##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended
    September 30, 2004                                       
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number 0-49782

T REIT, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                                 |  |                                                                           
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------
|Virginia                                                                                                         |  | 52-2140299                                                                
|(State or other jurisdiction of
    incorporation or organization)                                               |  | (I.R.S. Employer
    Identification No.)                                  
|                                                                                                                
|1551 N. Tustin Avenue,
    Suite 200
    Santa Ana, California 92705(Address of principal executive
    offices) |  | (877) 888-7348(Registrants telephone
    number,
    including area code)

N/A

(Former name)


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

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

As
of November 15, 2004, there were 4,612,000 shares of
common stock of T REIT, Inc. outstanding.



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INDEX

|                                   |  |                                                                                           |    |                                                                                                                                                                                   |    |  |   | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- |  | - | 
|                                   |  |                                                                                           |    | Page                                                                                                                                                                             
|                                   |  |                                                                                           |    |                                                                                                                                                                                  
|PART I 
    FINANCIAL INFORMATION
|Item 1.                            |  | Financial Statements                                                                      |    |                                                                                                                                                                                   | 2  | 
|                                   |  |                                                                                           |    | Condensed Consolidated
    Balance Sheets as of September 30, 2004 and
    December 31, 2003 (Unaudited)                                                                          |    |  | 3 | 
|                                   |  |                                                                                           |    | Condensed Consolidated
    Statements of Operations and Comprehensive Operations for the
    three-month and nine-month periods ended September 30, 2004
    and 2003 (Unaudited) |    |  | 4 | 
|                                   |  |                                                                                           |    | Condensed Consolidated
    Statement of Shareholders Equity for the nine-month period
    ended September 30, 2004 (Unaudited)                                                   |    |  | 5 | 
|                                   |  |                                                                                           |    | Condensed Consolidated
    Statements of Cash Flows for the nine-month periods ended
    September 30, 2004 and 2003 (Unaudited)                                                  |    |  | 6 | 
|                                   |  |                                                                                           |    | Notes to Condensed
    Consolidated Financial Statements                                                                                                                          |    |  | 8 | 
|Item 2.                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |                                                                                                                                                                                   | 23 | 
|Item 3.                            |  | Quantitative and Qualitative
    Disclosure About Market Risks                            |    |                                                                                                                                                                                   | 33 | 
|Item 4.                            |  | Controls and Procedures                                                                   |    |                                                                                                                                                                                   | 34 | 
|                                  
|PART II 
    OTHER INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                         |    |                                                                                                                                                                                   | 35 | 
|Item 2.                            |  | Unregistered Sales of Equity
    Securities and Use of Proceeds                           |    |                                                                                                                                                                                   | 36 | 
|Item 3.                            |  | Defaults Upon Senior
    Securities                                                       |    |                                                                                                                                                                                   | 36 | 
|Item 4.                            |  | Submission of Matters to a
    Vote of Security Holders                                   |    |                                                                                                                                                                                   | 36 | 
|Item 5.                            |  | Other Information                                                                         |    |                                                                                                                                                                                   | 36 | 
|Item 6.                            |  | Exhibits and Reports on
    Form 8-K                                                      |    |                                                                                                                                                                                   | 36 | 
|Signatures                         |  |                                                                                           | 39 |                                                                                                                                                                                  
|EXHIBIT 31.1                      
|EXHIBIT 31.2                      
|EXHIBIT 32.1                      
|EXHIBIT 32.2                      



1



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##### Table of Contents



T REIT, INC



FORWARD-LOOKING STATEMENTS


PART I  FINANCIAL
INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

The accompanying September 30, 2004 and 2003
interim financial statements of T REIT, Inc.
(Company) required to be filed with this
Form 10-Q Quarterly Report were prepared by management
without audit and commence on the following page, together with
the related notes to the condensed consolidated financial
statements. In the opinion of management, these interim
financial statements present fairly the financial condition,
results of operations and cash flows of the Company, but should
be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31,
2003 included in the Companys Annual Report on
Form 10-K/A previously filed with the Securities and
Exchange Commission.

2



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T REIT, INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS

(Unaudited)


|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------- | ---------- | ------------ |  | - | ---------- | ---------- | 
|                                                                                                                                                                                                      |                                           | September 30, |            | December 31,
|                                                                                                                                                                                                      |                                           | 2004          |            | 2003        
|                                                                                                                                                                                                      |                                           |               |            |             
|ASSETS                                                                                                                                                                                               
|Real estate investments:                                                                                                                                                                              |                                           |               |            |              |  |   |            |           
|                                                                                                                                                                                                      | Operating properties, net                 |               | $          | 24,005,000   |  |   | $          | 15,747,000 | 
|                                                                                                                                                                                                      | Investments in unconsolidated real estate |               |            | 20,798,000   |  |   |            | 19,331,000 | 
|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |           
|                                                                                                                                                                                                      |                                           |               | 44,803,000 |              |  |   | 35,078,000 |           
|Cash and cash equivalents                                                                                                                                                                             |                                           |               | 6,729,000  |              |  |   | 12,189,000 |           
|Restricted cash                                                                                                                                                                                       |                                           |               | 671,000    |              |  |   | 574,000    |           
|Investment in marketable securities                                                                                                                                                                   |                                           |               | 599,000    |              |  |   |           |           
|Accounts receivable, net                                                                                                                                                                              |                                           |               | 44,000     |              |  |   | 37,000     |           
|Accounts receivable from related parties                                                                                                                                                              |                                           |               | 1,109,000  |              |  |   | 538,000    |           
|Real estate deposits                                                                                                                                                                                  |                                           |               |           |              |  |   | 11,000     |           
|Other assets, net                                                                                                                                                                                     |                                           |               | 4,476,000  |              |  |   | 296,000    |           
|Notes receivable                                                                                                                                                                                      |                                           |               | 3,364,000  |              |  |   | 647,000    |           
|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |           
|Total assets                                                                                                                                                                                          |                                           | $             | 61,795,000 |              |  | $ | 49,370,000 |           
|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |           
|LIABILITIES & SHAREHOLDERS
    EQUITY                                                                                                                                                               
|Mortgages payable                                                                                                                                                                                     |                                           | $             | 19,301,000 |              |  | $ | 9,250,000  |           
|Accounts payable and accrued liabilities                                                                                                                                                              |                                           |               | 1,401,000  |              |  |   | 1,635,000  |           
|Accounts payable due to related parties                                                                                                                                                               |                                           |               | 1,128,000  |              |  |   |           |           
|Distributions payable                                                                                                                                                                                 |                                           |               | 319,000    |              |  |   | 318,000    |           
|Security deposits and prepaid rent                                                                                                                                                                    |                                           |               | 176,000    |              |  |   | 59,000     |           
|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |           
|                                                                                                                                                                                                      |                                           |               | 22,325,000 |              |  |   | 11,262,000 |           
|Minority interests                                                                                                                                                                                    |                                           |               | 1,921,000  |              |  |   |            |           
|Commitments and contingencies (Note 10)                                                                                                                                                               |                                           |               |            |              |  |   |            |           
|Shareholders equity:                                                                                                                                                                                 |                                           |               |            |              |  |   |            |           
|Common stock, $.01 par value;
    10,000,000 shares authorized; 4,720,000 shares issued;
    4,612,000 and 4,646,000 shares outstanding at
    September 30, 2004 and December 31, 2003, respectively |                                           |               | 47,000     |              |  |   | 47,000     |           
|Additional paid-in capital                                                                                                                                                                            |                                           |               | 41,501,000 |              |  |   | 41,265,000 |           
|Treasury stock, 108,000 and
    74,000 shares at September 30, 2004 and
    December 31, 2003, respectively                                                                                           |                                           |               | (979,000   | )            |  |   | (675,000   | )         
|Distributions in excess of earnings                                                                                                                                                                   |                                           |               | (2,986,000 | )            |  |   | (2,529,000 | )         
|Accumulated other comprehensive loss                                                                                                                                                                  |                                           |               | (34,000    | )            |  |   |           |           
|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |           
|Total shareholders equity                                                                                                                                                                            |                                           |               | 37,549,000 |              |  |   | 38,108,000 |           
|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |           
|Total liabilities and shareholders equity                                                                                                                                                            |                                           | $             | 61,795,000 |              |  | $ | 49,370,000 |           
|                                                                                                                                                                                                      |                                           |               |            |              |  |   |            |           

The accompanying notes are an integral part of
these condensed consolidated financial statements.

3



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T REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

AND COMPREHENSIVE OPERATIONS


(Unaudited)


|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |           | 
|--------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------ | --------- | ----------------- | - | ---- | --------- | ------------- | - | - | --------- | --------- | - | - | --------- | --------- | 
|                                                                                                          |                                                                   |                    |           |                  
|                                                                                                          |                                                                   | Three Months Ended |           | Nine Months Ended
|                                                                                                          |                                                                   | September 30,      |           | September 30,    
|                                                                                                          |                                                                   |                    |           |                  
|                                                                                                          |                                                                   | 2004               |           | 2003              |   | 2004 |           | 2003         
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |              
|                                                                                                          |                                                                   |                    |           | (As restated)     |   |      |           | (As restated)
|Revenues:                                                                                                 |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          | Rental income                                                     |                    | $         | 1,568,000         |   |      | $         | 54,000        |   |   | $         | 3,667,000 |   |   | $         | 560,000   | 
|Expenses:                                                                                                 |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          | Rental expenses                                                   |                    |           | 468,000           |   |      |           | 68,000        |   |   |           | 1,248,000 |   |   |           | 192,000   | 
|                                                                                                          | General and administrative                                        |                    |           | 458,000           |   |      |           | 228,000       |   |   |           | 822,000   |   |   |           | 563,000   | 
|                                                                                                          | Depreciation and amortization                                     |                    |           | 225,000           |   |      |           | 50,000        |   |   |           | 1,320,000 |   |   |           | 124,000   | 
|                                                                                                          | Interest (including amortization of deferred
    financing costs) |                    |           | 347,000           |   |      |           | 65,000        |   |   |           | 836,000   |   |   |           | 190,000   | 
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          |                                                                   |                    | 1,498,000 |                   |   |      | 411,000   |               |   |   | 4,226,000 |           |   |   | 1,069,000 |          
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Income (loss) before other income, discontinued
    operations and minority interest expense              |                                                                   |                    | 70,000    |                   |   |      | (357,000  | )             |   |   | (559,000  | )         |   |   | (509,000  | )        
|Other income                                                                                              |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          | Interest and dividend income                                      |                    |           | 82,000            |   |      |           | 11,000        |   |   |           | 323,000   |   |   |           | 76,000    | 
|                                                                                                          | Gain on sale of marketable securities                             |                    |           | 82,000            |   |      |           |              |   |   |           | 132,000   |   |   |           |          | 
|                                                                                                          | Equity in earnings of unconsolidated real estate                  |                    |           | 50,000            |   |      |           | 267,000       |   |   |           | 683,000   |   |   |           | 1,231,000 | 
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          |                                                                   |                    | 214,000   |                   |   |      | 278,000   |               |   |   | 1,138,000 |           |   |   | 1,307,000 |          
|Income (loss) from continuing operations before
    discontinued operations and minority interest expense |                                                                   |                    | 284,000   |                   |   |      | (79,000   | )             |   |   | 579,000   |           |   |   | 798,000   |          
|Discontinued operations:                                                                                  |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          | Gain on sale on real estate dispositions                          |                    |           | 821,000           |   |      |           | 2,813,000     |   |   |           | 1,634,000 |   |   |           | 2,622,000 | 
|                                                                                                          | Income (loss) from discontinued operations                        |                    |           | (38,000           | ) |      |           | (38,000       | ) |   |           | 63,000    |   |   |           | 731,000   | 
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          |                                                                   |                    | 783,000   |                   |   |      | 2,775,000 |               |   |   | 1,697,000 |           |   |   | 3,353,000 |          
|Income before minority interests                                                                          |                                                                   |                    | 1,067,000 |                   |   |      | 2,696,000 |               |   |   | 2,276,000 |           |   |   | 4,151,000 |          
|Minority interests                                                                                        |                                                                   |                    | (26,000   | )                 |   |      |          |               |   |   | (125,000  | )         |   |   |          |          
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Net income                                                                                                |                                                                   | $                  | 1,093,000 |                   |   | $    | 2,696,000 |               |   | $ | 2,401,000 |           |   | $ | 4,151,000 |          
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Comprehensive income:                                                                                     |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          | Net income                                                        |                    | $         | 1,093,000         |   |      | $         | 2,696,000     |   |   | $         | 2,401,000 |   |   | $         | 4,151,000 | 
|                                                                                                          | Unrealized loss on marketable securities                          |                    |           | (25,000           | ) |      |           |              |   |   |           | (34,000   | ) |   |           |          | 
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Comprehensive income                                                                                      |                                                                   | $                  | 1,068,000 |                   |   | $    | 2,696,000 |               |   | $ | 2,367,000 |           |   | $ | 4,151,000 |          
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Earnings (loss) per share  basic and
    diluted                                                         |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|                                                                                                          | Continuing operations                                             |                    | $         | 0.07              |   |      | $         | (0.02         | ) |   | $         | 0.15      |   |   | $         | 0.17      | 
|                                                                                                          | Discontinued operations                                           |                    | $         | 0.17              |   |      | $         | 0.59          |   |   | $         | 0.37      |   |   | $         | 0.72      | 
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Total earnings per share  basic and
    diluted                                                          |                                                                   | $                  | 0.24      |                   |   | $    | 0.57      |               |   | $ | 0.52      |           |   | $ | 0.89      |          
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Weighted average shares of common stock
    outstanding  basic and diluted                               |                                                                   |                    | 4,620,000 |                   |   |      | 4,696,000 |               |   |   | 4,636,000 |           |   |   | 4,685,000 |          
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          
|Dividends declared per share                                                                              |                                                                   | $                  | 0.21      |                   |   | $    | 0.20      |               |   | $ | 0.62      |           |   | $ | 0.62      |          
|                                                                                                          |                                                                   |                    |           |                   |   |      |           |               |   |   |           |           |   |   |           |          

The accompanying notes are an integral part of
these condensed consolidated financial statements.

4



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T REIT, INC.

CONDENSED CONSOLIDATED STATEMENT OF
SHAREHOLDERS EQUITY

For the Nine Months Ended September 30,
2004


(Unaudited)


|                                         |  |              |           |            |  |             |        |               |  |              |            |               |  |       |          |   |  |   |            |   |  |   |         |   |  |   |            |  
|---------------------------------------- |  | ------------ | --------- | ---------- |  | ----------- | ------ | ------------- |  | ------------ | ---------- | ------------- |  | ----- | -------- | - |  | - | ---------- | - |  | - | ------- | - |  | - | ---------- | -
|                                         |  |              |           |            |  |             |        |              
|                                         |  | Common Stock |           |            |  |             |        |              
|                                         |  |              |           |            |  | Accumulated |        |              
|                                         |  |              |           | Additional |  |             |        | Distributions |  | Other        |            |              
|                                         |  | Number of    |           |            |  | Paid-In     |        | Treasury      |  | in Excess of |            | Comprehensive |  |      
|                                         |  | Shares       |           | Par Value  |  | Capital     |        | Stock         |  | Earnings     |            | Loss          |  | Total
|                                         |  |              |           |            |  |             |        |               |  |              |            |               |  |      
|BALANCE  December 31,
    2003          |  |              | 4,646,000 |            |  | $           | 47,000 |               |  | $            | 41,265,000 |               |  | $     | (675,000 | ) |  | $ | (2,529,000 | ) |  | $ |        |   |  | $ | 38,108,000 |  
|Net income                               |  |              |          |            |  |             |       |               |  |              |           |               |  |       |         |   |  |   | 2,401,000  |   |  |   |        |   |  |   | 2,401,000  |  
|Unrealized loss on marketable securities |  |              |          |            |  |             |       |               |  |              |           |               |  |       |         |   |  |   |           |   |  |   | (34,000 | ) |  |   | (34,000    | )
|                                         |  |              |           |            |  |             |        |               |  |              |            |               |  |       |          |   |  |   |            |   |  |   |         |   |  |   |            |  
|Comprehensive income                     |  |              |          |            |  |             |       |               |  |              |           |               |  |       |         |   |  |   |           |   |  |   |        |   |  |   | 2,367,000  |  
|Stock based compensation expense         |  |              |          |            |  |             |       |               |  |              | 236,000    |               |  |       |         |   |  |   |           |   |  |   |        |   |  |   | 236,000    |  
|Distributions                            |  |              |          |            |  |             |       |               |  |              |           |               |  |       |         |   |  |   | (2,858,000 | ) |  |   |        |   |  |   | (2,858,000 | )
|Repurchase of shares                     |  |              | (34,000   | )          |  |             |       |               |  |              |           |               |  |       | (304,000 | ) |  |   |           |   |  |   |        |   |  |   | (304,000   | )
|                                         |  |              |           |            |  |             |        |               |  |              |            |               |  |       |          |   |  |   |            |   |  |   |         |   |  |   |            |  
|BALANCE  September 30,
    2004         |  |              | 4,612,000 |            |  | $           | 47,000 |               |  | $            | 41,501,000 |               |  | $     | (979,000 | ) |  | $ | (2,986,000 | ) |  | $ | (34,000 | ) |  | $ | 37,549,000 |  
|                                         |  |              |           |            |  |             |        |               |  |              |            |               |  |       |          |   |  |   |            |   |  |   |         |   |  |   |            |  

The accompanying notes are an integral part of
these condensed consolidated financial statements.

5



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##### Table of Contents



T REIT, INC.




CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS

(Unaudited)


|                                                                                     |                                                                                          |                                                         |           |               |            |   |           |             |             |  
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------- | ------------- | ---------- | - | --------- | ----------- | ----------- | -
|                                                                                     |                                                                                          |                                                        
|                                                                                     |                                                                                          | Nine Months Ended                                      
|                                                                                     |                                                                                          | September 30,                                          
|                                                                                     |                                                                                          |                                                        
|                                                                                     |                                                                                          | 2004                                                    |           | 2003         
|                                                                                     |                                                                                          |                                                         |           |              
|                                                                                     |                                                                                          |                                                         |           | (As restated)
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |                                                                                          |                                                         |           |               |            |   |           |            
|Net income                                                                           |                                                                                          | $                                                       | 2,401,000 |               |            | $ | 4,151,000 |            
|Adjustments to reconcile net income to net cash
    provided by operating activities |                                                                                          |                                                         |           |               |            |   |           |            
|                                                                                     | Distributions received in excess of equity in
    earnings of unconsolidated real estate |                                                         |           | 661,000       |            |   |           | 290,000     |            
|                                                                                     | Gain on sale of real estate investments                                                  |                                                         |           | (1,634,000    | )          |   |           | (2,622,000  | )          
|                                                                                     | Gain on sale of marketable securities                                                    |                                                         |           | (132,000      | )          |   |           |            |            
|                                                                                     | Depreciation and amortization 
    continuing and discontinued operations               |                                                         |           | 1,738,000     |            |   |           | 501,000     |            
|                                                                                     | Stock based compensation expense                                                         |                                                         |           | 236,000       |            |   |           |            |            
|                                                                                     | Minority interests                                                                       |                                                         |           | (125,000      | )          |   |           |            |            
|Change in operating assets and liabilities:                                          |                                                                                          |                                                         |           |               |            |   |           |            
|                                                                                     | Accounts receivable                                                                      |                                                         |           | (7,000        | )          |   |           | 145,000     |            
|                                                                                     | Accounts receivable from related parties                                                 |                                                         |           | 99,000        |            |   |           | 93,000      |            
|                                                                                     | Other assets                                                                             |                                                         |           | 446,000       |            |   |           | 544,000     |            
|                                                                                     | Accounts payable and accrued liabilities                                                 |                                                         |           | (84,000       | )          |   |           | (280,000    | )          
|                                                                                     | Security deposits and prepaid rent                                                       |                                                         |           | 117,000       |            |   |           | (93,000     | )          
|                                                                                     |                                                                                          |                                                         |           |               |            |   |           |            
|                                                                                     |                                                                                          | Net cash provided by operating activities               |           |               | 3,716,000  |   |           |             | 2,729,000   |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |                                                                                          |                                                         |           |               |            |   |           |            
|                                                                                     | Purchase of marketable securities                                                        |                                                         |           | (6,235,000    | )          |   |           |            |            
|                                                                                     | Proceeds from sale of marketable securities                                              |                                                         |           | 5,734,000     |            |   |           |            |            
|                                                                                     | Purchase of real estate operating properties                                             |                                                         |           | (6,462,000    | )          |   |           | (8,884,000  | )          
|                                                                                     | Purchase of investments in unconsolidated real
    estate                                |                                                         |           | (1,125,000    | )          |   |           | (5,126,000  | )          
|                                                                                     | Restricted cash                                                                          |                                                         |           | (97,000       | )          |   |           |            |            
|                                                                                     | Capital expenditures                                                                     |                                                         |           | (1,666,000    | )          |   |           | (156,000    | )          
|                                                                                     | Proceeds from disposition of properties                                                  |                                                         |           | 3,239,000     |            |   |           | 36,164,000  |            
|                                                                                     | Collections of notes receivable                                                          |                                                         |           | 6,511,000     |            |   |           | 5,000       |            
|                                                                                     | Real estate deposits applied to purchases                                                |                                                         |           | 11,000        |            |   |           | 3,821,000   |            
|                                                                                     |                                                                                          |                                                         |           |               |            |   |           |            
|                                                                                     |                                                                                          | Net cash (used in) provided by investing
    activities |           |               | (90,000    | ) |           |             | 25,824,000  |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |                                                                                          |                                                         |           |               |            |   |           |            
|                                                                                     | Borrowings under notes payable                                                           |                                                         |           |              |            |   |           | 5,000,000   |            
|                                                                                     | Principal payments on mortgages payable                                                  |                                                         |           | (4,949,000    | )          |   |           | (23,800,000 | )          
|                                                                                     | Borrowings on line of credit                                                             |                                                         |           | 710,000       |            |   |           |            |            
|                                                                                     | Repayment on line of credit                                                              |                                                         |           | (1,255,000    | )          |   |           |            |            
|                                                                                     | Distributions paid                                                                       |                                                         |           | (2,858,000    | )          |   |           | (2,889,000  | )          
|                                                                                     | Distributions to minority shareholders                                                   |                                                         |           | (430,000      | )          |   |           |            |            
|                                                                                     | Repurchase of shares                                                                     |                                                         |           | (304,000      | )          |   |           | (294,000    | )          
|                                                                                     |                                                                                          |                                                         |           |               |            |   |           |            
|                                                                                     |                                                                                          | Net cash used in financing activities                   |           |               | (9,086,000 | ) |           |             | (21,983,000 | )
|                                                                                     |                                                                                          |                                                         |           |               |            |   |           |            



The accompanying notes are an integral part of
these condensed consolidated financial statements.


6



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##### Table of Contents



|                                                                           |                                                |                   |            |               |  |   |            |           | 
|-------------------------------------------------------------------------- | ---------------------------------------------- | ----------------- | ---------- | ------------- |  | - | ---------- | --------- | 
|                                                                           |                                                |                  
|                                                                           |                                                | Nine Months Ended
|                                                                           |                                                | September 30,    
|                                                                           |                                                |                  
|                                                                           |                                                | 2004              |            | 2003         
|                                                                           |                                                |                   |            |              
|                                                                           |                                                |                   |            | (As restated)
|NET (DECREASE) INCREASE IN CASH AND CASH
    EQUIVALENTS                   |                                                |                   | (5,460,000 | )             |  |   | 6,570,000  |          
|CASH AND CASH EQUIVALENTS 
    beginning of period                        |                                                |                   | 12,189,000 |               |  |   | 6,129,000  |          
|                                                                           |                                                |                   |            |               |  |   |            |          
|CASH AND CASH EQUIVALENTS  end of
    period                              |                                                | $                 | 6,729,000  |               |  | $ | 12,699,000 |          
|                                                                           |                                                |                   |            |               |  |   |            |          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION:                      |                                                |                   |            |               |  |   |            |          
|Cash paid during the period for:                                           |                                                |                   |            |               |  |   |            |          
|                                                                           | Interest                                       |                   | $          | 825,000       |  |   | $          | 1,556,000 | 
|                                                                           |                                                |                   |            |               |  |   |            |          
|                                                                           | Income taxes                                   |                   | $          | 13,000        |  |   | $          | 30,000    | 
|                                                                           |                                                |                   |            |               |  |   |            |          
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
    AND FINANCING ACTIVITIES: |                                                |                   |            |               |  |   |            |          
|                                                                           | Note receivable due to sale of property        |                   | $          | 9,228,000     |  |   | $          |          | 
|                                                                           |                                                |                   |            |               |  |   |            |          
|NONCASH INVESTING ACTIVITIES:                                              |                                                |                   |            |               |  |   |            |          
|                                                                           | Liabilities incurred acquisitions/dispositions |                   | $          | 18,021,000    |  |   | $          |          | 
|                                                                           |                                                |                   |            |               |  |   |            |          



The accompanying notes are an integral part of
these condensed consolidated financial statements.


7



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##### Table of Contents






T REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                             
|-- | --------------------------------------------
|1. | Organization and Description of
    Business

T REIT, Inc. (Company), was
incorporated in December 1998 under the laws of the Commonwealth
of Virginia. The Company has qualified and elected to be treated
as a real estate investment trust, (REIT), for
federal income tax purposes. The Company is in the business of
acquiring existing office, industrial, retail and service
properties located in several states. As of September 30,
2004, the Company owned real estate investments consisting of
two consolidated properties and interests in ten unconsolidated
properties. The Company acquires properties through its
operating partnership, T REIT, L.P., (Operating
Partnership), which is wholly owned by the Company.

The Company is externally advised by an
affiliated company, Triple Net Properties, LLC,
(Advisor),which is primarily responsible for
managing the day-to-day operations and assets of the Company.
The Company and the Advisor entered into an Advisory Agreement
dated February 22, 2000, between the Company and the
Advisor is for an initial one-year term, subject to successive
renewals. The Advisor is affiliated with the Company in that the
two entities have common officers and directors, some of whom
also own an equity interest in the Advisor (See Note 9).



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company, the
Operating Partnership, the wholly owned subsidiaries of the
Operating Partnership and all majority-owned subsidiaries and
affiliates over which the Company has financial and operating
control and variable interest entities (VIEs) in
which the Company has determined it is the primary beneficiary
are included in the condensed consolidated financial statements.
All significant intercompany balances and transactions have been
eliminated in consolidation and all references to the Company
include the Operating Partnership and its subsidiaries. The
Company accounts for all other unconsolidated real estate
investments using the equity method of accounting. Accordingly,
the Companys share of the earnings of these real estate
investments is included in consolidated net income.

In January 2003, the Financial Accounting
Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). In
December 2003, the FASB issued FIN 46R, Consolidation
of Variable Interest Entities, which amended FIN 46.
FIN 46R was effective immediately for arrangements entered
into after January 31, 2003, and became effective during
the first quarter of 2004 for all arrangements entered into
before February 1, 2003. FIN 46R requires existing
unconsolidated VIEs to be consolidated by their primary
beneficiaries. The primary beneficiary of a VIE is the party
that absorbs a majority of the entitys expected losses or
receives a majority of its expected residual returns, or both,
as a result of holding variable interests, which are the
ownership interests, contractual interests, or other pecuniary
interests in an entity that change with changes in the fair
value of the entitys net assets excluding variable
interests. Prior to FIN 46R, the Company included an entity
in its consolidated financial statements only if it controlled
the entity through voting interests. The adoption and
application of FIN 46 and FIN 46R has not had a
material impact on the Companys condensed consolidated
financial statements.



| |                                                     
| | ----------------------------------------------------
| | Interim Financial Data and Basis of
    Presentation

The accompanying interim financial statements
have been prepared by the Companys management in
accordance with accounting principles generally accepted in the
United States of America, (GAAP), and in conjunction
with the rules and regulations of the Securities and Exchange
Commission, (SEC) Certain information and footnote
disclosures required for annual financial statements have been
condensed or excluded pursuant to SEC rules and regulations.
Accordingly, the interim financial statements do not

8



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

include all of the information and footnotes
required by GAAP for complete financial statements. The
accompanying unaudited financial statements reflect all
adjustments, which are, in the opinion of the Companys
management, of a normal recurring nature and necessary for a
fair presentation of the Companys financial position,
results of operations and cash flows for the interim periods.
Interim results of operations are not necessarily indicative of
the results to be expected for the full year; such results may
be less favorable. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the notes
thereto included in the 2003 Annual Report on Form 10-K/ A
as filed with the SEC.



| |                
| | ---------------
| | Restricted Cash

Restricted cash is comprised of impound reserve
accounts for property taxes, insurance and tenant improvements.



| |                                        
| | ---------------------------------------
| | Investment in Marketable
    Securities

Marketable securities are carried at fair value
and consist primarily of investments in marketable equity
securities of public REITs. The Company classifies its
marketable securities portfolio as available-for-sale. This
portfolio is continually monitored for differences between the
cost and estimated fair value of each security. If the Company
believes that a decline in the value of an equity security is
temporary in nature, it records the change in other
comprehensive income (loss) in shareholders equity. If the
decline is believed to be other than temporary, the equity
security is written down to the fair value and a realized loss
is recorded on the Companys statement of operations. There
was no realized gain/loss recorded by the Company due to the
write down in value for the periods ended September 30,
2004 and 2003. Managements assessment of a decline in
value includes, among other things, its current judgment as to
the financial position and future prospects of the entity that
issued the security. If that judgment changes in the future, the
Company may ultimately record a realized loss after having
initially concluded that the decline in value was temporary.



| |                   
| | ------------------
| | Minority Interests

Minority interests relate to the interests in the
consolidated properties that are not owned by the Company,
which, at September 30, 2004, amounted to a 25% interest in
one of the consolidated properties.



| |                          
| | -------------------------
| | Purchase Price Allocation

In accordance with Statement of Financial
Accounting Standard (SFAS) No. 141, Business
Combinations, the Company, with the assistance from
independent valuation specialists, allocates the purchase price
of acquired properties to tangible and identified intangible
assets based on their respective fair values. The allocation to
tangible assets (building and land) is based upon
managements determination of the value of the property as
if it were vacant using discounted cash flow models similar to
those used by independent appraisers. Factors considered by
management include an estimate of carrying costs during the
expected lease-up periods considering current market conditions
and costs to execute similar leases. Additionally, the purchase
price of the applicable property is allocated to the above or
below market value of in-place leases and the value of in-place
leases and related tenant relationships.

The value allocable to the above or below market
component of the acquired in-place leases is determined based
upon the present value (using a discount rate which reflects the
risks associated with the acquired leases) of the difference
between (i) the contractual amounts to be paid pursuant to
the lease over its remaining term, and
(ii) managements estimate of the amounts that would
be paid using fair market rates over the remaining term of the
lease. The amounts allocated to above market leases are included
in the intangible in-place lease asset and below market lease
values are included in intangible

9



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lease liability in the accompanying condensed
consolidated financial statements and are amortized to rental
income over the weighted average remaining term of the acquired
leases with each property.

The total amount of other intangible assets
acquired is further allocated to in-place lease costs and the
value of tenant relationships based on managements
evaluation of the specific characteristics of each tenants
lease and the Companys overall relationship with that
respective tenant. Characteristics considered by management in
allocating these values include the nature and extent of the
credit quality and expectations of lease renewals, among other
factors.

These allocations are subject to change based on
continuing due diligence, or other evidence, which may be
obtained in the future to further substantiate these values.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to prior
year amounts in order to conform to the current period
presentation.



| |             
| | ------------
| | Income Taxes

The Company operates as a real estate investment
trust for federal income tax purposes. As a REIT, the Company is
generally not subject to income taxes. To maintain its REIT
status, the Company is required to distribute annually as
dividends at least 90% of its REIT taxable income for the year,
as defined by the Internal Revenue Code, (Code), to
its shareholders, among other requirements. If the Company fails
to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax on its taxable income at regular
corporate tax rates. Although the Company qualifies as a REIT,
the Company may be subject to certain state and local taxes on
its income and property and federal income and excise taxes on
its undistributed income. The Company believes that it has met
all of the REIT distribution and technical requirements for the
nine months ended September 30, 2004 and the year ended
December 31, 2003 and was not subject to any federal income
taxes. Management intends to continue to adhere to these
requirements and maintain the Companys REIT status.



| |                     
| | --------------------
| | Comprehensive Income

The Company reports comprehensive income in
accordance with SFAS No. 130, Reporting Comprehensive
Income. This statement defines comprehensive income as the
changes in equity of an enterprise except those resulting from
stockholders transactions. Accordingly, comprehensive
income includes certain changes in equity that are excluded from
net income. The Companys only comprehensive income items
were net income and the unrealized change in fair value of
marketable securities.



| |               
| | --------------
| | Per Share Data

The Company reports earnings per share pursuant
to SFAS No. 128, Earnings Per Share. Basic
earnings (loss) per share attributable for all periods presented
is computed by dividing the net income by the weighted average
number of common shares of common stock outstanding during the
period. Diluted earnings per share are computed based on the
weighted average number of common shares and all potentially
dilutive securities. The Companys potentially dilutive
securities were stock warrants and stock options. As of
September 30, 2004 and December 31, 2003, there were
101,000 stock warrants and 425,000 and 165,000 stock
options, respectively, which were accounted for under the
treasury stock method. The options and warrants did not have a
dilutive effect on earnings per share.

10



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Use of Estimates

The preparation of the Companys financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
the assets and liabilities and the revenues and expenses for the
reporting period. Actual results could differ from those
estimates, potentially in adverse ways.



| |                         
| | ------------------------
| | Stock Based Compensation

As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, and
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, the Company has
elected to follow Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its
employee stock options and warrants. Under APB No. 25,
compensation expense is recorded when the exercise price of
employee stock options is less than the fair value of the
underlying stock on the date of grant. The Company has
implemented the disclosure-only provisions of
SFAS No. 123 and SFAS No. 148. If the
Company had elected to adopt the expense recognition provisions
of SFAS No. 123, the impact on net income and earnings
per share of common stock would have been as follows:

|                                                                                                                  |  |                    |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                  |  |                    |           |                  
|                                                                                                                  |  | Three Months Ended |           | Nine Months Ended
|                                                                                                                  |  | September 30,      |           | September 30,    
|                                                                                                                  |  |                    |           |                  
|                                                                                                                  |  | 2004               |           | 2003              |  | 2004 |           | 2003
|                                                                                                                  |  |                    |           |                   |  |      |           |     
|Reported net income                                                                                               |  | $                  | 1,093,000 |                   |  | $    | 2,696,000 |      |  | $ | 2,401,000 |   |  | $ | 4,151,000 |  
|Add: Stock based employee compensation expense
    included in reported net income                                |  |                    | 236,000   |                   |  |      |          |      |  |   | 236,000   |   |  |   |          |  
|Less: Total stock based employee compensation
    expense determined under fair value based method for all awards |  |                    | (280,000  | )                 |  |      | (9,000    | )    |  |   | (344,000  | ) |  |   | (42,000   | )
|                                                                                                                  |  |                    |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Pro forma net income                                                                                              |  | $                  | 1,049,000 |                   |  | $    | 2,687,000 |      |  | $ | 2,293,000 |   |  | $ | 4,109,000 |  
|                                                                                                                  |  |                    |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Reported net income per share  basic
    and diluted                                                             |  | $                  | 0.24      |                   |  | $    | 0.57      |      |  | $ | 0.52      |   |  | $ | 0.89      |  
|                                                                                                                  |  |                    |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Pro forma net income per share  basic
    and diluted                                                            |  | $                  | 0.23      |                   |  | $    | 0.57      |      |  | $ | 0.49      |   |  | $ | 0.88      |  
|                                                                                                                  |  |                    |           |                   |  |      |           |      |  |   |           |   |  |   |           |  

These pro forma amounts were determined by
estimating the fair value of each option, using the
Black-Scholes option-pricing model, assuming an 8.25% dividend
yield, a 4.25% risk-free interest rate based on the 10-year
U.S. Treasury Bond, an expected life of 8.8 years, and
an expected volatility rate of 10%.



| |         
| | --------
| | Segments

The Company internally evaluates all properties
as one industry segment and, accordingly, does not report
segment information.



|   |                        
|-- | -----------------------
|3. | Real Estate Investments

The Companys real estate investments are
comprised of (i) consolidated properties excluding property
held for sale, and (ii) investments in unconsolidated real
estate.

