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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 June 30,
    2003                                            
|  
|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                               |  | (877) 888-7348                          
|Santa Ana, California 92705                                        |  | (Registrants telephone number,         
|(Address of principal executive
    offices)                       |  | 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
Act).  Yes o  No þ

As of August 12, 2003, there were 4,663,824
shares of common stock of T REIT, Inc. outstanding.



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TABLE OF CONTENTS



|                                               |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION               
|                                               | Item 1. Financial Statements                                                                 
|CONSOLIDATED BALANCE SHEETS                   
|CONSOLIDATED STATEMENTS OF OPERATIONS         
|CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|CONSOLIDATED STATEMENTS OF CASH FLOWS         
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                               | Item 4. Controls and Procedures                                                              
|Part II -- Other Information                  
|                                               | Item 1. Legal Proceedings                                                                    
|                                               | Item 2. Changes in Securities and Use of Proceeds                                            
|                                               | Item 3. Defaults Upon Senior Securities                                                      
|                                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                               | Item 5. Other Information                                                                    
|                                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|EXHIBIT INDEX                                 
|EXHIBIT 31.1                                  
|EXHIBIT 31.2                                  
|EXHIBIT 32.1                                  
|EXHIBIT 32.2                                  



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##### Table of Contents



T REIT, INC.

FORM 10-Q

For the Quarterly Period Ended June 30,
2003


INDEX

|                                  |  |                                                                                                                                  |    |      |    | 
|--------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                  |  |                                                                                                                                  |    | Page
|                                  |  |                                                                                                                                  |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                           |  | Financial Statements                                                                                                             |    |      | 2  | 
|                                  |  | Consolidated Balance Sheets as of June 30, 2003
    (Unaudited) and December 31, 2002                                            |    |      | 3  | 
|                                  |  | Consolidated Statements of Operations for the
    three-month and six-month periods ended June 30, 2003 and 2002
    (Unaudited) |    |      | 4  | 
|                                  |  | Consolidated Statement of Shareholders
    Equity for the six month period ended June 30, 2003 (Unaudited)                      |    |      | 5  | 
|                                  |  | Consolidated Statements of Cash Flows for the
    six-month periods ended June 30, 2003 and 2002 (Unaudited)                     |    |      | 6  | 
|                                  |  | Notes to Consolidated Financial Statements                                                                                       |    |      | 7  | 
|Item 2.                           |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                        |    |      | 19 | 
|Item 3.                           |  | Quantitative and Qualitative Disclosure About
    Market Risks                                                                   |    |      | 27 | 
|Item 4.                           |  | Controls and Procedures                                                                                                          |    |      | 28 | 
|                                 
|PART II  OTHER INFORMATION       
|Item 1.                           |  | Legal Proceedings                                                                                                                |    |      | 28 | 
|Item 2.                           |  | Changes in Securities and Use of Proceeds                                                                                        |    |      | 28 | 
|Item 3.                           |  | Defaults Upon Senior Securities                                                                                                  |    |      | 28 | 
|Item 4.                           |  | Submission of Matters to a Vote of Security
    Holders                                                                          |    |      | 28 | 
|Item 5.                           |  | Other Information                                                                                                                |    |      | 29 | 
|Item 6.                           |  | Exhibits and Reports on Form 8-K                                                                                                 |    |      | 29 | 
|Signatures                        |  |                                                                                                                                  | 32 |     

1



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






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

The accompanying June 30, 2003 and 2002
interim financial statements of the 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. 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, 2002 included in our Annual Report on
Form 10-K previously filed with the Securities and Exchange
Commission (SEC).

2



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##### Table of Contents



T REIT, INC.






CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                          |                                           |             |            |              |   |   |            |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------- | ---------- | ------------ | - | - | ---------- | ---------- | -
|                                                                                                                                                                          |                                           | June 30,    |            |             
|                                                                                                                                                                          |                                           | 2003        |            | December 31,
|                                                                                                                                                                          |                                           | (Unaudited) |            | 2002        
|                                                                                                                                                                          |                                           |             |            |             
|ASSETS                                                                                                                                                                   
|Real estate investments:                                                                                                                                                  |                                           |             |            |              |   |   |            |           
|                                                                                                                                                                          | Operating properties                      |             | $          | 15,685,292   |   |   | $          | 37,374,780 |  
|                                                                                                                                                                          | Property held for sale, net               |             |            | 29,521,935   |   |   |            | 3,917,239  |  
|                                                                                                                                                                          | Investments in unconsolidated real estate |             |            | 19,439,554   |   |   |            | 14,499,831 |  
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|                                                                                                                                                                          |                                           |             | 64,646,781 |              |   |   | 55,791,850 |           
|                                                                                                                                                                          | Less: accumulated depreciation            |             |            | (231,778     | ) |   |            | (1,111,856 | )
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|                                                                                                                                                                          |                                           |             | 64,415,003 |              |   |   | 54,679,994 |           
|Cash and cash equivalents                                                                                                                                                 |                                           |             | 1,150,696  |              |   |   | 6,129,468  |           
|Accounts receivable, net                                                                                                                                                  |                                           |             | 358,344    |              |   |   | 242,587    |           
|Accounts receivable from related parties                                                                                                                                  |                                           |             | 354,209    |              |   |   | 593,670    |           
|Real estate deposits                                                                                                                                                      |                                           |             |           |              |   |   | 3,918,743  |           
|Other assets, net                                                                                                                                                         |                                           |             | 2,343,448  |              |   |   | 1,617,263  |           
|Note receivable                                                                                                                                                           |                                           |             | 583,323    |              |   |   | 587,178    |           
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|Total assets                                                                                                                                                              |                                           | $           | 69,205,023 |              |   | $ | 67,768,903 |           
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                                                 
|Accounts payable and accrued liabilities                                                                                                                                  |                                           | $           | 812,434    |              |   | $ | 997,870    |           
|Distributions payable                                                                                                                                                     |                                           |             | 321,279    |              |   |   | 321,252    |           
|Security deposits and prepaid rent                                                                                                                                        |                                           |             | 99,391     |              |   |   | 144,018    |           
|Notes payable                                                                                                                                                             |                                           |             | 9,333,996  |              |   |   | 25,221,036 |           
|Notes payable secured by property held for sale                                                                                                                           |                                           |             | 20,697,303 |              |   |   | 2,869,089  |           
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|                                                                                                                                                                          |                                           |             | 31,264,403 |              |   |   | 29,553,265 |           
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|Commitments and contingencies                                                                                                                                             |                                           |             |            |              |   |   |            |           
|Shareholders equity:                                                                                                                                                     |                                           |             |            |              |   |   |            |           
|Common stock, $.01 par value; 10,000,000 shares
    authorized; 4,720,176 shares issued and 4,694,561 outstanding at
    June 30, 2003 and 4,696,300 at December 31, 2002 |                                           |             | 47,202     |              |   |   | 47,202     |           
|Additional paid-in capital                                                                                                                                                |                                           |             | 41,265,443 |              |   |   | 41,265,443 |           
|Treasury stock, 25,615 and 23,876 shares at
    June 30, 2003 and December 31, 2002, respectively                                                                         |                                           |             | (236,393   | )            |   |   | (220,653   | )         
|Distributions in excess of earnings                                                                                                                                       |                                           |             | (3,135,632 | )            |   |   | (2,876,354 | )         
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|Total shareholders equity                                                                                                                                                |                                           |             | 37,940,620 |              |   |   | 38,215,638 |           
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           
|Total liabilities and shareholders equity                                                                                                                                |                                           | $           | 69,205,023 |              |   | $ | 67,768,903 |           
|                                                                                                                                                                          |                                           |             |            |              |   |   |            |           

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

3



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##### Table of Contents



T REIT, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)


|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |           | 
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------- | ---------------- | --------- | ------------------ |  | ---- | -------- | --------- |  | - | ------- | --------- |  | - | -------- | --------- | 
|                                                                                     |                                                                  |                  |           |                   
|                                                                                     |                                                                  | Six Months Ended |           | Three Months Ended
|                                                                                     |                                                                  | June 30,         |           | June 30,          
|                                                                                     |                                                                  |                  |           |                   
|                                                                                     |                                                                  | 2003             |           | 2002               |  | 2003 |          | 2002     
|                                                                                     |                                                                  |                  |           |                    |  |      |          |          
|Revenues                                                                             |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|                                                                                     | Rental income                                                    |                  | $         | 1,128,787          |  |      | $        |          |  |   | $       | 636,154   |  |   | $        |          | 
|                                                                                     | Interest income                                                  |                  |           | 65,231             |  |      |          | 188,447   |  |   |         | 40,544    |  |   |          | 77,397    | 
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|                                                                                     |                                                                  |                  | 1,194,018 |                    |  |      | 188,447  |           |  |   | 676,698 |           |  |   | 77,397   |          
|Expenses                                                                             |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|                                                                                     | Rental expenses                                                  |                  |           | 400,360            |  |      |          |          |  |   |         | 236,227   |  |   |          |          | 
|                                                                                     | General and administrative                                       |                  |           | 372,483            |  |      |          | 381,349   |  |   |         | 252,229   |  |   |          | 265,065   | 
|                                                                                     | Depreciation and amortization                                    |                  |           | 174,757            |  |      |          |          |  |   |         | 106,540   |  |   |          |          | 
|                                                                                     | Interest (including amortization of deferred
    financing fees) |                  |           | 215,203            |  |      |          |          |  |   |         | 93,949    |  |   |          |          | 
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|                                                                                     |                                                                  |                  | 1,162,803 |                    |  |      | 381,349  |           |  |   | 688,945 |           |  |   | 265,065  |          
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Income (loss) before equity in earnings of
    unconsolidated real estate            |                                                                  |                  | 31,215    |                    |  |      | (192,902 | )         |  |   | (12,247 | )         |  |   | (187,668 | )        
|Equity in earnings of unconsolidated real estate                                     |                                                                  |                  | 964,057   |                    |  |      | 410,283  |           |  |   | 405,896 |           |  |   | 356,150  |          
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Income from continuing operations before gain on
    sale of real estate investments |                                                                  |                  | 995,272   |                    |  |      | 217,381  |           |  |   | 393,649 |           |  |   | 168,482  |          
|Gain on sale of real estate investments                                              |                                                                  |                  | 23,617    |                    |  |      |         |           |  |   |        |           |  |   |         |          
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Income from continuing operations                                                    |                                                                  |                  | 1,018,889 |                    |  |      | 217,381  |           |  |   | 393,649 |           |  |   | 168,482  |          
|Income from discontinued operations 
    property held for sale, net                |                                                                  |                  | 650,156   |                    |  |      | 544,985  |           |  |   | 488,498 |           |  |   | 263,060  |          
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Net income                                                                           |                                                                  | $                | 1,669,054 |                    |  | $    | 762,366  |           |  | $ | 882,147 |           |  | $ | 431,542  |          
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Net income per common share:                                                         |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|                                                                                     | Continuing operations  basic and
    diluted                    |                  | $         | 0.22               |  |      | $        | 0.06      |  |   | $       | 0.08      |  |   | $        | 0.04      | 
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|                                                                                     | Discontinued operations  basic and
    diluted                  |                  | $         | 0.14               |  |      | $        | 0.16      |  |   | $       | 0.10      |  |   | $        | 0.07      | 
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Total net income per common share 
    basic and diluted                            |                                                                  | $                | 0.36      |                    |  | $    | 0.22     |           |  | $ | 0.18    |           |  | $ | 0.11     |          
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Dividends declared per share                                                         |                                                                  | $                | 0.41      |                    |  | $    | 0.41     |           |  | $ | 0.21    |           |  | $ | 0.21     |          
|                                                                                     |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|Weighted average common shares outstanding                                           |                                                                  |                  |           |                    |  |      |          |           |  |   |         |           |  |   |          |          
|                                                                                     | Basic                                                            |                  |           | 4,695,512          |  |      |          | 3,366,673 |  |   |         | 4,694,733 |  |   |          | 3,937,623 | 
|                                                                                     | Diluted                                                          |                  |           | 4,700,070          |  |      |          | 3,574,201 |  |   |         | 4,703,799 |  |   |          | 4,158,901 | 

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

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##### Table of Contents



T REIT, INC.






CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


For the Six Months Ended June 30,
2003


(Unaudited)


|                            |  |           |           |           |  |            |        |          |  |               |            |       |  |   |          |   |  |   |            |   |  |   |            |  
|--------------------------- |  | --------- | --------- | --------- |  | ---------- | ------ | -------- |  | ------------- | ---------- | ----- |  | - | -------- | - |  | - | ---------- | - |  | - | ---------- | -
|                            |  |           |           | Common    |  | Additional |        |          |  | Distributions |            |      
|                            |  | Number of |           | Stock Par |  | Paid-in    |        | Treasury |  | in Excess of  |            |      
|                            |  | Shares    |           | Value     |  | Capital    |        | Stock    |  | Earnings      |            | Total
|                            |  |           |           |           |  |            |        |          |  |               |            |      
|BALANCE  December 31, 2002 |  |           | 4,696,300 |           |  | $          | 47,202 |          |  | $             | 41,265,443 |       |  | $ | (220,653 | ) |  | $ | (2,876,354 | ) |  | $ | 38,215,638 |  
|Dividends                   |  |           |          |           |  |            |       |          |  |               |           |       |  |   |         |   |  |   | (1,928,332 | ) |  |   | (1,928,332 | )
|Repurchase of shares        |  |           | (1,739    | )         |  |            |       |          |  |               |           |       |  |   | (15,740  | ) |  |   |           |   |  |   | (15,740    | )
|Net income                  |  |           |          |           |  |            |       |          |  |               |           |       |  |   |         |   |  |   | 1,669,054  |   |  |   | 1,669,054  |  
|                            |  |           |           |           |  |            |        |          |  |               |            |       |  |   |          |   |  |   |            |   |  |   |            |  
|BALANCE                    |  |           | 4,694,561 |           |  | $          | 47,202 |          |  | $             | 41,265,443 |       |  | $ | (236,393 | ) |  | $ | (3,135,632 | ) |  | $ | 37,940,620 |  
|                            |  |           |           |           |  |            |        |          |  |               |            |       |  |   |          |   |  |   |            |   |  |   |            |  

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

5



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##### Table of Contents



T REIT, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |          |             |             |  
|------------------------------------------------------------------------------------ | ---------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------- | ------------- | ---------- | ---------- | ---------- | -------- | ----------- | ----------- | -
|                                                                                     |                                          | Six Months                                                                 |                                                         | Six Months   
|                                                                                     |                                          | Ended                                                                      |                                                         | Ended        
|                                                                                     |                                          | June 30, 2003                                                              |                                                         | June 30, 2002
|                                                                                     |                                          |                                                                            |                                                         |              
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |                                          |                                                                            |                                                         |               |            |            |            |         
|Net income                                                                           |                                          | $                                                                          | 1,669,054                                               |               |            | $          | 762,366    |         
|Adjustments to reconcile net income to net cash
    provided by operating activities |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     |                                          | Equity in earnings of unconsolidated real estate,
    net of distributions |                                                         |               | (964,057   | )          |            |          | (410,283    | )          
|                                                                                     |                                          | Gain on sale of real estate investment                                     |                                                         |               | (23,617    | )          |            |          |            |            
|                                                                                     |                                          | Depreciation  continuing operations                                       |                                                         |               | 174,757    |            |            |          | 18,439      |            
|                                                                                     |                                          | Depreciation  discontinued operations                                     |                                                         |               | 102,176    |            |            |          | 419,574     |            
|                                                                                     |                                          | Amortization of deferred financing fees                                    |                                                         |               | 88,982     |            |            |          | 87,708      |            
|Change in operating assets and liabilities:                                          |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     | Accounts receivable                      |                                                                            |                                                         | (115,757      | )          |            |            | (275,302 | )          
|                                                                                     | Accounts receivable from related parties |                                                                            |                                                         | 239,461       |            |            |            | 403,029  |            
|                                                                                     | Other assets                             |                                                                            |                                                         | (815,167      | )          |            |            | (386,556 | )          
|                                                                                     | Accounts payable and accrued liabilities |                                                                            |                                                         | (185,436      | )          |            |            | 468,056  |            
|                                                                                     | Security deposits and prepaid rent       |                                                                            |                                                         | (44,627       | )          |            |            | (65,606  | )          
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     |                                          |                                                                            | Net cash provided by operating activities               |               |            | 125,769    |            |          |             | 1,021,425   |  
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     |                                          | Purchase of real estate operating properties                               |                                                         |               | (8,891,156 | )          |            |          | (75,000     | )          
|                                                                                     |                                          | Purchase of investments in unconsolidated real
    estate                  |                                                         |               | (3,975,666 | )          |            |          | (12,010,718 | )          
|                                                                                     |                                          | Real estate property improvements                                          |                                                         |               |           |            |            |          | (39,434     | )          
|                                                                                     |                                          | Proceeds from disposition of property held for
    sale                    |                                                         |               | 3,842,581  |            |            |          |            |            
|                                                                                     |                                          | Collections of notes receivable                                            |                                                         |               | 3,855      |            |            |          | 3,521       |            
|                                                                                     |                                          | Collections of notes receivable from related
    parties                   |                                                         |               |           |            |            |          | 379,131     |            
|                                                                                     |                                          | Real estate deposits applied to purchases                                  |                                                         |               | 3,918,743  |            |            |          | 631,500     |            
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     |                                          |                                                                            | Net cash used in investing activities                   |               |            | (5,101,643 | )          |          |             | (11,111,000 | )
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     |                                          | Issuance of common shares                                                  |                                                         |               |           |            |            |          | 19,851,226  |            
|                                                                                     |                                          | Borrowings under notes payable                                             |                                                         |               | 5,000,000  |            |            |          | 456,237     |            
|                                                                                     |                                          | Principal payments on notes payable                                        |                                                         |               | (3,058,826 | )          |            |          | (132,132    | )          
|                                                                                     |                                          | Repurchase of shares                                                       |                                                         |               | (15,740    | )          |            |          | (116,090    | )          
|                                                                                     |                                          | Distributions paid                                                         |                                                         |               | (1,928,332 | )          |            |          | (1,410,257  | )          
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     |                                          |                                                                            | Net cash (used in) provided by financing
    activities |               |            | (2,898     | )          |          |             | 18,648,984  |  
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                            |                                          |                                                                            | (4,978,772                                              | )             |            |            | 8,559,409  |         
|CASH AND CASH EQUIVALENTS  beginning
    of period                                  |                                          |                                                                            | 6,129,468                                               |               |            |            | 3,647,159  |         
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|CASH AND CASH EQUIVALENTS  end of
    period                                        |                                          |                                                                            | 1,150,696                                               |               |            |            | 12,206,568 |         
|                                                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                    |                                          |                                                                            |                                                         |               |            |            |            |         
|Cash paid during the period for:                                                     |                                          |                                                                            |                                                         |               |            |            |            |         
|                                                                                     | Interest                                 |                                                                            | $                                                       | 967,019       |            |            | $          | 980,753  |            
|                                                                                     | Income taxes                             |                                                                            | $                                                       | 17,488        |            |            | $          | 1,730    |            

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

6



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##### Table of Contents



T REIT, INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


June 30, 2003


(Unaudited)


1.     Organization

T REIT, Inc. (the Company) was
formed in December 1998 in the Commonwealth of Virginia and
operates as a real estate investment trust (REIT)
under the Internal Revenue Code of 1986, as amended. The Company
is in the business of acquiring existing office, industrial,
retail and service properties located in several states. As of
June 30, 2003, the Company owned real estate investments
consisting of four properties, five tenant in common interests
and two membership interests in limited liability companies (see
Note 3).

Pursuant to a registration statement on
Form S-11 (the Registration Statement) under
the Securities Act of 1933, as amended, the Company offered for
sale to the public up to 10,000,000 shares of its common
stock (the Offering) at an Offering price of $10.00
per share and up to 700,000 shares under the Companys
Dividend Reinvestment Plan (the DRIP). The
Registration Statement was declared effective on
February 22, 2000. By May 31, 2002, when the Offering
and the DRIP were terminated, the Company had sold
4,720,176 shares of common stock, including 22,100 sold to
the Advisor and 69,676 shares sold under the DRIP.
Aggregate gross proceeds before Offering costs and selling
commissions were approximately $46,395,000. Through
June 30, 2003, the Company repurchased 25,615 shares
pursuant to its Share Repurchase Plan (See Note 7). As of
June 30, 2003, there were 4,694,561 common shares
outstanding.

The Company owns all of its interests in
properties through its majority-owned subsidiary, T REIT,
L.P., a Virginia limited partnership (the Operating
Partnership), and conducts substantially all of its
operations through the Operating Partnership. As of
June 30, 2003, the Company was the sole general partner of
the Operating Partnership and owned substantially all of the
equity interests therein, except for 100 incentive non-voting
ownership units issued to the Companys Advisor. The
incentive units entitle the Advisor to receive certain incentive
distributions of operating cash flow after a minimum 8% return
on invested capital has been paid to the Companys
shareholders (as defined in the Registration Statement). In
addition, the Advisor is entitled to incentive distributions
from net proceeds from the sale of properties after the
Companys shareholders have received distributions equal to
their invested capital, as defined, plus an 8% return on such
invested capital.

The Company is externally advised by Triple Net
Properties, LLC (the Advisor), which is primarily
responsible for managing the day-to-day operations and assets of
the Company. The Advisory Agreement between the Company and the
Advisor, as amended, was renewed by the Board of Directors on
June 28, 2003 for an additional one-year term effective
February 22, 2003 (See Note 8).



|   |                                                                                
|-- | -------------------------------------------------------------------------------
|2. | Interim Financial Statements and Summary of
    Significant Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying consolidated financial
statements include the accounts of the Company, T REIT,
L.P. and the wholly owned subsidiaries of T REIT, L.P. All
material intercompany transactions and account balances have
been eliminated in consolidation. All references to the Company
include the Operating Partnership and its subsidiaries.

The information furnished has been prepared in
accordance with accounting principles generally accepted in the
United States of America for interim financial reporting, the
instructions to Form 10-Q, and Rule 10-01 of
Regulation S-X. Accordingly, certain information and
disclosures have been condensed or omitted. In the opinion of
management, all adjustments considered necessary for the fair
presentation of the Companys financial position, results
of operations and cash flows have been included and are only of
a normal recurring nature. The results of operations for the six
months ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the year ending
December 31, 2003.

