
REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED
DEPRECIATION

December 31, 2003



|                                    |  |                        |        |              |   |                                           |  |              |                                               |       |   |        |      |   |                        |      |           |                                                                        |                          |  |                      |        |  |              |        |  |   |       |  |      |      |  |       |  |           
|----------------------------------- |  | ---------------------- | ------ | ------------ | - | ----------------------------------------- |  | ------------ | --------------------------------------------- | ----- | - | ------ | ---- | - | ---------------------- | ---- | --------- | ---------------------------------------------------------------------- | ------------------------ |  | -------------------- | ------ |  | ------------ | ------ |  | - | ----- |  | ---- | ---- |  | ----- |  | ----------
|                                    |  |                        |        | Initial Cost |   | Cost CapitalizedSubsequent to Acquisition |  |              | Gross Amounts of Which Carried at End of Year |       |   |        |      |   |                        |      |           | Life on Which Depreciation In Latest Statement of Operationis Computed
|Property/Location                   |  | Encumbrances           |        | Land         |   | Building & Improvements                   |  | Improvements |                                               | Other |   |        | Land |   | Building &Improvements |      | (1) Total |                                                                        | Accumulated Depreciation |  | Date of Construction |        |  | DateAcquired |       
|                                    |  | (dollars in thousands)
|Held for Investment:                |  |                        |        |              |   |                                           |  |              |                                               |       |   |        |      |   |                        |      |           |                                                                        |                          |  |                      |        |  |              |        |  |   |       |  |      |      |  |       |  |           
|Apartments                          |  |                        |        |              |   |                                           |  |              |                                               |       |   |        |      |   |                        |      |           |                                                                        |                          |  |                      |        |  |              |        |  |   |       |  |      |      |  |       |  |           
|4400, Midland, TX                   |  | $                      | 1,024  |              | $ | 349                                       |  | $            | 1,396                                         |       | $ |       |      | $ |                       |      |           | $                                                                      | 349                      |  | $                    | 1,396  |  | $            | 1,745  |  | $ | 198   |  | 1981 |      |  | 04/98 |  | 40 years  
|Apple Lane, Lawrence, KS            |  |                        | 1,400  |              |   | 168                                       |  |              | 1,259                                         |       |   |       |      |   |                       |      |           |                                                                        | 168                      |  |                      | 1,259  |  |              | 1,427  |  |   | 134   |  | 1989 |      |  | 01/00 |  | 40 years  
|Arbor Point, Odessa, TX             |  |                        | 2,010  |              |   | 321                                       |  |              | 1,285                                         |       |   | 526    |      |   |                       |      |           |                                                                        | 321                      |  |                      | 1,811  |  |              | 2,132  |  |   | 730   |  | 1975 |      |  | 08/96 |  | 5-40 years
|Ashton Way, Midland, TX             |  |                        | 1,024  |              |   | 384                                       |  |              | 1,536                                         |       |   | 52     |      |   |                       |      |           |                                                                        | 384                      |  |                      | 1,588  |  |              | 1,972  |  |   | 284   |  | 1978 |      |  | 04/98 |  | 5-40 years
|Autumn Chase, Midland, TX           |  |                        | 873    |              |   | 141                                       |  |              | 1,265                                         |       |   |       |      |   |                       |      |           |                                                                        | 141                      |  |                      | 1,265  |  |              | 1,406  |  |   | 119   |  | 1985 |      |  | 04/00 |  | 40 years  
|Baywalk, Galveston, TX              |  |                        | 5,359  |              |   | 679                                       |  |              | 6,106                                         |       |   |       |      |   |                       |      |           |                                                                        | 679                      |  |                      | 6,106  |  |              | 6,785  |  |   | 370   |  | 1979 |      |  | 09/01 |  | 40 years  
|Blue Lake Villas, Waxahachie, TX    |  |                        | 8,632  |              |   | 1,049                                     |  |              |                                              |       |   | 9,770  |      |   |                       |      |           |                                                                        | 1,049                    |  |                      | 9,770  |  |              | 10,819 |  |   | 101   |  | 2002 |      |  | 01/02 |  | 40 years  
|Bluffs At Vista Ridge               |  |                        | 2,201  |              |   |                                          |  |              |                                              |       |   | 2,791  |      |   |                       |      |           |                                                                        |                          |  |                      | 2,791  |  |              | 2,791  |  |   |      |  |     | (11) |  | 08/03 |  |           
|Breakwater Bay, Beaumont, TX        |  |                        | 1,554  |              |   | 740                                       |  |              |                                               |       |   | 1,951  |      |   |                       |      |           |                                                                        | 740                      |  |                      | 1,951  |  |              | 2,691  |  |   |      |  |     | (11) |  | 05/03 |  |           
|By the Sea, Corpus Christi, TX      |  |                        | 5,393  |              |   | 644                                       |  |              | 5,797                                         |       |   |       |      |   |                       |      |           |                                                                        | 644                      |  |                      | 5,797  |  |              | 6,441  |  |   | 352   |  | 1973 |      |  | 08/01 |  | 40 years  
|Capitol Hill, Little Rock, AR       |  |                        | 1,718  |              |   | 932                                       |  |              | 973                                           |       |   | 1,398  |      |   |                       |      |           |                                                                        | 932                      |  |                      | 2,371  |  |              | 3,303  |  |   |       |  |     | (11) |  | 03/03 |  |           
|Cliffs of Eldorado, McKinney, TX    |  |                        | 10,369 |              |   | 2,647                                     |  |              | 10,589                                        |       |   |       |      |   |                       |      |           |                                                                        | 2,647                    |  |                      | 10,589 |  |              | 13,236 |  |   | 1,427 |  | 1997 |      |  | 10/98 |  | 40 years  
|Courtyard, Midland, TX              |  |                        | 997    |              |   | 151                                       |  |              | 1,359                                         |       |   |       |      |   |                       |      |           |                                                                        | 151                      |  |                      | 1,359  |  |              | 1,510  |  |   | 91    |  | 1976 |      |  | 05/01 |  | 40 years  
|Coventry, Midland, TX               |  |                        | 1,197  |              |   | 236                                       |  |              | 369                                           |       |   | 173    |      |   |                       |      |           |                                                                        | 236                      |  |                      | 542    |  |              | 778    |  |   | 241   |  | 1977 |      |  | 08/96 |  | 5-40 years
|DeSoto Ranch, DeSoto, TX            |  |                        | 15,586 |              |   | 1,472                                     |  |              |                                              |       |   | 17,186 |      |   |                       |      |           |                                                                        | 1,472                    |  |                      | 17,186 |  |              | 18,658 |  |   |      |  | 2002 |      |  | 05/02 |  | 40 years  
|Echo Valley, Dallas, TX             |  |                        | 8,801  |              |   | 788                                       |  |              |                                              |       |   | 10,057 |      |   |                        |      |           |                                                                        | 788                      |  |                      | 10,057 |  |              | 10,845 |  |   |      |  | 2002 |      |  | 01/02 |  | 40 years  
|El Chapparal, San Antonio, TX       |  |                        | 4,125  |              |   | 279                                       |  |              | 2,821                                         |       |   |       |      |   | (402                   | )(2) |           |                                                                        | 279                      |  |                      | 2,419  |  |              | 2,698  |  |   | 1,015 |  | 1963 |      |  | 01/88 |  | 5-40 years
|Fairway View Estates, El Paso, TX   |  |                        | 4,963  |              |   | 548                                       |  |              | 4,530                                         |       |   | 261    |      |   |                       |      |           |                                                                        | 548                      |  |                      | 4,791  |  |              | 5,338  |  |   | 722   |  | 1977 |      |  | 03/99 |  | 40 years  
|Fairways, Longview, TX              |  |                        | 3,441  |              |   | 657                                       |  |              | 1,532                                         |       |   | 119    |      |   | (266                   | )(2) |           |                                                                        | 657                      |  |                      | 1,385  |  |              | 2,042  |  |   | 489   |  | 1980 |      |  | 03/93 |  | 5-40 years
|Falcon Lakes, Arlington, TX         |  |                        | 11,120 |              |   | 1,437                                     |  |              |                                              |       |   | 13,058 |      |   |                        |      |           |                                                                        | 1,437                    |  |                      | 13,058 |  |              | 14,495 |  |   | 247   |  | 2001 |      |  | 10/01 |  | 40 years  
|Fountain Lake, Texas City, TX       |  |                        | 3,226  |              |   | 861                                       |  |              | 2,585                                         |       |   | 19     |      |   | (254                   | )(2) |           |                                                                        | 861                      |  |                      | 2,350  |  |              | 3,211  |  |   | 612   |  | 1975 |      |  | 12/94 |  | 5-40 years
|Fountains of Waterford, Midland, TX |  |                        | 1,682  |              |   | 311                                       |  |              | 852                                           |       |   | 1,538  |      |   |                       |      |           |                                                                        | 311                      |  |                      | 2,390  |  |              | 2,701  |  |   | 1,309 |  | 1977 |      |  | 05/98 |  | 5-40 years
|Harpers Ferry, Lafayette, LA       |  |                        | 3,303  |              |   | 349                                       |  |              | 1,398                                         |       |   | 223    |      |   |                       |      |           |                                                                        | 349                      |  |                      | 1,621  |  |              | 1,970  |  |   | 583   |  | 1972 |      |  | 02/92 |  | 5-40 years
|Heather Creek, Mesquite, TX         |  |                        | 11,052 |              |   | 1,100                                     |  |              |                                              |       |   | 11,536 |      |   |                       |      |           |                                                                        | 1,100                    |  |                      | 11,536 |  |              | 12,636 |  |   |      |  |     | (11) |  | 03/03 |  |           
|Hunters Glen, Midland, TX           |  |                        | 1,844  |              |   | 519                                       |  |              | 2,075                                         |       |   | 321    |      |   |                       |      |           |                                                                        | 519                      |  |                      | 2,396  |  |              | 2,915  |  |   | 631   |  | 1982 |      |  | 01/98 |  | 5-40 years
|In the Pines, Gainesville, FL       |  |                        | 5,274  |              |   | 1,288                                     |  |              | 5,154                                         |       |   | 91     |      |   | (573                   | )(2) |           |                                                                        | 1,288                    |  |                      | 4,672  |  |              | 5,960  |  |   | 1,184 |  | 1972 |      |  | 12/94 |  | 5-40 years
|Island Bay, Galveston, TX           |  |                        | 15,061 |              |   | 2,095                                     |  |              | 18,852                                        |       |   |       |      |   |                       |      |           |                                                                        | 2,095                    |  |                      | 18,852 |  |              | 20,947 |  |   | 1,141 |  | 1973 |      |  | 09/01 |  | 40 years  
|Kingsland Ranch, Houston, TX        |  |                        | 12,291 |              |   | 1,188                                     |  |              |                                               |       |   | 13,018 |      |   |                       |      |           |                                                                        | 1,188                    |  |                      | 13,018 |  |              | 14,206 |  |   |       |  |     | (11) |  | 03/03 |  |           
|Limestone Canyon, Austin, TX        |  |                        | 12,585 |              |   | 1,998                                     |  |              |                                              |       |   | 12,247 |      |   | 1,895                  | (4)  |           |                                                                        | 1,998                    |  |                      | 14,142 |  |              | 16,140 |  |   | 1,305 |  | 1997 |      |  | 07/98 |  | 40 years  
|Limestone Ranch, Lewisville, TX     |  |                        | 13,000 |              |   | 1,620                                     |  |              |                                              |       |   | 13,058 |      |   |                       |      |           |                                                                        | 1,620                    |  |                      | 13,058 |  |              | 14,678 |  |   | 527   |  | 2001 |      |  | 05/01 |  | 40 years  
|Marina Landing, Galveston, TX       |  |                        | 12,927 |              |   | 1,240                                     |  |              | 11,161                                        |       |   |       |      |   |                       |      |           |                                                                        | 1,240                    |  |                      | 11,161 |  |              | 12,401 |  |   | 650   |  | 1985 |      |  | 09/01 |  | 40 years  
|Mountain Plaza, El Paso, TX         |  |                        | 4,299  |              |   | 837                                       |  |              | 3,347                                         |       |   | 139    |      |   |                       |      |           |                                                                        | 837                      |  |                      | 3,486  |  |              | 4,323  |  |   | 640   |  | 1972 |      |  | 01/98 |  | 5-40 years
|Oak Park IV, Clute, TX              |  |                        | 969    |              |   | 224                                       |  |              | 674                                           |       |   | 27     |      |   | (95                    | )(2) |           |                                                                        | 224                      |  |                      | 606    |  |              | 830    |  |   | 173   |  | 1981 |      |  | 06/94 |  | 5-40 years
|Paramount Terrace, Amarillo, TX     |  |                        | 2,659  |              |   | 340                                       |  |              | 3,061                                         |       |   |       |      |   |                       |      |           |                                                                        | 340                      |  |                      | 3,061  |  |              | 3,401  |  |   | 349   |  | 1983 |      |  | 05/00 |  | 40 years  