11



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                        
| | -----------------------
| | Consolidated Properties

The Companys investment in consolidated
properties at September 30, 2004 and December 31, 2003
is summarized as follows:

|                                  |  |               |            |              |  |   |            |  
|--------------------------------- |  | ------------- | ---------- | ------------ |  | - | ---------- | -
|                                  |  | September 30, |            | December 31,
|                                  |  | 2004          |            | 2003        
|                                  |  |               |            |             
|Buildings and tenant improvements |  | $             | 18,399,000 |              |  | $ | 15,160,000 |  
|Land                              |  |               | 6,318,000  |              |  |   | 1,012,000  |  
|                                  |  |               |            |              |  |   |            |  
|                                  |  |               | 24,717,000 |              |  |   | 16,172,000 |  
|Less: accumulated depreciation    |  |               | (712,000   | )            |  |   | (425,000   | )
|                                  |  |               |            |              |  |   |            |  
|Operating properties, net         |  | $             | 24,005,000 |              |  | $ | 15,747,000 |  
|                                  |  |               |            |              |  |   |            |  



| |             
| | ------------
| | Acquisitions

During the nine months ended September 30,
2004, the Company completed the following acquisitions:



| |                                 
| | --------------------------------
| | AmberOaks LP  Austin,
    Texas

On January 20, 2004, the Company, through
its wholly-owned subsidiary, TREIT  AmberOaks LP,
purchased a 75% undivided tenant in common interest in three
buildings at AmberOaks Corporate Center located in Austin, Texas
from an unaffiliated third party. Three unaffiliated entities
purchased the remaining 25% tenant-in-common interests in the
property. The total purchase price for this consolidated real
estate property was $22,965,000. The purchase was financed by a
$15,000,000 loan secured by the property from North Houston
Bank. The mortgage requires interest only payments through
February 15, 2006 and, thereafter, principal and interest
payments through the maturity date of the loan on
January 20, 2007, with an option to extend for up to
24 months until January 20, 2009. The interest rate on
the mortgage loan is the prime rate plus 1.0% subject to a
floor of 5.5%. The seller paid a sales commission to Triple Net
Properties Realty, Inc. (Realty), which is solely
owned by Anthony W. Thompson, the Companys Chief Executive
Officer and President until his resignation effective
August 18, 2004, of $585,000, or 2.3% of the purchase
price. AmberOaks is a three-building Class A office
portfolio totaling 206,000 square feet and is part of an
eight-building complex built during 1999-2001. An affiliate of
the Advisor purchased the remaining five buildings. During the
nine months ended September 30, 2004, the Company recorded
approximately $5,085,000 in lease intangible assets related to
its acquisition of AmberOaks.



| |                                               
| | ----------------------------------------------
| | Gateway Mall Land  Bismarck, North
    Dakota

On February 27, 2004, the Company purchased
43 acres of land, including 36 acres of land situated
under Gateway Mall from an unaffiliated third party for a
purchase price including closing costs of $1,631,000.



| |             
| | ------------
| | Dispositions



| |                                          
| | -----------------------------------------
| | Gateway Mall  Bismarck, North
    Dakota

On March 18, 2004, the Company sold Gateway
Mall to an unaffiliated third party for a purchase price of
$11,600,000. The sale of Gateway Mall included the underlying
36 acres of land described above. Net sales proceeds
included cash of $2,452,000 and a note receivable in the amount
of $8,700,000. The note was secured by a pledge agreement, bore
interest at 6% per annum and matured on June 14, 2004.

12



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The note was refinanced by the buyer and the
Company collected $6,500,000 on July 9, 2004 and received
an adjustable note receivable for $2,200,000 (Note 5). In
connection with the sale of Gateway Mall, the Company repaid a
note payable secured by the property with an outstanding balance
of $4,876,000. At closing, the Company paid a real estate
commission to Realty of $339,000, or 2.9% of the selling price.



| |                                               
| | ----------------------------------------------
| | Gateway Mall Land  Bismarck, North
    Dakota

On September 9, 2004, the Company sold the
remaining seven acres of land to an unaffiliated third party for
$1,385,000. Net sales proceeds included cash of $794,000 and a
note receivable in the amount of $528,000. The note is secured
by a pledge agreement, bears interest at 4% per annum and
is due on March 7, 2005. At closing, the Company paid a
real estate commission to Realty of $44,000, or 3.2% of the
selling price.



| |                                              
| | ---------------------------------------------
| | Investments in Unconsolidated Real
    Estate

During the nine months ended September 30,
2004, the Company invested in the following unconsolidated
investments:

Oakey Building, LLC Las Vegas, Nevada 
April 2, 2004  9.76%

Emerald Plaza, LLC, San Diego,
CA  July 26, 2004  2.7%

The aggregate investment for the two investments
in unconsolidated real estate was approximately
$1.7 million.



| |                                       
| | --------------------------------------
| | Oakey Building  Las Vegas,
    Nevada

On April 2, 2004, the Company, through its
wholly-owned subsidiary, TREIT  NNN Oakey Building
2003, LLC, purchased a 9.761% interest in the Oakey
Building in Las Vegas, Nevada from an unaffiliated third party.
The total purchase price for the Oakey Building was $8,137,000.
The Companys total initial investment was $670,000. The
purchase was financed by $4,000,000 in borrowings secured by the
property. The loan is payable to Ivan Halaj and Vilma Halaj
Inter Vivos Trust. The loan requires principal and interest
payments at a fixed interest rate of 10% per annum until
the due date of April 1, 2005. The seller of the property
paid a sales commission to Realty of $237,000, or 2.9% of the
purchase price. The Oakey Building is a Class A office
building of approximately 104,000 square feet located in
Las Vegas, Nevada.



| |                                  
| | ---------------------------------
| | Emerald Plaza  San Diego,
    CA

On July 26, 2004, the Company, through its
wholly-owned subsidiary, TREIT  NNN Emerald Plaza,
LLC, purchased a 2.7% interest in the Emerald Plaza
Building in San Diego, CA from an unaffiliated third party
for $1,000,000. The total purchase price was $100,940,000 and
was financed by $68,500,000 in borrowings under a secured loan
from Citigroup Global Markets Realty Corp. The loan requires
interest only payments through the maturity date of
June 17, 2007 at a fixed interest rate of 3.83% per
annum. The seller of the property paid a sales commission to
Realty of $2,940,000, or 2.9% of the purchase price. Emerald
Plaza is a Class A office tower of approximately
354,525 square feet located in downtown San Diego,
California.

Investments in unconsolidated real estate consist
of the Companys investments in undivided tenant in common
interests (TIC) and limited liability companies
(LLC), which is accounted for under the

13



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

equity method. The Company had the following
investments in unconsolidated real estate at September 30,
2004:

|                                        |  |          |                  |            |  |               |       |   |  |   |            | 
|--------------------------------------- |  | -------- | ---------------- | ---------- |  | ------------- | ----- | - |  | - | ---------- | 
|                                        |  |          |                  |            |  | Companys    
|                                        |  |          |                  |            |  | Investment   
|                                        |  |          |                  | Percentage |  | September 30,
|Property                                |  | Location |                  | Owned      |  | 2004         
|                                        |  |          |                  |            |  |              
|City Center West
    A Building  TIC |  |          | Las Vegas, NV    |            |  |               | 89.13 | % |  | $ | 7,987,000  | 
|Congress Center  LLC                   |  |          | Chicago, IL      |            |  |               | 10.22 | % |  |   | 4,322,000  | 
|Pacific Corporate Park  LLC            |  |          | Lake Forest, CA  |            |  |               | 22.76 | % |  |   | 1,363,000  | 
|Titan Building and Titan Plaza  TIC    |  |          | San Antonio, TX  |            |  |               | 48.50 | % |  |   | 2,088,000  | 
|Reno Trademark Building  TIC           |  |          | Reno, NV         |            |  |               | 40.00 | % |  |   | 1,529,000  | 
|Saddleback Financial  TIC              |  |          | Laguna Hills, CA |            |  |               | 25.00 | % |  |   | 1,007,000  | 
|Oakey Building  LLC                    |  |          | Las Vegas, NV    |            |  |               | 9.76  | % |  |   | 630,000    | 
|Enclave  LLC                           |  |          | Houston, TX      |            |  |               | 3.26  | % |  |   | 454,000    | 
|County Center Building  TIC            |  |          | Temecula, CA     |            |  |               | 16.00 | % |  |   | 439,000    | 
|Emerald Plaza  LLC                     |  |          | San Diego, CA    |            |  |               | 2.70  | % |  |   | 979,000    | 
|                                        |  |          |                  |            |  |               |       |   |  |   |            | 
|                                        |  |          |                  |            |  |               |       |   |  | $ | 20,798,000 | 
|                                        |  |          |                  |            |  |               |       |   |  |   |            | 

The summarized unaudited condensed combined
financial information in the Companys unconsolidated real
estate is as follows:

|                               |  |               |             |              |  |   |             | 
|------------------------------ |  | ------------- | ----------- | ------------ |  | - | ----------- | 
|                               |  | As of         |             | As of       
|                               |  | September 30, |             | December 31,
|                               |  | 2004          |             | 2003        
|                               |  |               |             |             
|Assets (primarily real estate) |  | $             | 361,552,000 |              |  | $ | 246,975,000 | 
|                               |  |               |             |              |  |   |             | 
|Mortgages notes payable        |  | $             | 232,061,000 |              |  | $ | 159,962,000 | 
|Other liabilities              |  |               | 7,715,000   |              |  |   | 3,713,000   | 
|Equity                         |  |               | 121,776,000 |              |  |   | 83,300,000  | 
|                               |  |               |             |              |  |   |             | 
|Total liabilities and equity   |  | $             | 361,552,000 |              |  | $ | 246,975,000 | 
|                               |  |               |             |              |  |   |             | 
|Companys share of equity      |  | $             | 20,798,000  |              |  | $ | 19,331,000  | 
|                               |  |               |             |              |  |   |             | 

|                             |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |            | 
|---------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | --------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                             |  |                    |            |                  
|                             |  | Three Months Ended |            | Nine Months Ended
|                             |  | September 30,      |            | September 30,    
|                             |  |                    |            |                  
|                             |  | 2004               |            | 2003              |  | 2004 |           | 2003
|                             |  |                    |            |                   |  |      |           |     
|Revenues                     |  | $                  | 11,806,000 |                   |  | $    | 7,103,000 |      |  | $ | 28,924,000 |  |  | $ | 18,249,000 | 
|Rental and other Expenses    |  |                    | 12,950,000 |                   |  |      | 4,905,000 |      |  |   | 27,237,000 |  |  |   | 14,095,000 | 
|                             |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |            | 
|Net Income (loss)            |  | $                  | (1,144,000 | )                 |  | $    | 2,198,000 |      |  | $ | 1,687,000  |  |  | $ | 4,154,000  | 
|                             |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |            | 
|Companys Equity in earnings |  | $                  | 50,000     |                   |  | $    | 267,000   |      |  | $ | 683,000    |  |  | $ | 1,231,000  | 
|                             |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |            | 

14



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|4. | Other Assets

Other assets as of September 30, 2004 and
December 31, 2003 consisted of the following:

|                                                                                                                                              |                    |               |           |              |  |   |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------------- | --------- | ------------ |  | - | ------- | ------- | 
|                                                                                                                                              |                    | September 30, |           | December 31,
|                                                                                                                                              |                    | 2004          |           | 2003        
|                                                                                                                                              |                    |               |           |             
|Deferred rent receivable                                                                                                                      |                    | $             | 100,000   |              |  | $ | 75,000  |        
|Lease commissions, net of accumulated
    amortization of $1,071,000 and $9,000 at September 30, 2004
    and December 31, 2003, respectively |                    |               | 4,014,000 |              |  |   | 75,000  |        
|Loan fees, net of accumulated amortization of
    $101,000 and $48,000 at September 30, 2004 and
    December 31, 2003, respectively          |                    |               | 266,000   |              |  |   | 145,000 |        
|Prepaid expenses                                                                                                                              |                    |               | 96,000    |              |  |   |        |        
|Other assets                                                                                                                                  |                    |               |          |              |  |   | 1,000   |        
|                                                                                                                                              |                    |               |           |              |  |   |         |        
|                                                                                                                                              | Total other assets |               | $         | 4,476,000    |  |   | $       | 296,000 | 
|                                                                                                                                              |                    |               |           |              |  |   |         |        



|   |                 
|-- | ----------------
|5. | Notes Receivable

The Company received a note for $8,700,000 from
the purchaser in conjunction with the sale of Gateway Mall. The
note was secured by a pledge agreement, bore interest at
6% per annum and was due June 14, 2004. The note was
refinanced and the Company collected $6,500,000 in cash on
July 9, 2004 and received a new note for $2,200,000. The
new note is an adjustable rate note with interest calculated at
a blended rate in which the borrowers aggregate interest
paid cannot exceed $522,000 annually on this note and the
buyers first mortgage. The interest rate for the
$2,200,000 note at September 30, 2004 was 8.6% per
annum. The note is interest only with the balance, including all
unpaid interest, due on August 1, 2006.

On September 3, 2004, the Company received a
note for $528,000 from the purchaser in conjunction with the
sale of Gateway Mall Land. The note is secured by a pledge
agreement, bears interest at 4% per annum, is interest
only, paid monthly, with the balance, including all unpaid
interest due on March 7, 2005.

The Company also holds a note with a balance of
$636,000 and $647,000 at September 30, 2004 and
December 31, 2003, respectively. The note is secured by a
first deed of trust on a real estate property, and bears
interest at 8.5% per annum. All accrued, unpaid interest
and principal is due in December 2006.



|   |               
|-- | --------------
|6. | Line of Credit

On September 3, 2003, the Company entered
into an agreement with Fleet National Bank, (Fleet)
for a line of credit in the amount of $1,000,000 which bears
interest at Fleets prime rate plus 50 basis points.
The applicable credit facility matured on September 2, 2004
and has two one-year extensions. On September 21, 2004, the
Company extended the line of credit for one year until
September 30, 2005. The credit facility is subject to a fee
of 1% to be paid one-third on each of the effective date, the
first anniversary and the second anniversary. As of
September 30, 2004, the Company had no outstanding amount
under the line of credit.



|   |                       
|-- | ----------------------
|7. | Mortgage Loans Payable

In connection with the January 2004 acquisition
of a 75% tenant in common interest in AmberOaks, an office
portfolio located in Austin, Texas, the Company obtained a first
mortgage in the amount of $15,000,000 from North Houston Bank.
The loan requires interest only payments through
February 15, 2006 and, thereafter, principal and interest
payments through the maturity date of January 20, 2007 at
the prime rate plus 1.0%, subject to a floor of 5.5%. The
interest rate at September 30, 2004 was 5.75%.

15



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                     
|-- | --------------------
|8. | Shareholders Equity



| |                         
| | ------------------------
| | Share Repurchase Program

Effective May 24, 2001, the Company adopted
the Share Repurchase Plan, (the Repurchase Plan),
which provides eligible shareholders with limited liquidity by
enabling them to request the repurchase of their common shares
by the Company, subject to various limitations. Repurchases are
made at the sole discretion of the Companys Board of
Directors. To be eligible to request a repurchase, a shareholder
must offer for resale at least 25% of the total number of shares
of common stock owned and must have owned the shares for at
least one year.

The price paid by the Company per repurchased
share of common stock varies in accordance with the terms of the
Repurchase Plan. Repurchases, if any, are effected by the
Company on or about the last day of each calendar quarter.
Funding for the Repurchase Plan comes from the Companys
operations. The Company repurchased 31,000 and
34,000 shares of common stock for $272,000 and $304,000
during the three and nine months ended September 30, 2004,
respectively.



| |                   
| | ------------------
| | Stock Option Plans

In February 2000, the Company adopted stock
option plans, (the Plans), for (1) independent
and outside directors, and (2) its officers and employees.
Shares of common stock issued upon the exercise of such options
will have certain transferability restrictions. The unregistered
public sale of restricted stock, which is governed by
Rule 144 of the Securities Act of 1933, is prohibited
during the first year of ownership and limited as set forth in
such rule during the second year of ownership.

Stock options granted pursuant to the Plans will
expire ten years from the grant date and will be exercisable in
whole or in part upon the second anniversary of the grant date;
provided, however, that if the exercise of any stock option
would cause the aggregate of all the Companys stock owned
by the Advisor, affiliates of the Advisor and the Companys
officers and directors to exceed 10.% of the total outstanding
shares of the Companys common stock, such exercise would
be delayed until the first date on which the exercise would not
cause such limit to be exceeded. The Company has authorized and
reserved a total of 100,000 shares of common stock and
700,000 shares of common stock for issuance under the
Director Plan and the Officer/ Employee Plan, respectively.
Option grants are subject to shareholder approval of the Plans.
Each of the Plans was approved by shareholders at the Annual
Meeting of Shareholders held June 28, 2003.

|                       |           |           |         |          |   |                  |      |      |  |   |      |      | 
|---------------------- | --------- | --------- | ------- | -------- | - | ---------------- | ---- | ---- |  | - | ---- | ---- | 
|                       |           | Number    |         | Exercise |   | Weighted Average
|Options Outstanding at |           | of Shares |         | Price    |   | Exercise Price  
|                       |           |           |         |          |   |                 
|December 31, 2003      |           |           | 165,000 |          |   | $                | 9.05 |      |  | $ | 9.05 |     
|                       | Granted   |           |         | 320,000  |   |                  |      | 9.05 |  |   |      | 9.05 | 
|                       | Cancelled |           |         | (60,000  | ) |                  |      | 9.05 |  |   |      | 9.05 | 
|                       |           |           |         |          |   |                  |      |      |  |   |      |     
|September 30, 2004     |           |           | 425,000 |          |   | $                | 9.05 |      |  | $ | 9.05 |     
|                       |           |           |         |          |   |                  |      |      |  |   |      |     

A summary of outstanding options exercisable
under the Plans is presented in the schedule below.

|                |       |             |  |                  |         |                  |  |             |     |                  |  |   |      |  |  |  |         |  |  |   |      | 
|--------------- | ----- | ----------- |  | ---------------- | ------- | ---------------- |  | ----------- | --- | ---------------- |  | - | ---- |  |  |  | ------- |  |  | - | ---- | 
|                |       |             |  | Weighted Average |         | Weighted Average |  |             |     | Weighted Average
|                |       |             |  | Remaining        |         | Exercise Price  |  |             |     | Exercise Price 
|                |       | Options     |  | Contractual Life |         | Outstanding      |  | Options     |     | Exercisable     
|Exercise Prices |       | Outstanding |  | (Years)          |         | Options          |  | Exercisable |     | Options         
|                |       |             |  |                  |         |                  |  |             |     |                 
|                | $9.05 |             |  |                  | 425,000 |                  |  |             | 8.8 |                  |  | $ | 9.05 |  |  |  | 160,000 |  |  | $ | 9.05 | 

16



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                           
|-- | --------------------------
|9. | Related Party Transactions



| |                   
| | ------------------
| | Advisory Agreement

The Advisory Agreement between the Company and
the Advisor, as amended, was renewed by the Board of Directors
on May 8, 2004 for an additional one-year term effective
February 22, 2004. The Company compensates the Advisor for
its services through a series of fees pursuant to the Advisory
Agreement. No amounts are currently due the Advisor under this
Agreement. As described below, there were no amounts paid to the
Advisor for services provided during the three and nine months
ended September 30, 2004 and 2003.