7



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

These financial statements should be read in
conjunction with the Companys audited December 31,
2002 consolidated financial statements included in
Form 10-K previously filed with the Securities and Exchange
Commission.

Real Estate
Investments

Operating
Properties

Operating properties are held for investment and
carried at cost less accumulated depreciation. Cost includes the
cost of land and completed buildings and related improvements.
Expenditures that increase the service life of properties are
capitalized; the cost of maintenance and repairs is charged to
expense as incurred.

Depreciation is generally provided on a
straight-line basis over the estimated useful lives of the
buildings and improvements, ranging primarily from 15 to
39 years. When depreciable property is retired or disposed
of, the related costs and accumulated depreciation are removed
from the accounts and any gain or loss reflected in operations.

Impairment losses are recorded on long-lived
assets used in operations when indicators of impairment are
present and the assets carrying amount is greater than the
sum of the future undiscounted cash flows estimated to be
generated by those assets. As of June 30, 2003, no
indicators of impairment existed and no impairment losses have
been recorded.

The Company follows the provisions of EITF 97-11,
Accounting for Internal Costs Related to Real Estate
Property Acquisitions. Accordingly, the Company does not
capitalize internal acquisition costs incurred in conjunction
with the identification and acquisition of properties to be held
for operations.

Property Held
for Sale

Property held for sale is carried at the lower of
cost or estimated fair value less cost to sell and such property
is no longer depreciated. The Company adopted the Financial
Accounting Standards Boards Statement of Financial
Accounting Standards (SFAS) 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, on January 1, 2002. SFAS 144 supersedes
SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The
primary objectives of SFAS 144 are to develop one
accounting model based on the frame work established in
SFAS 121 for long-lived assets to be disposed of by sale
and to address significant implementation issues regarding
impairment of long-lived assets held for use. In accordance with
SFAS  44, the Company classifies operating properties as
property held for sale in the period in which all of the
following criteria are met:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | management, having the authority to approve the
    action, commits to a plan to sell the asset;                                                                
|
| |  | the asset is available for immediate sale in its
    present condition subject only to terms that are usual and
    customary for sales of such assets;         
|
| |  | an active program to locate a buyer and other
    actions required to complete the plan to sell the asset have
    been initiated;                              
|
| |  | the sale of the asset is probable and the
    transfer of the asset is expected to qualify for recognition as
    a completed sale within one year;             
|
| |  | the asset is being actively marketed for sale at
    a price that is reasonable in relation to its current fair
    value; and;                                 
|
| |  | actions required to complete the plan indicate
    that it is unlikely that significant changes to the plan will be
    made or that the plan will be withdrawn.

8



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The application of SFAS 144 resulted in:
(i) the presentation of the net operating results of
certain properties held for sale, less allocated interest
expense and depreciation, as income from discontinued operations
for all periods presented (See Note 3). Interest and
depreciation expense was allocated based on specific
identification. Implementation of SFAS 144 impacted income
statement classification only and had no effect on total results
of operations. As required, properties sold prior to
January 1, 2002 were presented as a component of continuing
operations.

As of June 30, 2003, two properties were
classified as held for sale. As of December 31, 2002, one
property was classified as held for sale.

Investments in
Unconsolidated Real Estate

Investments in unconsolidated real estate are
accounted for using the equity method of accounting. Disposition
of investments accounted for using the equity method are
classified within continuing operations in conformity with APB
No. 18.

Financing
Costs

Financing costs consist of loan fees and other
loan costs. Loan fees and other loan costs are amortized over
the term of the respective loan. Amortization of financing costs
is included in interest expense.

Revenue
Recognition

Real estate property is leased to tenants under
leases with terms exceeding one year. Revenues from these
leases, which are accounted for as operating leases, are
recognized on a straight-line basis over the related term. Cost
recoveries from tenants are included in rental income in the
period the related costs are accrued.

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, as defined by
the Internal Revenue Code (the 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. As of June 30, 2003, the Company was
in compliance with all relevant REIT requirements.

Per Share
Data

The Company reports earnings per share pursuant
to Statement of Financial Accounting Standards No. 128,
Earnings Per Share. Basic earnings per share
attributable for all periods presented is computed by dividing
the net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share are
computed based on the weighted average number of common shares
and all potentially dilutive securities. As of June 30,
2003, there were 165,000 potentially dilutive securities
including 135,000 options granted to officers.

Allowance for
Uncollectible Receivables

When needed, the Company maintains an allowance
for estimated losses resulting from the inability of tenants to
make required payments, which results in a reduction of income.
Management determines the adequacy of this allowance by
continually evaluating individual tenant receivables considering
the tenants financial condition, security deposits,
letters of credit, lease guarantees and current economic
conditions.

9



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Management has established an allowance for
uncollectible accounts of $67,759 at June 30, 2003, to
reduce receivables to recoverable amounts.

Stock Option
Plans

The Company follows the disclosure only
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148.
For employee compensatory stock options that will eventually
vest, compensation expense is recognized during the periods in
which the related employee services are rendered. Such expense
is generally measured by determining the excess, if any, of the
grant date estimated fair market value of the underlying stock
over the amount to be paid by the employee in conformity with
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25). Compensatory stock options and similar equity
instruments issued to non-employees in exchange for goods or
services are accounted for based on the estimated fair market
value of (1) the goods or services received or (2) the
equity instrument issued, whichever is more reliably measurable.
This accounting policy is in conformity with SFAS 123.

Effective with the Offering, the Company
authorized and reserved a total of 100,000 shares of common
stock for issuance under the Independent Director Stock Option
Plan and 700,000 shares of common stock for issuance under
the Officer and Employee Stock Option Plan. Options granted
under these plans vest two years after the option grant date,
provided, however that such options are not exercisable until
the Plans have been approved by a majority of the Companys
shareholders. Each of the Plans was approved by shareholders at
the Annual Meeting of Shareholders held June 28, 2003.

As of June 30, 2003, options for a total of
165,000 shares are outstanding under the Officer and
Employee Stock Option Plan and Independent Director Stock Option
Plan.

|                                     |           |           |         |                 |  |                  |      |      |  |   |      |      | 
|------------------------------------ | --------- | --------- | ------- | --------------- |  | ---------------- | ---- | ---- |  | - | ---- | ---- | 
|                                     |           | Number    |         | Range of        |  | Weighted Average
|Options Outstanding at               |           | of Shares |         | Exercise Prices |  | Exercise Price  
|                                     |           |           |         |                 |  |                 
|December 31, 2002                    |           |           |        |                 |  | $                |     |      |  | $ |     |     
|                                     | Granted   |           |         | 165,000         |  |                  |      | 9.05 |  |   |      | 9.05 | 
|                                     | Exercised |           |         |                |  |                  |      |     |  |   |      |     | 
|                                     | Cancelled |           |         |                |  |                  |      |     |  |   |      |     | 
|                                     | Expired   |           |         |                |  |                  |      |     |  |   |      |     | 
|                                     |           |           |         |                 |  |                  |      |      |  |   |      |     
|Options outstanding at June 30, 2003 |           |           | 165,000 |                 |  | $                | 9.05 |      |  | $ | 9.05 |     
|                                     |           |           |         |                 |  |                  |      |      |  |   |      |     

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

|                |      |             |  |              |         |             |  |             |      |             |  |   |      |  |  |  |        |  |  |   |      | 
|--------------- | ---- | ----------- |  | ------------ | ------- | ----------- |  | ----------- | ---- | ----------- |  | - | ---- |  |  |  | ------ |  |  | - | ---- | 
|                |      |             |  |              |         | Wtd Avg     |  |             |      | Wtd Avg    
|                |      |             |  | Wtd Avg      |         | Exercise    |  |             |      | Exercise   
|                |      |             |  | Remaining    |         | Price      |  |             |      | Price     
|Range of        |      | Number      |  | Contractual  |         | Outstanding |  | Number      |      | Exercisable
|Exercise Prices |      | Outstanding |  | Life (Years) |         | Options     |  | Exercisable |      | Options    
|                |      |             |  |              |         |             |  |             |      |            
|$               | 9.05 |             |  |              | 165,000 |             |  |             | 9.50 |             |  | $ | 9.05 |  |  |  | 90,000 |  |  | $ | 9.05 | 

Pursuant to SFAS 148, the Company is
required to disclose the effects on net income and per share
data as if the Company had elected to use the fair value
approach to account for its stock-based compensation plans. Had
the compensation cost for all of the Companys option plans
been determined using the fair value

10



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

method, the compensation expense would have
decreased the Companys net income for the three-month and
six-month periods ended June 30, 2003 as shown below.

|                               |  |                |         |                |  |   |           | 
|------------------------------ |  | -------------- | ------- | -------------- |  | - | --------- | 
|                               |  | Three Months   |         | Six Months    
|                               |  | Ended June 30, |         | Ended June 30,
|                               |  | 2003           |         | 2003          
|                               |  |                |         |               
|Actual net income              |  | $              | 882,147 |                |  | $ | 1,669,054 | 
|Pro forma compensation expense |  |                | 247,178 |                |  |   | 247,178   | 
|                               |  |                |         |                |  |   |           | 
|Pro forma net income           |  | $              | 634,969 |                |  | $ | 1,421,876 | 
|                               |  |                |         |                |  |   |           | 
|Actual net income per share    |  | $              | .18     |                |  | $ | .36       | 
|                               |  |                |         |                |  |   |           | 
|Pro forma net income per share |  | $              | .13     |                |  | $ | .30       | 
|                               |  |                |         |                |  |   |           | 

This pro forma amount was determined by
estimating the fair value of each option outstanding effective
June 28, 2003 upon shareholder approval at approximately
$2.00 per option using the Black-Scholes option-pricing model.
Assumptions used in the calculation included a 7.50% dividend
yield, a 3.53% risk-free interest rate based on the 10-year
U.S. Treasury Bond, an expected life of 9.50 years,
and a 0% volatility rate. The pro forma expense primarily
reflects options that vested immediately upon shareholder
approval of the respective option plans.

Qualification
as a REIT

The Company elected to be taxed as a REIT in
2000. As of June 30, 2003, the Company believes it meets
the compliance tests required to maintain its REIT status.

Recently
Issued Accounting Pronouncements

The Financial Accounting Standards Board
(FASB) issued Statements No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143) and No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS 144). SFAS 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs, and is effective for financial
statements issued for fiscal years beginning after June 15,
2002. SFAS 144 supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets, including accounting for a segment of a
business accounted for as a discontinued operation.
SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 resulted in the presentation of
discontinued operations in 2002 and all prior periods presented
related to property held for sale.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections. SFAS No. 145 rescinds three existing
pronouncements (relating to the intangible assets of motor
carriers and certain debt extinguishments), amends SFAS
No. 13 (Accounting for Leases), and makes
technical corrections that are not substantive in nature to
several other pronouncements. The amendment of SFAS No. 13,
which is effective for transactions occurring after May 15,
2002, requires sale-leaseback accounting by lessees for certain
lease modifications that are economically similar to
sale-leaseback transactions. SFAS No. 145 did not affect
the accompanying 2003 financial statements, and is not presently
expected to have a significant impact on the Companys
future financial statements.

In June, 2002, the FASB approved for issuance
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, SFAS No. 146 is
effective for such activities initiated after December 31,
2002.