56



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##### Table of Contents

SCHEDULE III

(Continued)



TRANSCONTINENTAL REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003



|                                        |  |                        |        |              |   |                                            |  |              |                                               |       |   |        |      |   |                         |      |                                                                       |   |                          |  |                      |        |              |   |        |  |       |  |           |  |       |  |           
|--------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------------------------------------ |  | ------------ | --------------------------------------------- | ----- | - | ------ | ---- | - | ----------------------- | ---- | --------------------------------------------------------------------- | - | ------------------------ |  | -------------------- | ------ | ------------ | - | ------ |  | ----- |  | --------- |  | ----- |  | ----------
|                                        |  |                        |        | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |              | Gross Amounts of Which Carried at End of Year |       |   |        |      |   |                         |      | Life onWhich Depreciation In Latest Statement of Operationis
Computed
|Property/Location                       |  | Encumbrances           |        | Land         |   | Building & Improvements                    |  | Improvements |                                               | Other |   |        | Land |   | Building & Improvements |      | (1) Total                                                             |   | Accumulated Depreciation |  | Date of Construction |        | DateAcquired |  
|                                        |  | (dollars in thousands)
|Plantation, Tulsa, OK                   |  | $                      | 2,300  |              | $ | 344                                        |  | $            | 2,396                                         |       | $ |       |      | $ |                        |      |                                                                       | $ | 344                      |  | $                    | 2,396  |              | $ | 2,740  |  | 334   |  | 1968      |  | 12/99 |  | 40 years  
|Quail Oaks, Balch Springs, TX           |  |                        | 2,784  |              |   | 90                                         |  |              | 2,160                                         |       |   | 152    |      |   | (187                    | )(2) |                                                                       |   | 90                       |  |                      | 2,125  |              |   | 2,215  |  | 1,088 |  | 1982      |  | 02/87 |  | 5-40 years
|River Oaks, Wiley, TX                   |  |                        | 9,811  |              |   | 590                                        |  |              |                                              |       |   | 11,840 |      |   |                        |      |                                                                       |   | 590                      |  |                      | 11,840 |              |   | 12,430 |  | 212   |  | 2001      |  | 10/01 |  | 40 years  
|Sendero Ridge, San Antonio, TX          |  |                        | 20,976 |              |   | 2,635                                      |  |              |                                              |       |   | 22,802 |      |   |                        |      |                                                                       |   | 2,635                    |  |                      | 22,802 |              |   | 25,437 |  |      |  | 2001      |  | 11/01 |  | 40 years  
|Somerset, Texas City, TX                |  |                        | 2,872  |              |   | 936                                        |  |              | 2,811                                         |       |   | 179    |      |   | (452                    | )(2) |                                                                       |   | 936                      |  |                      | 2,538  |              |   | 3,474  |  | 810   |  | 1985      |  | 12/93 |  | 5-40 years
|Southgate, Odessa, TX                   |  |                        | 1,743  |              |   | 335                                        |  |              | 1,338                                         |       |   | 318    |      |   |                        |      |                                                                       |   | 335                      |  |                      | 1,656  |              |   | 1,991  |  | 564   |  | 1976      |  | 08/96 |  | 5-40 years
|Spy Glass, Mansfield, TX                |  |                        | 15,996 |              |   | 1,376                                      |  |              |                                              |       |   | 16,498 |      |   | (90                     | )    |                                                                       |   | 1,376                    |  |                      | 16,408 |              |   | 17,784 |  |      |  | 2002      |  | 03/02 |  | 40 years  
|Sunchase, Odessa, TX                    |  |                        | 3,461  |              |   | 742                                        |  |              | 2,842                                         |       |   | 458    |      |   |                        |      |                                                                       |   | 742                      |  |                      | 3,300  |              |   | 4,042  |  | 828   |  | 1981      |  | 10/97 |  | 5-40 years
|Terrace Hills, El Paso, TX              |  |                        | 6,065  |              |   | 1,286                                      |  |              | 5,145                                         |       |   | 167    |      |   |                        |      |                                                                       |   | 1,286                    |  |                      | 5,312  |              |   | 6,598  |  | 943   |  | 1985      |  | 03/97 |  | 5-40 years
|Timbers, Tyler, TX                      |  |                        | 2,429  |              |   | 497                                        |  |              | 1,988                                         |       |   |       |      |   |                        |      |                                                                       |   | 497                      |  |                      | 1,988  |              |   | 2,485  |  | 289   |  | 1973      |  | 12/97 |  | 40 years  
|Tivoli, Dallas, TX                      |  |                        | 10,000 |              |   | 1,355                                      |  |              |                                              |       |   | 12,592 |      |   |                        |      |                                                                       |   | 1,355                    |  |                      | 12,592 |              |   | 13,947 |  | 330   |  | 2001      |  | 12/01 |  | 40 years  
|Verandas at City View, Fort Worth, TX   |  |                        | 13,745 |              |   | 2,545                                      |  |              |                                              |       |   | 15,744 |      |   |                        |      |                                                                       |   | 2,545                    |  |                      | 15,744 |              |   | 18,289 |  |      |  | 2001      |  | 09/01 |  | 40 years  
|Vistas at Pinnacle Park, Dallas, TX     |  |                        | 2,788  |              |   | 1,750                                      |  |              | 2,236                                         |       |   | 1,048  |      |   | 473                     |      |                                                                       |   | 1,750                    |  |                      | 3,757  |              |   | 5,507  |  |      |  | 2002      |  | 10/02 |  | 40 years  
|Waters Edge IV, Gulfport, MS            |  |                        |       |              |   | 443                                        |  |              |                                              |       |   | 4,258  |      |   |                        |      |                                                                       |   | 443                      |  |                      | 4,258  |              |   | 4,701  |  | 142   |  | 2001      |  | 11/01 |  | 40 years  
|Westwood, Odessa, TX                    |  |                        |       |              |   | 85                                         |  |              | 341                                           |       |   | 91     |      |   |                        |      |                                                                       |   | 85                       |  |                      | 432    |              |   | 517    |  | 157   |  | 1977      |  | 08/96 |  | 5-40 years
|Willow Creek, El Paso, TX               |  |                        | 2,369  |              |   | 608                                        |  |              | 1,832                                         |       |   | 76     |      |   | (156                    | )(2) |                                                                       |   | 608                      |  |                      | 1,752  |              |   | 2,360  |  | 472   |  | 1972      |  | 05/94 |  | 5-40 years
|Will-O-Wick, Pensacola, FL              |  |                        | 2,990  |              |   | 747                                        |  |              | 2,990                                         |       |   | 174    |      |   | (281                    | )(2) |                                                                       |   | 747                      |  |                      | 2,883  |              |   | 3,630  |  | 784   |  | 1974      |  | 05/95 |  | 5-40 years
|Windsong, Fort Worth, TX                |  |                        | 10,745 |              |   | 790                                        |  |              |                                              |       |   | 11,242 |      |   |                        |      |                                                                       |   | 790                      |  |                      | 11,242 |              |   | 12,032 |  |      |  | 2003      |  | 07/03 |  | 40 years  
|Woodview, Odessa, TX                    |  |                        | 1,991  |              |   | 716                                        |  |              | 2,864                                         |       |   | 102    |      |   |                        |      |                                                                       |   | 716                      |  |                      | 2,966  |              |   | 3,682  |  | 504   |  | 1974      |  | 05/98 |  | 5-40 years
|                                        |  |                        |        |              |   |                                            |  |              |                                               |       |   |       
|Office Buildings                        |  |                        |        |              |   |                                            |  |              |                                               |       |   |        |      |   |                         |      |                                                                       |   |                          |  |                      |        |              |   |        |  |       |  |           |  |       |  |           
|1010 Commons, New Orleans, LA           |  |                        | 5,799  |              |   | 2,113                                      |  |              | 15,010                                        |       |   | 19,291 |      |   | (1,218                  | )(2) |                                                                       |   | 2,113                    |  |                      | 33,084 |              |   | 35,197 |  | 8,106 |  | 1971      |  | 03/98 |  | 5-40 years
|225 Baronne, New Orleans, LA            |  |                        | 6,258  |              |   | 1,162                                      |  |              | 10,457                                        |       |   | 7,212  |      |   | (1,293                  | )(2) |                                                                       |   | 1,162                    |  |                      | 16,376 |              |   | 17,538 |  | 4,907 |  | 1960      |  | 03/98 |  | 5-40 years
|4135 Beltline, Addison, TX              |  |                        | 2,858  |              |   | 476                                        |  |              | 4,280                                         |       |   | 182    |      |   |                        |      |                                                                       |   | 476                      |  |                      | 4,462  |              |   | 4,938  |  | 539   |  | 1981/1982 |  | 06/99 |  | 40 years  
|9033 Wilshire Blvd., Los Angeles, CA    |  |                        | 6,616  |              |   | 956                                        |  |              | 8,609                                         |       |   | 479    |      |   |                        |      |                                                                       |   | 956                      |  |                      | 9,088  |              |   | 10,044 |  | 958   |  | 1957      |  | 04/00 |  | 5-40 years
|Ambulatory Surgery Center, Sterling, VA |  |                        | 3,388  |              |   | 908                                        |  |              | 8,170                                         |       |   |       |      |   |                        |      |                                                                       |   | 908                      |  |                      | 8,170  |              |   | 9,078  |  | 664   |  | 1991      |  | 07/00 |  | 40 years  
|AMOCO, New Orleans, LA                  |  |                        | 10,088 |              |   | 894                                        |  |              | 3,582                                         |       |   | 6,859  |      |   | (1,149                  | )(2) |                                                                       |   | 895                      |  |                      | 9,292  |              |   | 10,187 |  | 4,959 |  | 1974      |  | 06/97 |  | 5-40 years
|Atrium, Palm Beach, FL                  |  |                        | 3,773  |              |   | 1,147                                      |  |              | 4,590                                         |       |   | 221    |      |   |                        |      |                                                                       |   | 1,147                    |  |                      | 4,811  |              |   | 5,958  |  | 770   |  | 1985      |  | 06/98 |  | 40 years  
|Bay Plaza, Tampa, FL                    |  |                        | 2,198  |              |   | 895                                        |  |              | 3,582                                         |       |   | 557    |      |   | (384                    | )(2) |                                                                       |   | 895                      |  |                      | 3,755  |              |   | 4,650  |  | 941   |  | 1988      |  | 07/97 |  | 5-40 years
|Bay Plaza II, Tampa, FL                 |  |                        | 3,416  |              |   | 506                                        |  |              | 4,550                                         |       |   | 143    |      |   |                        |      |                                                                       |   | 506                      |  |                      | 4,693  |              |   | 5,198  |  | 448   |  | 1985      |  | 06/00 |  | 40 years  
|Brandeis, Omaha, NE                     |  |                        | 8,750  |              |   | 1,451                                      |  |              | 13,061                                        |       |   | 114    |      |   | (4,802                  | )    |                                                                       |   | 1,451                    |  |                      | 8,373  |              |   | 9,824  |  | 1,003 |  | 1921      |  | 11/00 |  | 40 years  
|Centura, Farmers Branch, TX             |  |                        | 40,239 |              |   | 5,000                                      |  |              | 45,000                                        |       |   | 705    |      |   |                        |      |                                                                       |   | 5,000                    |  |                      | 45,705 |              |   | 50,705 |  | 1,648 |  | 1999      |  | 06/02 |  | 40 years  
|Corporate Point, Chantilly, VA          |  |                        | 3,656  |              |   | 830                                        |  |              | 3,321                                         |       |   | 547    |      |   |                        |      |                                                                       |   | 830                      |  |                      | 3,868  |              |   | 4,698  |  | 1,145 |  | 1992      |  | 10/94 |  | 5-40 years
|Durham Center, Durham, NC               |  |                        | 13,315 |              |   | 4,233                                      |  |              | 16,932                                        |       |   | 1,441  |      |   | (1,362                  | )(2) |                                                                       |   | 4,233                    |  |                      | 17,011 |              |   | 21,244 |  | 3,553 |  | 1988      |  | 07/97 |  | 5-40 years
|Eton Square, Tulsa, OK                  |  |                        | 10,045 |              |   | 1,469                                      |  |              | 13,219                                        |       |   | 615    |      |   |                        |      |                                                                       |   | 1,469                    |  |                      | 13,834 |              |   | 15,303 |  | 1,671 |  | 1985      |  | 09/99 |  | 5-40 years
|Forum, Richmond, VA                     |  |                        | 4,990  |              |   | 1,360                                      |  |              | 5,439                                         |       |   | 772    |      |   |                        |      |                                                                       |   | 1,360                    |  |                      | 6,211  |              |   | 7,571  |  | 1,971 |  | 1987      |  | 10/92 |  | 2-40 years
|Institute Place, Chicago, IL            |  |                        | 7,886  |              |   | 665                                        |  |              | 7,057                                         |       |   | 139    |      |   |                        |      |                                                                       |   | 665                      |  |                      | 7,196  |              |   | 7,861  |  | 4,399 |  | 1910      |  | 01/93 |  | 2-40 years
|Lexington Center, Colorado Springs, CO  |  |                        | 3,975  |              |   | 1,103                                      |  |              | 4,413                                         |       |   | 558    |      |   |                        |      |                                                                       |   | 1,103                    |  |                      | 4,971  |              |   | 6,074  |  | 1,157 |  | 1986      |  | 12/97 |  | 3-40 years
|Mimado, Sterling, VA                    |  |                        |       |              |   | 582                                        |  |              | 5,236                                         |       |   | 52     |      |   |                        |      |                                                                       |   | 582                      |  |                      | 5,288  |              |   | 5,870  |  | 448   |  | 1986      |  | 09/00 |  | 40 years  
|One Steeplechase, Sterling, VA          |  |                        | 7,702  |              |   | 1,380                                      |  |              | 5,520                                         |       |   | 2,633  |      |   | 72                      | (4)  |                                                                       |   | 1,380                    |  |                      | 8,225  |              |   | 9,605  |  | 3,954 |  | 1987      |  | 12/92 |  | 5-40 years
|Parkway North, Dallas, TX               |  |                        | 3,566  |              |   | 1,173                                      |  |              | 4,692                                         |       |   | 980    |      |   |                        |      |                                                                       |   | 1,173                    |  |                      | 5,672  |              |   | 6,845  |  | 1,332 |  | 1980      |  | 02/98 |  | 2-40 years



