##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number: 0-49782





T REIT, Inc.


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Virginia                                                           |  | 52-2140299                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

1551 N. Tustin Avenue, Suite 200


Santa Ana, California 92705


(Address of
principal executive offices)


(877) 888-7348


(Registrants telephone number, including area code)





Securities registered pursuant to Section 12(b) of the
Act:


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the
Act:


Title of Class:




þ o


o




o þ












---



T REIT, INC.


(A VIRGINIA CORPORATION)


TABLE OF CONTENTS







|             |  |                                                                                                                      |     |      |    | 
|------------ |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|             |  |                                                                                                                      |     | Page |   
|             |  |                                                                                                                      |     |      |   
|PART I      
|Item 1.      |  | Business                                                                                                             |     |      | 1  | 
|Item 2.      |  | Properties                                                                                                           |     |      | 8  | 
|Item 3.      |  | Legal Proceedings                                                                                                    |     |      | 15 | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                              |     |      | 16 | 
|            
|PART II     
|Item 5.      |  | Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer Purchases of Equity
    Securities |     |      | 17 | 
|Item 6.      |  | Selected Financial Data                                                                                              |     |      | 18 | 
|Item 7.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |     |      | 20 | 
|Item 7A.     |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |     |      | 51 | 
|Item 8.      |  | Financial Statements and Supplementary
    Data                                                                      |     |      | 52 | 
|Item 9.      |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |     |      | 52 | 
|Item 9A.     |  | Controls and Procedures                                                                                              |     |      | 53 | 
|Item 9B.     |  | Other Information                                                                                                    |     |      | 54 | 
|            
|PART III    
|Item 10.     |  | Directors and Executive Officers of the
    Registrant                                                               |     |      | 55 | 
|Item 11.     |  | Executive Compensation                                                                                               |     |      | 60 | 
|Item 12.     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                   |     |      | 61 | 
|Item 13.     |  | Certain Relationships and Related
    Transactions                                                                   |     |      | 62 | 
|Item 14.     |  | Principal Accounting Fees and Services                                                                               |     |      | 65 | 
|            
|PART IV     
|Item 15.     |  | Exhibits and Financial Statement
    Schedules                                                                       |     |      | 66 | 
|SIGNATURES   |  |                                                                                                                      | 105 |     
|EXHIBIT 14.1
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



i



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##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business

Significant events occurring since November 22, 2004
(the filing date of the Form 10-Q for the third quarter of
2004) include:




| |                    
| | -------------------
| | Plan of Liquidation





| |                         
| | ------------------------
| | Prior Performance Tables



Our Company








---



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Developments During 2004






| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we purchased a consolidated property in January 2004 for
    $22,965,000 and purchased interests in two unconsolidated
    properties for $1,670,000 in April and July 2004; and
|
| |  | we sold one consolidated property for a total gross sales price
    of approximately $11,600,000.                                                                               

Current Investment Objectives and Policies


General






| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | invest in income producing real property (or interests therein)
    generally through equity investments in a manner which permits
    us to continue to qualify as a REIT for federal income tax
    purposes;
|
| |  | generate cash available for distribution to our shareholders;                                                                                                                                                  
|
| |  | preserve and protect shareholder capital; and                                                                                                                                                                  
|
| |  | realize capital appreciation upon the ultimate sale of our
    properties.                                                                                                                                     



2



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##### Table of Contents





Acquisition Strategies














Acquisition Standards




3



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| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | geographic location and type;                                                                                             
|
| |  | construction quality and condition;                                                                                       
|
| |  | potential for capital appreciation;                                                                                       
|
| |  | lease terms and rent roll, including the potential for rent
    increases;                                                
|
| |  | potential for economic growth in the tax and regulatory
    environment of the community in which the property is located;
|
| |  | potential for expanding the physical layout of the property;                                                              
|
| |  | occupancy and demand by tenants for properties of a similar type
    in the same geographic vicinity;                     
|
| |  | prospects for liquidity through sale, financing or refinancing
    of the property;                                       
|
| |  | competition from existing properties and the potential for the
    construction of new properties in the area; and        
|
| |  | treatment under applicable federal, state and local tax and
    other laws and regulations.                               









| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in general economic or local conditions;                                                                                                 
|
| |  | changes in supply of or demand for similar competing properties
    in an area;                                                                  
|
| |  | changes in interest rates and availability of permanent mortgage
    funds which may render the sale of a property difficult or
    unattractive;
|
| |  | changes in tax, real estate, environmental and zoning laws;                                                                                      
|
| |  | periods of high interest rates and tight money supply which may
    make the sale of properties more difficult;                                  
|
| |  | tenant turnover; and                                                                                                                             
|
| |  | general overbuilding or excess supply in the market area.                                                                                        

Disposition Strategies






| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | the ability to sell the property at a price we believe would
    provide an attractive return to our shareholders;
|
| |  | our ability to recycle capital into core markets consistent with
    our business strategy;                       
|
| |  | our desire to exit markets that are not core markets;                                                             
|
| |  | whether the property is strategically located;                                                                    
|
| |  | tenant composition and lease rollover for the property;                                                           
|
| |  | general economic conditions and outlook, including job growth in
    the local market; and                        
|
| |  | the general quality of the asset.                                                                                 

4



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##### Table of Contents



Operating Strategies






| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | managing costs and seeking to minimize operating expenses by
    centralizing management, leasing, marketing, financing,
    accounting, renovation and data processing activities;
|
| |  | improving rental income and cash flow by aggressively marketing
    rentable space and raising rents when feasible;                                                                
|
| |  | emphasizing regular maintenance and periodic renovation to meet
    the needs of tenants and to maximize long-term returns;                                                        
|
| |  | re-positioning properties, including, for example, shifting from
    single to multi-tenant use in order to maximize desirability and
    utility for prospective tenants; and     
|
| |  | financing acquisitions and refinancing properties when favorable
    financing terms are available to increase the cash flow.                                                      

Financing Policies








Tax Status




Distribution Policy




5



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Competition










Government Regulations




Costs of Compliance with the Americans with Disabilities
Act.


Costs of Government Environmental Regulation and Private
Litigation.


6



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##### Table of Contents





Use of Hazardous Substances by Some of Our Tenants.


Other Federal, State and Local Regulations.


Significant Tenants




|                         |  |              |           |               |             |  |    |          |  |  |                |       |  |                 |        |  |  |  |               | 
|------------------------ |  | ------------ | --------- | ------------- | ----------- |  | -- | -------- |  |  | -------------- | ----- |  | --------------- | ------ |  |  |  | ------------- | 
|                         |  |              |           | Percentage of |             |  |    |          |  |  |               
|                         |  | 2004 Annual  |           |               | 2004 Annual |  |    |          |  |  |                | Lease | 
|Tenant                   |  | Base Rent(1) |           |               | Base Rent   |  |    | Property |  |  | Square Footage |       |  | Expiration Date |       
|                         |  |              |           |               |             |  |    |          |  |  |                |       |  |                 |       
|ACS State Health Systems |  | $            | 588,000   |               |             |  | 12 | %        |  |  | AmberOaks      |       |  |                 | 44,000 |  |  |  | February 2005 | 
|Netsolve, Inc.           |  | $            | 1,073,000 |               |             |  | 21 | %        |  |  | AmberOaks      |       |  |                 | 78,000 |  |  |  | April 2007    | 






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Annualized rental income based on contractual base rent sent
    forth in leases in effect at December 31, 2004.



Employees




Financial Information About Industry Segments




7



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|        |           
|------- | ----------
|Item 2. | Properties

Real Estate Investments








|                                    |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              |  |  |       |   |  |   |       | 
|----------------------------------- |  | ----------------- | --------------- | --- | ------- |  | --------- | ----- |  | ---- | -------- | - | ------ | ------- | -------- | ---------- | ------------ | - | ----------- | ------------ |  |  | ----- | - |  | - | ----- | 
|                                    |  |                   |                 | GLA |         |  | %         |       |  | Date |          |   | Annual |         |          | % Physical |              |   | Annual Rent |             
|Property Name                       |  | Property Location |                 |     | (Sq Ft) |  |           | Owned |  |      | Acquired |   |        | Rent(1) |          |            | Occupancy(2) |   |             | per Sq Ft(3) | 
|                                    |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              | 
|Consolidated Properties:            |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              |  |  |       |   |  |   |       | 
|University Heights                  |  |                   | San Antonio, TX |     |         |  | 68,000    |       |  |      | 100.0    | % |        |         | 08/22/02 |            |              | $ | 790,000     |              |  |  | 95.8  | % |  | $ | 12.05 | 
|AmberOaks Corporate Center          |  |                   | Austin, TX      |     |         |  | 207,000   |       |  |      | 75.0     |   |        |         | 01/20/04 |            |              |   | 2,629,000   |              |  |  | 99.1  |   |  |   | 12.83 | 
|                                    |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              | 
|Total/ Weighted Average             |  |                   |                 |     |         |  | 275,000   |       |  |      |          |   |        |         |          |            |              | $ | 3,419,000   |              |  |  | 98.3  | % |  | $ | 12.64 | 
|                                    |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              | 
|Unconsolidated Properties:          |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              |  |  |       |   |  |   |       | 
|Reno Trademark Building  TIC       |  |                   | Reno, NV        |     |         |  | 72,000    |       |  |      | 40.0     |   |        |         | 09/04/01 |            |              | $ | 816,000     |              |  |  | 100.0 | % |  | $ | 11.29 | 
|County Center Drive  TIC           |  |                   | Temecula, CA    |     |         |  | 78,000    |       |  |      | 16.0     |   |        |         | 01/11/02 |            |              |   | 605,000     |              |  |  | 100.0 |   |  |   | 7.80  | 
|City Center West A Building  TIC |  |                   | Las Vegas, NV   |     |         |  | 106,000   |       |  |      | 89.1     |   |        |         | 03/15/02 |            |              |   | 2,710,000   |              |  |  | 96.7  |   |  |   | 26.45 | 
|Pacific Corporate Park  LLC        |  |                   | Lake Forest, CA |     |         |  | 89,000    |       |  |      | 22.8     |   |        |         | 03/25/02 |            |              |   | 799,000     |              |  |  | 59.7  |   |  |   | 15.08 | 
|Titan Building & Plaza  TIC        |  |                   | San Antonio, TX |     |         |  | 131,000   |       |  |      | 48.5     |   |        |         | 04/17/02 |            |              |   | 1,737,000   |              |  |  | 88.6  |   |  |   | 14.94 | 
|Congress Center  LLC               |  |                   | Chicago, IL     |     |         |  | 525,000   |       |  |      | 10.3     |   |        |         | 01/09/03 |            |              |   | 12,460,000  |              |  |  | 90.0  |   |  |   | 26.39 | 
|Enclave Parkway  LLC               |  |                   | Houston, TX     |     |         |  | 207,000   |       |  |      | 3.3      |   |        |         | 12/22/03 |            |              |   | 3,744,000   |              |  |  | 100.0 |   |  |   | 18.05 | 
|Oakey Building  LLC                |  |                   | Las Vegas, NV   |     |         |  | 95,000    |       |  |      | 9.8      |   |        |         | 4/2/04   |            |              |   | 2,913,000   |              |  |  | 88.3  |   |  |   | 34.60 | 
|Emerald Plaza  LLC                 |  |                   | San Diego, CA   |     |         |  | 355,000   |       |  |      | 2.7      |   |        |         | 7/6/04   |            |              |   | 9,081,000   |              |  |  | 80.8  |   |  |   | 31.70 | 
|                                    |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              | 
|Total/ Weighted Average             |  |                   |                 |     |         |  | 1,658,000 |       |  |      |          |   |        |         |          |            |              | $ | 34,865,000  |              |  |  | 88.8  | % |  | $ | 23.69 | 
|                                    |  |                   |                 |     |         |  |           |       |  |      |          |   |        |         |          |            |              |   |             |              | 






|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Annualized rental income based on contractual base rent from
    leases in effect at December 31, 2004.
|   
|(2) | Physical occupancy at December 31, 2004.                                                               
|   
|(3) | Average effective annual rent per square foot at
    December 31, 2004.                                

8



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##### Table of Contents





|                                    |  |          |                 |            |       |  |           |            |  |   |            | 
|----------------------------------- |  | -------- | --------------- | ---------- | ----- |  | --------- | ---------- |  | - | ---------- | 
|                                    |  |          |                 | Percentage |       |  | Companys |           
|Property                            |  | Location |                 |            | Owned |  |           | Investment | 
|                                    |  |          |                 |            |       |  |           |            | 
|City Center West A Building  TIC |  |          | Las Vegas, NV   |            |       |  | 89.1      | %          |  | $ | 8,004,000  | 
|Congress Center  LLC               |  |          | Chicago, IL     |            |       |  | 10.3      |            |  |   | 3,875,000  | 
|Pacific Corporate Park  LLC        |  |          | Lake Forest, CA |            |       |  | 22.8      |            |  |   | 1,830,000  | 
|Titan Building & Plaza  TIC        |  |          | San Antonio, TX |            |       |  | 48.5      |            |  |   | 2,027,000  | 
|Reno Trademark Building  TIC       |  |          | Reno, NV        |            |       |  | 40.0      |            |  |   | 1,154,000  | 
|Oakey Building  LLC                |  |          | Las Vegas, NV   |            |       |  | 9.8       |            |  |   | 585,000    | 
|Enclave Parkway  LLC               |  |          | Houston, TX     |            |       |  | 3.3       |            |  |   | 452,000    | 
|County Center Drive  TIC           |  |          | Temecula, CA    |            |       |  | 16.0      |            |  |   | 432,000    | 
|Emerald Plaza  LLC                 |  |          | San Diego, CA   |            |       |  | 2.7       |            |  |   | 913,000    | 
|                                    |  |          |                 |            |       |  |           |            | 
|                                    |  |          |                 |            |       |  |           |            |  | $ | 19,272,000 | 
|                                    |  |          |                 |            |       |  |           |            | 





| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we believe all of the properties are adequately covered by
    insurance and are suitable for their intended purposes;                                                                                                                  
|
| |  | we have no plans for any material renovations, improvements or
    development of the properties, except in accordance with planned
    budgets;                                                                                        
|
| |  | our properties are located in markets where we are subject to
    competition for attracting new tenants and retaining current
    tenants; and                                                                                         
|
| |  | depreciation is provided on a straight-line basis over the
    estimated useful lives of the buildings, ranging primarily from
    15 to 39 years and over the shorter of the lease term or
    useful lives of the tenant improvements.



T REIT, Inc.





9



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Congress Center







AmberOaks Corporate Center







10



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##### Table of Contents



City Center West A Building







County Center Drive







11



---



##### Table of Contents



Emerald Plaza







Enclave Parkway







12



---



##### Table of Contents



Oakey Building







Pacific Corporate Park







13



---



##### Table of Contents



Reno Trademark







Titan Building and Plaza







14



---



##### Table of Contents



Affiliated Companies







Lease Expiration Table




|                        |       |           |   |           |          |      |           |             |  |             |            |     |   |   |           |           | 
|----------------------- | ----- | --------- | - | --------- | -------- | ---- | --------- | ----------- |  | ----------- | ---------- | --- | - | - | --------- | --------- | 
|                        |       |           |   |           |          | % of |           |             | 
|                        |       |           |   | Total Sq. |          |      | Total GLA |             |  | Annual Base |           
|                        |       | Number    |   |           | Ft. of   |      |           | Represented |  |             | Rent Under |    
|                        |       | of Leases |   |           | Expiring |      |           | by Expiring |  |             | Expiring   |    
|Year Ending December 31 |       | Expiring  |   |           | Leases   |      |           | Leases      |  |             | Leases     |    
|                        |       |           |   |           |          |      |           |             |  |             |            |    
|2005                    |       |           | 5 |           |          |      | 58,000    |             |  |             | 21.17      | %   |   | $ | 767,000   |          
|2006                    |       |           | 8 |           |          |      | 45,000    |             |  |             | 16.42      |     |   |   | 580,000   |          
|2007                    |       |           | 3 |           |          |      | 80,000    |             |  |             | 29.20      |     |   |   | 1,091,000 |          
|2008                    |       |           | 2 |           |          |      | 64,000    |             |  |             | 23.36      |     |   |   | 623,000   |          
|2009                    |       |           | 2 |           |          |      | 6,000     |             |  |             | 2.19       |     |   |   | 30,000    |          
|2010                    |       |           | 0 |           |          |      |          |             |  |             |           |     |   |   |          |          
|2011                    |       |           | 0 |           |          |      |          |             |  |             |           |     |   |   |          |          
|2012                    |       |           | 0 |           |          |      |          |             |  |             |           |     |   |   |          |          
|2013                    |       |           | 0 |           |          |      |          |             |  |             |           |     |   |   |          |          
|2014                    |       |           | 0 |           |          |      |          |             |  |             |           |     |   |   |          |          
|Thereafter              |       |           | 1 |           |          |      | 21,000    |             |  |             | 7.66       |     |   |   | 284,000   |          
|                        |       |           |   |           |          |      |           |             |  |             |            |    
|                        | Total |           |   | 21        |          |      |           | 274,000     |  |             |            | 100 | % |   | $         | 3,375,000 | 
|                        |       |           |   |           |          |      |           |             |  |             |            |    

Indebtedness









|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings



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

In the matter of Triple Net Properties, LLC.


15



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##### Table of Contents









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












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



16



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##### Table of Contents






PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Shareholder Matters

Market Information






Shareholders




Distributions








Equity Compensation Plan Information




|                                                           |  |                            |         |  |                     |   |      |                      |  |  |         | 
|---------------------------------------------------------- |  | -------------------------- | ------- |  | ------------------- | - | ---- | -------------------- |  |  | ------- | 
|                                                           |  | Number of Securities to Be |         |  | Weighted Average    |   |      |                     
|                                                           |  | Issued Upon Exercise of    |         |  | Exercise Price of   |   |      | Number of Securities | 
|                                                           |  | Outstanding Options,       |         |  | Outstanding Options |   |      | Remaining Available  | 
|Plan Category                                              |  | Warrants and Rights        |         |  | Warrants and Rights |   |      | for Future Issuance  | 
|                                                           |  |                            |         |  |                     |   |      |                      | 
|Equity compensation plans approved by security holders(1)  |  |                            | 425,000 |  |                     | $ | 9.05 |                      |  |  | 375,000 | 
|Equity compensation plans not approved by security holders |  |                            |        |  |                     |   |      |                      |  |  |        | 
|                                                           |  |                            |         |  |                     |   |      |                      | 
|Total                                                      |  |                            | 425,000 |  |                     |   |      |                      |  |  | 375,000 | 
|                                                           |  |                            |         |  |                     |   |      |                      | 






|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each of the Independent Director and Officer/ Employee Stock
    Option Plans was approved at our annual meeting of shareholders
    held on June 28, 2003.