11



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Activities of this type include restructurings
(such as relocation of a business and fundamental
reorganizations of a business itself), which may give rise to
costs such as contract cancellation provisions, employee
relocation, and one-time termination costs. SFAS No. 146
prohibits liability recognition based solely on
managements intent, and requires that liabilities be
measured at estimated fair value. The adoption of SFAS
No. 146 did not have a material effect on the
Companys financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123. The disclosure
requirements of Statement 123, Accounting for
Stock-Based Compensation, which apply to stock
compensation plans of all companies, are amended to require
certain disclosures about stock-based employee compensation
plans in an entitys accounting policy note. Those
disclosures include a tabular format of pro forma net income
and, if applicable, earnings per share under the fair value
method if the intrinsic value method is used in any period
presented. Pro forma information in a tabular format is also
required in the notes to interim financial information if the
intrinsic value method is used in any period presented. Before
amendment by Statement 148, Statement 123 required
entities changing to the fair value method of accounting for
stock-based employee compensation to account for the change in
method prospectively. The Board decided to provide a choice
among three transition methods (the prospective method
originally required by Statement 123, the modified
prospective method, and the retroactive restatement method) for
entities voluntarily adopting the fair value method in periods
beginning before December 16, 2003. Statement 123s
original prospective transition method will not be available to
entities changing to the fair value method in fiscal years
beginning after December 15, 2003. The amendments to the
disclosure and transition provisions of Statement 123 are
effective for fiscal years ending after December 15, 2002.
The disclosure requirement for interim financial information is
effective for interim periods beginning after December 15,
2002. The Company has adopted the disclosure requirements of
SFAS 148 in the accompanying financial statements. The
implementation of this standard did not have a material effect
upon the Companys financial statements.

The FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Nos. 5,
57 and 107 and rescission of FASB Interpretation No. 34.
This Interpretation elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. Implementation of these
provisions of the Interpretation is not expected to have a
material impact on the Companys consolidated financial
statements. The disclosure requirements of the Interpretation
are effective for financial statements of interim or annual
periods ended after December 15, 2002, and have been
adopted in the accompanying consolidated financial statements
and the additional disclosures required have been included.

The FASB issued Interpretation No. 46,
Consolidation of Variable Interest
Entities  an interpretation of Accounting
Research Bulletin (ARB) No. 51. This
Interpretation defines a variable interest entity and provides
that if a business enterprise has a controlling financial
interest in a variable interest entity, the assets, liabilities,
and results of the activities of the variable interest entity
should be included in consolidated financial statements with
those of the business enterprise. Furthermore, the Board
indicates that the voting interest approach of ARB No. 51
is not effective in identifying controlling financial interests
in entities that are not controllable through voting interest or
in which the equity investors do not bear the residual economic
risk. This Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The
Interpretation

12



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

applies to public enterprises as of the beginning
of the applicable interim or annual period. The implementation
of this Interpretation did not have a material effect upon the
Companys financial statements.

In May 2003, the FASB issued Statement
No. 150 (SFAS 150), Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This statement establishes
standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments
with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for all financial
instruments created or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption
of SFAS 150 is not expected to have a material effect on the
Companys consolidated financial condition or results of
operations.



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

Certain reclassifications have been made to the
prior year financial statements in order to conform to the
current year presentation.



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

The Companys real estate investments are
comprised of (i) wholly-owned properties including
operating properties and properties held for sale and (ii)
investments in unconsolidated real estate.



| |                        
| | -----------------------
| | Wholly-Owned Properties



| |                     
| | --------------------
| | Operating Properties

At June 30, 2003, the Companys
operating properties were as follows:

|                                    |  |      |           |               |  |       |            |   |  |   |            |  
|----------------------------------- |  | ---- | --------- | ------------- |  | ----- | ---------- | - |  | - | ---------- | -
|                                    |  |      |           | Buildings and |  |      
|                                    |  | Land |           | Improvements  |  | Total
|                                    |  |      |           |               |  |      
|University Heights, San Antonio, TX |  | $    | 1,011,262 |               |  | $     | 5,796,451  |   |  | $ | 6,807,713  |  
|Gateway Mall, Bismarck, ND          |  |      |          |               |  |       | 8,877,579  |   |  |   | 8,877,579  |  
|                                    |  |      |           |               |  |       |            |   |  |   |            |  
|                                    |  |      | 1,011,262 |               |  |       | 14,674,030 |   |  |   | 15,685,292 |  
|Less: accumulated depreciation      |  |      |          |               |  |       | (231,778   | ) |  |   | (231,778   | )
|                                    |  |      |           |               |  |       |            |   |  |   |            |  
|                                    |  | $    | 1,011,262 |               |  | $     | 14,442,252 |   |  | $ | 15,453,514 |  
|                                    |  |      |           |               |  |       |            |   |  |   |            |  

The Gateway Mall property is subject to a ground
lease expiring in 2028 with 10 five-year option periods
thereafter.



| |                         
| | ------------------------
| | Properties Held for Sale

On February 25, 2003, management of the
Company approved plans to sell two of its operating properties,
Thousand Oaks Shopping Center and Pahrump Valley Shopping Center.

These properties have been reclassified as held
for sale and are carried at June 30, 2003 at their net
historical cost basis, which is not in excess of estimated fair
value less cost to sell. The Company ceased depreciation upon
its decision to sell each of the properties and the accumulated
depreciation has been reclassified against the cost basis. Prior
to February 25, 2003, Thousand Oaks and Pahrump were
classified as operating properties.

SFAS No. 144 requires the operating results
of any property with their own identifiable cash flows that is
held for sale to be removed from income from continuing
operations and reported as discontinued operations for the
current period and all prior periods presented. Summarized
operating information for the properties

13



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

held for sale and sold through the six months
ended June 30, 2003 and June 30, 2002 referred to
above which are included in discontinued operations follows:

|                                    |  |      |           |      |  |   |           | 
|----------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                    |  | 2003 |           | 2002
|                                    |  |      |           |     
|Revenues                            |  | $    | 2,103,434 |      |  | $ | 2,458,118 | 
|Income from discontinued operations |  | $    | 650,156   |      |  | $ | 544,985   | 

On May 2, 2003, the Company entered into an
agreement with an unaffiliated third party to sell Thousand Oaks
Shopping Center for $15,880,000. See Note 10 
Subsequent Events.

On May 15, 2003, the Company entered into an
agreement with an affiliated third party to sell Pahrump Valley
Shopping Center for $19,000,000. Closing of this sale is
anticipated during the third quarter of 2003.



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

Investments in unconsolidated real estate consist
of the Companys investments in undivided tenant in common
interests and limited liability companies. At June 30,
2003, the Company had the following investments in
unconsolidated real estate:

|                                    |  |                                |  |                      |            | 
|----------------------------------- |  | ------------------------------ |  | -------------------- | ---------- | 
|Entity Name                         |  | Property                       |  | Companys Investment
|                                    |  |                                |  |                     
|T REIT  Reno Trademark, LLC        |  | Trademark Building             |  | $                    | 1,124,486  | 
|NNN County Center  12, LLC         |  | County Center Building         |  |                      | 456,625    | 
|T REIT  City Center West A, LLC    |  | City Center West A Building  |  |                      | 8,028,126  | 
|NNN Pacific Corporate Park 1, LLC   |  | Pacific Corporate Park         |  |                      | 2,102,500  | 
|NNN Congress Center, LLC            |  | Congress Center                |  |                      | 5,044,952  | 
|T REIT  Titan Plaza, L.P.          |  | Titan Building and Titan Plaza |  |                      | 1,836,421  | 
|T REIT  Saddleback Financial, L.P. |  | Saddleback Financial           |  |                      | 846,444    | 
|                                    |  |                                |  |                      |            | 
|                                    |  |                                |  | $                    | 19,439,554 | 
|                                    |  |                                |  |                      |            | 

Unaudited condensed combined historical financial
information for the Companys investments in unconsolidated
real estate as of and for the three and six months ended
June 30, 2003 and 2002 is as follows:

|                               |  |                |             | 
|------------------------------ |  | -------------- | ----------- | 
|                               |  | As of June 30,
|                               |  | 2003          
|                               |  |               
|Assets (primarily real estate) |  | $              | 205,184,991 | 
|                               |  |                |             | 
|                              
|Mortgages notes payable        |  | $              | 136,428,536 | 
|Other liabilities              |  |                | 2,031,506   | 
|Equity                         |  |                | 66,724,949  | 
|                               |  |                |             | 
|                               |  | $              | 205,184,991 | 
|                               |  |                |             | 
|                              
|Companys share of equity      |  | $              | 19,439,554  | 
|                               |  |                |             | 

|                             |  |                |           |                |  |                |            |                |  |   |           |  |  |   |           | 
|---------------------------- |  | -------------- | --------- | -------------- |  | -------------- | ---------- | -------------- |  | - | --------- |  |  | - | --------- | 
|                             |  | Three Months   |           | Six Months     |  | Three Months   |            | Six Months    
|                             |  | Ended June 30, |           | Ended June 30, |  | Ended June 30, |            | Ended June 30,
|                             |  | 2003           |           | 2003           |  | 2002           |            | 2002          
|                             |  |                |           |                |  |                |            |               
|Revenues                     |  | $              | 5,803,652 |                |  | $              | 11,146,200 |                |  | $ | 1,570,547 |  |  | $ | 2,030,909 | 
|Expenses                     |  |                | 5,221,690 |                |  |                | 9,189,268  |                |  |   | 976,819   |  |  |   | 1,287,386 | 
|                            
|Companys equity in earnings |  |                | 405,896   |                |  |                | 964,057    |                |  |   | 356,150   |  |  |   | 410,283   | 

The Company is jointly and severally liable for
the entire amount of the debt in connection with the above
properties (See Note 9).

14



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

Other assets as of June 30, 2003 and the
year ended December 31, 2002 consisted of the following:

|                           |                    |          |         |              |  |   |         |           | 
|-------------------------- | ------------------ | -------- | ------- | ------------ |  | - | ------- | --------- | 
|                           |                    | June 30, |         | December 31,
|                           |                    | 2003     |         | 2002        
|                           |                    |          |         |             
|Loan impounds and reserves |                    | $        | 886,384 |              |  | $ | 568,297 |          
|Deferred rent receivable   |                    |          | 661,034 |              |  |   | 436,622 |          
|Lease commissions  net    |                    |          | 214,389 |              |  |   | 117,372 |          
|Loan fees  net            |                    |          | 389,823 |              |  |   | 417,480 |          
|Prepaid expenses           |                    |          | 178,330 |              |  |   | 77,142  |          
|Other assets               |                    |          | 13,488  |              |  |   | 350     |          
|                           |                    |          |         |              |  |   |         |          
|                           | Total other assets |          | $       | 2,343,448    |  |   | $       | 1,617,263 | 
|                           |                    |          |         |              |  |   |         |          

5.     Note
Receivable

In November 2001, the Company advanced $595,000
to the buyer of the Christie Street Building. The note is
secured by a first deed of trust, with interest at 8.5% per
annum maturing in December 2006. Interest income earned in
connection with this note for the three and six months ended
June 30, 2003 was approximately $12,600 and $25,200,
respectively.

6.     Accounts and
Notes Receivable from Related Parties

Accounts receivable from related parties at
June 30, 2003 consist primarily of $120,000 of
reimbursements from the Advisor for offering costs in excess of
2.5% of gross offering proceeds and a $460,000 receivable from
the Advisor for amounts due related to an indemnification
agreement associated with the sale of the Christie Street
Building in 2001. As of June 30, 2003 the remaining balance
due on these amounts was $354,209.