57



---

##### Table of Contents

SCHEDULE III

(Continued)



TRANSCONTINENTAL REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003



|                                       |  |                        |  |              |  |                                          |  |              |                                               |        |      |  |        |  |                         |  |                                                                        |  |                          |  |                      |  |               |  |           
|-------------------------------------- |  | ---------------------- |  | ------------ |  | ---------------------------------------- |  | ------------ | --------------------------------------------- | ------ | ---- |  | ------ |  | ----------------------- |  | ---------------------------------------------------------------------- |  | ------------------------ |  | -------------------- |  | ------------- |  | ----------
|                                       |  |                        |  | Initial Cost |  | Cost CapitalizedSubsequent toAcquisition |  |              | Gross Amounts of Which Carried at End of Year |        |      |  |        |  |                         |  | Life on Which Depreciation In Latest Statement of Operationis Computed
|Property/Location                      |  | Encumbrances           |  | Land         |  | Building & Improvements                  |  | Improvements |                                               | Other  |      |  | Land   |  | Building & Improvements |  | (1) Total                                                              |  | Accumulated Depreciation |  | Date of Construction |  | Date Acquired | 
|                                       |  | (dollars in thousands)
|Signature Athletic Club, Dallas, TX    |  | 2,453                  |  | 1,075        |  | 2,921                                    |  | 1,227        |                                               | (465   | )(2) |  | 1,075  |  | 3,683                   |  | 4,758                                                                  |  | 1,142                    |  | 1985                 |  | 02/99         |  | 5-40 years
|Venture Center, Atlanta, GA            |  | 2,567                  |  | 411          |  | 2,746                                    |  | 220          |                                               |       |      |  | 411    |  | 2,966                   |  | 3,377                                                                  |  | 1,220                    |  | 1981                 |  | 07/89         |  | 1-40 years
|Westgrove Air Plaza, Addison, TX       |  | 3,397                  |  | 211          |  | 1,898                                    |  | 114          |                                               |        |      |  | 211    |  | 2,012                   |  | 2,223                                                                  |  | 378                      |  | 1982                 |  | 10/97         |  | 5-40 years
|                                       |  |                        |  |              |  |                                          |  |              |                                               |        |      | 
|Industrial Warehouses                  |  |                        |  |              |  |                                          |  |              |                                               |        |      |  |        |  |                         |  |                                                                        |  |                          |  |                      |  |               |  |           
|5360 Tulane, Atlanta, GA               |  | 364                    |  | 95           |  | 514                                      |  | 50           |                                               | (44    | )(2) |  | 95     |  | 520                     |  | 615                                                                    |  | 332                      |  | 1970                 |  | 11/97         |  | 5-40 years
|5700 Tulane, Atlanta, GA               |  |                       |  |             |  |                                         |  | 720          |                                               | (100   | )(2) |  |       |  | 620                     |  | 620                                                                    |  | 153                      |  | 1998                 |  | 11/97         |  | 40 years  
|Addison Hangar, Addison, TX            |  | 1,168                  |  | 928          |  | 1,481                                    |  | 33           |                                               |       |      |  | 928    |  | 1,514                   |  | 2,442                                                                  |  | 178                      |  | 1992                 |  | 12/99         |  | 5-40 years
|Addison Hanger II, Addison, TX         |  | 1,440                  |  |             |  | 1,150                                    |  | 248          |                                               |       |      |  |       |  | 1,398                   |  | 1,398                                                                  |  | 476                      |  | 2000                 |  | 12/99         |  | 5-40 years
|Encon, Fort Worth, TX                  |  | 3,408                  |  | 984          |  | 3,934                                    |  | 67           |                                               |       |      |  | 984    |  | 4,001                   |  | 4,985                                                                  |  | 620                      |  | 1958                 |  | 10/97         |  | 5-40 years
|Space Center, San Antonio, TX          |  | 1,063                  |  | 247          |  | 1,332                                    |  | 112          |                                               | (131   | )(2) |  | 247    |  | 1,313                   |  | 1,560                                                                  |  | 826                      |  | 1970                 |  | 11/97         |  | 5-40 years
|Texstar, Arlington, TX                 |  | 1,157                  |  | 333          |  | 1,331                                    |  | 216          |                                               |       |      |  | 333    |  | 1,547                   |  | 1,880                                                                  |  | 545                      |  | 1967                 |  | 12/93         |  | 5-40 years
|                                       |  |                        |  |              |  |                                          |  |              |                                               |        |      | 
|Shopping Centers                       |  |                        |  |              |  |                                          |  |              |                                               |        |      |  |        |  |                         |  |                                                                        |  |                          |  |                      |  |               |  |           
|Bridgeview Plaza                       |  | 6,446                  |  | 870          |  | 7,830                                    |  |              |                                               |        |      |  | 870    |  | 7,830                   |  | 8,700                                                                  |  | 1,958                    |  |                      |  |               |  |           
|Cullman SC                             |  | 1,684                  |  | 200          |  | 1,800                                    |  |              |                                               |        |      |  | 200    |  | 1,800                   |  | 2,000                                                                  |  | 450                      |  |                      |  |               |  |           
|Dunes Plaza, Michigan City, IN         |  | 2,845                  |  | 1,230        |  | 5,430                                    |  | 1,931        |                                               | (482   | )(5) |  | 1,230  |  | 6,879                   |  | 8,109                                                                  |  | 2,323                    |  | 1978                 |  | 03/92         |  | 5-40 years
|Fiesta, San Angelo, TX                 |  |                       |  | 44           |  |                                         |  |             |                                               |       |      |  | 44     |  |                        |  | 44                                                                     |  |                         |  |                     |  | 12/91         |  |          
|K-Mart, Cary, NC                       |  | 1,692                  |  | 1,358        |  | 1,157                                    |  | 162          |                                               |       |      |  | 1,358  |  | 1,319                   |  | 2,677                                                                  |  | 124                      |  | 1981                 |  | 08/98         |  | 40 years  
|Promenade, Highlands Ranch, CO         |  | 6,979                  |  | 1,749        |  | 6,995                                    |  | 546          |                                               | (679   | )(2) |  | 1,749  |  | 6,862                   |  | 8,611                                                                  |  | 1,549                    |  | 1985                 |  | 07/96         |  | 5-40 years
|Sadler Square, Amelia Island, FL       |  | 2,722                  |  | 679          |  | 2,715                                    |  | 164          |                                               |       |      |  | 679    |  | 2,879                   |  | 3,558                                                                  |  | 860                      |  | 1987                 |  | 11/93         |  | 3-40 years
|                                       |  |                        |  |              |  |                                          |  |              |                                               |        |      | 
|Hotels                                 |  |                        |  |              |  |                                          |  |              |                                               |        |      |  |        |  |                         |  |                                                                        |  |                          |  |                      |  |               |  |           
|Akademia, Wroclaw, Poland              |  | 21,423                 |  | 2,184        |  |                                         |  | 16,164       |                                               |       |      |  | 2,184  |  | 16,164                  |  | 18,348                                                                 |  | 1,114                    |  | 2001                 |  | 02/01         |  | 40 years  
|The Majestic, Chicago, IL              |  | 2,215                  |  | 572          |  | 2,365                                    |  | 1,515        |                                               |       |      |  | 572    |  | 3,880                   |  | 4,452                                                                  |  | 1,007                    |  | 1995                 |  | 12/98         |  | 5-40 years
|City Suites, Chicago, IL               |  | 3,695                  |  | 950          |  | 3,847                                    |  | 1,106        |                                               |       |      |  | 950    |  | 4,953                   |  | 5,903                                                                  |  | 1,317                    |  | 1995                 |  | 12/98         |  | 5-40 years
|Majestic Inn, San Francisco, CA        |  | 5,255                  |  | 1,139        |  | 4,555                                    |  | 985          |                                               |       |      |  | 1,139  |  | 5,540                   |  | 6,679                                                                  |  | 2,366                    |  | 1902                 |  | 12/90         |  | 5-40 years
|Willows, Chicago, IL                   |  | 3,670                  |  | 945          |  | 3,851                                    |  | 1,416        |                                               |       |      |  | 945    |  | 5,267                   |  | 6,212                                                                  |  | 1,577                    |  | 1995                 |  | 12/98         |  | 5-40 years
|                                       |  |                        |  |              |  |                                          |  |              |                                               |        |      | 
|Land                                   |  |                        |  |              |  |                                          |  |              |                                               |        |      |  |        |  |                         |  |                                                                        |  |                          |  |                      |  |               |  |           
|1013 Commons, New Orleans, LA          |  |                       |  | 615          |  |                                         |  | 159          |                                               | (36    | )(2) |  | 738    |  |                        |  | 738                                                                    |  | 51                       |  |                     |  | 08/98         |  |          
|2301 Valley Branch, Farmers Branch, TX |  | 3,023                  |  | 4,169        |  |                                         |  | 84           |                                               |       |      |  | 4,253  |  |                        |  | 4,253                                                                  |  |                         |  |                     |  | 09/02         |  |          
|Alamo Springs, Dallas, TX              |  |                       |  | 1,385        |  |                                         |  |             |                                               |       |      |  | 1,385  |  |                        |  | 1,385                                                                  |  |                         |  |                     |  | 09/99         |  |          
|Centura, Farmers Branch, TX            |  | 6,150                  |  | 13,300       |  |                                         |  | 65           |                                               | 30     |      |  | 13,395 |  |                        |  | 13,395                                                                 |  |                         |  |                     |  | 12/02         |  |          
|Dominion, Dallas, TX                   |  | 552                    |  | 3,931        |  |                                         |  |             |                                               |       |      |  | 3,931  |  |                        |  | 3,931                                                                  |  |                         |  |                     |  | 03/99         |  |          
|Folsom                                 |  |                       |  | 1,781        |  |                                         |  | 450          |                                               |       |      |  | 2,231  |  |                        |  | 2,231                                                                  |  |                         |  |                     |  | 10/00         |  |          
|Fruitland, Fruitland Park, FL          |  |                       |  | 253          |  |                                         |  |             |                                               | (100   | )(6) |  | 153    |  |                        |  | 153                                                                    |  |                         |  |                     |  | 05/92         |  |          
|Hollywood Casino, Farmers Branch, TX   |  | 6,222                  |  | 16,987       |  |                                         |  | 2            |                                               |       |      |  | 16,989 |  |                        |  | 16,989                                                                 |  |                         |  |                     |  | 06/02         |  |          
|Lakeshore Villas, Harris County, TX    |  |                       |  | 950          |  |                                         |  | 112          |                                               | (1     | )    |  | 1,061  |  |                        |  | 1,061                                                                  |  |                         |  |                     |  | 03/02         |  |          
|Lamar Parmer/LimestoneII, Austin, TX   |  |                       |  | 1,999        |  |                                         |  | 635          |                                               | (79    | )    |  | 2,555  |  |                        |  | 2,555                                                                  |  |                         |  |                     |  | 01/00         |  |          
|Las Colinas, Las Colinas, TX           |  |                       |  | 995          |  |                                         |  | 5            |                                               |       |      |  | 1,000  |  |                        |  | 1,000                                                                  |  |                         |  |                     |  | 01/96         |  |          
|Lemon Carlisle, Dallas, TX             |  | 1,745                  |  | 3,576        |  |                                         |  | 30           |                                               |       |      |  | 3,606  |  |                        |  | 3,606                                                                  |  |                         |  |                     |  | 02/98         |  |          
|Manhattan, Farmers Branch, TX          |  | 4,171                  |  | 11,186       |  |                                         |  | 927          |                                               | 44     |      |  | 12,157 |  |                        |  | 12,157                                                                 |  | 74                       |  |                     |  | 02/00         |  |          
|Marine Creek, Ft. Worth, TX            |  | 1,012                  |  | 3,713        |  |                                         |  | 106          |                                               |       |      |  | 3,819  |  |                        |  | 3,819                                                                  |  |                         |  |                     |  | 06/02         |  |          
|Mason Park, Houston, TX                |  |                        |  | 2,790        |  |                                         |  | 301          |                                               | (1,188 | )    |  | 1,903  |  |                        |  | 1,903                                                                  |  |                         |  |                     |  | 06/02         |  |          



