Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ Nox

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 the past 90 days. Yesx No¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer and large accelerated filer” in Rule ~~126-2~~12b-2 of the Exchange Act (check one).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x

The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price at which the common equity was last sold which was the sales price of the Common Stock on the New York Stock Exchange as of June 30, ~~2005~~2006 (the last business day of the Registrant’s most recently completed second fiscal quarter) was ~~$29,937,653~~$19,028,169 based upon a total of 1,409,494 shares held as of June 30, ~~2005~~2006 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing, would yield a different value.

As of March ~~24, 2006,~~23, 2007, there were ~~7,900,869~~7,898,869 shares of common stock outstanding.

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. Commission File No. 001-14784

Consolidated Financial Statements of American Realty Investors, Inc. Commission File No. 001-15663

~~Index to Financial Statements~~

Certain Statements in ~~the~~this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described under “Risk Factors Related to our Business” beginning on page 6.5.

Transcontinental Realty Investors, Inc. (“TCI” or the “Company” or “we” or “us”), a Nevada corporation, is the successor to a California business trust that was organized on September 6, 1983 and commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of Continental Mortgage and Equity Trust (“CMET”), a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). During the third quarter of 2000, due to a concentration of ownership TCI no longer met the requirement for tax treatment as a REIT.

TCI’s real estate at December 31, ~~2005,~~2006, consisted of ~~132~~165 properties held for investment, ~~one~~1 partnership property, ~~five~~14 construction properties and ~~five~~3 properties held-for-sale. In ~~2005,~~2006, TCI purchased 2646 properties held for investment. TCI’s mortgage notes receivable portfolio at December 31, ~~2005,~~2006, consisted of 2130 mortgage loans. TCI’s real estate and mortgage notes receivable portfolios are more fully discussed in ITEM 2. “PROPERTIES.”

Effective March 31, 2003, TCI financial results were consolidated in the American Realty Investors, Inc. (“ARI”) Form 10-K and related consolidated financial statements. As of December 31, ~~2005,~~2006, ARI through subsidiaries owned 82.2% of the outstanding TCI common shares.

TCI’s business is investing in real estate through direct equity ownership and partnerships and financing real estate and real estate related activities through investments in mortgage loans, including first, wraparound and junior mortgage loans. TCI’s real estate is located throughout the continental United States and one property is located in Poland. Information regarding TCI’s real estate and mortgage notes receivable portfolios is set forth in ITEM 2. “PROPERTIES”, and in Schedules III and IV to the Consolidated Financial Statements included in ITEM 8. “CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.” TCI has four operating segments; apartments, commercial properties, hotels and land ownership.

TCI’s business is not seasonal. Management intends to pursue a balanced investment policy, seeking both current income and capital appreciation. With respect to new real estate investments, management’s plan is to consider all types of real estate with an emphasis on properties generating current cash flow. Management expects to invest in and improve these properties to maximize both their immediate and long-term value. Management intends to continue the development of apartment properties in selected markets primarily in Texas.

Management intends to pursue sales opportunities for properties in stabilized real estate markets where TCI’s

~~Index to Financial Statements~~

properties have reached their potential. Management also expects to be an opportunistic seller of properties in markets where demand exceeds current supply.

Management’s operating strategy is to attempt to maximize each TCI property’s operating income through aggressive leasing and controlling operating expenses while at the same time making property renovations and/or improvements where appropriate. Such expenditures maintain or enhance the value of the properties, making the properties more desirable to prospective tenants and thereby allowing the Company to charge higher rents.

Management does not expect to fund or acquire new mortgage loans in ~~2006.~~2007. However, TCI may originate mortgage loans in conjunction with providing purchase money financing related to a property sale. Management intends to service and hold for investment the mortgage notes in TCI’s portfolio. TCI may borrow against its mortgage notes, using the proceeds from such borrowings for property acquisitions or for general working capital needs. Management also intends to pursue TCI’s rights vigorously with respect to mortgage notes in default. TCI’s Articles of Incorporation impose no limitations on its investment policy with respect to mortgage loans and does not prohibit the Company from investing more than a specified percentage of its assets in any one mortgage loan.

Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies, which guide it, its day-to-day operations were performed until July 1, 2003 by Basic Capital Management, Inc. (“BCM”), a contractual advisor under the supervision of the Board. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by Prime Asset Management, Inc., (“PAMI”) under the same terms as BCM’s advisory agreement. PAMI is owned by Realty Advisors (80.0%) and Syntek West, Inc. (20.0%), related parties. Syntek West, Inc. (“Syntek”) is owned by Gene E. Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (“PIAMI”). On October 1, 2003, Prime Income Asset Management, LLC (“Prime”), which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. The duties of Prime include, among other things, locating, investigating, evaluating and recommending real estate, mortgage note investment and sales opportunities, as well as financing and refinancing sources. Prime also serves as a consultant in connection with TCI’s business plan and investment decisions made by the Board.