The Company made no related party loans during
the quarter ended June 30, 2003 and had no related party
loans outstanding as of June 30, 2003 or December 31,
2002.



|   |                     
|-- | --------------------
|7. | Shareholders Equity

At the conclusion of its Offering in May 2002,
the Company had sold 4,720,176 shares of common stock at
$10.00 per share, including 22,100 shares issued to the
Advisor and 69,676 shares sold under the DRIP.

During the quarter ended June 30, 2003, the
Company repurchased 1,739 shares of its common stock for
$15,740 pursuant to its Share Repurchase Plan. Through
June 30, 2003, the Company had repurchased a total of
25,615 shares pursuant to the Share Repurchase Plan. As of
June 30, 2003, there were 4,694,561 shares outstanding.

8.     Advisory
Agreement and Related Party Transactions



| |              
| | -------------
| | Advisory Fees

The Company is externally advised by Triple Net
Properties, LLC (the Advisor), which is primarily
responsible for managing the day-to-day operations and assets of
the Company. The Advisory Agreement between the Company and the
Advisor, as amended, was renewed by the Board of Directors on
June 28, 2003 for an additional one-year term effective
February 22, 2003. 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.

15



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company pays Realty property management fees
equal to 5% of the gross income of each property managed by
Realty. All of the Companys properties are managed by
Realty. For the three and six months ended June 30, 2003,
the Company paid Realty approximately $108,400 and $180,600 in
property management fees, 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 after the Companys shareholders
have received an 8.00% annual return on their invested capital.
No incentive distributions were made to the Advisor for the six
months ended June 30, 2003.

The Company compensates the Advisor for its
services through a series of fees pursuant to the Advisory
Agreement. No amounts were incurred during the six months ended
June 30, 2003 and no amounts are currently due the Advisor
under this agreement.

9.     Commitments
and Contingencies



| |                       
| | ----------------------
| | Master Lease Agreement

In connection with the sale of the Christie
Building in November 2001, the Company agreed as part of the
sale transaction, to guarantee the lease payment in the amount
$20,000 per month for a period of five years under a master
lease agreement. Under this agreement, the Company is obligated
to make lease payments to the lessor only in the event the
sub-lessee fails to make the lease payments. In addition, the
Company is also obligated to pay a pro rata share of lease
commissions and tenant improvements in the event the premises
are re-leased prior to November 13, 2006. Concurrent with
the issuance of the guarantee, the Advisor agreed to indemnify
the Company against any future losses under the master lease
agreement as evidenced by an indemnity agreement dated
November 13, 2001. The Christie Building is a single tenant
office building. The current tenants lease expired on
August 31, 2002 and the tenant vacated the property in
October 2002. Accordingly, the Company has accrued $460,000
related to its obligations under the guaranty, of which $120,000
has been paid through June 30, 2003. The Companys
accrual assumes a new tenant will occupy the property beginning
in the third quarter of 2003 and has been calculated assuming a
discount rate of 10% per annum. The Company has no collateral,
however it has recourse against the Advisor under the indemnity
agreement. Through June 2003, the Company has been reimbursed by
the Advisor for all amounts paid under the guarantee and expects
to be reimbursed by the Advisor in connection with the indemnity
agreement for the full amount of its obligation.



| |                            
| | ---------------------------
| | Contingent Loan Obligations

The Company has the following contingent loan
obligations at June 30, 2003, which it discloses under
FIN 45. None of these liabilities are carried on the
consolidated balance sheets as the Companys joint and
several obligation under these loans constitutes a guarantee of
entities under the common control of the Advisor, and, as a
result, is exempted from recognition and measurement required by
FIN 45.

The Company is jointly and severally liable for
the entire $4,600,000 balance of a mortgage loan in connection
with the refinancing of the Trademark Building. The note is
secured by a deed of trust with a fixed interest rate of 6.35%,
amortized on a 30-year schedule, with a due date of
January 1, 2013. The Companys 40.0% proportionate
share of this debt was approximately $1,840,000.

In connection with the acquisition of the County
Center Building, the Companys wholly-owned subsidiary,
NNN County Center Drive  12, LLC, is jointly and
severally liable on a $3,210,000 mortgage

16



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

loan on the property payable to a bank. The loan
terms include a variable rate of 4.125% over 6-month LIBOR,
subject to an 8.00% floor rate, with a 20-year amortization
period due September 2011.

In connection with the acquisition of the City
Center West A Building, the Companys
wholly-owned subsidiary, T REIT  City Center
West A, LLC, is jointly and severally liable on a
$13,000,000 mortgage loan on the property payable to a bank. The
loan terms include a 6.5% fixed interest rate with a 27-year
amortization period due in five years.

In connection with the acquisition of the
membership interest in NNN Pacific Corporate Park , LLC, such
entity is jointly and severally liable on an approximately
$5,683,000 mortgage loan (originally $15,500,000 and reduced by
subsequent sales of buildings in the office park) on Pacific
Corporate Park from a financial institution. The loan terms
include a spread of 3.25% over LIBOR, with interest-only
payments for two years and two six-month extensions at the
borrowers election upon payment of a 0.25% fee upon each
extension. The initial interest rate was locked for 60 days
at a spread of 3.25% over 60-day LIBOR. After the initial 60-day
rate lock period, the borrowers locked $2,000,000 of the loan at
a spread of 3.25% over 30-day LIBOR and the balance of the loan
at a spread of 3.25% over 60-day LIBOR.

In connection with the acquisition of the Titan
Building and Titan Plaza, the Companys wholly-owned
subsidiary, T REIT  Titan Plaza, L.P., is
jointly and severally liable on a $6,000,000 mortgage loan
payable to a bank. The loan terms include a variable rate of
3.25% over 30-day LIBOR, subject to a 5.25% floor rate, with a
30-year amortization period due May 2004.

In connection with the acquisition of the
Saddleback Financial Center, the Companys wholly-owned
subsidiary, T REIT  Saddleback Financial L.P.,
is jointly and severally liable on a $7,650,000 mortgage loan
payable to a bank. The loan terms include a variable rate of
0.5% over the Wall Street Journal Prime Rate, subject to a 5.00%
floor rate, with a 30-year amortization period due September
2007.

In connection with the acquisition of Congress
Center, the Company, through its membership interest in NNN
Congress Center, LLC, is jointly and severally liable on a
$95,950,000 mortgage loan payable to a bank and any subsequent
increases in the total debt. The loan terms include an
$80,950,000, 36-month senior mortgage bridge loan and a
$15,000,000, 36-month mezzanine loan.

In the event of default on the above loans by
other property owners, the Company may be required to fully
repay a defaulted loan and accrued interest thereon. In such
event, the Company would have recourse against the other owners
and would then be able to proportionally increase its ownership
interest in the respective property.



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

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

Section 6.4 of Article 6 of the
Companys Articles of Incorporation prohibits the Company
from making any loans or advances to its Advisor, directors,
officers or any affiliated entities; however, during 2001 and
2000, the Company made such loans or advances to affiliates, all
of which have been collected in full prior to December 31,
2002. Management does not believe that these past violations of
the Articles of Incorporation will impact future operations of
the Company.



|    |                  
|--- | -----------------
|10. | Subsequent Events

On August 1, 2003, the Company executed a
term sheet with Fleet National Bank for a line of credit in the
amount of $1,000,000 which bears interest at the choice of the
Company at the prime rate or LIBOR plus 1.75% per annum. The
credit facility has a term of one year with two one-year
extensions. The credit facility is

17



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subject to a fee of 1% to be paid one-third on
each of the effective date, the first anniversary and the second
anniversary.

On August 11, 2003, the Company sold the
Thousand Oaks Shopping Center in San Antonio, Texas to an
unaffiliated third-party for a purchase price of $15,880,000. At
closing, the Company paid a commission to Realty of $158,800 or
approximately 1.0% of the selling price, and a commission to an
unaffiliated broker of $317,600, or approximately 2.0% of the
selling price. The Company realized net cash proceeds of
$6,700,000 from the sale. The Company intends to reinvest the
proceeds from the sale in real estate property that qualifies
for like-kind exchange treatment under Section 1031 of the
Internal Revenue Code.

18



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

The following discussion should be read in
conjunction with the consolidated financial statements and notes
thereto of the Company appearing elsewhere in this report. Such
financial statements have been prepared to reflect the
Companys financial position as of June 30, 2003 and
December 31, 2002, together with the results of operations
and cash flows for the three-month and six-month periods ended
June 30, 2003 and 2002.

Forward-Looking Statements

Historical results and trends are not necessarily
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
such 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 is
including this statement for purposes of complying with such
provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and
expectations of management, 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 affect on the operations and
future prospects of the Company include, but are not limited to:
changes in general economic conditions and in the real estate
market specifically (including those in the local economy of the
regions where the Companys properties are located),
legislative/ regulatory changes (including changes in Federal
and/or state laws governing the taxation of REITs), availability
of capital, interest rates, competition, supply and demand for
operating properties in the Companys current and proposed
market areas, and generally accepted accounting principles
applicable to REITs. These risks and uncertainties should be
considered in evaluating forward-looking statements, and undue
reliance should not be placed on any such statements. Further
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 Company does not intend to update any of the
forward-looking statements after the date this report is filed
to conform these statements to actual results, unless required
by law.

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 at which time gross proceeds of
approximately $46,395,000 had been received from the sale of
4,720,176 shares. Through December 31, 2002, the
Company had repurchased 23,876 shares pursuant to its Share
Repurchase Plan. During the quarter ended June 30, 2003,
1,739 additional shares were repurchased. As a result,
4,694,561 shares were outstanding at June 30, 2003.

Critical Accounting Policies

The preparation of these financial statements in
accordance with accounting principles generally accepted in the
United States of America requires us 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 require significant
judgments and estimates such as those related to revenue
recognition and allowance for uncollectible receivables,
impairment of real estate assets, 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

19



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##### Table of Contents



be reasonable under the circumstances. Actual
results could vary from those estimates and those estimates
could be different under different assumptions or conditions.




| |                                                                    
| | -------------------------------------------------------------------
| | Revenue Recognition and Allowance for
    Uncollectible Receivables

Base rental income is recognized on a
straight-line basis over the terms of the respective lease
agreements. Differences between rental income recognized and
amounts contractually due under the lease agreements are
credited or charged, as applicable, to rent receivable. The
Company maintains, as necessary, an allowance for doubtful
accounts for estimated losses resulting from the inability of
tenants to make required payments which will result in a
reduction to income. Management determines the adequacy of this
allowance by continually evaluating individual tenant
receivables considering the tenants financial condition,
security deposits, letters of credit, lease guarantees and
current economic conditions.



| |                                     
| | ------------------------------------
| | Impairment of Real Estate
    Assets

The Company assesses the impairment of a real
estate asset when events or changes in circumstances indicate
that the net book value may not be recoverable. Indicators
management considers important which could trigger an impairment
review include the following:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | significant negative industry or economic trend;                                                    
|
| |  | a significant underperformance relative to
    historical or projected future operating results; and
|
| |  | a significant change in the manner in which the
    asset is used.                                  



| |                
| | ---------------
| | Deferred Assets

Costs incurred for debt financing and property
leasing are capitalized as deferred assets. Deferred financing
costs include amounts paid to lenders and others to obtain
financing. Such costs are amortized over the term of the related
loan. Amortization of deferred financing costs is included in
interest expense in the Companys statements of operations.
Deferred leasing costs include leasing commissions that are
amortized using the straight-line method over the term of the
related lease. Deferred leasing costs are included in the basis
when a property is sold and therefore reduce the gain on sale.
Unamortized financing and leasing costs are charged to expense
in the event of debt prepayment or early termination of the
lease.



| |                        
| | -----------------------
| | Qualification as a REIT

The Company has made an election to be taxed as a
REIT in 2000. If the Company was to fail to qualify as a REIT,
it would be, among other things, required to provide for federal
income taxes on its income and reduce the level of distributions
made to its shareholders. Critical estimates include the
allocation of cost between personal and real property, and the
calculation of earnings and profits for tax purposes, among
others.

