TRANSCONTINENTAL REALTY INVESTORS INC, 10-K405, 1995-03-29

TRANSCONTINENTAL REALTY INVESTORS INC
10-K405, 1995-03-29
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1994

Commission File Number 0-13291

TRANSCONTINENTAL REALTY INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

10670 North Central Expressway, Suite 300, Dallas, Texas 75231
-------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

(214) 692-4700
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)

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

<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------------------ ----------------------------
<S> <C>
Common Stock, $.01 par value New York Stock Exchange
</TABLE>

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

NONE

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

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

As of March 17, 1995, the Registrant had 2,674,850 shares of Common Stock
outstanding. Of the total shares outstanding 1,779,178 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $26,687,670
based on the last trade as reported on the New York Stock Exchange on March 17,
1995. The basis of this calculation does not constitute a determination by the
Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.

1
<PAGE> 2
INDEX TO
ANNUAL REPORT ON FORM 10-K

PART I
------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Business............................................. 3

Item 2. Properties........................................... 7

Item 3. Legal Proceedings.................................... 23

Item 4. Submission of Matters to a Vote of Security
Holders........................................... 25

PART II
-------

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 26

Item 6. Selected Financial Data.............................. 28

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 29

Item 8. Financial Statements and Supplementary Data.......... 36

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 78

PART III
--------

Item 10. Directors, Executive Officers and Advisor of the
Registrant........................................ 78

Item 11. Executive Compensation............................... 91

Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 94

Item 13. Certain Relationships and Related Transactions....... 95

PART IV
-------

Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K................. 98

Signature Page................................................... 101
</TABLE>

2
<PAGE> 3
PART I

ITEM 1. BUSINESS

Transcontinental Realty Investors, Inc. (the "Company" or the "Registrant"), a
Nevada corporation, was formed December 20, 1991 and on March 24, 1992 merged
with and succeeded Transcontinental Realty Investors, Inc., a Delaware
corporation, which was formed May 24, 1990 and which on August 18, 1990, merged
with and succeeded Transcontinental Realty Investors, a California business
trust, which was organized on September 6, 1983. The Company has elected to be
treated as a Real Estate Investment Trust ("REIT") under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended. The Company has, in the
opinion of the Company's management, qualified for federal taxation as a REIT
for each year subsequent to December 31, 1982.

The Company's real estate at December 31, 1994 consisted of 40 properties held
for investment, nine partnership properties and seven properties held for sale
which were primarily obtained through foreclosure. Six of the properties held
for investment were acquired during 1994. The Company's mortgage notes
receivable portfolio at December 31, 1994 consisted of 38 mortgage loans.
Two of the mortgage loans were originated during 1994. In addition, the Company
has an interest in a partnership which holds two wraparound mortgage loans.
The Company's real estate and mortgage notes receivable portfolios are more
fully discussed in ITEM 2. "PROPERTIES."

Business Plan and Investment Policy

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

The Company's business is not seasonal. The Company has determined to pursue a
balanced investment policy, seeking both current income and capital
appreciation. With respect to new investments, the Company's plan of operation
is to consider all types of real estate, but in keeping with its current focus,
primarily commercial properties including office buildings, industrial
facilities and shopping centers. In making any new investments, emphasis will
be on acquiring properties generating current cash flow. As it has done in the
past, the Company will then invest in and improve these assets to maximize both
their immediate and longer term value.

The Company's operating strategy with regard to already owned properties is to
maximize each property's operating income by aggressive property management
through closely monitoring expenses while at the same time

3
<PAGE> 4
ITEM 1. BUSINESS (Continued)

Business Plan and Investment Policy (Continued)

making property renovations and/or improvements where appropriate. While such
expenditures increase the amount of revenue required to cover operating
expenses, the Company's management believes that such expenditures are
necessary to maintain or enhance the value of the Company's properties.

With respect to properties acquired through foreclosure and held for sale, the
Company intends to enhance the value of such properties through property
renovations and, if possible, to finance or refinance such properties and to
sell such properties to third parties, retaining an equity participation where
possible, as additional consideration for providing purchase money financing.
The Company's management is also seeking opportunities to sell other of its
properties to take advantage of mature and/or stabilized real estate markets.

The Company has determined that it will no longer seek to fund or acquire new
mortgage loans, other than those which it may originate in conjunction with
providing purchase money financing of a property sale. The Company does
intend, however, to service and hold for investment the mortgage notes
currently in its portfolio. The Company also intends to pursue its rights
vigorously with respect to mortgage notes that are in default. The Company's
Articles of Incorporation impose no limitations on the Company's investment
policy with respect to mortgage notes and do not prohibit the Company from
investing more than a specified percentage of its assets in any one mortgage
note.

The Company's Board of Directors currently intends to continue its policy of
prohibiting the Company from incurring aggregate secured and unsecured
indebtedness in excess of 300% of the Company's net asset value (defined as the
book value of all assets of the Company minus all of its liabilities); however,
the Board of Directors may alter such policy at any time.

Management of the Company

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

BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips served as a Director of the Company until December 31,
1992. Mr. Phillips also served as a director of BCM until December 22, 1989
and as Chief Executive Officer of BCM until

4
<PAGE> 5
ITEM 1. BUSINESS (Continued)

Management of the Company (Continued)

September 1, 1992. Mr. Phillips serves as a representative of his children's
trust which owns BCM and, in such capacity, has substantial contact with the
management of BCM and input with respect to its performance of advisory
services to the Company. BCM is more fully described in ITEM 10. "DIRECTORS,
EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor."

BCM has been providing advisory services to the Company since March 28, 1989.
Renewal of BCM's advisory agreement with the Company was approved by the
Company's stockholders at the Company's annual meeting of stockholders held on
March 7, 1995. BCM also serves as advisor to Continental Mortgage and Equity
Trust ("CMET") and Income Opportunity Realty Trust ("IORT"). The Directors of
the Company are also trustees of CMET and IORT and the officers of the Company
are also officers of CMET and IORT. Mr. Phillips is a general partner of
Syntek Asset Management, L.P. ("SAMLP"), the general partner of National
Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating
partnership of NRLP. BCM performs certain administrative functions for NRLP
and NOLP on a cost-reimbursement basis. BCM also serves as advisor to American
Realty Trust, Inc. ("ART"). Mr. Phillips served as Chairman of the Board and
as a director of ART until November 16, 1992. Oscar W. Cashwell, President of
the Company, also serves as President of BCM, CMET and IORT, as a director of
ART and as the President and a director of Syntek Asset Management, Inc.
("SAMI"), which is the managing general partner of SAMLP. The officers of the
Company, other than Mr. Cashwell, are also officers of ART. As of March 17,
1995, the Company owned approximately 22% of IORT's shares of beneficial
interest and ART owned approximately 26% of the outstanding shares of the
Company's Common Stock and approximately 22% of IORT's outstanding shares of
beneficial interest.

Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. Currently, Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides such property management services. Carmel, Ltd. subcontracts
with other entities for the provision of the property-level management services
to the Company. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr.
Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the
benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of 26 of the Company's commercial
properties and the commercial properties owned by a real estate partnership in
which the Company and IORT are partners to Carmel Realty, Inc. ("Carmel
Realty"), which is a company owned by SWI. Carmel Realty is entitled to
receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with
Carmel, Ltd.

Carmel Realty is also entitled to receive real estate brokerage commissions in
accordance with the terms of a non- exclusive brokerage agreement as discussed
in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The
Advisor."

5
<PAGE> 6
ITEM 1. BUSINESS (Continued)

Management of the Company (Continued)

The Company has no employees. Employees of the Advisor render services to the
Company.

Competition

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

To the extent that the Company seeks to sell any of its properties, the sales
prices for such properties may be affected by competition from other real
estate entities also attempting to sell their properties and governmental
agencies and financial institutions whose assets are located in areas in which
the Company's properties are located, and are seeking to liquidate foreclosed
properties.

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

In addition, as also described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships," the Company also

6
<PAGE> 7
ITEM 1. BUSINESS (Continued)

Competition (Continued)

competes with other entities which are affiliates of the Advisor and which may
have investment objectives similar to the Company's and that may compete with
the Company in purchasing, selling, leasing and financing real estate and real
estate related investments. In resolving any potential conflicts of interest
which may arise, the Advisor has informed the Company that it intends to
continue to exercise its best judgment as to what is fair and reasonable under
the circumstances in accordance with applicable law.

Certain Factors Associated with Real Estate and Related Investments

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

ITEM 2. PROPERTIES

The Company's principal offices are located at 10670 North Central Expressway,
Suite 300, Dallas, Texas 75231. In the opinion of the Company's management,
the Company's offices are suitable and adequate for its present operations.

Details of the Company's real estate and mortgage notes receivable portfolios
at December 31, 1994, are set forth in Schedules III and IV, respectively, to
the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA." The discussions set forth below under the headings
"Real Estate" and "Mortgage Loans" provide certain summary information
concerning the Company's real estate and mortgage notes receivable portfolios.

The Company's real estate portfolio consists of properties held for investment,
investments in real estate entities and properties held for sale, primarily
obtained through foreclosure of the collateral securing mortgage notes
receivable. The discussion set forth below under the heading "Real Estate"
provides certain summary information concerning

7
<PAGE> 8
ITEM 2. PROPERTIES (Continued)

the Company's real estate and further summary information with respect to the
Company's properties held for investment, properties held for sale and
investments in real estate entities.

At December 31, 1994, none of the Company's properties, mortgage notes
receivable or investments in real estate entities exceeded 10% or more of the
Company's total assets. At December 31, 1994, 86% of the Company's assets
consisted of properties held for investment, 3% consisted of properties held
for sale, 5% consisted of mortgage notes and interest receivable and 3%
consisted of investments in real estate entities. The remaining 3% of the
Company's assets at December 31, 1994 were invested in cash, cash equivalents
and other assets. It should be noted, however, that the percentage of the
Company's assets invested in any one category is subject to change and no
assurance can be given that the composition of the Company's assets in the
future will approximate the percentages listed above.

The Company's real estate is geographically diverse. At December 31, 1994,
the Company held investments in apartments and commercial properties in each of
the geographic regions of the continental United States, although its
apartments and commercial properties are concentrated in the Southeast and
Southwest, as shown more specifically in the table under "Real Estate" below.
At December 31, 1994, the Company held mortgage notes receivable secured by
real estate located in each of the geographic regions, other than the Mountain
and Pacific regions, of the continental United States, with a concentration in
the Southeast, as shown more specifically in the table under "Mortgage Loans"
below.

To continue to qualify for federal taxation as a REIT under the Internal
Revenue Code of 1986, as amended, the Company is required, among other things,
to hold at least 75% of the value of its total assets in real estate assets,
government securities, cash and cash equivalents at the close of each quarter
of each taxable year.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

8
<PAGE> 9
ITEM 2. PROPERTIES (Continued)

Geographic Regions

The Company has divided the continental United States into the following six
geographic regions.

Northeast region comprised of the states of Connecticut, Delaware,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia. The Company owns 1
apartment and 1 commercial property in this region.

Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. This
Company owns 3 apartments and 10 commercial properties in this region.

Southwest region comprised of the states of Arizona, Arkansas, Louisiana,
New Mexico, Oklahoma and Texas. The Company owns 5 apartments and 11
commercial properties in this region.

Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, West Virginia and Wisconsin. The Company owns 1 apartment
and 3 commercial properties in this region.

Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Company owns 1 commercial property in this
region.

Pacific region comprised of the states of California, Oregon and
Washington. The Company owns 1 apartment, 1 hotel and 3 commercial
properties in this region.

Excluded from the above are six parcels of unimproved land as described below.

Real Estate

At December 31, 1994, over ninety percent of the Company's assets were invested
in real estate. The Company invests in real estate located throughout the
continental United States, either on a leveraged or nonleveraged basis. The
Company's real estate portfolio consists of properties held for investment,
investments in real estate entities and properties held for sale (which were
primarily obtained through foreclosure of the collateral securing mortgage
notes receivable).

Types of Real Estate Investments. The Company's real estate consists of
commercial properties (office buildings, industrial facilities and shopping
centers) and apartments or similar properties having established
income-producing capabilities. In selecting new real estate investments, the
location, age and type of property, gross rentals, lease terms, financial and
business standing of tenants, operating

9
<PAGE> 10
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

expenses, fixed charges, land values and physical condition are among the
factors considered. The Company may acquire properties subject to or assume
existing debt and may mortgage, pledge or otherwise obtain financing for its
properties. The Company's Board of Directors may alter the types of and
criteria for selecting new real estate investments and for obtaining financing
without a vote of stockholders.

Although the Company has typically invested in developed real estate, and has
no current intentions to do otherwise, the Company may also invest in new
construction or development either directly or in partnership with
nonaffiliated parties or affiliates (subject to approval by the Company's Board
of Directors). To the extent that the Company invests in construction and
development projects, the Company would be subject to business risks, such as
cost overruns and construction delays, associated with such higher risk
projects.

At December 31, 1994, the Company had no properties on which significant
capital improvements were in process.

In the opinion of the Company's management, the properties owned by the Company
are adequately covered by insurance.

The following table sets forth the percentages, by property type and geographic
region of the Company's real estate (other than a hotel in the Pacific region
and land included in "Properties Held for Sale") at December 31, 1994.

<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
--------- ---------- ----------
<S> <C> <C>
Pacific......................... 3% 7%
Midwest......................... 6 8
Northeast....................... 13 2
Southwest....................... 43 48
Southeast....................... 35 33
Mountain........................ - 2
------- -------
100% 100%
</TABLE>

The foregoing table is based solely on the number of apartment units and amount
of commercial square footage owned by the Company and does not reflect the
value of the Company's investment in each region. See Schedule III to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for a more detailed description of the Company's real
estate portfolio.

A summary of activity in the Company's owned real estate portfolio during 1994
is as follows:

<TABLE>
<S> <C>
Owned properties at January 1, 1994...................... 43
Properties acquired through purchase..................... 6
Properties sold.......................................... (2)
---
Owned properties at December 31, 1994.................... 47
===
</TABLE>

10
<PAGE> 11

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Properties Held for Investment. Set forth below are the Company's properties
held for investment and the monthly rental rate for apartments and the average
annual rental rate for commercial properties and occupancy thereof at December
31, 1994 and 1993:

<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/ -------------- ----------------
Property Location Square Footage 1994 1993 1994 1993
------------------------ -------------------- ---------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Apartments
----------
Fountain Village Tucson, AZ 410 Units/
363,079 Sq. Ft. $.64 $ .60 95% 97%
Harper's Ferry Lafayette, LA 122 Units/
112,500 Sq. Ft. .44 .41 97% 95%
Heritage Tulsa, OK 136 Units/
92,464 Sq. Ft. .60 .56 93% 96%
Monterey Bay St. Petersburg, FL 368 Units/
310,494 Sq. Ft. .52 .51 89% 88%
Park Forest Dearborn Heights, MI 144 Units/
124,992 Sq. Ft. .73 .66 97% 92%
South Cochran Los Angeles, CA 64 Units/
43,100 Sq. Ft. .93 .93 96% 94%
Spa Cove Annapolis, MD 303 Units/
305,989 Sq. Ft. .74 .74 96% 97%
Summerchase Norcross, GA 240 Units/
255,520 Sq. Ft. .64 .61 94% 96%
Summerfield Orlando, FL 224 Units/
203,940 Sq. Ft. .54 * 82% *
Summerstone Houston, TX 242 Units/
188,734 Sq. Ft. .57 .39 95% 85%
Woodland Hills San Antonio, TX 96 Units/
57,800 Sq. Ft. .59 .54 97% 91%
Industrial Facilities
---------------------
Corporate Center at
Beaumeade I, II & III Ashburn, VA 178,492 Sq. Ft. 5.96 * 71% *
Denton Drive Dallas, TX 123,800 Sq. Ft. 1.34 1.34 100% 100%
Parke Long Chantilly, VA 222,197 Sq. Ft. 5.55 * 71% *
Technology Trading
Center Sterling, VA 199,582 Sq. Ft. 4.69 3.29 74% 74%
Texstar Arlington, TX 97,846 Sq. Ft. 1.86 1.86 100% 100%
Tricon Warehouses Atlanta, GA 570,808 Sq. Ft. 3.17 2.84 92% 87%

Office Buildings
----------------
74 New Montgomery San Francisco, CA 114,952 Sq. Ft. 14.59 15.09 53% 27%
Chesapeake Ridge San Diego, CA 100,484 Sq. Ft. 12.84 12.48 100% 68%
Corporate Pointe at
Westfields Chantilly, VA 65,918 Sq. Ft. 12.74 * 81% *
Forum Richmond, VA 80,941 Sq. Ft. 11.46 12.73 86% 75%
Hartford Dallas, TX 174,727 Sq. Ft. 9.64 * 56% *
Institute Place Lofts Chicago, IL 142,215 Sq. Ft. 12.49 12.25 70% 70%
Latham Square Oakland, CA 125,948 Sq. Ft. 9.18 9.14 77% 86%
North Central Plaza
One Dallas, TX 198,061 Sq. Ft. 10.12 * 94% *
One Steeplechase Sterling, VA 103,376 Sq. Ft. 13.91 13.50 100% 100%
Plaza St. Petersburg, FL 188,218 Sq. Ft. 11.85 11.70 75% 58%
Republic Towers I,
II & III Dallas, TX 1,324,624 Sq. Ft. 8.84 10.50 17% 13%
Town and Country Houston, TX 64,089 Sq. Ft. 3.69 3.78 76% 76%
Venture Center Atlanta, GA 38,271 Sq. Ft. 11.65 11.29 100% 86%
Waterstreet Boulder, CO 106,211 Sq. Ft. 14.30 14.26 98% 90%
</TABLE>

11
<PAGE> 12
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)
<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
--------------- --------------
Property Location Square Footage 1994 1993 1994 1993
------------------------ -------------------- ---------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Shopping Centers
----------------
Dunes Plaza Michigan City, IN 223,938 Sq. Ft. $ 4.31 $ 4.05 77% 87%
Fiesta Mart San Angelo, TX 29,000 Sq. Ft. 2.62 2.58 100% 100%
Heritage Tulsa, OK 16,446 Sq. Ft. 6.84 6.29 93% 83%
Northtown Mall Dallas, TX 354,174 Sq. Ft. 3.07 3.05 83% 85%
Parkway Center Dallas, TX 28,228 Sq. Ft. 11.09 10.91 95% 84%
President's Square San Antonio, TX 46,509 Sq. Ft. 6.99 6.79 89% 71%
Sadler Square Amelia Island, FL 73,396 Sq. Ft. 5.90 5.89 96% 96%
Shaw Plaza Sharon, MA 103,482 Sq. Ft. 5.80 5.69 85% 88%
Sheboygan Sheboygan, WI 74,532 Sq. Ft. 1.99 1.99 100% 100%

---------------------------------
</TABLE>

* Property was acquired in 1994.

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

In January 1994, the mortgage secured by the Northtown Mall, a shopping center
in Dallas, Texas, matured. In February 1994, the Company reached an agreement
with the lender to modify and extend the mortgage, with the Company making a
principal paydown of $200,000. The modified mortgage required an additional
principal payment of $200,000 in July 1994 which the Company did not make until
October 1994, when the Company repaid the loan in full from the proceeds of the
new financing described below.

In March 1994, the Company borrowed $1.4 million from a Northtown Mall tenant,
secured by a second lien on the shopping center. The loan proceeds were used
primarily for specified renovations and repairs to the shopping center. The
second lien mortgage bore interest at 8.5% per annum, required monthly payments
of interest only and matured in March 1999. In October 1994, the tenant loaned
the Company an additional $1.9 million, the proceeds of which were used in part
to repay the first mortgage secured by the property described above. At
funding of the second loan, the two loans were combined into a new first
mortgage. The new first mortgage, in the amount of $3.3 million, bears
interest at 12% per annum, requires monthly payments of interest only of
$32,500 and matures October 31, 1995.

In April 1994, the Company purchased the Corporate Center at Beaumeade I and
II, a two building, 99,083 square foot industrial facility in Ashburn,
Virginia, for $3.3 million, consisting of $600,000 in cash and new mortgage
financing of $2.7 million. The mortgage bears interest at 9.28% per annum,
requires monthly payments of principal and interest of $22,132 and matures on
April 30, 1999. The Company paid a real estate brokerage commission of
$119,000 to Carmel Realty and an acquisition fee of $33,000 to BCM based on the
$3.3 million purchase price. In October 1994, the Company purchased the third
building in the center, a 79,409 square foot industrial facility for $2.7
million, consisting of $600,000 in cash and new mortgage financing of $2.1
million. The mortgage bears interest at 10.09% per annum, requires monthly
payments of principal and

12
<PAGE> 13
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

interest of $19,693 and matures on September 30, 1999. The Company paid a real
estate brokerage commission of $100,000 to Carmel Realty and an acquisition fee
of $27,000 to BCM based on the $2.7 million purchase price.

Also in April 1994, the Company refinanced the mortgage debt secured by the
Heritage Apartments in Tulsa, Oklahoma, in the amount of $2.1 million. The
Company received net cash of $1.2 million after the payoff of $650,000 in
existing mortgage debt that was scheduled to mature in December 1994. The
remainder of the refinancing proceeds were used to fund required repair and tax
escrows and the payment of various closing costs associated with the
refinancing. The new mortgage bears interest at 9.25% per annum, requires
monthly payments of principal and interest of $16,978 and matures May 1, 2001.
The Company paid a mortgage brokerage and equity refinancing fee of $21,000 to
BCM based on the $2.1 million refinancing.

In June 1994, the Company purchased the Parke Long Industrial Buildings, a four
building, 222,197 square foot office/industrial facility in Chantilly,
Virginia, for $8.8 million, consisting of $900,000 in cash and $7.9 million in
seller provided mortgage financing. The mortgage bears interest at 6.0% per
annum in the first two years, increasing to 7.0% per annum in the third year,
8.0% per annum in the fifth year and 9.0% in the ninth year. The mortgage
requires monthly payments of interest only in the first two years and monthly
payments of principal and interest thereafter, and matures in June 2006. The
Company paid a real estate brokerage commission of $246,000 to Carmel Realty
and an acquisition fee of $88,000 to BCM, based on the $8.8 million purchase
price.

In July 1994, the Company refinanced the mortgage debt secured by the
Waterstreet Office Building in Boulder, Colorado in the amount of $8.6 million.
The Company received net cash of $1.4 million after the payoff of $6.8 million
in existing mortgage debt that was scheduled to mature in December 1996. The
remainder of the refinancing proceeds were used to fund required tenant
improvement escrows and the payment of various closing costs associated with
the refinancing. The new mortgage bears interest at 9.99% per annum, requires
monthly payments of principal and interest of $82,935 and matures July 31,
1999. The Company guaranteed repayment of the new mortgage. The Company
paid a mortgage brokerage and equity refinancing fee of $86,000 to BCM based on
the $8.6 million refinancing.

In September 1994, the Company obtained mortgage financing of $1.0 million
secured by the previously unencumbered South Cochran Apartments in Los Angeles,
California. The mortgage bears interest at a variable rate of 4.5% above the
Eleventh District monthly weighted average cost of funds, currently 10% per
annum, requires monthly payments of principal and interest and matures October
1, 2004. The Company guaranteed repayment of the mortgage. The Company paid
a mortgage brokerage and equity refinancing fee of $10,000 to BCM based on the
$1.0 million financing.

13
<PAGE> 14
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Also in September 1994, the Company sold the Cedar Creek Apartments, a 260 unit
apartment complex in Charlotte, North Carolina, for $10.1 million, receiving
net cash of $2.2 million after paying off of the first mortgage of $7.7 million
and funding a $250,000 escrow for correction of a zoning infraction, which was
released to the Company in December 1994. The Company recognized a gain on the
sale of $2.2 million. The Company paid a real estate sales commission of
$272,000 to Carmel Realty based on the $10.1 million sales price.

In October 1994, the Company purchased Corporate Pointe at Westfields, a 65,918
square foot office building located in Chantilly, Virginia for $4.0 million,
consisting of $1.0 million in cash and new mortgage financing of $3.0 million.
The mortgage bears interest at 10.09% per annum, requires monthly payments of
principal and interest of $29,052 and matures September 30, 1999. The Company
guaranteed 10% of the mortgage's principal balance. The Company paid a real
estate brokerage commission of $139,000 to Carmel Realty and an acquisition fee
of $40,000 to BCM based on the $4.0 million purchase price. Concurrently, the
Company also purchased from an affiliate of the seller the third of the
Corporate Center at Beaumeade industrial facilities, as described above.

In November 1994, the Company purchased the Summerfield Apartments, a 224 unit
apartment complex in Orlando, Florida, for $5.6 million, consisting of $800,000
in cash and assumption of existing mortgage debt of $4.8 million. The mortgage
bears interest at a variable rate based on the London Interbank Offered Rate
("LIBOR") six month rate plus 4.10%, with a ceiling of 10.25% currently 10.25%
per annum, requires monthly payments of principal and interest of $43,240 and
matures March 1, 2024. The Company paid a real estate brokerage commission of
$182,000 to Carmel Realty and an acquisition fee of $56,000 to BCM based on the
$5.6 million purchase price.

Also in November 1994, the Company purchased the Hartford Building, a 174,727
square foot office building in Dallas, Texas, for $3.0 million, consisting of
$700,000 in cash and seller provided mortgage financing of $2.3 million. The
mortgage bears interest at 7% per annum in the first year, increasing to 8% per
annum in the second year and 9% per annum thereafter. The mortgage requires
monthly payments of principal and interest and matures December 31, 1999. The
Company guaranteed repayment of the first $450,000 of the mortgage. The
Company paid a real estate brokerage commission of $110,000 to Carmel Realty
and an acquisition fee of $30,000 to BCM, based on the $3.0 million purchase
price.

14
<PAGE> 15
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

lender may call the note on each of February 1, 1998, 2003, 2008 or 2013 upon
giving notice to the Company on or before July 1 of the preceding year. The
Company paid a real estate brokerage commission of $306,000 to Carmel Realty
and an acquisition fee of $124,000 to BCM based on the $12.4 million purchase
price.

The Company is the sole limited partner of the partnership with a 97.5% limited
partner interest. The general partner of the partnership, with a 2.5% general
partner interest, is Ensearch Holding Company, a corporation controlled by an
adult son of A. Bob Jordan, a Director of the Company until March 7, 1995. The
Company has the option to acquire such general partner interest at any time for
one dollar upon obtaining the consent of the lender and a release from the
lender of the general partner's loan guarantee. The Company intends to
exercise such option. The Partnership is consolidated for financial statement
purposes.

Also in December 1994, the Company obtained mortgage financing of $1.8 million
secured by the previously unencumbered Harper's Ferry Apartments in Lafayette,
Louisiana. The mortgage bears interest at 10.5625% per annum, requires monthly
payments of principal and interest of $16,900 and matures December 1, 2001.
The Company paid a mortgage brokerage and equity refinancing fee of $18,400 to
BCM based on the $1.8 million financing.

The Company owns Institute Place Lofts, a 142,215 square foot office building
in Chicago, Illinois. The Company did not payoff the $6.3 million mortgage
secured by the property on its June 1, 1993 maturity, as the Company determined
further investment in the property could not be justified without a substantial
modification of the mortgage. For the six months ended June 30, 1994, the
property's cash flow of $358,176 was remitted to the lender all of which was
applied to unpaid real estate taxes. In July 1994, the property was placed in
bankruptcy. In January 1995, the Bankruptcy Court approved a plan of
reorganization which provides for a reduction in the mortgage's principal
balance to $4.1 million, reduces the pay rate to 6% per annum in the first
year, increasing to 10.25% per annum in the fourth year, with interest accruing
at 10.25% per annum. In February 1995, the Company funded required escrows of
$500,000 to satisfy outstanding real estate taxes and to cover projected
negative cash flow of the property. The Company recorded no gain or loss as a
result of the debt restructuring.

In March 1995, the Company refinanced the mortgage debt secured by the Fountain
Village Apartments in Tucson, Arizona, in the amount of $6.2 million. The
Company received net cash of $1.1 million after the payoff of $4.9 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund required repair and tax escrows and the payment of various closing costs
associated with the refinancing. The new mortgage bears interest at a variable
rate of 2.75% above the average yield of United States Treasury Securities,
currently 6.375%, requires monthly payments of principal and interest and
matures April 1, 1998. The Company guaranteed payment of $1.3 million

15
<PAGE> 16
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

of the mortgage. The Company paid a mortgage brokerage and equity refinancing
fee of $62,000 to BCM based on the $6.2 million refinancing.