The Advisor bears the expenses incurred in
connection with supervising, monitoring and inspecting real
property or other assets owned by the Company (excluding
proposed acquisitions) or otherwise relating to its duties under
the Advisory Agreement. Such expenses include employing its
personnel, rent, telephone, equipment, and other administrative
expenses. The Company reimburses the Advisor for certain
expenses incurred, including those related to proposed
acquisitions and travel expenses. However, the Company will not
reimburse the Advisor for any operating expenses that, in any
four consecutive fiscal quarters, exceed the greater of 2% of
Average Invested Assets (as defined) or 25% of net income for
such year. If the Advisor receives an incentive distribution,
net income (for purposes of calculating reimbursable operating
expenses) excludes any gain from the sale of assets. Any amount
exceeding the greater of 2% of Average Invested Assets or 25% of
net income paid to the Advisor during a fiscal quarter will be
repaid to the Company within 60 days after the end of the
fiscal year. The Company bears its own expenses for functions
not required to be performed by the Advisor under the Advisory
Agreement, which generally include capital raising and financing
activities, corporate governance matters and other activities
not directly related to real estate properties and other assets.

The Advisor may receive an annual asset
management fee of up to 1.5% of the Average Invested Assets.
This fee will be paid or accrued quarterly, but will not be paid
until the shareholders have received distributions equal to a
cumulative non-compounded rate of 8% per annum on their
investment in the Company. If the fee is not paid in any
quarter, it will accrue and be paid once the shareholders have
received a cumulative 8% return. There were no asset
management fees incurred or paid to the Advisor during the three
and six month periods ended September 30, 2004 and 2003.
The Advisor is also entitled to receive property management fees
for management and leasing services. Such fees may not exceed 5%
of the gross revenue earned by the Company on properties managed.



| |                         
| | ------------------------
| | Property Management Fees

The Company pays Realty a property management fee
equal to 5% of the gross revenue, as defined by the Advisory
Agreement, from the properties. For the three and nine months
ended September 30, 2004 and 2003, the Company incurred and
paid property management fees to Realty of $82,000 and $226,000
and $17,000 and $198,000, respectively.



| |                        
| | -----------------------
| | Incentive Distributions

The Advisor owns 100 non-voting incentive
performance units in T REIT, L.P., the Companys
Operating Partnership, and is entitled to incentive
distributions of operating cash flow, as defined, after the
Companys shareholders have received an 8% annual
return on their invested capital. No incentive distributions
were made to the Advisor for the nine months ended
September 30, 2004 and 2003.



| |                        
| | -----------------------
| | Real Estate Commissions

The total real estate sales commissions paid to
Realty by the Company and unrelated third parties in connection
with the Companys real estate acquisitions and
dispositions for the three and nine months ended
September 30, 2004 and 2003 was $2,984,000 and $4,145,000
and $350,000 and $2,600,000,

17



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

respectively. Of the total real estate sales
commission paid to Realty, the Company paid $44,000 and $383,000
and $350,000 and $350,000 for the three and nine months ended
September 30, 2004 and 2003, respectively (Note 3).



| |                                               
| | ----------------------------------------------
| | Related Party Accounts Receivable/
    Payable

Related party accounts receivable/ payable
consists primarily of amounts due from/to the Company for the
investments in unconsolidated properties.



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies



| |                  
| | -----------------
| | SEC Investigation

On September 16, 2004, the Companys
Advisor, Triple Net Properties, LLC, or Triple Net, learned that
the SEC is conducting an investigation captioned In the
matter of Triple Net Properties, LLC. The SEC has requested
information from Triple Net relating to disclosure in securities
offerings (including offerings by G REIT, T REIT and
A REIT) and information advising it which exemption from
the registration requirements of the Securities Act of 1933, as
amended, were being relied upon for the private offerings in
which Triple Net and its affiliated entities were involved. In
addition, the SEC has requested financial information regarding
these REITs as well as the limited liability companies advised
by Triple Net. The Company and Triple Net intend to cooperate
fully with the SEC in its investigation.



| |                   
| | ------------------
| | Insurance Coverage



| |                                                                      
| | ---------------------------------------------------------------------
| | Property Damage, Business Interruption,
    Earthquake and Terrorism:

The insurance coverage provided through
third-party insurance carriers is subject to coverage
limitations. For each type of insurance coverage described
below, should an uninsured or underinsured loss occur, the
Company could lose all or a portion of its investment in, and
anticipated cash flows from, one or more of the properties. In
addition, there can be no assurance that third-party insurance
carriers will be able to maintain reinsurance sufficient to
cover any losses that may be incurred.

|                                          |  |                                                                                                                          
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------
|Type of Insurance Coverage                |  | Loss Exposure/Deductible                                                                                                 
|                                          |  |                                                                                                                          
|Property Damage and Business Interruption |  | $200 million annual aggregate exposure, plus
    $10 thousand per occurrence deductible                                  
|Earthquake                                |  | $10 million annual aggregate exposure plus
    5 percent ($100,000 minimum) per occurrence deductible                    
|Earthquake (California Properties)        |  | $50 million in excess of $10 million                                                                                     
|Flood  Named Storm                       |  | $10 million annual aggregate exposure plus
    5 percent ($100,000 minimum) per occurrence deductible                    
|Flood  All Other                         |  | $10 million annual aggregate exposure plus
    5 percent ($25,000 minimum/$100,000 maximum) per occurrence
    deductible
|Liability                                 |  | $2 million annual aggregate exposure plus
    $1 million each occurrence                                                 
|Umbrella (Excess Liability)               |  | $100 million aggregate exposure                                                                                          
|Acts of Terrorism                         |  | $100 million annual aggregate exposure, plus
    $10,000 per occurrence deductible.                                      

18



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Unconsolidated Debt

The Companys share of unconsolidated debt
was approximately $32.3 million and $30.3 million at
September 30, 2004 and December 31, 2003,
respectively. The increase of approximately $2 million was
due to the refinancing of Congress Center in September 2004
along with the purchase of interests in the unconsolidated
investments of the Oakey Building and Emerald Plaza in April
2004 and July 2004, respectively.

On September 3, 2004, the Advisor refinanced
Congress Center with three loans totaling $97,500,000, through
Principal Commercial Funding and Principal Life Insurance. While
the Company owns a 10.22% interest in Congress Center, it is
jointly and severally liable with the other owners for payment
of the three loans. In connection with the Congress Center
refinancing, the unamortized portion of the capitalized loan
costs of $580,000 was expensed in September 2004.

Note A is in the amount of $80,000,000 and
bears interest at a fixed rate of 5.635% per annum. The
Property is required to make monthly interest only payments
until the due date of October 1, 2014. No payments of
principal is permitted until July 1, 2014.

Note B is in the amount of $15,000,000 and
bears interest at a fixed rate of 5.635% per annum. The
Property is required to make monthly interest only payments
until the due date of October 1, 2014. No payments of
principal is permitted until July 1, 2014.

Note C is in the amount of $2,500,000 and
bears interest at a fixed rate of 7.0% per annum. The
Property is required to make monthly interest only payments
until October 1, 2006. Thereafter, the Property is required
to make monthly principal and interest payments based on a
30-year amortization schedule until the due date of
October 1, 2014. No prepayments of principal is permitted
until July 1, 2014.



| |           
| | ----------
| | Litigation

On February 11, 2004, Clearview Properties
(Clearview) filed a petition in the District Court
of the 270th Judicial District, Harris County, Texas against
Property Texas SC One Corporation (Property Texas),
Clarion Partners, LLC, Granite Partners I, LLC, three
unaffiliated entities, and the Advisor, Realty and the Company.
The complaint alleges that Property Texas breached an Agreement
of Sale and Purchase to sell Clearview certain real property
located in Houston, Texas. Only one of the complaints
eight separate counts alleges the involvement of the Company,
the Advisor and Realty. That count alleges that the Company, the
Advisor and Realty and/or the other defendants wilfully and
intentionally interfered with the contract between Clearview and
Property Texas and that such interference proximately caused
Clearviews injury and sufferance of actual damages. The
maximum exposure to the Company is uncertain, as Clearview has
failed to specifically allege a monetary amount of loss as the
result of the Companys alleged involvement. The Company
believes that there is no substantive merit to the claims made
by Clearview with respect to the Company, the Advisor or Realty
and it intends to vigorously defend the action. In depositions
made on October 20, 2004, an officer of Clearview testified
that he had no evidence of interference by the Company. As such,
the Company intends to file a motion for summary judgment in its
favor. However, if Clearview were to prevail in this action, it
could have a material adverse effect upon the Companys
financial condition, results of operations and cash flows.

On July 19, 2004, Michael R. and Patricia C.
Long, as Trustees of the Michael R. and Patricia C. Long 2001
Trust (the Purchasers) filed a petition in the
District Court of the 25th Judicial District Guadalupe County,
Texas against T REIT-Seguin, LLC, Peck-Seguin, LLC, Lake Air
Mall-Seguin, LLC, Chicago Title Company and Triple Net
Properties, LLC (collectively, the Sellers). The
Company, through its wholly owned subsidiary T REIT-Seguin, LLC
purchased a 26% interest in the Seguin Corners Shopping Center
in November 2000 which was sold to the Purchasers in August
2002. The petition alleges

19



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

that Sellers misrepresented and/or failed to
disclose that they did not own and could not convey the property
in its entirety to the Purchasers. The Company believes that
there is no substantive merit to the claims made by the
Purchaser and intends to vigorously defend the action. If the
Purchasers prevails in this action, it could have a material
adverse effect upon the Companys financial condition,
results of operations and cash flows.

There are no other material pending legal
proceedings, other than routine litigation incidental to the
business, to which the Company is a party to or of which any of
its properties is the subject.



| |                      
| | ---------------------
| | Environmental Matters

The Company follows the policy of monitoring its
properties for the presence of hazardous or toxic substances.
While there can be no assurance that a material environmental
liability does not exist, the Company is not currently aware of
any environmental liability with respect to the properties that
would have a material effect on the Companys financial
condition, results of operations and cash flows. Further, the
Company is not aware of any environmental liability or any
unasserted claim or assessment with respect to an environmental
liability that the Company believes would require additional
disclosure or the recording of a loss contingency.



| |      
| | -----
| | Other

The Companys other commitments and
contingencies include the usual obligations of a real estate
owners and operators in the normal course of business. In the
opinion of management, these matters are not expected to have a
material impact on the Companys consolidated financial
position and results of operations.



|    |                                                     
|--- | ----------------------------------------------------
|11. | Discontinued Operations  Property
    Held for Sale

In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, the net income and the net gain on dispositions of
operating properties sold subsequent to December 31, 2001
or classified as held for sale are reflected in the condensed
consolidated statement of operations as discontinued operations
for all periods presented. For the three and nine months ended
September 30, 2004 and 2003, discontinued operations
included the net income of one property sold in 2004 and three
properties sold in 2003. The following table summarizes the
income and expense components that comprise discontinued
operations for the three and nine months ended
September 30, 2004 and 2003:

|                  |                                                                  |                    |         |                   |  |      |           |           |   |   |         |         |  |   |           |           | 
|----------------- | ---------------------------------------------------------------- | ------------------ | ------- | ----------------- |  | ---- | --------- | --------- | - | - | ------- | ------- |  | - | --------- | --------- | 
|                  |                                                                  |                    |         |                  
|                  |                                                                  | Three Months Ended |         | Nine Months Ended
|                  |                                                                  | September 30,      |         | September 30,    
|                  |                                                                  |                    |         |                  
|                  |                                                                  | 2004               |         | 2003              |  | 2004 |           | 2003     
|                  |                                                                  |                    |         |                   |  |      |           |          
|Revenues          |                                                                  |                    |         |                   |  |      |           |           |   |   |         |         |  |   |           |          
|                  | Rental income                                                    |                    | $       |                  |  |      | $         | 1,024,000 |   |   | $       | 350,000 |  |   | $         | 3,749,000 | 
|                  | Interest income                                                  |                    |         |                  |  |      |           | 1,000     |   |   |         | 26,000  |  |   |           | 2,000     | 
|                  |                                                                  |                    |         |                   |  |      |           |           |   |   |         |         |  |   |           |          
|                  |                                                                  |                    |        |                   |  |      | 1,025,000 |           |   |   | 376,000 |         |  |   | 3,751,000 |          
|Expenses          |                                                                  |                    |         |                   |  |      |           |           |   |   |         |         |  |   |           |          
|                  | Rental expenses                                                  |                    |         | 38,000            |  |      |           | 464,000   |   |   |         | 100,000 |  |   |           | 1,199,000 | 
|                  | General and administrative                                       |                    |         |                  |  |      |           | (4,000    | ) |   |         |        |  |   |           | 54,000    | 
|                  | Depreciation and amortization                                    |                    |         |                  |  |      |           | 48,000    |   |   |         | 19,000  |  |   |           | 294,000   | 
|                  | Interest (including amortization of deferred
    financing fees) |                    |         |                  |  |      |           | 555,000   |   |   |         | 194,000 |  |   |           | 1,473,000 | 
|                  |                                                                  |                    |         |                   |  |      |           |           |   |   |         |         |  |   |           |          
|                  |                                                                  |                    | 38,000  |                   |  |      | 1,063,000 |           |   |   | 313,000 |         |  |   | 3,020,000 |          
|                  |                                                                  |                    |         |                   |  |      |           |           |   |   |         |         |  |   |           |          
|Net income (loss) |                                                                  | $                  | (38,000 | )                 |  | $    | (38,000   | )         |   | $ | 63,000  |         |  | $ | 731,000   |          
|                  |                                                                  |                    |         |                   |  |      |           |           |   |   |         |         |  |   |           |          

20



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##### Table of Contents



T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |            
|--- | -----------
|12. | Restatement

Subsequent to the issuance of the Companys
interim condensed consolidated financial statements for the
quarter ended September 30, 2003, the Company determined
that it should have reported the gain (loss) on sale of real
estate investments in certain real estate properties previously
reported in income from continuing operations in the periods
ended September 30, 2003 as discontinued operations and
that the gain (loss) on sale of certain real estate reported in
the periods ended September 30, 2003 contained an error
because the final allocation of the property basis had not been
taken into account in the proper period. As a result, the
accompanying condensed consolidated financial statements for the
three and nine months ended September 30, 2003 have been
restated from the amounts previously reported to correct the
accounting for the transactions discussed herein and to
reclassify the operating results of properties disposed
subsequent to September 30, 2003 as discontinued
operations. A summary of the significant effects of the
restatement on the condensed consolidated financial statements
is as follows:

|                                                                 |                         |                                       |           |                  |   |                 |            |             |  |   |          |   |  |   |           |       |  
|---------------------------------------------------------------- | ----------------------- | ------------------------------------- | --------- | ---------------- | - | --------------- | ---------- | ----------- |  | - | -------- | - |  | - | --------- | ----- | -
|                                                                 |                         |                                      
|                                                                 |                         | Three Months Ended September 30, 2003
|                                                                 |                         |                                      
|                                                                 |                         |                                       |           | Reclassification |   |                
|                                                                 |                         | As Previously                         |           | Correction       |   | of Discontinued |            |            
|                                                                 |                         | Reported                              |           | of Errors        |   | Operations      |            | As Restated
|                                                                 |                         |                                       |           |                  |   |                 |            |            
|Revenues                                                         |                         | $                                     | 548,000   |                  |   | $               |           |             |  | $ | (494,000 | ) |  | $ | 54,000    |      
|Operating expenses                                               |                         |                                       | 824,000   |                  |   |                 |           |             |  |   | (413,000 | ) |  |   | 411,000   |      
|Other income                                                     |                         |                                       | 278,000   |                  |   |                 |           |             |  |   |         |   |  |   | 278,000   |      
|Gain (loss) on sale of real estate investments                   |                         |                                       | 2,814,000 |                  |   |                 | (2,814,000 | )           |  |   |         |   |  |   |          |      
|                                                                 |                         |                                       |           |                  |   |                 |            |             |  |   |          |   |  |   |           |      
|Income (loss) from continuing operations                         |                         |                                       | 2,816,000 |                  |   |                 | (2,814,000 | )           |  |   | (81,000  | ) |  |   | (79,000   | )    
|Gain (loss) on sale of real estate investments                   |                         |                                       |          |                  |   |                 | 2,814,000  |             |  |   | (1,000   | ) |  |   | 2,813,000 |      
|Income from discontinued operations 
    property held for sale |                         |                                       | (120,000  | )                |   |                 |           |             |  |   | 82,000   |   |  |   | (38,000   | )    
|                                                                 |                         |                                       |           |                  |   |                 |            |             |  |   |          |   |  |   |           |      
|Net income                                                       |                         | $                                     | 2,696,000 |                  |   | $               |           |             |  | $ |         |   |  | $ | 2,696,000 |      
|                                                                 |                         |                                       |           |                  |   |                 |            |             |  |   |          |   |  |   |           |      
|Net income (loss) per common share 
    basic and diluted       |                         |                                       |           |                  |   |                 |            |             |  |   |          |   |  |   |           |      
|                                                                 | Continuing operations   |                                       | $         | 0.60             |   |                 |            |             |  |   |          |   |  |   | $         | (0.02 | )
|                                                                 | Discontinued operations |                                       | $         | (0.03            | ) |                 |            |             |  |   |          |   |  |   | $         | 0.59  |  
|                                                                 |                         |                                       |           |                  |   |                 |            |             |  |   |          |   |  |   |           |      
|Total net income per common share                                |                         | $                                     | 0.57      |                  |   |                 |            |             |  |   |          |   |  | $ | 0.57      |      
|                                                                 |                         |                                       |           |                  |   |                 |            |             |  |   |          |   |  |   |           |      

|                   |  |                                      |           |                  |  |                 |   |             |  |   |            |   |  |   |           | 
|------------------ |  | ------------------------------------ | --------- | ---------------- |  | --------------- | - | ----------- |  | - | ---------- | - |  | - | --------- | 
|                   |  |                                     
|                   |  | Nine Months Ended September 30, 2003
|                   |  |                                     
|                   |  |                                      |           | Reclassification |  |                
|                   |  | As Previously                        |           | Correction       |  | of Discontinued |   |            
|                   |  | Reported                             |           | of Errors        |  | Operations      |   | As Restated
|                   |  |                                      |           |                  |  |                 |   |            
|Revenues           |  | $                                    | 1,676,000 |                  |  | $               |  |             |  | $ | (1,116,000 | ) |  | $ | 560,000   | 
|Operating expenses |  |                                      | 1,986,000 |                  |  |                 |  |             |  |   | (917,000   | ) |  |   | 1,069,000 | 