17



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



SELECTED FINANCIAL DATA


T REIT, INC.


|                                                         |  |                    |            |  |      |   |            |      |  |   |            |  |  |      |            |  |  |   |            | 
|-------------------------------------------------------- |  | ------------------ | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- |  |  | ---- | ---------- |  |  | - | ---------- | 
|                                                         |  | As of December 31, |           
|                                                         |  |                    |           
|Selected Financial Data(1)                               |  | 2004               |            |  | 2003 |   |            | 2002 |  |   | 2001       |  |  | 2000 |           
|                                                         |  |                    |            |  |      |   |            |      |  |   |            |  |  |      |           
|BALANCE SHEET DATA:                                      |  |                    |            |  |      |   |            |      |  |   |            |  |  |      |            |  |  |   |            | 
|Total assets                                             |  | $                  | 60,553,000 |  |      | $ | 49,369,000 |      |  | $ | 67,769,000 |  |  | $    | 45,441,000 |  |  | $ | 21,572,000 | 
|Mortgage loans payable, including property held for sale |  |                    | 19,285,000 |  |      |   | 9,250,000  |      |  |   | 28,090,000 |  |  |      | 24,737,000 |  |  |   | 15,079,000 | 
|Shareholders equity                                     |  |                    | 36,819,000 |  |      |   | 38,107,000 |      |  |   | 38,216,000 |  |  |      | 19,765,000 |  |  |   | 5,093,000  | 
|Book value per share                                     |  | $                  | 7.98       |  |      | $ | 8.20       |      |  | $ | 8.14       |  |  | $    | 8.00       |  |  | $ | 7.67       | 

|                                                                                                                                            |                                            |                          |             |      |      |   |           |      |  |   |             |      |  |      |            |       |   |   |            |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------ | ----------- | ---- | ---- | - | --------- | ---- |  | - | ----------- | ---- |  | ---- | ---------- | ----- | - | - | ---------- | ----- | -
|                                                                                                                                            |                                            | Years Ended December 31, |            
|                                                                                                                                            |                                            |                          |            
|                                                                                                                                            |                                            | 2004                     |             |      | 2003 |   |           | 2002 |  |   | 2001        |      |  | 2000 |           
|                                                                                                                                            |                                            |                          |             |      |      |   |           |      |  |   |             |      |  |      |           
|OPERATING DATA:                                                                                                                             |                                            |                          |             |      |      |   |           |      |  |   |             |      |  |      |            |       |   |   |            |      
|Total revenues                                                                                                                              |                                            | $                        | 4,959,000   |      |      | $ | 1,068,000 |      |  | $ | 304,000     |      |  | $    | 197,000    |       |   | $ | 204,000    |      
|Income from continuing operations before discontinued operations
    and gain on sale of real estate investments and minority
    interests |                                            |                          | (96,000     | )    |      |   | 809,000   |      |  |   | 1,038,000   |      |  |      | (312,000   | )     |   |   | (104,000   | )    
|Discontinued operations, including gain on sale                                                                                             |                                            |                          | 2,555,000   |      |      |   | 3,380,000 |      |  |   | 1,255,000   |      |  |      | (151,000   | )     |   |   | 4,000      |      
|Net income (loss)                                                                                                                           |                                            |                          | 2,544,000   |      |      |   | 4,189,000 |      |  |   | 2,293,000   |      |  |      | (464,000   | )     |   |   | (101,000   | )    
|Income (loss) per common share, basic and diluted(2):                                                                                       |                                            |                          |             |      |      |   |           |      |  |   |             |      |  |      |            |       |   |   |            |      
|                                                                                                                                            | Income (loss) from continuing operations   |                          | $           | 0.00 |      |   | $         | 0.17 |  |   | $           | 0.26 |  |      | $          | (0.22 | ) |   | $          | (0.46 | )
|                                                                                                                                            | Income (loss) from discontinued operations |                          |             | 0.55 |      |   |           | 0.73 |  |   |             | 0.31 |  |      |            | (0.11 | ) |   |            | 0.02  |  
|                                                                                                                                            |                                            |                          |             |      |      |   |           |      |  |   |             |      |  |      |           
|                                                                                                                                            | Net income(loss)                           |                          | $           | 0.55 |      |   | $         | 0.90 |  |   | $           | 0.57 |  |      | $          | (0.33 | ) |   | $          | (0.44 | )
|                                                                                                                                            |                                            |                          |             |      |      |   |           |      |  |   |             |      |  |      |           
|OTHER DATA:                                                                                                                                 |                                            |                          |             |      |      |   |           |      |  |   |             |      |  |      |            |       |   |   |            |      
|Cash flows provided by (used in) operating activities                                                                                       |                                            | $                        | 3,590,000   |      |      | $ | 2,950,000 |      |  | $ | 2,290,000   |      |  | $    | (1,242,000 | )     |   | $ | 279,000    |      
|Cash flows (used in) provided by investing activities                                                                                       |                                            |                          | (14,333,000 | )    |      |   | 2,517,000 |      |  |   | (19,279,000 | )    |  |      | (7,492,000 | )     |   |   | (5,224,000 | )    
|Cash flows provided by financing activities                                                                                                 |                                            |                          | 5,783,000   |      |      |   | 593,000   |      |  |   | 19,471,000  |      |  |      | 12,133,000 |       |   |   | 5,194,000  |      
|Distributions declared                                                                                                                      |                                            | $                        | 3,806,000   |      |      | $ | 3,843,000 |      |  | $ | 3,312,000   |      |  | $    | 1,146,000  |       |   | $ | 149,000    |      
|Distributions declared per share                                                                                                            |                                            | $                        | 0.82        |      |      | $ | 0.82      |      |  | $ | 0.83        |      |  | $    | 0.83       |       |   | $ | 0.65       |      
|Funds from operations(3)                                                                                                                    |                                            | $                        | 3,487,000   |      |      | $ | 3,307,000 |      |  | $ | 2,825,000   |      |  | $    | 308,000    |       |   | $ | (62,000    | )    

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The selected financial data should be read in conjunction with
    the historical consolidated financial statements and related
    notes appearing elsewhere in this report. Certain amounts in the
    prior years have been reclassified as discontinued operations
    related to properties disposed of in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | Net income (loss) and distributions per share are based upon the
    weighted average number of shares of common shares outstanding.
    Distributions by us of our current and accumulated earnings and
    profits for federal income tax purposes are taxable to
    shareholders as ordinary income. Distributions in excess of
    these earnings and profits generally are treated as a
    non-taxable reduction of the shareholders basis in the
    shares to the extent thereof (a return of capital for tax
    purposes) and, thereafter, as taxable gain. These distributions
    in excess of earnings and profits will have the effect of
    deferring taxation of the distributions until the sale of the
    shareholders common stock. For the years ended
    December 31, 2004, 2003 and 2002, 0%, 52% and 51%,
    respectively, of distributions represented a return of capital
    for tax purposes. In addition, for the years ended
    December 31, 2004 and 2003, 75.6%, 39.5% and 3.2%,
    respectively, of distributions represented capital gain for tax
    purposes. In order to maintain our qualification as a REIT, we
    must make annual distributions to shareholders of at least 90%
    of our REIT taxable income excluding capital gains. Under
    certain circumstances, we may be required to make distributions
    in excess of cash available for distribution in order to meet
    the REIT distribution requirements. Subject to our board of
    directors and our shareholders approval of the plan
    of liquidation, which has not yet been submitted for approval or
    been approved, distributions are determined by our board of
    directors and are dependent on a number of factors, including
    the amount of funds available for distribution, our financial
    condition, any decision by our board of directors to reinvest
    funds rather than to distribute the funds, our capital
    expenditures, the annual distribution required to maintain REIT
    status under the Code and other factors our board of directors
    may deem relevant.
|   
|(3) | Subject to our board of directors and our
    shareholders approval of the plan of liquidation, which
    has not yet been submitted for approval or been approved,, one
    of our objectives is to provide cash distributions to our
    shareholders from cash generated by our operations. We believe
    that funds from operations, or FFO, is a useful supplemental
    measure of our operating performance. We compute FFO in
    accordance with the White Paper on FFO approved by the Board of
    Governors of the National Association of Real Estate Investment
    Trusts, or NAREIT, as revised in February, 2004. The White Paper
    defines FFO as net income or loss computed in accordance with
    generally accepted accounting principles, or GAAP, excluding
    extraordinary items, as defined by GAAP, and gains and losses
    from sales of depreciable operating property, plus real estate
    related depreciation and amortization (excluding amortization of
    deferred financing costs and depreciation of non-real estate
    assets), and after adjustment for unconsolidated partnerships
    and joint ventures. Other REITs may use different methodologies
    for calculating FFO, and accordingly, our FFO may not be
    comparable to other REITs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because FFO excludes depreciation and amortization, gains and
    losses from property dispositions and extraordinary items, it
    provides a performance measure that, when compared year over
    year, reflects the impact to operations from trends in occupancy
    rates, rental rates, operating costs, development activities,
    general and administrative expenses and interest costs,
    providing a perspective not immediately apparent from net
    income. In addition, we believe FFO provides useful information
    to the investment community about our financial performance when
    compared to other REITs since FFO is generally recognized as the
    industry standard for reporting the operations of REITs.
|
| | However, FFO should not be viewed as an alternative measure of
    our operating performance since it does not reflect either
    depreciation and amortization costs or the level of capital
    expenditures and leasing costs necessary to maintain the
    operating performance of our properties, which are significant
    economic costs and could materially impact our results of
    operations.                                                                                                                                                                                                                                                                                                                                 
|
| | Non-cash adjustments to arrive at FFO included depreciation and
    amortization and net gain (loss) from sale of joint ventures.
    For additional information, see Funds from Operations below
    which includes a reconciliation of our GAAP net income available
    to shareholders to FFO for the years ended December 31,
    2004 and 2003.                                                                                                                                                                                                                                                                                                                                                                                       

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following discussion should be read in conjunction with
Item 6, Selected Financial Data, and our
historical consolidated financial statements and related notes
thereto included elsewhere in this report.


Forward-Looking Statements




Overview and Background










20



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##### Table of Contents





Business Strategy








| |                     
| | --------------------
| | Acquisitions in 2004



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





21



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##### Table of Contents





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





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





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





|                                                                             |  |  |      |            
|---------------------------------------------------------------------------- |  |  | ---- | -----------
|AWT Family LP, a limited partnership wholly owned by Anthony W.
    Thompson |  |  | 1.9  | %          
|NNN Emerald Plaza, LLC                                                       |  |  | 20.5 | %          
|Unaffiliated third parties                                                   |  |  | 77.6 | %(combined)



|                         |  |                        |       | 
|------------------------ |  | ---------------------- | ----- | 
|                         |  | Membership Interest in |      
|Member                   |  | NNN Emerald Plaza, LLC |      
|                         |  |                        |      
|NNN 2003 Value Fund, LLC |  |                        | 22.2% | 
|T REIT, LP               |  |                        | 13.2% | 
|Affiliated Members       |  |                        | 0.4%  | 
|Unaffiliated Members     |  |                        | 64.2% | 





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| |                     
| | --------------------
| | Acquisitions in 2003



| |                                    
| | -----------------------------------
| | Congress Center  Chicago, Illinois





|                                         |  |               |                  | 
|---------------------------------------- |  | ------------- | ---------------- | 
|Tenant in Common                         |  | Interest Held |                 
|                                         |  |               |                 
|G REIT Inc. (our affiliate)              |  |               | 30.0%            | 
|NNN Congress Center, LLC (our affiliate) |  |               | 28.9%            | 
|Unaffiliated third parties               |  |               | 41.1% (combined) | 



|                         |  |                          |                  |  |                             |  |                 | 
|------------------------ |  | ------------------------ | ---------------- |  | --------------------------- |  | --------------- | 
|                         |  | Membership Interest in   |                  |  |                            
|Member                   |  | NNN Congress Center, LLC |                  |  | Interest in Congress Center | 
|                         |  |                          |                  |  |                             | 
|NNN 2002 Value Fund, LLC |  |                          | 42.5%            |  |                             |  | 12.3%           | 
|T REIT, Inc.             |  |                          | 35.5%            |  |                             |  | 10.3%           | 
|Unaffiliated members     |  |                          | 22.0% (combined) |  |                             |  | 6.3% (combined) | 







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





| |                                 
| | --------------------------------
| | Enclave Parkway  Houston, Texas



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| |                     
| | --------------------
| | Dispositions in 2004



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





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





| |                                                           
| | ----------------------------------------------------------
| | Saddleback Financial Center  Laguna Hills,
    California





| |                     
| | --------------------
| | Dispositions in 2003



| |                                                        
| | -------------------------------------------------------
| | Northstar Crossing Shopping Center  Garland,
    Texas





| |                                                       
| | ------------------------------------------------------
| | Thousand Oaks Shopping Center  San Antonio,
    Texas





| |                                                              
| | -------------------------------------------------------------
| | Pahrump Valley Junction Shopping Center  Pahrump,
    Nevada



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Critical Accounting Policies






| |                       
| | ----------------------
| | Property Held for Sale

Accounting for the Impairment or Disposal of Long Lived
Assets






| |                                                            
| | -----------------------------------------------------------
| | Revenue Recognition and Allowance for Doubtful
    Accounts





| |           
| | ----------
| | Impairment



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| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | 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.                                      





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

Business Combinations












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



Qualification as a REIT






Factors Which May Influence Results of Operations




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





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







| |                   
| | ------------------
| | Sarbanes-Oxley Act



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##### Table of Contents







Results of Operations






| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Comparison of the year ended December 31, 2004 to the
    year ended December 31, 2003

|                                                                                                  |                                                                           |                          |           |            |      |   |            |           |   |   |            |           |   |  |         |          |   
|------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------ | --------- | ---------- | ---- | - | ---------- | --------- | - | - | ---------- | --------- | - |  | ------- | -------- | --
|                                                                                                  |                                                                           | Years Ended December 31, |           |            |      |   |           
|                                                                                                  |                                                                           |                          |           |            |      |   | Percentage |          
|                                                                                                  |                                                                           | 2004                     |           |            | 2003 |   |            | Change    |   |   | Change     |          
|                                                                                                  |                                                                           |                          |           |            |      |   |            |           |   |   |            |          
|Revenues:                                                                                         |                                                                           |                          |           |            |      |   |            |           |   |   |            |           |   |  |         |         
|                                                                                                  | Rental income                                                             |                          | $         | 4,959,000  |      |   | $          | 1,068,000 |   |   | $          | 3,891,000 |   |  |         | 364.33   | % 
|Expenses:                                                                                         |                                                                           |                          |           |            |      |   |            |           |   |   |            |           |   |  |         |         
|                                                                                                  | Rental expenses                                                           |                          |           | 1,868,000  |      |   |            | 265,000   |   |   |            | 1,603,000 |   |  |         | 604.91   | % 
|                                                                                                  | General and administrative                                                |                          |           | 1,264,000  |      |   |            | 815,000   |   |   |            | 449,000   |   |  |         | 55.09    | % 
|                                                                                                  | Depreciation and amortization                                             |                          |           | 1,961,000  |      |   |            | 150,000   |   |   |            | 1,811,000 |   |  |         | 1,207.33 | % 
|                                                                                                  |                                                                           |                          |           |            |      |   |            |           |   |   |            |          
|Loss before other income (expense), discontinued operations and
    minority interest             |                                                                           |                          | (134,000  | )          |      |   | (162,000   | )         |   |   | 28,000     |           |   |  | 17.28   | %       
|Other income (expense):                                                                           |                                                                           |                          |           |            |      |   |            |           |   |   |            |           |   |  |         |         
|                                                                                                  | Interest expense (including amortization of deferred financing
    costs) |                          |           | (1,187,000 | )    |   |            | (305,000  | ) |   |            | (882,000  | ) |  |         | 289.18   | % 
|                                                                                                  | Interest income                                                           |                          |           | 449,000    |      |   |            | 116,000   |   |   |            | 333,000   |   |  |         | 287.07   | % 
|                                                                                                  | Dividend income                                                           |                          |           | 86,000     |      |   |            |          |   |   |            | 86,000    |   |  |         |         |   
|                                                                                                  | Gain on sale of marketable securities                                     |                          |           | 109,000    |      |   |            |          |   |   |            | 109,000   |   |  |         |         |   
|                                                                                                  | Equity in earnings of unconsolidated real estate                          |                          |           | 581,000    |      |   |            | 1,160,000 |   |   |            | (579,000  | ) |  |         | (49.91   | )%
|                                                                                                  |                                                                           |                          |           |            |      |   |            |           |   |   |            |          
|Income (loss) from continuing operations before discontinued
    operations and minority interest |                                                                           |                          | (96,000   | )          |      |   | 809,000    |           |   |   | (905,000   | )         |   |  | (111.87 | )%      
|Gain on sale of real estate investments                                                           |                                                                           |                          | 2,466,000 |            |      |   | 2,614,000  |           |   |   | (148,000   | )         |   |  | (5.66   | )%      
|Income from discontinued operations  property held
    for sale, net                             |                                                                           |                          | 89,000    |            |      |   | 766,000    |           |   |   | (677,000   | )         |   |  | (88.38  | )%      
|                                                                                                  |                                                                           |                          |           |            |      |   |            |           |   |   |            |          
|Net income before minority interests                                                              |                                                                           |                          | 2,459,000 |            |      |   | 4,189,000  |           |   |   | (1,730,000 | )         |   |  | (41.30  | )%      
|Minority interests                                                                                |                                                                           |                          | (85,000   | )          |      |   |           |           |   |   | (85,000    | )         |   |  |        |         
|                                                                                                  |                                                                           |                          |           |            |      |   |            |           |   |   |            |          
|Net income                                                                                        |                                                                           | $                        | 2,544,000 |            |      | $ | 4,189,000  |           |   | $ | (1,645,000 | )         |   |  | (39.27  | )%      
|                                                                                                  |                                                                           |                          |           |            |      |   |            |           |   |   |            |          





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| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Comparison of the year ended December 31, 2003 to the
    year ended December 31, 2002

|                                                                                      |                                                                           |                          |           |           |      |   |            |           |   |   |           |          |   |  |          |          |   
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------ | --------- | --------- | ---- | - | ---------- | --------- | - | - | --------- | -------- | - |  | -------- | -------- | --
|                                                                                      |                                                                           | Years Ended December 31, |           |           |      |   |           
|                                                                                      |                                                                           |                          |           |           |      |   | Percentage |          
|                                                                                      |                                                                           | 2003                     |           |           | 2002 |   |            | Change    |   |   | Change    |         
|                                                                                      |                                                                           |                          |           |           |      |   |            |           |   |   |           |         
|Revenues:                                                                             |                                                                           |                          |           |           |      |   |            |           |   |   |           |          |   |  |          |         
|                                                                                      | Rental income                                                             |                          | $         | 1,068,000 |      |   | $          | 304,000   |   |   | $         | 764,000  |   |  |          | 251.32   | % 
|Expenses:                                                                             |                                                                           |                          |           |           |      |   |            |           |   |   |           |          |   |  |          |         
|                                                                                      | Rental expenses                                                           |                          |           | 265,000   |      |   |            | 102,000   |   |   |           | 163,000  |   |  |          | 159.80   | % 
|                                                                                      | General and administrative                                                |                          |           | 815,000   |      |   |            | 539,000   |   |   |           | 276,000  |   |  |          | 51.21    | % 
|                                                                                      | Depreciation and amortization                                             |                          |           | 150,000   |      |   |            | 21,000    |   |   |           | 129,000  |   |  |          | 614.29   | % 
|                                                                                      |                                                                           |                          |           |           |      |   |            |           |   |   |           |         
|Loss before other income (expense), discontinued operations and
    minority interest |                                                                           |                          | (162,000  | )         |      |   | (358,000   | )         |   |   | 196,000   |          |   |  | 54.75    | %       
|Other income (expense):                                                               |                                                                           |                          |           |           |      |   |            |           |   |   |           |          |   |  |          |         
|                                                                                      | Interest expense (including amortization of deferred financing
    costs) |                          |           | (305,000  | )    |   |            | (13,000   | ) |   |           | (292,000 | ) |  |          | 2,246.15 | % 
|                                                                                      | Interest income                                                           |                          |           | 116,000   |      |   |            | 283,000   |   |   |           | (167,000 | ) |  |          | (59.01   | )%
|                                                                                      | Equity in earnings of unconsolidated real estate                          |                          |           | 1,160,000 |      |   |            | 1,126,000 |   |   |           | 34,000   |   |  |          | 3.02     | % 
|                                                                                      |                                                                           |                          |           |           |      |   |            |           |   |   |           |         
|Income from continuing operations before discontinued operations                      |                                                                           |                          | 809,000   |           |      |   | 1,038,000  |           |   |   | (229,000  | )        |   |  | (22.06   | )%      
|Gain on sale of real estate investments                                               |                                                                           |                          | 2,614,000 |           |      |   | 213,000    |           |   |   | 2,401,000 |          |   |  | 1,127.23 | %       
|Income from discontinued operations  property held
    for sale, net                 |                                                                           |                          | 766,000   |           |      |   | 1,042,000  |           |   |   | (276,000  | )        |   |  | (26.49   | )%      
|                                                                                      |                                                                           |                          |           |           |      |   |            |           |   |   |           |         
|Net income                                                                            |                                                                           | $                        | 4,189,000 |           |      | $ | 2,293,000  |           |   | $ | 1,896,000 |          |   |  | 82.69    | %       
|                                                                                      |                                                                           |                          |           |           |      |   |            |           |   |   |           |         