Prime is a single-member, limited liability company, the sole member of which is PIAMI, which is owned 80% by Realty Advisors, Inc., and 20% by Syntek. Realty Advisors, Inc. is owned 100% by a trust for the benefit of the children of Gene E. Phillips. Syntek is owned 100% by Gene E. Phillips. Mr. Phillips is not an officer or director of Prime, but serves as a representative of the trust and is an officer of Syntek, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI. Prime is more fully described ~~in.~~in ITEM 10. “DIRECTORS AND EXECUTIVE OFFICERS ~~OF THE REGISTRANT—~~& CORPORATE GOVERNANCE—The Advisor.”

~~BCM provided advisory services to TCI from March 28, 1989 until June 30, 2003, when Prime replaced BCM as the contractual advisor to TCI.~~ Prime also serves as advisor to ARI. The directors of TCI are also directors of ARI. Certain officers of TCI also serve as officers of ARI, BCM and Prime. As of March ~~24, 2006,~~23, 2007, TCI owned approximately 24.0% of Income Opportunity Realty Investors, Inc. (“IORI”) outstanding shares of common stock. ARI owns approximately 82.2% of the outstanding shares of TCI’s common stock.

~~Since February 1, 1990, affiliates~~For more than the past three years, Triad Realty Services, Ltd. (“Triad”) an affiliate of ~~BCM and~~ Prime ~~have~~has provided property management services to TCI. ~~Currently, Triad Realty Services, Ltd. (“Triad”) provides such property management services.~~ Triad subcontracts with other entities for the provision of property-level management services to TCI. The general partner of Triad is PIAMI. The limited partner of Triad is Highland Realty Services, Inc. (“Highland”). Triad subcontracts the property-level management and leasing of 2224 of TCI’s commercial properties (office buildings, shopping centers and industrial warehouses) to Regis Realty I, LLC (“Regis I”), which is owned by Highland. Regis I receives property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis I is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive

~~Index to Financial Statements~~

Hotel I, LLC, has managed TCI’s four hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland. See ITEM 10. “DIRECTORS AND EXECUTIVE OFFICERS ~~OF THE REGISTRANT—~~& CORPORATE GOVERNANCE—The Advisor.”

TCI has no employees. Employees of Prime render services to TCI in accordance with the terms of the Advisory Agreement dated October 1, 2003.

Real Estate. The real estate business is highly competitive and TCI competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS—Related Party Transactions”), some of which have greater financial resources than TCI. Management believes that success against such competition is dependent upon the geographic location of the property, the performance of property-level managers in areas such as leasing and marketing, collections and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors include ease of access to the property, the adequacy of related facilities, such as parking and other amenities, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of units and the ability to provide a community atmosphere for the residents. Management believes that beyond general economic circumstances and trends, the degree to which properties are renovated or new properties developed in the competing submarket are also competitive factors. See also Item 1A. “RISK FACTORS.”

To the extent that TCI seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties and by aggressive buyers attempting to penetrate or dominate a particular market.

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

In addition, as also described in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS—Certain Business Relationships,” TCI also competes with other entities which are affiliates of Prime and which have investment objectives similar to TCI’s and may compete with it in purchasing, selling, leasing and financing of real estate and real estate related investments. In resolving any potential conflicts of interest which may arise, Prime intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.

TCI maintains an internet site athttp://www.transconrealty-invest.com. TCI has available through ~~their~~its website free of charge Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. In addition, the Company has posted the charters for our Audit Committee, Compensation Committee and Governance and Nominating Committee, as well as our Code of Business Conduct and Ethics, Corporate Governance Guidelines

on Director Independence and other information on the website. These charters and principles are not incorporated in this Report by reference. TCI will also provide a copy of these documents free of charge to

~~Index to Financial Statements~~

stockholders upon written request. The Company issues Annual Reports containing audited financial statements to its common stockholders.

An investment in our securities involves various risks. All investors should carefully consider the following risk factors in conjunction with the other information in this Report before trading our securities.

Adverse events concerning TCI’s existing tenants or negative market conditions affecting TCI’s existing tenants could have an adverse impact on TCI’s ability to attract new tenants, release space, collect rent or renew leases, and thus could adversely affect cash flow from operations and inhibit growth. Cash flow from operations depends in part on the ability to lease space to tenants on economically favorable terms. TCI could be adversely affected by various facts and events over which the Company has limited or no control, such as:

lack of demand for space in areas where the properties are located;

inability to retain existing tenants and attract new tenants;

oversupply of or reduced demand for space and changes in market rental rates;

defaults by tenants or failure to pay rent on a timely basis;

the need to periodically renovate and repair marketable space;

physical damage to properties;

economic or physical decline of the areas where properties are located;

potential risk of functional obsolescence of properties over time.

At any time, any tenant may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to the Company.

If tenants do not renew their leases as they expire, TCI may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is relet, may have terms that are less economically favorable than expiring lease terms, or may require TCI to incur significant costs, such as renovations, tenant improvements or lease transaction costs. Any of these events could adversely affect cash flow from operations and TCI’s ability to make distributions to shareholders and service indebtedness. A significant portion of the costs of owning property, such as real estate taxes, insurance, and debt service payments, are not necessarily reduced when circumstances cause a decrease in rental income from the properties.

TCI may not be able to compete successfully with other entities that operate in our industry.TCI experiences a great deal of competition in attracting tenants for the properties and in locating land to develop and properties to acquire.