58



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##### Table of Contents

SCHEDULE III

(Continued)



TRANSCONTINENTAL REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003



|                                        |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           
|--------------------------------------- |  | ---------------------- | ------- | --- | ------------ | - | ------------------------------------------ |  | ------------ | --------------------------------------------- | ----- | - | ------- | ---- | - | ---------------------- | ------- | ----------------------------------------------------------------------- | - | ------------------------ |  | -------------------- | ------- | ------------- | - | ------- |  | - | ------ |  | --------- |  | ----- |  | ----------
|                                        |  |                        |         |     | Initial Cost |   | Cost Capitalized Subsequent to Acquisition |  |              | Gross Amounts of Which Carried at End of Year |       |   |         |      |   |                        |         | Life on Which Depreciation In Latest Statement of Operation is Computed
|Property/Location                       |  | Encumbrances           |         |     | Land         |   | Building & Improvements                    |  | Improvements |                                               | Other |   |         | Land |   | Building &Improvements |         | (1) Total                                                               |   | Accumulated Depreciation |  | Date of Construction |         | Date Acquired |  
|                                        |  | (dollars in thousands)
|Mira Lago, Farmers Branch, TX           |  |                        |        |     |              |   | 541                                        |  |              |                                              |       |   | 82      |      |   |                       |         |                                                                         |   | 623                      |  |                      |        |               |   | 623     |  |   |       |  |          |  | 05/01 |  |          
|Maumelle Town Center, Maumelle, AR      |  |                        | 640     |     |              |   | 1,153                                      |  |              |                                               |       |   | 11      |      |   |                        |         |                                                                         |   | 1,164                    |  |                      |         |               |   | 1,164   |  |   |        |  |           |  |       |  |           
|Nakash                                  |  |                        | 161     |     |              |   | 113                                        |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   | 113                      |  |                      |         |               |   | 113     |  |   |        |  |           |  |       |  |           
|Nashville, Nashville, TN                |  |                        |        |     |              |   | 1,890                                      |  |              |                                              |       |   | 34      |      |   |                       |         |                                                                         |   | 1,924                    |  |                      |        |               |   | 1,924   |  |   |       |  |          |  | 06/02 |  |          
|Pac-Trust, Dallas, TX                   |  |                        | 277     |     |              |   | 1,232                                      |  |              |                                              |       |   |        |      |   |                       |         |                                                                         |   | 1,232                    |  |                      |        |               |   | 1,232   |  |   |       |  |          |  | 10/01 |  |          
|Pulaski, Pulaski County, AR             |  |                        | 1,400   |     |              |   | 2,095                                      |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   | 2,095                    |  |                      |         |               |   | 2,095   |  |   |        |  |           |  |       |  |           
|Rasor, Plano, TX                        |  |                        | 1,260   |     |              |   | 2,319                                      |  |              |                                              |       |   | 227     |      |   |                       |         |                                                                         |   | 2,546                    |  |                      |        |               |   | 2,546   |  |   |       |  |          |  | 03/02 |  |          
|Round Mt, Austin, TX                    |  |                        |        |     |              |   | 5,740                                      |  |              |                                              |       |   |        |      |   | (5,421                 | )(2)(3) |                                                                         |   | 319                      |  |                      |        |               |   | 319     |  |   |       |  |          |  | 12/86 |  |          
|Seminary West, Fort Worth, TX           |  |                        |        |     |              |   | 234                                        |  |              |                                              |       |   |        |      |   |                       |         |                                                                         |   | 234                      |  |                      |        |               |   | 234     |  |   |       |  |          |  | 07/01 |  |          
|Shefield Village, Grand Prairie, Texas  |  |                        | 975     |     |              |   | 1,643                                      |  |              |                                              |       |   |        |      |   |                       |         |                                                                         |   | 1,643                    |  |                      |        |               |   | 1,643   |  |   |       |  |          |  | 09/03 |  |          
|West End, Dallas, TX                    |  |                        | 5,766   |     |              |   | 11,405                                     |  |              |                                              |       |   | 77      |      |   | (4,013                 | )(8)    |                                                                         |   | 7,469                    |  |                      |        |               |   | 7,469   |  |   |       |  |          |  | 08/97 |  |          
|                                        |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           
|Investment Properties                   |  |                        | 562,539 |     |              |   | 185,964                                    |  |              | 363,491                                       |       |   | 281,103 |      |   | (23,189                | )       |                                                                         |   | 178,506                  |  |                      | 628,863 |               |   | 807,369 |  |   | 88,294 |  |           |  |       |  |           
|                                        |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           
|                                        |  |                        |         |     |              |   |                                            |  |              |                                               |       |  
|Properties Held for Sale                |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           
|Land                                    |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           
|Countryside Retail Center, Sterling, VA |  |                        | 22,027  |     |              |   | 2,088                                      |  |              | 18,791                                        |       |   | 40      |      |   |                       |         |                                                                         |   | 2,088                    |  |                      | 18,831  |               |   | 20,919  |  |   | 1,513  |  | 1986      |  | 09/00 |  | 40 years  
|Harmon, Sterling, VA                    |  |                        | 8,827   |     |              |   | 1,054                                      |  |              | 9,487                                         |       |   | 219     |      |   |                       |         |                                                                         |   | 1,054                    |  |                      | 9,706   |               |   | 10,760  |  |   | 809    |  | 1987      |  | 09/00 |  | 5-40 years
|Kelly Warehouses, Dallas, TX            |  |                        | 1,910   |     |              |   | 1,136                                      |  |              | 4,856                                         |       |   | 224     |      |   | (2,856                 | )(2)(9) |                                                                         |   | 1,136                    |  |                      | 2,224   |               |   | 3,360   |  |   | 713    |  | 1966/1973 |  | 03/95 |  | 5-40 years
|McKinney 36, Collin County, TX          |  |                        | 50      | (7) |              |   | 2,203                                      |  |              |                                              |       |   |        |      |   | (230                   | )(2)    |                                                                         |   | 1,973                    |  |                      |        |               |   | 1,973   |  |   |       |  |          |  | 01/98 |  |          
|Ogden, Ogden, UT                        |  |                        | 1,780   |     |              |   | 52                                         |  |              | 1,568                                         |       |   | 112     |      |   | (70                    | )       |                                                                         |   | 52                       |  |                      | 1,610   |               |   | 1,662   |  |   | 627    |  | 1979      |  | 01/86 |  | 5-40 years
|Red Cross, Dallas, TX                   |  |                        | 4,475   |     |              |   | 7,676                                      |  |              |                                              |       |   | 2       |      |   | (197                   | )       |                                                                         |   | 7,481                    |  |                      |        |               |   | 7,481   |  |   |       |  |          |  | 05/99 |  |          
|Sandison, Collin County, TX             |  |                        | 140     | (7) |              |   | 5,021                                      |  |              |                                              |       |   |        |      |   | (392                   | )(2)    |                                                                         |   | 4,629                    |  |                      |        |               |   | 4,629   |  |   |       |  |          |  | 05/98 |  |          
|Sandstone, Mesa, AZ                     |  |                        | 5,526   |     |              |   | 1,656                                      |  |              | 6,625                                         |       |   | 95      |      |   |                       |         |                                                                         |   | 1,656                    |  |                      | 6,720   |               |   | 8,376   |  |   | 1,130  |  | 1986      |  | 10/97 |  | 5-40 years
|Solco Allen, Collin County, TX          |  |                        | 80      | (7) |              |   | 1,388                                      |  |              |                                              |       |   |        |      |   | (80                    | )(2)    |                                                                         |   | 1,308                    |  |                      |        |               |   | 1,308   |  |   |       |  |          |  | 05/98 |  |          
|Stacy Road, Allen, TX                   |  |                        | 232     | (7) |              |   | 2,665                                      |  |              |                                              |       |   |        |      |   | (193                   | )(2)    |                                                                         |   | 2,472                    |  |                      |        |               |   | 2,472   |  |   |       |  |          |  | 04/97 |  |          
|State Highway 121, Collin County, TX    |  |                        | 173     | (7) |              |   | 4,354                                      |  |              |                                              |       |   |        |      |   | (2,878                 | )(2)    |                                                                         |   | 1,476                    |  |                      |        |               |   | 1,476   |  |   |       |  |          |  | 02/97 |  |          
|Watters Road, Collin County, TX         |  |                        | 140     | (7) |              |   | 1,787                                      |  |              |                                              |       |   |        |      |   | (527                   | )(2)    |                                                                         |   | 1,260                    |  |                      |        |               |   | 1,260   |  |   |       |  |          |  | 02/97 |  |          
|Whisenant, Collin County, TX            |  |                        | 23      | (7) |              |   | 631                                        |  |              |                                              |       |   |        |      |   | (59                    | )(2)    |                                                                         |   | 572                      |  |                      |        |               |   | 572     |  |   |       |  |          |  | 05/98 |  |          
|                                        |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           
|Properties Held for Sale                |  |                        | 44,440  |     |              |   | 31,711                                     |  |              | 41,327                                        |       |   | 692     |      |   | (7,482                 | )       |                                                                         |   | 27,157                   |  |                      | 39,091  |               |   | 66,248  |  |   | 4,792  |  |           |  |       |  |           
|                                        |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           
|                                        |  | $                      | 606,979 |     |              | $ | 217,675                                    |  | $            | 404,818                                       |       | $ | 281,795 |      | $ | (30,671                | )       |                                                                         | $ | 205,663                  |  | $                    | 667,954 |               | $ | 873,617 |  | $ | 93,086 |  |           |  |       |  |           
|                                        |  |                        |         |     |              |   |                                            |  |              |                                               |       |   |         |      |   |                        |         |                                                                         |   |                          |  |                      |         |               |   |         |  |   |        |  |           |  |       |  |           