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Liquidity and Capital Resources




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



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











| |                                         
| | ----------------------------------------
| | Current Sources of Capital and Liquidity



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| |                      
| | ---------------------
| | Other Liquidity Needs









|                  |  |              |           |  |      |  |       |      |  |   |           |  |  |  |       |   |  |   |           |  |  |  |       |  
|----------------- |  | ------------ | --------- |  | ---- |  | ----- | ---- |  | - | --------- |  |  |  | ----- | - |  | - | --------- |  |  |  | ----- | -
|                  |  | December 31, |          
|                  |  |              |          
|                  |  | 2004         |           |  | 2003 |  |       | 2002 | 
|                  |  |              |           |  |      |  |       |      | 
|Ordinary income   |  | $            | 930,000   |  |      |  | 24.4  | %    |  | $ | 332,000   |  |  |  | 8.6   | % |  | $ | 1,478,000 |  |  |  | 46.2  | %
|Capital gain      |  |              | 2,877,000 |  |      |  | 75.6  | %    |  |   | 1,519,000 |  |  |  | 39.5  | % |  |   | 102,000   |  |  |  | 3.2   | %
|Return of capital |  |              |          |  |      |  |      |      |  |   | 1,993,000 |  |  |  | 51.9  | % |  |   | 1,619,000 |  |  |  | 50.6  | %
|                  |  |              |           |  |      |  |       |      |  |   |           |  |  |  |       |   |  |  
|                  |  | $            | 3,807,000 |  |      |  | 100.0 | %    |  | $ | 3,844,000 |  |  |  | 100.0 | % |  | $ | 3,199,000 |  |  |  | 100.0 | %
|                  |  |              |           |  |      |  |       |      |  |   |           |  |  |  |       |   |  |  





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Capital Resources




| |        
| | -------
| | General







33



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##### Table of Contents







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







| |                          
| | -------------------------
| | Cash and Cash Equivalents





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



34



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##### Table of Contents





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



|                                                       |  |            |      |               |              |   |              |            |               |               |              |  |              |            |             |  |  |   |            | 
|------------------------------------------------------ |  | ---------- | ---- | ------------- | ------------ | - | ------------ | ---------- | ------------- | ------------- | ------------ |  | ------------ | ---------- | ----------- |  |  | - | ---------- | 
|                                                       |  |            |      | Mortgage Debt |              |   |              |            | Mortgage Debt |               |              | 
|                                                       |  |            |      | Balance as of |              |   | T REIT Incs |            |               | Balance as of |              |  | T REIT Incs |           
|                                                       |  | Ownership  |      |               | December 31, |   |              | Portion of |               |               | December 31, |  |              | Portion of |            
|Property                                               |  | Percentage |      |               | 2004         |   |              | Debt       |               |               | 2003         |  |              | Debt       |            
|                                                       |  |            |      |               |              |   |              |            |               |               |              |  |              |            |            
|Reno Trademark Building  TIC                          |  |            | 40.0 | %             |              | $ | 4,504,000    |            |               | $             | 1,802,000    |  |              | $          | 4,555,000   |  |  | $ | 1,822,000  | 
|County Center Drive  TIC                              |  |            | 16.0 | %             |              |   | 2,980,000    |            |               |               | 477,000      |  |              |            | 3,059,000   |  |  |   | 489,000    | 
|City Center West A Building  TIC                    |  |            | 89.1 | %             |              |   | 12,484,000   |            |               |               | 11,127,000   |  |              |            | 12,688,000  |  |  |   | 11,308,000 | 
|Titan Building & Plaza  TIC                           |  |            | 48.5 | %             |              |   | 5,795,000    |            |               |               | 2,811,000    |  |              |            | 5,874,000   |  |  |   | 2,849,000  | 
|Pacific Corporate Park  LLC                           |  |            | 22.8 | %             |              |   | 5,474,000    |            |               |               | 1,246,000    |  |              |            | 5,684,000   |  |  |   | 1,294,000  | 
|Congress Center  LLC                                  |  |            | 10.3 | %             |              |   | 97,500,000   |            |               |               | 9,962,000    |  |              |            | 96,989,000  |  |  |   | 9,909,000  | 
|Saddleback Financial Center  TIC (sold December 2004) |  |            | 25.0 | %             |              |   |             |            |               |               |             |  |              |            | 7,439,000   |  |  |   | 1,860,000  | 
|Enclave Parkway  LLC                                  |  |            | 3.3  | %             |              |   | 23,310,000   |            |               |               | 759,000      |  |              |            | 23,600,000  |  |  |   | 769,000    | 
|Oakey Building  LLC                                   |  |            | 9.8  | %             |              |   | 4,000,000    |            |               |               | 390,000      |  |              |            |            |  |  |   |           | 
|Emerald Plaza  LLC                                    |  |            | 2.7  | %             |              |   | 68,500,000   |            |               |               | 1,850,000    |  |              |            |            |  |  |   |           | 
|                                                       |  |            |      |               |              |   |              |            |               |               |              |  |              |            |            
|Total                                                  |  |            |      |               |              | $ | 224,547,000  |            |               | $             | 30,424,000   |  |              | $          | 159,888,000 |  |  | $ | 30,300,000 | 
|                                                       |  |            |      |               |              |   |              |            |               |               |              |  |              |            |            







| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Note A is in the amount of $80,000,000 and bears interest
    at a fixed rate of 5.635% per annum. The borrower is
    required to make monthly interest only payments until the due
    date of October 1, 2014. No prepayments of principal are
    permitted until July 1, 2014.                                                                                                                                                          
|
| | Note B is in the amount of $15,000,000 and bears interest
    at a fixed rate of 5.635% per annum. The borrower is
    required to make monthly interest only payments until the due
    date of October 1, 2014. No prepayments of principal are
    permitted until July 1, 2014.                                                                                                                                                          
|
| | Note C is in the amount of $2,500,000 and bears interest at
    a fixed rate of 7.0% per annum. The borrower is required to
    make monthly interest only payments until October 1, 2006.
    Thereafter, the borrower is required to make monthly principal
    and interest payments based on a 30-year amortization schedule
    until the due date of October 1, 2014. No prepayments of
    principal are permitted until July 1, 2014.

35



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Unconsolidated debt due to related parties








| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pacific Corporate Park had $81,000 outstanding due to Cunningham
    at an interest rate of 12.0% per annum and is due one year from
    the origination. On February 3, 2005, February 11,
    2005, and March 18, 2005, Pacific Corporate Park issued
    promissory notes to Cunningham in the amounts of $130,000,
    $263,000, and $20,000, respectively. These notes bear interest
    at 12.0% per annum and have a one year maturity date.





| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | County Center Drive had $121,000, consisting of $109,000 in
    principal and $11,000 in interest, outstanding due to our
    Advisor. This note bears interest at 12.0% per annum and is due
    upon demand.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 2004 Notes Program has made loans from time to time to
    certain of our properties. Terms of the 2004 Notes Program
    provide for interest payments at 11.0% per annum. In addition to
    interest, the 2004 Notes Program is entitled to the greater of a
    1.0% prepayment penalty or 20.0% of the profits upon sale of the
    property prorated for the amount of time the loan was
    outstanding. As of December 31, 2004, loans from the 2004
    Notes Program to Congress Center, which has been repaid and
    County Center Drive, which has an outstanding balance of
    $16,000, consisting of $14,000 in principal and $2,000 in
    interest, may result in additional amounts due to the 2004 Notes
    Program upon the sale of these properties, depending on profits,
    if any, upon sale. We cannot reasonably estimate the additional
    amounts due, if any, to the 2004 Notes Program if and when the
    Congress Center and County Center Drive properties are sold.

36



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





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



|                                          |  |                                                                                                                      
|----------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|Type of Insurance Coverage                |  | Loss Exposure/Deductible                                                                                             
|                                          |  |                                                                                                                      
|Property damage and business interruption |  | $200 million annual aggregate exposure, plus
    $10 thousand per occurrence deductible                              
|Earthquake                                |  | $10 million annual aggregate exposure plus 5 percent
    ($100,000 minimum) per occurrence deductible                
|Earthquake (California properties)        |  | $90 million in excess of $10 million                                                                                 
|Flood  named storm                       |  | $10 million annual aggregate exposure plus 5 percent
    ($100,000 minimum) per occurrence deductible                
|Flood  all other                         |  | $10 million annual aggregate exposure plus 5 percent
    ($25,000 minimum/$100,000 maximum) per occurrence deductible
|Liability                                 |  | $2 million annual aggregate exposure plus $1 million
    each occurrence                                             
|Umbrella (excess liability)               |  | $100 million aggregate exposure                                                                                      
|Acts of terrorism                         |  | $100 million annual aggregate exposure, plus
    $10,000 per occurrence deductible.                                  



| |                          
| | -------------------------
| | Debt Service Requirements



|           |  |   |            | 
|---------- |  | - | ---------- | 
|2005       |  | $ | 65,000     | 
|2006       |  |   | 266,000    | 
|2007       |  |   | 14,875,000 | 
|2008       |  |   | 4,079,000  | 
|2009       |  |   |           | 
|Thereafter |  |   |           | 
|           |  |   |           
|           |  | $ | 19,285,000 | 
|           |  |   |           

37



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



|                                                                                 |       |                        |         |         |             |   |            |             |  |   |              |           |       |   |   |   |  |   |            |            | 
|-------------------------------------------------------------------------------- | ----- | ---------------------- | ------- | ------- | ----------- | - | ---------- | ----------- |  | - | ------------ | --------- | ----- | - | - | - |  | - | ---------- | ---------- | 
|                                                                                 |       | Payments Due by Period |         |        
|                                                                                 |       |                        |         |        
|                                                                                 |       | Less Than              |         |         |             |   | More Than  |             | 
|                                                                                 |       | 1 Year                 |         |         | 1-3 Years   |   |            | 4-5 Years   |  |   | 5 Years      |           |      
|                                                                                 |       | (2005)                 |         |         | (2006-2007) |   |            | (2008-2009) |  |   | (After 2009) |           | Total |  
|                                                                                 |       |                        |         |         |             |   |            |             |  |   |              |           |       |  
|Principal payments  fixed rate debt                                             |       | $                      | 65,000  |         |             | $ | 141,000    |             |  | $ | 4,079,000    |           |       | $ |  |   |  | $ | 4,285,000  |           
|Principal payments  variable rate debt                                          |       |                        |         |         |             |   | 15,000,000 |             |  |   |              |           |       |   |   |   |  |   | 15,000,000 |           
|Interest payments  fixed rate debt                                              |       |                        |         |         |             |   | 669,000    |             |  |   |              |           |       |   |   |   |  |   | 669,000    |           
|Interest payments  variable rate debt (rate in effect
    at December 31, 2004) |       |                        |         |         |             |   | 1,767,000  |             |  |   |              |           |       |   |   |   |  |   | 1,767,000  |           
|Lease guarantee(1)                                                               |       |                        | 220,000 |         |             |   | 214,000    |             |  |   |             |           |       |   |  |   |  |   | 434,000    |           
|                                                                                 |       |                        |         |         |             |   |            |             |  |   |              |           |       |   |  
|                                                                                 | Total |                        | $       | 285,000 |             |   | $          | 17,791,000  |  |   | $            | 4,079,000 |       |   | $ |  |  |   | $          | 22,155,000 | 
|                                                                                 |       |                        |         |         |             |   |            |             |  |   |              |           |       |   |  






|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The lease guarantee relates to our obligation on the Christie
    Street Office Building sold in 2001. Our Advisor agreed to
    indemnify us for the full amount of our obligation.



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





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









38



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##### Table of Contents





|                                                                   |                                                                                     |                          |            |           |      |   |            |           |  |   |           |         | 
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | ------------------------ | ---------- | --------- | ---- | - | ---------- | --------- |  | - | --------- | ------- | 
|                                                                   |                                                                                     | Years Ended December 31, |           
|                                                                   |                                                                                     |                          |           
|                                                                   |                                                                                     | 2004                     |            |           | 2003 |   |            | 2002      | 
|                                                                   |                                                                                     |                          |            |           |      |   |            |           | 
|Net income                                                         |                                                                                     | $                        | 2,544,000  |           |      | $ | 4,189,000  |           |  | $ | 2,293,000 |        
|Add:                                                               |                                                                                     |                          |            |           |      |   |            |           |  |   |           |        
|                                                                   | Depreciation and Amortization  continuing operations                               |                          |            | 2,034,000 |      |   |            | 150,000   |  |   |           | 64,000  | 
|                                                                   | Depreciation and Amortization  discontinued operations                             |                          |            | 50,000    |      |   |            | 321,000   |  |   |           | 74,000  | 
|                                                                   | Depreciation and Amortization  unconsolidated real
    estate operating properties |                          |            | 1,325,000 |      |   |            | 1,261,000 |  |   |           | 607,000 | 
|Less:                                                              |                                                                                     |                          |            |           |      |   |            |           |  |   |           |        
|Gain on sale of property                                           |                                                                                     |                          | (2,466,000 | )         |      |   | (2,614,000 | )         |  |   | (213,000  | )      
|                                                                   |                                                                                     |                          |            |           |      |   |            |           | 
|Funds from operations                                              |                                                                                     | $                        | 3,487,000  |           |      | $ | 3,307,000  |           |  | $ | 2,825,000 |        
|                                                                   |                                                                                     |                          |            |           |      |   |            |           | 
|Weighted average common shares outstanding  basic and
    diluted |                                                                                     |                          | 4,630,000  |           |      |   | 4,676,000  |           |  |   | 4,013,000 |        
|                                                                   |                                                                                     |                          |            |           |      |   |            |           | 



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

In the matter of Triple Net Properties, LLC.






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



Subsequent Events




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



39



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Other




| |                    
| | -------------------
| | Plan of Liquidation



40



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##### Table of Contents





New Accounting Pronouncements








Consolidation of
Variable Interest Entities Consolidated Financial Statements


Risk Factors




| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The pending SEC investigation of our Advisor could result
    in regulatory actions against us which could negatively impact
    our ability to pay distributions.

In the matter of Triple Net Properties, LLC.


41



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| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Erroneous disclosure in the prior performance tables in
    our public offerings could result in lawsuits or other actions
    against us which could have a material adverse effect upon our
    business and results of operations.





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to incur increasingly significant costs in
    connection with Sarbanes-Oxley compliance and we may become
    subject to liability for any failure to comply.







| |                                                         
| | --------------------------------------------------------
| | Distributions by us may include a return of
    capital.



42



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| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Due to the risks involved in the ownership of real estate,
    there is no guarantee of any return on our shareholders
    investments and our shareholders may lose some or all of their
    investments.





| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | changes in the general economic climate;                                                                        
|
| |  | changes in local conditions such as an oversupply of space or
    reduction in demand for real estate;          
|
| |  | changes in interest rates and the availability of
    financing; and                                            
|
| |  | changes in laws and governmental regulations, including those
    governing real estate usage, zoning and taxes.





| |                                             
| | --------------------------------------------
| | Our properties face significant competition.





| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Competition with entities that have greater financial
    resources may limit our investment opportunities.





| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend upon our tenants to pay rent, and their
    inability to pay rent may substantially reduce our revenues and
    cash available for distribution to our members.





| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | downturns in national, regional or local economic conditions
    where our properties are located, which generally will
    negatively impact the demand for office space and rental rates;

43



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| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in local market conditions such as an oversupply of
    office properties, including space available by sublease, or a
    reduction in demand for office properties, making it more
    difficult for us to lease space at attractive rental rates or at
    all;                                             
|
| |  | competition from other available office properties, which could
    cause us to lose current or prospective tenants or cause us to
    reduce rental rates;                                                                                                                                                            
|
| |  | the ability to pay for adequate maintenance, insurance, utility,
    security and other operating costs, including real estate taxes
    and debt service payments, that are not necessarily reduced when
    circumstances such as market factors and competition cause a
    reduction in income from a property; and
|
| |  | changes in federal, state or local regulations and controls
    affecting rents, prices of goods, interest rates, fuel and
    energy consumption.                                                                                                                                                                     





| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lack of diversification and illiquidity of real estate may
    make it difficult for us to sell underperforming properties or
    recover our investment in one or more properties.





| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot successfully negotiate an extension of the
    Advisory Agreement, we could lose the services of our Advisor,
    which may increase operating expenses, and delay or reduce our
    liquidating distributions.





| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lack of geographic diversity may expose us to regional
    economic downturns that could adversely impact our operations or
    our ability to recover our investment in one or more
    properties.



44



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| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Due to the limited number of properties in our portfolio,
    we are dependent upon those tenants that generate significant
    rental income, which may have a negative impact on our financial
    condition if these tenants are unable to meet their rental
    obligations.





| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Losses for which we either could not or did not obtain
    insurance will adversely affect our earnings and we may be
    unable to comply with insurance requirements contained in
    mortgage or other agreements due to high insurance costs.





| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our co-ownership arrangements with affiliated entities may
    not reflect solely our stockholders best interests and may
    subject these investments to increased risks.





| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the risk that the co-owner(s) in the investment might become
    bankrupt;                                                                                                                                                                                     
|
| |  | the risk that the co-owner(s) may at any time have economic or
    business interests or goals which are inconsistent with our
    business interests or goals;                                                                                                
|
| |  | the risk that the co-owner(s) may not be unable to make required
    payments on loans that could result in loan defaults and
    possible loss of such property or properties in a foreclosure
    proceeding under which we are jointly and severally liable;
|
| |  | the risk that all the co-owners may not approve refinancings,
    leases and lease amendments requiring unanimous consent of
    co-owners that would have adverse consequences for our
    shareholders; or                                                   
|
| |  | the risk that the co-owner(s) may be in a position to take
    action contrary to our instructions or requests or contrary to
    our policies or objectives, such as selling a property at a time
    when it would have adverse consequences to us.          