In TCI’s effort to lease its properties, TCI competes for tenants with a broad spectrum of other landlords in each of the markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial terms than TCI is able to offer.

If the availability of land or high quality properties in TCI’s markets diminishes, operating results could be adversely affected.

~~Index to Financial Statements~~

TCI may experience increased operating costs which could adversely affect our financial results and the value of our properties.TCI’s properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping, repairs, and maintenance of the properties. While some current tenants are obligated by their leases to reimburse TCI for a portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or new tenants will agree to pay these costs. If operating expenses increase in TCI’s markets, TCI may not be able to increase rents or reimbursements in all of these markets to offset the increased expenses, without at the same time decreasing occupancy rates. If this occurs, TCI’s ability to make distributions to shareholders and service indebtedness could be adversely affected.

TCI’s ability to achieve growth in operating income depends in part on its ability to develop additional properties. TCI intends to continue to develop properties where warranted by market conditions. TCI has a number of ongoing development and land projects being readied for commencement.

Additionally, general construction and development activities include the following risks:

construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability for that property;

construction costs may exceed original estimates due to increases in interest rates and increased cost of materials, labor or other costs, possibly making the property less profitable because of inability to increase rents to compensate for the increase in construction costs;

some developments may fail to achieve expectations, possibly making them less profitable;

TCI may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require TCI to abandon its activities entirely with respect to a project;

TCI may abandon development opportunities after the initial exploration, which may result in failure to recover costs already incurred. If TCI determines to alter or discontinue its development efforts, future costs of the investment may be expensed as incurred rather than capitalized and TCI may determine the investment is impaired resulting in a loss;

TCI may expend funds on and devote management’s time to projects which will not be completed;

occupancy rates and rents at newly-completed properties may fluctuate depending on various factors including market and economic conditions, and may result in lower than projected rental rates and reduced income from operations.

TCI faces risks associated with property acquisitions. TCI acquires individual properties and various portfolios of properties and intends to continue to do so. Acquisition activities are subject to the following risks:

when TCI is able to locate a desired property, competition from other real estate investors may significantly increase the seller’s offering price;

acquired properties may fail to perform as expected;

the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;

acquired properties may be located in new markets where TCI faces risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures;

TCI may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected.

~~Index to Financial Statements~~

TCI may acquire properties subject to liabilities and without any recourse, or with limited recourse, with respect to unknown liabilities. However, if an unknown liability was later asserted against the acquired properties, TCI might be required to pay substantial sums to settle it, which could adversely affect cash flow.

Many of TCI’s properties are concentrated in our primary markets and the Company may suffer economic harm as a result of adverse conditions in those markets.TCI’s properties are located principally in specific geographic areas in the Southwestern, Southeastern, and Midwestern United States. The Company’s overall performance is largely dependent on economic conditions in those regions.

TCI is leveraged and may not be able to meet our debt service obligations. TCI had total indebtedness at December 31, ~~2005~~2006 of approximately ~~$767.6~~$968.1 million. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they represent a prior claim on assets and most require fixed payments regardless of profitability. TCI’s leveraged position makes it vulnerable to declines in the general economy and may limit the Company’s ability to pursue other business opportunities in the future.

TCI may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms. TCI relies on proceeds from property dispositions and third party capital sources for a portion of its capital needs, including capital for acquisitions and development. The public debt and equity markets are among the sources upon which the Company relies. There is no guarantee TCI will be able to access these markets or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:

general economic conditions affecting these markets;

TCI’s own financial structure and performance;

the market’s opinion of real estate companies in general;

the market’s opinion of real estate companies that own properties similar to TCI.

TCI may suffer adverse effects as a result of terms and covenants relating to the Company’s indebtedness. Required payments on TCI’s indebtedness generally are not reduced if the economic performance of the portfolio declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders may be reduced. If payments on debt cannot be made, TCI could sustain a loss or suffer judgments, or in the case of mortgages, suffer foreclosures by mortgagees. Further, some obligations contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.

TCI anticipates only a small portion of the principal of its debt will be repaid prior to maturity. Therefore, TCI is likely to refinance a portion of its outstanding debt as it matures. There is a risk that TCI may not be able to refinance existing debt or the terms of any refinancing will not be as favorable as the terms of the maturing debt. If principal balances due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity capital, cash flow may not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

TCI’s credit facilities and unsecured debt contain customary restrictions, requirements and other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios, and minimum ratios of unencumbered assets to unsecured debt, which TCI must maintain. TCI’s continued ability to borrow is subject to compliance with financial and other covenants. In addition, failure to comply with such covenants could cause a default under credit facilities, and TCI may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available, or be available only on unattractive terms.

TCI’s degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock.The degree of leverage could affect TCI’s ability to obtain additional financing for working

~~Index to Financial Statements~~

capital, capital expenditures, acquisitions, development or other general corporate purposes. The degree of leverage could also make TCI more vulnerable to a downturn in business or the general economy.

An increase in interest rates would increase interest costs on variable rate debt and could adversely impact the ability to refinance existing debt.TCI currently has, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will the interest costs, which could adversely affect cash flow and the ability to pay principal and interest on TCI’s debt and the ability to make distributions to shareholders. Further, rising interest rates could limit TCI’s ability to refinance existing debt when it matures.