Partnership Properties. Set forth below are the properties owned by
partnerships which the Company accounts for using the equity method and the
monthly rental rate for apartments and the average annual rental rate for
commercial properties and occupancy thereof at December 31, 1994 and 1993:

<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy
Units/ -------------- --------------
Property Location Square Footage 1994 1993 1994 1993
------------------------ -------------------- ---------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Apartments
----------
Inwood Green Houston, TX 126 Units/
105,960 Sq. Ft. $.43 $.42 91% 94%
Lincoln Court Dallas, TX 55 Units/
40,063 Sq. Ft. .94 .94 98% 95%
Oaks of Inwood Houston, TX 198 Units/
167,872 Sq. Ft. .43 .41 90% 87%
Shadow Run Pinellas Park, FL 276 Units/
216,400 Sq. Ft. .68 .67 99% 97%
Twinbrook Village Rockville, MD 162 Units/
146,460 Sq. Ft. .91 .91 94% 91%
Westgate of Laurel Laurel, MD 218 Units/
201,704 Sq. Ft. .79 .79 94% 93%

Office Building
---------------
MacArthur Mills Carrollton, TX 53,472 Sq. Ft. 6.99 9.04 88% 99%

Shopping Centers
----------------
Chelsea Square Houston, TX 70,275 Sq. Ft. 8.67 8.38 78% 69%
Summit at Bridgewood Fort Worth, TX 48,696 Sq. Ft. 8.92 9.93 62% 68%
</TABLE>

The Company owns a combined 63.7% limited and general partner interest and IORT
owns a 36.3% general partner interest in Tri-City Limited Partnership
("Tri-City") which owns five properties in Texas: Chelsea Square, a shopping
center in Houston, Texas; Summit at Bridgewood, a shopping center in Fort
Worth, Texas; MacArthur Mills, an office building in Carrollton, Texas; and two
apartment complexes, Oaks of Inwood and Inwood Green, both in Houston, Texas.
None of the five properties are subject to mortgage debt. In 1994, the Company
received distributions of $446,000 from the partnership. See ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Related Party Transactions."

16
<PAGE> 17
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

by the general partner. In January 1992, the partnership stopped making
payments on the first mortgage secured by the One East Penn Square Office
Building in Philadelphia, Pennsylvania. An affiliate of the lender owned the
remaining 45% limited partner interest. In May 1993, the lender filed a
foreclosure action against One Penn Square. On October 6, 1993, the court
appointed a receiver for the property. The lender also filed an action against
the partnership and the Company to set aside, as a fraudulent conveyance,
payments from the partnership to the Company in 1992 and in 1993 of $1.8
million made to repay the Company's mortgage note secured by a second lien on
the One East Penn Square Office Building. In April 1994, the Company and the
lender reached an agreement which provided that the Company pay $575,000 to the
lender and convey the Company's interest in the partnership to the lender. In
August 1994, the Company made the required $575,000 payment, conveyed its
partnership interest to the lender and the parties executed mutual releases and
all litigation between the parties was dismissed. The Company recognized an
extraordinary gain of $1.2 million as the carrying value of its investment in
the partnership was less than the debt secured by the One Penn Square Office
Building due to previously recognized equity losses.

In March 1994, the Company sold its 50% general partner interests in Pilgrim
Village Associates and Pilgrim Village Associates II to the co-general partner
for $2.6 million in cash. The partnerships owned the Pilgrim Village
Apartments I and II, respectively, in Canton Township, Michigan. The Company
recognized a gain of $2.5 million on the sale.

Effective January 1, 1995, the other 50% general partners in both Twinbrook
Village Associates, which owns Twinbrook Village Apartments in Rockville,
Maryland, and Gate Laurel Associates, which owns the Westgate of Laurel
Apartments in Laurel, Maryland, conveyed their interests in the partnerships to
the Company in exchange for a release from their general partner liability.

In January 1995, the Company refinanced the mortgage debt secured by the Shadow
Run Apartments, an apartment complex located in Pinellas Park, Florida. The
new first mortgage of $7.2 million bears interest at 10.21% per annum, requires
monthly payments of principal and interest of $64,305 and matures February 1,
2002. The Company used the refinancing proceeds and $300,000 of its cash
reserves to pay the existing mortgage of $7.0 million, accrued but unpaid
interest, financing fees and real estate taxes. The Company paid a mortgage
brokerage and equity refinancing fee of $72,000 to BCM based on the $7.2
million refinancing. The Company has agreed to purchase the remaining general
partner interest in Shadow Run Associates, which owns the Shadow Run
Apartments, for $50,000 in cash. The purchase is expected to close in April
1995.

17
<PAGE> 18
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

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

<TABLE>
<CAPTION>
Property Location Rooms/Acres
---------------------- ------------------------ ------------------
<S> <C> <C>
Hotel
-----
Majestic Inn San Francisco, CA 60 Rooms
Land
----
Byron Greensboro, NC 522 Acres
Cheyenne Colorado Springs, CO 7 Acres
Dunes Michigan City, IN 14.1 Acres
Fruitland Fruitland Park, FL 4.66 Acres

Maumelle Maumelle, AR 70 Lots
Moss Creek Greensboro, NC 257 Acres
</TABLE>

In February 1994, the Company sold 1,406 acres of land in sixteen residential
and commercial subdivisions in Maumelle, Arkansas, for $8.4 million, retaining
114 residential lots. The Company received $1.7 million in cash and provided
purchase money financing of $6.7 million, as discussed in "Mortgage Loans,"
below. The Company has recorded this transaction as a cost recovery method
sale and accordingly has deferred recognizing a gain on the sale pending
collection of the note receivable. The Company paid a real estate brokerage
commission of $215,000 to Carmel Realty based on $7.2 million, the sales price
of $8.4 million less allowable early payment discounts of $1.2 million.
Through December 1994, the Company sold or otherwise disposed of 44 of the
retained lots for a total of $101,000 in cash recognizing no gain or loss.

In June 1994, the Company sold the RCA Building, a vacant 100,800 square foot
office building in Mt. Laurel, New Jersey, for $100,000. The Company provided
purchase money financing for the entire sales price. The Company also received
an equity participation in any subsequent appreciation of the building. The
Company incurred no loss on the sale beyond the amounts which had been
previously provided. See "Mortgage Loans" below.

Mortgage Loans

In addition to investments in real estate, a substantial portion of the
Company's assets are invested in mortgage notes receivable, principally secured
by income-producing real estate. The Company expects that the percentage of
its assets invested in mortgage notes will decrease, as it has determined that
it will no longer seek to fund or acquire new mortgage loans, other than those
which it may originate in conjunction with providing purchase money financing
of a property sale. The Company does intend, however, to service and hold for
investment the mortgage notes currently in its portfolio. The Company's
mortgage notes receivable consist of first, wraparound and junior mortgage
loans.

Types of Mortgage Activity. In the past the Company has originated its own
mortgage loans, as well as acquired existing mortgage notes either directly
from builders, developers or property owners, or through mortgage banking
firms, commercial banks or other qualified brokers. The Company is not
considering new mortgage lending, except in connection with purchase money
financing offered to facilitate the sale

18
<PAGE> 19
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

of Company owned properties. BCM, in its capacity as a mortgage servicer,
services the Company's mortgage notes. The Company's investment policy is
described in ITEM 1. "BUSINESS - Business Plan and Investment Policy."

Types of Properties Securing Mortgage Notes. The properties securing the
Company's mortgage notes receivable portfolio at December 31, 1994, consisted
of office buildings, apartments, a single-family residence, a hotel, 1,386
acres of land in sixteen developed residential and commercial subdivisions and
three parcels of unimproved land. The Company's Board of Directors may alter
the types of properties subject to mortgage loans in which the Company invests
without a vote of stockholders. The Company's Articles of Incorporation impose
certain restrictions on transactions with related parties, as discussed in ITEM
13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

At December 31, 1994, the Company's mortgage notes receivable portfolio
included eight mortgage loans with an aggregate outstanding balance of $10.4
million secured by income-producing real estate located throughout the United
States, and 30 loans with an aggregate outstanding balance of $8.5 million
which are secured by collateral other than income- producing real estate. At
December 31, 1994, 5% of the Company's assets were invested in mortgage notes
and interest receivable (3% in first mortgage notes, 2% in wraparound mortgage
notes and less than 1% in junior and other mortgage notes).

The following table sets forth the percentages (based on the outstanding
mortgage note balance) by property type and geographic region, of the
properties (other than a hotel, a residence and unimproved land) that serve as
collateral for the Company's outstanding mortgage notes receivable at December
31, 1994. See Schedule IV to the Consolidated Financial Statements included at
ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for further details of
the Company's mortgage notes receivable portfolio.

<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
--------- ---------- ---------- -------
<S> <C> <C> <C>
Midwest...................... 9% 1% 10%

Northeast.................... 23 - 23

Southwest.................... 9 - 9

Southeast.................... - 58 58
----------- -------- ------
41% 59% 100%
</TABLE>

19
<PAGE> 20
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

A summary of the activity in the Company's mortgage notes receivable portfolio
during 1994 is as follows:

<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1994................................. 43
Loans originated through sales of properties......... 2
Loans paid in full................................... (6)
Loans written off as uncollectible................... (2)
Loan modified and split into two notes............... 1
-------
Loans in mortgage notes receivable portfolio
at December 31, 1994............................... 38
=======
</TABLE>

During 1994, the Company provided $6.8 million of purchase money financing in
conjunction with property sales. Also during the year, mortgage notes of
$249,000 were collected in full and $1.5 million in mortgage principal payments
were received.

At December 31, 1994, less than 1% of the Company's assets were invested in
mortgage notes secured by non-income-producing real estate, comprised of a
note participation secured by 4.8 acres of unimproved land in Naperville,
Illinois, a first mortgage note secured by 34,847 square feet of unimproved
land in Milwaukee, Wisconsin, sixteen first mortgage notes secured by developed
residential lots in Greensboro, North Carolina, a first mortgage note secured
by a residence in Phoenix, Arizona, and a first mortgage note secured by 1,386
acres of land in sixteen developed residential and commercial subdivisions in
Maumelle, Arkansas.

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

The following discussion briefly describes the first mortgage loans that the
Company originated as well as events that affected previously funded first
mortgage loans, during 1994.

In January 1994, the Company instituted foreclosure proceedings on a mortgage
note receivable secured by an office building in Madison, Wisconsin. In June
1994, the Company wrote off the debt as uncollectible, the building having been
foreclosed upon by the local taxing authority. The Company incurred no loss in
excess of the reserve previously established.

20
<PAGE> 21
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

As discussed in "Real Estate" above, in February 1994, the Company provided
$6.7 million of purchase money financing in conjunction with the sale of 1,406
acres of land in sixteen developed residential and commercial subdivisions
located in Maumelle, Arkansas. The note receivable bears interest at 8.0% per
annum, requires annual payments of principal of $850,000 plus accrued interest
through maturity in February 1998, is secured by a first lien on the properties
sold and provides discounts of up to $1.2 million for early payments. The note
is guaranteed by companies affiliated with the purchaser. In December 1994, a
residential tract, comprising 20 acres, was sold. The Company received
$203,000, the release price for such tract. The borrower did not make the
scheduled February 1995 principal and interest payments. The Company has
commenced negotiations with the borrower in an effort to correct the default.
As negotiations are in a preliminary stage, it is too early to predict their
outcome. However, if the Company were to foreclose the collateral securing the
note it would not incur a loss as the fair value of the property exceeds the
carrying value of the note.

In June 1994, a mortgage note receivable with a principal balance of $2.7
million and secured by the Lincoln Court Apartments, a 53 unit apartment
complex in Dallas, Texas, was paid down and modified. The Company received
$1.3 million in cash and the remaining note balance of $1.4 million was split
into two new notes and subordinated to a new first mortgage secured by the
property. The apartment complex is owned by Jor-Trans Investors Limited
Partnership ("Jor- Trans"), in which the Company has a 45% general partner
interest and a 10% limited partner interest. The Company accounts for its
investment in Jor-Trans using the equity method. One new note, in the amount
of $600,000, is secured by a second lien mortgage on the property, bears
interest at the prime rate plus 1%, requires monthly payments of interest only
and matures in June 2004. The second new note in the amount of $769,000, is
unsecured, bears interest at the prime rate plus 1%, requires payments of net
cash flow from property operations and has no stated maturity date.

Also in June 1994, as discussed in "Real Estate" above, the Company sold the
RCA Building located in Mt. Laurel, New Jersey, providing purchase money
financing for the entire sales price of $100,000. The note bears interest at
10% per annum and all principal and interest is due at maturity on January 15,
1996. The Company also received an equity participation in any subsequent
appreciation of the building.

In July and August 1994, the Company received $120,000 and $105,000,
respectively, from the payoff of two notes receivable at their respective
maturities.

In June 1991, in an effort to develop a potential source for future financing,
the Company entered into an asset sales agreement whereby the Company sold a
participation in one of its mortgage notes in the amount of $1.1 million in
exchange for the assignment of a first mortgage note for the same amount from
an insurance company. In December 1991, the

21
<PAGE> 22
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

participation in the Company's mortgage note was increased by $181,000. In
return, the Company received a participation for a like amount in another first
mortgage note (the "loan participation"). In conjunction with these
transactions, the Company entered into a put and guaranty agreement whereby, at
any time, either party could demand that the seller reacquire any
participation or mortgage sold pursuant to the terms of the asset sales
agreement for the consideration originally received. Both the mortgage note
and the loan participation received by the Company were in default at December
31, 1991. In April 1992, the property securing the first mortgage note in the
amount of $1.1 million was deeded to the Company in lieu of foreclosure. In
the first quarter of 1992, the Company recorded a provision for losses of
$366,000 to reduce the carrying value of the mortgage note to the estimated
fair value of the collateral property at the date of foreclosure. In September
1993, the Company sold the collateral property for $850,000, receiving $125,000
in cash and providing purchase money financing of $725,000. The mortgage bears
interest at 7.5% per annum, requires monthly payments of principal and interest
of $5,069, annual principal reduction payments of $25,000 and matures August 1,
1996. The Company recognized no loss on the note beyond the amount previously
provided. In the third quarter of 1992, the Company recorded a provision for
losses of $184,000 to fully reserve for the carrying value of the loan
participation. In 1993, the Company received payment in full for the mortgage
note receivable participation sold, but has not remitted such amount to the
insurance company.

In March 1992, the insurance company was placed in receivership and in June
1992, the Company provided notice to the insurance company, under the terms of
the put and guaranty agreement, of its desire to divest itself of all assets
received. The Receiver refused to allow the enforcement of the terms of the
put and guaranty agreement.

The Company has reached a settlement with the Receiver which was approved by
the court on February 15, 1995. Under the terms of the settlement, the Company
will retain the assets transferred to it by the insurance company as well as
receive from the insurance company the loan participation that the insurance
company had received from the Company. In exchange, the Company will pay the
insurance company $1.0 million in cash. The asset transfer and the Company's
cash payment are anticipated to occur in the second quarter of 1995. The
Company will incur no loss on the settlement. The settlement requires the
Company to pay interest on the cash portion of the settlement from March 17,
1995 until the asset transfer is completed. Interest is payable monthly.

Wraparound Mortgage Loans. A wraparound mortgage loan, sometimes called an
all-inclusive loan, is a mortgage loan having an original principal balance
equal to the outstanding balance under the prior existing mortgage loan(s) plus
the amount actually advanced under the wraparound mortgage loan. Wraparound
mortgage loans may provide for full, partial or no amortization of principal.
The Company's policy was to make wraparound mortgage loans in amounts and on
properties as to which it would otherwise make first mortgage loans.

22
<PAGE> 23
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

The Company did not originate or acquire any wraparound mortgage loans in 1994.

Junior Mortgage Loans. The Company has invested in junior mortgage loans.
Such loans are secured by mortgages that are subordinate to one or more prior
liens either on the fee or a leasehold interest in real estate. Recourse on
such loans ordinarily includes the real estate on which the loan is made, other
collateral and personal guarantees by the borrower. The Company's Board of
Directors restricts investment in junior mortgage loans, excluding wraparound
mortgage loans, to not more than 10% of the Company's assets. At December 31,
1994, less than 1% of the Company's assets were invested in junior mortgage
loans.

The Company did not originate or acquire any junior mortgage loans in 1994.

Loans Secured by Collateral Other than Real Estate. In June 1992, the Company
received ten notes receivable secured by collateral other than real estate in
satisfaction of a $622,000 obligation to the Company. At December 31, 1994,
eight of the notes with a combined principal balance of $460,000 remained
outstanding. The Company's investment policy precludes the origination of
loans secured by collateral other than real estate. The following discussion
briefly describes events that affected those loans during 1994.

In February 1994, a note receivable with a principal balance of $48,000 and
secured by the operations of a fast food restaurant in Wisconsin was modified.
The modified note bears interest at 8.0% per annum in the first year,
increasing by 0.5% per annum each year thereafter, requires monthly payments of
interest only and annual principal payments of $5,000 and matures February 1,
1999. The borrower was unable to pay the principal installment due in December
1994. The Company is evaluating its options regarding this note, but does not
anticipate incurring a loss in excess of the reserve previously established.

In September 1994, the Company received $30,000 in settlement of a note
receivable with a principal balance of $72,000. The Company recorded no loss
on the settlement in excess of the reserve previously established. In October
1994, the Company received payment in full of a third note receivable with a
principal balance of $74,000.

ITEM 3. LEGAL PROCEEDINGS

Olive Litigation

In February 1990, the Company, together with CMET, IORT and National Income
Realty Trust ("NIRT"), three real estate entities with, at the time, the same
officers, directors or trustees and advisor as the Company, entered into a
settlement of a class and derivative action entitled Olive et al. v. National
Income Realty Trust et al., relating to the operation and management of each of
such entities. On April 23, 1990, the court granted final approval of the
terms of the settlement.

23
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS (Continued)

Olive Litigation (Continued)

On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994 and final court approval
was entered on December 12, 1994. The effective date of the modification was
January 11, 1995.

The Modification, among other things, provided for the addition of three new
unaffiliated members to the Company's Board of Directors and set forth new
requirements for the approval of any transactions with affiliates over the next
five years. In addition, BCM, the Company's advisor, Mr. Phillips and William
S. Friedman, who served as President and Director of the Company until February
24, 1994, President of BCM until May 1, 1993 and director of BCM until December
22, 1989, agreed to pay a total of $1.2 million to CMET, IORT, NIRT and the
Company, of which the Company's share is $150,000. The Company received
$50,100 in May 1994. The remaining $99,900 is to be paid in 18 monthly
installments, which began February 1, 1995.

Under the Modification, the Company, CMET, IORT and NIRT and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Company, CMET, IORT and NIRT also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Company held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Company's Board of Directors that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Company's Board of Directors appointed pursuant to
the terms of the Modification that stand for reelection during the three
calendar years following the effective date of the Modification.

Pursuant to the terms of the Modification, any related party transaction which
the Company may enter into prior to April 27, 1999, will require the unanimous
approval of the Company's Board of Directors. In addition, related party
transactions may only be entered into in exceptional circumstances and after a
determination by the Company's Board of Directors that the transaction is in
the best interests of the Company and that no other opportunity exists that is
as good as the opportunity presented by such transaction.

The Modification also terminated a number of the provisions under the
settlement, including the requirement that the Company, CMET, IORT and NIRT
maintain a Related Party Transaction Committee and a Litigation Committee of
their respective Boards. The court retained jurisdiction to enforce the
Modification.

24
<PAGE> 25
ITEM 3. LEGAL PROCEEDINGS (Continued)

Settlement of Southmark Adversary Proceedings

During 1990 and 1991, several adversary proceedings were initiated against the
Company and others by Southmark and its affiliates. On December 27, 1991, an
agreement to settle all claims in connection with the Southmark adversary
proceedings was executed by Southmark and Messrs. Phillips and Friedman, SWI,
NRLP and ART. The settlement covered all claims between Southmark and its
affiliates and Messrs. Phillips and Friedman, ART, SWI, NRLP, CMET, IORT, NIRT,
Vinland Property Trust ("VPT") and the Company. The final settlement of such
litigation concluded all of the suits in which the Company was a defendant.
Pursuant to the settlement agreement, Southmark received a total of $13.2
million from the various settling defendants. The final installment of $1.3
million was paid by the defendants in July 1994.

Under the settlement, the Company acquired four apartment complexes, five
mortgage notes, two commercial properties and four parcels of developed land
from Southmark and its affiliates. As the purchase price for these assets, the
Company paid Southmark $7.4 million which was less than 80 percent of the
appraised market value of the assets conveyed to the Company.

In addition to the asset purchase, the Company also paid Southmark $243,095 in
complete settlement of the much larger liquidated and unliquidated claims
asserted by Southmark against the Company. In addition, CMET, IORT, NIRT and
VPT paid Southmark a total of $357,000 to settle all of Southmark's claims
against them.

As part of this global settlement, NRLP and ART paid Southmark an aggregate of
$4.1 million and Messrs. Phillips and Friedman paid Southmark $1.0 million.
ART also transferred to Southmark a 19.2% limited partnership interest in the
general partner of NRLP and NOLP.

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

The Company held its annual meeting of stockholders on March 7, 1995, at which
meeting the Company's stockholders were asked to consider and vote upon (i)
the election of three Class II Directors of the Company and (ii) the renewal of
the Company's advisory agreement with BCM.

At such meeting the Company's stockholders elected the following individuals as
Class II Directors of the Company:

<TABLE>
<CAPTION>
Shares Voting
-----------------------------------
Withheld
Director For Authority
-------- --------- ----------
<S> <C> <C>
Harold Furst, Ph.D. 1,862,595 83,372
John P. Parsons 1,863,069 82,898
Ted P. Stokely 1,862,871 83,071
</TABLE>

The Company's Class I and Class III Directors who continued to serve were
Martin L. White and Edward G. Zampa, Class I Directors and Geoffrey C. Etnire
and Bennett B. Sims, Class III Directors.

25
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(Continued)

Also at such meeting the Company's stockholders approved the renewal of the
Company's advisory agreement with BCM through the next annual meeting of
stockholders with 1,779,372 votes for the proposal, 95,251 votes against the
proposal and 71,344 votes abstaining.

_________________________________

PART II

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

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

<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------ -------- -------
<S> <C> <C>
March 31, 1995................................. $ 15 1/4 $ 14 5/8
(through March 17, 1995)

March 31, 1994................................. 14 7/8 12 1/2
June 30, 1994.................................. 14 3/4 13 7/8
September 30, 1994............................. 14 7/8 13 7/8
December 31, 1994.............................. 15 13 3/4

March 31, 1993................................. 9 6 3/4
June 30, 1993.................................. 11 1/8 9
September 30, 1993............................. 15 1/2 10
December 31, 1993.............................. 17 7/8 12 1/2
</TABLE>

As of March 17, 1995, the closing price of the Company's Common Stock on the
New York Stock Exchange was $15.00 per share.

As of March 17, 1995, the Company's Common Stock was held by 8,233 holders of
record.

The Company's dividend policy provides for an annual determination of
dividends, after the Company's year end. The minimum amount of dividends will
be determined by the amount, if any, required to maintain the Company's status
as a REIT for federal tax purposes. The Company had a loss for federal tax
purposes in 1994, 1993 and 1992, therefore, no dividends were declared or paid
in those years.

On December 5, 1989, the Company's Board of Directors approved a program for
the Company to repurchase its shares of Common Stock. The Company's Board of
Directors has authorized the Company to repurchase a total of 458,000 shares of
its Common Stock pursuant to such program. As of

26
<PAGE> 27
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (Continued)

March 17, 1995, the Company had repurchased 233,725 shares pursuant to such
program at a cost to the Company of $1.7 million. None of such shares were
purchased in 1994 or through March 17, 1995.

On March 24, 1989, the Company distributed one share purchase right for each
outstanding share of Common Stock. The rights were terminated effective March
24, 1992 upon the Company's Board of Directors having determined that the
rights were no longer necessary to protect the Company from coercive tender
offers. In connection with this determination, Messrs. Phillips and Friedman
and their affiliates agreed not to acquire more than 49% of the outstanding
shares of the Company's Common Stock without prior action by the Company's
Independent Directors to the effect that they do not object to such increased
ownership.

On August 23, 1994, the Company's Board of Directors took action to the effect
that in determining total ownership, shares of the Company's Common Stock, if
any, owned by Mr. Friedman and his affiliates, are no longer to be included.
At March 17, 1995, Mr. Phillips and his affiliates, primarily ART, owned
approximately 34% of the outstanding shares of the Company's Common Stock.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

27
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1994 1993 1992 1991 1990
----------- ------------ -------------- ------------ -----------
(dollars in thousands, except per share)

<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Income . . . . . . . . . . . . $ 37,893 $ 31,980 $ 26,353 $ 24,608 $ 28,826
Expense . . . . . . . . . . . . 47,154 42,168 33,937 42,719 36,183
--------- --------- ---------- ---------- ----------

(Loss) before gain on
sale of partnership
interests, gain on sale
of real estate and
extraordinary gain . . . . . (9,261) (10,188) (7,584) (18,111) (7,357)
Gain on sale of partner-
ship interests . . . . . . . 2,514 - 912 - -
Gain on sale of
real estate . . . . . . . . . 2,153 24 476 873 -
Extraordinary gain . . . . . . 1,189 1,594 440 1,176 -
--------- --------- ---------- ---------- ----------
Net (loss) . . . . . . . . . . $ (3,405) $ (8,570) $ (5,756) $ (16,062) $ (7,357)
========= ========= ========== ========== ===========

PER SHARE DATA
(Loss) before gain on
sale of partnership
interests, gain on sale
of real estate and
extraordinary gain . . . . . $ (3.47) $ (3.79) $ (2.43) $ (6.02) $ (2.33)
Gain on sale of partner-
ship interests . . . . . . . .94 - .30 - -
Gain on sale of
real estate . . . . . . . . . .80 .01 .15 .29 -
Extraordinary gain . . . . . . .44 .59 .14 .39 -
--------- --------- ---------- ---------- -----------
Net (loss) . . . . . . . . . . $ (1.29) $ (3.19) $ (1.84) $ (5.34) $ (2.33)
========= ========= ========== ========== ===========

Dividends per share . . . . . . $ - $ - $ - $ 1.13 $ .72

Weighted average shares
outstanding . . . . . . . . . 2,674,850 2,688,888 3,115,455 3,009,116 3,162,789

December 31,
-----------------------------------
1994 1993 1992 1991 1990
----------- ------------ ---------- ---------- ----------
(dollars in thousands, except per share)

BALANCE SHEET DATA
Notes and interest
receivable . . . . . . . . . $ 12,161 $ 13,442 $ 18,705 $ 59,356 $ 65,483
Real estate . . . . . . . . . . 221,818 195,239 161,522 124,905 112,332
Total assets . . . . . . . . . 247,964 221,095 203,687 184,594 189,009
Notes and interest payable . . 145,514 116,024 91,276 65,210 52,494
Redeemable common stock . . . . - - - 3,939 3,939
Stockholders' equity . . . . . 93,177 96,582 105,625 108,839 125,125

Book value per share . . . . . $ 34.83 $ 36.11 $ 38.76 $ 38.28 $ 43.41
</TABLE>

28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

Introduction

Transcontinental Realty Investors, Inc. (the "Company") invests in real estate
through acquisitions, leases and partnerships and in mortgage loans on real
estate, including first, wraparound and junior mortgage loans. The Company was
organized on September 6, 1983 and commenced operations on January 31, 1984.

Liquidity and Capital Resources

Cash and cash equivalents at December 31, 1994 aggregated $563,000 compared
with $5.9 million at December 31, 1993. The principal reasons for this decrease
in cash are discussed in the paragraphs below.

The Company's principal sources of cash have been and will continue to be from
property operations, proceeds from property and mortgage note sales, the
collection of mortgage notes receivable and borrowings. Cash on hand at
December 31, 1994, and cash that will be generated in 1995 from the collection
of mortgage notes receivable, sales of properties, borrowings against certain
of the Company's unencumbered properties and refinancing or extending of
certain of its mortgage debt will be sufficient to meet all of the Company's
cash requirements, including debt service obligations coming due in 1995, and
property maintenance and improvements, as more fully discussed in the
paragraphs below.

In March 1995, the Company refinanced the mortgage debt secured by the Fountain
Village Apartments in Tucson, Arizona, receiving net cash of $1.1 million from
such financing. See NOTE 6. "NOTES AND INTEREST PAYABLE."

In 1994, the Company received cash of $1.8 million from the payoff or
collection of mortgage notes receivable. The Company also received $16.0
million from new mortgage financings during 1994. In 1994, the Company expended
$9.8 million in cash on real estate acquisitions. The Company also paid $12
million in principal payoffs or paydowns on its mortgage debt.

Principal payments on notes payable of $14.7 million are due in 1995.

As discussed in NOTE 3. "REAL ESTATE AND DEPRECIATION," during 1994 the Company
funded $4.4 million for operating cash deficits, including tenant improvements
of $1.0 million, of the Republic Towers Office Buildings in Dallas, Texas due
to minimal occupancy and operating expenses far exceeding rents. The Company
expects to fund a like amount for these buildings in 1995.

During 1994, the Company repurchased none of its shares of Common Stock
pursuant to a repurchase program originally announced by the Company on
December 5, 1989. The Company's Board of Directors has authorized the
repurchase of a total of 458,000 shares under such repurchase program of which
224,275 shares remained to be purchased as of March 17, 1995.

29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage notes receivable, properties held for investment and
properties held for sale. Generally accepted accounting principles require that
the carrying value of an investment held for sale cannot exceed the lower of
its cost or its estimated net realizable value. In those instances in which
estimates of net realizable value of the Company's properties or notes are less
than the carrying value thereof at the time of evaluation, a provision for loss
is recorded by a charge against operations. The estimate of net realizable
value of the mortgage notes receivable is based on management's review and
evaluation of the collateral properties securing such notes. The property
review generally includes selective property inspections, a review of the
property's current rents compared to market rents, a review of the property's
expenses, a review of the maintenance requirements, discussions with the
manager of the property and a review of the surrounding area.