45



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| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There is currently no public market for our common stock.
    Therefore, it will likely be difficult for you to sell your
    shares and, if you are able to sell your shares, you will likely
    do so at a substantial discount from the price you paid.





| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Our success will be dependent on the performance of our
    Advisor as well as key employees of our Advisor.





| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our use of borrowings to partially fund acquisitions and
    improvements on properties could result in foreclosures and
    unexpected debt service expenses upon refinancing, both of which
    could have an adverse impact on our operations and cash flow,
    and restrictive covenants in our loan documents may restrict our
    operating or acquisition activities.







46



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| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The pending SEC investigation of our Advisor could result
    in defaults or alleged defaults under our loan documents or
    limit our ability to obtain debt financing in the future.





| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we purchase assets at a time when the commercial real
    estate market is experiencing substantial influxes of capital
    investment and competition for properties, the real estate we
    purchase may not appreciate or may decrease in value.





| |                                                                              
| | -----------------------------------------------------------------------------
| | Our cash flow is not assured, we may not pay distributions
    in the future.





| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Our board of directors may alter our investment policies
    at any time without shareholder approval.





| |                                                                   
| | ------------------------------------------------------------------
| | Our past performance is not a predictor of our future
    results.



47



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Conflicts of Interest




| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | The conflicts of interest described below may mean we will
    not be managed solely in the best interests of our
    shareholders.









| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | limit the time and services that our Advisor devotes to us,
    because they will be providing similar services to G REIT, NNN
    2002 Value Fund, LLC and NNN 2003 Value Fund, LLC and other real
    estate programs and properties;
|
| |  | impair our ability to compete for tenants in geographic areas
    where other properties are advised by our Advisor and its
    affiliates; and                                                                                        
|
| |  | impair our ability to compete for the acquisition of properties
    with other real estate entities that are also advised by our
    Advisor and its affiliates.                                                                       





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The absence of arms length bargaining may mean that
    our agreements are not as favorable to our shareholders as these
    agreements otherwise would have been.



Risks associated with being a REIT




| |                                                                                   
| | ----------------------------------------------------------------------------------
| | If we fail to qualify as a REIT, our shareholders could be
    adversely affected.





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | that the gross income and investments of a REIT are largely real
    estate related, including mortgages secured by real estate;
|
| |  | that a REIT distributes substantially all its ordinary taxable
    income to its shareholders on a current basis; and           
|
| |  | that the REITs equity ownership is not overly concentrated.                                                                    

48



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| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to meet, or we may need to incur
    borrowings that would otherwise not be incurred to meet, REIT
    minimum distribution requirements.







| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the amount of the cash available for distribution;                                                                                                
|
| |  | the impact of such distribution on other partners of the
    Operating Partnership;                                                               
|
| |  | the Operating Partnerships financial condition;                                                                                                  
|
| |  | the Operating Partnerships capital expenditure
    requirements and reserves therefor; and                                                       
|
| |  | the annual distribution requirements contained in the Internal
    Revenue Code necessary to qualify and maintain our qualification
    as a REIT.







| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because of our inability to retain earnings, we will rely
    on debt and equity financings for acquisitions. If we do not
    have sufficient capital resources from such financings, our
    growth may be limited.



49



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##### Table of Contents







| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | We may be harmed by changes in tax laws applicable to
    REITs, or the reduced 15% tax rate on certain corporate
    distributions.







| |                                                            
| | -----------------------------------------------------------
| | We may incur a 100% tax on any prohibited
    transactions.



Risks associated with adoption of a plan of liquidation




| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | If approved by our board and our shareholders our
    implementation of a plan of liquidation may affect our
    shareholders return on their investments.





| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Our officers and directors and our Advisor have interests
    that differ from our shareholders in the event of our
    liquidation.



50



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk



51



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|                                                     |  |      |        |   |      |   |         |      |  |   |            |   |  |      |           |            |  |       |   |  |            |   |   |  |  |   |            |   |  |   |            | 
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ---------- | - |  | ---- | --------- | ---------- |  | ----- | - |  | ---------- | - | - |  |  | - | ---------- | - |  | - | ---------- | 
|                                                     |  | 2005 |        |   | 2006 |   |         | 2007 |  |   | 2008       |   |  | 2009 |           | Thereafter |  | Total |   |  | Fair Value |  
|                                                     |  |      |        |   |      |   |         |      |  |   |            |   |  |      |           |            |  |       |   |  |            |  
|Fixed rate debt                                      |  | $    | 65,000 |   |      | $ | 69,000  |      |  | $ | 72,000     |   |  | $    | 4,079,000 |            |  | $     |  |  |            | $ |  |  |  | $ | 4,285,000  |   |  | $ | 4,662,000  | 
|Average interest rate on maturing fixed rate debt    |  |      | 5.25   | % |      |   | 5.25    | %    |  |   | 5.25       | % |  |      | 5.25      | %          |  |       |  |  |            |   |  |  |  |   | 5.25       | % |  |   |            | 
|Variable rate debt                                   |  | $    |       |   |      | $ | 197,000 |      |  | $ | 14,803,000 |   |  | $    |          |            |  | $     |  |  |            | $ |  |  |  | $ | 15,000,000 |   |  | $ | 16,072,000 | 
|Average interest rate on maturing variable rate debt |  |      |       |   |      |   | 5.75    | %    |  |   | 5.75       | % |  |      |          |            |  |       |  |  |            |   |  |  |  |   | 5.75       | % |  |   |            | 





|                                       |  |      |         |   |      |   |         |      |  |   |           |   |  |      |        |   |            |   |           |   |  |            |   |  |  |   |           |   |  |   |           | 
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | --------- | - |  | ---- | ------ | - | ---------- | - | --------- | - |  | ---------- | - |  |  | - | --------- | - |  | - | --------- | 
|                                       |  | 2004 |         |   | 2005 |   |         | 2006 |  |   | 2007      |   |  | 2008 |        |   | Thereafter |   | Total     |   |  | Fair Value |  
|                                       |  |      |         |   |      |   |         |      |  |   |           |   |  |      |        |   |            |   |           |   |  |            |  
|Fixed rate debt                        |  | $    | 62,000  |   |      | $ | 65,000  |      |  | $ | 68,000    |   |  | $    | 72,000 |   |            | $ | 4,079,000 |   |  | $          |  |  |  | $ | 4,346,000 |   |  | $ | 4,703,000 | 
|Average interest rate on maturing debt |  |      | 5.25    | % |      |   | 5.25    | %    |  |   | 5.25      | % |  |      | 5.25   | % |            |   | 5.25      | % |  |            |  |  |  |   | 5.25      | % |  |   |           | 
|Variable rate debt                     |  | $    | 100,000 |   |      | $ | 103,000 |      |  | $ | 4,701,000 |   |  | $    |       |   |            | $ |          |   |  | $          |  |  |  | $ | 4,904,000 |   |  | $ | 4,908,000 | 
|Average interest rate on maturing debt |  |      | 3.27    | % |      |   | 3.27    | %    |  |   | 3.27      | % |  |      |       |   |            |   |          |   |  |            |  |  |  |   | 3.27      | % |  |   |           | 








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure

Dismissal of Grant Thornton LLP and Engagement of
Deloitte & Touche, LLP




52



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|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of disclosure controls and
procedures.








53



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Changes in internal control over financial
reporting.







|         |                  
|-------- | -----------------
|Item 9B. | Other Information



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PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



|                    |  |     |    |  |          |                                                      |                |  |            | 
|------------------- |  | --- | -- |  | -------- | ---------------------------------------------------- | -------------- |  | ---------- | 
|Name                |  | Age |    |  | Position |                                                      | Term of Office | 
|                    |  |     |    |  |          |                                                      |                | 
|Anthony W. Thompson |  |     | 58 |  |          | Chairman of the Board of Directors                   |                |  | Since 1999 | 
|D. Fleet Wallace    |  |     | 37 |  |          | Director                                             |                |  | Since 2002 | 
|W. Brand Inlow      |  |     | 51 |  |          | Director                                             |                |  | Since 2002 | 
|Scott Peters        |  |     | 47 |  |          | Executive Vice President and Chief Financial Officer |                |  | Since 2004 | 
|Jack R. Maurer      |  |     | 61 |  |          | Chief Executive Officer and President                |                |  | Since 2004 | 
|Andrea Biller       |  |     | 54 |  |          | Secretary                                            |                |  | Since 2004 | 
|Kelly J. Caskey     |  |     | 37 |  |          | Chief Accounting Officer                             |                |  | Since 2004 | 



Anthony W. (Tony) Thompson


D. Fleet Wallace


55



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W. Brand Inlow


Scott D. Peters


Jack R. Maurer


Andrea R. Biller


Kelly J. Caskey


56



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Our Advisors Managers and Executive Officers




Anthony W. (Tony) Thompson


Scott D. Peters


Jack R. Maurer


Talle A. Voorhies


Louis J. Rogers


Daniel R. Dan Baker cum laude


Richard T. Hutton Jr.


57



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Shannon Alter


Fiduciary Relationship of our Advisor to Us








Committees of Our Board of Directors




| |                      
| | ---------------------
| | Acquisition Committee





| |                
| | ---------------
| | Audit Committee



58



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| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | makes recommendations to our board of directors concerning the
    engagement of independent public accountants;                                                                                                                       
|
| |  | reviews the plans and results of the audit engagement with the
    independent public accountants;                                                                                                                                     
|
| |  | approves professional services provided by, and the independence
    of, the independent public accountants;                                                                                                                           
|
| |  | considers the range of audit and non-audit fees;                                                                                                                                                                                       
|
| |  | consults with the independent public accountants regarding the
    adequacy of our internal accounting controls; and                                                                                                                   
|
| |  | periodically meets with representatives of our disclosure
    committee on various subjects within the scope of the discloser
    committees charter (the disclosure committee is comprised
    of representatives of our management).



| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) W. Brand Inlow, who is an audit committee financial
    expert, will not be deemed expertfor any purpose
    including, without limitation, for purposes of section 11
    of the Securities Act as a result of being designated or
    identified as an audit committee financial expert.                                                                                       
|
| | (ii) The designation or identification of Mr. Inlow as
    an audit committee financial expert does not impose on such
    person any duties, obligations or liability that are greater
    than the duties, obligations and liability imposed on such
    person as a member of the audit committee and board of directors
    in the absence of such designation or identification.
|
| | (iii) The designation or identification of Mr. Inlow
    as an audit committee financial expert does not affect the
    duties, obligations or liability of any other member of the
    audit committee or board of directors.                                                                                                                                                       





| |                                 
| | --------------------------------
| | Executive Compensation Committee





| |                  
| | -----------------
| | Special Committee



Director Compensation




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Independent Director Stock Option Plan






Officer and Employee Stock Option Plan






Section 16(a) Beneficial Ownership Reporting
Compliance











|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Compensation of Executive Officers




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Option/ SAR Grants in Last Fiscal Year




Aggregated Option/ SAR Exercises and Fiscal Year-End Option/
SAR Value Table


|                       |  |              |     |  |              |                      |                        |                           |                      |              |                            |  |  |  |             | 
|---------------------- |  | ------------ | --- |  | ------------ | -------------------- | ---------------------- | ------------------------- | -------------------- | ------------ | -------------------------- |  |  |  | ----------- | 
|                       |  |              |     |  |              | Number of Securities |                        |                           | Value of Unexercised |             
|                       |  | Shares       |     |  |              |                      | Underlying Unexercised |                           |                      | In-the-Money |                           
|                       |  | Acquired on  |     |  | Value        |                      |                        | Options/SARs at FY-End    |                      |              | Options/SARs at FY-End ($) | 
|Name                   |  | Exercise ($) |     |  | Realized ($) |                      |                        | Exercisable/Unexercisable |                      |              | Exercisable/Unexercisable  | 
|                       |  |              |     |  |              |                      |                        |                           |                      |              |                            | 
|Anthony W. Thompson(1) |  |              | -0- |  |              |                      | -0-                    |                           |                      |              | 135,000/0                  |  |  |  | $128,000/$0 | 
|Jack R. Maurer(2)      |  |              | -0- |  |              |                      | -0-                    |                           |                      |              | 0/60,000                   |  |  |  | $0/$60,000  | 






|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Mr. Thompson served as our chief executive officer until
    his resignation effective August 18, 2004.
|   
|(2) | Mr. Maurer was appointed as our chief executive officer
    effective August 18, 2004.                 

Compensation Committee Interlocks and Insider
Participation




Board Compensation Committee Report on Executive
Compensation









|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters



|                                                |  |              |         |  |            |  |     |  
|----------------------------------------------- |  | ------------ | ------- |  | ---------- |  | --- | -
|                                                |  | Number of    |         |  |           
|                                                |  | Shares       |         |  |           
|                                                |  | Beneficially |         |  | Percent of | 
|Name of Beneficial Owner                        |  | Owned(1)     |         |  | Class      | 
|                                                |  |              |         |  |            | 
|Anthony W. Thompson(2)                          |  |              | 155,203 |  |            |  | 3.4 | %
|Jack R. Maurer(3)                               |  |              |        |  |            |  | *   |  
|D. Fleet Wallace                                |  |              | 10,552  |  |            |  | *   |  
|W. Brand Inlow                                  |  |              | 10,552  |  |            |  | *   |  
|                                                |  |              |         |  |            | 
|All Directors and Executive Officers as a group |  |              | 178,307 |  |            |  | 3.9 | %






|    |                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Represents less than 1% of our outstanding common stock.                                                                                                                                                                                                                                                                                                                                                
|   
|(1) | Beneficial ownership includes outstanding shares and shares that
    any person has the right to acquire within 60 days after
    the date of this table. Except as indicated in the footnotes to
    this table and pursuant to applicable community property laws,
    the persons named in the table have sole voting and investment
    power with respect to all shares beneficially owned by them.
|   
|(2) | Mr. Thompson served as our chief executive officer until
    his resignation effective August 18, 2004. Includes
    103 Shares owned by AWT Family LP, a limited partnership
    controlled by Mr. Thompson and 22,100 shares owned by
    Triple Net Properties, LLC, a limited liability company
    controlled by Mr. Thompson.                                                                     
|   
|(3) | Mr. Maurer was appointed as our chief executive officer
    effective August 18, 2004.                                                                                                                                                                                                                                                                                                                  

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Equity Compensation Plan Information




|                                                           |  |                            |         |  |                     |   |      |                      |  |  |         | 
|---------------------------------------------------------- |  | -------------------------- | ------- |  | ------------------- | - | ---- | -------------------- |  |  | ------- | 
|                                                           |  | Number of Securities to be |         |  | Weighted Average    |   |      |                     
|                                                           |  | Issued Upon Exercise of    |         |  | Exercise Price of   |   |      | Number of Securities | 
|                                                           |  | Outstanding Options,       |         |  | Outstanding Options |   |      | Remaining Available  | 
|Plan Category                                              |  | Warrants and Rights        |         |  | Warrants and Rights |   |      | for Future Issuance  | 
|                                                           |  |                            |         |  |                     |   |      |                      | 
|Equity compensation plans approved by security holders(1)  |  |                            | 425,000 |  |                     | $ | 9.05 |                      |  |  | 375,000 | 
|Equity compensation plans not approved by security holders |  |                            |        |  |                     |   |      |                      |  |  |        | 
|                                                           |  |                            |         |  |                     |   |      |                      | 
|Total                                                      |  |                            | 425,000 |  |                     |   |      |                      |  |  | 375,000 | 
|                                                           |  |                            |         |  |                     |   |      |                      | 






|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each of the Independent Director and Officer/ Employee Stock
    Option Plans was approved at our Annual Meeting of Shareholders
    held on June 28, 2003.






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions







| |                   
| | ------------------
| | Advisory agreement







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| |                         
| | ------------------------
| | Property management fees



Real estate
commissions






| |                        
| | -----------------------
| | Incentive distributions





| |                                           
| | ------------------------------------------
| | Unconsolidated debt due to related parties







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pacific Corporate Park had $81,000 outstanding due to Cunningham
    at an interest rate of 12.0% per annum and is due one year from
    the origination. On February 3, 2005, February 11,
    2005, and March 18, 2005, Pacific Corporate Park issued
    promissory notes to Cunningham in the amounts of $130,000,
    $263,000, and $20,000, respectively. These notes bear interest
    at 12.0% per annum and have a one year maturity date.





| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | County Center Drive had $121,000, consisting of $109,000 in
    principal and $11,000 in interest, outstanding due to our
    Advisor. This note bears interest at 12.0% per annum and is due
    upon demand.





| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 2004 Notes Program has made loans from time to time to
    certain of our properties. Terms of the 2004 Notes Program
    provide for interest payments at 11.0% per annum. In addition to
    interest, the 2004 Notes Program is entitled to the greater of a
    1.0% prepayment penalty or 20.0% of the

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | profits upon sale of the property prorated for the amount of
    time the loan was outstanding. As of December 31, 2004,
    loans from the 2004 Notes Program to Congress Center, which has
    been repaid and County Center Drive, which has an outstanding
    balance of $16,000, consisting of $14,000 in principal and
    $2,000 in interest, may result in additional amounts due to the
    2004 Notes Program upon the sale of these properties, depending
    on profits, if any, upon sale. We cannot reasonably estimate the
    additional amounts due, if any, to the 2004 Notes Program if and
    when the Congress Center and County Center Drive properties are
    sold.

Accounts receivable from related parties




| |      
| | -----
| | Lease





| |                                                                
| | ---------------------------------------------------------------
| | Executive officer investments in unconsolidated real
    estate





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









| |                                          
| | -----------------------------------------
| | Business relationships with legal counsel



64



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##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services





|                      |  |      |         |  |      |   |         | 
|--------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|Services              |  | 2004 |         |  | 2003 |  
|                      |  |      |         |  |      |  
|Audit Fees(1)         |  | $    | 401,000 |  |      | $ | 227,000 | 
|Audit-Related Fees(2) |  |      | 74,000  |  |      |   |        | 
|Tax Fees(3)           |  |      | 172,000 |  |      |   | 10,000  | 
|All Other Fees(4)     |  |      |        |  |      |   |        | 
|                      |  |      |         |  |      |  
|Total                 |  | $    | 647,000 |  |      | $ | 237,000 | 
|                      |  |      |         |  |      |  






|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees billed in 2004 and 2003 consisted of audit of our
    annual financial statements, acquisition audits, reviews of our
    quarterly financial statements, and statutory and regulatory
    audits, consents and other services related to filings with the
    SEC.
|   
|(2) | Audit-related fees billed in 2004 and 2003 consisted of
    financial accounting and reporting consultations.                                                                                                                                                                 
|   
|(3) | Tax services billed in 2004 and 2003 consisted of tax compliance
    and tax planning and advice.                                                                                                                                                                             
|   
|(4) | There were no fees billed for other services in 2004 or 2003.                                                                                                                                                                                                                 







| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Consultations and consents related to SEC filings and
    registration statements
|
| |  | Consultation of accounting matters                                               
|
| |  | Tax planning and tax compliance for the U.S. income and
    other taxes          



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PART IV







|         |                                        
|-------- | ---------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules

Financial Statements:


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                       |  |       |     | 
|---------------------------------------------------------------------- |  | ----- | --- | 
|                                                                       |  | Pages |    
|                                                                       |  |       |    
|Report of Independent Registered Public
    Accounting Firm            |  |       | 67  | 
|Report of Independent Registered Public
    Accounting Firm            |  |       | 68  | 
|Consolidated Balance Sheets                                            |  |       | 69  | 
|Consolidated Statements of Operations and
    Comprehensive Operations |  |       | 70  | 
|Consolidated Statements of
    Shareholders Equity                    |  |       | 71  | 
|Consolidated Statements of Cash Flows                                  |  |       | 72  | 
|Notes to Consolidated Financial
    Statements                         |  |       | 74  | 
|Schedules                                                              |  |       | 103 | 

Financial Statement Schedules




|                                                                                 |  |      |     | 
|-------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                 |  | Page |    
|                                                                                 |  |      |    
|Valuation and Qualifying Accounts (Schedule II)                                  |  |      | 103 | 
|Real Estate Operating Properties and Accumulated Depreciation
    (Schedule III) |  |      | 104 | 



Exhibits




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                                   
| | ----------------------------------
| | /s/     Deloitte &
    Touche, LLP





67



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                       
| | ----------------------
| | /s/ GRANT THORNTON LLP





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T REIT, INC.