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T REIT, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |                         |                                      |           |                  |  |                 |            |             |  |   |          |   |  |   |           |            | 
|---------------------------------------------------------------- | ----------------------- | ------------------------------------ | --------- | ---------------- |  | --------------- | ---------- | ----------- |  | - | -------- | - |  | - | --------- | ---------- | 
|                                                                 |                         |                                     
|                                                                 |                         | Nine Months Ended September 30, 2003
|                                                                 |                         |                                     
|                                                                 |                         |                                      |           | Reclassification |  |                
|                                                                 |                         | As Previously                        |           | Correction       |  | of Discontinued |            |            
|                                                                 |                         | Reported                             |           | of Errors        |  | Operations      |            | As Restated
|                                                                 |                         |                                      |           |                  |  |                 |            |            
|Other income                                                     |                         |                                      | 1,308,000 |                  |  |                 |           |             |  |   | (1,000   | ) |  |   | 1,307,000 |           
|Gain (loss) on sale of real estate investments                   |                         |                                      | 2,837,000 |                  |  |                 | (2,837,000 | )           |  |   |         |   |  |   |          |           
|                                                                 |                         |                                      |           |                  |  |                 |            |             |  |   |          |   |  |   |           |           
|Income (loss) from continuing operations                         |                         |                                      | 3,835,000 |                  |  |                 | (2,837,000 | )           |  |   | (200,000 | ) |  |   | 798,000   |           
|Gain (loss) on sale of real estate investments                   |                         |                                      |          |                  |  |                 | 2,622,000  |             |  |   |         |   |  |   | 2,622,000 |           
|Income from discontinued operations 
    property held for sale |                         |                                      | 531,000   |                  |  |                 |           |             |  |   | 200,000  |   |  |   | 731,000   |           
|                                                                 |                         |                                      |           |                  |  |                 |            |             |  |   |          |   |  |   |           |           
|Net income                                                       |                         | $                                    | 4,366,000 |                  |  | $               | (215,000   | )           |  | $ |         |   |  | $ | 4,151,000 |           
|                                                                 |                         |                                      |           |                  |  |                 |            |             |  |   |          |   |  |   |           |           
|Net income (loss) per common share 
    basic and diluted       |                         |                                      |           |                  |  |                 |            |             |  |   |          |   |  |   |           |           
|                                                                 | Continuing operations   |                                      | $         | 0.82             |  |                 |            |             |  |   |          |   |  |   | $         | 0.17       | 
|                                                                 | Discontinued operations |                                      | $         | 0.11 $0.93       |  |                 |            |             |  |   |          |   |  |   | $         | 0.72 $0.89 | 
|Total net income per common share                                |                         |                                      |           |                  |  |                 |            |             |  |   |          |   |  |   |           |           
|                                                                 |                         |                                      |           |                  |  |                 |            |             |  |   |          |   |  |   |           |           



|    |                  
|--- | -----------------
|13. | Subsequent Events

Subsequent to September 30, 2004 the Company
has listed certain unconsolidated properties with a real estate
broker.

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|        |                                                                                                       
|------- | ------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    (MD&A) of Financial Condition and Results of
    Operations

The following discussion should be read in
conjunction with the Companys financial statements and
notes appearing elsewhere in this Form 10-Q. Such financial
statements and information have been prepared to reflect the
Companys financial position as of September 30, 2004
and December 31, 2003, together with results of operations
and cash flows for the three and nine month periods ended
September 30, 2004 and 2003, respectively.

Forward-Looking Statements

Historical results and trends should not be taken
as indicative of future operations. Managements statements
contained in this report that are not historical facts are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results may differ materially from those
included in the forward-looking statements. The Company intends
those forward-looking statements to be covered by the
safe-harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and are
including this statement for purposes of complying with those
safe-harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally
identifiable by use of the words believe,
expect, intend, anticipate,
estimate, project,
prospects, or similar expressions. The
Companys ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors
which could have a material adverse effect on the operations and
future prospects of the Company on a consolidated basis include,
but are not limited to: changes in economic conditions generally
and the real estate market specifically; legislative/regulatory
changes (including changes to laws governing the taxation of
real estate investment trusts (REIT)); availability
of capital, interest rates; competition; supply and demand for
operating properties in the Companys current and proposed
market areas; generally accepted accounting principles, policies
and guidelines applicable to REITs; the availability of
properties to acquire; the availability of buyers to acquire
properties the Company makes available for sale; the
availability of financing; and the absence of material
litigation. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance
should not be placed on such statements. Additional information
concerning the Company and its business, including additional
factors that could materially affect the Companys
financial results, is included herein and in the Companys
other filings with the Securities and Exchange Commission (the
SEC).

Overview and Background

The Company was organized in December 1998 to
acquire and manage a diversified portfolio of real estate
composed of office, industrial, retail and service properties
located primarily in the following focus states: Alaska,
Florida, Iowa, Michigan, Minnesota, Nevada, North Carolina,
South Carolina, South Dakota, Tennessee, Texas, Virginia,
Washington, Wisconsin and Wyoming. The Company has been
operating and intends to continue operating as a REIT for
federal and state income tax purposes. To maintain the REIT
status, the Company is required to distribute annually as
dividends at least 90% of its REIT taxable income, as defined by
the Internal Revenue Code, to the shareholders, among other
requirements. If the Company fails to qualify as a REIT in any
taxable year, it would be subject to federal income tax on its
taxable income at regular corporate tax rates. As of
September 30, 2004, the Company believes it is in
compliance with all relevant REIT requirements.

The Company was incorporated to acquire ownership
interests in office, industrial and service real estate
properties. The Company completed its first property acquisition
in September 2001. As of September 30, 2004, it has
purchased interests in 12 properties, including two consolidated
office properties and ten unconsolidated interests in
office/industrial properties.

The Company is externally advised by Triple Net
Properties, LLC. (the Advisor). The Advisor is
primarily responsible for managing the day-to-day operations and
assets of the Company. The advisory agreement between the
Company and its Advisor has a one year term, and is subject to
successive

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renewals with the written consent of the parties
including a majority of the Companys independent
directors. The Companys Advisor is affiliated with the
Company in that the two entities have common officers and
directors, some of whom also own an equity interest in the
Advisor.


Business Strategy

The Companys primary business strategy is
to actively manage its property portfolio to seek to achieve
gains in rental rates and occupancy, control operating expenses
and maximize income from ancillary operations and services. The
Company may also sell existing properties and place the net
proceeds therefrom into new investment properties it believes
will generate long-term value.



| |                                                                 
| | ----------------------------------------------------------------
| | Acquisitions During the Nine Months Ended
    September 30, 2004

During the nine months ended September 30,
2004, the Company completed the following acquisitions:



| |                                 
| | --------------------------------
| | AmberOaks LP  Austin,
    Texas

On January 20, 2004, the Company, through
its wholly-owned subsidiary, TREIT  AmberOaks LP,
purchased a 75% undivided tenant in common interest in three
buildings at AmberOaks Corporate Center located in Austin, Texas
from an unaffiliated third party. Three unaffiliated entities
purchased the remaining 25% tenant-in-common interests in the
property. The total purchase price for AmberOaks was
$22,965,000. The purchase was financed by a $15,000,000 loan
secured by the property from North Houston Bank. The mortgage
requires interest only payments through February 15, 2006
and, thereafter, principal and interest payments through the
maturity date of the loan on January 20, 2007, with an
option to extend for up to 24 months until January 20,
2009. The interest rate on the mortgage loan is the prime rate
plus 1.0% subject to a floor of 5.5%. The seller paid a
sales commission to Triple Net Properties Realty, Inc.
(Realty), which is solely owned by Anthony W.
Thompson, the Companys Chief Executive Officer and
President until his resignation effective August 18, 2004,
of $585,000, or 2.3% of the purchase price. AmberOaks is a
three-building Class A office portfolio totaling
206,000 square feet and is part of an eight-building
complex built during 1999-2001. An affiliate of the Advisor
purchased the remaining five buildings. During the nine months
ended September 30, 2004, the Company recorded
approximately $5,085,000 in lease intangible assets related to
its acquisition of AmberOaks.



| |                                               
| | ----------------------------------------------
| | Gateway Mall Land  Bismarck, North
    Dakota

On February 27, 2004, the Company purchased
43 acres of land, including 36 acres of land situated
under Gateway Mall from an unaffiliated third party for a
purchase price including closing costs of $1,631,000.

During the nine months ended September 30,
2004, the Company invested in the following unconsolidated
investments:



| |                                                                   
| | ------------------------------------------------------------------
| | Oakey Building, LLC, Las Vegas,
    Nevada  April 2, 2004  9.76%
| | Emerald Plaza, LLC, San Diego,
    CA  July 26, 2004  2.7%      

The aggregate investment for the two
unconsolidated investments was approximately $1.7 million.



| |                                       
| | --------------------------------------
| | Oakey Building  Las Vegas,
    Nevada

On April 2, 2004, the Company, through its
wholly-owned subsidiary, TREIT  NNN Oakey Building
2003, LLC, purchased a 9.761% interest in the Oakey Building in
Las Vegas, Nevada from an unaffiliated third party. The total
purchase price for the Oakey Building was $8,137,000. The
Companys total initial investment was $670,000. The
purchase was financed by $4,000,000 in borrowings under a
secured mortgage with Ivan Halaj and Vilma Halaj Inter Vivos
Trust. The mortgage requires principal and interest payments at
a fixed interest rate of 10% until the due date of April 1,
2005. The seller of the property paid a sales commission to
Realty of $237,000, or 2.9% of the purchase price. The Oakey
Building is a 104,000 square foot Class A office
building located in Las Vegas, Nevada.

24



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##### Table of Contents





| |                                  
| | ---------------------------------
| | Emerald Plaza  San Diego,
    CA

On July 26, 2004, the Company, through its
wholly-owned subsidiary, TREIT  NNN Emerald Plaza,
LLC, purchased a 2.7% interest in the Emerald Plaza Building in
San Diego, CA from an unaffiliated third party for
$1,000,000. The total purchase price was $100,940,000 and was
financed by $68,500,000 in borrowings under a secured mortgage
with Citigroup Global Markets Realty Corp. The mortgage requires
interest only payments through the maturity date of
June 17, 2007 at an interest rate of 3.83%. The seller of
the property paid a sales commission to Realty of $2,940,000, or
2.9% of the purchase price. Emerald Plaza is a
354,525 square foot Class A office tower located in
downtown San Diego, California.

Investments in unconsolidated real estate consist
of the Companys investments in undivided tenant in common
interests (TIC) and limited liability companies
(LLC). The Company had the following investments in
unconsolidated real estate at September 30, 2004:

|                                        |  |          |                  |            |  |            |        |  |  |   |            | 
|--------------------------------------- |  | -------- | ---------------- | ---------- |  | ---------- | ------ |  |  | - | ---------- | 
|                                        |  |          |                  |            |  | Companys 
|                                        |  |          |                  | Percentage |  | Investment
|Property                                |  | Location |                  | Owned      |  | 9/30/2004 
|                                        |  |          |                  |            |  |           
|City Center West A
    Building  TIC |  |          | Las Vegas, NV    |            |  |            | 89.13% |  |  | $ | 7,987,000  | 
|Congress Center  LLC                   |  |          | Chicago, IL      |            |  |            | 10.22% |  |  |   | 4,322,000  | 
|Pacific Corporate Park  LLC            |  |          | Lake Forest, CA  |            |  |            | 22.76% |  |  |   | 1,363,000  | 
|Titan Building and Titan Plaza  TIC    |  |          | San Antonio, TX  |            |  |            | 48.50% |  |  |   | 2,088,000  | 
|Reno Trademark Building  TIC           |  |          | Reno, NV         |            |  |            | 40.00% |  |  |   | 1,529,000  | 
|Saddleback Financial  TIC              |  |          | Laguna Hills, CA |            |  |            | 25.00% |  |  |   | 1,007,000  | 
|Oakey Building  LLC                    |  |          | Las Vegas, NV    |            |  |            | 9.76%  |  |  |   | 630,000    | 
|Enclave  LLC                           |  |          | Houston, TX      |            |  |            | 3.26%  |  |  |   | 454,000    | 
|County Center Building  TIC            |  |          | Temecula, CA     |            |  |            | 16.00% |  |  |   | 439,000    | 
|Emerald Plaza  LLC                     |  |          | San Diego, CA    |            |  |            | 2.70%  |  |  |   | 979,000    | 
|                                        |  |          |                  |            |  |            |        |  |  |   |            | 
|                                        |  |          |                  |            |  |            |        |  |  | $ | 20,798,000 | 
|                                        |  |          |                  |            |  |            |        |  |  |   |            | 



| |                                                                 
| | ----------------------------------------------------------------
| | Dispositions During the Nine Months Ended
    September 30, 2004



| |                                          
| | -----------------------------------------
| | Gateway Mall  Bismarck, North
    Dakota

On March 18, 2004, the Company sold Gateway
Mall to an unaffiliated third party for a purchase price of
$11,600,000. The sale of Gateway Mall included the underlying
36 acres of land. Net sales proceeds included cash of
$2,452,000 and a note receivable in the amount of $8,700,000.
The note was secured by a pledge agreement, bore interest at
6% per annum and matured June 14, 2004. The note was
refinanced by the buyer and the Company received $6,500,000 on
July 9, 2004 and was issued an adjustable note receivable
for $2,200,000. In connection with the sale of Gateway Mall, the
Company repaid a note payable secured by the property with an
outstanding balance of $4,876,000. At closing, the Company paid
a real estate commission to Realty of $339,000, or 2.9% of the
selling price.



| |                                               
| | ----------------------------------------------
| | Gateway Mall Land  Bismarck, North
    Dakota

On September 9, 2004, the Company sold the
remaining seven acres of land to an unaffiliated third party for
$1,385,000. Net sales proceeds included cash of $794,000 and a
note receivable in the amount of $528,000. The note is secured
by a pledge agreement, bears interest at 4% per annum and
is due March 7, 2005. At closing, the Company paid a real
estate commission to Realty of $44,000, or 3.2% of the selling
price.

Critical Accounting Policies

The preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America (GAAP), requires the
Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The
Company believes that its critical accounting policies are those
that

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##### Table of Contents



require significant judgments and estimates such
as those related to revenue recognition, allowance for doubtful
accounts, impairment of real estate and intangible assets,
purchase price allocation, deferred assets and qualification as
a REIT. These estimates are made and evaluated on an on-going
basis using information that is currently available as well as
various other assumptions believed to be reasonable under the
circumstances. Actual results could vary from those estimates,
perhaps in material adverse ways, and those estimates could be
different under different assumptions or conditions. A summary
of these policies can be found in Managements
Discussion and Analysis in the Companys Annual
Report on Form 10-K/ A for the year ended December 31,
2003. There have been no material changes to these policies in
2004.


Factors Which May Influence Results of
Operations



| |              
| | -------------
| | Rental Income

The amount of rental income generated by the
Companys properties depends principally on the
Companys ability to maintain the occupancy rates of
currently leased space and to lease currently available space
and space available from unscheduled lease terminations at the
existing rental rates. Negative trends in one or more of these
factors could adversely affect the Companys rental income
in future periods.



| |                            
| | ---------------------------
| | Scheduled Lease Expirations

As of September 30, 2004, the Companys
portfolio was 91% leased to 23 tenants. There are no leases
expiring during the remainder of 2004 and 21% of the leased
square footage expires during 2005. The Companys leasing
strategy for 2005 focuses on negotiating renewals for leases
scheduled to expire during the year and identifying new tenants
or existing tenants seeking additional space to occupy the
square footage for which the Company is unable to negotiate such
renewals. Of the leases expiring in 2005, the Company
anticipates, but cannot assure, that approximately 84% of the
tenants will renew for another term.

Public Offering of Equity Securities

On February 22, 2000, the Company commenced
its initial public offering of up to 10,000,000 shares of
common stock at $10.00 per share pursuant to a registration
statement on Form S-11 filed under the Securities Act of
1933, as amended. The Company commenced its active operations on
September 26, 2000 when it completed its first property
acquisition. The Company terminated its initial public offering
on May 31, 2002 for which it received gross proceeds of
approximately $46,395,000 from the sale of 4,720,000 shares
of common stock. For the nine months ended September 30,
2004 and 2003, the Company had repurchased 34,000 and
32,000 shares of common stocks pursuant to its Repurchase
Plan, respectively.

Restatement

As discussed in Note 12 to the condensed
consolidated financial statements included in Item 1, the
Companys financial statements for the three and nine month
periods ended September 30, 2003 have been restated. The
accompanying MD&A give effect to the restatement.

Results of Operations

Operating results are primarily comprised of
income derived from the Companys portfolio of properties.
Because of the significant property acquisitions and
dispositions throughout the three and nine months ended
September 30, 2004 and 2003, respectively, the
comparability of financial data from period to period is
limited. Certain 2003 amounts have been restated to reflect the
effects of discontinued operations adjustments for properties
disposed of in 2004. See Note 11 to the condensed
consolidated financial statements for additional information.