Results of Operations

1994 compared to 1993. The Company's net loss for 1994 was $3.4 million as
compared to a net loss of $8.6 million in 1993. The Company's 1994 net loss
includes a gain on the sale of partnership interests of $2.5 million, gain on
sale of real estate of $2.2 million and an extraordinary gain of $1.2 million.
Included in the Company's 1993 net loss is a gain on sale of real estate of
$24,000 and an extraordinary gain of $1.6 million. The primary factors
contributing to the Company's net loss are discussed in the following
paragraphs.

Net rental income (rental income less property operating expenses) was $9.6
million in 1994 compared to $6.7 million in 1993. Of the increase, $2.3 million
is attributable to properties acquired during late 1993 and 1994 and increases
of $238,000 and $2.0 million are attributable to increased occupancy and rental
rates and decreased operating expenses at several of the Company's apartment
complexes and commercial properties, respectively. The increases are partially
offset by a decrease of $472,000 attributable to minimal occupancy and high
repair and maintenance expenses at the Republic Towers Office Buildings, a
decrease of $800,000 attributable to a lease buyout at one of the Company's
shopping centers and a decrease of $258,000 due to the sale of the Cedar Creek
Apartments in 1994. Net rental income is expected to increase in 1995 due to a
full year of operations from properties acquired during 1994.

Interest income decreased to $1.5 million in 1994 compared to $1.9 million in
1993. The decrease is attributable to the payoff or modification of notes
receivable during 1994 and 1993. Interest income in 1995 is expected to
approximate that of 1994.

Equity in results of operations of investees was a loss of $90,000 in 1994
compared to a loss of $262,000 in 1993. A reduction in equity loss of $444,000
is attributable to the Company ceasing to record equity

30
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

losses on the One Penn Square Associates Limited Partnership ("One Penn
Square"). The Company's interest in the partnership was conveyed to the lender
on the partnership's office building to settle litigation. See NOTE 5.
"INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES." This reduction in loss is
partially offset by an increase of $251,000 attributable to lower net income of
Income Opportunity Realty Trust ("IORT"), a real estate investment trust in
which the Company has an approximate 22% interest.

Interest expense increased to $10.6 million in 1994 compared to $8.7 million in
1993. An increase of $2.2 million is attributable to properties acquired or
properties upon which debt financing or debt refinancing was obtained during
1993 and 1994. An increase of $232,000 is attributable to increased interest
rates on variable rate loans. These increases are partially offset by a
decrease of $318,000 attributable to loans paid off and properties sold during
1993 and 1994. Interest expense is expected to increase in 1995 from
properties that were either acquired or upon which debt financing or debt
refinancing was obtained during 1994.

Depreciation expense increased to $6.1 million in 1994 as compared to $5.4
million in 1993. This increase is attributable to properties acquired by the
Company in late 1993 and 1994. Depreciation expense in 1995 is expected to
increase again as a full year of depreciation is recognized on properties
acquired during 1994.

The Company recorded no provision for losses in 1994 compared to $873,000 in
1993. The 1993 provision for losses includes $731,000 to reduce the carrying
value of a property held for sale to its then estimated fair value and $142,000
to record the transfer of a note pool to a third party.

The advisory fee increased to $1.7 million in 1994 as compared to $1.5 million
in 1993, such increase is attributable to an increase in the Company's gross
assets, the basis for such fee. The advisory fee can be expected to increase if
the Company makes additional property purchases.

General and administrative expenses of $1.8 million in 1994 decreased from $2.0
million in 1993. The decrease is primarily related to a decrease in fees
related to the Olive Litigation which was settled in 1994. See NOTE 16.
"COMMITMENTS AND CONTINGENCIES - Olive Litigation."

In 1994, the Company realized a gain of $2.1 million on the sale of the Cedar
Creek Apartments and a gain of $2.5 million on the sale of its interest in two
partnerships. In 1993, the Company realized a gain of $24,000 on the sale of
its interest in a property which the Company was to have received from
Southmark Corporation ("Southmark"). See NOTE 16. "COMMITMENTS AND
CONTINGENCIES - Settlement of Southmark Adversary Proceedings."

31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

In 1994, the Company recognized an extraordinary gain of $1.2 million on the
conveyance of its limited partner interest in One Penn Square to the lender on
the partnership's office building to settle litigation. In 1993, the Company
recognized extraordinary gains of $1.1 million as a result of the forgiveness
of debt related to the modification of a mortgage and $500,000 as a result of
the early payoff of the mortgage secured by the Plaza Office Building in St.
Petersburg, Florida.

1993 compared to 1992. The Company's net loss for 1993 was $8.6 million as
compared to net loss of $5.8 million in 1992. The Company's 1993 net loss
includes a gain on the sale of real estate of $24,000 and an extraordinary gain
of $1.6 million. Included in the Company's 1992 net loss is a gain on sale of
real estate of $476,000, a gain on sale of partnership interest of $912,000 and
an extraordinary gain of $440,000. The primary factors contributing to the
Company's net loss are discussed in the following paragraphs.

Net rental income (rental income less property operating expenses) was $6.7
million in 1993 compared to $7.5 million in 1992. A decrease in net rental
income of $215,000 is attributable to the sale of an apartment complex in May
1992, a decrease of $3.3 million is attributable to the acquisition of the
Republic Towers Office Buildings in Dallas, Texas in late 1992, where, due to
minimal occupancy, operating expenses exceeded rents. A decrease of $176,000 is
due to fluctuations in rental and occupancy rates and in expenses at certain of
the Company's properties, primarily in the Pacific and Southeast regions. These
decreases were partially offset by an increase of $2.6 million attributable to
properties purchased during 1992 and 1993 and an increase of $316,000 due to
the settlement of a lawsuit.

Interest income decreased to $1.9 million in 1993 compared to $5.7 million in
1992. A decrease of $3.3 million is attributable to the pay off of the National
Operating, L.P. revolving loan commitment in December 1992, and a decrease of
$990,000 is attributable to the payoff or sale of other notes receivable during
1992 and 1993. These decreases were partially offset by increases of $778,000
attributable to new loans and loans that returned to a performing status in
1993.

Equity in results of operations of investees was a loss of $262,000 in 1993
compared to a loss of $716,000 in 1992. Of the reduction in equity losses,
$223,000 is due to increased income reported by IORT, and $300,000 is due to
the consolidation of Institute Place Associates beginning in January 1993.

Interest expense increased to $8.7 million in 1993 compared to $6.7 million in
1992. This increase is attributable to properties acquired during the latter
part of 1992 or during 1993. This increase was partially offset by a decrease
of $192,000 attributable to the sale of an apartment complex in May 1992 and a
decrease of $557,000 attributable to loan modifications and principal
reductions.

32
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

Depreciation expense increased to $5.4 million in 1993 as compared to $4.0
million in 1992. This increase is attributable to properties acquired by the
Company in late 1992 and 1993.

The Company recorded a provision for losses of $873,000 in 1993. The 1993
provision for losses includes $731,000 to reduce the carrying value of a
property held for sale to its then current estimated fair value and $142,000 to
record the transfer of a note pool to a third party in July 1993. The Company
recorded a provision for losses of $4.4 million in 1992. The 1992 provision for
losses included $2.0 million to reserve against the carrying value of a note
receivable secured by a second lien on an office building and $1.4 million to
reduce the carrying values of two foreclosed properties to their then estimated
fair values. In addition, the Company recorded a provision for losses in the
aggregate amount of $573,000 to reduce the carrying value of several of the
Company's notes receivable to the estimated fair values of the collateral
securing such notes. The Company also recorded a provision for losses of
$350,000 to writeoff an uncollectible account receivable.

The advisory fee decreased to $1.5 million in 1993 as compared to $1.6 million
in 1992. Such reduction was due to the new advisory fee agreement that became
effective December 1, 1992.

General and administrative expenses decreased to $2.0 million in 1993 compared
to $3.3 million in 1992. A decrease of $570,000 is attributable to a decrease
in professional fees, primarily consultants, a decrease of $499,000 is due to a
decrease in legal fees, primarily related to the Olive litigation as discussed
in NOTE 16. "COMMITMENTS AND CONTINGENCIES," and a decrease of $159,000 is due
to a decrease in franchise and other taxes and fees.

In 1993, the Company recognized extraordinary gains of $1.1 million as a result
of the forgiveness of debt related to the modification of a mortgage and
$500,000 as a result of the early payoff of the mortgage secured by the Plaza
Office Building in St. Petersburg, Florida. The Company recognized an
extraordinary gain of $440,000 in 1992 from the acquisition of the mortgage
debt secured by its apartment complex in Lafayette, Louisiana, at a discount.

In 1993, the Company realized a gain of $24,000 on the sale of its interest in
a property which the Company was to have received from Southmark. See NOTE 16.
"COMMITMENTS AND CONTINGENCIES - Settlement of Southmark Adversary
Proceedings." In 1992, the Company recognized the previously deferred gain of
$955,000 from the sale of four nursing homes in June 1991. The Company had
initially recorded this transaction as a cost recovery method sale, however, in
March 1992, as a result of a sale of the mortgage notes for $4.0 million in
cash and a one year promissory note (which was collected in March 1993), the
Company recognized the previously deferred gain on the sale. This gain was
offset by a loss of $479,000 attributable to the sale of a foreclosed apartment
complex held

33
<PAGE> 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

for sale in May 1992. In addition, the Company recognized a gain of $912,000 on
the sale of its 50% general partner interest in a partnership in February 1992.

Environmental Matters

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

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

Inflation

The effects of inflation on the Company's operations are not quanti- fiable.
Revenues from property operations fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of inflation
also affect sale values of properties, and correspondingly, the ultimate
realizable value of the Company's real estate and notes receivable portfolios.
Inflation also has an effect on the Company's earnings from short-term
investments.

Tax Matters

For the years ended December 31, 1994, 1993 and 1992, the Company elected and
in the opinion of the Company's management, qualified to be taxed as a Real
Estate Investment Trust ("REIT") as defined under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"). To continue to
qualify for federal taxation as a REIT under the Code, the Company is required
to hold at least 75% of the value of its total assets in real estate assets,
government securities, cash and cash equivalents at the close of each quarter
of each taxable year. The Code also requires a REIT to distribute at least 95%
of its REIT taxable income, plus 95% of its net income from foreclosure
property, all as defined in Section 857 of the Code, on an annual basis to
stockholders.

Recent Accounting Pronouncements

In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors
for Impairment of a Loan" which amends SFAS No.

34
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Recent Accounting Pronouncements (Continued)

5 - "Accounting for Contingencies" and SFAS No. 15 - "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." The statement requires that notes
receivable be considered impaired when "based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due, both principal and interest, according to the contractual terms of the
loan agreement". Impairment is to be measured either on the present value of
expected future cash flows discounted at the note's effective interest rate or
if the note is collateral dependent, on the fair value of the collateral. In
October 1994, the FASB issued SFAS No. 118 - "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure" which amends SFAS No.
114. SFAS No. 118 eliminates the income recognition provision of SFAS No. 114,
substituting disclosure of the creditor's policy of income recognition on
impaired notes. SFAS No. 114 and SFAS No. 118 are both effective for fiscal
years beginning after December 15, 1994. The Company's management has not fully
evaluated the effects of implementing these statements, but expects that they
will not affect the Company's interest income recognition policy but may
require the classification of otherwise performing loans as impaired.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . 37

Consolidated Balance Sheets -
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Consolidated Statements of Operations -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . 39

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . 40

Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . 41

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 44

Schedule III - Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . 70

Schedule IV - Mortgage Loans on Real Estate . . . . . . . . . . . . . . . . . . . . . . . 74
</TABLE>

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

36
<PAGE> 37

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
Transcontinental Realty Investors, Inc.

We have audited the accompanying consolidated balance sheets of
Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31,
1994 and 1993 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. We have also audited the schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31,
1994 and 1993, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.

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

BDO SEIDMAN

Dallas, Texas
March 20, 1995

37
<PAGE> 38
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
---------------------------------
1994 1993
-------------- ------------
(dollars in thousands)
<S> <C> <C>
Assets
------

Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,659 $ 12,270
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . . . . . 1,502 1,172
------------- ------------
12,161 13,442
Real estate held for sale, net of accumulated
depreciation ($514 in 1994 and $641 in 1993) . . . . . . . . . . . . . 8,373 15,577

Less - allowance for estimated losses . . . . . . . . . . . . . . . . . . (960) (5,504)
-------------- -------------
19,574 23,515
Real estate held for investment, net of
accumulated depreciation ($31,035 in 1994 and
$27,509 in 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,445 179,662
Investment in real estate entities . . . . . . . . . . . . . . . . . . . 8,577 7,127
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 563 5,902
Other assets (including $212 in 1994 and $117 in
1993 due from affiliates) . . . . . . . . . . . . . . . . . . . . . . . 5,805 4,889
------------- ------------
$ 247,964 $ 221,095
============= ============

Liabilities and Stockholders' Equity
------------------------------------

Liabilities
Notes and interest payable . . . . . . . . . . . . . . . . . . . . . . . $ 145,514 $ 116,024

Other liabilities (including $2,314 in 1994 and $182
in 1993 due to affiliates) . . . . . . . . . . . . . . . . . . . . . . 9,273 8,489
------------- ------------
154,787 124,513
Commitments and contingencies

Stockholders' equity
Common Stock, $.01 par value; authorized, 10,000,000
shares; issued and outstanding 2,674,850 shares
in 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 27
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,049 219,049
Accumulated distributions in excess of accumulated
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125,899) (122,494)
-------------- -------------
93,177 96,582
------------- ------------
$ 247,964 $ 221,095
============= ============
</TABLE>

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

38
<PAGE> 39
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1994 1993 1992
------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Interest (including $27 in 1993
Rentals . . . . . . . . . . . . . . . . . . . . $ 36,494 $ 30,373 $ 21,404
and $3,385 in 1992 from
affiliates) . . . . . . . . . . . . . . . . 1,489 1,869 5,665
Equity in (losses) of real estate
entities . . . . . . . . . . . . . . . . . . (90) (262) (716)
-------------- ---------------- ---------------
37,893 31,980 26,353

Expenses
Property operations (including
$1,280 in 1994, $747 in 1993 and
$323 in 1992 to affiliates) . . . . . . . . 26,944 23,659 13,865
Interest (including $2 in 1992
to affiliates) . . . . . . . . . . . . . . . 10,642 8,662 6,737
Depreciation . . . . . . . . . . . . . . . . . 6,095 5,435 4,033
Advisory fees to affiliate . . . . . . . . . . 1,708 1,548 1,607
General and administrative
(including $706 in 1994, $856
in 1993 and $916 in 1992 to
affiliates) . . . . . . . . . . . . . . . . 1,765 1,991 3,308
Provision for losses . . . . . . . . . . . . . - 873 4,387
-------------- --------------- --------------
47,154 42,168 33,937
-------------- --------------- --------------

(Loss) before gain on sale of part-
nership interests, gain on sale of
real estate and extraordinary gain . . . . . . (9,261) (10,188) (7,584)
Gain on sale of partnership interests . . . . . . 2,514 - 912
Gain on sale of real estate . . . . . . . . . . . 2,153 24 476
Extraordinary gain . . . . . . . . . . . . . . . 1,189 1,594 440
-------------- --------------- --------------
Net (loss) . . . . . . . . . . . . . . . . . . . $ (3,405) $ (8,570) $ (5,756)
============== ================ ===============

Earnings per share
(Loss) before gain on sale of part-
nership interests, gain on sale of
real estate and extraordinary gain. . . . . . . $ (3.47) $ (3.79) $ (2.43)
Gain on sale of partnership interests . . . . . . .94 - .30
Gain on sale of real estate . . . . . . . . . . . .80 .01 .15
Extraordinary gain . . . . . . . . . . . . . . . .44 .59 .14
-------------- --------------- --------------
Net (loss) . . . . . . . . . . . . . . . . . . . $ (1.29) $ (3.19) $ (1.84)
============== =============== ==============

Weighted average Common shares used
in computing earnings per share 2,674,850 2,688,888 3,115,455
============== =============== ==============
</TABLE>

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

39
<PAGE> 40
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Accumulated
Distributions
Common Stock in Excess of
------------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
---------- --------- ---------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992.. . . . 2,843,250 28 216,979 (108,168) 108,839

Repurchase of Common Stock . . . (117,500) (1) (658) - (659)

Reclassification of
redeemable shares of
Common Stock . . . . . . . . 140,656 1 3,938 - 3,939

Repurchase of Redeemable
Common Stock . . . . . . . . (140,656) (1) (737) - (738)

Shares of Common Stock
issued . . . . . . . . . . . 450,000 4 (4) - -

Shares of Common Stock
canceled . . . . . . . . . . (450,000) (4) 4 - -

Net (loss) . . . . . . . . . . . - - - (5,756) (5,756)
----------- ---- --------- ----------- --------

Balance, December 31, 1992 . . . 2,725,750 27 219,522 (113,924) 105,625

Repurchase of Common Stock . . . (50,900) - (473) - (473)

Net (loss) . . . . . . . . . . . - - - (8,570) (8,570)
----------- ---- -------- ----------- --------

Balance, December 31, 1993 . . . 2,674,850 27 219,049 (122,494) 96,582

Net (loss) . . . . . . . . . . . - - - (3,405) (3,405)
----------- ---- --------- ----------- --------

Balance, December 31, 1994 . . . 2,674,850 $ 27 $ 219,049 $ (125,899) $ 93,177
=========== ==== ========= =========== ==========
</TABLE>

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

40
<PAGE> 41
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1994 1993 1992
------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rentals collected . . . . . . . . . . . . . . . . $ 36,336 $ 30,399 $ 21,482
Interest collected (including $27 in
1993 and $4,950 in 1992 from affiliates) . . . 1,464 1,072 6,210
Interest paid (including $2 in 1992
to affiliates) . . . . . . . . . . . . . . . . (9,054) (7,302) (6,559)
Payments for property operations
(including $1,280 in 1994, $714 in 1993
and $323 in 1992 to affiliates) . . . . . . . (27,773) (21,661) (12,668)
Advisory fee paid to affiliate . . . . . . . . . (1,733) (1,536) (1,556)
General and administrative expenses paid
(including $706 in 1994, $856 in 1993
and $916 in 1992 to affiliates) . . . . . . . (2,373) (3,144) (3,532)
Distributions from real estate entities . . . . . 811 2,765 1,838
Other . . . . . . . . . . . . . . . . . . . . 1,974 659 (635)
------------- --------------- --------------

Net cash (used in) provided by operating
activities . . . . . . . . . . . . . . . (348) 1,252 4,580

Cash Flows from Investing Activities
Funding of notes receivable . . . . . . . . . . . - (2,525) (4,634)
Collections on notes and receivables
(including $2,784 in 1993 and $21,092 in
1992 from affiliates) . . . . . . . . . . . . 1,850 12,010 34,309
Real estate improvements . . . . . . . . . . . . (5,354) (5,028) (1,828)
Proceeds from sale of real estate . . . . . . . . 3,285 344 1,622
Proceeds from sale of joint venture
partnership interest . . . . . . . . . . . . . 2,076 - 500
Acquisition of real estate . . . . . . . . . . . (9,790) (8,690) (19,555)
Acquisition of partnership interest . . . . . . . - - (5,365)
Acquisition of Income Opportunity Realty
Trust shares of beneficial interest . . . . . - - (896)
Deposits on pending purchases . . . . . . . . . . - (50) (1,545)
Funding of receivable from affiliate . . . . . . - - (1,990)
Contributions to real estate entities . . . . . . (947) (492) (870)
Other . . . . . . . . . . . . . . . . . . . . - - 53
------------- --------------- --------------

Net cash (used in) investing activities . . . (8,880) (4,431) (199)
</TABLE>

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

41
<PAGE> 42
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1994 1993 1992
------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Payments on notes payable . . . . . . . . . . . $ (2,165) $ (2,357) $ (589)
Payoffs of notes payable . . . . . . . . . . . (9,545) (5,905) (1,177)
Proceeds from notes payable . . . . . . . . . . 15,599 6,036 8,001
Shares of Common Stock repurchased . . . . . . - (473) (659)
Acquisition of Redeemable Common Stock . . . . - - (738)
-------------- --------------- --------------

Net cash provided by (used in)
financing activities . . . . . . . . . 3,889 (2,699) 4,838
-------------- ---------------- ---------------

Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . (5,339) (5,878) 9,219

Cash and cash equivalents, beginning of year . . 5,902 11,780 2,561
-------------- ---------------- --------------

Cash and cash equivalents, end of year . . . . . $ 563 $ 5,902 $ 11,780
============== ================ ==============

Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss) . . . . . . . . . . . . . . . . . . $ (3,405) $ (8,570) $ (5,756)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating
activities
Depreciation and amortization . . . . . 6,343 5,651 4,299
Provision for losses . . . . . . . . . - 873 4,387
Extraordinary gain . . . . . . . . . . (1,189) (1,594) (440)
Equity in losses of real estate
entities . . . . . . . . . . . . . . 90 262 716
Gain on sale of partnership interests. (2,514) - (912)
Gain on sale of real estate . . . . . . (2,153) (24) (476)
Distributions from real estate
entities . . . . . . . . . . . . . . . 811 2,765 1,838
(Increase) decrease in interest
receivable . . . . . . . . . . . . . . 213 (522) 585
(Increase) decrease in other assets . . 1,543 706 (252)
Increase (decrease) in interest payable 881 869 (128)
Increase (decrease) in other
liabilities . . . . . . . . . . . . . . (968) 836 719
-------------- ---------------- --------------

Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . $ (348) $ 1,252 $ 4,580
============== ================ ==============
</TABLE>

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

42
<PAGE> 43
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1994 1993 1992
------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Schedule of noncash investing and financing
activities
Carrying value of real estate acquired
through foreclosure in satisfaction of
notes receivable (with carrying values
of $2,363 in 1993 and $2,696 in 1992) . . . $ - $ 2,363 $ 2,320

Notes receivable from sales of real
estate in 1994 and 1993 and assumption of
debt by purchaser of real estate in 1992 . . 6,837 1,130 5,767

Notes payable from acquisition of real
estate . . . . . . . . . . . . . . . . . . . 30,936 21,041 22,933

Receipt of notes receivable in satisfaction
of accounts receivable of $792 . . . . . . . - - 784

Carrying value of property acquired through
assumption of debt of $6,559 . . . . . . . . - 6,559 -

Carrying value of loans transferred to
third party in exchange for assumption of
related liabilities . . . . . . . . . . . . - 422 -

Transfer of limited partner interest to
partnership's lender in settlement of
litigation . . . . . . . . . . . . . . . . . 1,189 - -
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.

43
<PAGE> 44
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Company business. Transcontinental Realty Investors, Inc.
("TCI"), a Nevada corporation, is successor to a California business trust,
Transcontinental Realty Investors, which was organized on September 6, 1983.
The Company invests in real estate through direct equity ownership and
investments in real estate entities. It also has invested in mortgage loans on
real estate, including first, wraparound and junior mortgage loans.

Basis of consolidation. The Consolidated Financial Statements include the
accounts of TCI, subsidiaries and partnerships which it controls. All
intercompany transactions and balances have been eliminated. Minority
interests (which are not significant) are included in other liabilities.

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

Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable and properties held for sale to the extent
that the investment in the notes or properties exceeds the Company's estimate
of net realizable value of the property or the collateral securing such note,
or fair value of the collateral if foreclosure is probable. In estimating net
realizable value, consideration is given to the current estimated collateral or
property value adjusted for costs to complete or improve, hold and dispose.
The cost of funds, one of the criteria used in the calculation of estimated net
realizable value (approximately 5.6% and 5.0% as of December 31, 1994 and 1993,
respectively) is based on the average cost of all capital. The provision for
losses is based on estimates, and actual losses may vary from current
estimates. Such estimates are reviewed periodically, and any additional
provision determined to be necessary is charged against earnings in the period
in which it becomes reasonably estimable.

44
<PAGE> 45
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreclosed real estate held for sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. After foreclosure, the excess of new cost, if any,
over fair value minus estimated costs of sale is recognized in a valuation
allowance. Subsequent changes in fair value either increase or decrease such
valuation allowance. See "Allowance for estimated losses" above. Properties
held for sale are depreciated in accordance with the Company's established
depreciation policies. See "Real estate and depreciation" below.

Annually, all foreclosed properties held for sale are reviewed by the Company's
management and a determination is made if the held for sale classification
remains appropriate. The following are among the factors considered in
determining that a change in classification to held for investment is
appropriate: (i) the property has been held for at least one year; (ii)
Company management has no intent to dispose of the property within the next
twelve months; (iii) the property is a "qualifying asset" as defined in the
Internal Revenue Code of 1986, as amended; (iv) property improvements have been
funded; and (v) the Company's financial resources are such that the property
can be held long-term. The subsequent classification of property previously
held for sale to held for investment does not result in a restatement of
previously reported revenues, expenses or net (loss).

Real estate and depreciation. Real estate is carried at the lower of cost or
estimated net realizable value, except for foreclosed properties held for sale,
which are recorded at the lower of original cost or fair value minus estimated
costs of sale. Depreciation is provided for by the straight-line method over
the estimated useful lives of the assets, which range from 3 to 40 years.

Present value discounts/premiums. The Company provides for present value
discounts or premiums on notes receivable or payable that have interest rates
that differ substantially from prevailing market rates and amortizes such
discounts and premiums by the interest method over the lives of the related
notes. The factors considered in determining a market rate for notes
receivable include the borrower's credit standing, nature of the collateral and
payment terms of the note.

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

Investment in noncontrolled partnerships and equity investees. The Company
uses the equity method to account for investments in partnerships which it
does not control and for its investment in the shares of

45
<PAGE> 46
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

beneficial interest of Income Opportunity Realty Trust ("IORT"). Under the
equity method, the Company's initial investment, recorded at cost, is increased
by the Company's proportionate share of the investee's operating income and
additional advances and decreased by the Company's proportionate share of the
investee's operating losses and distributions received.

Fair value of financial instruments. The Company used the following
assumptions in estimating the fair value of its notes receivable, marketable
equity securities and notes payable. For performing notes receivable, the fair
value was estimated by discounting future cash flows using current interest
rates for similar loans. For nonperforming notes receivable, the estimated
fair value of the Company's interest in the collateral property was used. For
marketable equity securities, fair value was based on the year end closing
market price of the security. The estimated fair value presented does not
purport to present the amounts to be ultimately realized by the Company. The
amounts ultimately realized may vary significantly from the estimated fair
value presented. For notes payable, the fair value was estimated using current
rates for mortgages with similar terms and maturities.

Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.

Earnings per share. Loss per share is computed based upon the weighted average
number of shares of Common Stock outstanding during each year.

NOTE 2. NOTES AND INTEREST RECEIVABLE

Notes and interest receivable consisted of the following:

<TABLE>
<CAPTION>
1994 1993
--------------------------------- --------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Notes receivable
Performing . . . . . . . . . . . . . $ 13,285 $ 11,583 $ 15,974 $ 13,441
Nonperforming, nonaccruing . . . . . 8,471 7,347 780 1,092
-------------- ------------ ------------ ------------
$ 21,756 18,930 $ 16,754 14,533
============== ============

Interest receivable . . . . . . . . . . 389 176
Unamortized (discounts) . . . . . . . . (2,210) (1,267)
Deferred gain . . . . . . . . . . . . . (4,948) -
------------- ------------
$ 12,161 $ 13,442
============ ============
</TABLE>

The Company does not recognize interest income on nonperforming notes
receivable. Notes receivable are considered to be nonperforming when

46
<PAGE> 47
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)

they become 60 days or more delinquent. For the years 1994, 1993 and 1992,
unrecognized interest income on nonperforming notes receivable aggregated
$256,371, $423,000 and $1.9 million, respectively.

Notes receivable at December 31, 1994, mature from 1995 through 2016 with
interest rates ranging from 3.9% to 13.0%, with a weighted average rate of
7.4%. Premiums/discounts are based on imputed interest rates of 10.0%. Notes
receivable are generally nonrecourse and are generally collateralized by real
estate. Scheduled principal maturities of $1.6 million are due in 1995.

In June 1994, a mortgage note receivable with a principal balance of $2.7
million and secured by the Lincoln Apartments, a 53 unit apartment complex in
Dallas, Texas, was paid down and modified. The apartment complex is owned by
Jor-Trans Investors Limited Partnership ("Jor-Trans"), in which the Company has
a 45% general partner interest and a 10% limited partner interest. The Company
accounts for its investment in Jor-Trans using the equity method. The Company
received $1.3 million in cash and the remaining note balance of $1.4 million
was split into two new notes and subordinated to a new first mortgage secured
by the property. One new note, in the amount of $600,000, is secured by a
second lien mortgage on the property, bears interest at the prime rate plus 1%,
requires monthly payments of interest only and matures in June 2004. The
second new note in the amount of $769,000, is unsecured, bears interest at the
prime rate plus 1%, requires payments of net cash flow from property operations
and has no stated maturity date.

Also in June 1994, the Company sold the RCA Building, a vacant 100,800 square
foot office building in Mt. Laurel, New Jersey, for $100,000. The Company
provided purchase money financing for the entire sales price. The note bears
interest at 10% per annum and requires that all principal and interest shall be
paid at maturity in January 1996. The Company also received an equity
participation in any subsequent appreciation of the building. The Company
incurred no loss on the sale beyond the amounts which had been previously
provided. See NOTE 3. "REAL ESTATE AND DEPRECIATION."