Unbudgeted capital expenditures or cost overruns could adversely affect business operations and cash flow.If capital expenditures for ongoing or planned development projects or renovations exceed expectations, the additional cost of these expenditures could have an adverse effect on business operations and cash flow. In addition, TCI might not have access to funds on a timely basis to pay the unexpected expenditures.

Construction costs are funded in large part through construction financing, which the Company may guarantee and the Company’s obligation to pay interest on this financing continues until the rental project is completed, leased up and permanent financing is obtained, or the for sale project is sold or the construction loan is otherwise paid. Unexpected delays in completion of one or more ongoing projects could also have a significant adverse impact on business operations and cash flow.

TCI may need to sell properties from time-to-time for cash flow purposes. Because of the lack of liquidity of real estate investments generally, TCI’s ability to respond to changing circumstances may be limited. Real estate investments generally cannot be sold quickly. In the event that TCI must sell assets to generate cash flow, TCI cannot predict whether there will be a market for those assets in the time period desired, or whether TCI will be able to sell the assets at a price that will allow the Company to fully recoup its investment. TCI may not be able to realize the full potential value of the assets and may incur costs related to the early pay-off of the debt secured by such assets.

The Company intends to devote resources to the development of new projects.TCI plans to continue developing new projects as opportunities arise in the future. Development and construction activities entail a number of risks, including but not limited to the following:

TCI may abandon a project after spending time and money determining its feasibility;

construction costs may materially exceed original estimates;

the revenue from a new project may not be enough to make it profitable or generate a positive cash flow;

TCI may not be able to obtain financing on favorable terms for development of a property, if at all;

the Company may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs;

TCI may not be able to obtain, or may be delayed in obtaining, necessary governmental permits.

The overall business is subject to all of the risks associated with the real estate industry.TCI is subject to all risks incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:

TCI’s real estate assets are concentrated primarily in the Southwest and any deterioration in the general economic conditions of this region could have an adverse effect;

changes in interest rates may make the ability to satisfy debt service requirements more burdensome;

lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive;

changes in real estate and zoning laws;

increases in real estate taxes and insurance costs;

Index to Financial Statements

federal or local economic or rent control;

acts of terrorism, and

hurricanes, tornadoes, floods, earthquakes and other similar natural disasters.

Risks Related to the Real Estate Industry

Real estate investments are illiquid, and the Company may not be able to sell properties if and when it is appropriate to do so.Real estate generally cannot be sold quickly. TCI may not be able to dispose of properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue Code may limit TCI’s ability to sell properties (without incurring significant tax costs) in some situations when it may be otherwise economically advantageous to do so, thereby adversely affecting returns to stockholders and adversely impacting TCI’s ability to meet it’s obligations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

TCI’s principal offices are located at 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate for TCI’s present operations.

Details of TCI’s real estate and mortgage notes receivable portfolios at December 31, ~~2005,~~2006, are set forth in Schedules III and IV to the Consolidated Financial Statements included at ITEM 8. “CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.” The discussions set forth below under the headings “Real Estate” and “Mortgage Loans” provide certain summary information concerning TCI’s real estate and mortgage notes receivable portfolios.

TCI’s real estate portfolio consists of properties held for investment, properties held for sale, properties subject to sales contract, and investments in partnerships. The discussion set forth below under the heading “Real Estate” provides certain summary information concerning TCI’s real estate and further summary information with respect to its properties held for investment, properties held for sale and its investment in partnerships.

At December 31, ~~2005,~~2006, none of TCI’s properties, mortgage notes receivable or investments in partnerships exceeded 10.0% of total assets. At December 31, ~~2005, 76.6%~~2006, 79.4% of TCI’s assets consisted of properties held for investment, ~~3.7%~~4.4% consisted of properties held for sale, ~~6.3%~~5.3% consisted of properties subject to sales contract, ~~6.0%~~3.2% consisted of mortgage notes and interest receivables and ~~2.3%~~2.4% consisted of investments in partnerships and equity investees. The remaining ~~5.1%~~5.3% of TCI’s assets were invested in cash, cash equivalents, and other assets. The percentage of TCI’s assets invested in any one category is subject to change and no assurance can be given that the composition of TCI’s assets in the future will approximate the percentages listed above.

TCI’s real estate is geographically diverse. At December 31, ~~2005,~~2006, TCI held investments in apartments and commercial properties in each of the geographic regions of the continental United States, although its apartments and commercial properties were concentrated in the Southeast and Southwest regions, as shown more specifically in the table under “Real Estate” below. At December 31, ~~2005,~~2006, TCI held mortgage notes receivable secured by commercial properties in the Southwest and Southeast regions of the continental United States, as shown more specifically in the table under “Mortgage Loans” below.

Real Estate

At December 31, ~~2005,~~2006, approximately ~~86.6%~~89.1% of TCI’s assets were invested in real estate. TCI invests primarily in real estate located throughout the continental United States, either on a leveraged or non-leveraged

Index to Financial Statements

basis. TCI’s real estate portfolio consists of properties held for investment, investments in partnerships and properties held for sale.