CONSOLIDATED BALANCE SHEETS


December 31, 2004 and 2003


|                                                                                                                                                                                 |                                                         |              |            |            |      |   |            |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------ | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                                                                                                                                                 |                                                         | December 31, |           
|                                                                                                                                                                                 |                                                         |              |           
|                                                                                                                                                                                 |                                                         | 2004         |            |            | 2003 |  
|                                                                                                                                                                                 |                                                         |              |            |            |      |  
|ASSETS                                                                                                                                                                          
|Real estate investments:                                                                                                                                                         |                                                         |              |            |            |      |   |            |           
|                                                                                                                                                                                 | Operating properties, net of accumulated depreciation   |              | $          | 23,874,000 |      |   | $          | 6,602,000  | 
|                                                                                                                                                                                 | Property held for sale, net of accumulated depreciation |              |            |           |      |   |            | 9,144,000  | 
|                                                                                                                                                                                 | Investments in unconsolidated real estate               |              |            | 19,272,000 |      |   |            | 19,331,000 | 
|                                                                                                                                                                                 |                                                         |              |            |            |      |  
|                                                                                                                                                                                 |                                                         |              | 43,146,000 |            |      |   | 35,077,000 |           
|Cash and cash equivalents                                                                                                                                                        |                                                         |              | 7,229,000  |            |      |   | 12,189,000 |           
|Restricted cash                                                                                                                                                                  |                                                         |              | 1,691,000  |            |      |   | 574,000    |           
|Investment in marketable securities                                                                                                                                              |                                                         |              | 491,000    |            |      |   |           |           
|Accounts receivable, net of allowance for doubtful accounts                                                                                                                      |                                                         |              | 125,000    |            |      |   | 37,000     |           
|Accounts receivable from related parties                                                                                                                                         |                                                         |              | 514,000    |            |      |   | 538,000    |           
|Real estate deposits                                                                                                                                                             |                                                         |              |           |            |      |   | 11,000     |           
|Other assets, net                                                                                                                                                                |                                                         |              | 4,058,000  |            |      |   | 296,000    |           
|Note receivable                                                                                                                                                                  |                                                         |              | 3,299,000  |            |      |   | 647,000    |           
|                                                                                                                                                                                 |                                                         |              |            |            |      |  
|Total assets                                                                                                                                                                     |                                                         | $            | 60,553,000 |            |      | $ | 49,369,000 |           
|                                                                                                                                                                                 |                                                         |              |            |            |      |  
|                                                                                                                                                                                
|LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS
    EQUITY                                                                                                                    
|Mortgages payable                                                                                                                                                                |                                                         | $            | 19,285,000 |            |      | $ | 4,346,000  |           
|Mortgages payable secured by property held for sale                                                                                                                              |                                                         |              |           |            |      |   | 4,904,000  |           
|Accounts payable and accrued liabilities                                                                                                                                         |                                                         |              | 1,904,000  |            |      |   | 1,611,000  |           
|Accounts payable due to related party                                                                                                                                            |                                                         |              | 49,000     |            |      |   | 24,000     |           
|Distributions payable                                                                                                                                                            |                                                         |              | 327,000    |            |      |   | 318,000    |           
|Security deposits and prepaid rent                                                                                                                                               |                                                         |              | 253,000    |            |      |   | 59,000     |           
|                                                                                                                                                                                 |                                                         |              |            |            |      |  
|                                                                                                                                                                                 |                                                         |              | 21,818,000 |            |      |   | 11,262,000 |           
|Minority interests                                                                                                                                                               |                                                         |              | 1,916,000  |            |      |   |           |           
|Commitments and contingencies (Note 13)                                                                                                                                          |                                                         |              |            |            |      |   |            |           
|Shareholders equity:                                                                                                                                                            |                                                         |              |            |            |      |   |            |           
|Common stock, $.01 par value; 10,000,000 shares
    authorized; 4,720,000 shares issued, 4,612,000 and
    4,646,000 outstanding at December 31, 2004 and 2003,
    respectively |                                                         |              | 47,000     |            |      |   | 47,000     |           
|Additional paid-in capital                                                                                                                                                       |                                                         |              | 41,533,000 |            |      |   | 41,265,000 |           
|Treasury stock, 107,000 and 74,000 shares at
    December 31, 2004 and 2003, respectively                                                                                        |                                                         |              | (979,000   | )          |      |   | (675,000   | )         
|Distributions in excess of earnings                                                                                                                                              |                                                         |              | (3,792,000 | )          |      |   | (2,530,000 | )         
|Accumulated other comprehensive income                                                                                                                                           |                                                         |              | 10,000     |            |      |   |           |           
|                                                                                                                                                                                 |                                                         |              |            |            |      |  
|Total shareholders equity                                                                                                                                                       |                                                         |              | 36,819,000 |            |      |   | 38,107,000 |           
|                                                                                                                                                                                 |                                                         |              |            |            |      |  
|Total liabilities, minority interests and shareholders
    equity                                                                                                               |                                                         | $            | 60,553,000 |            |      | $ | 49,369,000 |           
|                                                                                                                                                                                 |                                                         |              |            |            |      |  



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T REIT, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
OPERATIONS


For the Years Ended December 31, 2004, 2003 and 2002


|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |           |   |           |         |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------- | --------- | ---------- | --------- | - | --------- | -------- | --------- | - | --------- | ------- | ------- | 
|                                                                                                                                                   |                                                                           | Years Ended December 31,                    |          
|                                                                                                                                                   |                                                                           |                                             |          
|                                                                                                                                                   |                                                                           | 2004                                        |           |            | 2003      |   |           | 2002     |          
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Revenues:                                                                                                                                          |                                                                           |                                             |           |            |           |   |           |          |           |   |           |        
|                                                                                                                                                   |                                                                           | Rental income                               |           | $          | 4,959,000 |   |           | $        | 1,068,000 |   |           | $       | 304,000 | 
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Expenses:                                                                                                                                          |                                                                           |                                             |           |            |           |   |           |          |           |   |           |        
|                                                                                                                                                   |                                                                           | Rental                                      |           |            | 1,868,000 |   |           |          | 265,000   |   |           |         | 102,000 | 
|                                                                                                                                                   |                                                                           | General and administrative                  |           |            | 1,264,000 |   |           |          | 815,000   |   |           |         | 539,000 | 
|                                                                                                                                                   |                                                                           | Depreciation and amortization               |           |            | 1,961,000 |   |           |          | 150,000   |   |           |         | 21,000  | 
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|                                                                                                                                                   |                                                                           |                                             | 5,093,000 |            |           |   | 1,230,000 |          |           |   | 662,000   |        
|Loss before other income (expense), discontinued operations, and
    minority interests                                                            |                                                                           |                                             | (134,000  | )          |           |   | (162,000  | )        |           |   | (358,000  | )      
|Other income (expense):                                                                                                                            |                                                                           |                                             |           |            |           |   |           |          |           |   |           |        
|                                                                                                                                                   | Interest expense (including amortization of deferred financing
    costs) |                                             |           | (1,187,000 | )         |   |           | (305,000 | )         |   |           | (13,000 | )      
|                                                                                                                                                   | Interest income                                                           |                                             |           | 449,000    |           |   |           | 116,000  |           |   |           | 283,000 |        
|                                                                                                                                                   | Dividend income                                                           |                                             |           | 86,000     |           |   |           |         |           |   |           |        |        
|                                                                                                                                                   | Gain on sale of marketable securities                                     |                                             |           | 109,000    |           |   |           |         |           |   |           |        |        
|Equity in earnings of unconsolidated real estate                                                                                                   |                                                                           |                                             | 581,000   |            |           |   | 1,160,000 |          |           |   | 1,126,000 |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Income (loss) from continuing operations before discontinued
    operations and gain on sale of real estate investments and
    minority interests |                                                                           |                                             | (96,000   | )          |           |   | 809,000   |          |           |   | 1,038,000 |        
|Gain on sale of real estate investments                                                                                                            |                                                                           |                                             | 2,466,000 |            |           |   | 2,614,000 |          |           |   | 213,000   |        
|Income from discontinued operations                                                                                                                |                                                                           |                                             | 89,000    |            |           |   | 766,000   |          |           |   | 1,042,000 |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Net income before minority interests                                                                                                               |                                                                           |                                             | 2,459,000 |            |           |   | 4,189,000 |          |           |   | 2,293,000 |        
|Minority interests                                                                                                                                 |                                                                           |                                             | (85,000   | )          |           |   |          |          |           |   |          |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Net income                                                                                                                                         |                                                                           | $                                           | 2,544,000 |            |           | $ | 4,189,000 |          |           | $ | 2,293,000 |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Other comprehensive income:                                                                                                                        |                                                                           |                                             |           |            |           |   |           |          |           |   |           |        
|Net income                                                                                                                                         |                                                                           | $                                           | 2,544,000 |            |           | $ | 4,189,000 |          |           | $ | 2,293,000 |        
|Unrealized gain on marketable securities                                                                                                           |                                                                           |                                             | 10,000    |            |           |   |          |          |           |   |          |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Net comprehensive income                                                                                                                           |                                                                           | $                                           | 2,554,000 |            |           | $ | 4,189,000 |          |           | $ | 2,293,000 |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Net income per common share:                                                                                                                       |                                                                           |                                             |           |            |           |   |           |          |           |   |           |        
|                                                                                                                                                   |                                                                           | Continuing operations  basic and diluted   |           | $          | 0.00      |   |           | $        | 0.17      |   |           | $       | 0.26    | 
|                                                                                                                                                   |                                                                           | Discontinued operations  basic and diluted |           |            | 0.55      |   |           |          | 0.73      |   |           |         | 0.31    | 
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Total net income per common share  basic and diluted                                                                                              |                                                                           | $                                           | 0.55      |            |           | $ | 0.90      |          |           | $ | 0.57      |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Weighted average common shares outstanding  basic and
    diluted                                                                                 |                                                                           |                                             | 4,630,000 |            |           |   | 4,676,000 |          |           |   | 4,013,000 |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          
|Distributions declared per share                                                                                                                   |                                                                           | $                                           | 0.82      |            |           | $ | 0.82      |          |           | $ | 0.83      |        
|                                                                                                                                                   |                                                                           |                                             |           |            |           |   |           |          |          



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T REIT, INC.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


For the Years Ended December 31, 2004, 2003 and 2002


|                                         |  |           |           |              |           |   |        |                 |  |   |                  |  |  |           |          |   |               |   |            |       |  |   |        |  |  |   |            |  
|---------------------------------------- |  | --------- | --------- | ------------ | --------- | - | ------ | --------------- |  | - | ---------------- |  |  | --------- | -------- | - | ------------- | - | ---------- | ----- |  | - | ------ |  |  | - | ---------- | -
|                                         |  |           |           | Common Stock |           |   |        |                 |  |   |                  |  | 
|                                         |  |           |           |              |           |   |        |                 |  |   | Accumulated      |  |  |          
|                                         |  |           |           | Common       |           |   |        |                 |  |   | Distributions in |  |  | Other     |          |   |              
|                                         |  | Number of |           |              | Stock Par |   |        | Additional      |  |   | Treasury         |  |  | Excess of |          |   | Comprehensive |   |            |      
|                                         |  | Shares    |           |              | Value     |   |        | Paid-In Capital |  |   | Stock            |  |  | Earnings  |          |   | Income        |   |            | Total | 
|                                         |  |           |           |              |           |   |        |                 |  |   |                  |  |  |           |          |   |               |   |            |       | 
|BALANCE  December 31, 2001              |  |           | 2,470,000 |              |           | $ | 25,000 |                 |  | $ | 21,609,000       |  |  | $         | (8,000   | ) |               | $ | (1,857,000 | )     |  |   |       |  |  | $ | 19,769,000 |  
|Issuance of common stock                 |  |           | 2,249,000 |              |           |   | 22,000 |                 |  |   | 19,656,000       |  |  |           |         |   |               |   |           |       |  |   |       |  |  |   | 19,678,000 |  
|Distributions                            |  |           |          |              |           |   |       |                 |  |   |                 |  |  |           |         |   |               |   | (3,312,000 | )     |  |   |       |  |  |   | (3,312,000 | )
|Repurchase of Shares                     |  |           | (23,000   | )            |           |   |       |                 |  |   |                 |  |  |           | (212,000 | ) |               |   |           |       |  |   |       |  |  |   | (212,000   | )
|Net income                               |  |           |          |              |           |   |       |                 |  |   |                 |  |  |           |         |   |               |   | 2,293,000  |       |  |   |       |  |  |   | 2,293,000  |  
|                                         |  |           |           |              |           |   |        |                 |  |   |                  |  |  |           |          |   |               |   |            |       | 
|BALANCE  December 31, 2002              |  |           | 4,696,000 |              |           |   | 47,000 |                 |  |   | 41,265,000       |  |  |           | (220,000 | ) |               |   | (2,876,000 | )     |  |   |       |  |  |   | 38,216,000 |  
|Distributions                            |  |           |          |              |           |   |       |                 |  |   |                 |  |  |           |         |   |               |   | (3,843,000 | )     |  |   |       |  |  |   | (3,843,000 | )
|Repurchase of Shares                     |  |           | (50,000   | )            |           |   |       |                 |  |   |                 |  |  |           | (455,000 | ) |               |   |           |       |  |   |       |  |  |   | (455,000   | )
|Net income                               |  |           |          |              |           |   |       |                 |  |   |                 |  |  |           |         |   |               |   | 4,189,000  |       |  |   |       |  |  |   | 4,189,000  |  
|                                         |  |           |           |              |           |   |        |                 |  |   |                  |  |  |           |          |   |               |   |            |       | 
|BALANCE  December 31, 2003              |  |           | 4,646,000 |              |           |   | 47,000 |                 |  |   | 41,265,000       |  |  |           | (675,000 | ) |               |   | (2,530,000 | )     |  |   |       |  |  |   | 38,107,000 |  
|Distributions                            |  |           |          |              |           |   |       |                 |  |   |                 |  |  |           |         |   |               |   | (3,806,000 | )     |  |   |       |  |  |   | (3,806,000 | )
|Stock Based Compensation Expense         |  |           |          |              |           |   |       |                 |  |   | 268,000          |  |  |           |         |   |               |   |           |       |  |   |       |  |  |   | 268,000    |  
|Repurchase of Shares                     |  |           | (34,000   | )            |           |   |       |                 |  |   |                 |  |  |           | (304,000 | ) |               |   |           |       |  |   |       |  |  |   | (304,000   | )
|Unrealized gain on marketable securities |  |           |          |              |           |   |       |                 |  |   |                 |  |  |           |         |   |               |   |           |       |  | $ | 10,000 |  |  |   | 10,000     |  
|Net income                               |  |           |          |              |           |   |       |                 |  |   |                 |  |  |           |         |   |               |   | 2,544,000  |       |  |   |       |  |  |   | 2,544,000  |  
|                                         |  |           |           |              |           |   |        |                 |  |   |                  |  |  |           |          |   |               |   |            |       | 
|BALANCE  December 31, 2004              |  |           | 4,612,000 |              |           | $ | 47,000 |                 |  | $ | 41,533,000       |  |  | $         | (979,000 | ) |               | $ | (3,792,000 | )     |  | $ | 10,000 |  |  | $ | 36,819,000 |  
|                                         |  |           |           |              |           |   |        |                 |  |   |                  |  |  |           |          |   |               |   |            |       | 