In July and August 1994, the Company received $120,000 and $105,000,
respectively, from the payoff of two notes receivable at their respective
maturities.

47
<PAGE> 48
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)

In January 1993, a wraparound mortgage note receivable which was in default at
December 31, 1992 was modified. As a result of such modification, the mortgage
note receivable balance was increased from $2.7 million to $2.9 million for
accrued but unpaid interest. The interest rate was reduced from 9.25% per
annum to 7.5% through January 11, 1995 and 10.0% per annum through the new
maturity date of January 1, 1998. In addition, the borrower made a principal
reduction payment on the underlying note payable which decreased the balance
from $1.3 million to $1.1 million at the date of the modification. The
interest rate on the underlying note payable was also changed from 1.50% above
the prime lending rate to 7.85% per annum, and the maturity date of the note
was extended to January 31, 1996. At December 31, 1994, the loan was
performing in accordance with its modified terms.

In February 1993, the Company purchased two first lien mortgage notes secured
by notes and 1,900 acres of land in improved residential and commercial
subdivisions in Maumelle, Arkansas for $2.6 million in cash. The notes, with a
principal balance of $7.8 million, were in default at the date of purchase. In
May 1993, the Company completed foreclosure proceedings. In July 1993, the
Company transferred the notes acquired through the foreclosure proceedings to a
third party, in exchange for the assumption of debt secured by the notes. The
Company recognized a loss of $421,000 on the transfer, $279,000 of which had
previously been provided. See NOTE 3. "REAL ESTATE AND DEPRECIATION," for a
discussion of subsequent land sales activity and terms of the purchase money
financing provided by the Company in conjunction with the sale.

In March 1993, the Company purchased a wraparound mortgage note secured by a
K-Mart in Wake County, North Carolina for $250,000 in cash. The note
receivable had a principal balance of $2.5 million at the date of purchase and
the underlying debt had a principal balance of $2.2 million at the date of
purchase.

On March 1, 1993, the Company received $4.1 million in cash from the pay-off of
two notes receivable at their maturity. The Company in turn paid off $3.7
million of indebtedness secured by the two notes.

In September 1993, the Company wrote off as uncollectible a note with a
principal balance of $15,000, all of which had been previously provided.

In October 1993, a note receivable with a principal balance of $50,000 and
secured by the operations of three fast food restaurants in Wisconsin was
modified. The Company received a principal paydown of

48
<PAGE> 49
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)

$13,300 and forgave indebtedness of $18,000, which had been previously
provided. The borrower did not make the scheduled principal payment in
December 1994. The Company is evaluating its options regarding this note, but
does not expect to incur a loss in excess of the reserve previously
established.

In December 1993, the Company modified the first mortgage note secured by the
6363 Richmond Building located in Houston, Texas. The note was paid in full at
its August 1994 maturity.

In 1992, the Company purchased, from a financial institution, two mortgage
notes secured by first liens on an office building and a parcel of undeveloped
land and a mortgage note secured by a second lien on three commercial
properties for $1.3 million in cash. The $620,000 excess of the purchase price
over the fair value of the notes represented additional consideration for the
loan the Company received from the same financial institution on the
Waterstreet Office Building. Such additional consideration being amortized
as additional interest, over the life of the Waterstreet loan. At December 31,
1993, the notes were in default. In January 1994, the Company instituted
foreclosure proceedings on the first mortgage note secured by the office
building. In June 1994, the Company wrote off the note receivable secured by
the office building as uncollectible, the property having been foreclosed upon
by the local taxing authority. The Company recognized no loss in excess of the
reserve previously established. At December 31, 1994, the remaining two notes
with a carrying value of $152,000 were in default and fully reserved.

Two second lien mortgage notes receivable secured by condominium projects in
San Francisco, California totaling $3.8 million were not paid at maturity on
April 1, 1992. During the second quarter of 1992, the borrower was placed in
bankruptcy. In August 1992, a settlement was reached between the Company and
the title company, which had issued title insurance policies in conjunction
with the loans, under which the title company paid to the Company all past due
interest, late charges, attorneys' fees and collection costs. On March 1,
1993, both new notes were paid in full and the original mortgage notes were
assigned to the title company.

During 1992, the Company sold four tax-free notes acquired in 1991 for $4.0
million in cash and a $5.0 million promissory note and recognized a previously
deferred gain of $955,000 on the sale of four nursing homes in 1991. The
Company received a $500,000 principal paydown in 1992 and the remaining balance
of $4.5 million was paid in 1993.

49
<PAGE> 50
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)

participation in the Company's mortgage note was increased by $181,000. In
return, the Company received a participation for a like amount in another
first mortgage note (the "loan participation"). In conjunction with these
transactions, the Company entered into a put and guaranty agreement whereby, at
any time, either party could demand that the seller reacquire any participation
or mortgage sold pursuant to the terms of the asset sales agreement for the
consideration originally received. Both the mortgage loan and the loan
participation received by the Company were in default at December 31, 1991. In
April 1992, the property securing the first mortgage note in the amount of $1.1
million was deeded to the Company in lieu of foreclosure. In the first quarter
of 1992, the Company recorded a provision for losses of $366,000 to reduce the
carrying value of the mortgage note to the estimated fair value of the
collateral property at the date of foreclosure. In September 1993, the Company
sold the collateral property for $850,000, receiving $125,000 in cash and
providing purchase money financing of $725,000. The mortgage bears interest at
7.5% per annum, requires monthly payments of principal and interest of $5,069,
annual principal reduction payments of $25,000 and matures August 1, 1996. The
Company recognized no loss on the sale beyond the amount previously provided.
In the third quarter of 1992, the Company recorded a provision for losses of
$184,000 to fully reserve for the carrying value of the loan participation. In
1993, the Company received payment in full for the mortgage note receivable
participation sold, but has not remitted such amount to the insurance company.

In March 1992, the insurance company was placed in receivership. In June 1992,
the Company provided notice to the insurance company under the terms of the put
and guaranty agreement, of its desire to divest itself of all assets received.
The Receiver refused to allow the enforcement of the terms of the put and
guaranty agreement.

NOTE 3. REAL ESTATE AND DEPRECIATION

As described in NOTE 2. "NOTES AND INTEREST RECEIVABLE," in May 1993, the
Company foreclosed the collateral securing mortgage notes with a principal
balance of $7.8 million which the Company had acquired in February 1993 for
$2.6 million. The collateral for the mortgage notes

50
<PAGE> 51
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)

was notes and 1,900 acres of land in improved residential and commercial
subdivisions in Maumelle, Arkansas. In February 1994, the Company sold 1,406
acres of land in sixteen residential and commercial subdivisions for $8.4
million, retaining 114 residential lots. Through December 1994, the Company
has sold or otherwise disposed of 44 of the retained lots for a total of
$101,000 in cash recognizing no gain or loss.

The Company received $1.7 million in cash and provided purchase money financing
of $6.7 million. The note receivable bears interest at 8.0% per annum,
requires annual payments of principal of $850,000 plus accrued interest through
maturity in February 1998, is secured by a first lien on the properties sold
and provides discounts of up to $1.2 million for early payments. The note is
guaranteed by companies affiliated with the purchaser. In December 1994, a
residential tract, comprising 20 acres, was sold. The Company received
$203,000, the release price for such tract. The Company has recorded this
transaction as a cost recovery method sale and accordingly has deferred
recognizing a gain on the sale pending collection of the note receivable. The
borrower did not make the scheduled February 1995 principal and interest
payments. The Company has commenced negotiations with the borrower in an
effort to correct the default. As negotiations are in a preliminary stage, it
is too early to predict their outcome. However, if the Company were to
foreclose the collateral securing the note it would not incur a loss as the
fair value of the property exceeds the carrying value of the note. The Company
has classified the note as nonperforming, nonaccruing in the accompanying
December 31, 1994 Consolidated Balance Sheet.

In April 1994, the Company purchased the Corporate Center at Beaumeade I and
II, a two building, 99,083 square foot industrial facility in Ashburn,
Virginia, for $3.3 million, consisting of $600,000 in cash and new mortgage
financing of $2.7 million. The mortgage bears interest at 9.28% per annum,
requires monthly payments of principal and interest of $22,132 and matures in
April 1999. In October 1994, the Company purchased the third building in the
center, a 79,409 square foot industrial facility, for $2.7 million, consisting
of $600,000 in cash and new mortgage financing of $2.1 million. The mortgage
bears interest at 10.09% per annum, requires monthly payments of principal and
interest of $19,693 and matures in September 1999.

In June 1994, the Company purchased the Parke Long Industrial Buildings, a four
building, 222,197 square foot office/industrial facility in Chantilly,
Virginia, for $8.8 million, consisting of $900,000 in cash and $7.9 million in
seller provided mortgage financing. The mortgage bears interest at 6.0% per
annum in the first two years, increasing to 7.0% per annum in the third year,
8.0% per annum in the fifth year and 9.0% per annum in the ninth year. The
mortgage requires monthly payments of interest only in the first two years and
monthly payments of principal and interest thereafter, and matures in June
2006.

51
<PAGE> 52
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)

In June 1994, the Company sold the RCA Building, a vacant 100,800 square foot
office building, held for sale, in Mt. Laurel, New Jersey. The Company
provided purchase money financing for the entire purchase price. See NOTE 2.
"NOTES AND INTEREST RECEIVABLE."

In September 1994, the Company sold the Cedar Creek Apartments, a 260 unit
apartment complex in Charlotte, North Carolina, for $10.1 million, receiving
net cash of $2.2 million after paying off the first mortgage of $7.7 million
and funding a $250,000 escrow for correction of a zoning infraction, which was
released to the Company in December 1994. The Company recognized a gain on the
sale of $2.2 million.

In October 1994, the Company purchased Corporate Pointe at Westfields, a 65,918
square foot office building located in Chantilly, Virginia, for $4.0 million,
consisting of $1.0 million in cash and new mortgage financing of $3.0 million.
The mortgage bears interest at 10.09% per annum, requires monthly payments of
principal and interest of $29,052 and matures in September 1999. The Company
guaranteed 10% of the mortgage's principal balance. Concurrently, the Company
also purchased from an affiliate of the seller the third of the Corporate
Center at Beaumeade industrial facilities, as described above.

In November 1994, the Company purchased the Summerfield Apartments, a 224 unit
apartment complex in Orlando, Florida, for $5.6 million, consisting of $800,000
in cash and assumption of existing mortgage debt of $4.8 million. The mortgage
bears interest at a variable rate based on the London Interbank Offered Rate
("LIBOR") six month rate plus 4.10%, currently 10.25% per annum, requires
monthly payments of principal and interest of $43,240 and matures March 1,
2024.

Also in November 1994, the Company purchased the Hartford Building, a 174,727
square foot office building in Dallas, Texas, for $3.0 million, consisting of
$700,000 in cash and seller provided mortgage financing of $2.3 million. The
mortgage bears interest at 7% per annum in the first year, increasing to 8%
per annum in the second year and 9% per annum thereafter. The mortgage
requires monthly payments of principal and interest and matures December 31,
1999. The Company guaranteed the first $450,000 of the mortgage.

In December 1994, NCPO Texas, Ltd., a Texas limited partnership, purchased the
North Central Plaza One Building, a 198,061 square foot office building in
Dallas, Texas for $12.4 million, consisting of $4.2 million in cash and new
mortgage financing of $8.2 million. The mortgage bears interest at 8.625% per
annum, requires monthly payments of principal and interest of $68,994 and
matures January 31, 2017. The lender may call the note on each of February 1,
1998, 2003, 2008 or 2013 upon giving notice to the Company on or before July 1
of the preceding year. The Company is the sole limited partner of the
partnership with a 97.5% limited partner interest. The general partner of the
partnership with a 2.5% general partner interest is Ensearch Holding

52
<PAGE> 53
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)

Company, a corporation controlled by an adult son of A. Bob Jordan, a Director
of the Company until March 7, 1995. The Company has the option to acquire such
general partner interest at any time for one dollar upon obtaining the consent
of the lender and a release from the lender of the general partner's loan
guarantee. The Company intends to exercise such option. The Partnership is
consolidated for financial statement purposes.

In February 1993, the Company purchased eight industrial warehouses with a
total of 570,808 square feet in Atlanta, Georgia in a single transaction for
$8.8 million, consisting of $2.9 million in cash and $5.9 million of seller
provided mortgage financing.

In April 1993, the Company purchased President's Square, a 46,509 square foot
shopping center in San Antonio, Texas, for $1.6 million, consisting of $400,000
in cash and $1.2 million in seller provided mortgage financing.

In May 1993, the Company sold at auction 28 lots in the Moss Creek residential
subdivision, located in Greensboro, North Carolina, for a total sales price of
$667,000 consisting of $262,000 in cash, and Company provided purchase money
financing of $405,000. In August 1993, the Company sold an additional lot in
the subdivision for $49,000 in cash. In December 1993, the Company transferred
the clubhouse to the Moss Creek Homeowners' Association (the "Association") and
paid the Association $20,000 in full settlement of any further obligations to
construct or maintain improvements. The Company acquired the lots as well as
257 acres of land in August 1992 through foreclosure of four mortgage notes
that it had purchased in June 1992 for $1.2 million. The Company retains the
257 acres of land and recognized no gain or loss on the lot sales.

Also in May 1993, the Company purchased Denton Drive, a 123,800 square foot
industrial facility in Dallas, Texas, for $885,000, consisting of $485,000 in
cash and new mortgage financing of $400,000.

In September 1993, the Company sold a residence, which the Company had obtained
through foreclosure in 1992, in Phoenix, Arizona for $850,000. The Company
received net cash of $125,000 and provided purchase money financing of
$725,000. The Company incurred no loss on the sale in excess of the amount
previously provided.

In November 1993, the Company purchased Sadler Square, a 73,396 square foot
shopping center in Amelia Island, Florida, for $3.2 million, consisting of
$600,000 in cash and $2.6 million in mortgage financing, of which $400,000 was
provided by the seller.

Also in November 1993 the Company purchased a 14.1 acre parcel of vacant land
adjacent to the Dunes Plaza Shopping Center in Michigan City, Indiana, for
$353,000, consisting of $117,000 in cash and $236,000 in mortgage financing.

53
<PAGE> 54
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)

In December 1993, the Company purchased Texstar, a 97,846 square foot
industrial facility in Arlington, Texas, for $1.6 million, consisting of
$450,000 in cash and $1.2 million in seller provided mortgage financing.

Also in December 1993, the Company purchased Technology Trading Center, a
199,582 square foot industrial facility in Sterling, Virginia, for $5.7
million, consisting of $1.1 million in cash and $4.6 million in mortgage
financing.

In December 1993, the Company purchased Summerstone Apartments, a 242 unit
apartment complex in Houston, Texas, for $5.5 million, consisting of $200,000
in cash and $5.3 million in mortgage financing, $100,000 of which was provided
by the seller.

Also in December 1993, the Company sold seventeen residential lots
(approximately three acres) in a Maumelle residential subdivision for $68,000
in cash. The Company recognized no gain or loss on the sale.

In 1992, the Company sold an apartment complex in Gahanna, Ohio, for $8.1
million, incurring a loss of $479,000 on the sale.

NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------- -----------
<S> <C> <C> <C>
Balance January 1, . . . . . . . . . . . . . . . $ 5,504 $ 6,697 $ 12,510
Provision for losses . . . . . . . . . . . . - 731 3,918
Amounts charged off . . . . . . . . . . . . . (4,544) (1,924) (9,731)
------------ ------------- -----------
Balance December 31, . . . . . . . . . . . . . . $ 960 $ 5,504 $ 6,697
============ ============= ===========
</TABLE>

The provision for losses in the accompanying Consolidated Statement of
Operations includes, in 1993, $142,000 for the writeoff of notes receivable
transferred to a third party in exchange for assumption of debt, (see NOTE 2.
"NOTES AND INTEREST RECEIVABLE") and in 1992, $469,000 for the writeoff of
receivables.

NOTE 5. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES

The Company's investment in equity method real estate entities consists of the
following:

<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Income Opportunity Realty Trust ("IORT") . . . . . . . . . $ 809 $ 965
Tri-City Limited Partnership ("Tri-City") . . . . . . . . . 6,523 6,936
Pilgrim Village I & II . . . . . . . . . . . . . . . . . . - 120
One Penn Square Associates . . . . . . . . . . . . . . . . - (1,699)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,245 805
---------- ------------
$ 8,577 $ 7,127
========== ============

</TABLE>

54
<PAGE> 55
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)

In June 1989, the Company issued to F.C. MacArthur, Inc. ("MacArthur") a
wholly-owned subsidiary of Collecting Bank, N.A. (a national bank in
liquidation), 140,656 shares of redeemable Common Stock with a market value, at
the date of issuance, of $3.9 million in exchange for a 23.6% general partner
interest in Tri-City, which owns five properties in Texas. The general
partners of Tri-City are the Company and IORT, which purchased its 36.3%
general partner interest in the partnership in exchange for 170,750 of its
shares of beneficial interest. In November 1992, the Company purchased the
40.1% limited partner interest in Tri-City owned by MacArthur for $5.4 million,
thereby increasing its aggregate ownership interest in the partnership to
63.7%.

The Tri-City partnership agreement requires the consent of both the Company and
IORT, the other general partner, for any material change in the operations of
Tri-City's properties including sales, refinancings and changes in property
management. The Company accounts for its Tri-City investment using the equity
method as it is a noncontrolling partner.

In conjunction with its acquisition of MacArthur's limited partner interest in
Tri-City, the Company also acquired the 170,750 shares of beneficial interest
of IORT owned by MacArthur for $896,000 at December 31, 1994. At December 31,
1994, the Company owned an approximate 22% interest in IORT with a market value
of $3.4 million, as compared to $2.6 million at December 31, 1993. The Company
has pledged 110,750 of the IORT shares as additional collateral to secure a
note payable as described in NOTE 6. "NOTES AND INTEREST PAYABLE." The Company
accounts for its investment in IORT using the equity method.

The Company owned a 55% limited partner interest in One Penn Square Associates
Limited Partnership ("One Penn Square"), which was accounted for using the
equity method as control of the partnership was maintained by the general
partner. In January 1992, the partnership stopped making payments on the first
mortgage secured by the One East Penn Square Office Building in Philadelphia,
Pennsylvania. An affiliate of the lender owned the remaining 45% limited
partner interest. In May 1993, the lender filed a foreclosure action against
One Penn Square.

On October 6, 1993, the court appointed a receiver for the property. The
lender also filed an action against the partnership and the Company to set
aside, as a fraudulent conveyance, payments from the partnership to the
Company in 1992 and in 1993 of $1.8 million made to repay the Company's
mortgage note secured by a second lien on the One East Penn Square Office
Building. In April 1994, the Company and the lender reached an agreement which
provided that the Company pay $575,000 to the lender and convey the Company's
interest in the partnership to the lender. In August 1994, the Company made
the required $575,000 payment, conveyed its partnership interest to the lender
and the parties executed mutual releases and all litigation between the parties
was dismissed. The Company recognized an extraordinary gain of $1.2 million as
the

55
<PAGE> 56
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)

carrying value of its investment in the partnership was less than the debt
secured by the One Penn Square Office Building due to previously recognized
equity losses.

In January 1995, the Company refinanced the mortgage debt secured by the Shadow
Run Apartments, an apartment complex located in Pinellas Park, Florida. The
new first mortgage of $7.2 million bears interest at 10.21% per annum, requires
monthly payments of principal and interest of $64,305 and matures February 1,
2002. The Trust used the refinancing proceeds and $300,000 cash to pay the
existing mortgage of $7.0 million, accrued but unpaid interest, financing fees
and real estate taxes. The Company has agreed to purchase the remaining
general partner interest in Shadow Run Associates, which owns the Shadow Run
Apartments, for $50,000 in cash. The purchase is expected to close in April
1995.

In February 1992, the Company sold its 50% general partner interest in Amador
Lakes - Stage Coach Associates to its co-general partner for $1.2 million.
The Company recognized a gain of $912,000 on the sale.

The Company owns and shares 50% to 60% of the earnings, losses and
distributions of its other partnership investments accounted for using the
equity method.

Set forth below are summary financial data for the real estate entities
accounted for using the equity method (unaudited):

<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Property, net of accumulated
depreciation ($15,602 in 1994
and $17,908 in 1993) . . . . . . . . . . . . . . . . . . . $ 69,763 $ 95,519
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . 6,073 7,082
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 8,181 8,358
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . (46,692) (73,134)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . (1,287) (3,745)
----------- ------------
Partners' capital . . . . . . . . . . . . . . . . . . . . . . . $ 36,038 $ 34,080
========== ===========
</TABLE>

56
<PAGE> 57
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)

<TABLE>
<CAPTION>
1994 1993 1992
----------- ------------ -----------
<S> <C> <C> <C>
Rentals and interest income . . . . . . . . . . . . . $ 15,362 $ 20,497 $ 15,614
Depreciation . . . . . . . . . . . . . . . . . . . . (2,118) (2,911) (2,005)
Operating expenses . . . . . . . . . . . . . . . . . (8,998) (11,679) (8,840)
Interest expense . . . . . . . . . . . . . . . . . . (4,477) (6,571) (6,302)
Provision for losses . . . . . . . . . . . . . . . . - - (263)
----------- ------------ -----------
Net (loss) . . . . . . . . . . . . . . . . . . . . . $ (231) $ (664) $ (1,796)
============ ============= ===========
</TABLE>

The excess of the Company's investment over its respective share of the equity
in the underlying net assets of equity investees of $715,000 is amortized over
the estimated useful lives of the properties, and the deferred loan fees paid
by the Company on behalf of the partnerships of $10,000 are amortized over the
lives of the related notes.

NOTE 6. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

<TABLE>
<CAPTION>
1994 1993
--------------------------------- --------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Notes payable . . . . . . . . . . . . . $ 130,831 $ 143,292 $ 112,445 $ 114,683
============== ============
Interest payable . . . . . . . . . . . 2,222 1,341
------------ ------------

$ 145,514 $ 116,024
============ ============
</TABLE>

Scheduled principal payments are due as follows:

<TABLE>
<S> <C>
1995................................................ $ 14,652
1996................................................ 8,434
1997................................................ 25,391
1998................................................ 11,482
1999................................................ 21,025
Thereafter.......................................... 62,308
-------------
$ 143,292
=============
</TABLE>

57
<PAGE> 58
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. NOTES AND INTEREST PAYABLE (Continued)

the shopping center. The second lien mortgage bore interest at 8.5% per annum,
required monthly payments of interest only and matured in March 1999. In
October 1994, the tenant loaned the Company an additional $1.9 million, the
proceeds of which were used in part to repay the first mortgage secured by the
property described above. At funding of the second loan, the two loans were
combined into a new first mortgage. The new first mortgage, in the amount of
$3.3 million, bears interest at 12% per annum, requires monthly payments of
interest only of $32,500 and matures October 31, 1995.

In April 1994, the Company refinanced the mortgage debt secured by the Heritage
Apartments in Tulsa, Oklahoma in the amount of $2.1 million. The Company
received net cash of $1.2 million after the payoff of $650,000 in existing
mortgage debt that was scheduled to mature in December 1994. The remainder of
the refinancing proceeds were used to fund required repair and tax escrows and
the payment of various closing costs associated with the refinancing. The new
mortgage bears interest at 9.25% per annum, requires monthly payments of
principal and interest of $16,978 and matures May 1, 2001.

In December 1994, the Company obtained mortgage financing of $1.8 million
secured by the previously unencumbered Harper's Ferry Apartments in Lafayette,
Louisiana. The mortgage bears interest at 10.5625% per annum, requires monthly
payments of principal and interest of $16,900 and matures December 1, 2001.

In October 1990, the Company stopped making payments on the nonrecourse
mortgage debt secured by the Fountain Village Apartments, a 410 unit apartment
complex in Tucson, Arizona. In March 1991, the property was placed in
bankruptcy. In May 1993, the Company reached an agreement with the lender to
modify and reinstate the mortgage. The modified mortgage provides for a
reduced principal balance of $5.4 million. The Company recognized an
extraordinary gain of $1.1 million in 1993 related to this debt modification.

In March 1995, the Company refinanced the mortgage debt secured by the Fountain
Village Apartments in the amount of $6.2 million. The Company received net
cash of $1.1 million after the payoff of $4.9 million in existing mortgage
debt. The remainder of the refinancing proceeds were used to fund required
repair and tax escrows

58
<PAGE> 59
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. NOTES AND INTEREST PAYABLE (Continued)

and the payment of various closing costs associated with the refinancing. The
new mortgage bears interest at a variable rate of 2.75% above the average yield
of United States Treasury Securities, currently 6.375%, requires monthly
payments of principal and interest and matures April, 1998. The Company
guaranteed payment of $1.3 million of the mortgage.

In February 1993, the Company reached an agreement with the lender to modify
and extend the mortgage secured by the Plaza Office Building in St. Petersburg,
Florida. In exchange for the Company making a $500,000 principal reduction
payment, the maturity date of the mortgage was extended to December 1994. The
Company had the right to prepay the mortgage (with a balance of $2.7 million)
at any time through August 1993 and receive a $500,000 discount. The Company
took advantage of the discount and paid off the note in August 1993. The
Company recognized an extraordinary gain of $500,000 in 1993 on the payoff.

The nonrecourse mortgage loan secured by the Spa Cove Apartments, located in
Annapolis, Maryland, matured on June 30, 1993. The Company continued to make
its regular monthly payments which the lender continued to accept. In December
1993, the lender reinstated and modified the mortgage. The mortgage
modification requires a principal paydown on the mortgage of $1.6 million by
June 30, 1995 and a pledge by the Company of shares of IORT with a market value
of at least $1.6 million. The Company pledged 110,750 of its IORT shares,
which had an aggregate market value of $2.2 million ($19.625 per share) at
December 31, 1994. The modified mortgage matures in January 1997.

59
<PAGE> 60
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. NOTES AND INTEREST PAYABLE (Continued)

was remitted to the lender all of which was applied to unpaid real estate
taxes. In July 1994, the property was placed in bankruptcy. In January 1995,
the Bankruptcy Court approved a plan of reorganization which provides for a
reduction in the mortgage's principal balance to $4.1 million, reduces the pay
rate to 6% per annum in the first year, increasing to 10.25% per annum in the
fourth year, with interest accruing at 10.25% per annum. In February 1995, the
Company funded required escrows of $500,000 to satisfy outstanding real estate
taxes and to cover projected negative cash flow of the property. The Company
recorded no gain or loss as a result of the debt restructuring.

As discussed in NOTE 3. "REAL ESTATE AND DEPRECIATION", in 1994 the Company
purchased one apartment complex, one industrial facility, and four office
buildings and in 1993 the Company purchased one apartment complex, four
industrial facilities, two shopping centers and one parcel of land which were
financed in part by $31.0 million and $21.0 million, respectively, of new or
assumed mortgage debt.

Mortgage notes payable at December 31, 1994 bear interest at rates ranging from
6.5% to 15.0% and mature between 1995 and 2024. The mortgages are
collateralized by deeds of trust on real estate with a net carrying value of
$184 million.

In 1993, $72,000 of interest was capitalized. No interest was capitalized in
1994 or 1992.

NOTE 7. REDEEMABLE COMMON STOCK

In November 1992, in conjunction with the Company's purchase of a 40.1% limited
partner interest in Tri-City, the Company also acquired the sellers entire
Redeemable Common Stock ownership in the Company for $738,000. Upon purchase,
the Company retired its Redeemable Common Stock. See NOTE 5. "INVESTMENT IN
EQUITY METHOD REAL ESTATE ENTITIES."

NOTE 8. DIVIDENDS

The Company's dividend policy provides for an annual determination of
dividends, after the Company's year end. The minimum amount of dividends will
be determined by the amount, if any, required to maintain the Company's status
as a Real Estate Investment Trust ("REIT") for federal tax purposes. The
Company had a loss for federal tax purposes in 1994, 1993 and 1992, therefore,
no dividends were declared or paid in these years.

NOTE 9. RENTALS UNDER OPERATING LEASES

The Company's rental operations include the leasing of office buildings,
industrial facilities and shopping centers. The leases thereon expire

60
<PAGE> 61
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. RENTALS UNDER OPERATING LEASES (Continued)

at various dates through 2008. The following is a schedule of minimum future
rentals on non-cancelable operating leases at December 31, 1994:

<TABLE>
<S> <C>
1995............................................... $ 21,282
1996............................................... 18,245
1997............................................... 14,671
1998............................................... 11,368
1999............................................... 8,540
Thereafter......................................... 27,404
------------
$ 101,510
============
</TABLE>

NOTE 10. ADVISORY AGREEMENT

Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as advisor
to the Company since March 28, 1989. BCM is a company owned by a trust for the
benefit of the children of Gene E. Phillips. Mr. Phillips served as a Director
of the Company until December 31, 1992, as a director of BCM until December 22,
1989 and as Chief Executive Officer of BCM until September 1, 1992. Mr.
Phillips serves as a representative of his children's trust which owns BCM and,
in such capacity, has substantial contact with the management of BCM and input
with respect to its performance of advisory services to the Company.

At the Company's annual meeting of stockholders held on March 7, 1995, the
Company's stockholders approved the renewal of the Company's Advisory Agreement
with BCM through the next annual meeting of the Company's stockholders.
Subsequent renewals of the Advisory Agreement with BCM, do not require the
approval of the Company's stockholders but do require the approval of the
Company's Board of Directors.