---

|(1) | The aggregate cost for federal income tax purposes is $751.9 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.
|---- | -------------------------------------------------------------------------

|(11) | Property under construction.
|---- | ----------------------------



59



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##### Table of Contents

SCHEDULE III

(Continued)



TRANSCONTINENTAL REALTY INVESTORS, INC.



REAL ESTATE AND ACCUMULATED DEPRECIATION



|                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|---------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                     |  | 2003                   |         |   | 2002 |   |         | 2001 | 
|                                                     |  | (dollars in thousands) |        
|Reconciliation of Real Estate                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Balance at January 1,                                |  | $                      | 841,146 |   |      | $ | 713,348 |      |  | $ | 729,051  |  
|Additions                                            |  |                        |         |   |      |   |         |      |  |   |          |  
|Purchases, improvements and construction             |  |                        | 113,561 |   |      |   | 220,164 |      |  |   | 97,703   |  
|Real estate added from consolidation of partnerships |  |                        |        |   |      |   | 4,257   |      |  |   |         |  
|Deductions                                           |  |                        |         |   |      |   |         |      |  |   |          |  
|Sale of real estate                                  |  |                        | (80,872 | ) |      |   | (88,680 | )    |  |   | (111,986 | )
|Asset impairments                                    |  |                        | (5,007  | ) |      |   | (2,579  | )    |  |   |         |  
|Asset retirements                                    |  |                        |        |   |      |   | (5,364  | )    |  |   |         |  
|Sale of foreclosed properties                        |  |                        |        |   |      |   |        |      |  |   | (1,420   | )
|                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Balance at December 31,                              |  | $                      | 868,828 |   |      | $ | 841,146 |      |  | $ | 713,348  |  
|                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Reconciliation of Accumulated Depreciation           |  |                        |         |   |      |   |         |      |  |   |          |  
|Balance at January 1,                                |  | $                      | 81,659  |   |      | $ | 90,661  |      |  | $ | 88,187   |  
|Additions                                            |  |                        |         |   |      |   |         |      |  |   |          |  
|Depreciation                                         |  |                        | 22,655  |   |      |   | 20,445  |      |  |   | 19,705   |  
|Real estate added from consolidation of partnerships |  |                        |         |   |      |   | 817     |      |  |   |         |  
|Deductions                                           |  |                        |         |   |      |   |         |      |  |   |          |  
|Sale of real estate                                  |  |                        | (16,019 | ) |      |   | (24,900 | )    |  |   | (17,231  | )
|Asset retirements                                    |  |                        |        |   |      |   | (5,364  | )    |  |   |         |  
|                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Balance at December 31,                              |  | $                      | 88,295  |   |      | $ | 81,659  |      |  | $ | 90,661   |  
|                                                     |  |                        |         |   |      |   |         |      |  |   |          |  



60



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##### Table of Contents

SCHEDULE IV



TRANSCONTINENTAL
REALTY INVESTORS, INC.



MORTGAGE LOANS ON REAL ESTATE

December 31, 2003



|                                                                                    |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|----------------------------------------------------------------------------------- |  | ------------- | - |  | ------------------- |  | ----------------------------------------------------- |  | ----------- | ------ | ----------------------- | - | -------------------------------- |  | - | -------------------------------------------------------------------- | - |  | - | -
|Description                                                                         |  | Interest Rate |   |  | Final Maturity Date |  | Periodic Payment Terms                                |  | Prior Liens |        | Face Amount of Mortgage |   | Carrying Amounts of Mortgage (1) |  |   | Principal Amount of Loans Subject to Delinquent Principalor Interest
|                                                                                    |  |               |   |  |                     |  |                                                       |  |             |        | (dollars in thousands)  |   |                                  | 
|FIRST MORTGAGE LOANS                                                                |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|400 St. Paul Secured by an office building in Dallas, TX. Includes LOC of $250,000. |  | 6.5           | % |  | 03/07               |  | Monthly interest only payments.                       |  | $           |       |                         | $ | 4,299                            |  | $ | 4,299                                                                |   |  | $ | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|Executive Court Secured by a 41,840 sq. ft. office building in Memphis, TN.         |  | 12.0          | % |  | 12/04               |  | Excess property cash flow payments.                   |  |             |       |                         |   | 1,970                            |  |   | 1,970                                                                |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|WRAPAROUND MORTGAGE LOANS                                                           |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|Pinemont Secured by an office building in Houston, TX.                              |  | 10.40         | % |  | 07/08               |  | Monthly principal and interest payments of $6,281.    |  |             | 274    |                         |   | 467                              |  |   | 266                                                                  |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|Nakash Secured by a shopping Center in Malden, MO.                                  |  |               |   |  |                     |  | Monthly interest only payments of $13,000.            |  |             | 305    |                         |   | 902                              |  |   | 902                                                                  |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|JUNIOR MORTGAGE LOANS                                                               |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|Dallas Fund XVII Secured by an assignment of litigation proceeds. Nonperforming     |  | Varies        |   |  | 05/03               |  | One note bearing interest at the default rate of 18%. |  |             |       |                         |   | 4,303                            |  |   | 4,303                                                                |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|Pioneer Development Secured by 33.33 acres of unimproved land in Travis County, TX. |  | 10.0          | % |  | 10/08               |  | Interest only payments start in November 2007.        |  |             | 12,000 |                         |   | 2,386                            |  |   | 2,386                                                                |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|Foxwood Secured by an apartment building in Memphis, TN.                            |  | 12.0          | % |  |                     |  | Excess property cash flow payments.                   |  |             | 5,719  |                         |   | 1,092                            |  |   | 1,092                                                                |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|One Hickory Secured by an office building in Farmers Branch, TX.                    |  | 10.0          | % |  | 09/04               |  | Excess property cash flow payments.                   |  |             | 7,306  |                         |   | 11,974                           |  |   | 11,974                                                               |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|Two Hickory Secured by an office building in Farmers Branch, TX.                    |  | 12.0          | % |  |                     |  | Excess property cash flow payments.                   |  |             | 7,500  |                         |   | 4,448                            |  |   | 3,115                                                                |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|OTHER                                                                               |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|Mehrdad Moayedi Unsecured                                                           |  | 12.0          | % |  | 01/04               |  | Principal and interest due January 2004.              |  |             |       |                         |   | 34                               |  |   | 22                                                                   |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|North Augusta Plans Unsecured                                                       |  | 5.0           | % |  | 02/04               |  | Principal and interest due February 2004.             |  |             |       |                         |   | 42                               |  |   | 42                                                                   |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                      
|Apartment Development Services Secured by 100% interest in partnership.             |  | 12.0          | % |  | 06/05               |  | Principal and interest due February 2004.             |  |             |       |                         |   | 300                              |  |   | 300                                                                  |   |  |   | 
|                                                                                    |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|                                                                                    |  |               |   |  |                     |  |                                                       |  | $           | 33,104 |                         | $ | 32,217                           |  |   | 30,671                                                               |   |  | $ | 
|                                                                                    |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|Interest                                                                            |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   | 1,526                                                                |   |  |   |  
|Allowance for estimated losses                                                      |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   | (1,456                                                               | ) |  |   |  
|                                                                                    |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  
|                                                                                    |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  | $ | 30,741                                                               |   |  |   |  
|                                                                                    |  |               |   |  |                     |  |                                                       |  |             |        |                         |   |                                  |  |   |                                                                      |   |  |   |  

---

|(1) | The aggregate cost for federal income tax purposes is $24.6 million.
|--- | --------------------------------------------------------------------



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TRANSCONTINENTAL REALTY INVESTORS, INC.