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T REIT, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2004, 2003 and 2002


|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |            |            |           |   |            |             |  
|------------------------------------------------------------------------------------ | ------------------------------------------- | ------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ------- | ---------- | ----------- | ---------- | ---- | ---------- | ---------- | --------- | - | ---------- | ----------- | -
|                                                                                     |                                             | Years Ended December 31,                                                                   |                                                                
|                                                                                     |                                             |                                                                                            |                                                                
|                                                                                     |                                             | 2004                                                                                       |                                                                 |         | 2003       |             |            | 2002 |           
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |                                             |                                                                                            |                                                                 |         |            |             |            |      |            |            |           |  
|Net income                                                                           |                                             | $                                                                                          | 2,544,000                                                       |         |            | $           | 4,189,000  |      |            | $          | 2,293,000 |  
|Adjustments to reconcile net income to net cash provided by
    operating activities |                                             |                                                                                            |                                                                 |         |            |             |            |      |            |            |           |  
|                                                                                     |                                             | Distributions received in excess of (equity) in earnings of
    unconsolidated real estate |                                                                 |         | 964,000    |             |            |      | 631,000    |            |           |   | (450,000   | )          
|                                                                                     |                                             | Gain on sale of real estate investments                                                    |                                                                 |         | (2,466,000 | )           |            |      | (2,614,000 | )          |           |   | (213,000   | )          
|                                                                                     |                                             | Gain on sale of marketable securities                                                      |                                                                 |         | (109,000   | )           |            |      |           |            |           |   |           |            
|                                                                                     |                                             | Depreciation and amortization  continued and
    discontinued operations                  |                                                                 |         | 2,404,000  |             |            |      | 472,000    |            |           |   | 746,000    |            
|                                                                                     | Stock based compensation expense            |                                                                                            |                                                                 | 268,000 |            |             |            |     |            |            |           |  |           
|                                                                                     | Minority interest expense                   |                                                                                            |                                                                 | (85,000 | )          |             |            |     |            |            |           |  |           
|                                                                                     | Change in operating assets and liabilities: |                                                                                            |                                                                 |         |            |             |            |      |            |            |           |   |           
|                                                                                     |                                             | Accounts receivable                                                                        |                                                                 |         | (96,000    | )           |            |      | (308,000   | )          |           |   | 51,000     |            
|                                                                                     |                                             | Accounts receivable from related parties                                                   |                                                                 |         | 24,000     |             |            |      | 56,000     |            |           |   | 33,000     |            
|                                                                                     |                                             | Amortization of deferred financing costs                                                   |                                                                 |         | 99,000     |             |            |      | 121,000    |            |           |   |            |            
|                                                                                     |                                             | Other assets                                                                               |                                                                 |         | (376,000   | )           |            |      | 145,000    |            |           |   | (582,000   | )          
|                                                                                     |                                             | Accounts payable and accrued liabilities                                                   |                                                                 |         | 452,000    |             |            |      | 343,000    |            |           |   | 458,000    |            
|                                                                                     |                                             | Security deposits and prepaid rent                                                         |                                                                 |         | (33,000    | )           |            |      | (85,000    | )          |           |   | (46,000    | )          
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|                                                                                     |                                             |                                                                                            | Net cash provided by operating activities                       |         |            | 3,590,000   |            |      |            | 2,950,000  |           |   |            | 2,290,000   |  
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |                                             |                                                                                            |                                                                 |         |            |             |            |      |            |            |           |  
|                                                                                     |                                             |                                                                                            | Purchase of marketable securities                               |         |            | (7,236,000  | )          |      |            |           |           |   |            |            |  
|                                                                                     |                                             |                                                                                            | Proceeds from sale of marketable securities                     |         |            | 6,865,000   |            |      |            |           |           |   |            |            |  
|                                                                                     |                                             |                                                                                            | Purchase of real estate operating properties                    |         |            | (23,091,000 | )          |      |            | (9,580,000 | )         |   |            | (6,885,000  | )
|                                                                                     |                                             |                                                                                            | Purchase of investments in unconsolidated real estate           |         |            | (1,125,000  | )          |      |            | (2,438,000 | )         |   |            | (12,172,000 | )
|                                                                                     |                                             |                                                                                            | Restricted cash                                                 |         |            | (1,117,000  | )          |      |            | 356,000    |           |   |            |            |  
|                                                                                     |                                             |                                                                                            | Capital expenditures                                            |         |            | (80,000     | )          |      |            | (198,000   | )         |   |            | (232,000    | )
|                                                                                     |                                             |                                                                                            | Proceeds from disposition of properties                         |         |            | 3,245,000   |            |      |            | 13,320,000 |           |   |            | 1,502,000   |  
|                                                                                     |                                             |                                                                                            | Proceeds from sale of investments in unconsolidated real estate |         |            | 1,619,000   |            |      |            |           |           |   |            |            |  
|                                                                                     |                                             |                                                                                            | Collections of notes receivable                                 |         |            | 6,576,000   |            |      |            | (60,000    | )         |   |            | 1,795,000   |  
|                                                                                     |                                             |                                                                                            | Real estate deposits applied to purchases                       |         |            | 11,000      |            |      |            | 1,117,000  |           |   |            | (3,287,000  | )
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|                                                                                     |                                             |                                                                                            | Net cash (used in) provided by investing activities             |         |            | (14,333,000 | )          |      |            | 2,517,000  |           |   |            | (19,279,000 | )
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |                                             |                                                                                            |                                                                 |         |            |             |            |      |            |            |           |  
|                                                                                     |                                             | Issuance of common shares                                                                  |                                                                 |         |           |             |            |      |           |            |           |   | 19,343,000 |            
|                                                                                     |                                             | Borrowings under notes payable                                                             |                                                                 |         | 15,000,000 |             |            |      | 5,000,000  |            |           |   | 4,400,000  |            
|                                                                                     |                                             | Principal payments on notes payable and credit facility                                    |                                                                 |         | (5,510,000 | )           |            |      | (106,000   | )          |           |   | (1,047,000 | )          
|                                                                                     |                                             | Borrowings on credit facility                                                              |                                                                 |         | 545,000    |             |            |      |           |            |           |   |           |            
|                                                                                     |                                             | Payment of deferred financing costs                                                        |                                                                 |         |           |             |            |      |           |            |           |   | (150,000   | )          
|                                                                                     |                                             | Repurchase of shares                                                                       |                                                                 |         | (304,000   | )           |            |      | (455,000   | )          |           |   | (212,000   | )          
|                                                                                     |                                             | Distributions paid                                                                         |                                                                 |         | (3,796,000 | )           |            |      | (3,846,000 | )          |           |   | (2,863,000 | )          
|                                                                                     |                                             | Distributions to minority shareholders                                                     |                                                                 |         | (152,000   | )           |            |      |           |            |           |   |           |            
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|                                                                                     |                                             |                                                                                            | Net cash provided by financing activities                       |         |            | 5,783,000   |            |      |            | 593,000    |           |   |            | 19,471,000  |  
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                 |                                             |                                                                                            | (4,960,000                                                      | )       |            |             | 6,060,000  |      |            |            | 2,482,000 |  
|CASH AND CASH EQUIVALENTS  beginning of year                                        |                                             |                                                                                            | 12,189,000                                                      |         |            |             | 6,129,000  |      |            |            | 3,647,000 |  
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           
|CASH AND CASH EQUIVALENTS  end of year                                              |                                             | $                                                                                          | 7,229,000                                                       |         |            | $           | 12,189,000 |      |            | $          | 6,129,000 |  
|                                                                                     |                                             |                                                                                            |                                                                 |         |            |             |            |      |           

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T REIT, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS 
SUPPLEMENTAL INFORMATION


For the Years Ended December 31, 2004, 2003 and 2002


|                                                  |                                                                        |                          |   |            |      |  |   |            |  |  |   |           | 
|------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------ | - | ---------- | ---- |  | - | ---------- |  |  | - | --------- | 
|                                                  |                                                                        | Years Ended December 31, |  
|                                                  |                                                                        |                          |  
|                                                  |                                                                        | 2004                     |   |            | 2003 |  |   | 2002       | 
|                                                  |                                                                        |                          |   |            |      |  |   |            | 
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |                                                                        |                          |   |            |      |  |   |            |  |  |   |          
|Cash paid during the year for:                    |                                                                        |                          |   |            |      |  |   |            |  |  |   |          
|                                                  | Interest                                                               |                          | $ | 1,211,000  |      |  | $ | 1,780,000  |  |  | $ | 1,820,000 | 
|                                                  |                                                                        |                          |   |            |      |  |   |            | 
|                                                  | Income taxes                                                           |                          | $ | 6,000      |      |  | $ | 30,000     |  |  | $ | 69,000    | 
|                                                  |                                                                        |                          |   |            |      |  |   |            | 
|SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:    |                                                                        |                          |   |            |      |  |   |            |  |  |   |          
|INVESTING ACTIVITIES                              |                                                                        |                          |   |            |      |  |   |            |  |  |   |          
|                                                  | Increase in assets net of liabilities of
    acquisitions/dispositions |                          | $ | 5,131,000  |      |  | $ | 2,327,000  |  |  | $ |          | 
|                                                  | Increase in investment in operating properties                         |                          | $ | 19,525,000 |      |  | $ | 9,167,000  |  |  | $ |          | 
|                                                  | Decrease in investment in operating properties                         |                          | $ | 10,817,000 |      |  | $ | 33,327,000 |  |  | $ |          | 
|                                                  | Increase in investment in unconsolidated real estate                   |                          | $ | 1,670,000  |      |  | $ | 2,438,000  |  |  | $ |          | 
|                                                  | Decrease in investment in unconsolidated real estate                   |                          | $ | 766,000    |      |  | $ |           |  |  | $ |          | 
|                                                  | Decrease in notes payable due to the sale of properties                |                          | $ |           |      |  | $ | 23,732,000 |  |  | $ |          | 
|                                                  | Note receivable due to sale of properties                              |                          | $ | 9,228,000  |      |  | $ |           |  |  | $ |          | 
|                                                  | Minority interest liability of acquisitions                            |                          | $ | 2,153,000  |      |  | $ |           |  |  | $ |          | 
|FINANCING ACTIVITIES                              |                                                                        |                          |   |            |      |  |   |            |  |  |   |          
|                                                  | Issuance of common stock for distributions reinvested                  |                          | $ |           |      |  | $ |           |  |  | $ | 335,000   | 
|                                                  |                                                                        |                          |   |            |      |  |   |            | 



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T REIT, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For the Years Ended December 31, 2004, 2003 and 2002




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





Plan of Liquidation






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



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T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





| |                        
| | -----------------------
| | Real Estate Investments



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







| |                       
| | ----------------------
| | Property Held for Sale

Accounting for Impairment
or Disposal of Long-Lived Assets,




| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;    

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T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the asset is being actively marketed for sale at a price that is
    reasonable in relation to its current fair value; and                                   
|
| |  | given the actions required to complete the plan, it is unlikely
    that significant changes to the plan will be made or that the
    plan will be withdrawn.



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





| |                          
| | -------------------------
| | Cash and Cash Equivalents





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





| |                                     
| | ------------------------------------
| | Investments in Marketable Securities





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





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

Business Combinations




76



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                     
| | ------------------------------------
| | Allowance for Uncollectible Accounts





| |                             
| | ----------------------------
| | Concentration of Credit Risk







|                         |  |              |           |               |             |  |    |          |  |                |                 |  |       |                 |        |  |  |  |               | 
|------------------------ |  | ------------ | --------- | ------------- | ----------- |  | -- | -------- |  | -------------- | --------------- |  | ----- | --------------- | ------ |  |  |  | ------------- | 
|                         |  |              |           | Percentage of |             |  |    |          |  |                |                
|                         |  | 2004 Annual  |           |               | 2004 Annual |  |    |          |  | Square Footage |                 |  | Lease |                
|Tenant                   |  | Base Rent(1) |           |               | Base Rent   |  |    | Property |  |                | (Approximately) |  |       | Expiration Date |       
|                         |  |              |           |               |             |  |    |          |  |                |                 |  |       |                 |       
|ACS State Health Systems |  | $            | 588,000   |               |             |  | 12 | %        |  |                | AmberOaks       |  |       |                 | 44,000 |  |  |  | February 2005 | 
|Netsolve, Inc.           |  | $            | 1,073,000 |               |             |  | 21 | %        |  |                | AmberOaks       |  |       |                 | 78,000 |  |  |  | April 2007    | 

77



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                    |  |              |         |               |             |  |    |          |  |                |                    |  |       |                 |        |  |  |  |               | 
|------------------- |  | ------------ | ------- | ------------- | ----------- |  | -- | -------- |  | -------------- | ------------------ |  | ----- | --------------- | ------ |  |  |  | ------------- | 
|                    |  |              |         | Percentage of |             |  |    |          |  |                |                   
|                    |  | 2003 Annual  |         |               | 2003 Annual |  |    |          |  | Square Footage |                    |  | Lease |                
|Tenant              |  | Base Rent(1) |         |               | Base Rent   |  |    | Property |  |                | (Approximately)    |  |       | Expiration Date |       
|                    |  |              |         |               |             |  |    |          |  |                |                    |  |       |                 |       
|Computer Express    |  | $            | 79,000  |               |             |  | 10 | %        |  |                | University Heights |  |       |                 | 8,000  |  |  |  | December 2006 | 
|The Pacesetter Corp |  | $            | 130,000 |               |             |  | 17 | %        |  |                | University Heights |  |       |                 | 13,000 |  |  |  | August 2008   | 
|GSA                 |  | $            | 324,000 |               |             |  | 41 | %        |  |                | University Heights |  |       |                 | 21,000 |  |  |  | November 2015 | 



|                    |  |              |         |               |             |  |    |          |  |                |                    |  |       |                 |        |  |  |  |               | 
|------------------- |  | ------------ | ------- | ------------- | ----------- |  | -- | -------- |  | -------------- | ------------------ |  | ----- | --------------- | ------ |  |  |  | ------------- | 
|                    |  |              |         | Percentage of |             |  |    |          |  |                |                   
|                    |  | 2002 Annual  |         |               | 2002 Annual |  |    |          |  | Square Footage |                    |  | Lease |                
|Tenant              |  | Base Rent(1) |         |               | Base Rent   |  |    | Property |  |                | (Approximately)    |  |       | Expiration Date |       
|                    |  |              |         |               |             |  |    |          |  |                |                    |  |       |                 |       
|Computer Express    |  | $            | 79,000  |               |             |  | 10 | %        |  |                | University Heights |  |       |                 | 8,000  |  |  |  | December 2006 | 
|The Pacesetter Corp |  | $            | 130,000 |               |             |  | 17 | %        |  |                | University Heights |  |       |                 | 13,000 |  |  |  | August 2008   | 
|GSA                 |  | $            | 324,000 |               |             |  | 41 | %        |  |                | University Heights |  |       |                 | 21,000 |  |  |  | November 2015 | 






|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Annualized rental income based on contractual base rent sent
    forth in leases in effect at December 31, 2004, 2003, and
    2002, respectively.





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments

Disclosures About Fair Value of Financial Instruments




78



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                 
| | --------------------------------
| | Derivative financial instruments



Derivative Instruments and Hedging
Activities.




| |                    
| | -------------------
| | Revenue Recognition





| |                     
| | --------------------
| | Real Estate Deposits





| |             
| | ------------
| | Other Assets





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



79



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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





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





|                                                                      |  |                          |           |  |      |   |           |      |  |   |           | 
|--------------------------------------------------------------------- |  | ------------------------ | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                                                                      |  | Years Ended December 31, |          
|                                                                      |  |                          |          
|                                                                      |  | 2004                     |           |  | 2003 |   |           | 2002 | 
|                                                                      |  |                          |           |  |      |   |           |      | 
|Net income                                                            |  | $                        | 2,544,000 |  |      | $ | 4,189,000 |      |  | $ | 2,293,000 | 
|Net income per share  basic and diluted                              |  |                          | 0.55      |  |      |   | 0.90      |      |  |   | 0.57      | 
|Weighted average number of shares outstanding  basic
    and diluted |  |                          | 4,630,000 |  |      |   | 4,676,000 |      |  |   | 4,013,000 | 



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

Accounting for
Stock-Based Compensation Accounting for Stock-Based Compensation Transition and
Disclosure Accounting for Stock
Issued to Employees


80



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                                  |  | Years Ended December 31, |          
|                                                                                                                  |  |                          |          
|                                                                                                                  |  | 2004                     |           |   | 2003 |   |           | 2002 | 
|                                                                                                                  |  |                          |           |   |      |   |           |      | 
|Reported Net Income                                                                                               |  | $                        | 2,544,000 |   |      | $ | 4,189,000 |      |  | $ | 2,293,000 |  
|Add: Stock based employee compensation expense included in
    reported net income                                |  |                          | 268,000   |   |      |   |          |      |  |   |          |  
|Less: Total stock based employee compensation expense determined
    under fair value based method for all awards |  |                          | (138,000  | ) |      |   | (49,000   | )    |  |   | (66,000   | )
|                                                                                                                  |  |                          |           |   |      |   |           |      | 
|Pro forma net income                                                                                              |  | $                        | 2,674,000 |   |      | $ | 4,140,000 |      |  | $ | 2,227,000 |  
|                                                                                                                  |  |                          |           |   |      |   |           |      | 
|Reported net income per share  basic and diluted                                                                 |  | $                        | 0.55      |   |      | $ | 0.90      |      |  | $ | 0.57      |  
|                                                                                                                  |  |                          |           |   |      |   |           |      | 
|Pro forma net income per share  basic and diluted                                                                |  | $                        | 0.58      |   |      | $ | 0.89      |      |  | $ | 0.55      |  
|                                                                                                                  |  |                          |           |   |      |   |           |      | 





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





| |                                          
| | -----------------------------------------
| | Recently Issued Accounting Pronouncements







81



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Consolidation of
Variable Interest Entities Consolidated Financial Statements




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





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





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



|                                  |  |              |            |   |      |   |           |  
|--------------------------------- |  | ------------ | ---------- | - | ---- | - | --------- | -
|                                  |  | December 31, |           
|                                  |  |              |           
|                                  |  | 2004         |            |   | 2003 |  
|                                  |  |              |            |   |      |  
|Buildings and tenant improvements |  | $            | 18,437,000 |   |      | $ | 5,796,000 |  
|Land                              |  |              | 6,317,000  |   |      |   | 1,011,000 |  
|                                  |  |              |            |   |      |  
|                                  |  |              | 24,754,000 |   |      |   | 6,807,000 |  
|Less: accumulated depreciation    |  |              | (880,000   | ) |      |   | (205,000  | )
|                                  |  |              |            |   |      |  
|                                  |  | $            | 23,874,000 |   |      | $ | 6,602,000 |  
|                                  |  |              |            |   |      |  





| |                                                                                    
| | -----------------------------------------------------------------------------------
| | University Heights Business Park, San Antonio, Texas 
     AmberOaks, Austin, Texas



| |                                             
| | --------------------------------------------
| | 2004 Acquisitions of Consolidated Properties



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



82



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





| |                                             
| | --------------------------------------------
| | 2003 Acquisitions of Consolidated Properties



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





| |                                             
| | --------------------------------------------
| | 2004 Dispositions of Consolidated Properties



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





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



83



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                             
| | --------------------------------------------
| | 2003 Dispositions of Consolidated Properties



| |                                                        
| | -------------------------------------------------------
| | Northstar Crossing Shopping Center  Garland,
    Texas





| |                                                       
| | ------------------------------------------------------
| | Thousand Oaks Shopping Center  San Antonio,
    Texas





| |                                                              
| | -------------------------------------------------------------
| | Pahrump Valley Junction Shopping Center  Pahrump,
    Nevada



84



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                                       |  |                  |      |              |      |   |            |      |  |   |            | 
|------------------------------------------------------ |  | ---------------- | ---- | ------------ | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                                       |  |                  |      | December 31, |     
|                                                       |  |                  |      |              |     
|                                                       |  | Percentage Owned |      |              | 2004 |   |            | 2003 | 
|                                                       |  |                  |      |              |      |   |            |      | 
|Reno Trademark Building  TIC                          |  |                  | 40.0 | %            |      | $ | 1,154,000  |      |  | $ | 1,151,000  | 
|County Center Drive  TIC                              |  |                  | 16.0 | %            |      |   | 432,000    |      |  |   | 445,000    | 
|City Center West A Building  TIC                    |  |                  | 89.1 | %            |      |   | 8,004,000  |      |  |   | 7,878,000  | 
|Pacific Corporate Park  LLC                           |  |                  | 22.8 | %            |      |   | 1,830,000  |      |  |   | 1,974,000  | 
|Titan Building & Plaza  TIC                           |  |                  | 48.5 | %            |      |   | 2,027,000  |      |  |   | 1,794,000  | 
|Saddleback Financial Center  TIC (sold December 2004) |  |                  | 25.0 | %            |      |   |           |      |  |   | 811,000    | 
|Congress Center  LLC                                  |  |                  | 10.3 | %            |      |   | 3,875,000  |      |  |   | 4,838,000  | 
|Enclave Parkway  LLC                                  |  |                  | 3.3  | %            |      |   | 452,000    |      |  |   | 440,000    | 
|Emerald Plaza  LLC                                    |  |                  | 2.7  | %            |      |   | 913,000    |      |  |   |           | 
|Oakey Building  LLC                                   |  |                  | 9.8  | %            |      |   | 585,000    |      |  |   |           | 
|                                                       |  |                  |      |              |      |   |            |      | 
|                                                       |  |                  |      |              |      | $ | 19,272,000 |      |  | $ | 19,331,000 | 
|                                                       |  |                  |      |              |      |   |            |      | 



|                               |  |                    |             |  |      |   |             | 
|------------------------------ |  | ------------------ | ----------- |  | ---- | - | ----------- | 
|                               |  | As of December 31, |            
|                               |  |                    |            
|                               |  | 2004               |             |  | 2003 |  
|                               |  |                    |             |  |      |  
|Assets (primarily real estate) |  | $                  | 349,806,000 |  |      | $ | 246,975,000 | 
|                               |  |                    |             |  |      |  
|Mortgage notes payable         |  |                    | 224,756,000 |  |      | $ | 159,962,000 | 
|Other liabilities              |  |                    | 10,179,000  |  |      |   | 3,713,000   | 
|Equity                         |  |                    | 114,871,000 |  |      |   | 83,300,000  | 
|                               |  |                    |             |  |      |  
|Total liabilities and equity   |  | $                  | 349,806,000 |  |      | $ | 246,975,000 | 
|                               |  |                    |             |  |      |  
|Companys share of equity      |  | $                  | 19,272,000  |  |      | $ | 19,331,000  | 
|                               |  |                    |             |  |      |  

|                             |  |                    |            |  |      |   |            |      |  |   |            | 
|---------------------------- |  | ------------------ | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                             |  | As of December 31, |           
|                             |  |                    |           
|                             |  | 2004               |            |  | 2003 |   |            | 2002 | 
|                             |  |                    |            |  |      |   |            |      | 
|Revenues                     |  | $                  | 43,575,000 |  |      | $ | 25,326,000 |      |  | $ | 14,860,000 | 
|Rental and other Expenses    |  |                    | 41,676,000 |  |      |   | 22,775,000 |      |  |   | 12,348,000 | 
|                             |  |                    |            |  |      |   |            |      | 
|Net Income                   |  | $                  | 1,899,000  |  |      | $ | 2,551,000  |      |  | $ | 2,512,000  | 
|                             |  |                    |            |  |      |   |            |      | 
|Companys Equity in Earnings |  | $                  | 581,000    |  |      | $ | 1,160,000  |      |  | $ | 1,126,000  | 
|                             |  |                    |            |  |      |   |            |      | 



| |                                               
| | ----------------------------------------------
| | 2004 Acquisitions of Unconsolidated Properties