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

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

61
<PAGE> 62
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. ADVISORY AGREEMENT (Continued)

contains guidelines for the Advisor's allocation of investment opportunities as
among itself, the Company and other entities it advises.

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

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

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

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

62
<PAGE> 63
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. ADVISORY AGREEMENT (Continued)

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

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

Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it in the performance of advisory services to the Company.

Under the Advisory Agreement, all or a portion of the annual advisory fee must
be refunded by the Advisor to the Company if the Operating Expenses of the
Company (as defined in the Advisory Agreement) exceed certain limits specified
in the Advisory Agreement based on the book value, net asset value and net
income of the Company during such fiscal year. The operating expenses of the
Company in 1994, 1993 or 1992 did not exceed such limitation.

Additionally, if the Company were to request that BCM render services to the
Company other than those required by the Advisory Agreement, BCM or an
affiliate of BCM will be separately compensated for such additional services on
terms to be agreed upon from time to time. As discussed in NOTE 11. "PROPERTY
MANAGEMENT," the Company has hired Carmel Realty Services, Ltd. ("Carmel,
Ltd."), an affiliate of BCM, to perform property management for the Company's
properties and as discussed in NOTE 12. "REAL ESTATE BROKERAGE," has engaged,
on a non-exclusive basis, Carmel Realty, Inc. ("Carmel Realty"), also an
affiliate of BCM, to perform brokerage services for the Company.

NOTE 11. PROPERTY MANAGEMENT

63
<PAGE> 64
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11. PROPERTY MANAGEMENT (Continued)

holder, (ii) Mr. Phillips and (iii) a trust for the benefit of the children of
Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and
leasing of 26 of the Company's commercial properties and the commercial
properties owned by a real estate partnership in which the Company and IORT are
partners to Carmel Realty, which is a company owned by SWI. Carmel Realty is
entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Carmel, Ltd.

NOTE 12. REAL ESTATE BROKERAGE

Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Company and received brokerage commissions in accordance with the advisory
agreement. Effective December 1, 1992, the Company's Board of Directors
approved the non-exclusive engagement by the Company of Carmel Realty to
perform brokerage services for the Company. Carmel Realty is entitled to
receive a commission for property acquisitions and sales by the Company in
accordance with the following sliding scale of total fees to be paid by the
Company: (i) maximum fee of 5% on the first $2.0 million of any purchase or
sale transaction of which no more than 4% would be paid to Carmel Realty or
affiliates; (ii) maximum fee of 4% on transaction amounts between $2.0 million
- $5.0 million of which no more than 3% would be paid to Carmel Realty or
affiliates; (iii) maximum fee of 3% on transaction amounts between $5.0 million
- $10.0 million of which no more than 2% would be paid to Carmel Realty or
affiliates; and, (iv) maximum fee of 2% on transaction amounts in excess of
$10.0 million of which no more than 1.5% would be paid to Carmel Realty or
affiliates.

NOTE 13. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

Fees and cost reimbursements to BCM, the Company's advisor, and its affiliates:

<TABLE>
<CAPTION>
1994 1993 1992
----------- ------------ -----------
<S> <C> <C> <C>
Fees
Advisory . . . . . . . . . . . . . . . . . . . . $ 1,708 $ 1,548 $ 1,607
Property acquisition . . . . . . . . . . . . . . 397 273 643
Real estate brokerage . . . . . . . . . . . . . . 1,687 819 242
Mortgage equity and refinancing . . . . . . . . . 163 63 46
Property and construction
management and leasing
commissions* . . . . . . . . . . . . . . . . . 1,280 646 323
----------- ------------ ----------
$ 5,235 $ 3,349 $ 2,861
=========== ============ ==========

Cost reimbursements . . . . . . . . . . . . . . . . . $ 706 $ 647 $ 916
=========== ============ ==========

----------------------------
</TABLE>

* Net of property management fees paid to subcontractors, other than
Carmel Realty.

64
<PAGE> 65
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. INCOME TAXES

For the years 1994, 1993 and 1992, the Company has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to stockholders, provided that at least
95% of its REIT taxable income, plus 95% of its taxable income from foreclosure
property as defined in Section 857 of the Code, is distributed. See NOTE 8.
"DIVIDENDS."

The Company had a loss for federal income tax purposes in 1994, 1993 and 1992;
therefore, the Company recorded no provision for income taxes.

The Company's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property sales, the difference in the
allowance for estimated losses, depreciation on owned properties and
investments in joint venture partnerships. At December 31, 1994, the Company's
tax basis in its net assets exceeded its basis for financial statement purposes
by $7.7 million. As a result, aggregate future income for income tax purposes
will be less than such amount for financial statement purposes, and the Company
would be able to maintain its REIT status without distributing 95% of its
financial statement income. Additionally, at December 31, 1994, the Company
had a tax net operating loss carryforward of $42.4 million expiring through
2009.

As a result of the Company's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.

NOTE 15. EXTRAORDINARY GAIN

In August 1994, the Company recognized an extraordinary gain of $1.2 million on
the conveyance of it's limited partner interest in One Penn Square to the
lender on a mortgage secured by the property owned by the partnership, in
settlement of all litigation between the Company and the lender. See "NOTE 4.
INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES".

In May 1993, the Company recognized an extraordinary gain of $1.1 million on
the modification of the mortgage debt secured by the Fountain Village
Apartments. In August 1993, the Company recognized an extraordinary gain of
$500,000 on the early payoff of the mortgage debt secured by the Plaza Office
Building. See NOTE 6. "NOTES AND INTEREST PAYABLE."

In 1992, the Company recognized an extraordinary gain of $440,000 as a result
of the Company's acquiring, at discount, the mortgage debt secured by its
Harper's Ferry Apartments.

65
<PAGE> 66
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. COMMITMENTS AND CONTINGENCIES

Olive Litigation. In February 1990, the Company together with Continental
Mortgage and Equity Trust ("CMET"), IORT and National Income Realty Trust
("NIRT"), three real estate entities with, at the time, the same officers,
directors or trustees and advisor as the Company, entered into a settlement of
a class and derivative action entitled Olive et al. v. National Income Realty
Trust et al., relating to the operation and management of each of such
entities. On April 23, 1990, the court granted final approval of the terms of
the settlement.

66
<PAGE> 67
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. COMMITMENTS AND CONTINGENCIES (Continued)

Company and that no other opportunity exists that is as good as the opportunity
presented by such transaction.

Settlement of Southmark Adversary Proceedings. During 1990 and 1991, several
adversary proceedings were initiated against the Company and others by
Southmark and its affiliates. On December 27, 1991, an agreement to settle all
claims in connection with the Southmark adversary proceedings was executed by
Southmark and Messrs. Phillips and Friedman, SWI, National Realty, L.P.
("NRLP") and American Realty Trust, Inc. ("ART"). The settlement covered all
claims between Southmark and its affiliates and Messrs. Phillips and Friedman,
ART, SWI, NRLP, CMET, IORT, NIRT, Vinland Property Trust ("VPT") and the
Company. The final settlement of such litigation concluded all of the suits in
which the Company was a defendant. Pursuant to the settlement agreement,
Southmark received a total of $13.2 million from the various settling
defendants. The final installment of $1.3 million was paid by the settling
defendants in July 1994.

As part of this global settlement NRLP and ART paid Southmark an aggregate of
$4.1 million and Messrs. Phillips and Friedman paid Southmark $1.0 million.
ART also transferred to Southmark a 19.2% limited partnership interest in the
general partner of NRLP and National Operating, L.P., the operating partnership
of NRLP.

Other Litigation. The Company is also involved in various other lawsuits
arising in the ordinary course of business. Management of the Company is of
the opinion that the outcome of these lawsuits will have no material impact on
the Company's financial condition.

67
<PAGE> 68
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 17. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of the Company's quarterly results of operations
for the years 1994 and 1993 (unaudited):

<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
1994 March 31, June 30, September 30, December 31,
------ ---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Income . . . . . . . . . . . . . . . . . $ 8,850 $ 9,218 $ 9,391 $ 10,434
Expenses . . . . . . . . . . . . . . . . 11,119 12,152 11,789 12,094
---------- --------- --------- ----------

(Loss) before gain on sale of
partnership interests, gain on
sale of real estate and
extraordinary gain . . . . . . . . . . . (2,269) (2,934) (2,398) (1,660)
Gain on sale of partnership
interests . . . . . . . . . . . . . . . 2,514 - - -
Gain of sale of real estate . . . . . . . - - 2,153 -
Extraordinary gain . . . . . . . . . . . - - 1,189 -
---------- --------- --------- ----------

Net income (loss) . . . . . . . . . . . . $ 245 $ (2,934) $ 944 $ (1,660)
========== ========= ========= ==========

Earnings Per Share
(Loss) before gain on sale of
partnership interests, gain on
sale of real estate and
extraordinary gain . . . . . . . . . . . $ (.85) $ (1.10) $ (.89) $ (.63)
Gain on sale of partnership
interests . . . . . . . . . . . . . . . .94 - - -
Gain on sale of real estate . . . . . . . - - .80 -
Extraordinary gain . . . . . . . . . . . - - .44 -
----------- --------- --------- ----------

Net income (loss) . . . . . . . . . . . . $ .09 $ (1.10) $ .35 $ (.63)
=========== ========= ========= ==========
</TABLE>

In the first quarter of 1994, a gain on sale of partnership interest of $2.5
million was recognized on the sale of the Company's general partnership
interest in two partnerships. In the third quarter of 1994, a gain on sale of
real estate of $2.2 million was recognized on the sale of an apartment complex,
and an extraordinary gain of $1.2 million was recognized on the conveyance of
the Company's limited partner interest in a partnership to the lender on a
mortgage secured by the property owned by the partnership in settlement of
litigation between the Company and the lender.

68
<PAGE> 69
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 17. QUARTERLY RESULTS OF OPERATIONS (Continued)

<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
1993 March 31, June 30, September 30, December 31,
------ ---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Income . . . . . . . . . . . . . . . . . $ 7,202 $ 8,175 $ 8,180 $ 8,423
Expenses . . . . . . . . . . . . . . . . 10,055 10,808 10,898 10,407
---------- --------- --------- ----------

(Loss) before gain on sale
of real estate and
extraordinary gain . . . . . . . . . . (2,853) (2,633) (2,718) (1,984)
Gain of sale of real estate . . . . . . . - - - 24
Extraordinary gain . . . . . . . . . . . - 1,045 500 49
---------- --------- --------- ----------

Net (loss) . . . . . . . . . . . . . . . $ (2,853) $ (1,588) $ (2,218) $ (1,911)
========== ========== ========== ===========

Earnings Per Share
(Loss) before gain on sale of
real estate and
extraordinary gain . . . . . . . . . . $ (1.05) $ (.98) $ (1.02) $ (.74)
Gain on sale of real estate . . . . . . . - - - .01
Extraordinary gain . . . . . . . . . . . - .39 .19 .01
---------- ---------- ---------- -----------

Net (loss) . . . . . . . . . . . . . . . $ (1.05) $ (.59) $ (.83) $ (.72)
========== ========== ========== ===========
</TABLE>

In the second quarter of 1993, a provision for losses of $731,000 was recorded
to reduce the carrying value of a property held for sale to its then estimated
fair value and an extraordinary gain of $1.0 million was recognized on the
modification of mortgage debt secured by an apartment complex. In the third
quarter of 1993, a provision for losses of $142,000 was recorded to provide for
the transfer of a note pool to a third party and an extraordinary gain of
$500,000 was recognized on the early payoff of the mortgage debt secured by an
office building. In the fourth quarter of 1993, an additional $49,000 was
recorded to adjust the extraordinary gain recognized in the second quarter of
1993.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

69
<PAGE> 70
SCHEDULE III

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994

Fountain Village . . . . $6,314 $1,518 $8,352 $1,683 $(2,375) (2)
Tucson, AZ
Harper's Ferry . . . . . 1,840 349 1,398 87 -
Lafayette, LA
Heritage . . . . . . . . 2,056 148 839 - (300) (3)
Tulsa, OK
Monterey Bay . . . . . . 3,953 716 4,059 128 -
St. Petersburg, FL
Park Forest. . . . . . . 2,980 414 3,677 667 -
Dearborn Heights, MI
South Cochran. . . . . . 995 540 2,162 - -
Los Angeles, CA
Spa Cove . . . . . . . . 13,673 2,254 10,297 3,404 682 (4)
Annapolis, MD
Summerchase. . . . . . . 8,720 1,149 8,309 1,159 (35) (5)
Norcross, GA
Summerfield. . . . . . . 4,807 1,175 4,698 - -
Orlando, FL
Summerstone. . . . . . . 4,962 1,155 4,618 - -
Houston, TX
Woodland Hills . . . . . 384 228 913 - -
San Antonio, TX

OFFICE BUILDINGS
----------------
74 New Montgomery. . . . 5,203 2,277 9,105 1,906 (336) (2)
San Francisco, CA
Chesapeake Ridge . . . . - 3,663 4,098 1,477 -
San Diego, CA
Corporate Pointe . . . . 2,958 830 3,321 - -
Chantilly, VA . . . . .
Forum. . . . . . . . . . 5,747 1,360 5,439 269 -
Richmond, VA
Hartford . . . . . . . . 2,300 630 2,520 - -
Dallas, TX
Institute Place Lofts. . 4,894 665 7,057 19 -
Chicago, IL
Latham Square. . . . . . - 1,001 4,003 163 (1,000) (2)
Oakland, CA
North Central Plaza One. 8,150 2,586 10,286 - -
Dallas, TX
One Steeplechase . . . . 8,330 1,380 5,520 2,796 72 (4)
Sterling, VA
The Plaza. . . . . . . . - 1,760 12,617 5,444 (4,379) (2)
St. Petersburg, FL
Republic Towers
I, II & III. . . . . . . - 2,914 5,441 1,546 -
Dallas, TX
<CAPTION>
Life on Which
Gross Amounts of Which Carried Date Depreciation
at End of Year of in Latest
------------------------------ Con- Statement
Buildings & (1) Accumulated struc- Date of Operation
Property/Location Land Improvements Total Depreciation tion Acquired is Computed
------------------ ---- ------------ ----- ------------ ------- -------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
APARTMENTS
----------

Fountain Village . . . . $1,162 $8,016 $9,178 $2,781 1973 01/10/86 5-40 years
Tucson, AZ
Harper's Ferry . . . . . 349 1,485 1,834 95 1972 02/25/92 40 years
Lafayette, LA
Heritage . . . . . . . . 88 599 687 32 1966 05/14/90 40 years
Tulsa, OK
Monterey Bay . . . . . . 716 4,187 4,903 413 1972 06/28/91 5-40 years
St. Petersburg, FL
Park Forest. . . . . . . 414 4,344 4,758 1,580 1968 02/27/86 5-40 years
Dearborn Heights, MI
South Cochran. . . . . . 540 2,162 2,702 194 1928 05/29/91 40 years
Los Angeles, CA
Spa Cove . . . . . . . . 2,254 14,383 16,637 3,102 1965 02/27/87 5-40 years
Annapolis, MD
Summerchase. . . . . . . 1,113 9,469 10,582 3,245 1985 10/01/85 5-40 years
Norcross, GA
Summerfield. . . . . . . 1,175 4,698 5,873 19 1971 11/02/94 40 years
Orlando, FL
Summerstone. . . . . . . 1,155 4,618 5,773 120 1984 12/17/93 40 years
Houston, TX
Woodland Hills . . . . . 228 913 1,141 57 1972 05/01/92 40 years
San Antonio, TX

OFFICE BUILDINGS
----------------
74 New Montgomery. . . . 2,210 10,742 12,952 1,473 1914 09/21/90 4-40 years
San Francisco, CA
Chesapeake Ridge . . . . 3,663 5,575 9,238 2,331 1985 06/30/85 5-40 years
San Diego, CA
Corporate Pointe . . . . 830 3,321 4,151 14 1992 10/28/94 40 years
Chantilly, VA . . . . .
Forum. . . . . . . . . . 1,360 5,708 7,068 351 1987 10/30/92 3-40 years
Richmond, VA
Hartford . . . . . . . . 630 2,520 3,150 9 11/10/94 40 years
Dallas, TX
Institute Place Lofts. . 665 7,076 7,741 2,766 01/01/93 4-40 years
Chicago, IL
Latham Square. . . . . . 801 3,366 4,167 360 1926 10/15/91 5-40 years
Oakland, CA
North Central Plaza One. 2,586 10,286 12,872 13 1983 12/13/94 40 years
Dallas, TX
One Steeplechase . . . . 1,380 8,388 9,768 719 1987 12/22/92 5-40 years
Sterling, VA
The Plaza. . . . . . . . 1,241 14,201 15,442 6,473 1979 11/14/85 3-40 years
St. Petersburg, FL
Republic Towers
I, II & III. . . . . . . 2,914 6,987 9,901 357 1954 11/27/92 5-40 years
Dallas, TX
</TABLE>

70
<PAGE> 71
SCHEDULE III
(Continued)

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994

<TABLE>
<CAPTION>
Cost
Capitalized Subsequent
Initial Cost to Acquisition
--------------------- ------------------------------
Buildings &
Property/Location Encumbrances Land Improvements Improvements Other
----------------- ------------ ---- ------------ ------------ -----
(dollars in thousands)
PROPERTIES HELD FOR INVESTMENT - Continued
<S> <C> <C> <C> <C> <C>
OFFICE BUILDINGS (Continued)
----------------
Town & Country . . . . . $ - $ 108 $ 432 $ 312 $ -
Houston, TX
Venture Center . . . . . - 411 2,746 71 -
Atlanta, GA
Waterstreet. . . . . . . 8,559 2,605 10,420 716 -
Boulder, CO

INDUSTRIAL FACILITIES
---------------------
Corporate Center at
Beaumeade I,II & III. . . 4,768 1,259 5,038 45 -
Ashburn, VA . . . . . .
Denton Drive. . . . . . . 337 414 527 - -
Dallas, TX . . . . . . .
Parke Long. . . . . . . . 7,933 1,838 7,361 41 -
Chantilly, VA
Technology Trading
Center. . . . . . . . . 4,487 1,199 4,796 - -
Sterling, VA
Texstar . . . . . . . . . 1,150 333 1,331 - -
Arlington, TX
Tricon. . . . . . . . . . 5,544 2,761 6,442 386 -
Atlanta, GA . . . . . .

SHOPPING CENTERS
----------------
Dunes Plaza . . . . . . . 5,648 958 5,430 31 (82)(6)
Michigan City, IN
Fiesta Mart . . . . . . . 144 116 466 - -
San Angelo, TX
Heritage. . . . . . . . . - 51 291 26 -
Tulsa, OK
Northtown . . . . . . . . 3,248 1,786 7,143 947 -
Dallas, TX
Parkway Center . . . . . - 273 1,876 312 -
Dallas, TX
President's Square . . . 1,200 483 1,182 39 -
San Antonio, TX
Sadler Square. . . . . . 2,557 679 2,715 - -
Amelia Island, FL
Shaw Plaza . . . . . . . 2,678 1,066 4,262 816 (109)(7)
Sharon, MA
Sheboygan. . . . . . . . 1,071 242 1,371 - -
Sheboygan, WI . . . . .
------- ------ ------- ------ ------
PROPERTIES HELD FOR
INVESTMENT . . . . . . . 137,590 45,294 182,558 24,490 (7,862)
------- ------ ------- ------ ------
<CAPTION>
Life on Which
Gross Amounts of Which Carried Date Depreciation
at End of Year of in Latest
------------------------------ Con- Statement
Buildings & (1) Accumulated struc- Date of Operation
Property/Location Land Improvements Total Depreciation tion Acquired is Computed
------------------ ---- ------------ ----- ------------ ------- -------- -------------
(dollars in thousands)
PROPERTIES HELD FOR INVESTMENT - Continued
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE BUILDINGS (Continued)
----------------
Town & Country . . . . . $ 108 $ 744 $ 852 $ 129 1982 05/01/92 5-40 years
Houston, TX
Venture Center . . . . . 411 2,817 3,228 440 1981 07/04/89 5-40 years
Atlanta, GA
Waterstreet. . . . . . . 2,605 11,136 13,741 1,077 1988 09/30/91 3-40 years
Boulder, CO

INDUSTRIAL FACILITIES
---------------------
Corporate Center at
Beaumeade I,II & III. . . 1,259 5,083 6,342 61 1989 04/28/94 3-40 years
Ashburn, VA . . . . . . 10/28/94
Denton Drive. . . . . . . 414 527 941 22 1948- 05/13/93 40 years
Dallas, TX . . . . . . . 1952
Parke Long. . . . . . . . 1,838 7,402 9,240 101 1989 06/16/94 3-40 years
Chantilly, VA
Technology Trading
Center. . . . . . . . . 1,199 4,796 5,995 123 1987 12/21/93 40 years
Sterling, VA
Texstar . . . . . . . . . 333 1,331 1,664 35 1967 12/16/93 40 years
Arlington, TX
Tricon. . . . . . . . . . 2,761 6,828 9,589 385 1971- 02/11/93 2-40 years
Atlanta, GA . . . . . . 1975

SHOPPING CENTERS
----------------
Dunes Plaza . . . . . . . 1,071 5,266 6,337 369 1978 03/17/92 5-40 years
Michigan City, IN
Fiesta Mart . . . . . . . 116 466 582 35 1976 12/13/91 40 years
San Angelo, TX
Heritage. . . . . . . . . 51 317 368 59 1966 05/14/90 5-40 years
Tulsa, OK
Northtown . . . . . . . . 1,786 8,090 9,876 502 1967 02/25/92 10-40 years
Dallas, TX
Parkway Center . . . . . 273 2,188 2,461 376 1979 11/01/91 4 - 40 years
Dallas, TX
President's Square . . . 483 1,221 1,704 52 1985 04/13/93 40 years
San Antonio, TX
Sadler Square. . . . . . 679 2,715 3,394 136 1987 11/22/93 40 years
Amelia Island, FL
Shaw Plaza . . . . . . . 1,081 4,954 6,035 539 1978 12/13/91 5-40 years
Sharon, MA
Sheboygan. . . . . . . . 242 1,371 1,613 90 1977 05/21/92 40 years
Sheboygan, WI . . . . .
------ ------- ------- ------
PROPERTIES HELD FOR
INVESTMENT . . . . . . . 44,184 200,296 244,480 31,035
------ ------- ------- ------
</TABLE>

71
<PAGE> 72
TRANSCONTINENTAL REALTY INVESTORS, INC. SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 1994

<TABLE>
<CAPTION>
Cost
Capitalized Subsequent
Initial Cost to Acquisition
--------------------- ------------------------------
Buildings &
Property/Location Encumbrances Land Improvements Improvements Other
----------------- ------------ ---- ------------ ------------ -----
(dollars in thousands)
PROPERTIES HELD FOR SALE
<S> <C> <C> <C> <C> <C>
HOTEL
-----
Majestic Inn . . . . . . $ 950 $ 1,139 $ 4,555 $ 86 $ -
San Francisco, CA

LAND
----
Byron. . . . . . . . . . - 1,605 - - -
Greensboro, NC
Cheyenne . . . . . . . . - 88 - - -
Colorado Springs, CO
Dunes. . . . . . . . . . - 272 - - -
Michigan City, IN
Fruitland. . . . . . . . - 253 - - -
Fruitland Park, FL
Maumelle . . . . . . . . - 2,213 - - (1,994) (8)
Maumelle, AR
Moss Creek . . . . . . . - 1,225 - 140 (695) (9)
Greensboro, NC
-------- ------- -------- ------- ---------
PROPERTIES HELD FOR
SALE. . . . . . . . . . 950 6,795 4,555 226 (2,689)
-------- ------- -------- ------- ---------

$138,540 $52,089 $187,113 $24,716 $ (10,551)
======== ======= ======== ======= =========

Allowance for
estimated losses. . . .

<CAPTION>
Life on Which
Gross Amounts of Which Carried Date Depreciation
at End of Year of in Latest
------------------------------ Con- Statement
Buildings & (1) Accumulated struc- Date of Operation
Property/Location Land Improvements Total Depreciation tion Acquired is Computed
------------------ ---- ------------ ----- ------------ ------- -------- -------------
(dollars in thousands)
PROPERTIES HELD FOR SALE
<S> <C> <C> <C> <C> <C> <C> <C>
HOTEL
-----
Majestic Inn . . . . . . $ 1,139 $ 4,641 $ 5,780 $ 492 1902 12/31/90 5-40 years
San Francisco, CA

LAND
----
Byron. . . . . . . . . . 1,605 - 1,605 - - 10/19/92 -
Greensboro, NC
Cheyenne . . . . . . . . 88 - 88 - - 02/25/92 -
Colorado Springs, CO
Dunes. . . . . . . . . . 272 - 272 - - 11/23/93 -
Michigan City, IN
Fruitland. . . . . . . . 253 - 253 - - 05/01/92 -
Fruitland Park, FL
Maumelle . . . . . . . . 219 - 219 - - 05/11/93 -
Maumelle, AR
Moss Creek . . . . . . . 559 111 670 22 1993 08/12/92 10 years
Greensboro, NC
------- -------- -------- --------
PROPERTIES HELD FOR
SALE. . . . . . . . . . 4,135 4,752 8,887 514
------- -------- -------- --------

$48,319 $205,048 253,367 $ 31,549
======= ======== ========

Allowance for
estimated losses. . . . (58)
--------

$253,309
========
</TABLE>

_______________________

(1) The aggregate cost for federal income tax purposes is $238,533.
(2) Writedown of property to estimated net realizable value.
(3) Escrow deposits deducted from the basis of the property.
(4) Construction period interest and taxes.
(5) Proceeds from condemnation of land.
(6) Cash from receiver deducted from the basis of the property, offset
by land acquired in 1992.
(7) Adjustment to purchase price.
(8) Adjustment to purchase price, offset by the proceeds from the sale
of all but 114 residential lots.
(9) Sale of 29 lots and option payments on sale of stable facilities.

72
<PAGE> 73

SCHEDULE III
(Continued)

TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate

Balance at January 1, . . . . . . . . . . . . . . . . $ 223,388 $ 181,878 $ 141,747

Additions
Acquisitions and improvements . . . . . . . . . . . . 47,218 42,863 33,137
Foreclosures. . . . . . . . . . . . . . . . . . . . . - 2,213 2,686
Real estate acquired in
Southmark settlement . . . . . . . . . . . . . . . . - - 12,957
Other. . . . . . . . . . . . . . . . . . . . . . . . - 53

Deductions
Sale of real estate . . . . . . . . . . . . . . . . . (9,626) - -
Sale of foreclosed properties . . . . . . . . . . . . (7,254) (1,778) (8,308)
Deed given in lieu of taxes . . . . . . . . . . . . . (335) - -
Write down due to permanent
impairment of property . . . . . . . . . . . . . . - (1,336) -
Cash received and applied to
basis of real estate . . . . . . . . . . . . . . . - - (394)
Other . . . . . . . . . . . . . . . . . . . . . . . . (24) (452) -
----------- ---------- ----------

Balance at December 31, . . . . . . . . . . . . . . . $ 253,367 $ 223,388 $ 181,878
=========== ========== ==========

Reconciliation of Accumulated
Depreciation

Balance at January 1, . . . . . . . . . . . . . . . . $ 28,149 $ 20,356 $ 16,842

Additions
Depreciation . . . . . . . . . . . . . . . . . . . . 6,095 5,436 4,033
Accumulated depreciation of
partnership property acquired
through assumption of debt. . . . . . . . . . . . - 2,357 -

Deductions
Sale of real estate . . . . . . . . . . . . . . . . (2,388) - -
Sale of foreclosed properties . . . . . . . . . . . (307) - (519)
----------- ---------- ----------

Balance at December 31, . . . . . . . . . . . . . . $ 31,549 $ 28,149 $ 20,356
=========== ========== ==========
</TABLE>

73
<PAGE> 74

SCHEDULE IV

TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994

<TABLE>
<CAPTION>
Final
Interest Maturity Prior
Description Rate Date Periodic Payment Terms Liens
------------------------ -------- -------- ------------------------------------------ -----------

FIRST MORTGAGE LOANS
<S> <C> <C> <C> <C>
LANDMARK APARTMENTS . . . . . Varies 07/2002 Note receivable bearing interest at $ -
------------------- 9.5% to 11% from 8/1/94 through 7/31/99
Secured by apartment and the greater of 12% or 3% over the 10 year
complex in Erie, PA. T-Bill rate through maturity. Interest-only
payments due monthly, principal payments
of $5,000 monthly beginning 8/1/99, at
maturity all principal and unpaid
interest are due. No prepayment penalty.

TOWN AND COUNTRY APARTMENTS. . Varies 07/98 Note receivable bearing interest at -
--------------------------- 9% through 7/95, 9.5% through 7/96 and
Secured by apartment 10% through 7/98 at which time all
complex in Detroit, MI. principal and accrued interest is due.
Interest only payments required monthly.
All principal and unpaid interest due at
maturity.

BLAYDES PARTICIPATION . . . . 10.0% 06/92 Note receivable bearing interest at
--------------------- 10%. All principal and accrued
Secured by 4.8 acres of interest due.
residential land in
Dupage County, IL.

MILWAUKEE LAND . . . . . . . Varies 01/91 Note receivable bearing interest at -
-------------- prime plus 1%. Monthly interest only
Secured by 34,847 sq. ft. of payments due until maturity, at which
land in Milwaukee, WI. time all principal and unpaid interest
was due. No prepayment penalty.