MORTGAGE LOANS ON REAL ESTATE



|                                                        |  |                        |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                        |  | 2003                   |         |   | 2002 |   |         | 2001 | 
|                                                        |  | (dollars in thousands) |        
|Balance at January 1,                                   |  | $                      | 28,447  |   |      | $ | 22,689  |      |  | $ | 8,668  |  
|Additions                                               |  |                        |         |   |      |   |         |      |  |   |        |  
|New mortgage loans                                      |  |                        | 14,692  |   |      |   | 25,037  |      |  |   | 20,063 |  
|Mortgages added from consolidation of partnerships      |  |                        |        |   |      |   | 902     |      |  |   |       |  
|Deductions                                              |  |                        |         |   |      |   |         |      |  |   |        |  
|Collections of principal                                |  |                        | (12,364 | ) |      |   | (18,737 | )    |  |   | (6,042 | )
|Mortgages eliminated from consolidation of partnerships |  |                        |        |   |      |   | (1,369  | )    |  |   |       |  
|Discount on sale of note receivable                     |  |                        | (104    | ) |      |   |        |      |  |   |       |  
|Write off of principal due to discount for early payoff |  |                        |        |   |      |   | (75     | )    |  |   |       |  
|                                                        |  |                        |         |   |      |   |         |      |  |   |        |  
|Balance at December 31,                                 |  | $                      | 30,671  |   |      | $ | 28,447  |      |  | $ | 22,689 |  
|                                                        |  |                        |         |   |      |   |         |      |  |   |        |  



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



Not applicable.



|ITEM 9A. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



As required by rule 13a-15(b), TCIs management, including the Acting Principal Executive Officer and Principal Accounting Officer, conducted an
evaluation as of the end of the period covered by this report, of the effectiveness of TCIs disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the chief executive officer and the chief
financial officer concluded that TCIs disclosure controls and procedures were effective as of the end of the period covered by this report. As required by rule 13a-15(d), TCIs management, including the Acting Principal Executive Officer
and Principal Accounting Officer, also conducted an evaluation of TCIs internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are reasonably
likely to materially affect, TCIs internal control over financial reporting. Based on the evaluation, there has been no such change during the fourth fiscal quarter.



It should be noted that any system of controls, however well designed and operated, can only provide reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.



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---



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.



After December 31, 2003, a number of changes occurred in the composition of the Board of Directors of TCI, the creation of
certain Board committees, the adoption of Committee charters, the adoption of a Code of Ethics for Senior Financial Officers, and the adoption of Guidelines for Director Independence. Also, the composition of the members of the Board of Directors
changed with the resignation of Earl D. Cecil (on February 29, 2004) as well as the election of independent directors, Ted R. Munselle and Sharon Hunt on February 20, 2004.



It is the Boards objective that a majority of the Board consist of independent directors. For a director to be
considered independent, the Board must determine that the Director does not have any direct or indirect material relationship with TCI. The Board has established guidelines to assist it in determining director independence which conform to, or are
more exacting than, the independence requirements in the New York Stock Exchange listing rules. The independence guidelines are set forth in TCIs Corporate Governance Guidelines. The text of this document has been posted on
TCIs internet website at http://www.transconrealty-invest.com and is available in print to any shareholder who requests it. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making
an independent determination.



All members of the Audit
Committee and Nominating and Corporate Governance Committee must be independent directors. Members of the Audit Committee must also satisfy additional independence requirements, which provide (i) that they may not accept, directly or indirectly, any
consulting, advisory, or compensatory fee from TCI or any of its subsidiaries other than their Directors compensation (other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other committee of the
Board), and (ii) no member of the Audit Committee may be an affiliated person of TCI or any of its subsidiaries, as defined by the Securities and Exchange Commission.



The current Directors of TCI are listed below, together with their ages, terms of service, all positions and offices with
TCI or its former advisor, BCM or Prime, which took over as contractual advisor for BCM on July 1, 2003, 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, Prime or an officer of TCI or an officer or director of an affiliate 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 or Prime, 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 70, Director (Affiliated) (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; General Manager (since April 2002) of Unified Housing Foundation, Inc., a nonprofit corporation; Director and Chairman of the Board of ARI (since November 2002); and
Director (since April 1990) and Chairman of the Board (since January 1995) of IORI.



HENRY BUTLER:    Age 53, Director (Affiliated) (since December 2001).



BrokerLand Sales (since 1992) of BCM; Owner/Operator (1989 to 1991) of Butler Interests, Inc.; Director (since July 2003) of ARI;
and Director (December 2001 to July 2003) of IORI.



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MARTIN L. WHITE:    Age 64, 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 (January 1995 to March 2004) of
IORI.



TED R. MUNSELLE:    Age 48,
Director (Independent) (since February 2004).



Vice President and Chief Financial Officer of Landmark Nurseries, Inc.; Employed in the accounting industry from 1997 until October 1998; Certified Public Accountant in the State of Texas; and Director (since February 2004) of ARI.



SHARON HUNT:    Age 61, Director
(Independent) (since February 2004).



Licensed
Realtor in Dallas, Texas with Cook Realtors; President and Owner of Sharons Pretzels, Inc.; Director (since 1991) of a 501(c)(3) non-profit corporation involved in the acquisition, renovation and operation of real estate; and Director (since
February 2004) of ARI.



Board Committees



The Board of Directors held 10 meetings during 2003. 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 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 standing Audit, Compensation and Governance and Nominating Committees. The Audit Committee was formed on February 19, 2003, and its function is to review TCIs operating and accounting procedures. A Charter of the Audit Committee
has also been adopted by the Board. The current members of the Audit Committee, all of whom are independent within the meaning of the SEC Regulations, the listing standards of the New York Stock Exchange, Inc. and TCIs Corporate Governance
Guidelines, are Messrs. White and Munselle and Ms. Hunt. Mr. Ted R. Munselle, a member of the Committee is qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the Board has determined that he has accounting
and related financial management expertise within the meaning of the listing standards of the New York Stock Exchange, Inc. The predecessor Audit Committee met nine times during 2003.



The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to
corporate governance, including reviewing and monitoring implementation of TCIs Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to
the Board regarding such candidates. The Committee also prepares and supervises the Boards annual review of director independence and the Boards performance self-evaluation. The Charter of the Governance and Nominating Committee was
adopted on March 22, 2004. The members of the Committee are Messrs. Munselle (Chairman) and White and Ms. Hunt.



The Board has also formed a Compensation Committee of the Board of Directors, adopted a Charter for the Compensation Committee on March 22, 2004, and
selected Ms. Hunt (Chairman) and Messrs. Munselle and White as the members of such Committee.



The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:



|                |  |                 |  |                                     |  |                       
|--------------- |  | --------------- |  | ----------------------------------- |  | ----------------------
|                |  | Audit Committee |  | Governance and Nominating Committee |  | Compensation Committee
|Ted P. Stokley  |  |                 |  |                                     |  |                       
|Ted R. Munselle |  | T               |  | T                                   |  | T                     
|Sharon Hunt     |  | T               |  | T                                   |  | T                     
|Martin L. White |  | T               |  | T                                   |  | T                     
|Henry A. Butler |  |                 |  |                                     |  |                       



During February 2004,
the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during the year by the New York Stock Exchange, Inc. Pursuant to the Guidelines, the Board undertook its
annual review of director independence, and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and TCI and its subsidiaries and affiliates, including those
reported under Certain Relationships and Related Transactions below. The Board also examined transactions and



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relationship between directors or their affiliates and members of TCIs senior management or their affiliates. As
provided in the Guidelines, the purpose of such review was to determine whether such relationships or transactions were inconsistent with the determination that the director is independent.



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 and General Counsel; and Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer. Their positions with TCI are not subject to a vote of stockholders.
Their ages, terms of service, all positions and offices with TCI or Prime, 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 49, 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 July 2003) of Prime and Prime Income Asset Management, Inc. (PIAMI); 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 56, Executive Vice
PresidentGeneral Counsel (since February 2004); Secretary (since February 2004); 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Residential (since July 2003) of Prime and PIAMI; Executive Vice PresidentGeneral Counsel (since February 2004), Secretary (since February 2004), Executive Vice PresidentResidential (since June
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 51, Acting Principal Executive Officer, Executive Vice President and
Chief Financial Officer (since January 2002).



Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer (since July 2003) of Prime and PIAMI; Acting Principal Executive Officer, 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).



Officers



Although not an executive officer, Robert A. Waldman at December 31, 2003 served as Senior Vice President, Secretary and
General Counsel. His position with TCI was not subject to a vote of stockholders. His age, term of service, all positions and offices with TCI, Prime or BCM, other principal occupations, business experience and directorships with other companies
during the last five years or more is set forth below. On February 5, 2004, Mr. Waldman resigned from the company.



ROBERT A. WALDMAN:    Age 51, (Resigned on February 5, 2004) Senior Vice President and General Counsel (since July 2003) of
Prime and PIAMI; 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.



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



Code of Ethics



TCI has adopted a code of ethics entitled Code of Business Conduct and
Ethics that applies to all directors, officers, and employees (including those of the contractual Advisor to TCI). In addition, TCI has adopted a code of ethics entitled Code of Ethics for Senior Financial Officers that applies to
the principal executive officer, president, principal financial officer, chief financial officer, principal accounting officer, and controller.



The text of these documents has been posted on TCIs internet website at http://www.transconrealty-invest.com and are available in print to
any shareholder who requests them.



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 2003. 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 Prime under the supervision of the Board. The duties of Prime 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. Prime also serves as a consultant to the Board in connection with the business plan and investment decisions made by the
Board.



BCM served as TCIs advisor from March 1989 to
June 30, 2003. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by PAMI under the same terms as BCMs advisory agreement. PIAMI is owned by Realty Advisors (79%) and Syntek West, Inc. (21%), related parties. Syntek West,
Inc. is owned by Gene Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (PIAMI). On October 1, 2003, Prime, which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. The duties
of Prime 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. Prime also serves as a consultant in
connection with TCIs business plan and investment decisions made by the Board.



Prime is a company of which Messrs. Branigan, Corna, and Kimbrough serve as executive officers. Prime is indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of
Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Primess business, including the rendering of advisory services and the making of
investment decisions for itself and for TCI.