Types of Real Estate Investments.TCI’s real estate consists of commercial properties (office buildings, industrial warehouses and shopping centers), hotels and apartments having established income-producing capabilities. In selecting real estate for investment, the location, age and type of property, gross rents, lease terms, financial and business standing of tenants, operating expenses, fixed charges, land values and physical condition are among the factors considered. TCI may acquire properties subject to or assume existing debt and may mortgage, pledge or otherwise obtain financing for its properties. The Board of Directors may alter the types of criteria for selecting new real estate investments and for obtaining financing without a vote of stockholders.

TCI’s current real estate portfolio consists of 143 owned properties. Of the 143 properties, 12 apartments were sold to partnerships controlled by Metra Capital, LLC (“Metra”) in 2002. Because the Metra sales transaction was accounted for as a finance transaction, TCI continued to account for the 12 properties as owned properties. In April 2005, TCI settled a litigation action against Metra regarding the original transaction. The resolution of the litigation resulted in settling all liabilities remaining from the original partnership arrangements which included a return of investor equity, cessation of preferential returns, prospective asset management fees and miscellaneous fees and transactions costs from the Plaintiffs as a prepayment of a preferred return, along with a delegation of management and corresponding payment of management fees to Prime, and a motion to dismiss the action as a part of the resolution. See NOTE 8. “RELATED PARTY TRANSACTIONS.”

TCI typically invests in developed real estate. However, TCI also invests in unimproved land and apartment development and construction. To the extent that TCI continues to invest in development and construction projects, it will be subject to business risks, such as cost overruns and construction delays, associated with higher risk projects.

At December 31, ~~2005,~~2006, TCI had the following properties under construction:


Property	Location	Units	Amount Expended		Additional Amount to Expend		Construction Loan Funding		Location	Units	Amount Expended		Additional Amount to Expend		Construction Loan Funding
Apartments
Bolivar Homes									Cleveland, MS	65 Units	$	1,218	$	7,390	$	1,300
Broadway Estates									Greenville, MS	104 Units		788		7,569		850
Lago Vista									Farmer’s Branch, TX	212 Units		5,091		21,359		2,079
Laguna Vista	Farmers Branch, TX	206 Units	$	8,308	$	12,797	$	17,741	Farmers Branch, TX	206 Units		9,969		12,232		14,719
Legends of El Paso	El Paso, TX	240 Units		5,319		12,765		16,040	El Paso, TX	240 Units		6,430		15,461		14,988
Mason Park									Houston, TX	312 Units		1,991		17,409		3,349
Mission Oaks	San Antonio, TX	228 Units		12,072		5,397		15,636	San Antonio, TX	228 Units		14,241		—		11,376
Park at Maumelle	Maumelle, AR	240 Units		11,805		6,894		16,829
Park at Metro Center	Nashville, TN	144 Units		3,328		9,287		11,141
Parc at Maumelle									Maumelle, AR	240 Units		18,921		—		13,015
Parc at Metro Center									Nashville, TN	144 Units		4,373		6,768		8,340
Parc at Rogers									Rogers, AR	152 Units		973		19,852		3,563
Park at Clarksville									Clarksville, TN	206 Units		889		13,002		5,624
Pecan Pointe									Temple, TX	232 Units		1,991		14,846		180
Sunflower Estates									Indianola, MS	65 Units		755		7,674		810
Yazoo Estates									Yazoo City, MS	96 Units		31		8,314		835

No properties were completed during 2006.

For the period ended December 31, 2005, TCI completed the 70 unit Blue Lake Villas II in Waxahachie, Texas, the 272 unit Bluffs at Vista Ridge in Lewisville, Texas, the 232 unit Bridges on Kinsey in Tyler, Texas, the 208 unit Dakota Arms in Lubbock, Texas, the 240 unit Lake Forest in Houston, Texas, the 220 unit Wildflower Villas in Temple, Texas, the 398 unit Kingsland Ranch Apartments in Houston, Texas, the 240 unit Stonebridge at City Park Apartments in Houston, Texas, and the 240 unit Vistas of Vance Jackson in San Antonio, Texas.

For the period ending December 31, 2004, TCI completed the 248 unit DeSoto Ranch Apartments in DeSoto, Texas, the 314 unit Verandas at Cityview Apartments in Fort Worth, Texas, the 216 unit Mariposa Villas (Echo Valley) in Dallas, Texas, the 176 unit Breakwater Bay Apartments in Beaumont, Texas, the 156 unit Capitol Hill Apartments in Little Rock, Arkansas and the 332 unit Vistas of Pinnacle Park Apartments in Dallas, Texas.

In November 2004, TCI agreed to swap 69,903 square feet of Centura land, located in Dallas, Texas, with 71,393 square feet of land TXU Electric Delivery Company (“TXU”) owns adjacent to Centura land for the

Index to Financial Statements

relocation of electric transmission and distribution facilities. TCI agreed to pay the actual costs of relocation, which is estimated at $453,000. ARI paid $216,361 of this cost on TCI’s behalf in November 2004. Prime paid the remaining $216,361 on TCI’s behalf in September 2005. TCI paid an additional $36,000 to TXU for the difference in the size of the TCI property and the TXU property.