26



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##### Table of Contents





| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Comparison of the Three and Nine Months
    Ended September 30, 2004 to the Three and Nine Months Ended
    September 30, 2003

|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |        |   
|-------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------- | --------- | ------------------------------- | - | ------ | --------- | --------- | - | ---- | ---------- | ---------- | - | ------ | ------- | ------- | -- | - | --------- | --------- |  | - | --------- | --------- |  | - | ---------- | --------- | - |  | ------ | ------ | --
|                                                                                                   |                                                                   |                                  |           |                                
|                                                                                                   |                                                                   | Three Months Ended September 30, |           | Nine Months Ended September 30,
|                                                                                                   |                                                                   |                                  |           |                                
|                                                                                                   |                                                                   |                                  |           | Percent                         |   |        |           | Percent  
|                                                                                                   |                                                                   | 2004                             |           | 2003                            |   | Change |           | Change    |   | 2004 |            | 2003       |   | Change |         | Change 
|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |        
|Revenues:                                                                                          |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|                                                                                                   | Rental income                                                     |                                  | $         | 1,568,000                       |   |        | $         | 54,000    |   |      | $          | 1,514,000  |   |        |         | 2803.70 | %  |   | $         | 3,667,000 |  |   | $         | 560,000   |  |   | $          | 3,107,000 |   |  |        | 554.82 | % 
|Expenses:                                                                                          |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|                                                                                                   | Rental expenses                                                   |                                  |           | 468,000                         |   |        |           | 68,000    |   |      |            | 400,000    |   |        |         | 588.24  | %  |   |           | 1,248,000 |  |   |           | 192,000   |  |   |            | 1,056,000 |   |  |        | 550.00 | % 
|                                                                                                   | General and administrative                                        |                                  |           | 458,000                         |   |        |           | 228,000   |   |      |            | 230,000    |   |        |         | 100.88  | %  |   |           | 822,000   |  |   |           | 563,000   |  |   |            | 259,000   |   |  |        | 46.00  | % 
|                                                                                                   | Depreciation and amortization                                     |                                  |           | 225,000                         |   |        |           | 50,000    |   |      |            | 175,000    |   |        |         | 350.00  | %  |   |           | 1,320,000 |  |   |           | 124,000   |  |   |            | 1,196,000 |   |  |        | 964.52 | % 
|                                                                                                   | Interest (including amortization of deferred
    financing costs) |                                  |           | 347,000                         |   |        |           | 65,000    |   |      |            | 282,000    |   |        |         | 433.85  | %  |   |           | 836,000   |  |   |           | 190,000   |  |   |            | 646,000   |   |  |        | 340.00 | % 
|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|                                                                                                   |                                                                   |                                  | 1,498,000 |                                 |   |        | 411,000   |           |   |      | 1,087,000  |            |   |        | 264.48  | %       |    |   | 4,226,000 |           |  |   | 1,069,000 |           |  |   | 3,157,000  |           |   |  | 295.32 | %     
|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|Income (loss) before other income, discontinued
    operations and minority interests              |                                                                   |                                  | 70,000    |                                 |   |        | (357,000  | )         |   |      | 427,000    |            |   |        | (119.61 | )%      |    |   | (559,000  | )         |  |   | (509,000  | )         |  |   | (50,000    | )         |   |  | 9.82   | %     
|Other income:                                                                                      |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|                                                                                                   | Interest and dividend income                                      |                                  |           | 82,000                          |   |        |           | 11,000    |   |      |            | 71,000     |   |        |         | 645.45  | %  |   |           | 323,000   |  |   |           | 76,000    |  |   |            | 247,000   |   |  |        | 325.00 | % 
|                                                                                                   | Gain on sale of marketable securities                             |                                  |           | 82,000                          |   |        |           |          |   |      |            | 82,000     |   |        |         | 0.00    | %  |   |           | 132,000   |  |   |           |          |  |   |            | 132,000   |   |  |        | 0.00   | % 
|                                                                                                   | Equity in earnings of unconsolidated real estate                  |                                  |           | 50,000                          |   |        |           | 267,000   |   |      |            | (217,000   | ) |        |         | (81.27  | )% |   |           | 683,000   |  |   |           | 1,231,000 |  |   |            | (548,000  | ) |  |        | (44.52 | )%
|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|                                                                                                   |                                                                   |                                  | 214,000   |                                 |   |        | 278,000   |           |   |      | (64,000    | )          |   |        | (23.02  | )%      |    |   | 1,138,000 |           |  |   | 1,307,000 |           |  |   | (169,000   | )         |   |  | (12.93 | )%    
|Income (loss) from continuing operations before
    discontinued operations and minority interests |                                                                   |                                  | 284,000   |                                 |   |        | (79,000   | )         |   |      | 363,000    |            |   |        | (459.49 | )%      |    |   | 579,000   |           |  |   | 798,000   |           |  |   | (219,000   | )         |   |  | (27.44 | )%    
|Discontinued operations:                                                                           |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|                                                                                                   | Gain on sale on real estate dispositions                          |                                  |           | 821,000                         |   |        |           | 2,813,000 |   |      |            | (1,992,000 | ) |        |         | (70.81  | )% |   |           | 1,634,000 |  |   |           | 2,622,000 |  |   |            | (988,000  | ) |  |        | (37.70 | )%
|                                                                                                   | Income (loss) from discontinued operations                        |                                  |           | (38,000                         | ) |        |           | (38,000   | ) |      |            |           |   |        |         | 0.00    | %  |   |           | 63,000    |  |   |           | 731,000   |  |   |            | (668,000  | ) |  |        | (91.38 | )%
|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|                                                                                                   |                                                                   |                                  | 783,000   |                                 |   |        | 2,775,000 |           |   |      | (1,992,000 | )          |   |        | (71.78  | )%      |    |   | 1,697,000 |           |  |   | 3,353,000 |           |  |   | (1,656,000 | )         |   |  | (49.40 | )%    
|Income before minority interests                                                                   |                                                                   |                                  | 1,067,000 |                                 |   |        | 2,696,000 |           |   |      | (1,629,000 | )          |   |        | (60.42  | )%      |    |   | 2,276,000 |           |  |   | 4,151,000 |           |  |   | (1,875,000 | )         |   |  | (45.17 | )%    
|Minority interests                                                                                 |                                                                   |                                  | (26,000   | )                               |   |        |          |           |   |      | (26,000    | )          |   |        | 0.00    | %       |    |   | (125,000  | )         |  |   |          |           |  |   | (125,000   | )         |   |  | 0.00   | %     
|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       
|Net income                                                                                         |                                                                   | $                                | 1,093,000 |                                 |   | $      | 2,696,000 |           |   | $    | (1,603,000 | )          |   |        | (59.46  | )%      |    | $ | 2,401,000 |           |  | $ | 4,151,000 |           |  | $ | (1,750,000 | )         |   |  | (42.16 | )%    
|                                                                                                   |                                                                   |                                  |           |                                 |   |        |           |           |   |      |            |            |   |        |         |         |    |   |           |           |  |   |           |           |  |   |            |           |   |  |        |       

Rental income increased $1,514,000, or 2,804%, to
$1,568,000 and $3,107,000, or 555%, to $3,667,000 during the
three and nine months ended September 30, 2004,
respectively, when compared with the same periods of the prior
year. $1,080,000 and $2,695,000 of these increases for the three
and nine months ended September 30, 2004, respectively,
were attributable to the acquisition of AmberOaks in January
2004.

Rental expenses increased $400,000, or 588%, to
$468,000 and $1,056,000, or 550%, to $1,248,000 during the three
and nine months ended September 30, 2004, respectively,
when compared with the same periods of the prior year. $374,000
and $1,021,000 of these increases for the three and nine months
ended September 30, 2004, respectively, were attributable
to the acquisition of AmberOaks in January 2004. The increases
were also attributable to an increase in property taxes,
administration fees, ground maintenance expenses, offset by a
decrease in management fees for University Heights.

27



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##### Table of Contents



General and administrative expenses increased
$230,000, or 101%, to $458,000 and $259,000, or 46%, to $822,000
during the three and nine months ended September 30, 2004,
respectively, when compared with the same periods of the prior
year due to the increase in accounting and legal fees due to
regulatory filings.

Interest expense increased $282,000, or 434%, to
$347,000 and $646,000, or 340%, to $836,000 during the three and
nine months ended September 30, 2004, respectively, when
compared to the same periods of the prior year. $211,000 and
$548,000 of these increases for the three and nine months ended
September 30, 2004, respectively, were attributable to the
interest on the mortgage note for AmberOaks. The increases were
also attributable to the Christie Street Indemnification and
draws under the line of credit in 2004.

Depreciation and amortization increased $175,000,
or 350%, to $225,000 and $1,196,000, or 965%, to $1,320,000
during the three and nine months ended September 30, 2004,
respectively, when compared with the same periods of the prior
year. $215,000 and $1,235,000 of these increases for the three
and nine months ended September 30, 2004, respectively,
were attributable to the acquisition of AmberOaks in January
2004.

Interest and dividend income increased $71,000,
or 645%, to $82,000 and $247,000, or 325%, to $323,000 during
the three and nine months ended September 30, 2004,
respectively, when compared with the same periods of the prior
year. This increase was primarily due to the interest earned on
the notes receivable for the sale of Gateway Mall and dividends
on investments in marketable securities.

Gain on sale of marketable securities was due to
the purchase and sale of REIT investment securities for the
three and nine months ended September 30, 2004,
respectively.

Equity in earnings of unconsolidated real estate
decreased by $217,000, or 81%, to $50,000 and $548,000, or 45%,
to $683,000 for the three and nine months ended
September 30, 2004, respectively, compared with the same
periods of the prior year. The decrease was primarily due to the
write off of prepaid loan costs due to the refinancing of the
Congress Center property as well as the increase in depreciation
and amortization as a result of finalization of purchase price
allocations of the acquired unconsolidated real estate assets.

Income (loss) from continuing operations
increased by $363,000, or 459% to $284,000 or $0.07 per
basic and diluted share and decreased $219,000, or 27%, to
$579,000, or $0.15 per basic and diluted share for the
three and nine months ended September 30, 2004,
respectively, when compared with the same periods of the prior
year.

Income from discontinued operations for the nine
months ended September 30, 2004 represents the net
operating results of one consolidated property that was sold
during the nine months ended September 30, 2004, including
interest expense and depreciation related to this property
through the date of sale. Income from discontinued operations
for the nine months ended September 30, 2003 represents the
net operating results of the three properties sold in 2003 and
the one property sold in 2004. Gain (loss) on sale of real
estate dispositions was $1,634,000 for the nine months ended
September 30, 2004 and was due to the sale of Gateway Mall
on March 18, 2004 and Gateway Mall Land on
September 9, 2004. Gain on the sale of real estate
dispositions for the nine months ended September 30, 2003
was $2,622,000 and was due to the sales of North Star Shopping
Center, Thousand Oaks, and Pahrump.

Net income was $1,093,000, or $0.24, per basic
and dilutive share and $2,401,000, or $0.52, per basic and
dilutive share, for the three and nine months ended
September 30, 2004, respectively, compared with net income
of $2,696,000, or $0.57 per basic and dilutive share, and
$4,151,000, or $0.89 per basic and dilutive share, for the
three and nine months ended September 30, 2003,
respectively.

28



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##### Table of Contents



Liquidity and Capital Resources



| |          
| | ---------
| | Liquidity



| |           
| | ----------
| | Cash Flows

Net cash provided by operating activities was
$3,716,000 for the nine months ended September 30, 2004
compared to net cash provided by operating activities of
$2,729,000 for the nine months ended September 30, 2003.
The increase was primarily contributed by an increase in
accounts payable, an increase in depreciation for AmberOaks
which was acquired in 2004, and an increase in amortization,
compared to the prior period.

Net cash used in investing activities was $90,000
for the nine months ended September 30, 2004, a decrease
from net cash provided by investing activities of $25,824,000
for the nine months ended September 30, 2003. The decrease
from the prior period is primarily attributed to the $32,925,000
decrease in net proceeds from real estate dispositions,
partially offset by the collection of notes receivable of
$6,500,000 in 2004.

Net cash used in financing activities was
$9,086,000 for the nine months ended September 30, 2004
compared to $21,983,000 for the nine months ended
September 30, 2003. Cash was used primarily for the payment
of debt and shareholder distributions.

As a result of the above, cash and cash
equivalents decreased $5,460,000 for the nine months ended
September 30, 2004 to $6,729,000.

During the nine months ended September 30,
2004 and 2003, the Company generated cash from operations of
$3,716,000 and $2,729,000, respectively. During the nine months
ended September 30, 2004 and 2003, the Company declared and
paid distributions to our stockholders of $2,858,000 and
$2,889,000 respectively. Cash used in financing activities
during the nine months ended September 30, 2004 and 2003,
was $9,086,000 (including a debt repayment of $6,204,000) and
$21,983,000 (including debt repayments of $23,800,000),
respectively. Cash flows from investing activities during the
nine months ended September 30, 2004 and 2003, was
$(90,000) and $25,824,000 (primarily from property
dispositions), respectively. The Company currently has no
principal debt repayments until February 2006; however, it
continues to pay monthly interest payments on such debt. As
there is no maturing debt coming due through the end of 2004 and
2005, the Company believes that its net cash provided by
operating activities, availability under the line of credit,
proceeds from other financing sources that are expected to be
available and proceeds from anticipated asset sales will
together provide sufficient liquidity to meet its cash needs
during the next twelve months.

If the Company experiences lower occupancy
levels, reduced rental rates, reduced revenues as a result of
asset sales, increased capital expenditures and leasing costs
compared to historical levels due to competitive market
conditions for new and renewal leases, the effect would be a
reduction of net cash provided by operating activities. If our
Board of Directors continues to declare distributions for the
shareholders at current levels, the Company expects a cash flow
deficit in subsequent periods. This estimate is based on various
assumptions which are difficult to predict, including the levels
of leasing activity at year end and related leasing costs. Any
changes in these assumptions could impact the financial results.
To the extent any distributions are made to the shareholders in
excess of accumulated earnings, the excess distributions are
considered a return of capital to shareholders for Federal
income tax purposes.

A material adverse change in the net cash
provided by operating activities may affect the Companys
ability to fund these items and may affect the financial
performance covenants under its line of credit and unsecured
notes. If the Company fails to meet its financial performance
covenants and are unable to reach a satisfactory resolution with
the lenders, the maturity dates for the unsecured notes could be
accelerated, and the line of credit could become unavailable to
the Company or the interest charged on the line of credit could
increase. Any of these circumstances could adversely affect the
Companys ability to fund working capital and unanticipated
cash needs, acquisitions and development costs.

29



---



##### Table of Contents



Distributions are determined by the
Companys Board of Directors and are dependent on a number
of factors, including the amount of funds available for
distribution, the Companys financial condition, any
decision by the Board of Directors to reinvest funds rather than
to distribute the funds, the Companys capital
expenditures, the annual distribution required to maintain REIT
status under the Code, and other factors the Board of Directors
may deem relevant.



| |          
| | ---------
| | Financing

Notes and contracts payable as a percentage of
total capitalization increased to 67% at September 30, 2004
from 20% at December 31, 2003. This increase was due to the
issuance of the mortgage with the acquisition of AmberOaks
offset in part by the sale of Gateway Mall and subsequent
payment of the note related to the property.



| |               
| | --------------
| | Line of Credit

On September 3, 2003, the Company entered
into an agreement with Fleet National Bank, (Fleet)
for a line of credit in the amount of $1,000,000 which bears
interest at Fleets prime rate plus 50 basis points.
The applicable credit facility matured on September 2, 2004
and has two one-year extensions. On September 21, 2004, the
Company extended the line of credit for one year until
September 30, 2005. The credit facility is subject to a fee
of 1% to be paid one-third on each of the effective date, the
first anniversary and the second anniversary. As of
September 30, 2004, the Company had no outstanding amount
under the line of credit.



| |                    
| | -------------------
| | Unconsolidated Debt

The Companys share of unconsolidated debt
was approximately $32.3 million and $30.3 million at
September 30, 2004 and December 31, 2003,
respectively. The increase of approximately $2 million was
due to the refinancing of Congress Center in September 2004
along with the purchase of interests in the unconsolidated
investments of Oakey Building and Emerald Plaza in April 2004
and July 2004, respectively.

On September 3, 2004, the Advisor refinanced
Congress Center with three loans totaling $97,500,000, through
Principal Commercial Funding and Principal Life Insurance. While
the Company owns a 10.22% interest in Congress Center, it is
jointly and severally liable with the other owners for payment
of the three loans. In connection with the Congress Center
refinancing, the total unamortized portion of the capitalized
loan costs of $580,000 was expensed in September 2004.

Note A is in the amount of $80,000,000 and
bears interest at a fixed rate of 5.635% per annum. The
Property is required to make monthly interest only payments
until the due date of October 1, 2014. No payments of
principal is permitted until July 1, 2014.

Note B is in the amount of $15,000,000 and
bears interest at a fixed rate of 5.635% per annum. The
Property is required to make monthly interest only payments
until the due date of October 1, 2014. No payments of
principal is permitted until July 1, 2014.

Note C is in the amount of $2,500,000 and
bears interest at a fixed rate of 7.0% per annum. The
Property is required to make monthly interest only payments
until October 1, 2006. Thereafter, the Property is required
to make monthly principal and interest payments based on a
30-year amortization schedule until the due date of
October 1, 2014. No prepayments of principal is permitted
until July 1, 2014.



| |                  
| | -----------------
| | REIT Requirements

In order to qualify as a REIT for federal income
tax purposes, the Company is required to make distributions to
its shareholders of at least 90% of REIT taxable income. Cash
flow from operating activities is expected to be used for
distributions to shareholders.