ALLEN RESIDENCE . . . . . . . 7.5% 08/96 Note receivable bearing interest at -
--------------- 7.5%. Principal and interest payments
Secured by a residence of $5,069 due monthly. Annual
in Phoenix, AZ. principal payments of $25,000. No
prepayment penalty.

MAUMELLE LAND . . . . . . . . 8.0% 02/98 Note receivable bearing interest at -
------------- 8.0%. Annual principal reductions of
Secured by 1,386 acres of $850,000 due February 1, with annual
developed residential and interest payments. Note allows a dis-
commercial subdivisions in count of principal balance of $400,000
Maumelle, AR if principal reduction of $3 million
is made by 5/15/95. Additional dis-
counts or $400,000 if principal re-
ductions totaling $4 million made by
5/15/96 and final discount of $400,000
if principal reductions totaling $5
million are made by 5/15/97.
<CAPTION>

Principal Amount of
Carrying Loans Subject to
Face Amount Amounts Delinquent Principal
Description of Mortgage of Mortgage (1) or Interest
------------------------ --------------- ------------------ --------------------
(dollars in thousands)
FIRST MORTGAGE LOANS
<S> <C> <C> <C>
LANDMARK APARTMENTS . . . . . $2,610 $2,110 $ -
-------------------
Secured by apartment
complex in Erie, PA.

TOWN AND COUNTRY APARTMENTS. . 875 875 -
---------------------------
Secured by apartment
complex in Detroit, MI.

BLAYDES PARTICIPATION . . . . 181 181 181
---------------------
Secured by 4.8 acres of
residential land in
Dupage County, IL.

MILWAUKEE LAND . . . . . . . 200 60 60
--------------
Secured by 34,847 sq. ft. of
land in Milwaukee, WI.

ALLEN RESIDENCE . . . . . . . 725 691 -
---------------
Secured by a residence
in Phoenix, AZ.

MAUMELLE LAND . . . . . . . . 6,737 6,737 6,737
-------------
Secured by 1,386 acres of
developed residential and
commercial subdivisions in
Maumelle, AR
</TABLE>

<PAGE> 75
SCHEDULE IV
(Continued)

TRANSCONTINENTAL REALTY INVESTORS, INC
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994

<TABLE>
<CAPTION>
Final
Interest Maturity
Description Rate Date Periodic Payment Terms
----------------------- --------- -------- ---------------------------------

<S> <C> <C> <C>
FIRST MORTGAGE LOANS (CONTINUED)
MOSS CREEK LOTS . . . . . . 9.0% 06/2000 16 notes outstanding at 12/31/94.
--------------- Monthly payments of principal and
Secured by developed resi- - 12.0% interest ranging from $118 to $421.
dential lots in Greensboro,
NC.

RCA BUILDING . . . . . . . 10.0% 01/96 Note receivable bearing interest at
------------ 10%. Monthly interest accrual is
Secured by office building compounded to principal. All interest
in Mt. Laurel, NJ. accruals and principal due at maturity.

WRAPAROUND MORTGAGE LOANS

CHATEAU CHARLES . . . . . . 3.875% 02/2016 Note receivable bearing interest at
--------------- 3.85%. Principal and interest pay-
Secured by a hotel ments of $13,327 due monthly. Pre-
in Lake Charles, LA. payment penalty of 1% of outstanding
principal balance.

HOLCOMB #12 . . . . . . . . Varies 01/98 Note receivable bearing interest at
----------- 7.5% through 1/95, then 10% through
Secured by office maturity. Monthly interest only
building located in payments due until maturity, at which
Gwinnett County, GA. time all principal and unpaid interest
is due. No prepayment penalty.

K-MART, CARY . . . . . . . Varies 03/2012 Note receivable bearing interest at
------------ prime plus 1%. Monthly payments of
Secured by a shopping center lesser of $37,277 or net cash flow of
in Wake County, NC. the collateral property.

JUNIOR MORTGAGE LOANS

HAMPTON . . . . . . . . . . Varies - Note receivable bearing interest at
------- prime plus 1%. Monthly payments of
Secured by two office interest only required. Principal
buildings and a retail is due upon demand. No prepayment
center in penalty.
Milwaukee, WI.

LINCOLN COURT APARTMENTS . Varies 06/2004 Two notes receivable bearing interest
------------------------ at prime plus 1%. Interest only pay-
Secured by apartment ments due monthly until maturity, at
building in which time all principal and unpaid
Dallas, TX. interest are due. No prepayment penalty.
<CAPTION>
Principal Amount of
Carrying Loans Subject to
Prior Face Amount Amounts Delinquent Principal
Description Liens of Mortgage of Mortgage (1) or Interest
----------------------- -------- ----------- --------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
FIRST MORTGAGE LOANS (CONTINUED)
MOSS CREEK LOTS . . . . . . - 345 304 -
---------------
Secured by developed resi-
dential lots in Greensboro,
NC.

RCA BUILDING . . . . . . . - 100 104 -
------------
Secured by office building
in Mt. Laurel, NJ.

WRAPAROUND MORTGAGE LOANS

CHATEAU CHARLES . . . . . . 313 3,000 481 -
---------------
Secured by a hotel
in Lake Charles, LA.

HOLCOMB #12 . . . . . . . . 980 2,900 2,900 -
-----------
Secured by office
building located in
Gwinnett County, GA.

K-MART, CARY . . . . . . . 2,202 3,400 2,514 -
------------
Secured by a shopping center
in Wake County, NC.

JUNIOR MORTGAGE LOANS

HAMPTON . . . . . . . . . . 956 400 92 95
-------
Secured by two office
buildings and a retail
center in
Milwaukee, WI.

LINCOLN COURT APARTMENTS . 1,395 1,369 1,369 -
------------------------
Secured by apartment
building in
Dallas, TX.

-------- -------- --------- -------
5,846 22,842 18,418 7,073
</TABLE>

75
<PAGE> 76
SCHEDULE IV
(Continued)

TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994

<TABLE>
<CAPTION>
Final
Principal Interest Maturity
Description Rate Date Periodic Payment Terms
------------------------ -------- -------- ----------------------------------
<S> <C> <C> <C>
SECURED BY OTHER THAN REAL ESTATE
CRIVELLO #2 . . . . . . . . Varies On Demand Note receivable bearing interest at
----------- prime. Monthly payment of interest
Secured by a mortgage only.
note secured by real
property in Milwaukee, WI.

DENOTO . . . . . . . . . . 10.0% 11/97 Note receivable bearing interest at
------ 10%. Monthly payments of principal
Secured by a general busi- and interest. No prepayment penalty.
ness security agreement.

DOUBLE FEATURE VIDEO . . . Varies 07/98 Three notes outstanding. Quarterly
-------------------- payments due based on gross sales.
Secured by a general Unpaid accruals compounded to principal.
business security
agreement.

HOPPER . . . . . . . . . . 12.5% 11/95 Principal and interest payments of $480
------ due monthly. No prepayment penalty.
Secured by a general
business security agreement.

KELLY . . . . . . . . . . . Varies 02/99 Note receivable bearing interest at
----- 8% to 10% from 1/195 to 1/31/99.
Secured by a general Interest only payments due monthly.
business security $5,000 principal reduction due
agreement. annually on December 31. No prepay-
ment penalty.

ROHLOFF/WEITZ . . . . . . . 12.5% 03/95 Note receivable bearing interest at
------------- 12.5%. Principal and interest pay-
Secured by a general busi- ments of $240. No prepayment penalty.
ness security agreement.

UNSECURED

WICHROWSKI . . . . . . . . Varies 11/99 Note receivable bearing interest at
---------- 8% to 9.5% from 1/95 to 11/99.
Monthly payments of principal and
interest. Annual principal reduction
of $325 due 11/1. No prepayment
penalty.
Total

Interest Receivable . . . .
Discount on notes receivable
Deferred gain . . . . . . .

Allowance for estimated
losses . . . . . . . . .
<CAPTION>
Principal Amount of
Carrying Loans Subject to
Principal Prior Face Amount Amounts Delinquent Principal
Description Liens of Mortgage of Mortgage (1) or Interest
------------------------ ---------- ----------- --------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
SECURED BY OTHER THAN REAL ESTATE
CRIVELLO #2 . . . . . . . . $ - $879 $193 $193
-----------
Secured by a mortgage
note secured by real
property in Milwaukee, WI.

DENOTO . . . . . . . . . . - 7 7 -
------
Secured by a general busi-
ness security agreement.

DOUBLE FEATURE VIDEO . . . - 645 181 181
--------------------
Secured by a general
business security
agreement.

HOPPER . . . . . . . . . . - 44 44 -
------
Secured by a general
business security agreement.

KELLY . . . . . . . . . . . - 47 47 -
-----
Secured by a general
business security
agreement.

ROHLOFF/WEITZ . . . . . . . - 20 20 -
------------- ----- -------- -------- --------
Secured by a general busi-
ness security agreement.

UNSECURED

WICHROWSKI . . . . . . . .
----------

Total 5,846 $24,504 18,930 $7,447
===== ======= ========
Interest Receivable . . . . 389
Discount on notes receivable (2,210)
Deferred gain . . . . . . . (4,948)
--------
12,161
Allowance for estimated
losses . . . . . . . . . (902)
--------
$ 11,259
========
</TABLE>
-----------------------------

(1) The aggregate cost for federal income tax purposes is $19,317.

76
<PAGE> 77
SCHEDULE IV
(Continued)

TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOANS ON REAL ESTATE

<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1,. . . . . . . . . . . . . . . . $ 13,787 $ 18,743 $ 35,256

Additions
New mortgage loans and
additional fundings on
mortgage loans . . . . . . . . . . . . . . . . . 6,837 6,430 2,747
Loans acquired in Southmark
settlement . . . . . . . . . . . . . . . . . . . - - 3,694
New loan from sale of four
loans. . . . . . . . . . . . . . . . . . . . . . - - 5,005
Reclassification of
participation to note payable - - 1,256
Deferred interest . . . . . . . . . . . . . . . . . 4 395 50

Deductions
Collections of principal. . . . . . . . . . . . . . (1,713) (8,997) (11,268)
Foreclosed properties and
deeds-in-lieu of foreclosure . . . . . . . . . . - (2,363) (3,844)
Transfer of four loans sold
to new loan. . . . . . . . . . . . . . . . . . . - - (4,700)
Write off of uncollectible
mortgage loan. . . . . . . . . . . . . . . . . . (497) - (5,927)
Write off of principal due to
pay off of mortgage loans at
discounts. . . . . . . . . . . . . . . . . . . . - - (2,910)
Writedown of mortgage notes. . . . . . . . . . . . - - (621)
Transfer of loans to third
party in exchange for
assumption of related
liability . . . . . . . . . . . . . . . . . . . - (421) -
Other . . . . . . . . . . . . . . . . . . . . . . . - - 5
---------- ---------- -----------

Balance at December 31,. . . . . . . . . . . . . . . $ 18,418 $ 13,787 $ 18,743
========== ========== ===========
</TABLE>

77
<PAGE> 78

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

Not applicable.

___________________________________

PART III

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

Directors

The affairs of Transcontinental Realty Investors, Inc. (the "Company" or the
"Registrant") are managed by a seven-member Board of Directors which is divided
into three classes serving for staggered three year terms. The Directors are
elected at the annual meeting of stockholders or appointed by the incumbent
Board of Directors and serve until their respective terms expire or until a
successor has been elected or appointed.

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

GEOFFREY C. ETNIRE: Age 46, Director (Class III) (Independent) (since January
1993).

Attorney engaged in private practice of real estate law in
Pleasanton, California (since 1981); Licensed Real Estate Broker in
California (since 1985); Director (1985 to 1989) of Mission Valley
Bancorp; Director (1984 to 1989) and Chairman (1986 to 1989) of Bank
of Pleasanton; Managing Partner (1981 to 1988) with Smith, Etnire,
Polson & Scott law firm; Trustee (January 1993 to March 1995) of
National Income Realty Trust ("NIRT"); and Trustee (since January
1993) of Continental Mortgage and Equity Trust ("CMET") and Income
Opportunity Realty Trust ("IORT").

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<PAGE> 79
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Directors (Continued)

HAROLD FURST, PH.D.: Age 78, Director (Class II) (Independent) (since January
1995).

Executive Vice President (since 1992) of SONY Signatures;
Independent business consultant (since 1975) with emphasis on
economic and financial matters; President (1973 to 1975) of Gerson
Bakar & Associates, a property development, ownership and management
company; Former Senior Vice President of Bank of America, N.T. and
S.A. (retired 1972); and Trustee (since January 1995) of CMET and
IORT.

JOHN P. PARSONS: Age 66, Director (Class II) (Independent) (since January
1995).

Chairman and Chief Executive Officer (since 1984) of Pierpont
Corporation; Director of Zentrum Holdings Limited (NZ) (since 1984),
the Pickford Foundation (since 1980), International Divertissments,
Ltd. (since 1986), and Lifehouse International, Ltd.(since 1990);
and Trustee (since January 1995) of CMET and IORT.

BENNETT B. SIMS: Age 62, Director (Class III) (Independent) (since April
1990).

Producer (since January 1994) for Blue Train Pictures; Author (since
1964); Screen and Television Writer (since 1960); Independent
Marketing Consultant (since 1980) for various companies; Professor
of Dramatic Writing (since September 1987) at Tisch School of the
Arts, New York University; Trustee (April 1990 to August 1994) of
NIRT; Trustee (December 1992 to August 1994) of Vinland Property
Trust ("VPT"); and Trustee (since April 1990) of CMET and IORT.

TED P. STOKELY: Age 61, Director (Class II) (Independent) (since April 1990)
and Chairman of the Board (since January 1995).

General Manager (since January 1993) of Minority and Elderly Housing
Assistance Foundation, Inc., a nonprofit corporation; Part-time
unpaid Consultant (since January 1993) and paid Consultant (April
1992 to December 1992) of Eldercare Housing Foundation
("Eldercare"), a nonprofit corporation engaged in the acquisition of
low income and elderly housing; President (April 1992 to April 1994)
of PSA Group (real estate management and consulting); Executive Vice
President (1987 to 1991) of Key Companies Inc., a publicly traded
company that develops, acquires and sells water and minerals;
Trustee (April 1990 to August 1994) of NIRT; and Trustee (since
April 1990) and Chairman of the Board (since January 1995) of CMET
and IORT.

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<PAGE> 80
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Directors (Continued)

MARTIN L. WHITE: Age 55, Director (Class I) (Independent) (since January
1995).

Chairman and Chief Executive Officer (since 1993) of North American
Trading Company Ltd.; President and Chief Operating Officer (since
1992) of Community Based Developers, Inc.; Development Officer and
Loan Manager (1986 to 1992) of the City of San Jose, California;
Vice President and Director of Programs (1967 to 1986) of Arpact,
Inc., a government contractor for small business development and
trade; and Trustee (since January 1995) of CMET and IORT.

EDWARD G. ZAMPA: Age 60, Director (Class I) (Independent) (since January 1995).

General Partner (since 1976) of Edward G. Zampa and Company; and
Trustee (since January 1995) of CMET and IORT.

Litigation and Claims Involving Mr. Phillips

Gene E. Phillips served as a Director of the Company until December 31, 1992,
and as a director until December 22, 1989 and Chief Executive Officer until
September 1, 1992 of BCM. Although Mr. Phillips no longer serves as an officer
or director of BCM or as a Director of the Company, he does serve as a
representative of the trust established for the benefit of his children which
owns BCM and, in such capacity, has substantial contact with the management of
BCM and input with respect to its performance of advisory services for the
Company.

Southmark Bankruptcy. Until January 1989, Mr. Phillips served as Chairman of
the Board and Director (since 1980) and President and Chief Executive Officer
(since 1981) of Southmark Corporation ("Southmark"). As a result of a deadlock
on Southmark's Board of Directors, Mr. Phillips, among others reached an
agreement with Southmark on January 17, 1989, whereby Mr. Phillips resigned his
positions with Southmark and certain of Southmark's subsidiaries and
affiliates. Southmark filed a voluntary petition in bankruptcy under Chapter
11 of the United States Bankruptcy Code on July 14, 1989.

San Jacinto Savings Association. On November 30, 1990, San Jacinto Savings
Association ("SJSA"), a savings institution that had been owned by Southmark
since 1983 and for which Mr. Phillips served as a director from 1987 to January
1989, was placed under conservatorship of the Resolution Trust Corporation
("RTC") by federal banking authorities. On December 14, 1990, SJSA was
converted into a Federal Association and placed in receivership. On November
26, 1993, the RTC filed lawsuits in Dallas and New York City against Mr.
Phillips, six former directors, auditors and lawyers of SJSA, alleging that the
auditors and former directors could and should have stopped SJSA's poor lending
practice during the period it was owned by Southmark and that the former

80
<PAGE> 81
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Litigation and Claims Involving Mr. Phillips (Continued)

directors abdicated their responsibility for reviewing loans during the same
period. The Office of Thrift Supervision ("OTS") also conducted a formal
examination of SJSA and its affiliates.

On November 21, 1994, Mr. Phillips entered into an agreement with the RTC and
OTS settling all claims relating to his involvement with SJSA.

Litigation Against Southmark and its Affiliates Alleging Fraud or
Mismanagement. There were several lawsuits filed against Southmark, its former
officers and directors (including Mr. Phillips) and others, alleging, among
other things, that such persons and entities engaged in conduct designed to
defraud and mislead the investing public by intentionally misrepresenting the
financial condition of Southmark. All such lawsuits have been settled or
dismissed without any findings or admissions of wrongdoing by Mr. Phillips.
THE COMPANY WAS NOT A DEFENDANT IN ANY OF THESE LAWSUITS.

Litigation Relating to Lincoln Savings and Loan Association, F.A. In an action
filed in the United States District Court for the District of Arizona on behalf
of Lincoln Savings and Loan Association, F.A. ("Lincoln") and captioned RTC v.
Charles H. Keating, Jr., et al, the RTC alleged that Charles H. Keating, Jr.
and other persons, including Mr. Phillips, fraudulently diverted funds from
Lincoln.

The RTC alleged that Mr. Phillips aided and abetted the insider defendants in a
scheme to defraud Lincoln and its regulators; that Southmark, its subsidiaries
and affiliates, including SJSA, facilitated and concealed the use of Lincoln
funds to finance the sale, at inflated prices, of assets of Lincoln's parent,
American Continental Corp. ("ACC"), in return for loans from Lincoln and
participations in contrived transactions; and that the insider defendants
caused Southmark to purchase ACC assets at inflated prices. The RTC alleged
that Lincoln and/or ACC engaged in three illegal transactions with Southmark or
its affiliates while Mr. Phillips was affiliated with Southmark. Southmark was
not a defendant in this action.

The RTC alleged nine separate causes of action against Mr. Phillips, including
aiding and abetting the violation of, and conspiracy to violate, federal and
state Racketeer Influenced and Corrupt Organizations Act ("RICO") statutes,
violations of Arizona felony statutes, common law fraud, civil conspiracy and
breach of fiduciary duty. The RTC sought to recover from the defendants more
than $1 billion, as well as treble damages under the federal RICO statute,
punitive damages of at least $100 million and attorneys' fees and costs.

On November 21, 1994, Mr. Phillips entered into an agreement with the RTC
settling all claims relating to his involvement with Lincoln.

Southmark Partnership Litigation. One of Southmark's principal businesses was
real estate syndication, and from 1981 to 1987 Southmark

81
<PAGE> 82
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Litigation and Claims Involving Mr. Phillips (Continued)

raised over $500 million in investments from limited partners of several
hundred limited partnerships. The following two lawsuits related to and
involved such activities.

In an action filed in May 1992 in a Texas state court captioned HCW Pension
Real Estate Fund, et al. v. Phillips et al., the plaintiffs, fifteen former
Southmark related public limited partnerships, alleged that the defendants
violated the partnership agreements by charging certain administrative costs
and expenses to the plaintiffs. The complaint alleged claims for breach of
fiduciary duty, fraud and conspiracy to commit to fraud and sought to recover
actual damages of approximately $12.6 million plus punitive damages, attorneys'
fees and costs. The defendants included, among others, Mr. Phillips. In
October 1993, the court granted partial summary judgment in favor of Mr.
Phillips on the plaintiffs' breach of fiduciary duty claims. Notice of
non-suit in favor of Mr. Phillips was entered on March 9, 1994.

In an action filed in January 1993 in a Michigan state court captioned Van
Buren Associates Limited Partnership, et al. v. Friedman, et al., the
plaintiff, a former Southmark sponsored limited partnership, alleged a claim
for breach of fiduciary duty in connection with the 1988 transfer of certain
property by the partnership. The plaintiff sought damages in an unspecified
amount, plus costs and attorneys' fees. The plaintiff also sought to quiet
title to the property at issue. The defendants included, among others, Mr.
Phillips. The lawsuit was settled in November 1994.

Board Committees

The Company's Board of Directors held ten meetings during 1994. For such year,
no incumbent Director attended fewer than 75% of the aggregate of (i) the total
number of meetings held by the Company's Board of Directors during the period
for which he had been a Director and (ii) the total number of meetings held by
all committees of the Board of Directors on which he served during the period
that he served, except for Willie K. Davis and Randall K. Gonzalez, who each
attended only one of the meetings held by the Audit Committee.

The Company's Board of Directors has an Audit Committee, the function of which
is to review the Company's operating and accounting procedures. The current
members of the Audit Committee, all of whom are Independent Directors, are
Messrs. Etnire (Chairman), Parsons, Stokely and White. The Audit Committee
met twice during 1994.

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

Until January 11, 1995, the Company's Board of Directors had a Related Party
Transaction Committee which reviewed and made recommendations to the Board of
Directors with respect to transactions involving the

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<PAGE> 83
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Board Committees (Continued)

Company and any other party or parties related to or affiliated with the
Company, any of its Directors or any of their affiliates, and a Litigation
Committee which reviewed litigation involving Mr. Phillips. The members of
each such committee were Independent Directors of the Company. During 1994,
the Related Party Transaction Committee met eight times and the Litigation
Committee met four times.

The Litigation Committee evaluated the nature and quality of the allegations
made in any litigations or investigations involving Mr. Phillips in order to
assess whether BCM should continue to act as the advisor to the Company. The
Litigation Committee, while not needing to duplicate the adjudicatory process,
was required to conduct any investigation that was appropriate and necessary to
discharge the above obligations.

The Related Party Transaction Committee and the Litigation Committee were
formed in 1990 pursuant to the settlement of the Olive litigation, as more
fully discussed in ITEM 3. "LEGAL PROCEEDINGS - Olive Litigation." In December
1994, the court approved a modification of the settlement which relieved the
Company of the requirement to maintain the two committees. Accordingly, both
of the committees were terminated by the Company's Board of Directors on
January 11, 1995.

Executive Officers

The following persons currently serve as executive officers of the Company:
Oscar W. Cashwell, President; Karl L. Blaha, Executive Vice President and
Director of Commercial Management; Bruce A. Endendyk, Executive Vice President;
Randall M. Paulson, Executive Vice President; and Hamilton P. Schrauff,
Executive Vice President and Chief Financial Officer. Their positions with the
Company are not subject to a vote of stockholders. Their ages, terms of
service, all positions and offices with the Company or BCM, other principal
occupations, business experience and directorships with other companies during
the last five years or more are set forth below.

OSCAR W. CASHWELL: Age 67, President (since February 1994).

President (since February 1994) of CMET and IORT; President and
Director of Property and Asset Management (since January 1994) and
Assistant to the President, Real Estate Operations (July 1989 to
December 1993) of BCM; President (since February 1994) and Director
(since March 1994) of Syntek Asset Management, Inc. ("SAMI"), the
managing general partner of Syntek Asset Management, L.P. ("SAMLP"),
which is the general partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP"), and a company owned by BCM;
Assistant to the President, Real Estate Operations (March 1982 to
June 1989) of Southmark; and Director (since November 1992) of
American Realty Trust, Inc. ("ART").

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<PAGE> 84
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Executive Officers (Continued)

KARL L. BLAHA: Age 46, Executive Vice President and Director of Commercial
Management (since April 1992).

President (since October 1993) and Executive Vice President and
Director of Commercial Management (April 1992 to September 1993) of
ART; Executive Vice President and Director of Commercial Management
(since April 1992) of BCM, SAMI, CMET and IORT; Executive Vice
President (since October 1992) of Carmel Realty, Inc. ("Carmel
Realty"), a company owned by Syntek West, Inc. ("SWI"); Executive
Vice President and Director of Commercial Management (April 1992 to
February 1994) of NIRT and VPT; Partner - Director of National Real
Estate Operations of First Winthrop Corporation (August 1988 to
March 1992); Corporate Vice President of Southmark (April 1984 to
August 1988); and President of Southmark Commercial Management
(March 1986 to August 1988).

BRUCE A. ENDENDYK: Age 46, Executive Vice President (since January 1995).

President (since January 1995) of Carmel Realty; Executive Vice
President (since January 1995) of BCM, SAMI, ART, CMET and IORT;
Management Consultant (November 1990 to December 1994); Executive
Vice President (January 1989 to November 1990) of Southmark;
President and Chief Executive Officer (March 1988 to January 1989)
of Southmark Equities Corporation; and Vice President/Resident
Manager (December 1975 to March 1988) of Coldwell Banker
Commercial/Real Estate Services in Houston, Texas.

RANDALL M. PAULSON: Age 48, Executive Vice President (since January 1995).

Executive Vice President (since January 1995) of SAMI, ART, CMET and
IORT and (since October 1994) of BCM; Vice President (1993 to 1994)
of GSSW, LP, a joint venture of Great Southern Life and Southwestern
Life; Vice President (1990 to 1993) of Property Company of America
Realty, Inc.; President (1990) of Paulson Realty Group; President
(1983 to 1989) of Johnstown Management Company; and Vice President
(1979 to 1982) of Lexton-Ancira.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

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<PAGE> 85
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Executive Officers (Continued)

HAMILTON P. SCHRAUFF: Age 59, Executive Vice President and Chief Financial
Officer (since October 1991).

Executive Vice President and Chief Financial Officer (since October
1991) of BCM, SAMI, ART, CMET and IORT; Executive Vice President and
Chief Financial Officer (October 1991 to February 1994) of NIRT and
VPT; Executive Vice President - Finance of Partnership Investments,
Hallwood Group (December 1990 to October 1991); Vice President -
Finance and Treasurer (October 1980 to October 1990) and Vice
President - Finance (November 1976 to September 1980) of Texas Oil &
Gas Corporation; and Assistant Treasurer - Finance Manager (February
1975 to October 1976) of Exxon U.S.A.

Officers

Although not executive officers of the Company, the following persons currently
serve as officers of the Company: Thomas A. Holland, Senior Vice President and
Chief Accounting Officer; Robert A. Waldman, Senior Vice President, General
Counsel and Secretary and Drew D. Potera, Treasurer. Their positions with the
Company are not subject to a vote of stockholders. Their ages, terms of
service, all positions and offices with the Company or BCM, other principal
occupations, business experience and directorships with other companies during
the last five years or more are set forth below.

THOMAS A. HOLLAND: Age 52, Senior Vice President and Chief Accounting Officer
(since July 1990).

Senior Vice President and Chief Accounting Officer (since July 1990)
of BCM, SAMI, ART, CMET and IORT; Senior Vice President and Chief
Accounting Officer (July 1990 to February 1994) of NIRT and VPT;
Vice President and Controller (December 1986 to June 1990) of
Southmark; Vice President- Finance (January 1986 to December 1986)
of Diamond Shamrock Chemical Company; Assistant Controller (May 1976
to January 1986) of Maxus Energy Corporation (formerly Diamond
Shamrock Corporation); Trustee (August 1989 to June 1990) of
Arlington Realty Investors; and Certified Public Accountant (since
1970).

[THIS SPACE INTENTIONALLY LEFT BLANK.]

85
<PAGE> 86
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

Officers (Continued)

ROBERT A. WALDMAN: Age 42, Senior Vice President and General Counsel (since
January 1995), Vice President (December 1990 to January 1995) and Secretary
(since December 1993).

Senior Vice President and General Counsel (since January 1995), Vice
President (December 1990 to January 1995) and Secretary (since
December 1993) of CMET and IORT; Vice President (December 1990 to
February 1994) and Secretary (December 1993 to February 1994) of
NIRT and VPT; Senior Vice President and General Counsel (since
January 1995), Vice President (January 1993 to January 1995) and
Secretary (since December 1989) of ART; Senior Vice President and
General Counsel (since November 1994), Vice President and Corporate
Counsel (November 1989 to November 1994), and Secretary (since
November 1989) of BCM; Senior Vice President and General Counsel
(since January 1995), Vice President (April 1990 to January 1995)
and Secretary (since December 1990) of SAMI; Director (February 1987
to October 1989) and General Counsel and Secretary (1985 to October
1989) of Red Eagle Resources Corporation (oil and gas); Assistant
General Counsel, Senior Staff Attorney and Staff Attorney (1981 to
1985) of Texas International Company (oil and gas); and Staff
Attorney (1979 to 1981) of Iowa Beef Processors, Inc.

DREW D. POTERA: Age 35, Treasurer (since December 1990).