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



85



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





|                                                                             |  |  |                 |  
|---------------------------------------------------------------------------- |  |  | --------------- | -
|AWT Family LP, a limited partnership wholly owned by
    Anthony W. Thompson |  |  | 1.9%            |  
|NNN Emerald Plaza, LLC                                                       |  |  | 20.5%           |  
|Unaffiliated third parties                                                   |  |  | 77.6% (combined | )



|                         |  |                        |      |   |                           |  |      |  
|------------------------ |  | ---------------------- | ---- | - | ------------------------- |  | ---- | -
|                         |  | Membership Interest in |      |   |                          
|Member                   |  | NNN Emerald Plaza, LLC |      |   | Interest in Emerald Plaza | 
|                         |  |                        |      |   |                           | 
|NNN 2003 Value Fund, LLC |  |                        | 22.2 | % |                           |  | 4.6  | %
|T REIT, LP               |  |                        | 13.2 | % |                           |  | 2.7  | %
|Affiliated Members       |  |                        | 0.4  | % |                           |  | 0.08 | %
|Unaffiliated Members     |  |                        | 64.2 | % |                           |  | 13.2 | %







| |                                                
| | -----------------------------------------------
| | 2003 Acquisitions of Unconsolidated Real Estate



| |                                    
| | -----------------------------------
| | Congress Center  Chicago, Illinois



86



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                         |  |                 
|---------------------------------------- |  | ----------------
|Tenant in Common                         |  | Interest Held   
|                                         |  |                 
|G REIT Inc. (our affiliate)              |  | 30.0%           
|NNN Congress Center, LLC (our affiliate) |  | 28.9%           
|Unaffiliated third parties               |  | 41.1% (combined)



|                         |  |                          |  |                            
|------------------------ |  | ------------------------ |  | ---------------------------
|                         |  | Membership Interest in   |  |                            
|Member                   |  | NNN Congress Center, LLC |  | Interest in Congress Center
|                         |  |                          |  |                            
|NNN 2002 Value Fund, LLC |  | 42.5%                    |  | 12.3%                      
|T REIT, Inc.             |  | 35.5%                    |  | 10.3%                      
|Unaffiliated members     |  | 22.0% (combined)         |  | 6.3% (combined)            







| |                                 
| | --------------------------------
| | Enclave Parkway  Houston, Texas





| |                                                
| | -----------------------------------------------
| | 2004 Dispositions of Unconsolidated Real Estate



| |                                                
| | -----------------------------------------------
| | Saddleback Financial  Laguna Hills, California



87



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                
|-- | ---------------
|4. | Restricted Cash



5.                Marketable
Equity Securities




|     |         |  |             |   |        |                   |  |   |                      |  |  |   |         | 
|---- | ------- |  | ----------- | - | ------ | ----------------- |  | - | -------------------- |  |  | - | ------- | 
|Cost |         |  | Gross Gains |   |        | Unrealized Losses |  |   | Estimated Fair Value | 
|     |         |  |             |   |        |                   |  |   |                      | 
|$    | 481,000 |  |             | $ | 10,000 |                   |  | $ | 0                    |  |  | $ | 491,000 | 





|   |             
|-- | ------------
|6. | Other Assets



|                                                                                                                                                   |                    |      |           |           |      |   |         |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ---- | --------- | --------- | ---- | - | ------- | ------- | 
|                                                                                                                                                   |                    | 2004 |           |           | 2003 |  
|                                                                                                                                                   |                    |      |           |           |      |  
|In-place leases and tenant relationships, net of accumulated
    amortization of $1,279,000 and $0 at December 31, 2004 and
    2003, respectively |                    | $    | 2,802,000 |           |      | $ |        |        
|Above market leases, net of accumulated amortization of $393,000
    and $0 at December 31, 2004 and 2003, respectively                            |                    |      | 611,000   |           |      |   |        |        
|Deferred rent receivable                                                                                                                           |                    |      | 147,000   |           |      |   | 75,000  |        
|Lease commissions, net of accumulated amortization of $1,000 and
    $9,000 at December 31, 2004 and 2003, respectively                            |                    |      | 20,000    |           |      |   | 75,000  |        
|Loan fees, net of accumulated amortization of $133,000 and
    48,000 at December 31, 2004 and 2003, respectively                                  |                    |      | 242,000   |           |      |   | 145,000 |        
|Prepaid expenses                                                                                                                                   |                    |      | 236,000   |           |      |   |        |        
|Other assets                                                                                                                                       |                    |      |          |           |      |   | 1,000   |        
|                                                                                                                                                   |                    |      |           |           |      |  
|                                                                                                                                                   | Total other assets |      | $         | 4,058,000 |      |   | $       | 296,000 | 
|                                                                                                                                                   |                    |      |           |           |      |  



88



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |  |        |           | 
|---- |  | ------ | --------- | 
|Year |  | Amount |          
|     |  |        |          
|2005 |  | $      | 1,235,000 | 
|2006 |  | $      | 962,000   | 
|2007 |  | $      | 576,000   | 
|2008 |  | $      | 295,000   | 
|2009 |  | $      | 258,000   | 



|   |                 
|-- | ----------------
|7. | Notes Receivable











|   |                
|-- | ---------------
|8. | Credit Facility



89



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |              
|-- | -------------
|9. | Notes Payable



|                                                                                                                                                                                                                                                                                                                                                                           |  |              |            |  |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- |  | ---- | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                                                           |  | December 31, |           
|                                                                                                                                                                                                                                                                                                                                                                           |  |              |           
|                                                                                                                                                                                                                                                                                                                                                                           |  | 2004         |            |  | 2003 |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |              |            |  |      |  
|Note payable to a mortgage company, secured by a deed of trust,
    rate per annum equal to an initial benchmark floor rate of 3%
    based on the 10-year Treasury note plus 2.25%. At
    December 31, 2004 and 2003, the interest rate was 5.25%.
    Matures in January 1, 2008. Equal principal and interest
    payments are payable monthly until repayment in full |  | $            | 4,285,000  |  |      | $ | 4,346,000  |  
|Note payable to a mortgage company, secured by a first deed of
    trust, interest at six-month LIBOR plus 2.15%. Principal and
    interest payable in monthly installments of $25,165                                                                                                                                                                                    |  |              |           |  |      |   | 4,904,000  |  
|Note payable to bank, secured by a first deed of trust, interest
    only through February 15, 2006 and thereafter, principal
    and interest payments through the maturity date of
    January 20, 2007 at the prime rate plus 1.07, subject to a
    floor of 5.5% per annum. The interest rate at December 31,
    2004 was 5.75% per anum                             |  |              | 15,000,000 |  |      |   |           |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |              |            |  |      |  
|                                                                                                                                                                                                                                                                                                                                                                           |  | $            | 19,285,000 |  |      | $ | 9,250,000  |  
|Less: notes payable secured by property held for sale(a)                                                                                                                                                                                                                                                                                                                   |  |              |           |  |      |   | (4,904,000 | )
|                                                                                                                                                                                                                                                                                                                                                                           |  |              |            |  |      |  
|                                                                                                                                                                                                                                                                                                                                                                           |  | $            | 19,285,000 |  |      | $ | 4,346,000  |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |              |            |  |      |  






|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On January 27, 2004, our board of directors approved the
    sale of Gateway Mall. Such property is classified as property
    held for sale at December 31, 2003 (See Note 14).



|           |  |        |            | 
|---------- |  | ------ | ---------- | 
|Year       |  | Amount |           
|           |  |        |           
|2005       |  | $      | 65,000     | 
|2006       |  |        | 266,000    | 
|2007       |  |        | 14,875,000 | 
|2008       |  |        | 4,079,000  | 
|2009       |  |        |           | 
|Thereafter |  |        |           | 
|           |  |        |           
|           |  | $      | 19,285,000 | 
|           |  |        |           





|    |                     
|--- | --------------------
|10. | Shareholders Equity



| |                      
| | ---------------------
| | Share Repurchase Plan



90



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |         
| | --------
| | Warrants











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





91



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                |                                                |           |         |         |                 |   |      |                  |  |   |      |      | 
|----------------------------------------------- | ---------------------------------------------- | --------- | ------- | ------- | --------------- | - | ---- | ---------------- |  | - | ---- | ---- | 
|                                                |                                                | Number    |         |         | Range of        |   |      | Weighted Average | 
|Options Outstanding at                          |                                                | of Shares |         |         | Exercise Prices |   |      | Exercise Price   | 
|                                                |                                                |           |         |         |                 |   |      |                  | 
|January 1, 2002 (30,000 options exercisable)    |                                                |           | 155,000 |         |                 | $ | 9.05 |                  |  | $ | 9.05 |     
|                                                | Granted (weighted average fair value of $1.01) |           |         | 10,000  |                 |   |      | 9.05             |  |   |      | 9.05 | 
|                                                |                                                |           |         |         |                 |   |      |                  | 
|December 31, 2003 (90,000 options exercisable)  |                                                |           | 165,000 |         |                 |   | 9.05 |                  |  |   | 9.05 |     
|                                                | Granted (weighted average fair value of $1.03) |           |         | 320,000 |                 |   |      | 9.05             |  |   |      | 9.05 | 
|                                                | Cancelled                                      |           |         | (60,000 | )               |   |      | 9.05             |  |   |      | 9.05 | 
|                                                |                                                |           |         |         |                 |   |      |                  | 
|December 31, 2004 (155,000 options exercisable) |                                                |           | 425,000 |         |                 | $ | 9.05 |                  |  | $ | 9.05 |     
|                                                |                                                |           |         |         |                 |   |      |                  | 



|                |  |             |         |           |              |  |         |                     |  |   |             |         |  |                     |         |  |  |   |      | 
|--------------- |  | ----------- | ------- | --------- | ------------ |  | ------- | ------------------- |  | - | ----------- | ------- |  | ------------------- | ------- |  |  | - | ---- | 
|                |  |             |         | Wtd Avg   |              |  |         |                     |  |   |            
|                |  |             |         | Remaining |              |  | Wtd Avg |                     |  |   |             | Wtd Avg | 
|Range of        |  | Number      |         |           | Contractual  |  |         | Exercise Price     |  |   | Number      |         |  | Exercise Price     |        
|Exercise Prices |  | Outstanding |         |           | Life (Years) |  |         | Outstanding Options |  |   | Exercisable |         |  | Exercisable Options |        
|                |  |             |         |           |              |  |         |                     |  |   |             |         |  |                     |        
|$9.05           |  |             | 425,000 |           |              |  | 8.6     |                     |  | $ | 9.05        |         |  |                     | 155,000 |  |  | $ | 9.05 | 





|    |                    
|--- | -------------------
|11. | Future Minimum Rent



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



|            |       |        |           |           | 
|----------- | ----- | ------ | --------- | --------- | 
|Year Ending |       | Amount |          
|            |       |        |          
|2005        |       | $      | 2,830,000 |          
|2006        |       |        | 2,263,000 |          
|2007        |       |        | 1,278,000 |          
|2008        |       |        | 558,000   |          
|2009        |       |        | 383,000   |          
|Thereafter  |       |        | 1,923,000 |          
|            |       |        |          
|            | Total |        | $         | 9,235,000 | 
|            |       |        |          

92



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                                   
|--- | --------------------------------------------------
|12. | Advisory Fees and Other Related Party Transactions



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







93



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | Property management fees





| |                        
| | -----------------------
| | Real estate commissions





| |                        
| | -----------------------
| | Incentive distributions





| |                                         
| | ----------------------------------------
| | Investment in unconsolidated real estate





| |                                         
| | ----------------------------------------
| | Accounts receivable from related parties





| |                                           
| | ------------------------------------------
| | Unconsolidated debt due to related parties







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pacific Corporate Park had $81,000 outstanding due to Cunningham
    at an interest rate of 12.0% per annum and is due one year from
    the origination. On February 3, 2005, February 11,
    2005, and March 18, 2005, Pacific Corporate Park issued
    promissory notes to Cunningham in the amounts of $130,000,
    $263,000, and $20,000, respectively. These notes bear interest
    at 12.0% per annum and have a one year maturity date.





| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | County Center Drive had $121,000, consisting of $109,000 in
    principal and $11,000 in interest, outstanding due to our
    Advisor. This note bears interest at 12.0% per annum and is due
    upon demand.

94



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 2004 Notes Program has made loans from time to time to
    certain of our properties. Terms of the 2004 Notes Program
    provide for interest payments at 11.0% per annum. In addition to
    interest, the 2004 Notes Program is entitled to the greater of a
    1% prepayment penalty or 20.0% of the profits upon sale of the
    property prorated for the amount of time the loan was
    outstanding. As of December 31, 2004, loans from the 2004
    Notes Program to Congress Center, which has been repaid and
    County Center Drive, which has an outstanding balance of $16,000
    consisting of $14,000 in principal and $2,000 in interest, may
    result in additional amounts due to the 2004 Notes Program upon
    the sale of these properties, depending on profits, if any, upon
    sale. We cannot reasonably estimate the additional amounts due,
    if any, to the 2004 Notes Program if and when the Congress
    Center and County Center Drive properties are sold.



|    |                              
|--- | -----------------------------
|13. | Commitments and Contingencies



| |                 
| | ----------------
| | Operating leases





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

In the matter of Triple Net Properties, LLC.






| |                         
| | ------------------------
| | Prior Performance Tables



95



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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









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





| |      
| | -----
| | Lease



96



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                    
| | -------------------
| | Investments at risk





| |                    
| | -------------------
| | Unconsolidated debt



|                            |  |            |      |               |                   |   |             |                 |               |   |                   |  |  |                 |             |  |  |   |            | 
|--------------------------- |  | ---------- | ---- | ------------- | ----------------- | - | ----------- | --------------- | ------------- | - | ----------------- |  |  | --------------- | ----------- |  |  | - | ---------- | 
|                            |  |            |      | Mortgage Debt |                   |   |             |                 | Mortgage Debt |   |                   | 
|                            |  | Ownership  |      |               | Balance as of     |   |             | T REIT Incs    |               |   | Balance as of     |  |  | T REIT Incs    |            
|Property                    |  | Percentage |      |               | December 31, 2004 |   |             | Portion of Debt |               |   | December 31, 2003 |  |  | Portion of Debt |            
|                            |  |            |      |               |                   |   |             |                 |               |   |                   |  |  |                 |            
|Reno Trademark              |  |            | 40.0 | %             |                   | $ | 4,504,000   |                 |               | $ | 1,802,000         |  |  | $               | 4,555,000   |  |  | $ | 1,822,000  | 
|County Center Drive         |  |            | 16.0 | %             |                   |   | 2,980,000   |                 |               |   | 477,000           |  |  |                 | 3,059,000   |  |  |   | 489,000    | 
|City Center West A Building |  |            | 89.1 | %             |                   |   | 12,484,000  |                 |               |   | 11,127,000        |  |  |                 | 12,688,000  |  |  |   | 11,308,000 | 
|Titan Building & Plaza      |  |            | 48.5 | %             |                   |   | 5,795,000   |                 |               |   | 2,811,000         |  |  |                 | 5,874,000   |  |  |   | 2,849,000  | 
|Pacific Corporate Park      |  |            | 22.8 | %             |                   |   | 5,474,000   |                 |               |   | 1,246,000         |  |  |                 | 5,684,000   |  |  |   | 1,294,000  | 
|Congress Center             |  |            | 10.3 | %             |                   |   | 97,500,000  |                 |               |   | 9,962,000         |  |  |                 | 96,989,000  |  |  |   | 9,909,000  | 
|Saddleback Financial        |  |            | 25.0 | %             |                   |   |            |                 |               |   |                  |  |  |                 | 7,439,000   |  |  |   | 1,860,000  | 
|Enclave Parkway             |  |            | 3.3  | %             |                   |   | 23,310,000  |                 |               |   | 759,000           |  |  |                 | 23,600,000  |  |  |   | 769,000    | 
|Oakey Building              |  |            | 9.8  | %             |                   |   | 4,000,000   |                 |               |   | 390,000           |  |  |                 |            |  |  |   |           | 
|Emerald Plaza               |  |            | 2.7  | %             |                   |   | 68,500,000  |                 |               |   | 1,850,000         |  |  |                 |            |  |  |   |           | 
|                            |  |            |      |               |                   |   |             |                 |               |   |                   |  |  |                 |            
|Total                       |  |            |      |               |                   | $ | 224,547,000 |                 |               | $ | 30,424,000        |  |  | $               | 159,888,000 |  |  | $ | 30,300,000 | 
|                            |  |            |      |               |                   |   |             |                 |               |   |                   |  |  |                 |            



97



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T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Note A is in the amount of $80,000,000 and bears interest
    at a fixed rate of 5.635% per annum. The borrower is
    required to make monthly interest only payments until the due
    date of October 1, 2014. No prepayments of principal are
    permitted until July 1, 2014.                                                                                                                                                          
|
| | Note B is in the amount of $15,000,000 and bears interest
    at a fixed rate of 5.635% per annum. The borrower is
    required to make monthly interest only payments until the due
    date of October 1, 2014. No prepayments of principal are
    permitted until July 1, 2014.                                                                                                                                                          
|
| | Note C is in the amount of $2,500,000 and bears interest at
    a fixed rate of 7.0% per annum. The borrower is required to
    make monthly interest only payments until October 1, 2006.
    Thereafter, the Property is required to make monthly principal
    and interest payments based on a 30-year amortization schedule
    until the due date of October 1, 2014. No prepayments of
    principal are permitted until July 1, 2014.