Under the
Advisory Agreement, Prime 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 Prime 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 Prime 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 Prime shall be deemed to be in a fiduciary relationship to the stockholders; contains a broad standard governing Primes liability for losses by TCI; and contains guidelines for Primes allocation of
investment opportunities as among itself, TCI and other entities it advises.



The Advisory Agreement provides for Prime 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 Prime 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



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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 Prime or an
affiliate of Prime 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 Prime or any affiliate of Prime 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 Prime or any affiliate of Prime 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 Prime or an affiliate of Prime 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, Prime or an affiliate of Prime 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 Prime or an affiliate of Prime without the approval of TCIs Board of
Directors. No fee shall be paid on loan extensions.



Under the
Advisory Agreement, Prime 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 Advisory Agreement based on the book value, net asset value and net income of TCI during the fiscal year. BCM, as advisor at the time, was required to refund $1.4 million of the 2002
advisory fee under this provision.



Additionally, if management
were to request that Prime render services to TCI other than those required by the Advisory Agreement, Prime or an affiliate of Prime 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 had engaged, on a non-exclusive basis, Regis Realty, Inc. (Regis), a related party, to perform brokerage services for TCI until December 2002. Beginning January 1, 2003, Regis Realty I LLC performs brokerage
services for TCI.



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



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



|                     |  |                                                                                         
|-------------------- |  | ----------------------------------------------------------------------------------------
|Mickey N. Phillips:  |  | Director                                                                                
|Ryan T. Phillips:    |  | Director                                                                                
|Mark W. Branigan:    |  | Executive Vice PresidentResidential                                                    
|Louis J. Corna:      |  | Executive Vice PresidentGeneral Counsel, Executive Vice PresidentTax, Secretary       
|Ronald E. Kimbrough: |  | Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer
|Dan S. Allred:       |  | Senior Vice PresidentLand Development                                                  



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 indirectly owns Prime and, in such capacity, has
substantial contact with the management of Prime and input with respect to its performance of advisory services to TCI.



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Property Management



Since February 1, 1990, affiliates of BCM have provided property management services to TCI. Currently, 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 Highland Realty Services, Inc. (Highland), a related party. Triad
subcontracted the property-level management and leasing of 39 of TCIs commercial properties to Regis which was a company owned by Highland, until December 2002. Regis was entitled to receive property and construction management fees and
leasing commissions in accordance with the terms of its property-level management agreement with Triad, until December 2002. Regis also was entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive
brokerage agreement. Since January 1, 2003, Regis Realty I, LLC (Regis I), provided these services. Regis I is owned by Highland. Regis Hotel Corporation, a related party, managed TCIs five hotels, until December 2002. Since
January 1, 2003, Regis Hotel I, LLC, managed TCIs five hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland.



Real Estate Brokerage



Regis also provided real estate brokerage services to TCI (on a non-exclusive basis), until December 2002. Regis was 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. Beginning January 1, 2003, Regis I provides
these services. The sole member of Regis I is Highland.



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 Prime, TCIs advisor, are compensated by Prime. Such executive officers perform a variety of services for Prime and the amount of their compensation is determined solely by Prime. Prime 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 Prime.



The only remuneration paid by TCI is to the Directors who are
not officers or directors of Prime 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 2003, $91,113 was paid to the Independent Directors in total
Directors fees for all services, including the annual fee for service during the period January 1, 2003 through December 31, 2003, and 2003 special service fees as follows: Earl D. Cecil, $32,255; Ted P. Stokely, $37,103; and Martin L. White,
$32,250.



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 receives 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, 2004, TCI had 140,000 shares of Common Stock reserved for issuance under the Directors Stock Option Plan of which 30,000 options were outstanding.



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Performance Graph



The following performance graph compares the cumulative total stockholder return on TCIs shares of Common Stock with the Dow Jones US Total Market
Index (DJ Total Market Index) and the Dow Jones Real Estate Investment Index (DJ Real Estate Index). The comparison assumes that $100 was invested on December 31, 1998, 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 YEARS CUMULATIVE TOTAL RETURN



LOGO



|                           |  |        |  |        |  |        |  |        |  |        |  |       
|-------------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                           |  | 1998   |  | 1999   |  | 2000   |  | 2001   |  | 2002   |  | 2003  
|TCI                        |  | 100.00 |  | 103.41 |  | 75.95  |  | 137.35 |  | 150.95 |  | 143.17
|DJ Real Estate Index       |  | 100.00 |  | 94.69  |  | 120.74 |  | 134.99 |  | 139.90 |  | 191.51
|DJ Total U.S. Market Index |  | 100.00 |  | 122.54 |  | 111.35 |  | 98.09  |  | 76.43  |  | 99.92 



|ITEM 12.SECURITY |  | OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|---------------- |  | -----------------------------------------------------



Securities Authorized for Issuance Under Equity Compensation Plans



The following table provides information as of December 31, 2003 regarding compensation plans (including individual compensation arrangements) under which
equity securities of TCI are authorized for issuance.



|                                                     |  |                                                                                                |  |                                                                                 |  |                                                                                                                                                
|---------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                        |  | Number of Securities to be Issued Upon Exercise of Outstanding Options,Warrants and
Rights (a) |  | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) |  | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
|2000 Stock Option Plan approved by stockholders      |  |                                                                                               |  |                                                                                |  | 300,000                                                                                                                                        
|Directors Stock Option Plan approved by stockholders |  |                                                                                               |  |                                                                                |  | 65,000                                                                                                                                         
|                                                     |  |                                                                                                |  |                                                                                 |  |                                                                                                                                                
|Total                                                |  |                                                                                               |  |                                                                                |  | 365,000                                                                                                                                        
|                                                     |  |                                                                                                |  |                                                                                 |  |                                                                                                                                                



69



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##### Table of Contents

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 19, 2004.



|                                                                                                        |  |                                           |  |                                 |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- |  | ------------------------------- | -
|Name and Address of Beneficial Owner                                                                    |  | Amount and Nature of Beneficial Ownership |  | Approximate Percent of Class(1) |  
|EQK Holdings, Inc.(2) 1800 Valley View Lane Suite 300 Dallas, Texas 75234                               |  | 5,278,149                                 |  | 65.1                            | %
|                                                                                                        |  |                                          
|Transcontinental Realty Acquisition Corporation (3) 1800 Valley View Lane Suite 100 Dallas, Texas 75234 |  | 1,213,226                                 |  | 15.0                            | %

---

|(1) | Percentage is based upon 8,113,669 shares of Common Stock outstanding at March 19, 2004.
|--- | ----------------------------------------------------------------------------------------

|(2) | EQK Holdings, Inc. (EQK) is a wholly-owned subsidiary of ART, which is a wholly-owned subsidiary of ARI.
|--- | ----------------------------------------------------------------------------------------------------------

|(3) | Transcontinental Realty Acquisition Corporation (TRAC) 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 19, 2004.



|                                                                |  |                                           |              |  |                                 |  
|--------------------------------------------------------------- |  | ----------------------------------------- | ------------ |  | ------------------------------- | -
|Name of Beneficial Owner                                        |  | Amount and Nature of Beneficial Ownership |              |  | Approximate Percent of Class(1) |  
|Mark W. Branigan                                                |  | 6,491,375                                 | (2)          |  | 80.0                            | %
|Henry A. Butler                                                 |  | 6,491,375                                 | (3)          |  | 80.0                            | %
|Louis J. Corna                                                  |  | 6,491,375                                 | (2)          |  | 80.0                            | %
|Ronald E. Kimbrough                                             |  | 6,491,375                                 | (2)          |  | 80.0                            | %
|Ted P. Stokely                                                  |  | 6,501,375                                 | (3)(4)       |  | 80.1                            | %
|Martin L. White                                                 |  | 6,501,375                                 | (3)(5)       |  | 80.1                            | %
|Sharon Hunt                                                     |  | 6,491,375                                 | (3)          |  | 80.0                            | %
|Ted Munselle                                                    |  | 6,491,375                                 | (3)          |  | 80.0                            | %
|All Directors and Executive Officers as a group (9 individuals) |  | 6,501,375                                 | (2)(3)(4)(5) |  | 80.1                            | %

---

|(1) | Percentage is based upon 8,113,669 shares of Common Stock outstanding at March 19, 2004 and 20,000 shares which may be issued under existing Director Stock Options.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 5,278,149 shares owned by EQK and 1,213,226 shares owned by TRAC. Each of the executive officers of ARI may be deemed to be beneficial owners of such shares by virtue of
their positions as executive officers of ARI and its subsidiaries, EQK and TRAC. The executive officers of TCI disclaim such beneficial ownership.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 5, 278,149 shares owned by EQK and 1,213,226 shares owned by TRAC. Messrs. Butler, Stokely and Munselle and Ms. Hunt may be deemed to be beneficial owners of such shares by
virtue of their positions as directors of ARI. Messrs. Butler, Stokely and Munselle and Ms. Hunt disclaim such beneficial ownership.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 10,000 shares which may be acquired by Mr. Stokely pursuant to the Director Stock Option Plan.
|--- | -------------------------------------------------------------------------------------------------------

|(5) | Includes 10,000 shares which may be acquired by Mr. White pursuant to the Director Stock Option Plan.
|--- | -----------------------------------------------------------------------------------------------------



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##### Table of Contents

|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. Effective July 1, 2004, Prime replaced BCM as the contractual advisor to TCI. Prime is indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of Prime, but
serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Primes business, including the rendering of advisory services and the making of investment
decisions for itself and for TCI.



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 Highland, a related party. Triad subcontracted the
property-level management and leasing of 39 of TCIs commercial properties, and its five hotels to Regis, a related party, which is a company owned by Highland, until December 2002. Since January 1, 2003, Regis I provided this service.



Regis also provided real estate brokerage services for TCI, on
a non-exclusive basis, and receives brokerage commissions in accordance with the brokerage agreement, until December 2002. Since January 1, 2003, Regis I provided this service.



Two of TCIs Directors also serve as directors of IORI. The Directors owe fiduciary duties to IORI as well as to TCI
under applicable law. At December 31, 2003, TCI owned approximately 24.0% of the outstanding common shares of IORI. Prime also serves as advisor to ARI. Messrs. Stokely, White, Munselle and Hunt serve also as Directors of ARI and Messrs. Stokley and
White serve also as Directors of IORI. Messrs. Branigan, Corna, and Kimbrough serve as executive officers of ARI.



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.



Operating Relationships



In the year ended December 31, 2003, TCI received $175,000 in rent from BCM for BCMs lease at Addison Hanger. BCM owns
a corporate jet that is housed at the hanger and TCI has available space at the hanger.



Property Transactions



In January 2002, TCI
purchased 100% of the outstanding common shares of ART Two Hickory Corporation from ARI, for $4.4 million. See NOTE 3. NOTES AND INTEREST RECEIVABLE. The purchase price was determined based upon the market value of the property
exchanged, using a market rate multiple of net operating income (cap rate) of 7.0%. The business purpose of the transaction was for TCI to make an equity investment in Two Hickory anticipating a profitable return.



In February 2002, TCI sold a $2.0 million senior participation interest in a
loan to IORI. See NOTE 3. NOTES AND INTEREST RECEIVABLE. Management determined that TCI could benefit from the increase in cash and decrease its notes receivable outstanding portfolio.