Treasurer (since December 1990) of CMET and IORT; Treasurer
(December 1990 to February 1994) of NIRT and VPT; Treasurer (since
August 1991) and Assistant Treasurer (December 1990 to August 1991)
of ART; Vice President, Treasurer and Securities Manager (since July
1990) of BCM; Vice President and Treasurer (since February 1992) of
SAMI; and Financial Consultant with Merrill Lynch, Pierce, Fenner &
Smith Incorporated (June 1985 to June 1990).

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

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

Under the securities laws of the United States, the Company's Directors,
executive officers, and any persons holding more than ten percent of the
Company's shares of Common Stock are required to report their ownership of the
Company's shares and any changes in that ownership to the Securities and
Exchange Commission (the "Commission"). Specific due dates for these reports
have been established and the Company is required to report any failure to file
by these dates during 1994. All of these filing requirements were satisfied by
the Company's Directors and executive officers and ten percent holders. In
making these statements, the Company has relied on the written representations
of its incumbent Directors and executive officers and its ten percent holders
and copies of the reports that they have filed with the Commission.

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<PAGE> 87
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

The Advisor

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

BCM has served as the Company's advisor since March 1989. BCM is a corporation
of which Messrs. Cashwell, Blaha, Endendyk, Paulson and Schrauff serve as
executive officers. BCM is a company owned by a trust for the benefit of the
children of Mr. Phillips. Mr. Phillips served as a director of BCM until
December 22, 1989, and as Chief Executive Officer of BCM until September 1,
1992. Mr. Phillips serves as a representative of his children's trust which
owns BCM and, in such capacity, has substantial contact with the management of
BCM and input with respect to its performance of advisory services to the
Company.

At the Company's annual meeting of stockholders held on March 7, 1995, the
Company's stockholders approved the renewal of the Company's advisory agreement
with BCM through the next annual meeting of the Company's stockholders.
Subsequent renewals of the Advisory Agreement with BCM do not require the
approval of the Company's stockholders but do require the approval of the
Company's Board of Directors.

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<PAGE> 88
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

The Advisor (Continued)

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

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

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

88
<PAGE> 89
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

The Advisor (Continued)

(ii) a brokerage or commitment fee which is reasonable and fair under the
circumstances. Such fee will not be paid in connection with the origination or
funding by the Company of any mortgage loan.

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

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

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

RYAN T. PHILLIPS: Director

OSCAR W. CASHWELL: President and Director of Property and
Asset Management

KARL L. BLAHA: Executive Vice President and Director of
Commercial Management

BRUCE A. ENDENDYK: Executive Vice President

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<PAGE> 90
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

The Advisor (Continued)

RANDALL M. PAULSON: Executive Vice President

HAMILTON P. SCHRAUFF: Executive Vice President and Chief
Financial Officer

CLIFFORD C. TOWNS, JR.: Executive Vice President, Finance

STEPHEN R. YOUNG: Executive Vice President and Director of
Acquisitions

THOMAS A. HOLLAND: Senior Vice President and Chief
Accounting Officer

ROBERT A. WALDMAN: Senior Vice President, Secretary and
General Counsel

DREW D. POTERA: Vice President, Treasurer and Securities
Manager

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

Property Management

Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. Currently, Carmel, Ltd. provides such property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under its management. Carmel, Ltd. subcontracts
with other entities for the provision of the property- level management
services to the Company at various rates. The general partner of Carmel, Ltd.
is BCM. The limited partners of Carmel, Ltd. are (i) SWI, of which Mr.
Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust for the
benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the
property-level management and leasing of 26 of the Company's commercial
properties and the commercial properties owned by a real estate partnership in
which the Company and IORT are partners to Carmel Realty, which is a company
owned by SWI. Carmel Realty is entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Carmel, Ltd.

Real Estate Brokerage

Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Company and received brokerage commissions in accordance with the terms of the
advisory agreement. Effective December 1, 1992, the Company's Board of
Directors approved the non-exclusive engagement by

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<PAGE> 91
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT (Continued)

the Company of Carmel Realty to perform brokerage services for the Company.
Carmel Realty is entitled to receive a real estate commission for property
acquisitions and sales by the Company in accordance with the following sliding
scale of total fees to be paid by the Company: (i) maximum fee of 5% on the
first $2.0 million of any purchase or sale transaction of which no more than 4%
would be paid to Carmel Realty or affiliates; (ii) maximum fee of 4% on
transaction amounts between $2.0 million - $5.0 million of which no more than
3% would be paid to Carmel Realty or affiliates; (iii) maximum fee of 3% on
transaction amounts between $5.0 million - $10.0 million of which no more than
2% would be paid to Carmel Realty or affiliates; and, (iv) maximum fee of 2% on
transaction amounts in excess of $10.0 million of which no more than 1.5% would
be paid to Carmel Realty or affiliates.

ITEM 11. EXECUTIVE COMPENSATION

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

The only remuneration paid by the Company is to the Directors who are not
officers or directors of BCM or its affiliated companies. The Independent
Directors (i) review the investment policies of the Company to determine that
they are in the best interest of the Company's stockholders, (ii) review the
Company's contract with the advisor, (iii) supervise the performance of the
Company's advisor and review the reasonableness of the compensation which the
Company pays to its advisor in terms of the nature and quality of services
performed, (iv) review the reasonableness of the total fees and expenses of the
Company and (v) select, when necessary, a qualified independent real estate
appraiser to appraise properties purchased by the Company. The Independent
Directors receive compensation in the amount of $6,000 per year plus
reimbursement for expenses. In addition, each Independent Director receives
(i) $3,000 per year for each committee of the Company's Board of Directors on
which he serves, (ii) $2,500 per year for each committee chairmanship and (iii)
$1,000 per day for any special services rendered by him to the Company outside
of his ordinary duties as Director, plus reimbursement for expenses.

During 1994, the Company's Board of Directors established a Screening Committee
for the purpose of interviewing candidates for nomination to the Company's
Board of Directors pursuant to the Modification of Stipulation Settlement of
the Olive Litigation. In connection with such services each member of the
Screening Committee received a $5,000 fee.

91
<PAGE> 92
ITEM 11. EXECUTIVE COMPENSATION (Continued)

During 1994, $120,580 was paid to the Independent Directors in total Directors'
fees for all services, including the annual fee for service during the period
June 1, 1994 through May 31, 1995, and 1994 special service fees as follows:
Willie K. Davis, $13,667; Geoffrey C. Etnire, $25,705; Randall K. Gonzalez,
$11,000; A. Bob Jordan, $10,250; Dan L. Johnston, $17,208; Raymond V.J.
Schrag, $8,750; Bennett B. Sims, $17,000; and Ted P. Stokely, $17,000.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

92
<PAGE> 93
ITEM 11. EXECUTIVE COMPENSATION (Continued)

Performance Graph

The following performance graph compares the cumulative total stockholder
return on the Company's shares of Common Stock with the Standard & Poor's 500
Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The
comparison assumes that $100 was invested on December 31, 1989 in the Company's
shares of Common Stock and in each of the indices and further assumes the
reinvestment of all dividends. Past performance is not necessarily an
indicator of future performance.

COMPARISON OF FIVE YEAR
CUMULATIVE TOTAL RETURN

[GRAPH]

<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
THE COMPANY 100 34 56 67 134 148
S&P 500 INDEX 100 97 126 136 150 152
REIT INDEX 100 72 100 116 141 147
</TABLE>

93
<PAGE> 94
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Company's Common Stock, both beneficially and of
record, both individually and in the aggregate, for those persons or entities
known by the Company to be beneficial owners of more than 5% of its shares of
Common Stock as of the close of business on March 17, 1995.

<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
--------------------------- ----------------- ----------
<S> <C> <C>
American Realty Trust, Inc. 685,847 25.6%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

---------------------------
</TABLE>

(1) Percentage is based upon 2,674,850 shares of Common Stock outstanding at
March 17, 1995.

Security Ownership of Management. The following table sets forth the ownership
of the Company's Common Stock, both beneficially and of record, both
individually and in the aggregate, for the Directors and executive officers of
the Company as of the close of business on March 17, 1995.

<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
-------------------------- ------------------- ----------
<S> <C> <C>
All Directors and Executive 895,672 (2)(3) 33.5%
Officers as a group
(12 individuals)

---------------------------
</TABLE>

(1) Percentage is based upon 2,674,850 shares of Common Stock outstanding at
March 17, 1995.

(2) Includes 53,000 shares owned by CMET of which the Company's Directors may
be deemed to be beneficial owners by virtue of their positions as
trustees of CMET. The Directors of the Company disclaim beneficial
ownership of such shares.

(3) Includes 17,650 shares owned by SAMLP, 139,175 shares owned by BCM and
685,847 shares owned by ART, of which the executive officers of the
Company may be deemed to be beneficial owners by virtue of their
positions as executive officers or directors of SAMI, BCM and ART. The
executive officers of the Company disclaim beneficial ownership of such
shares.

94
<PAGE> 95
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Business Relationships

In February 1989, the Company's Board of Directors voted to retain BCM as the
Company's advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO
THE REGISTRANT - The Advisor." BCM is a corporation of which Messrs.
Cashwell, Blaha, Endendyk, Paulson and Schrauff serve as executive officers.
Mr. Phillips served as a director of BCM until December 22, 1989 and as Chief
Executive Officer of BCM until September 1, 1992. BCM is owned by a trust for
the benefit of the children of Mr. Phillips. Mr. Phillips serves as a
representative of his children's trust which owns BCM and, in such capacity,
has substantial contact with the management of BCM and input with respect to
BCM's performance of advisory services to the Company.

Since February 1990, affiliates of BCM have provided property management
services to the Company. Currently, Carmel, Ltd. provides such property
management services. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of 26 of the Company's commercial properties and the
commercial properties owned by a real estate partnership in which the Company
and IORT are partners to Carmel Realty, which is a company owned by SWI.

Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Company and received brokerage commissions in accordance with the advisory
agreement. Since December 1, 1992, the Company has engaged, on a non-
exclusive basis, Carmel Realty to perform brokerage services for the Company.
Carmel Realty is a company owned by SWI.

The Directors and officers of the Company also serve as trustees and officers
of CMET and IORT. The Directors owe fiduciary duties to such entities as well
as to the Company under applicable law. CMET and IORT have the same
relationship with BCM as the Company. The Company owned approximately 22% of
the outstanding shares of beneficial interest of IORT at December 31, 1994.
Mr. Phillips is a general partner of SAMLP, the general partner of NRLP and
NOLP. BCM performs certain administrative functions for NRLP and NOLP on a
cost-reimbursement basis. BCM also serves as advisor to ART. Mr. Phillips
served as Chairman of the Board and director of ART until November 16, 1992.
In addition, Messrs. Blaha, Endendyk, Paulson and Schrauff serve as executive
officers of ART and Mr. Cashwell serves as director of ART.

From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
Consultant and since January 1, 1993 as a part- time unpaid Consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income and
elderly housing. Eldercare has a revolving loan commitment from SWI, of which
Mr. Phillips is the sole shareholder. Eldercare filed for bankruptcy
protection in July 1993, and was dismissed from bankruptcy on October 12, 1994.

95
<PAGE> 96
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Related Party Transactions

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

In December 1994, NCPO Texas, Ltd., a Texas limited partnership, purchased the
North Central Plaza One Building, a 197,848 square foot office building in
Dallas, Texas for $12.4 million, consisting of $4.2 million in cash and new
mortgage financing of $8.2 million. The mortgage bears interest at 8.625% per
annum, requires monthly payments of principal and interest of $68,994 and
matures January 31, 2017. The Company is the sole limited partner of the
partnership with a 97.5% limited partner interest. The general partner of the
partnership, with a 2.5% general partner interest, is Ensearch Holding Company,
a corporation controlled by an adult son of A. Bob Jordan, a Director of the
Company until March 7, 1995. The Company has the option to acquire such
general partner interest at any time for one dollar upon obtaining the consent
of the lender and a release from the lender of the general partner's loan
guarantee. The Company intends to exercise such option.

At December 31, 1994, the Company owned a combined 63.7% general and limited
partner interest in Tri-City Limited Partnership, a limited partnership in
which IORT is a 36.7% general partner. The Company owns 170,750 shares of
beneficial interest of IORT, an approximate 22% interest.

In 1994, the Company paid BCM and its affiliates $1.7 million in advisory fees,
$397,000 in property acquisition fees, $1.7 million in real estate brokerage
commissions, $163,000 in mortgage equity and refinancing fees and $1.3 million
in property and construction management fees and leasing commissions, net of
property management fees paid to subcontractors, other than Carmel Realty. In
addition, as provided in the Advisory Agreement, BCM received cost
reimbursements from the Company of $706,000 in 1994.

Restrictions on Related Party Transactions

Article FOURTEENTH of the Company's Articles of Incorporation provides that the
Company shall not, directly or indirectly, contract or engage in any
transaction with (i) any director, officer or employee of the Company, (ii) any
director, officer or employee of the advisor, (iii) the advisor or (iv) any
affiliate or associate (as such terms are defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) of any of the aforementioned
persons, unless (a) the material facts as to the relationship among or
financial interest of the relevant individuals or persons and as to the
contract or transaction are disclosed to or are known by the Board of Directors
or the appropriate committee thereof and (b) the Board of Directors or
committee thereof

96
<PAGE> 97
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Restrictions on Related Party Transactions (Continued)

determines that such contract or transaction is fair to the Company and
simultaneously authorizes or ratifies such contract or transaction by the
affirmative vote of a majority of independent directors of the Company entitled
to vote thereon.

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

From 1990 until January 11, 1995, all related party transactions that the
Company entered into were required to be reviewed by the Related Party
Transaction Committee of the Company's Board of Directors to determine whether
such transactions were: (i) fair to the Company and (ii) were permitted by the
Company's Articles of Incorporation. Each of the members of the Related Party
Transaction Committee was an Independent Director, who was not an officer,
director or employee of BCM, the Company's Advisor, and was not an officer or
employee of the Company. The Related Party Transaction Committee was
terminated by the Company's Board of Directors on January 11, 1995.

Pursuant to the terms of the Modification of Stipulation of Settlement in the
Olive Litigation, as more fully discussed in ITEM 3. "LEGAL PROCEEDINGS - Olive
Litigation," which became effective on January 11, 1995, any related party
transaction which the Company may enter into prior to April 27, 1999, will
require the unanimous approval of the Company's Board of Directors. In
addition, related party transactions may only be entered into in exceptional
circumstances and after a determination by the Company's Board of Directors
that the transaction is in the best interests of the Company and that no other
opportunity exists that is as good as the opportunity presented by such
transaction.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

97
<PAGE> 98
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K

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

1. Consolidated Financial Statements

Report of Independent Certified Public Accountants

Consolidated Balance Sheets -
December 31, 1994 and 1993

Consolidated Statements of Operations -
Years Ended December 31, 1994, 1993 and 1992

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1994, 1993 and 1992

Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Schedule III - Real Estate and Accumulated Depreciation

Schedule IV - Mortgage Loans on Real Estate

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

3. Incorporated Financial Statements

Consolidated Financial Statements of Income Opportunity Realty Trust
(Incorporated by reference to Item 8 of Income Opportunity Realty Trust's
Annual Report on Form 10-K for the year ended December 31, 1994).

4. Exhibits

The following documents are filed as Exhibits to this Report:

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------------------------------------------------------------------------------------
<S> <C>
3.0 Articles of Incorporation of Transcontinental Realty Investors, Inc. (incorporated by reference to
Exhibit No. 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).

3.1 By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
</TABLE>

98
<PAGE> 99
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)

<TABLE>
<CAPTION>
Exhibit
Number Description
------- ----------------------------------------------------------------------------------------------------------
<S> <C>
10.0 Advisory Agreement dated as of March 24, 1992 between Transcontinental Realty Investors, Inc. and National
Realty Advisors, Inc. (incorporated by reference to Exhibit No. 10.1 to the Registrant's Current Report on
Form 8-K dated March 18, 1992).

10.1 Advisory Agreement dated as of December 1, 1992, between Transcontinental Realty Investors, Inc. and Basic
Capital Management, Inc. (incorporated by reference to Exhibit No. 10.2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992).

10.2 Advisory Agreement dated as of March 7, 1995, between Transcontinental Realty Investors, Inc. and Basic
Capital Management, Inc., filed herewith.

10.3 Brokerage Agreement dated as of December 1, 1992, between Transcontinental Realty Investors, Inc. and Carmel
Realty, Inc. (incorporated by reference to Exhibit No. 10.3 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992).

10.4 Brokerage Agreement dated as of February 11, 1994, between Transcontinental Realty Investors, Inc. and
Carmel Realty, Inc. (incorporated by reference to Exhibit No. 10.4 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993).

10.5 Brokerage Agreement dated as of February 11, 1995 between Transcontinental Realty Investors, Inc. and Carmel
Realty, Inc., filed herewith.

27.0 Financial Data Schedule.

99.0 Settlement Agreement and Mutual Release, dated as of December 27, 1991, between Southmark Corporation, et
al. and Gene E. Phillips, et al. (incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 27, 1991).

99.1 Agreement, dated as of February 25, 1992, between Gene E. Phillips, William S. Friedman, American Realty
Trust, Inc., Syntek West, Inc., National Realty Advisors, Inc., Transcontinental Realty Investors, Inc.,
Continental Mortgage and Equity Trust, National Income Realty Trust and Income Opportunity Realty Trust
(incorporated by reference to the Registrant's Current Report on Form 8-K dated February 25, 1992).
</TABLE>

99
<PAGE> 100
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)

(b) Reports on Form 8-K:

A Current Report on Form 8-K, dated November 1, 1994, was filed with
respect to Item 2, "Acquisition or Disposition of Assets", and Item 7,
"Financial Statements and Exhibits", which reports the acquisition of
Summerfield Apartments.

A Current Report on Form 8-K, dated December 13, 1994, was filed with
respect to Item 2, "Acquisition or Disposition of Assets,", and Item 7,
"Financial Statements and Exhibits", which reports the acquisition of
North Central Plaza One Office Building and which was amended on Form
8-K/A filed February 3, 1995.

100
<PAGE> 101
SIGNATURES

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

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

Dated: March 29, 1995 By: /s/ Oscar W. Cashwell
----------------------------------- -------------------------------------
Oscar W. Cashwell
President
</TABLE>

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

<TABLE>
<S> <C>
By: By: /s/ Ted P. Stokely
-------------------------------------- -------------------------------------
Geoffrey C. Etnire Ted P. Stokely
Director Director

By: /s/ Harold Furst, Ph.D. By: /s/ Martin L. White
-------------------------------------- -------------------------------------
Harold Furst, Ph.D. Martin L. White
Director Director

By: /s/ John P. Parsons By: /s/ Edward G. Zampa
-------------------------------------- -------------------------------------
John P. Parsons Edward G. Zampa
Director Director

By: /s/ Bennett B. Sims
--------------------------------------
Bennett B. Sims
Director

By: /s/ Hamilton P. Schrauff By: /s/ Thomas A. Holland
-------------------------------------- -------------------------------------
Hamilton P. Schrauff Thomas A. Holland
Executive Vice President and Senior Vice President and
Chief Financial Officer Chief Accounting Officer

Dated: March 29, 1995
-----------------------------------
</TABLE>

101
<PAGE> 102
TRANSCONTINENTAL REALTY INVESTORS, INC.

EXHIBITS TO
ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 1994

<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------------- ------
<S> <C> <C>
10.2 Advisory Agreement dated as of March 7, 1995, 103
between Transcontinental Realty Investors,
Inc. and Basic Capital Management, Inc.

10.5 Brokerage Agreement dated as of February 11, 129
1995, between Transcontinental Realty
Investors, Inc. and Carmel Realty, Inc.

27.0 Financial Data Schedule. 138
</TABLE>

102

<PAGE> 1
ADVISORY AGREEMENT EXHIBIT 10.2
BETWEEN
TRANSCONTINENTAL REALTY INVESTORS, INC.
AND
BASIC CAPITAL MANAGEMENT, INC.

THIS AGREEMENT dated as of March 7, 1995, between Transcontinental
Realty Investors, Inc., a Nevada corporation (the "Company") and Basic Capital
Management, Inc., a Nevada corporation (the "Advisor")

W I T N E S S E T H:

WHEREAS:

1. The Company owns a complex, diversified portfolio of real estate,
mortgages and other assets, including many non-performing or troubled assets.

2. The Company is an active real estate investment trust with funds
available for investment primarily in the acquisition of income-producing real
estate and to a lesser extent in short and medium term mortgages.

3. The Advisor and its employees have extensive experience in the
administration of real estate assets and the origination, structuring and
evaluation of real estate and mortgage investments.

NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties agree as follows:

1. DUTIES OF THE ADVISOR. Subject to the supervision of the

103
<PAGE> 2
Board of Directors, the Advisor will be responsible for the day-to-day
operations of the Company and, subject to Section 17 hereof, shall provide such
services and activities relating to the assets, operations and business plan of
the Company as may be appropriate, including:

(a) preparing and submitting an annual budget and business
plan for approval by the Board of the Company (the "Business Plan");

(b) using its best efforts to present to the Company a
continuing and suitable investment program consistent with the investment
policies and objectives of the Company as set forth in the Business Plan;

(c) using its best efforts to present to the Company
investment opportunities consistent with the Business Plan and such investment
program as the Directors may adopt from time to time;

(d) furnishing or obtaining and supervising the performance
of the ministerial functions in connection with the administration of the
day-to-day operations of the Company, including the investment of reserve funds
and surplus cash in short-term money market investments;

(e) serving as the Company's investment and financial
advisor and providing research, economic, and statistical data in connection
with the Company's investments and investment and financial policies;

(f) on behalf of the Company, investigating, selecting and
conducting relations with borrowers, lenders, mortgagors,

104
<PAGE> 3
brokers, investors, builders, developers and others; provided however, that the
Advisor shall not retain on the Company's behalf any consultants or third party
professionals, other than legal counsel, without prior Board approval;

(g) consulting with the Directors and furnishing the
Directors with advice and recommendations with respect to the making, acquiring
(by purchase, investment, exchange, or otherwise), holding, and disposition
(through sale, exchange, or otherwise) of investments consistent with the
Business Plan of the Company;

(h) obtaining for the Directors such services as may be
required in acquiring and disposing of investments, disbursing and collecting
the funds of the Company, paying the debts and fulfilling the obligations of
the Company, and handling, prosecuting, and settling any claims of the Company,
including foreclosing and otherwise enforcing mortgage and other liens securing
investments;

(i) obtaining for and at the expense of the Company such
services as may be required for property management, loan disbursements, and
other activities relating to the investments of the Company, provided, however,
the compensation for such services shall be agreed to by the Company and the
service provider;

(j) advising the Company in connection with public or
private sales of shares or other securities of the Company, or loans to the
Company, but in no event in such a way that the Advisor could be deemed to be
acting as a broker dealer or

105
<PAGE> 4
underwriter;

(k) quarterly and at any other time requested by the
Directors, making reports to the Directors regarding the Company's performance
to date in relation to the Company's approved Business Plan and its various
components, as well as the Advisor's performance of the foregoing services;

(l) making or providing appraisal reports, where
appropriate, on investments or contemplated investments of the Company;

(m) assisting in preparation of reports and other documents
necessary to satisfy the reporting and other requirements of any governmental
bodies or agencies and to maintain effective communications with stockholders
of the Company; and

(n) doing all things necessary to ensure its ability to
render the services contemplated herein, including providing office space and
office furnishings and personnel necessary for the performance of the foregoing
services as Advisor, all at its own expense, except as otherwise expressly
provided for herein.

2. NO PARTNERSHIP OR JOINT VENTURE. The Company and the Advisor are
not partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.

3. RECORDS. At all times, the Advisor shall keep proper books of
account and records of the Company's affairs which shall be accessible for
inspection by the Company at any time during

106
<PAGE> 5
ordinary business hours.

4. ADDITIONAL OBLIGATIONS OF THE ADVISOR. The Advisor shall refrain
from any action (including, without limitation, furnishing or rendering
services to tenants of property or managing or operating real property) that
would (a) adversely affect the status of the Company as a real estate
investment trust, as defined and limited in Sections 856-860 of the Internal
Revenue Code, (b) violate any law, rule, regulation, or statement of policy of
any governmental body or agency having jurisdiction over the Company or over
its securities, (c) cause the Company to be required to register as an
investment company under the Investment Company Act of 1940, or (d) otherwise
not be permitted by the Articles of Incorporation of the Company.

5. BANK ACCOUNTS. The Advisor may establish and maintain one or more
bank accounts in its own name, and may collect and deposit into any such
account or accounts, and disburse from any such account or accounts, any money
on behalf of the Company, under such terms and conditions as the Directors may
approve, provided that no funds in any such account shall be commingled with
funds of the Advisor; and the Advisor shall from time to time render
appropriate accounting of such collections and payments to the Directors and to
the auditors of the Company.

6. BOND. The Advisor shall maintain a fidelity bond with a
responsible surety company in such amount as may be required by the Directors
from time to time, covering all directors, officers, employees, and agents of
the Advisor handling funds of the Company

107
<PAGE> 6
and any investment documents or records pertaining to investments of the
Company. Such bond shall inure to the benefit of the Company in respect to
losses of any such property from acts of such directors, officers, employees,
and agents through theft, embezzlement, fraud, negligence, error, or omission
or otherwise, the premium for said bond to be at the expense of the Company.

7. INFORMATION FURNISHED ADVISOR. The Directors shall have the right
to change the Business Plan at any time, effective upon receipt by the Advisor
of notice of such change. The Company shall furnish the Advisor with a
certified copy of all financial statements, a signed copy of each report
prepared by independent certified public accountants, and such other
information with regard to the Company's affairs as the Advisor may from time
to time reasonably request.

8. CONSULTATION AND ADVICE. In addition to the services described
above, the Advisor shall consult with the Directors, and shall, at the request
of the Directors or the officers of the Company, furnish advice and
recommendations with respect to any aspect of the business and affairs of the
Company, including any factors that in the Advisor's best judgment should
influence the policies of the Company.

9. ANNUAL BUSINESS PLAN AND BUDGET. No later than January 15th of
each year, the Advisor shall submit to the Directors a written Business Plan
for the current Fiscal Year of the Company. Such Business Plan shall include a
twelve-month forecast of operations and cash flow with explicit assumptions and
a general

108
<PAGE> 7
plan for asset sales or acquisitions, lending, foreclosure and borrowing
activity, other investments or ventures and proposed securities offerings or
repurchases or any proposed restructuring of the Company. To the extent
possible, the Business Plan shall set forth the Advisor's recommendations and
the basis therefor with respect to all material investments of the Company.
Upon approval by the Board of Directors, the Advisor shall be authorized to
conduct the business of the Company in accordance with the explicit provisions
of the Business Plan, specifically including the borrowing, leasing,
maintenance, capital improvements, renovations and sale of investments set
forth in the Business Plan. Any transaction or investment not explicitly
provided for in the approved Business Plan shall require the prior approval of
the Board of Directors unless made pursuant to authority expressly delegated to
the Advisor. Within sixty (60) days of the end of each calendar quarter, the
Advisor shall provide the Board of Directors with a report comparing the
Company's actual performance for such quarter against the Business Plan.

10. DEFINITIONS. As used herein, the following terms shall have the
meanings set forth below:

(a) "Affiliate" shall mean, as to any Person, any other Person who
owns beneficially, directly, or indirectly, 1% or more of the outstanding
capital stock, shares or equity interests of such Person or of any other Person
which controls, is controlled by, or is under common control with such Person
or is an officer, retired officer, director, employee, partner, or trustee
(excluding

109
<PAGE> 8
noninterested trustees not otherwise affiliated with the entity) of such Person
or of any other Person which controls, is controlled by, or is under common
control with, such Person.

(b) "Appraised Value" shall mean the value of a Real Property
according to an appraisal made by an independent qualified appraiser who is a
member in good standing of the American Institute of Real Estate Appraisers
and is duly licensed to perform such services in accordance with the applicable
state law, or, when pertaining to Mortgage Loans, the value of the underlying
property as determined by the Advisor.

(c) "Book Value" of an asset or assets shall mean the value of such
asset or assets on the books of the Company, before provision for
amortization, depreciation, depletion or valuation reserves and before
deducting any indebtedness or other liability in respect thereof, except that
no asset shall be valued at more than its fair market value as determined by
the Directors.

(d) "Book Value of Invested Assets" shall mean the Book Value of the
Company's total assets (without deduction of any liabilities), but excluding
(i) goodwill and other intangible assets, (ii) cash, and (iii) cash equivalent
investments with terms which mature in one year or less.

(e) "Business Plan" shall mean the Company's investment policies and
objectives and the capital and operating budget based thereon, approved by the
Board as thereafter modified or amended.

(f) "Fiscal Year" shall mean any period for which an income tax
return is submitted to the Internal Revenue Service and which

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<PAGE> 9
is treated by the Internal Revenue Service as a reporting period.

(g) "Gross Asset Value" shall mean the total assets of the Company
after deduction of allowance for amortization, depreciation or depletion and
valuation reserves.

(h) "Mortgage Loans" shall mean notes, debentures, bonds, and other
evidences of indebtedness or obligations, whether negotiable or non-negotiable,
and which are secured or collateralized by mortgages, including first,
wraparound, construction and development, and junior mortgages.

(i) "Net Asset Value" shall mean the Book Value of all the assets of
the Company minus all the liabilities of the Company.