Real Estate Investments

Through June 30, 2003, the Company, through
the Operating Partnership, had purchased interests in 15 real
estate properties, including six operating properties, seven
undivided tenant in common interest properties and limited
liability membership interests in two properties. Through
June 30, 2003, the Company had sold two operating
properties and two undivided tenant in common interest
properties. In addition, two of its operating properties were
held for sale at June 30, 2003.

20



---



##### Table of Contents



The following table presents a summary of the
Companys wholly-owned properties and properties in which
it owned undivided tenant in common and limited liability
company membership interests as of June 30, 2003:

|                                              |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|--------------------------------------------- |  | -------- | ---------------- | ----------- |  | ------- | ------ | -------- |  | --------------- | --------- |  |  |  | -------- |  |  |  | ---------------------- | 
|                                              |  |          |                  | Company     |  | GLA(1)  |        | Date     |  |                
|Property Name                                 |  | Location |                  | Ownership % |  | (Sq Ft) |        | Acquired |  | Major Tenant(2)
|                                              |  |          |                  |             |  |         |        |          |  |                
|Operating Properties                          |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|University Heights                            |  |          | San Antonio, TX  |             |  |         | 100.00 | %        |  |                 | 68,400    |  |  |  | 08/22/02 |  |  |  | US Geological Survey   | 
|Gateway Mall                                  |  |          | Bismarck, ND     |             |  |         | 100.00 |          |  |                 | 333,210   |  |  |  | 01/29/03 |  |  |  | Sears Roebuck          | 
|                                              |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|                                              |  |          |                  |             |  |         |        |          |  |                 | 401,610   |  |  |  |          |  |  |  |                        | 
|Investments in Unconsolidated Real
    Estate |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|Trademark Building                            |  |          | Reno, NV         |             |  |         | 40.00  | (3)      |  |                 | 75,257    |  |  |  | 09/04/01 |  |  |  | Memec, Inc.            | 
|County Center Drive                           |  |          | Temecula, CA     |             |  |         | 16.00  | (3)      |  |                 | 77,582    |  |  |  | 01/11/02 |  |  |  | FFF Enterprises        | 
|City Center West A                          |  |          | Las Vegas, NV    |             |  |         | 89.13  | (3)      |  |                 | 105,964   |  |  |  | 03/15/02 |  |  |  | Citadel Broadcasting   | 
|Pacific Corporate Park                        |  |          | Lake Forest, CA  |             |  |         | 22.76  | (4)      |  |                 | 167,486   |  |  |  | 03/25/02 |  |  |  | Open Bid Exch Corp     | 
|Titan Building & Plaza                        |  |          | San Antonio, TX  |             |  |         | 48.50  | (3)      |  |                 | 131,527   |  |  |  | 04/17/02 |  |  |  | St. Paul Fire & Marine | 
|Saddleback Financial                          |  |          | Laguna Hills, CA |             |  |         | 25.00  | (3)      |  |                 | 72,711    |  |  |  | 09/25/02 |  |  |  | CA Bank & Trust        | 
|Congress Center                               |  |          | Chicago, IL      |             |  |         | 10.26  | (4)      |  |                 | 525,000   |  |  |  | 01/09/03 |  |  |  | General Services Admin | 
|                                              |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|                                              |  |          |                  |             |  |         |        |          |  |                 | 1,155,527 |  |  |  |          |  |  |  |                        | 
|Properties Held for Sale                      |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|Thousand Oaks                                 |  |          | San Antonio, TX  |             |  |         | 100.00 |          |  |                 | 162,864   |  |  |  | 12/06/00 |  |  |  | H. E. Butt             | 
|Pahrump                                       |  |          | Pahrump, NV      |             |  |         | 100.00 | %        |  |                 | 105,721   |  |  |  | 05/11/01 |  |  |  | Albertsons            | 
|                                              |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|                                              |  |          |                  |             |  |         |        |          |  |                 | 268,585   |  |  |  |          |  |  |  |                        | 
|                                              |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 
|Total                                         |  |          |                  |             |  |         |        |          |  |                 | 1,825,722 |  |  |  |          |  |  |  |                        | 
|                                              |  |          |                  |             |  |         |        |          |  |                 |           |  |  |  |          |  |  |  |                        | 



---



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | GLA unadjusted for the Companys percentage
    undivided tenant in common interest.
|   
|(2) | Tenant occupies largest space of property.                                          
|   
|(3) | Undivided tenant in common interest.                                                
|   
|(4) | Limited liability company membership interest.                                      

Acquisitions and Dispositions During the
Quarter Ended June 30, 2003

There were no acquisitions or dispositions during
the quarter ended June 30, 2003.

Discontinued Operations

On February 25, 2003, the Companys
Board of Directors approved managements plans to sell
Thousand Oaks Shopping Center and Pahrump Valley Shopping Center
and commenced active marketing of the properties. Current and
prior net operating income related to these properties is
classified as discontinued operations for all periods presented.

On May 2, 2003, the Company entered into an
agreement with an unaffiliated third party to sell Thousand Oaks
Shopping Center for $15,880,000. On August 11, 2003, the
Company sold this property as discussed in Subsequent
Events below.

On May 15, 2003, the Company entered into an
agreement with an affiliated third party to sell Pahrump Valley
Shopping Center for $19,000,000. Closing of this sale is
anticipated during the third quarter of 2003.

Results of Operations

The comparability of the financial information
discussed below is limited by acquisitions and dispositions
completed during the year ended December 31, 2002 and the
quarter ended June 30, 2003. During the quarter ended
March 31, 2002, the Company purchased 16% and 89.125%
tenant in common interests in a 77,582 square foot
office/distribution building and a 105,964 square foot office
building, respectively, and also

21



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##### Table of Contents



purchased a 38% membership interest in an LLC
owning a 60% tenant in common interest in a 166,785 square foot,
six-building office park. During the quarter ended June 30,
2002, the Company purchased a 48.50% tenant in common interest
in a 131,527 square foot office building. During the quarter
ended September 30, 2002, the Company purchased a 68,400
square foot flex/service center and a 25% undivided tenant in
common interest in a 72,711 square foot office building and sold
26% and 16.5% undivided tenant in common interests in two
shopping centers containing 21,455 square feet and 126,322
square feet, respectively. During the quarter ended
March 31, 2003, the Company purchased a 333,210 square foot
regional mall and a 38% limited liability company interest in an
LLC owning approximately 27% of a 525,000 square foot office
building and sold a 67,560 square foot shopping center. During
the quarter ended June 30, 2003, the Company made no
acquisitions or dispositions of property. For more information
on the Companys acquisitions and dispositions, see Note 3
to the Consolidated Financial Statements accompanying this
Quarterly Report on Form 10-Q.


Comparability is also impacted due to the
presentation of Thousand Oaks Shopping Center and Pahrump Valley
Shopping Center for the six months ended June 30, 2003, and
these two properties together with Northstar Shopping Center for
the six months ended June 30, 2002 as discontinued
operations.



| |                                                       
| | ------------------------------------------------------
| | Three Months Ended June 30, 2003 and
    June 30, 2002

As previously noted, comparability of the
financial information discussed below, including rental income,
rental expenses, mortgage interest, depreciation and
amortization, general and administrative expenses and other
items, is materially impacted by the property acquisitions and
dispositions during the year ended December 31, 2002 and
the quarter ended June 30, 2003.

The following discussion excludes the impact of
the reclassification of the previously mentioned shopping
centers as discontinued operations, except as noted.

Rental Income.Rental income consists of
straight-line monthly base rent, percentage rental income, if
applicable, due pursuant to tenant leases and property operating
expenses recovered from tenants. Rental income increased to
$636,154 for the quarter ended June 30, 2003 due to the
University Heights and Gateway Mall acquisitions.

Interest Income.Interest income consists of interest
earned from short-term money market investments and loans that
are held by the Company. Interest income decreased by $36,853 to
$40,544 for the quarter ended June 30, 2003 compared to
$77,397 for the quarter ended June 30, 2002. This decrease
was due primarily to a decrease in available cash and cash
equivalent balances awaiting investment during the quarter ended
June 30, 2003.

Rental Expenses.Rental expenses consist of the costs
of owning and maintaining the Companys properties
including primarily property management fees, real estate taxes,
insurance, maintenance to the exterior of the buildings and the
parking lots. These expenses increased to $236,227 for the
quarter ended June 30, 2003. The increase was primarily
attributable to the rental expense associated with the
University Heights and Gateway Mall properties.

General and Administrative Expenses.General and administrative expenses
consist primarily of third party legal and accounting fees and
the cost of computerized information services and related office
expenses required to maintain the Companys accounting and
investor records. These expenses decreased by $12,836 to
$252,229 for the quarter ended June 30, 2003 compared to
$265,065 for the quarter ended June 30, 2002. Management
anticipates lower legal and accounting expenses during the
remainder of 2003 relative to 2002 due to the end of the
Companys offering; however, this reduction will be
partially offset by increased general and administrative
expenses related to expanded audit and SEC compliance
requirements mandated by the Sarbanes-Oxley Act.

Depreciation.Depreciation expense of $106,540 for
the quarter ended June 30, 2003 was attributable to the
University Heights and Gateway Mall properties.

22



---



##### Table of Contents



Interest Expense.Interest expense consists of mortgage
interest paid on the Companys properties and the
amortization of deferred financing fees. Interest expense of
$93,949 for the quarter ended June 30, 2003 was due to the
University Heights and Gateway Mall properties.

Equity in Net Earnings of Unconsolidated Real
Estate.The Companys equity in
earnings of unconsolidated real estate increased $49,746 to
$405,896 for the quarter ended June 30, 2003 compared to
$356,150 for the quarter ended June 30, 2002. The majority
of the increase was due to the acquisitions of a 25% undivided
tenant in common interest in Saddleback Financial Center during
the third quarter of 2002 and a 10.26% interest in Congress
Center through the purchase of a limited liability company
interest during the first quarter of 2003.

Income From Discontinued
Operations  Property Held For Sale.Income from discontinued operations
represents the net operating results of two properties held for
sale for the three months ended June 30, 2003, including
interest expense and depreciation related to these properties.
Income from discontinued operations increased $225,438 to
$488,498 for the quarter ended June 30, 2003 compared to
$263,060 for the quarter ended June 30, 2002 primarily as a
result of the decline in depreciation expense resulting from the
classification of the properties as held for sale.