~~In the opinion of management, the properties owned by TCI are adequately covered by insurance.~~

The Company’s three office buildings in downtown New Orleans suffered extensive damage from Hurricane Katrina. Management ~~is presently working~~has worked with the Company’s insurance carriers to finalize all related claims. ~~Most of the necessary repairs to~~Repairs have nearly been completed for the Amoco and 1010 Common ~~Buildings~~buildings. The building at 225 Baronne is

not open and few repairs have ~~either~~ been ~~made or scheduled.~~ completed. During 2006, TCI reduced the carrying value of 225 Baronne to $1.2 million, which approximated the value of the underlying land. TCI intends to redevelop 225 Baronne as an urban residential facility, which it considers the best and most profitable use of the property. In August 2006, to facilitate the marketability of the property, TCI acquired the Clarke Garage and 305 Baronne for approximately $14.0 million to provide additional parking and retail for the residential development.

At ~~year-end,~~year end 2006, the Company had received approximately ~~$8.7~~$49.2 million from its insurance carriers ~~principally~~ as ~~partial~~ reimbursement for ~~Katrina-related lost~~both property damage as well as loss of rents. ~~At the same time, the~~The Company ~~had~~has spent ~~$1.7~~approximately $7.3 million to ~~stabilize and initiate~~make necessary repairs to the ~~buildings.~~New Orleans properties and has reserved approximately $7.2 million for additional repairs.

The Company is currently involved in litigation with certain parties including two parties who purchased properties from the Company but were still insured under the Company’s insurance policies and who suffered damage related to Hurricane Katrina. There is a dispute with these parties regarding the disbursement of additional insurance proceeds. At ~~December 31, 2005,~~this time, there is no indication as to how this litigation will be resolved. Currently, the ~~Amoco Building~~courts are holding approximately $50.8 million that is in dispute between the Company and the 1010 Common Building were open for business on a limited-access basis. The 225 Baronne Building, however, is closed until the assessment of damages can be fully completed. We believe our insurance coverage is adequate to fully cover the cost of repairs and lost rents, less our normal property and wind deductibles.

Two of our apartment communities in Galveston, Texas and one property in Lafayette, Louisiana suffered damage from Hurricane Rita. Most of the repairs have either been completed or scheduled. Our insurance policies will cover the costs of the required repairs, excluding normal property and wind deductibles.outside parties.

The following table sets forth the percentages, by property type and geographic region, of TCI’s real estate (other than three hotels in the Midwest region, one hotel in Poland and 5488 parcels of unimproved land, as described below) at December 31, ~~2005.~~2006.


Region	Apartments		Commercial Properties		Apartments		Commercial Properties
Pacific	—	%	—	%
Midwest	0.73		13.62		3	%	13	%
Mountain	—		1.95		—		2
Southwest	97.15		78.03		93		45
Southeast	2.12		6.40		4		40

	100.00	%	100.00	%	100	%	100	%

The foregoing table is based solely on the number of apartment units and amount of commercial square footage and does not reflect the value of TCI’s investment in each region. TCI owns 5488 parcels of unimproved ~~land, three~~land; 5 parcels, for a total of ~~23.82~~44.82 acres in the Southeast region, 5075 parcels, for a total of ~~4,179.3~~5,984.22 acres in the Southwest region, ~~and 110.68~~7 parcels, for a total of 118.92 acres in the USMidwest; and 109.18 acres in the U.S. Virgin Islands. See Schedule III to the Consolidated Financial Statements included at ITEM 8. “CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” for a detailed description of TCI’s real estate portfolio.

During ~~2005,~~2006, the activity in TCI’s owned real estate portfolio was:


Owned properties at January 1, ~~2005~~2006	~~129~~143
Properties purchased (excluding additions to existing land parcels or land for construction)	2647
Properties added from consolidation of partnerships	1—
Properties sold (excluding partial sales)	(137	)

Owned properties at December 31, ~~2005~~2006	~~143~~183

Properties Held for Investment.Set forth below are TCI’s properties held for investment and the monthly rental rate for apartments, the average annual rental rate for commercial properties and the average daily room

Index to Financial Statements

rate and room revenue divided by total available rooms for hotels and occupancy at December 31, 2006, 2005 ~~2004~~ and ~~2003,~~2004, for apartments and commercial properties and average occupancy during 2006, 2005 ~~2004~~ and ~~2003~~2004 for hotels:


Property	Location	Units/Square Footage		Rent Per Square Foot									Occupancy %								Location	Units/Sq. Ft.		Rent Per Square Foot									Occupancy %
Property	Location		2005			2004			2003			2005			2004			2003			Location	Units/Sq. Ft.	2006			2005			2004			2006			2005			2004
Apartments		Units/Square Footage
4400	Midland, TX	92 Units/94,472 Sq. Ft.		$	.55		$	.51		$	.49		97	%		97	%		86	%	Midland, TX	92 Units/94,472 Sq. Ft.		$	.60		$	.55		$	.51		94	%		97	%		98	%
Apple Lane	Lawrence, KS	75 Units/30,000 Sq. Ft.			1.12			1.08			1.05		100			100			100
Anderson Estates																					Oxford, MS	48 Units/41,760 Sq. Ft.			.49			*			*		98			*			*
Arbor Point	Odessa, TX	195 Units/178,920 Sq. Ft.			.50			.47			.45		92			90			95		Odessa, TX	195 Units/178,920 Sq. Ft.			.54			.50			.47		96			92			91
Ashton Way	Midland, TX	178 Units/138,964 Sq. Ft.			.48			.45			.43		96			95			87		Midland, TX	178 Units/138,964 Sq. Ft.			.53			.48			.45		96			96			96
Autumn Chase	Midland, TX	64 Units/58,652 Sq. Ft.			.61			.57			.55		95			98			98		Midland, TX	64 Units/58,652 Sq. Ft.			.68			.61			.57		100			95			98
Bay Walk																					Galveston, TX	192 Units/153,120 Sq. Ft.			.75			.75			.75		91			94			90
Blue Lake Villas	Waxahachie, TX	186 Units/169,746 Sq. Ft.			.93			.91			.91		95			90			92		Waxahachie, TX	186 Units/169,746 Sq. Ft.			.95			.93			.91		95			95			91
Blue Lake Villas II	Waxahachie, TX	70 Units/69,768 Sq. Ft.			.79			**			**		99			**			**		Waxahachie, TX	70 Units/69,768 Sq. Ft.			.81			.79			**		94			99			**
Bluffs at Vista Ridge	Lewisville, TX	272 Units/257,450 Sq. Ft.			.98			**			**		89			**			**		Lewisville, TX	272 Units/257,450 Sq. Ft.			.99			.98			**		95			89			**
Breakwater Bay	Beaumont, TX	176 Units/145,688 Sq. Ft.			.94			.93			**		99			87			**		Beaumont, TX	176 Units/145,688 Sq. Ft.			.98			.94			.93		96			99			88
Bridges on Kinsey	Tyler, TX	232 Units/209,888 Sq. Ft.			.87			**			**		98			**			**		Tyler, TX	232 Units/209,888 Sq. Ft.			.91			.87			**		100			98			**
Capitol Hill	Little Rock, AR	156 Units/151,116 Sq. Ft.			.76			.88			**		98			70			**		Little Rock, AR	156 Units/151,116 Sq. Ft.			.77			.76			.88		94			98			71
Curtis Moore/Leflore																					Greenwood, MS	104 Units/94,256 Sq. Ft.			.39			*			*		98			*			*
Courtyard	Midland, TX	133 Units/111,576 Sq. Ft.			.49			.47			.46		96			94			99		Midland, TX	133 Units/111,576 Sq. Ft.			.56			.49			.47		99			96			95
Coventry	Midland, TX	120 Units/105,608 Sq. Ft.			.51			.45			.44		98			96			84		Midland, TX	120 Units/105,608 Sq. Ft.			.58			.51			.45		98			98			97
Dakota Arms	Lubbock, TX	208 Units/178,776 Sq. Ft.			.88			**			**		93			**			**		Lubbock, TX	208 Units/178,776 Sq. Ft.			.88			.88			**		99			93			**
David Johnson Phase I																					Greenwood, MS	32 Units/27,840 Sq. Ft.			.35			*			*		100			*			*
David Johnson Phase II																					Greenwood, MS	40 Units/35,240 Sq. Ft.			.41			*			*		95			*			*
DeSoto Ranch	DeSoto, TX	248 Units/240,718 Sq. Ft.			.97			.95			.94		96			98			98		DeSoto, TX	248 Units/240,718 Sq. Ft.			.96			.97			.95		92			96			98
El Chapparal	San Antonio, TX	190 Units/174,220 Sq. Ft.			.76			.75			.73		93			94			96
El Chaparral																					San Antonio, TX	190 Units/174,220 Sq. Ft.			.79			.76			.75		89			93			95
Fairway View Estates	El Paso, TX	264 Units/204,000 Sq. Ft.			.67			.65			.64		95			90			96		El Paso, TX	264 Units/204,000 Sq. Ft.			.69			.67			.65		95			95			90
Fairways	Longview, TX	152 Units/134,176 Sq. Ft.			.61			.59			.58		91			96			93		Longview, TX	152 Units/134,176 Sq. Ft.			.63			.61			.59		93			91			96
Falcon Lakes	Arlington, TX	284 Units/207,960 Sq. Ft.			.97			.96			.96		96			94			94		Arlington, TX	284 Units/207,960 Sq. Ft.			.97			.97			.96		97			96			94
Fountain Lake	Texas City, TX	166 Units/161,220 Sq. Ft.			.62			.62			.62		92			86			96		Texas City, TX	166 Units/161,220 Sq. Ft.			.62			.62			.62		90			92			87