Unconsolidated debt due to related parties








| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pacific Corporate Park had $81,000 outstanding due to Cunningham
    at an interest rate of 12.0% per annum and is due one year from
    the origination. On February 3, 2005, February 11,
    2005, and March 18, 2005, Pacific Corporate Park issued
    promissory notes to Cunningham in the amounts of $130,000,
    $263,000, and $20,000, respectively. These notes bear interest
    at 12.0% per annum and have a one year maturity date.





| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | County Center Drive had $121,000, consisting of $109,000 in
    principal and $11,000 in interest, outstanding due to our
    Advisor. This note bears interest at 12.0% per annum and is due
    upon demand.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 2004 Notes Program has made loans from time to time to
    certain of our properties. Terms of the 2004 Notes Program
    provide for interest payments at 11.0% per annum. In addition to
    interest, the 2004 Notes Program is entitled to the greater of a
    1.0% prepayment penalty or 20.0% of the profits upon sale of the
    property prorated for the amount of time the loan was
    outstanding. As of December 31, 2004, loans from the 2004
    Notes Program to Congress Center, which has been repaid and
    County Center Drive, which has an outstanding balance of $16,000
    consisting of $14,000 in principal and $2,000 in interest, may
    result in additional amounts due to the 2004 Notes Program upon
    the sale of these properties, depending on profits, if any, upon
    sale. We cannot reasonably estimate the additional amounts due,
    if any, to the Notes Program if and when the Congress Center and
    County Center Drive properties are sold.

98



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





|    |                                                 
|--- | ------------------------------------------------
|14. | Discontinued Operations  Property Held for Sale





Accounting for the
Impairment or Disposal of Long-Lived Assets


|                                                                          |  |                          |         |  |      |   |           |      |  |   |           | 
|------------------------------------------------------------------------- |  | ------------------------ | ------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                                                                          |  | Years Ended December 31, |        
|                                                                          |  |                          |        
|                                                                          |  | 2004                     |         |  | 2003 |   |           | 2002 | 
|                                                                          |  |                          |         |  |      |   |           |      | 
|Rental income                                                             |  | $                        | 349,000 |  |      | $ | 4,207,000 |      |  | $ | 5,087,000 | 
|Rental expenses                                                           |  |                          | 80,000  |  |      |   | 1,565,000 |      |  |   | 1,311,000 | 
|Depreciation and amortization                                             |  |                          | 50,000  |  |      |   | 356,000   |      |  |   | 911,000   | 
|Interest expense (including amortization of deferred financing
    costs) |  |                          | 130,000 |  |      |   | 1,520,000 |      |  |   | 1,823,000 | 
|                                                                          |  |                          |         |  |      |   |           |      | 
|Income from discontinued operations  property held
    for sale, net     |  | $                        | 89,000  |  |      | $ | 766,000   |      |  | $ | 1,042,000 | 
|                                                                          |  |                          |         |  |      |   |           |      | 



|    |                               
|--- | ------------------------------
|15. | Tax Treatment of Distributions



|                  |  |                          |           |  |      |  |        |      |  |   |           |  |  |  |        |   |  |   |           |  |  |  |        |  
|----------------- |  | ------------------------ | --------- |  | ---- |  | ------ | ---- |  | - | --------- |  |  |  | ------ | - |  | - | --------- |  |  |  | ------ | -
|                  |  | Years Ended December 31, |          
|                  |  |                          |          
|                  |  | 2004                     |           |  | 2003 |  |        | 2002 | 
|                  |  |                          |           |  |      |  |        |      | 
|Ordinary income   |  | $                        | 930,000   |  |      |  | 24.43  | %    |  | $ | 332,000   |  |  |  | 8.64   | % |  | $ | 1,478,000 |  |  |  | 46.20  | %
|Capital gain      |  |                          | 2,877,000 |  |      |  | 75.57  | %    |  |   | 1,519,000 |  |  |  | 39.52  | % |  |   | 102,000   |  |  |  | 3.19   | %
|Return of capital |  |                          |          |  |      |  | 0.00   | %    |  |   | 1,993,000 |  |  |  | 51.85  | % |  |   | 1,619,000 |  |  |  | 50.61  | %
|                  |  |                          |           |  |      |  |        |      |  |   |           |  |  |  |        |   |  |  
|                  |  | $                        | 3,807,000 |  |      |  | 100.00 | %    |  | $ | 3,844,000 |  |  |  | 100.00 | % |  | $ | 3,199,000 |  |  |  | 100.00 | %
|                  |  |                          |           |  |      |  |        |      |  |   |           |  |  |  |        |   |  |  

99



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                    
|--- | -----------------------------------
|16. | Selected Quarterly Data (Unaudited)



|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |      |  |   |           |      | 
|------------------------------------------------------- | ------------------------------------------- | -------------- | --------- | ----- | ------------- | - | --------- | -------- |  | - | --------- | ---- |  | - | --------- | ---- | 
|                                                        |                                             | Quarters Ended |          
|                                                        |                                             |                |          
|                                                        |                                             | December 31,   |           |       | September 30, |   |           | June 30, |  |   | March 31, |     
|                                                        |                                             | 2004           |           |       | 2004          |   |           | 2004     |  |   | 2004      |     
|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |     
|Revenues                                                |                                             | $              | 1,481,000 |       |               | $ | 1,732,000 |          |  | $ | 1,515,000 |      |  | $ | 875,000   |     
|Expenses                                                |                                             |                | 2,053,000 |       |               |   | 1,498,000 |          |  |   | 2,008,000 |      |  |   | 721,000   |     
|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |     
|Equity in earnings (loss) of unconsolidated real estate |                                             |                | (102,000  | )     |               |   | 50,000    |          |  |   | 368,000   |      |  |   | 265,000   |     
|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |     
|Minority Interests                                      |                                             |                | (40,000   | )     |               |   | 26,000    |          |  |   | 104,000   |      |  |   | (5,000    | )   
|Income (loss) from continuing operations                |                                             |                | (714,000  | )     |               |   | 310,000   |          |  |   | (21,000   | )    |  |   | 414,000   |     
|Income (loss) from discontinued operations              |                                             |                | 858,000   |       |               |   | 783,000   |          |  |   | (13,000   | )    |  |   | 927,000   |     
|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |     
|Net income (loss)                                       |                                             | $              | 144,000   |       |               | $ | 1,093,000 |          |  | $ | (34,000   | )    |  | $ | 1,341,000 |     
|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |     
|                                                        | Earnings (loss) per share-basic and diluted |                |           |       |               |   |           |          |  |   |           |      |  |   |           |      | 
|                                                        | Continuing operations                       |                | $         | (0.16 | )             |   | $         | 0.07     |  |   | $         | 0.00 |  |   | $         | 0.08 | 
|                                                        | Discontinued operations                     |                | $         | 0.19  |               |   | $         | 0.17     |  |   | $         | 0.00 |  |   | $         | 0.20 | 
|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |     
|                                                        | Total net income (loss) per common share    |                | $         | 0.03  |               |   | $         | 0.24     |  |   | $         | 0.00 |  |   | $         | 0.28 | 
|                                                        |                                             |                |           |       |               |   |           |          |  |   |           |     

|                                                        |  |                |         |   |               |   |           |          |  |   |           |   |  |   |         | 
|------------------------------------------------------- |  | -------------- | ------- | - | ------------- | - | --------- | -------- |  | - | --------- | - |  | - | ------- | 
|                                                        |  | Quarters Ended |        
|                                                        |  |                |        
|                                                        |  | December 31,   |         |   | September 30, |   |           | June 30, |  |   | March 31, |  
|                                                        |  | 2003           |         |   | 2003          |   |           | 2003     |  |   | 2003      |  
|                                                        |  |                |         |   |               |   |           |          |  |   |           |  
|Revenues                                                |  | $              | 548,000 |   |               | $ | 65,000    |          |  | $ | 313,000   |   |  | $ | 258,000 | 
|Expenses                                                |  |                | 466,000 |   |               |   | 413,000   |          |  |   | 382,000   |   |  |   | 274,000 | 
|                                                        |  |                |         |   |               |   |           |          |  |   |           |  
|Equity in earnings (loss) of unconsolidated real estate |  |                | (71,000 | ) |               |   | 267,000   |          |  |   | 406,000   |   |  |   | 558,000 | 
|                                                        |  |                |         |   |               |   |           |          |  |   |           |  
|Income (loss) from continuing operations                |  |                | 11,000  |   |               |   | (81,000   | )        |  |   | 337,000   |   |  |   | 542,000 | 
|Income (loss) from discontinued operations              |  |                | 27,000  |   |               |   | 2,777,000 |          |  |   | 546,000   |   |  |   | 30,000  | 
|                                                        |  |                |         |   |               |   |           |          |  |   |           |  
|Net income (loss)                                       |  | $              | 38,000  |   |               | $ | 2,696,000 |          |  | $ | 883,000   |   |  | $ | 572,000 | 
|                                                        |  |                |         |   |               |   |           |          |  |   |           |  
|Earnings (loss) per share-basic and diluted             |  |                |         |   |               |   |           |          |  |   |           |   |  |   |         | 
|Continuing operations                                   |  | $              | 0.12    |   |               | $ | 0.07      |          |  | $ | (0.02     | ) |  | $ | 0.00    | 
|Discontinued operations                                 |  | $              | 0.01    |   |               | $ | 0.12      |          |  | $ | 0.59      |   |  | $ | 0.01    | 
|                                                        |  |                |         |   |               |   |           |          |  |   |           |  
|Total net income (loss) per common share                |  | $              | 0.13    |   |               | $ | 0.19      |          |  | $ | 0.57      |   |  | $ | 0.01    | 
|                                                        |  |                |         |   |               |   |           |          |  |   |           |  

100



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                     
|--- | --------------------
|17. | Business Combination









|    |                  
|--- | -----------------
|18. | Subsequent Events





101



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##### Table of Contents



T REIT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






102



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##### Table of Contents






SCHEDULE II


VALUATION AND QUALIFYING ACCOUNTS


|                                          |  |                                      |        |           |            |   |        |            |  |  |            |  |            |        |        |  |  |   |        | 
|----------------------------------------- |  | ------------------------------------ | ------ | --------- | ---------- | - | ------ | ---------- |  |  | ---------- |  | ---------- | ------ | ------ |  |  | - | ------ | 
|                                          |  | For the Year Ended December 31, 2004 |       
|                                          |  |                                      |       
|                                          |  |                                      |        | Additions |            |   |       
|                                          |  |                                      |        |           |            |   |       
|                                          |  | Balance at the                       |        |           | Charged to |   |        | Charged to |  |  |            |  | Balance at |       
|                                          |  | Beginning of the                     |        |           | Costs and  |   |        | Other      |  |  |            |  | End of the |       
|Description                               |  | Period                               |        |           | Expenses   |   |        | Accounts   |  |  | Deductions |  |            | Period |       
|                                          |  |                                      |        |           |            |   |        |            |  |  |            |  |            |        |       
|Reserve deducted from accounts receivable |  | $                                    | 41,000 |           |            | $ | 58,000 |            |  |  |            |  |            | $      | 41,000 |  |  | $ | 58,000 | 

|                                          |  |                                      |        |           |            |   |        |            |  |  |            |  |            |        |        |  |  |   |        | 
|----------------------------------------- |  | ------------------------------------ | ------ | --------- | ---------- | - | ------ | ---------- |  |  | ---------- |  | ---------- | ------ | ------ |  |  | - | ------ | 
|                                          |  | For the Year Ended December 31, 2003 |       
|                                          |  |                                      |       
|                                          |  |                                      |        | Additions |            |   |       
|                                          |  |                                      |        |           |            |   |       
|                                          |  | Balance at the                       |        |           | Charged to |   |        | Charged to |  |  |            |  | Balance at |       
|                                          |  | Beginning of the                     |        |           | Costs and  |   |        | Other      |  |  |            |  | End of the |       
|Description                               |  | Period                               |        |           | Expenses   |   |        | Accounts   |  |  | Deductions |  |            | Period |       
|                                          |  |                                      |        |           |            |   |        |            |  |  |            |  |            |        |       
|Reserve deducted from accounts receivable |  | $                                    | 68,000 |           |            | $ | 41,000 |            |  |  |            |  |            | $      | 68,000 |  |  | $ | 41,000 | 

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SCHEDULE III


T REIT, INC.


REAL ESTATE OPERATING PROPERTIES AND ACCUMULATED
DEPRECIATION


|                       |  |                          |            |               |                                                  |   |           |              |               |   |            |  |  |              |           |  |       |   |            |              |  |   |             |  |  |   |          |   |  |  |           | 
|---------------------- |  | ------------------------ | ---------- | ------------- | ------------------------------------------------ | - | --------- | ------------ | ------------- | - | ---------- |  |  | ------------ | --------- |  | ----- | - | ---------- | ------------ |  | - | ----------- |  |  | - | -------- | - |  |  | --------- | 
|                       |  | Initial Costs to Company |            |               | Gross Amount at Which Carried at Close of Period |  
|                       |  |                          |            |               |                                                  |  
|                       |  |                          |            | Buildings and |                                                  |   |           |              | Buildings and |   |            |  |  | Accumulated  |           |  | Date  |  
|                       |  | Encumbrances             |            |               | Land                                             |   |           | Improvements |               |   | Land       |  |  | Improvements |           |  | Total |   |            | Depreciation |  |   | Constructed | 
|                       |  |                          |            |               |                                                  |   |           |              |               |   |            |  |  |              |           |  |       |   |            |              |  |   |             | 
|University Heights, TX |  | $                        | 4,400,000  |               |                                                  | $ | 1,011,000 |              |               | $ | 5,725,000  |  |  | $            | 1,011,000 |  |       | $ | 5,837,000  |              |  | $ | 6,848,000   |  |  | $ | (394,000 | ) |  |  | 2000      | 
|AmberOaks, TX          |  |                          | 15,000,000 |               |                                                  |   | 3,474,000 |              |               |   | 19,688,000 |  |  |              | 5,306,000 |  |       |   | 12,600,000 |              |  |   | 17,906,000  |  |  |   | (486,000 | ) |  |  | 1999-2001 | 
|                       |  |                          |            |               |                                                  |   |           |              |               |   |            |  |  |              |           |  |       |   |            |              |  |   |             | 
|Total                  |  | $                        | 19,400,000 |               |                                                  | $ | 4,485,000 |              |               | $ | 25,413,000 |  |  | $            | 6,317,000 |  |       | $ | 18,437,000 |              |  | $ | 24,754,000  |  |  | $ | (880,000 | ) |  |  |           | 
|                       |  |                          |            |               |                                                  |   |           |              |               |   |            |  |  |              |           |  |       |   |            |              |  |   |             | 

|                       |  |               |  |                                      
|---------------------- |  | ------------- |  | -------------------------------------
|                       |  |               |  | Maximum Life on Which Depreciation in
|Description            |  | Date Acquired |  | Latest Income Statement is Computed  
|                       |  |               |  |                                      
|University Heights, TX |  | 2002          |  | 39                                   
|AmberOaks III, TX      |  | 2004          |  | 39                                   



|                             |  |      |             |  
|---------------------------- |  | ---- | ----------- | -
|                             |  | 2004 |            
|                             |  |      |            
|Balance at beginning of year |  | $    | 16,171,000  |  
|Acquisitions                 |  |      | 19,605,000  |  
|Dispositions                 |  |      | (11,022,000 | )
|                             |  |      |            
|Balance at end of year       |  | $    | 24,754,000  |  
|                             |  |      |            



| |     |                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------
| | (b) | The changes in accumulated depreciation for the year ended
    December 31, 2004 are as follows:

|                             |  |      |          |  
|---------------------------- |  | ---- | -------- | -
|                             |  | 2004 |         
|                             |  |      |         
|Balance at beginning of year |  | $    | 425,000  |  
|Additions                    |  |      | 691,000  |  
|Disposals                    |  |      | (236,000 | )
|                             |  |      |         
|Balance at end of year       |  | $    | 880,000  |  
|                             |  |      |         

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SIGNATURES






| |             
| | ------------
| | T-REIT, Inc.



| |     |                   
| | --- | ------------------
| | By: | /s/ Jack R. Maurer

| |                                     
| | ------------------------------------
| |                                     
| | Jack R. Maurer                      
| | Chief Executive Office and President
|
| | Date: April 1, 2005                 



|                                               |  |                                       |  |               |  | 
|---------------------------------------------- |  | ------------------------------------- |  | ------------- |  | 
|Name                                           |  | Title                                 |  | Date         
|                                               |  |                                       |  |              
|                                              
|/s/ Jack R. MaurerJack
    R. Maurer           |  | Chief Executive Officer and President |  | April 1, 2005
|                                              
|/s/ Scott D. PetersScott
    D. Peters         |  | Chief Financial Officer               |  | April 1, 2005
|                                              
|/s/ D. Fleet WallaceD.
    Fleet Wallace       |  | Director                              |  | April 1, 2005
|                                              
|/s/ W. Brand InlowW.
    Brand Inlow           |  | Director                              |  | April 1, 2005
|                                              
|/s/ Anthony W. ThompsonAnthony
    W. Thompson |  | Director                              |  | April 1, 2005
|                                              
|/s/ Kelly J. CaskeyKelly
    J. Caskey         |  | Chief Accounting Officer              |  | April 1, 2005

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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 our 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 |             | First Amendment to Advisory Agreement between the Company and
    our 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 | .7 |             | Operating Agreement of NNN Congress Center Member, LLC dated
    January 1, 2003 (included as Exhibit 10.15 to the Form
    8-K filed by the Company on January 24, 2003 and
    incorporated herein by reference).                                                                                                                           
|    
|     | 10 | .8 |             | Agreement for Purchase and Sale of Real Property and Escrow
    Instructions dated as of March 15, 2004 by and between T
    REIT  Gateway Mall ND Fee, LLC and VP Investments,
    L.L.C. (included as Exhibit 10.01 to the Form 8-K filed by
    the Company on March 29, 2004 and incorporated herein by
    reference).                  
|    
|     | 10 | .9 |             | First Amendment to Agreement for Purchase and Sale of Real
    Property and Escrow Instructions dated as of March 9, 2004
    by and between T REIT  Gateway Mall ND Fee, LLC and
    VP Investments, L.L.C. (included as Exhibit 10.02 to the
    Form 8-K filed by the Company on March 29, 2004 and
    incorporated herein by reference).
|    
|     | 14 | .1 |             | T REIT Code of Business Conduct and Ethics dated May 14,
    2004                                                                                                                                                                                                                                                                             
|    
|     | 23 | .1 |             | Consent of Deloitte & Touche, LLP                                                                                                                                                                                                                                                                                                             

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|     |    |    |             |                                                                                                                                                   
|---- | -- | -- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|Item |    |    |            
|No.  |    |    | Description
|     |    |    |            
|    
|     | 31 | .1 |             | Certification of Chief Executive Officer, pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                          
|    
|     | 31 | .2 |             | Certification of Chief Financial Officer, pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                          
|    
|     | 32 | .1 |             | Certification of Chief Executive Officer, pursuant to
    18 U.S.C. Section 1350, as created by Section 906
    of the Sarbanes-Oxley Act of 2002.
|    
|     | 32 | .2 |             | Certification of Chief Financial Officer, pursuant to
    18 U.S.C. Section 1350, as created by Section 906
    of the Sarbanes-Oxley Act of 2002 

107