Net Income.Net
income was $882,147 or $.18 per share  basic and
diluted  for the quarter ended June 30, 2003
compared to net income of $431,542 or $0.11 per
share  basic and diluted  for the quarter
ended June 30, 2002. Dividends declared were $968,289 or
$.21 per share for the quarter ended June 30, 2003 compared
to $812,135 or $.21 per share for the quarter ended
June 30, 2002.



| |                                                     
| | ----------------------------------------------------
| | Six Months Ended June 30, 2003 and
    June 30, 2002

As previously noted, comparability of the
financial information discussed below, including rental income,
rental expenses, mortgage interest, depreciation and
amortization, general and administrative expenses and other
items, is materially impacted by the property acquisitions and
dispositions during the six months ended June 30, 2002 and
June 30, 2003.

The following discussion excludes the impact of
the reclassification of the previously mentioned shopping
centers as discontinued operations, except as noted.

Rental Income.Rental income consists of
straight-line monthly base rent, percentage rental income, if
applicable, due pursuant to tenant leases and property operating
expenses recovered from tenants. Rental income increased to
$1,128,787 for the quarter ended June 30, 2003 due to the
University Heights and Gateway Mall acquisitions.

Interest Income.Interest income consists of interest
earned from short-term money market investments and loans that
are held by the Company. Interest income decreased by $123,216
to $65,231 for the quarter ended June 30, 2003 compared to
$188,447 for the quarter ended June 30, 2002. This decrease
was due primarily to the collection during 2002 of all loans
made by the Company and a decrease in available cash and cash
equivalent balances awaiting investment during the six months
ended June 30, 2003.

Rental Expenses.Rental expenses consist of the costs
of owning and maintaining the Companys properties
including primarily property management fees, real estate taxes,
insurance, maintenance to the exterior of the buildings and the
parking lots. These expenses amounting to $400,360 for the six
months ended June 30, 2003 were attributable to the
University Heights and Gateway Mall properties.

General and Administrative Expenses.General and administrative expenses
consist primarily of third party legal and accounting fees and
the cost of computerized information services and related office
expenses required to maintain the Companys accounting and
investor records. These expenses decreased by $8,866 to $372,483
for the six months ended June 30, 2003 compared to $381,349
for the six months ended June 30, 2002. Management
anticipates lower legal and accounting expenses during the
remainder of 2003 relative to 2002 due to the end of the
Companys offering; however, this reduction will be
partially offset by increased general and administrative
expenses related to expanded audit and SEC compliance
requirements mandated by the Sarbanes-Oxley Act.

23



---



##### Table of Contents



Depreciation.Depreciation expense of $174,757 for
the six months ended June 30, 2003 was attributable to the
University Heights and Gateway Mall properties.

Interest Expense.Interest expense consists of mortgage
interest paid on the Companys properties and the
amortization of deferred financing fees. Interest expense of
$215,203 for the quarter ended June 30, 2003 was due to the
University Heights and Gateway Mall properties.

Equity in Net Earnings of Unconsolidated Real
Estate.The Companys equity in
earnings of unconsolidated real estate increased $553,774 to
$964,057 for the six months ended June 30, 2003 compared to
$410,283 for the six months ended June 30, 2002. The
majority of the increase was due to the acquisitions of a 25%
undivided tenant in common interest in Saddleback Financial
Center during the third quarter of 2002 and a 10.26% interest in
Congress Center through the purchase of a limited liability
company interest during the first quarter of 2003. In addition,
ownership interests in City Center West A, Titan
Building & Titan Plaza and Pacific Corporate Park
contributed to the increase in equity in earnings of
unconsolidated real estate during the entire six-month period
ended June 30, 2003 compared to partial contributions
during the six months ended June 30, 2002 due to
acquisition timing.

Sales of Real Estate.During the six months ended
June 30, 2003, the Company realized total net gain on the
sale of the Northstar Shopping Center of $23,617. There were no
sales of real estate operating properties or investments in
unconsolidated real estate during the six months ended
June 30, 2002.

Income From Discontinued
Operations  Property Held For Sale.Income from discontinued operations
represents the net operating results of two properties held for
sale for the six months ended June 30, 2003 and three
properties for the six months ended June 30, 2002,
including interest expense and depreciation related to these
properties. Income from discontinued operations increased by
$50,271 to $595,256 for the six months ended June 30, 2003
compared to $544,985 for the six months ended June 30,
2002. The increase in income from discontinued operations
produced by lower depreciation expense resulting from the
classification of the properties as held for sale was partially
offset by the loss of revenues due to the sale of Northstar
Shopping Center during the quarter ended June 30, 2003.

Net Income.Net
income was $1,669,054 or $0.36 per share  basic and
diluted  for the six months ended June 30, 2003
compared to a net income of $762,366 or $0.22 per
share  basic and diluted  for the six
months ended June 30, 2002. Dividends declared were
$1,936,899 or $.41 per share for the six months ended
June 30, 2003 compared to $1,388,753 or $.41 per share for
the six months ended June 30, 2002.

Liquidity and Capital Resources



| |                  
| | -----------------
| | Capital Resources

At June 30, 2003, the Company had $1,150,696
of cash and cash equivalents as compared to $6,129,468 of cash
and cash equivalents at December 31, 2002 to meet its
immediate short-term liquidity requirements. Management expects
that future short-term liquidity requirements will be financed
by net cash flow from operations, existing working capital and
proceeds from the sale of properties. Operating cash flows are
expected to increase as additional properties and investments in
unconsolidated real estate are added to the Companys
portfolio. Cash and cash equivalents decreased since
December 31, 2002 principally as a result of acquisition of
real estate investments.

The Company anticipates that adequate cash will
be generated from operations to fund its operating and
administrative expenses, continuing debt service obligation and
the payment of dividends in the foreseeable future.

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, as defined by
the Code, to its shareholders, among other requirements. The
Company expects to continue to use its cash flow from operating
activities to pay dividends to shareholders and to support the
operating activities of the Company. The

24



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##### Table of Contents



Company maintains amounts accumulated for the
payment of dividends in interest-bearing money market accounts.


Dividends paid for the quarter ended
June 30, 2003 were $1,928,332 compared to $1,410,257 for
the six months ended June 30, 2002. The Company currently
pays cash dividends monthly at an annual rate of $0.825 per
share. For the six months ended June 30, 2003 approximately
16% of dividends declared and paid represented a return of
capital for federal income tax purposes. Dividends 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 Internal Revenue Code of 1986, as
amended, and other factors the Board of Directors may deem
relevant.



| |                                         
| | ----------------------------------------
| | Cash Flows From Operating
    Activities

Net cash provided by operating activities was
$125,769 for the six months ended June 30, 2003 compared to
net cash provided by operating activities of $1,021,425 for the
six months ended June 30, 2002. The decrease in cash
provided by operating activities relative to the prior period
was primarily due to a $815,167 increase in other assets
resulting primarily from tenant improvement and other
lender-required reserves totaling approximately $529,000
associated with the Gateway Mall and University Heights
properties. In addition, the Companys purchase of several
undivided tenant in common interests in properties resulted in a
net $553,774 increase in the Companys equity in earnings
of unconsolidated real estate to $964,057 for the six months
ended June 30, 2003 from $410,283 for the six months ended
June 30, 2002. Partially offsetting these reductions in
cash provided by operating activities was the $906,689 increase
in the Companys net income to $1,669,052 for the six
months ended June 30, 2003 from $762,366 for the six months
ended June 30, 2002 resulting primarily from the increased
size and improved performance of its real estate portfolio
during the quarter ended June 30, 2003.

Management expects cash flows from operating
activities to increase due to the acquisitions of Gateway Mall
and the limited liability company membership interest in
Congress Center completed during the six months ended
June 30, 2003 and the acquisition of additional properties
and investments in unconsolidated real estate during the
remainder of the year as the Company strategically redeploys its
capital. Management is currently considering other potential
opportunities to reinvest proceeds from real estate
dispositions. The decision to acquire one or more properties or
investments in unconsolidated real estate will generally depend
upon (i) receipt of a satisfactory environmental survey and
property appraisal, (ii) an absence of any material adverse
change relating to the property, its tenants, or local economic
conditions, and (iii) adequate financing. There is no
assurance that any of these conditions will be satisfied or, if
satisfied, that the Company will purchase any additional
properties or make any further investments in unconsolidated
real estate.



| |                                            
| | -------------------------------------------
| | Cash Flows Used In Investing
    Activities

Net cash used in investing activities amounted to
$5,101,643 for the six months ended June 30, 2003 compared
to $11,111,000 for the six months ended June 30, 2002. The
decrease in net cash used in investing activities was largely
the result of net proceeds of $3,842,581 received upon the sale
of Northstar Shopping Center in January and the application of
$3,918,743 in deposits toward the purchase of additional real
estate properties. The Company invested $12,866,568 in real
estate investments ($3,975,666 for investments in unconsolidated
real estate operating properties and $8,891,156 for the purchase
of real estate operating properties) during the six months ended
June 30, 2003 as compared to $12,085,718 in real estate
investments consisting almost entirely of investments in
unconsolidated real estate operating properties during the six
months ended June 30, 2002. There were no sales of property
during the quarter ended June 30, 2003.

At June 30, 2003, the Company does not have
any material planned capital expenditures resulting from any
known demand based on existing trends. However, management may
conclude that expenditures to improve properties are necessary
and/or desirable.

25



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##### Table of Contents





| |                                         
| | ----------------------------------------
| | Cash Flows From Financing
    Activities

Cash used in financing activities amounted to
$2,898 for the six months ended June 30, 2003 compared to
cash provided by financing activities of $18,648,984 for the six
months ended June 30, 2002. The primary reason for the
decline was the end of the Companys Offering on
May 31, 2002. In comparison, during the six months ended
June 30, 2002, the Company raised $19,851,226 through its
Offering (net of offering costs). During the six months ended
June 30, 2003, the Company borrowed $5,000,000 related to
the acquisition of Gateway Mall compared to $456,237 in
borrowings for the six months ended June 30, 2002. There
was also $3,058,826 in principal payments on notes payable,
primarily related to the repayment of the mortgage loan on
Northstar Shopping Center upon the sale of the property. In
addition, the Company paid $1,928,332 in cash dividends to
shareholders during the six months ended June 30, 2003
compared to $1,410,257 for the six months ended June 30,
2002. The increase in dividends paid was the result of
additional shares issued after the quarter ended June 30,
2002.

The Company intends to acquire additional
properties and make additional investments in unconsolidated
real estate and may seek to fund these acquisitions through
proceeds received from a combination of subsequent equity
offerings, debt financings or asset dispositions.

Management believes that, to the extent, if any,
that the Company is not successful in generating cash flow from
operations sufficient to meet its cash flow requirements, the
Company can secure a line of credit to finance any cash flow
deficits. Additionally, the Companys current cash position
of $1,150,696 at June 30, 2003 could be used to compensate
for cash flow deficits, if any.

Subsequent Events

On August 1, 2003, the Company executed a
term sheet with Fleet National Bank for a line of credit in the
amount of $1,000,000 which bears interest at the choice of the
Company at the prime rate or LIBOR plus 1.75% per annum. The
credit facility has a term of one year with two one-year
extensions. 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.