(j) "Net Income" for any period shall mean the Net Income of the
Company for such period computed in accordance with generally accepted
accounting principles after deduction of the Gross Asset Fee, but before
deduction of the Net Income Fee, as set forth in Sections 11 (a) and 11(b),
respectively, herein, and inclusive of gain or loss of the sale of assets.

(k) "Net Operating Income" shall mean rental income less property
operations expenses.

(l) "Operating Expenses" shall mean the aggregate annual expenses
regarded as operating expenses in accordance with generally accepted accounting
principles, as determined by the independent auditors selected by the Directors
and including the Gross Asset Fee payable to the Advisor and the fees and
expenses paid to the Directors who are not employees or Affiliates of the
Advisor. The operating expenses shall exclude, however, the

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following:
(i) the cost of money borrowed by the Company;

(ii) income taxes, taxes and assessments on real
property and all other taxes applicable to the Company;

(iii) expenses and taxes incurred in connection with
the issuance, distribution, transfer, registration, and stock exchange listing
of the Company's securities (including legal, auditing, accounting,
underwriting, brokerage, printing, engraving and other fees);

(iv) fees and expenses paid to independent mortgage
servicers, contractors, consultants, managers, and other agents retained by or
on behalf of the Company;

(v) expenses directly connected with the purchase,
origination, ownership, and disposition of Real Properties or Mortgage Loans
(including the costs of foreclosure, insurance, legal, protective, brokerage,
maintenance, repair, and property improvement services) other than expenses
with respect thereto of employees of the Advisor, except legal, internal
auditing, foreclosure and transfer agent services performed by employees of the
Advisor;

(vi) expenses of maintaining and managing real estate equity
interests and processing and servicing mortgage and other loans;

(vii) expenses connected with payments of dividends,
interest or distributions by the Company to shareholders;

(viii) expenses connected with communications to

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shareholders and bookkeeping and clerical expenses for maintaining shareholder
relations, including the cost of printing and mailing share certificates, proxy
solicitation materials and reports; and

(ix) transfer agent's registrar's and indenture trustee's
fees and charges;

(x) the cost of any accounting, statistical, bookkeeping or
computer equipment necessary for the maintenance of books and records of the
Company.

Additionally, the following expenses of the Advisor shall be excluded:

(i) employment expenses of the Advisor's personnel
(including Directors, officers, and employees of the Company who are directors,
officers, or employees of the Advisor or its Affiliates), other than the
expenses of those employee services listed at (v) above;

(ii) rent, telephone, utilities, and office furnishings and
other office expenses of the Advisor (except those relating to a separate
office, if any, maintained by the Company); and

(iii) the Advisor's overhead directly related to performance
of its functions under this Agreement.

(m) "Person" shall mean and include individuals,
corporations, limited partnerships, general partnerships, joint stock companies
or associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof.

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(n) "Real Property" shall mean and include land, rights in
land, leasehold interests (including but not limited to interests of a lessor
or lessee therein), and any buildings, structures, improvements, fixtures, and
equipment located on or used in connection with land, leasehold interests, and
rights in land or interests therein.

All calculations made pursuant to this Agreement shall be
based on statements (which may be unaudited, except as provided herein)
prepared on an accrual basis consistent with generally accepted accounting
principles, regardless of whether the Company may also prepare statements on a
different basis. All other terms shall have the same meaning as set forth in
the Company's Articles of Incorporation and Bylaws.

11. ADVISORY COMPENSATION.

(a) Gross Asset Fee. On or before the twenty-eighth day of each
month during the term hereof, the Company shall pay to the Advisor, as
compensation for the basic management and advisory services rendered to the
Company hereunder, a fee at the rate of .0625% per month of the average of the
Gross Asset Value of the Company at the beginning and at the end of the next
preceding calendar month. Without negating the provisions of Sections 18, 19,
22 and 23 hereof, the annual rate of the Gross Asset Fee shall be .75% per
annum.

(b) Net Income Fee. As an incentive for successful investment and
management of the Company's assets, the Advisor will be entitled to receive a
fee equal to 7.5% per annum of the

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<PAGE> 13
Company's Net Income for each Fiscal Year or portion thereof for which the
Advisor provides services. To the extent the Company has Net Income in a
quarter, the 7.5% Net Income Fee is to be paid quarterly on or after the third
business day following the filing of the report on Form 10-Q with the
Securities and Exchange Commission, except for the payment for the fourth
quarter, ended December 31, which is to be paid on or after the third business
day following the filing of the report on Form 10-K with the Securities and
Exchange Commission. The 7.5% Net Income Fee is to be cumulative within any
Fiscal Year, such that if the Company has a loss in any quarter during the
Fiscal Year, each subsequent quarter's payment during such Fiscal Year shall be
adjusted to maintain the 7.5% per annum rate, with final settlement being made
with the fourth quarter payment and in accordance with audited results for the
Fiscal Year. The 7.5% Net Income Fee is not cumulative from year to year.

(c) Acquisition Commission. For supervising the acquisition, purchase
or long term lease of Real Property for the Company, the Advisor is to receive
an Acquisition Commission equal to the lesser of (i) up to 1% of the cost of
acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers;
or (ii) the compensation customarily charged in arm's-length transactions by
others rendering similar property acquisition services as an ongoing public
activity in the same geographical location and for comparable property. The
aggregate of each purchase price of each property (including the Acquisition
Commissions and all real estate

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<PAGE> 14
brokerage fees) may not exceed such property's Appraised Value at acquisition.

(d) Incentive Sales Compensation. To encourage periodic sales of
appreciated Real Property at optimum value and to reward the Advisor for
improved performance of the Company's Real Property, the Company shall pay the
Advisor, on or before the 45th day after the close of each Fiscal Year, an
incentive fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all Real Property sold by the Company during such Fiscal Year
exceeds the sum of: (i) the cost of each such Real Property as originally
recorded in the Company's books for tax purposes (without deduction for
depreciation, amortization or reserve for losses), (ii) capital improvements
made to such assets during the period owned by the Company and (iii) all
closing costs (including real estate commissions) incurred in the sale of such
Real Property; provided, however, no incentive fee shall be paid unless (a)
such Real Property sold in such Fiscal Year, in the aggregate, has produced an
8% simple annual return on the Company's net investment including capital
improvements, calculated over the Company's holding period, before depreciation
and inclusive of operating income and sales consideration and (b) the aggregate
Net Operating Income from all Real Property owned by the Company for all of the
prior Fiscal Year and the current Fiscal Year shall be at least 5% higher in
the current Fiscal Year than in the prior Fiscal Year.

(e) Mortgage or Loan Acquisition Fees. For the acquisition

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<PAGE> 15
or purchase from an unaffiliated party of any existing mortgage or loan by the
Company, the Advisor or an Affiliate is to receive a Mortgage or Loan
Acquisition Fee equal to the lesser of (a) 1% of the amount of the mortgage or
loan purchased by the Company or (b) a brokerage or commitment fee which is
reasonable and fair under the circumstances. Such fee will not be paid in
connection with the origination or funding by the Company of any mortgage loan.

(f) Mortgage Brokerage and Equity Refinancing Fees. For obtaining
loans to the Company or refinancing on Company properties, the Advisor or an
Affiliate is to receive a Mortgage Brokerage and Equity Refinancing Fee equal
to the lesser of (a) 1% of the amount of the loan or the amount refinanced or
(b) a brokerage or refinancing fee which is reasonable and fair under the
circumstances; provided, however that no such fee shall be paid on loans from
the Advisor or an Affiliate without the approval of the Board of Directors. No
fee shall be paid on loan extensions.

12. LIMITATION ON THIRD PARTY MORTGAGE PLACEMENT FEES. The Advisor or
any of its Affiliates shall pay to the Company, one-half of any compensation
received by the Advisor or any such Affiliate from third parties with respect
to the origination, placement or brokerage of any loan made by the Company,
provided, however, the compensation retained by the Advisor or Affiliate shall
not exceed the lesser of (a) 2% of the amount of the loan committed by the
Company or (b) a loan brokerage and commitment fee which is reasonable and fair
under the circumstances.

13. STATEMENTS. The Advisor shall furnish to the Company not

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later than the tenth day of each calendar month, beginning with the second
calendar month of the term of this Agreement, a statement showing the
computation of the fees, if any, payable in respect to the next preceding
calendar month (or, in the case of incentive compensation, for the preceding
Fiscal Year, as appropriate) under the Agreement. The final settlement of
incentive compensation for each Fiscal Year shall be subject to adjustment in
accordance with, and upon completion of, the annual audit of the Company's
financial statements; any payment by the Company or repayment by the Advisor
that shall be indicated to be necessary in accordance therewith shall be made
promptly after the completion of such audit and shall be reflected in the
audited statements to be published by the Company.

14. COMPENSATION FOR ADDITIONAL SERVICES. If and to the extent that
the Company shall request the Advisor or any director, officer, partner, or
employee of the Advisor to render services for the Company other than those
required to be rendered by the Advisor hereunder, such additional services, if
performed, will be compensated separately on terms to be agreed upon between
such party and the Company from time to time. In particular, but without
limitation, if the Company shall request that the Advisor perform property
management, leasing, loan disbursement or similar functions, the Company and
the Advisor shall enter into a separate agreement specifying the obligations of
the parties and providing for reasonable additional compensation to the Advisor
for performing such services.

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<PAGE> 17
15. EXPENSES OF THE ADVISOR. Without regard to the amount of
compensation or reimbursement received hereunder by the Advisor, the Advisor
shall bear the following expenses:

(a) employment expenses of the personnel employed by the Advisor
(including Directors, officers, and employees of the Company who are directors,
officers, or employees of the Advisor or of any company that controls, is
controlled by, or is under common control with the Advisor), including, but not
limited to, fees, salaries, wages, payroll taxes, travel expenses, and the cost
of employee benefit plans and temporary help expenses except for those
personnel expenses described in Sections 16(e) and (p);

(b) advertising and promotional expenses incurred in seeking
investments for the Company;

(c) rent, telephone, utilities, office furniture and furnishings,
and other office expenses of the Advisor and the Company, except as any of such
expenses relates to an office maintained by the Company separate from the
office of the Advisor; and

(d) miscellaneous administrative expenses relating to performance
by the Advisor of its functions hereunder.

16. EXPENSES OF THE COMPANY. The Company shall pay all of its
expenses not assumed by the Advisor, including without limitation, the
following expenses:

(a) the cost of money borrowed by the Company;

(b) income taxes, taxes and assessments on real property, and all
other taxes applicable to the Company;

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<PAGE> 18
(c) legal, auditing, accounting, underwriting, brokerage, listing,
registration and other fees, printing, and engraving and other expenses, and
taxes incurred in connection with the issuance, distribution, transfer,
registration, and stock exchange listing of the Company's securities;

(d) fees, salaries, and expenses paid to officers and employees of
the Company who are not directors, officers or employees of the Advisor, or of
any company that controls, is controlled by, or is under common control with
the Advisor;

(e) expenses directly connected with the origination or purchase of
Mortgage Loans and with the acquisition, disposition, and ownership of real
estate equity interests or other property (including the costs of foreclosure,
insurance, legal, protective, brokerage, maintenance, repair, and property
improvement services) and including all compensation, traveling expenses, and
other direct costs associated with the Advisor's employees or other personnel
engaged in (i) real estate transaction legal services, (ii) internal auditing,
(iii) foreclosure and other mortgage finance services, (iv) sale or
solicitation for sale of mortgages, (v) engineering and appraisal services, and
(vi) transfer agent services;

(f) expenses of maintaining and managing real estate equity
interests;

(g) insurance, as required by the Directors (including directors'
liability insurance);

(h) the expenses of organizing, revising, amending,

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<PAGE> 19
converting, modifying, or terminating the Company;

(i) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Directors to holders of securities of the Company;

(j) all expenses connected with communications to holders of
securities of the Company and the other bookkeeping and clerical work necessary
in maintaining relations with holders of securities, including the cost of
printing and mailing certificates for securities and proxy solicitation
materials and reports to holders of the Company's securities;

(k) the cost of any accounting, statistical, bookkeeping or
computer equipment or computer time necessary for maintaining the books and
records of the Company and for preparing and filing Federal, State and Local
tax returns;

(l) transfer agent's, registrar's, and indenture trustee's fees and
charges;

(m) legal, accounting, investment banking, and auditing fees and
expenses charged by independent parties performing these services not
otherwise included in clauses (c) and (e) of this Section 16;

(n) expenses incurred by the Advisor, arising from the sales of
Company properties, including those expenses related to carrying out
foreclosure proceedings;

(o) commercially reasonable fees paid to the Advisor for efforts to
liquidate mortgages before maturity, such as the

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solicitation of offers and negotiation of terms of sale;

(p) costs and expenses connected with computer services, including
but not limited to employee or other personnel compensation, hardware and
software costs, and related development and installation costs associated
therewith;

(q) costs and expenses associated with risk management (i.e.
insurance relating to the Company's assets);

(r) loan refinancing compensation; and

(s) expenses associated with special services requested by the
Directors pursuant to Section 14 hereof.

17. OTHER ACTIVITIES OF ADVISOR. The Advisor, its officers,
directors, or employees or any of its Affiliates may engage in other business
activities related to real estate investments or act as advisor to any other
person or entity (including another real estate investment trust), including
those with investment policies similar to the Company, and the Advisor and its
officers, directors, or employees and any of its Affiliates shall be free from
any obligation to present to the Company any particular investment opportunity
that comes to the Advisor or such persons, regardless of whether such
opportunity is in accordance with the Company's Business Plan. However, to
minimize any possible conflict, the Advisor shall consider the respective
investment objectives of, and the appropriateness of a particular investment to
each such entity in determining to which entity a particular investment
opportunity should be presented. If appropriate to more than one entity, the
Advisor shall present the investment

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<PAGE> 21
opportunity to the entity that has had sufficient uninvested funds for the
longest period of time.

18. LIMITATION ON OPERATING EXPENSES. To the extent that the
Operating Expenses of the Company for any fiscal year exceed the lesser of (a)
1.5% of the average of the Book Values of Invested Assets of the Company at the
end of each calendar month of such fiscal year, or (b) the greater of 1.5% of
the average of the Net Asset Value of the Company at the end of each calendar
month of such fiscal year or 25% of the Company's Net Income, the Advisor shall
a refund to the Company from the fees paid to the Advisor the amount if any, by
which the Operating Expenses so exceed the applicable amount; provided,
however, that the Advisor shall not be required to refund to the Company, with
respect to any fiscal year, any amount which exceeds the aggregate of the Gross
Asset Fees paid to the Advisor under this Agreement with respect to such fiscal
year.

19. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue in
force until the next Annual Meeting of Stockholders of the Company, and,
thereafter, it may be renewed from year to year, subject to any required
approval of the Stockholders of the Company and, if any Director is an
Affiliate of the Advisor, the approval of a majority of the Directors who are
not so affiliated. Notice of renewal shall be given in writing by the Directors
to the Advisor not less than 60 days before the expiration of this Agreement or
of any extension thereof. This Agreement may be terminated for any reason
without penalty upon 60 days' written notice by the Company

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<PAGE> 22
to the Advisor or 120 days' written notice by the Advisor to the Company, in
the former case by the vote of a majority of the Directors who are not
Affiliates of the Advisor or by the vote of holders of a majority of the
outstanding shares of the Company. Notwithstanding the foregoing, however, in
the event of any material change in the ownership, control, or management of
the Advisor, the Company may terminate this Agreement without penalty and
without advance notice to the Advisor.

20. AMENDMENTS. This Agreement shall not be changed, modified,
terminated or discharged in whole or in part except by an instrument in writing
signed by both parties hereto, or their respective successors or assigns, or
otherwise as provided herein.

21. ASSIGNMENT. This Agreement shall not be assigned by the
Advisor without the prior consent of the Company. The Company may terminate
this Agreement in the event of its assignment by the Advisor without the prior
consent of the Company. Such an assignment or any other assignment of this
Agreement shall bind the assignee hereunder in the same manner as the Advisor
is bound hereunder. This Agreement shall not be assignable by the Company
without the consent of the Advisor, except in the case of assignment by the
Company to a corporation, association, trust, or other organization that is a
successor to the Company. Such successor shall be bound hereunder and by the
terms of said assignment in the same manner as the Company is bound hereunder.

22. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Directors,
this Agreement shall be and become terminated

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immediately upon written notice of termination from the Directors to the
Advisor if any of the following events shall occur:

(a) If the Advisor shall violate any provision of this Agreement,
and after notice of such violation shall not cure such default within 30 days;
or

(b) If the Advisor shall be adjudged bankrupt or insolvent by a
court of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or
trustee of the Advisor or of all or substantially all of its property by reason
of the foregoing, or approving any petition filed against the Advisor for its
reorganization, and such adjudication or order shall remain in force or
unstayed for a period of 30 days; or

(c) If the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the Federal
bankruptcy laws, or for relief under any law for the relief of debtors, or
shall consent to the appointment of a receiver of itself or of all or
substantially all its property, or shall make a general assignment for the
benefit of its creditors, or shall admit in writing its inability to pay its
debts generally, as they become due.

The Advisor agrees that if any of the events
specified in subsections (b) and (c) of this Section 22 shall occur, it will
give written notice thereof to the Directors within seven days after the
occurrence of such event.

23. ACTION UPON TERMINATION. From and after the effective

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<PAGE> 24
date of termination of this Agreement, pursuant to Sections 19, 21 or 22
hereof, the Advisor shall not be entitled to compensation for further services
hereunder but shall be paid all compensation accruing to the date of
termination. The Advisor shall forthwith upon such termination:

(a) pay over to the Company all monies collected and held for the
account of the Company pursuant to this Agreement;

(b) deliver to the Directors a full accounting, including a
statement showing all payments collected by it and a statement of any monies
held by it, covering the period following the date of the last accounting
furnished to the Directors; and

24. MISCELLANEOUS. The Advisor shall be deemed to be in a fiduciary
relationship to the shareholders of the Company. The Advisor assumes no
responsibility under this Agreement other than to render the services called
for hereunder in good faith, and shall not be responsible for any action of the
Directors in following or declining to follow any advice or recommendations of
the Advisor. Neither the Advisor nor any of its shareholders, directors,
officers, or employees shall be liable to the Company, the Directors, the
holders of securities of the Company or to any successor or assign of the
Company for any losses arising from the operation of the Company if the Advisor
had determined, in good faith, that the course of conduct which caused the loss
or liability was in the best interests of the Company and the

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liability or loss was not the result of negligence or misconduct by the
Advisor. However, in no event will the directors, officers or employees of the
Advisor be personally liable for any act or failure to act unless it was the
result of such person's willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.

25. NOTICES. Any notice, report, or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report, or other communication is accepted by the party to
whom it is given, and shall be given by being delivered at the following
addresses of the parties hereto:

The Directors and/or the Company:
Transcontinental Realty Investors, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President

The Advisor:
Basic Capital Management, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Executive Vice President and
Chief Financial Officer

Either party may at any time give notice in writing to the other party
of a change of its address for the purpose of this Section 25.

26. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.

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27. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.

28. EXECUTION. This instrument is executed and made on behalf of the
Company by an officer of the Company, not individually but solely as an
officer, and the obligations under this Agreement are not binding upon, nor
shall resort be had to the private property of, any of the Directors,
stockholders, officers, employees, or agents of the Company personally, but
bind only the Company property.

IN WITNESS WHEREOF, TRANSCONTINENTAL REALTY INVESTORS, INC. and BASIC
CAPITAL MANAGEMENT, INC., by their duly authorized officers, have signed these
presents all as of the day and year first above written.

TRANSCONTINENTAL REALTY INVESTORS, INC.

By: /s/ Oscar W. Cashwell
------------------------
Oscar W. Cashwell
President

BASIC CAPITAL MANAGEMENT, INC.

By: /s/ Hamilton P. Schrauff
-------------------------
Hamilton P. Schrauff
Executive Vice President

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<PAGE> 1
BROKERAGE AGREEMENT EXHIBIT 10.5

BETWEEN
TRANSCONTINENTAL REALTY INVESTORS, INC.
AND
CARMEL REALTY, INC.

THIS BROKERAGE AGREEMENT dated as of February 11, 1995, between
Transcontinental Realty Investors, Inc., a Nevada corporation, (the "Company"),
and Carmel Realty, Inc. (the "Broker"), a Texas corporation.

WITNESSETH:

WHEREAS:

1. The Company is an active real estate investment trust with
funds available for investment primarily in the acquisition of real estate.

2. The Company owns a diversified portfolio of real estate which
includes properties which by reason of their size, location and quality,
require special efforts to sell and the Company desires to sell certain of such
property and acquire additional property from time to time.

3. The Broker and its principal officers have extensive
experience in the sale and purchase of real estate assets.

4. The Broker is duly registered as a real estate broker, and is
duly qualified to procure the listing of real estate for sale, lease or rental,
and prospective purchasers, lessees, and renters therefor, and has the good
will of, and a reputation for dealing with, the public, and also maintains an
office, properly

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equipped and staffed, suitable to serving as a real estate broker.

5. In consideration for the non-exclusive opportunity offered
hereby, the Broker is willing to make an effort to sell any of the Company's
properties, regardless of the size, quality or location of such properties.

NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties agree as follows:

1. PROPERTY SALES. The Company shall make available to the
Broker on a non-exclusive basis information on real estate assets the Company
desires to sell and Broker shall work diligently and with its best efforts to
sell such real estate.

2. PROPERTY ACQUISITIONS. Broker shall attempt to locate real
estate assets suitable for purchase by the Company within the parameters set
forth by the Company from time to time.

3. NO PARTNERSHIP OR JOINT VENTURE. The Company and the Broker
are not partners or joint venturers with each other, and nothing herein shall
be construed so as to make them such partners or joint venturers or impose any
liability as such on either of them.

4. INDEPENDENT CONTRACTOR. The Broker will be performing
professional services for the Company as an independent contractor and the
Broker will not be subject to the will and control of the Company nor will the
Company have the right to control either the method and the result of the
services so performed. The Company will not be held responsible for the
collection and payment of taxes or contributions of any nature on behalf of the
Broker

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<PAGE> 3
including, but not by way of limitation, contributions on behalf of the Broker
for Federal Social Security (F.I.C.A.) for Federal and State Unemployment
Compensation, for State Workman's Compensation Insurance, for State Real Estate
Commission Registration, for State, County and Municipal Occupational Licensing
or for insurance, annuity, or retirement program in which the Broker may
participate.

5. BROKERAGE SERVICES. The Broker will perform professional
services as a Registered Real Estate Broker, and the Broker will devote
sufficient time and services on behalf of the Company to accomplish the mutual
purposes of the parties.

6. HOLD HARMLESS. The Broker will hold the Company harmless
against all suits, claims, and obligations which the Broker may incur in
performing services as an independent contractor, and the Broker shall have no
right to bind, contract, or obligate the Company in the performance of
services.

7. LEGAL COMPLIANCE. It is understood that the Broker will
abide by all laws, ethical practices and regulations promulgated by the
applicable state real estate commissions or other regulatory bodies.

8. PURCHASE COMMISSION. For locating and negotiating the lease
or purchase of any real property by the Company, the Broker is to receive a
purchase commission in accordance with the fee schedule attached as Exhibit A
to this Agreement. The aggregate of each purchase price of each property
(including the purchase commission paid to the Broker and the Company's
advisor) may not exceed such

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<PAGE> 4
property's appraised value at acquisition. Any commission which is paid to the
Broker by the seller shall be credited against the commission to be paid by the
Company hereunder.

9. REAL ESTATE SALES COMMISSION. For the sale of each property,
the Broker is to receive a real estate sales commission in accordance with the
fee schedule attached as Exhibit A to this Agreement.

10. EXPENSES OF THE BROKER. Without regard to the amount of
compensation received hereunder by the Broker, the Broker shall bear the
following expenses:

(a) employment expenses of the personnel employed by the
Broker, including, but not limited to, fees, salaries, wages, payroll taxes,
travel expenses, and the cost of employee benefit plans and temporary help
expenses;

(b) advertising and promotional expenses incurred in seeking
investment opportunities for the Company;

(d) miscellaneous administrative expenses relating to
performance by the Broker of its functions hereunder.

11. OTHER ACTIVITIES OF BROKER. Nothing herein contained shall
prevent the Broker or any of its officers, directors, or employees or any of
its affiliates from engaging in other business activities related to real
estate investments or from acting as broker to any other person or entity
(including another real estate investment trust), even though having investment
policies similar to the

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Company, and the Broker and its officers, directors, or employees. The Broker
shall have a duty to present to the Company any investment opportunity that
comes to the Broker or any of its affiliates if such opportunity is within the
Company's investment policies.

12. TERM; TERMINATION OF AGREEMENT. This Agreement shall continue
in force for a period of twelve months, and thereafter it may be renewed from
year to year, subject to the approval of a majority of the Directors of the
Company who are not affiliated with the Broker. Notice of renewal shall be
given in writing by the Directors to the Broker not less than 60 days before
the expiration of this Agreement or of any extension thereof. Notwithstanding
any other provision to the contrary, this Agreement may be terminated for any
reason without penalty upon written notice by the Company to the Broker or
written notice by the Broker to the Company, in the former case by the vote of
a majority of the Directors who are not affiliates of the Broker.

13. AMENDMENTS. This Agreement shall not be changed, modified,
terminated or discharged in whole or in part except by an instrument in writing
signed by both parties hereto, or their respective successors or assigns, or
otherwise as provided herein.

14. ASSIGNMENT. This Agreement shall not be assigned by the
Broker without the prior consent of the Company. The Company may terminate
this Agreement in the event of its assignment by the Broker without the prior
consent of the Company. Such an assignment or any other assignment of this
Agreement shall bind the

133
<PAGE> 6
assignee hereunder in the same manner as the Broker is bound hereunder. This
Agreement shall not be assignable by the Company without the consent of the
Broker, except in the case of assignment by the Company to a corporation,
association, trust, or other organization that is a successor to the Company.
Such successor shall be bound hereunder and by the terms of said assignment in
the same manner as the Company is bound hereunder.

15. DEFAULT, BANKRUPTCY, ETC. At the option solely of the
Directors, this Agreement shall be and become terminated immediately upon
written notice of termination from the Directors to the Broker if any of the
following events shall occur:

(a) If the Broker shall violate any provision of this
Agreement, and after notice of such violation shall not cure such default
within 30 days; or

(b) If the Broker shall be adjudged bankrupt or insolvent by
a court of competent jurisdiction, or an order shall be made by a court of
competent jurisdiction for the appointment of a receiver, liquidator, or
trustee of the Broker or of all or substantially all of its property by reason
of the foregoing, or approving any petition filed against the Broker for its
reorganization, and such adjudication or order shall remain in force or
unstayed for a period of 30 days; or

(c) If the Broker shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the Federal
bankruptcy laws, or for relief under any law for the relief of debtors, or
shall consent to the

134
<PAGE> 7
appointment of a receiver of itself or of all or substantially all its
property, or shall make a general assignment for the benefit of its creditors,
or shall admit in writing its inability to pay its debts generally, as they
become due.

The Broker agrees that if any of the events specified in subsections
(b) and (c) of this Section shall occur, it will give written notice thereof to
the Directors within seven days after the occurrence of such event.

16. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 12, 14 or 15 hereof, the
Broker shall not be entitled to compensation for further services hereunder but
shall be paid all compensation earned to the date of termination.

17. MISCELLANEOUS. The Broker assumes no responsibility under
this Agreement other than to render the services called for hereunder in good
faith, and shall not be responsible for any action of the Company in following
or declining to follow any advice or recommendations of the Broker. Neither the
Broker nor any of its shareholders, directors, officers, or employees shall be
liable to the Company, the Directors, the holders of securities of the Company
or to any successor or assign of the Company except by reason of acts
constituting bad faith, willful misfeasance, gross negligence, or reckless
disregard of their duties.

18. NOTICES. Any notice, report, or other communication required
or permitted to be given hereunder shall be in writing unless some other method
of giving such notice, report, or other

135
<PAGE> 8
communication is accepted by the party to whom it is given, and shall be given
by being delivered at the following addresses of the parties hereto:

The Company:

Transcontinental Realty Investors, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: President

The Broker:

Carmel Realty, Inc.
10670 North Central Expressway
Suite 640
Dallas, Texas 75231
Attention: Chief Executive Officer

Either party may at any time give notice in writing to the other party
of a change of its address for the purpose of this Section.

19. HEADINGS. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction, or effect of this Agreement.

20. GOVERNING LAW. This Agreement has been prepared, negotiated
and executed in the State of Texas. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in the State of
Texas.

21. EXECUTION. This instrument is executed and made on behalf of
the Company by an officer of the Company, not individually but solely as an
officer, and the obligations under this Agreement are not binding upon, nor
shall resort be had to the private property of, any of the Directors,
stockholders, officers, employees, or

136
<PAGE> 9
agents of the Company personally, but bind only the Company property.

IN WITNESS WHEREOF, TRANSCONTINENTAL REALTY INVESTORS, INC. and CARMEL
REALTY, INC., by their duly authorized officers, have signed these presents all
as of the day and year first above written.

TRANSCONTINENTAL REALTY INVESTORS, INC.

By: /s/ Oscar W. Cashwell
-------------------------
Oscar W. Cashwell
President

CARMEL REALTY, INC.

By: /s/ Bruce A. Endendyk
-------------------------
Bruce A. Endendyk
President

137

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