30



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##### Table of Contents





| |                             
| | ----------------------------
| | Commitment and Contingencies

Insurance Coverage



| |                                                                     
| | --------------------------------------------------------------------
| | Property Damage, Business Interruption,
    Earthquake and Terrorism

The insurance coverage provided through
third-party insurance carriers is subject to coverage
limitations. For each type of insurance coverage described
below, should an uninsured or underinsured loss occur, the
Company could lose all or a portion of our investment in, and
anticipated cash flows from, one or more of the Properties. In
addition, there can be no assurance that third-party insurance
carriers will be able to maintain reinsurance sufficient to
cover any losses that may be incurred.

|                                          |  |                                                                                                                          
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------
|Type of Insurance Coverage                |  | Loss Exposure/Deductible                                                                                                 
|                                          |  |                                                                                                                          
|Property damage and business interruption |  | $200 million annual aggregate exposure, plus
    $10 thousand per occurrence deductible                                  
|Earthquake                                |  | $10 million annual aggregate exposure plus
    5 percent ($100,000 minimum) per occurrence deductible                    
|Earthquake (California Properties)        |  | $50 million in excess of $10 million                                                                                     
|Flood  Named Storm                       |  | $10 million annual aggregate exposure plus
    5 percent ($100,000 minimum) per occurrence deductible                    
|Flood  All Other                         |  | $10 million annual aggregate exposure plus
    5 percent ($25,000 minimum/$100,000 maximum) per occurrence
    deductible
|Liability                                 |  | $2 million annual aggregate exposure plus
    $1 million each occurrence                                                 
|Umbrella (excess liability)               |  | $100 million aggregate exposure                                                                                          
|Acts of terrorism                         |  | $100 million annual aggregate exposure, plus
    $10,000 per occurrence deductible.                                      



| |                        
| | -----------------------
| | Contractual Obligations

The following table provides information with
respect to the maturities, scheduled principal payments of
secured debt and line of credit as well as scheduled interest
payments of the fixed rate debt at September 30, 2004. The
table does not reflect available extension options.

|                                        |  |           |         |             |  |             |            |              |  |       |           |  |  |   |   |  |  |   |            | 
|--------------------------------------- |  | --------- | ------- | ----------- |  | ----------- | ---------- | ------------ |  | ----- | --------- |  |  | - | - |  |  | - | ---------- | 
|                                        |  | Less Than |         |             |  |             |            | More Than    |  |      
|                                        |  | 1 Year    |         | 1-3 Years   |  | 4-5 Years   |            | 5 Years      |  |      
|                                        |  | (2004)    |         | (2005-2007) |  | (2008-2009) |            | (After 2009) |  | Total
|                                        |  |           |         |             |  |             |            |              |  |      
|Principal payments  fixed rate debt    |  | $         | 16,000  |             |  | $           | 206,000    |              |  | $     | 4,079,000 |  |  | $ |  |  |  | $ | 4,301,000  | 
|Interest payments  fixed rate debt     |  |           | 57,000  |             |  |             | 669,000    |              |  |       |          |  |  |   |  |  |  |   | 726,000    | 
|Principal payments  variable rate debt |  |           |        |             |  |             | 15,000,000 |              |  |       |          |  |  |   |  |  |  |   | 15,000,000 | 
|Interest payments  variable rate debt  |  |           | 216,000 |             |  |             | 1,767,000  |              |  |       |          |  |  |   |  |  |  |   | 1,983,000  | 
|                                        |  |           |         |             |  |             |            |              |  |       |           |  |  |   |   |  |  |   |            | 
|Total                                   |  | $         | 289,000 |             |  | $           | 17,642,000 |              |  | $     | 4,079,000 |  |  | $ |  |  |  | $ | 22,010,000 | 
|                                        |  |           |         |             |  |             |            |              |  |       |           |  |  |   |   |  |  |   |            | 



| |                                   
| | ----------------------------------
| | Off-Balance Sheet
    Arrangements

There are no off-balance sheet transactions,
arrangements or obligations (including contingent obligations)
that have, or are reasonably likely to have a current or future
material effect on the Companys financial condition,
changes in the financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or
capital resources.

31



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##### Table of Contents





| |                  
| | -----------------
| | SEC Investigation

On September 16, 2004, the Companys
Advisor, Triple Net Properties, LLC, or Triple Net, learned that
the SEC is conducting an investigation captioned In the
matter of Triple Net Properties, LLC. The SEC has requested
information from Triple Net relating to disclosure in securities
offerings (including offerings by G REIT, T REIT and A REIT) and
information advising it which exemption from the registration
requirements of the Securities Act of 1933,as amended, were
being relied upon for the private offerings in which Triple Net
and its affiliated entities were involved. In addition, the SEC
has requested financial information regarding these REITs as
well as the limited liability companies advised by Triple Net.
The Company and Triple Net intend to cooperate fully with the
SEC in its investigation.



| |          
| | ---------
| | Inflation

The Company will be exposed to inflation risk as
income from long-term leases is expected to be the primary
source of its cash flows from operations. The Company expects
that there will be provisions in the majority of its tenant
leases that would protect the Company from the impact of
inflation. These provisions include rent steps, reimbursement
billings for operating expense pass-through charges, real estate
tax and insurance reimbursements on a per square foot allowance.
However, due to the long-term nature of the leases, the leases
may not re-set frequently enough to cover inflation.



| |                      
| | ---------------------
| | Funds from Operations

The Company defines Funds from Operations
(FFO), a non-GAAP measure, consistent with the
standards established by the White Paper on FFO approved by the
Board of Governors of the National Association of Real Estate
Investment Trust (NAREIT), as revised in February
2004. The White Paper defines FFO as net income or loss computed
in accordance with GAAP, excluding gains or losses from sales of
property but including asset impairment writedowns, plus
depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated joint ventures are calculated to reflect FFO.

The Company considers FFO to be an appropriate
supplemental measure of a REITs operating performance as
it is based on a net income analysis of property portfolio
performance that excludes non-cash items such as depreciation.
The historical accounting convention used for real estate assets
requires straight-line depreciation of buildings and
improvements, which implies that the value of real estate assets
diminishes predictably over time. Since real estate values
historically rise and fall with market conditions, presentations
of operating results for a REIT, using historical accounting for
depreciation, could be less informative. The use of FFO is
recommended by the REIT industry as a supplemental performance
measure.

Presentation of this information is intended to
assist the reader in comparing the operating performance of
different REITs, although it should be noted that not all REITs
calculate FFO the same way, so comparisons with other REITs may
not be meaningful. Furthermore, FFO is not necessarily
indicative of cash flow available to fund cash needs and should
not be considered as an alternative to net income as an
indication of the Companys performance.

The Companys FFO reporting complies with
NAREITs policy described above.

32



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##### Table of Contents



Following is the calculation of FFO for the nine
months ended September 30, 2004 and 2003:

|                                                                   |                                                                                     |                   |           |                   |   |   |           |            |  
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | ----------------- | --------- | ----------------- | - | - | --------- | ---------- | -
|                                                                   |                                                                                     | Nine Months Ended |           | Nine Months Ended
|                                                                   |                                                                                     | September 30,     |           | September 30,    
|                                                                   |                                                                                     | 2004              |           | 2003             
|                                                                   |                                                                                     |                   |           |                  
|Net income                                                         |                                                                                     | $                 | 2,401,000 |                   |   | $ | 4,151,000 |           
|Add:                                                               |                                                                                     |                   |           |                   |   |   |           |           
|                                                                   | Depreciation and amortization 
    continuing operations                           |                   |           | 1,320,000         |   |   |           | 124,000    |  
|                                                                   | Depreciation and amortization 
    discontinued operations                         |                   |           | 17,000            |   |   |           | 263,000    |  
|                                                                   | Depreciation and amortization 
    unconsolidated real estate operating properties |                   |           | 1,041,000         |   |   |           | 782,000    |  
|Less:                                                              |                                                                                     |                   |           |                   |   |   |           |           
|                                                                   | (Gain)/ loss on sale of property                                                    |                   |           | (1,634,000        | ) |   |           | (2,622,000 | )
|                                                                   |                                                                                     |                   |           |                   |   |   |           |           
|Funds from operations                                              |                                                                                     | $                 | 3,145,000 |                   |   | $ | 2,698,000 |           
|                                                                   |                                                                                     |                   |           |                   |   |   |           |           
|Weighted average common shares
    outstanding  basic and diluted |                                                                                     |                   | 4,636,000 |                   |   |   | 4,685,000 |           
|                                                                   |                                                                                     |                   |           |                   |   |   |           |           






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

The Company is exposed to interest rate changes
primarily as a result of its long-term debt used to maintain
liquidity and fund capital expenditures and expansion of its
real estate investment portfolio and operations.
Managements interest rate risk management objectives are
to limit the impact of interest rate changes on earnings and
cash flows and to lower its overall borrowing costs. To achieve
these objectives the Company borrows primarily at fixed rates or
variable rates with the lowest margins available and in some
cases, with the ability to convert variable rate debt to fixed
rate debt. The Company may enter into derivative financial
instruments such as interest rate swaps, caps and treasury locks
in order to mitigate its interest rate risk on a related
financial instrument. The Company does not enter into derivative
or interest rate transactions for speculative purposes.

The Companys interest rate risk is
monitored using a variety of techniques. The table below
presents, as of September 30, 2004, the principal amounts
and weighted average interest rates by year of expected maturity
to evaluate the expected cash flows and sensitivity to interest
rate changes.

|                                       |  |      |        |      |  |      |        |      |  |      |         |            |  |       |            |   |  |   |           |   |  |   |   |  |  |   |            |  
|-------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- | ---------- |  | ----- | ---------- | - |  | - | --------- | - |  | - | - |  |  | - | ---------- | -
|                                       |  | 2004 |        | 2005 |  | 2006 |        | 2007 |  | 2008 |         | Thereafter |  | Total
|                                       |  |      |        |      |  |      |        |      |  |      |         |            |  |      
|Fixed rate debt                        |  | $    | 16,000 |      |  | $    | 65,000 |      |  | $    | 69,000  |            |  | $     | 72,000     |   |  | $ | 4,079,000 |   |  | $ |  |  |  | $ | 4,301,000  |  
|Average interest rate on maturing debt |  |      | 5.25   | %    |  |      | 5.25   | %    |  |      | 5.25    | %          |  |       | 5.25       | % |  |   | 5.25      | % |  |   |  |  |  |   | 5.25       | %
|Variable rate debt                     |  | $    |       |      |  | $    |       |      |  | $    | 197,000 |            |  | $     | 14,803,000 |   |  | $ |          |   |  | $ |  |  |  | $ | 15,000,000 |  
|Average interest rate on maturing debt |  |      |       |      |  |      |       |      |  |      | 5.75    | %          |  |       | 5.75       | % |  |   |          |   |  |   |  |  |  |   | 5.75       | %

The fair estimated value of the Companys
debt approximates its September 30, 2004 carrying amount.

The weighted average interest rate of mortgage
debt as of September 30, 2004 was approximately 5.64% per
annum. At September 30, 2004, the Companys mortgage
debt consisted of $4,301,000 or 22% of the total debt at a fixed
interest rate of 5.25% per annum and $15,000,000 or 78% of the
total debt at a weighted average variable interest rate of 5.75%
per annum. An increase in the variable interest rate on certain
mortgages payable constitutes a market risk. As of
September 30, 2004, for example, a .25% increase in LIBOR
would have increased the overall annual interest expense by
approximately $38,000 or less than 4.35%.

33



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures. The Company maintains disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in its Exchange Act reports is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.

Following the signatures section of this
Quarterly Report are certifications of the companys CEO
and the CFO required in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 and Rules 13a-14(a) and
15d-14(a) under the Securities and Exchange Act of 1934, as
amended (the Section 302 Certification). This
portion of our Quarterly Report on Form 10-Q is our
disclosure of the results of our controls evaluation referred to
in paragraphs (4) and (5) of the Section 302
Certification and should be read in conjunction with the
Section 302 Certification for a more complete understanding
of the topics presented.

As of the end of the period covered by this
report, the Company completed an evaluation under the
supervision and with the participation of the Companys
management, including the Companys Chief Executive
Officer, Chief Financial Officer and third-party consultants
(the Evaluation) of the effectiveness of the design
and operation of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934, as amended).
Effective February 8, 2004, our Board of Directors retained
Deloitte & Touche, LLP (Deloitte) as our
new independent registered public accounting firm based on the
recommendation of the audit committee. As a result of
Deloittes audit of the Companys consolidated
financial statements for the year ended December 31, 2003,
the Company received certain recommendations from Deloitte
concerning certain matters related to the Companys
internal controls and certain observations and recommendations
on other accounting, administrative and operating matters (the
Deloitte recommendations).

As a result of the Evaluation and the Deloitte
recommendations, we are (1) designing improved internal
control procedures to address a number of financial reporting
issues and disclosure controls by developing formal policies and
procedures and (2) developing policies and procedures to
(i) mitigate the disruptive effect of the recent turn-over
in senior management, including senior financial management
personnel, and (ii) train the appropriate personnel to
undertake their assignments more effectively. The Evaluation
also concluded that a significant portion of the financial
reporting issues were derived from staff turn-over and the
corresponding need for training and education of new personnel.

During the quarterly review process for the
period ended September 30, 2004, the Company concluded that
its previously filed financial statements for the quarters ended
March 31, 2004 and June 30, 2004 and March 31,
2003 and June 30, 2003 should no longer be relied upon. The
Company has restated the relevant financial statements to
reflect the fact that one of the Companys real estate
properties should have been recorded on the purchase date on a
consolidated basis and not as an unconsolidated investment and
the reclassification of discontinued operations and loss on sale
of real estate. The Company believes that adequate controls and
procedures have been implemented or are currently being
implemented to mitigate the risk of similar occurrences in the
future, including the development and implementation of internal
testing and oversight procedures and policies.

The Company has implemented and continues to
implement improvements in the Companys internal controls,
including, among others, devising, standardizing and
promulgating new policies and procedures to ensure consistent
and improved financial reporting, and to mitigate the possible
risks of any material misstatements regarding financial
reporting matters.

The Company has also employed a new Chief
Financial Officer with considerable experience in public company
financial reporting, GAAP and REIT compliance and added the
position of Chief Accounting Officer.

34



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##### Table of Contents



The Company is assigning a high priority to its
financial reporting and internal control issues. We will
continue to evaluate the effectiveness of our internal controls
and procedures on an on-going basis and will take further action
as appropriate.

Pursuant to the Evaluation, after taking into
account the above information, the Companys Chief
Executive Officer and Chief Financial Officer concluded as of
the end of the period covered in this report that the
Companys disclosure controls and procedures are effective
to ensure that information required to be disclosed by the
company in its reports that it files or submits under the
Exchange Act is recorded, processes, summarized and reported
within the applicable time periods specified in the SEC and
forms.




PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings



| |                  
| | -----------------
| | SEC Investigation

On September 16, 2004, the Companys
Advisor, Triple Net Properties, LLC, or Triple Net, learned that
the SEC is conducting an investigation captioned In the
matter of Triple Net Properties, LLC. The SEC has requested
information from Triple Net relating to disclosure in securities
offerings (including offerings by G REIT, T REIT and
A REIT) and information advising it which exemption from
the registration requirements of the Securities Act of 1933, as
amended, were being relied upon for the private offerings in
which Triple Net and its affiliated entities were involved. In
addition, the SEC has requested financial information regarding
these REITs as well as the limited liability companies advised
by Triple Net. The Company and Triple Net intend to cooperate
fully with the SEC in its investigation.



| |           
| | ----------
| | Litigation

On February 11, 2004, Clearview Properties
(Clearview) filed a petition in the District Court
of the 270th Judicial District, Harris County, Texas against
Property Texas SC One Corporation (Property Texas),
Clarion Partners, LLC, Granite Partners I, LLC, three
unaffiliated entities, and the Advisor, Realty and the Company.
The complaint alleges that Property Texas breached an Agreement
of Sale and Purchase to sell Clearview certain real property
located in Houston, Texas. Only one of the complaints
eight separate counts alleges the involvement of the Company,
the Advisor and Realty. That count alleges that the Company, the
Advisor and Realty and/or the other defendants wilfully and
intentionally interfered with the contract between Clearview and
Property Texas and that such interference proximately caused
Clearviews injury and sufferance of actual damages. The
maximum exposure to the Company is uncertain, as Clearview has
failed to specifically allege a monetary amount of loss as the
result of our alleged involvement. The Company believes that
there is no substantive merit to the claims made by Clearview
with respect to the Company, the Advisor or Realty and it
intends to vigorously defend the action.

In depositions made on October 20, 2004, an
Officer of Clearview testified that he had no evidence of
interference by the Company. As such, the Company intends to
file a motion for summary judgment in its favor. However, if
Clearview were to prevail in this action, it could have a
material adverse effect upon the Companys financial
condition, results of operations and cash flows.

On July 19, 2004, Michael R. and Patricia C.
Long, as Trustees of the Michael R. and Patricia C. Long 2001
Trust (the Purchasers) filed a petition in the
District Court of the 25th Judicial District Guadalupe County,
Texas against T REIT-Seguin, LLC, Peck-Seguin, LLC, Lake
Air Mall-Seguin, LLC, Chicago Title Company and Triple Net
Properties, LLC (collectively, the Sellers). The
Company, through its wholly owned subsidiary T REIT-Seguin
purchased a 26% interest in the Seguin Corners Shopping Center
in November 2000 which was sold to the Purchasers in August
2002. The petition alleges that Sellers misrepresented and/or
failed to disclose that they did not own and could not convey
the property in its entirety to Purchasers. The Company believes
there is no substantive merit to the claims made by the Sellers
with respect to the Company and it intents to vigorously defend
the action. If the

35



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##### Table of Contents



Purchasers prevail in this action, it could have
a material adverse effect upon the Companys financial
condition, results of operations and cash flows.


Other than the above, to the Companys
knowledge there are no material pending legal proceedings, other
than routine litigation incidental to the business, to which the
Company is a party to or of which any of its properties is the
subject.






|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and
    Use of Proceeds

None.






|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults Upon Senior
    Securities

None.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.






|        |                  
|------- | -----------------
|Item 5. | Other Information

In connection with the review process for the
quarterly period ended September 30, 2004, the
Companys audit committee determined on November 2,
2004 that the accounting treatment for one of the Companys
real estate properties inaccurately reflected the property as an
investment in unconsolidated real estate under the equity method
rather than as a consolidated tenant-in-common interest in the
Companys financial statements included in the
Form 10-Q filings for the respective quarterly periods
ending March 31, 2004 and June 30, 2004, and that,
therefore, a restatement of the Companys financial
statements for the periods referenced above should be made to
prevent future reliance on those filings.

Concurrent with this filing, the Company has
filed amended Quarterly Reports on Form 10-Q for the
quarterly periods ending March 31, 2004 and June 30,
2004 that include restated financial statements and amendments
to related disclosures.