On August 11, 2003, the Company sold the
Thousand Oaks Shopping Center in San Antonio, Texas to an
unaffiliated third-party for a purchase price of $15,880,000. At
closing, the Company paid a commission to Realty of $158,800 or
approximately 1.0% of the selling price, and a commission to an
unaffiliated broker of $317,600, or approximately 2.0% of the
selling price. The Company realized net cash proceeds of
$6,700,000 from the sale. The Company intends to reinvest the
proceeds from the sale in additional real estate property.

Funds From Operations

Due to the unique operating characteristics of
certain real estate companies, the National Association of Real
Estate Investment Trusts (NAREIT), an industry trade
group, has promulgated a standard known as funds from operations
(FFO) which it believes more accurately reflects the
operating performance of a REIT. As defined by NAREIT, FFO
equals net income or loss determined in accordance with
accounting principles generally accepted in the United States
(GAAP) less extraordinary, unusual and non-recurring
items, excluding gains/losses from debt restructuring and sales
of property, plus depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures
in which the REIT holds an interest.

The Company computes FFO in accordance with the
April 2002 White Paper on Funds From Operations, and
National Policy Bulletin published by NAREIT. The
Company generally considers FFO to be a relevant and meaningful
supplemental measure of the performance of an equity REIT
because it is predicated on a cash flow analysis, as contrasted
with net income/loss determined on a GAAP basis that gives
effect to non-cash items such as depreciation. However, FFO is
not intended to be an alternative to net income or loss as an
indicator of the Companys performance, nor to cash flow
provided by/used in operating activities (based on GAAP) as a
measure of liquidity. In addition, FFO is not necessarily
indicative of cash available to pay distributions or finance
other operating requirements. Since the aforementioned NAREIT
publications

26



---



##### Table of Contents



only provide general guidelines for computing
FFO, the computation thereof may vary from one REIT to another
because capitalization and expense accounting policies may
differ from entity to entity.


As stated in its April 5, 2002 National
Policy Bulletin (the Bulletin), NAREIT believes that
since SFAS No. 144 does not change bottom-line net income,
it should not change bottom-line FFO. Thus, the
Bulletin states that relevant financial items from
income-producing properties whether currently in use, held for
sale, sold or otherwise transferred should be included in FFO
for both current and prior periods.

The Companys FFO reporting complies with
NAREITs policy described in the preceding paragraph.

As noted in Funds From Operations
above, management considers FFO to be one measure of the
performance of a REIT. FFO were $1,216,883 for the three months
ended June 30, 2003 compared to $787,201 for the three
months ended June 30, 2002. FFO were $2,458,163 for the six
months ended June 30, 2003 compared to $1,372,782 for the
six months ended June 30, 2002. The Companys FFO were
calculated according to the table below:

|                      |                                                                    |                |           |                |  |      |         |         |  |   |           |         |  |   |           |         | 
|--------------------- | ------------------------------------------------------------------ | -------------- | --------- | -------------- |  | ---- | ------- | ------- |  | - | --------- | ------- |  | - | --------- | ------- | 
|                      |                                                                    |                |           |               
|                      |                                                                    | Three Months   |           | Six Months    
|                      |                                                                    | Ended June 30, |           | Ended June 30,
|                      |                                                                    |                |           |               
|                      |                                                                    | 2003           |           | 2002           |  | 2003 |         | 2002   
|                      |                                                                    |                |           |                |  |      |         |        
|Net income            |                                                                    | $              | 882,147   |                |  | $    | 431,542 |         |  | $ | 1,669,054 |         |  | $ | 762,366   |        
|Add:                  |                                                                    |                |          |                |  |      |        |         |  |   |          |         |  |   |          |        
|                      | Depreciation  continuing operations                               |                |           | 106,540        |  |      |         |        |  |   |           | 174,757 |  |   |           |        | 
|                      | Depreciation  discontinued operations                             |                |           |               |  |      |         | 197,991 |  |   |           | 102,176 |  |   |           | 419,575 | 
|                      | Depreciation  unconsolidated real
    estate operating properties |                |           | 251,813        |  |      |         | 157,668 |  |   |           | 512,176 |  |   |           | 190,841 | 
|Less:                 |                                                                    |                |           |                |  |      |         |         |  |   |           |         |  |   |           |        
|                      | Gain/(loss) on sale of real estate investment                      |                |           | 23,617         |  |      |         |        |  |   |           |        |  |   |           |        | 
|                      |                                                                    |                |           |                |  |      |         |         |  |   |           |         |  |   |           |        
|Funds from operations |                                                                    | $              | 1,216,883 |                |  | $    | 787,201 |         |  | $ | 2,458,163 |         |  | $ | 1,372,782 |        
|                      |                                                                    |                |           |                |  |      |         |         |  |   |           |         |  |   |           |        






|        |                                                               
|------- | --------------------------------------------------------------
|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, fund capital expenditures, and finance expansion of
the Companys operations and real estate portfolio. In
managing the Companys interest rate risk,
managements objectives are to limit the impact of interest
rate changes on operations and cash flows, and to lower its
overall borrowing costs. To achieve these objectives, the
Company borrows primarily at interest rates with the lowest
margins available and, in some cases, with the ability to
convert variable interest rates to fixed rates. In the future,
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 given financial instrument.
The Company does not enter into derivative or interest rate
transactions for speculative purposes.

27



---



##### Table of Contents



The table below presents the principal amounts
and weighted average interest rates of fixed and variable
interest rate debt by year of scheduled maturity to evaluate the
expected cash flows and sensitivity to interest rate changes.

|                                                         |  |                     |         |      |  |      |           |      |  |      |         |            |  |   |           |  |  |   |         |  |  |   |            | 
|-------------------------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | --------- | ---- |  | ---- | ------- | ---------- |  | - | --------- |  |  | - | ------- |  |  | - | ---------- | 
|                                                         |  |                     |         |     
|                                                         |  | As of June 30, 2003 |         |     
|                                                         |  |                     |         |     
|                                                         |  | 2003                |         | 2004 |  | 2005 |           | 2006 |  | 2007 |         | Thereafter
|                                                         |  |                     |         |      |  |      |           |      |  |      |         |           
|Fixed rate debt                                          |  | $                   | 120,965 |      |  | $    | 263,304   |      |  | $    | 283,324 |            |  | $ | 304,866   |  |  | $ | 328,046 |  |  | $ | 10,646,797 | 
|Average interest rate on maturing fixed rate debt        |  |                     | 7.25%   |      |  |      | 7.25%     |      |  |      | 7.25%   |            |  |   | 7.25%     |  |  |   | 7.25%   |  |  |   | 7.25%      | 
|Variable rate debt                                       |  | $                   | 86,261  |      |  | $    | 8,929,904 |      |  | $    | 187,449 |            |  | $ | 4,690,226 |  |  | $ | 59,805  |  |  | $ | 4,130,351  | 
|Average interest rate on maturing variable rate
    debt |  |                     | 4.01%   |      |  |      | 7.43%     |      |  |      | 4.04%   |            |  |   | 3.57%     |  |  |   | 5.25%   |  |  |   | 5.25%      | 

The estimated fair value of the Companys
variable-rate debt approximates its June 30, 2003 carrying
amount. Variable-rate debt secured by the Companys
properties bears interest at approximately 5.87% as of
June 30, 2003.






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

Senior management, including the Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the Companys disclosure controls and procedures as of
June 30, 2003. Based on this evaluation process, the Chief
Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures are
effective. Since that evaluation process was completed, there
have been no significant changes in internal controls or in
other factors that could significantly affect these controls.




Part II  Other
Information






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

None.






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

(a) None.

(b) None.

(c) None.

(d) N/A






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

None.






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

On June 28, 2002, the Company held its
Annual Meeting of Shareholders. At the meeting shareholders
voted on the election of directors to the Companys Board
of Directors, the approval of the Companys Independent
Director Stock Option Plan, the approval of the Companys
Officer and Employee Stock Option Plan and on the ratification
of the Companys auditors. The shareholders voted to elect
W. Brand Inlow, Anthony W. Thompson and D. Fleet
Wallace as directors for one year terms, to approve each of the
Independent Director and Officer and Employee Stock Option Plans
and to ratify the appointment of Grant Thornton LLP as the
Companys independent auditors for 2003.

28



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##### Table of Contents



The Company received proxies representing 54.5%
of the Companys 4,696,300 shares of common stock
outstanding as of May 10, 2003, the record date. The number
of votes for, against, abstaining, and withheld were as follows.

|                                                   |  |     |           |         |  |         |         |          |  |  |         |  |  |  |   | 
|-------------------------------------------------- |  | --- | --------- | ------- |  | ------- | ------- | -------- |  |  | ------- |  |  |  | - | 
|Directors                                          |  | For |           | Against |  | Abstain |         | Withheld
|                                                   |  |     |           |         |  |         |         |         
|W. Brand Inlow                                     |  |     | 2,419,560 |         |  |         |        |          |  |  | 139,706 |  |  |  |  | 
|Anthony W. Thompson                                |  |     | 2,419,560 |         |  |         |        |          |  |  | 139,706 |  |  |  |  | 
|D. Fleet Wallace                                   |  |     | 2,419,560 |         |  |         |        |          |  |  | 139,706 |  |  |  |  | 
|Approval of Independent Director Stock Option Plan |  |     | 2,136,245 |         |  |         | 203,194 |          |  |  | 220,854 |  |  |  |  | 
|Approval of Officer and Employee Stock Option Plan |  |     | 2,166,193 |         |  |         | 200,883 |          |  |  | 192,192 |  |  |  |  | 
|Ratification of Grant Thornton LLP as auditors     |  |     | 2,407,275 |         |  |         | 7,163   |          |  |  | 144,831 |  |  |  |  | 






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

None.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

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

|         |    |             |  |                                                                                                                                                                                                                                                                                      
|-------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item No. |    | Description
|         |    |            
|         | 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)                                   

29



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##### Table of Contents



|         |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item No. |    | Description
|         |    |            
|         | 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, 2002 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, 2002 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).                                                                                                                                                                                       
|         | 31 | .1          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            
|         | 31 | .2          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            
|         | 32 | .1          |  | Certification Pursuant to 18 U.S.C. Section
    1350, as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            
|         | 32 | .2          |  | Certification Pursuant to 18 U.S.C. Section
    1350, as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            

30



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##### Table of Contents



(b) The following 8-K Report was filed
during the quarter ended June 30, 2003:



| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 14, 2003, the Company filed a
    Current Report on Form 8-K/A dated January 29, 2003 to
    file the required Item 7 financial statements with respect
    to its purchase of the Gateway Mall in Bismarck, North Dakota.

31



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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/ ANTHONY W. THOMPSON

| |                        
| | -----------------------
| | Anthony W. Thompson    
| | Chief Executive Officer



| |     |                      
| | --- | ---------------------
| | By: | /s/ WILLIAM C. DANIEL

| |                        
| | -----------------------
| | William C. Daniel      
| | Chief Financial Officer

Date: August 14, 2003

32



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##### Table of Contents








EXHIBIT INDEX


|         |    |             |  |                                                                                                                                                                                                                                                                                                                                                                         
|-------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item No. |    | Description
|         |    |            
|         | 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)                                                                 

33



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##### Table of Contents



|         |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item No. |    | Description
|         |    |            
|         | 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, 2002 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, 2002 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).                                                                                                                                                                                       
|         | 31 | .1          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            
|         | 31 | .2          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            
|         | 32 | .1          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            
|         | 32 | .2          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                            

34