In March 2002, TCI paid cash of $600,000 and received from ARI two parcels of
land, a 24.5 acre tract of Rasor land, a 16.89 acre tract of Lakeshore Villas land, and the 45,623 sq. ft. Oaktree Village Shopping Center in exchange for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The exchange value prices for the
shopping centers were determined based on a cap rate of 10.5% and the value for the Rasor and Lakeshore Villas land was determined on appraised rates of $3.36 and $1.29, respectively, per square foot. The business purpose of the transaction was for
TCI to construct apartments on the Rasor and Lakeshore Villas land and to give ample value for the property TCI exchanged, the Oaktree Shopping Center was added to the transaction. See NOTE 2. REAL ESTATE.



In April 2002, TCI purchased 100% of the following entities from ARI: Garden
Confederate Point, L.P., Garden Foxwood, L.P., Garden Woodsong, L.P. and ART One Hickory Corporation for $10.0 million. See NOTE 3. NOTES AND INTEREST RECEIVABLE. The purchase price for these entities was determined based on a cap rate
of 8.41% for the partnerships and 7.0% for ART One Hickory Corporation. The business purpose of the transaction was for TCI to make an equity investment in the entities anticipating a profitable return.



71



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##### Table of Contents

In June 2002, TCI purchased Centura Tower, Ltd. partnership, which owns the Centura Tower Office Building
from ARI for $50.0 million. See NOTE 2. REAL ESTATE. The purchase price for the Centura Tower was determined based on appraised value and replacement cost. The business purpose of the transaction was for TCI to acquire a Class A office
building with significant upside potential anticipating a profitable return.



Also in June 2002, TCI purchased five parcels of unimproved land from ARI: the Hollywood Casino, Marine Creek, Mason Park, Nashville and Palm Desert land parcels. See NOTE 2. REAL ESTATE. The purchase
price of the Hollywood Casino land was determined based on an appraised rate of $9.10 per square foot. The business purpose of the transaction was for TCI to consolidate its holdings within the Mercer Crossing development. The purchase price for the
Marine Creek, Mason Park, Nashville and Palm Desert land parcels was determined based on appraised rates of $2.00, $3.56, $4.00 and $1.48 per square foot, respectively. The business purpose of the transaction was for TCI to develop apartments on
these four tracts of land.



In October 2002, a short term
working capital loan to BCM for a total of $4.0 million was assumed by TCI. The loan is secured on the Red Cross land, requires quarterly payments and was due in October 2002. This loan was extended to and paid in full in September 2003. See NOTE 7.
NOTES AND INTEREST PAYABLE.



In December 2002, TCI
purchased the NLP/CH, Ltd. partnership, which owns the Centura land parcel, from ARI. See NOTE 2. REAL ESTATE. The purchase price was determined based on an appraised rate of $34.89 per share foot. The business purpose of the transaction
was for TCI to construct apartments on the land.



As more fully
described in ITEM 2. PROPERTIES-Real Estate, TCI is a partner with IORI in Nakash Income Associates. TCI owns 345,728 shares of IORIs Common Stock, an approximate 24.0% interest. At December 31, 2003, the market value of the IORI
common shares was $5.3 million.



At December 31, 2003, 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
19, 2004, ARI owned approximately 64.5% of TCIs outstanding Common Stock. At December 31, 2003, the market value of the ARI common shares owned by TCI was $6.8 million.



In February 2002, a short term working capital loan to BCM for a total of $2.5 million was assumed by TCI. The loan is
secured by the Stone Oak Apartments in San Antonio, Texas, requires all principal and interest due and payable on April 28, 2003. TCI sold Stone Oak Apartments in July 2003 and paid the principal and accrued interest in full.



In 2003, TCI paid BCM and Prime, its affiliates and related parties $6.2
million in advisory, incentive and net income fees, $845,000 in mortgage brokerage and equity refinancing fees, $117,000 in property acquisition fees, $1.5 million in real estate brokerage commissions, $4.1 million in construction supervision fees
and $2.1 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of BCM or Prime. In addition, as provided in the Advisory Agreement, BCM and Prime
received cost reimbursements of $1.6 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, 2003,
TCI had receivables of $3.1 million, $1.7 million and $608,000 from Prime, GS Realty, and ARI, respectively. Also at December 31, 2003, TCI owed $706,000 and $260,000 to GS Realty and IORI, respectively.



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.



72



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##### Table of Contents

|ITEM 14. |  | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- |  | --------------------------------------



The following table sets for the aggregate fees for professional services rendered to or for TCI by BDO Seidman, LLP for 2003 and 2002:



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|Type of Fee        |  | 2003 |         | 2002
|Audit Fees         |  | $    | 219,524 |      | $ | 218,192
|Audit Related Fees |  |      |         |      |   |        
|Tax Fees           |  |      | 61,093  |      |   | 37,092 
|All Other Fees     |  |      |        |      |   | 50,192 
|                   |  |      |         |      |   |        
|Total              |  | $    | 280,617 |      | $ | 305,476
|                   |  |      |         |      |   |        



The audit fees for
2003 and 2002, respectively, were for professional services rendered for the audits and reviews of the consolidated financial statements of TCI. Tax fees for 2003 and 2002, respectively, were for services related to federal and state tax compliance
and advice. Other fees for 2002 were primarily for 8K reviews and filings and assistance related to a tender offer of TCI and IORI by ARI.



The audit committee has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The
Audit Committee has the responsibility to engage and terminate TCIs independent auditors, to pre-approve their performance of audit services and permitted non-audit services, to approve all audit and non-audit fees, and to set guidelines for
permitted non-audit services and fees. All fees for 2003 and 2002 were pre-approved by the Audit Committee or were within the pre-approved guidelines for permitted non-audit services and fees established by the Audit Committee, and there were no
instances of waiver of approved requirements or guidelines during the same periods.



Under the Sarbanes-Oxley Act of 2002 (the SO Act), and the rules of the Securities and Exchange Commission (the SEC), the Audit Committee of the Board of Directors is responsible for the
appointment, compensation and oversight of the work of the independent auditor. The purpose of the provisions of the SO Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and
responsibility for the appointment, compensation and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent
directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SO Act, the SEC issued rules specifying the types of services that an independent
may not provide to its audit client, and governing the Audit Committees administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to preapprove the audit and non-audit services
performed by the independent auditor in order to assure that they do not impair the auditors independence. Accordingly, the Audit Committee has adopted a preapproval policy of audit and non-audit services (the Policy), which sets
forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be preapproved. Consistent with the SEC rules establishing two different approaches to preapproving non-prohibited services, the Policy
of the Audit Committee covers Preapproval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and compliance services, and U.S. tax
compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and the
approval and rejection of each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditors independence from management. Typically, in
addition to the generally preapproved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit
Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to preapprove services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit
services, and such authority may only be exercised when the Audit Committee is not in session.



73



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##### Table of Contents

PART IV



|ITEM 15.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, 2003 and 2002



Consolidated Statements of OperationsYears Ended December 31, 2003, 2002 and 2001



Consolidated Statements of Stockholders EquityYears Ended December 31, 2003, 2002 and 2001



Consolidated Statements of Cash FlowsYears Ended December 31, 2003, 2002 and 2001



Notes to Consolidated Financial Statements



| | 2. | Financial Statement Schedules
| | -- | -----------------------------



Schedule IIIReal Estate and Accumulated Depreciation



Schedule IVMortgage Loans on Real Estate



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, 2003).



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, 2003).



| | (b) | Reports on Form 8-K: During the last quarter of the period covered by this report, the following reports on Form 8-K were filed on the dates indicated reporting the items set forth
below:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Current Report on Form
8-K for event occurring on October 1, 2003 (dated October 14, 2003) reporting under Item 5 Other Events and Regulation FD Disclosure.



74



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##### Table of Contents

| | (c) | Exhibits
| | --- | --------



The following documents are filed as Exhibits to this Report:



|               |     |  |                                                                                                                                                                                                                                                                                                                                                                                           
|-------------- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |     |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                    
|3              | .0  |  | Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 1991).                                                                                                                                                                                 
|3              | .1  |  | Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrants Current Report on Form 8-K, dated June 3, 1996).                                                                                                                                                                                     
|3              | .2  |  | Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrants Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                          
|3              | .3  |  | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
|3              | .4  |  | Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B
Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).          
|3              | .5  |  | Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C
Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).            
|3              | .6  |  | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated
December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001).                                          
|3              | .7  |  | By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrants Annual Report on Form 10-K for the year ended December 31,
1991).                                                                                                                                                                                                    
|10             | .0  |  | Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the
Registrants Current Report on Form 8-K for event occurring October 1, 2003).                                                                                                                     
|21             | .0* |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                           
|31             | .0* |  | Rule 13a-14(a) Certification by Acting Principal Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                           
|32             | .0* |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                   

---

|* | Filed herewith.
|- | ---------------



75



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##### Table of Contents

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.



|                       |  |     |  |                            |  |                                                                                                                                                             
|---------------------- |  | --- |  | -------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |  |     |  |                            |  | TRANSCONTINENTAL REALTY INVESTORS, INC.                                                                                                                     
|                       |  |    
|Dated:  March 30, 2004 |  | 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)



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.



|                                              |  |                                                                                                                                          |  |               
|--------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                     |  | Title                                                                                                                                    |  | Date          
|                                              |  |                                                                                                                                         
|/s/    TED P.
STOKELYTed P.
Stokely           |  | Chairman of the Board and Director                                                                                                       |  | March 30, 2004
|                                              |  |                                                                                                                                         
|/s/    HENRY A.
BUTLERHenry A.
Butler         |  | Director                                                                                                                                 |  | March 30, 2004
|                                              |  |                                                                                                                                         
|/s/    MARTIN L.
WHITEMartin L.
White         |  | Director                                                                                                                                 |  | March 30, 2004
|                                              |  |                                                                                                                                         
|/s/    TED R.
MUNSELLETed R.
Munselle         |  | Director                                                                                                                                 |  | March 30, 2004
|                                              |  |                                                                                                                                         
|/s/    SHARON
HUNTSharon Hunt                 |  | Director                                                                                                                                 |  | March 30, 2004
|                                              |  |                                                                                                                                         
|/s/    RONALD E.
KIMBROUGHRonald E.
Kimbrough |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive
Officer) |  | March 30, 2004



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##### Table of Contents

ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX



For the Year Ended December 31, 2003



|              |   |  |                                                                                                                                                                                                                                                                                                                                                                                           
|------------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |   |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                    
|3.0           |   |  | Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 1991).                                                                                                                                                                                 
|3.1           |   |  | Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrants Current Report on Form 8-K, dated June 3, 1996).                                                                                                                                                                                     
|3.2           |   |  | Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrants Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                          
|3.3           |   |  | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
|3.4           |   |  | Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B
Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).          
|3.5           |   |  | Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C
Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).            
|3.6           |   |  | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated
December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001).                                          
|3.7           |   |  | By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrants Annual Report on Form 10-K for the year ended December 31,
1991).                                                                                                                                                                                                    
|10.0          |   |  | Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the
Registrants Current Report on Form 8-K for event occurring October 1, 2003).                                                                                                                     
|21.0          | * |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                           
|31.0          | * |  | Rule 13a-14(a) Certification by Acting Principal Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                           
|32.0          | * |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                   



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