The Companys management and audit committee
have discussed the matters disclosed in this item with Deloitte.






|        |         
|------- | --------
|Item 6. | Exhibits

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

| |   |    |  |                                                                                                                                                                                                                                                                                      
| | - | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3 | .1 |  | Articles of Incorporation of the Company
    (included as Exhibit 3.1 to the Companys Registration
    Statement on Form S-11 filed on April 28, 1999 (File
    No. 333-77229) and incorporated herein by this reference)                                                           
| | 3 | .2 |  | Form of Amended and Restated Articles of
    Incorporation of the Company (included as Exhibit 3.2 to
    Amendment No. 3 to the Companys Registration
    Statement on Form S-11 filed on November 22, 1999
    (File No. 333-77229) and incorporated herein by this
    reference)
| | 3 | .3 |  | Form of By-Laws of the Company (included as
    Exhibit 3.3 to the Companys Registration Statement on
    Form S-11 filed on April 28, 1999 (File
    No. 333-77229) and incorporated herein by this reference)                                                                     
| | 3 | .4 |  | Form of Amended By-Laws of the Company (included
    as Exhibit 3.4 to Post-Effective Amendment No. 2 to
    the Companys Registration Statement on Form S-11
    filed on July 17, 2001 (File No. 333-77229) and
    incorporated herein by reference.)                            
| | 4 | .1 |  | Form of Share Certificate (included as
    Exhibit 4.1 to Amendment No. 4 to the Companys
    Registration Statement on Form S-11 filed on
    February 3, 2000 (File No. 333-77229) and incorporated
    herein by this reference)                                                 

36



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .1  |  | Form of Agreement of Limited Partnership of
    T REIT, L.P. (included as Exhibit 10.1 to Amendment
    No. 2 to the Companys Registration Statement on
    Form S-11 filed on October 13, 1999 (File
    No. 333-77229) and incorporated herein by this reference)                                                                                                                                      
| | 10 | .2  |  | Dividend Reinvestment Program (included as
    Exhibit C to the Companys Prospectus filed as part of
    the Companys Registration Statement on Form S-11 on
    April 28, 1999 (File No. 333-77229) and incorporated
    herein by this reference)                                                                                                                                                     
| | 10 | .3  |  | Independent Director Stock Option Plan (included
    as Exhibit 10.3 to Amendment No. 4 to the
    Companys Registration Statement on Form S-11 filed on
    February 3, 2000 (File No. 333-77229) and incorporated
    herein by this reference)                                                                                                                                                        
| | 10 | .4  |  | Employee and Officer Stock Option Plan (included
    as Exhibit 10.4 to Amendment No. 4 to the
    Companys Registration Statement on Form S-11 filed on
    February 3, 2000 (File No. 333-77229) and incorporated
    herein by this reference)                                                                                                                                                        
| | 10 | .5  |  | Advisory Agreement between the Company and the
    Advisor (included as Exhibit 10.5 to Amendment No. 2
    to the Companys Registration Statement on Form S-11
    filed on October 13, 1999 (File No. 333-77229) and
    incorporated herein by this reference)                                                                                                                                        
| | 10 | .6  |  | Purchase and Sale Agreement, dated June 5,
    2000, by and between Robert C. Parker and Carolyn
    De La Fuente Parker and Triple Net Properties, LLC
    (included as Exhibit 10.1 to Form 10-Q filed by the
    Registrant with the SEC on November 14, 2000 and
    incorporated herein by this reference)                                                                                           
| | 10 | .7  |  | Purchase and Sale Agreement, dated
    October 25, 2000, by and between CMF Capital Company LLC
    and T REIT, L.P. (included as Exhibit 10.1 to
    Form 8-K filed by the Registrant with the SEC on
    November 13, 2000 and incorporated herein by this reference)                                                                                                                                   
| | 10 | .8  |  | Purchase and Sale Agreement, dated
    October 26, 2000, by and between CMF Capital Company LLC
    and T REIT L.P. (included as exhibit 10.1 to
    Form 8-K filed by the Registrant with the SEC on
    December 20, 2000 and incorporated herein by this reference)                                                                                                                                    
| | 10 | .9  |  | Purchase and Sale Agreement, dated
    August 24, 2000, as amended, by and between Drummer Boy
    Holdings, LLC and Triple Net Properties, LLC (included as
    Exhibit 10.9 to Post Effective Amendment No. 2 to the
    Companys Registration Statement on Form S-11 filed on
    July 17, 2001 (File No. 333-772229) and incorporated
    herein by this reference)                                  
| | 10 | .10 |  | First Amendment to Advisory Agreement between the
    Company and the Advisor (included as Exhibit 10.10 to
    Post-Effective Amendment No. 1 to the Companys
    Registration Statement filed on Form S-11 on July 17,
    2001 (File No. 333-772229) and incorporated herein by this
    reference).                                                                                                  
| | 10 | .11 |  | Purchase and Sale Agreement, dated April 16,
    2001, by and between Kilroy Realty, L.P. and Triple Net
    Properties LLC (included as Exhibit 10.11 to Post Effective
    Amendment No. 3 to the Companys Registration
    Statement on Form S-11 filed on October 19, 2001 (File
    No. 333-772229) and incorporated herein by reference).                                                          
| | 10 | .12 |  | Purchase and Sale Agreement dated
    October 30, 2001, by and between Triple Net Properties, LLC
    and City Center West Development, LLC (included as
    Exhibit 10.1 to Form 8-K/A filed by the Company on
    May 14, 2003 and incorporated herein by reference).                                                                                                                                   
| | 10 | .13 |  | Purchase and Sale Agreement dated
    November 9, 2001, by and between Triple Net Properties, LLC
    and United States Fidelity and Guaranty Company (included as
    Exhibit 10.1 to Form 8-K/A filed by the Company on
    May 14, 2003 and incorporated herein by reference).                                                                                                                         
| | 10 | .14 |  | Amended and Restated Real Estate Purchase and
    Sale Agreement dated as of July 24, 2002 by and between
    Transwestern Heights, L.P. as seller and Triple Net Properties,
    LLC, as assigned to T REIT  University Heights,
    LP, a Texas limited partnership (included as Exhibit 10.14
    to the Form 8-K filed by the Company on September 5,
    2002 and incorporated herein by reference).
| | 10 | .15 |  | Purchase Agreement dated October 10, 2002
    between Congress Center, LLC and Triple Net Properties, LLC as
    assigned to NNN Congress Center, LLC, G REIT 
    Congress Center, LLC, and W REIT  Congress
    Center, LLC (included as Exhibit 10.14 to the Form 8-K
    filed by the Company on January 24, 2003 and incorporated
    herein by reference).                                        
| | 10 | .16 |  | Operating Agreement of NNN Congress Center
    Member, LLC dated January 1, 2003 (included as
    Exhibit 10.15 to the Form 8-K filed by the Company on
    January 24, 2003 and incorporated herein by reference).                                                                                                                                                                                       

37



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .17 |  | Agreement for Purchase and Sale of Real Property
    and Escrow Instructions dated as of May 14, 2003 by and
    between T REIT  Thousand Oaks, LP and Weingarten
    Realty Investors (included as Exhibit 10.01 to the
    Form 8-K filed by the Company on August 26, 2003 and
    incorporated herein by reference).                         
| | 10 | .18 |  | Agreement for Purchase and Sale of Real Property
    and Escrow Instructions dated as of May 15, 2003 by and
    between T REIT  Pahrump, LLC and Pacific Home
    Equities, LLC (included as Exhibit 10.01 to the
    Form 8-K filed by the Company on October 9, 2003 and
    incorporated herein by reference).                               
| | 10 | .19 |  | Purchase and Sale Agreement dated as of
    October 17, 2003 by and between Austin Jack, L.L.C. and
    Triple Net Properties, LLC (included as Exhibit 10.01 to
    the Form 8-K filed by the Company on February 4, 2004
    and incorporated herein by reference).                                                                             
| | 10 | .20 |  | First Amendment and Restatement of Purchase and
    Sale Agreement dated as of December 8, 2003 by and between
    Austin Jack, L.L.C. and Triple Net Properties, LLC (included as
    Exhibit 10.02 to the Form 8-K filed by the Company on
    February 4, 2004 and incorporated herein by reference).                                          
| | 10 | .21 |  | Agreement for Purchase and Sale of Real Property
    and Escrow Instructions dated as of March 15, 2004 by and
    between T REIT  Gateway Mall ND Fee, LLC and VP
    Investments, L.L.C. (included as Exhibit 10.01 to the
    Form 8-K filed by the Company on March 29, 2004 and
    incorporated herein by reference).                      
| | 10 | .22 |  | First Amendment to Agreement for Purchase and
    Sale of Real Property and Escrow Instructions dated as of
    March 9, 2004 by and between T REIT 
    Gateway Mall ND Fee, LLC and VP Investments, L.L.C.
    (included as Exhibit 10.02 to the Form 8-K filed by
    the Company on March 29, 2004 and incorporated herein by
    reference).
| | 31 | .1  |  | Certification of Chief Executive Officer,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                          
| | 31 | .2  |  | Certification of Chief Financial Officer,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                          
| | 32 | .1  |  | Certification of Chief Executive Officer,
    pursuant to 18 U.S.C. Section 1350, as created by
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                
| | 32 | .2  |  | Certification of Chief Financial Officer,
    pursuant to 18 U.S.C. Section 1350, as created by
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                

38



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |             
| | ------------
| | T REIT, INC.
| | (Registrant)



| |     |                   
| | --- | ------------------
| | By: | /s/ JACK R. MAURER

| |                        
| | -----------------------
| |                        
| | Jack R. Maurer         
| | Chief Executive Officer



| |     |                    
| | --- | -------------------
| | By: | /s/ SCOTT D. PETERS

| |                        
| | -----------------------
| |                        
| | Scott D. Peters        
| | Chief Financial Officer



| |     |                    
| | --- | -------------------
| | By: | /s/ KELLY J. CASKEY

| |                         
| | ------------------------
| |                         
| | Kelly J. Caskey         
| | Chief Accounting Officer

Date: November 22, 2004

39



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EXHIBIT INDEX

| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                          
| | -- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1  |  | Articles of Incorporation of the Company
    (included as Exhibit 3.1 to the Companys Registration
    Statement on Form S-11 filed on April 28, 1999 (File
    No. 333-77229) and incorporated herein by this reference).                                                                                                                                              
| | 3  | .2  |  | Form of Amended and Restated Articles of
    Incorporation of the Company (included as Exhibit 3.2 to
    Amendment No. 3 to the Companys Registration
    Statement on Form S-11 filed on November 22, 1999
    (File No. 333-77229) and incorporated herein by this
    reference).                                                                                   
| | 3  | .3  |  | Form of By-Laws of the Company (included as
    Exhibit 3.3 to the Companys Registration Statement on
    Form S-11 filed on April 28, 1999 (File
    No. 333-77229) and incorporated herein by this reference).                                                                                                                                                        
| | 3  | .4  |  | Form of Amended By-Laws of the Company (included
    as Exhibit 3.4 to Post-Effective Amendment No. 2 to
    the Companys Registration Statement on Form S-11
    filed on July 17, 2001 (File No. 333-77229) and
    incorporated herein by reference).                                                                                                                
| | 4  | .1  |  | Form of Share Certificate (included as
    Exhibit 4.1 to Amendment No. 4 to the Companys
    Registration Statement on Form S-11 filed on
    February 3, 2000 (File No. 333-77229) and incorporated
    herein by this reference).                                                                                                                                    
| | 10 | .1  |  | Form of Agreement of Limited Partnership of T
    REIT, L.P. (included as Exhibit 10.1 to Amendment
    No. 2 to the Companys Registration Statement on
    Form S-11 filed on October 13, 1999 (File
    No. 333-77229) and incorporated herein by this reference).                                                                                                    
| | 10 | .2  |  | Dividend Reinvestment Program (included as
    Exhibit C to the Companys Prospectus filed as part of
    the Companys Registration Statement on Form S-11 on
    April 28, 1999 (File No. 333-77229) and incorporated
    herein by this reference).                                                                                                                   
| | 10 | .3  |  | Independent Director Stock Option Plan (included
    as Exhibit 10.3 to Amendment No. 4 to the
    Companys Registration Statement on Form S-11 filed on
    February 3, 2000 (File No. 333-77229) and incorporated
    herein by this reference).                                                                                                                      
| | 10 | .4  |  | Employee and Officer Stock Option Plan (included
    as Exhibit 10.4 to Amendment No. 4 to the
    Companys Registration Statement on Form S-11 filed on
    February 3, 2000 (File No. 333-77229) and incorporated
    herein by this reference).                                                                                                                      
| | 10 | .5  |  | Advisory Agreement between the Company and the
    Advisor (included as Exhibit 10.5 to Amendment No. 2
    to the Companys Registration Statement on Form S-11
    filed on October 13, 1999 (File No. 333-77229) and
    incorporated herein by this reference).                                                                                                      
| | 10 | .6  |  | Purchase and Sale Agreement, dated June 5,
    2000, by and between Robert C. Parker and Carolyn
    De La Fuente Parker and Triple Net Properties, LLC
    (included as Exhibit 10.1 to Form 10-Q filed by the
    Registrant with the SEC on November 14, 2000 and
    incorporated herein by this reference).                                                         
| | 10 | .7  |  | Purchase and Sale Agreement, dated
    October 25, 2000, by and between CMF Capital Company LLC
    and T REIT, L.P. (included as Exhibit 10.1 to
    Form 8-K filed by the Registrant with the SEC on
    November 13, 2000 and incorporated herein by this
    reference).                                                                                             
| | 10 | .8  |  | Purchase and Sale Agreement, dated
    October 26, 2000, by and between CMF Capital Company LLC
    and T REIT L.P. (included as exhibit 10.1 to
    Form 8-K filed by the Registrant with the SEC on
    December 20, 2000 and incorporated herein by this
    reference).                                                                                              
| | 10 | .9  |  | Purchase and Sale Agreement, dated
    August 24, 2000, as amended, by and between Drummer Boy
    Holdings, LLC and Triple Net Properties, LLC (included as
    Exhibit 10.9 to Post Effective Amendment No. 2 to the
    Companys Registration Statement on Form S-11 filed on
    July 17, 2001 (File No. 333-772229) and incorporated
    herein by this reference).
| | 10 | .10 |  | First Amendment to Advisory Agreement between the
    Company and the Advisor (included as Exhibit 10.10 to
    Post-Effective Amendment No. 1 to the Companys
    Registration Statement filed on Form S-11 on July 17,
    2001 (File No. 333-772229) and incorporated herein by this
    reference).                                                                 
| | 10 | .11 |  | Purchase and Sale Agreement, dated April 16,
    2001, by and between Kilroy Realty, L.P. and Triple Net
    Properties LLC (included as Exhibit 10.11 to Post Effective
    Amendment No. 3 to the Companys Registration
    Statement on Form S-11 filed on October 19, 2001 (File
    No. 333-772229) and incorporated herein by reference).                         



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .12 |  | Purchase and Sale Agreement dated
    October 30, 2001, by and between Triple Net Properties, LLC
    and City Center West Development, LLC (included as
    Exhibit 10.1 to Form 8-K/A filed by the Company on
    May 14, 2003 and incorporated herein by reference).                                                                                                                                   
| | 10 | .13 |  | Purchase and Sale Agreement dated
    November 9, 2001, by and between Triple Net Properties, LLC
    and United States Fidelity and Guaranty Company (included as
    Exhibit 10.1 to Form 8-K/A filed by the Company on
    May 14, 2003 and incorporated herein by reference).                                                                                                                         
| | 10 | .14 |  | Amended and Restated Real Estate Purchase and
    Sale Agreement dated as of July 24, 2002 by and between
    Transwestern Heights, L.P. as seller and Triple Net Properties,
    LLC, as assigned to T REIT  University Heights,
    LP, a Texas limited partnership (included as Exhibit 10.14
    to the Form 8-K filed by the Company on September 5,
    2002 and incorporated herein by reference).
| | 10 | .15 |  | Purchase Agreement dated October 10, 2002
    between Congress Center, LLC and Triple Net Properties, LLC as
    assigned to NNN Congress Center, LLC, G REIT 
    Congress Center, LLC, and W REIT  Congress
    Center, LLC (included as Exhibit 10.14 to the Form 8-K
    filed by the Company on January 24, 2003 and incorporated
    herein by reference).                                        
| | 10 | .16 |  | Operating Agreement of NNN Congress Center
    Member, LLC dated January 1, 2003 (included as
    Exhibit 10.15 to the Form 8-K filed by the Company on
    January 24, 2003 and incorporated herein by reference).                                                                                                                                                                                       
| | 10 | .17 |  | Agreement for Purchase and Sale of Real Property
    and Escrow Instructions dated as of May 14, 2003 by and
    between T REIT  Thousand Oaks, LP and Weingarten
    Realty Investors (included as Exhibit 10.01 to the
    Form 8-K filed by the Company on August 26, 2003 and
    incorporated herein by reference).                                                                                 
| | 10 | .18 |  | Agreement for Purchase and Sale of Real Property
    and Escrow Instructions dated as of May 15, 2003 by and
    between T REIT  Pahrump, LLC and Pacific Home
    Equities, LLC (included as Exhibit 10.01 to the
    Form 8-K filed by the Company on October 9, 2003 and
    incorporated herein by reference).                                                                                       
| | 10 | .19 |  | Purchase and Sale Agreement dated as of
    October 17, 2003 by and between Austin Jack, L.L.C. and
    Triple Net Properties, LLC (included as Exhibit 10.01 to
    the Form 8-K filed by the Company on February 4, 2004
    and incorporated herein by reference).                                                                                                                                     
| | 10 | .20 |  | First Amendment and Restatement of Purchase and
    Sale Agreement dated as of December 8, 2003 by and between
    Austin Jack, L.L.C. and Triple Net Properties, LLC (included as
    Exhibit 10.02 to the Form 8-K filed by the Company on
    February 4, 2004 and incorporated herein by reference).                                                                                                  
| | 10 | .21 |  | Agreement for Purchase and Sale of Real Property
    and Escrow Instructions dated as of March 15, 2004 by and
    between T REIT  Gateway Mall ND Fee, LLC and VP
    Investments, L.L.C. (included as Exhibit 10.01 to the
    Form 8-K filed by the Company on March 29, 2004 and
    incorporated herein by reference).                                                                              
| | 10 | .22 |  | First Amendment to Agreement for Purchase and
    Sale of Real Property and Escrow Instructions dated as of
    March 9, 2004 by and between T REIT 
    Gateway Mall ND Fee, LLC and VP Investments, L.L.C.
    (included as Exhibit 10.02 to the Form 8-K filed by
    the Company on March 29, 2004 and incorporated herein by
    reference).                                                        
| | 31 | .1  |  | Certification of Chief Executive Officer,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                  
| | 31 | .2  |  | Certification of Chief Financial Officer,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                  
| | 32 | .1  |  | Certification of Chief Executive Officer,
    pursuant to 18 U.S.C. Section 1350, as created by
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                        
| | 32 | .2  |  | Certification of Chief Financial Officer,
    pursuant to 18 U.S.C. Section 1350, as created by
    Section 906 of the Sarbanes-Oxley Act of 2002.