Fountains of Waterford	Midland, TX	172 Units/129,200 Sq. Ft.			.61			.55			.53		96			96			99		Midland, TX	172 Units/129,200 Sq. Ft.			.69			.61			.55		95			96			97
Foxwood	Memphis, TN	220 Units/212,000 Sq. Ft.			.61			*			*		95			*			*		Memphis, TN	220 Units/212,000 Sq. Ft.			.61			.61			*		88			95			*
Harper’s Ferry	Lafayette, LA	122 Units/112,500 Sq. Ft.			.61			.61			.60		98			95			90		Lafayette, LA	122 Units/112,500 Sq. Ft.			.65			.61			.61		98			98			96
Heather Creek	Mesquite, TX	200 Units/170,212 Sq. Ft.			.95			.94			**		94			93			**		Mesquite, TX	200 Units/170,212 Sq. Ft.			.96			.95			.94		97			94			94
Hunters Glen	Midland, TX	212 Units/174,180 Sq. Ft.			.45			.42			.39		100			93			94		Midland, TX	212 Units/174,180 Sq. Ft.			.51			.45			.42		100			100			93
Island Bay																					Galveston, TX	458 Units/374,784 Sq. Ft.			.84			.84			.83		88			94			93
Kingsland Ranch	Houston, TX	398 Units/350,584 Sq. Ft.			.96			**			**		97			**			**		Houston, TX	398 Units/350,584 Sq. Ft.			.96			.96			**		91			97			**
Laguna Vista⁽¹⁾																					Farmers Branch, TX	206 Units/191,664 Sq. Ft.			.31			**			**		16			**			**
Lake Forest	Houston, TX	240 Units/193,872 Sq. Ft.			.97			**			**		95			**			**		Houston, TX	240 Units/193,872 Sq. Ft.			.97			.97			**		93			95			**
Legends of El Paso⁽¹⁾																					El Paso, TX	240 Units/221,340 Sq. Ft.			.38			**			**		25			**			**
Limestone Canyon	Austin, TX	260 Units/216,000 Sq. Ft.			1.06			1.06			1.06		94			96			91		Austin, TX	252 Units/219,600 Sq. Ft.			1.06			1.06			1.06		90			94			97
Limestone Ranch	Lewisville, TX	252 Units/219,600 Sq. Ft.			.97			.95			.94		94			95			91		Lewisville, TX	252 Units/219,600 Sq. Ft.			.98			.97			.95		93			94			95
Marina Landing																					Galveston, TX	256 Units/205,504 Sq. Ft.			.83			.83			.83		90			97			92
Mariposa Villas	Dallas, TX	216 Units/200,928 Sq. Ft.			.89			.89			.89		92			95			97		Dallas, TX	216 Units/200,928 Sq. Ft.			.90			.89			.89		95			92			96
Mission Oaks⁽¹⁾																					San Antonio, TX	228 Units/195,716 Sq. Ft.			.88			**			**		87			**			**
Monticello Estates																					Monticello, AR	32 Units/27,840 Sq. Ft.			.39			*			*		94			*			*
Mountain Plaza	El Paso, TX	188 Units/220,710 Sq. Ft.			.54			.52			.52		97			90			94		El Paso, TX	188 Units/220,710 Sq. Ft.			.59			.54			.52		82			97			90
Oak Park IV	Clute, TX	108 Units/78,708 Sq. Ft.			.56			.56			.56		93			93			91		Clute, TX	108 Units/78,708 Sq. Ft.			.56			.56			.56		92			93			94
Parc at Maumelle⁽¹⁾																					Little Rock, AR	240 Units/208,800 Sq. Ft.			.89			**			**		78			**			**
Parc at Metro⁽¹⁾																					Nashville, TN	144 Units/130,338 Sq. Ft.			.44			**			**		64			**			**
Paramount Terrace	Amarillo, TX	181 Units/123,840 Sq. Ft.			.62			.61			.60		96			91			93		Amarillo, TX	181 Units/123,840 Sq. Ft.			.64			.62			.61		97			96			92
Quail Oaks	Balch Springs, TX	131 Units/72,848 Sq. Ft.			.83			.83			.83		97			95			95		Balch Springs, TX	131 Units/72,848 Sq. Ft.			.85			.83			.83		86			97			95
River Oaks	Wiley, TX	180 Units/164,604 Sq. Ft.			.96			.86			.86		95			95			98		Wiley, TX	180 Units/164,604 Sq. Ft.			.90			.96			.86		94			95			95
Riverwalk I																					Greenville, MS	32 Units/27,840 Sq. Ft.			.38			*			*		100			*			*
Riverwalk II																					Greenville, MS	32 Units/27,840 Sq. Ft.			47			*			*		94			*			*
Sendero Ridge	San Antonio, TX	384 Units/340,880 Sq. Ft.			.95			1.02			1.01		90			94			80		San Antonio, TX	384 Units/340,880 Sq. Ft.			1.03			.95			1.02		93			90			94
Somerset	Texas City, TX	200 Units/163,368 Sq. Ft.			.68			.68			.68		92			85			88		Texas City, TX	200 Units/163,368 Sq. Ft.			.68			.68			.68		90			92			86
Southgate	Odessa, TX	180 Units/151,656 Sq. Ft.			.51			.46			.43		95			98			93		Odessa, TX	180 Units/151,656 Sq. Ft.			.58			.51			.46		98			95			98
Spy Glass	Mansfield, TX	256 Units/ 239,264 Sq. Ft.			.97			.96			.95		93			92			97
Stonebridge at City Park	Houston, TX	240 Units/ 207,424 Sq. Ft.			.97			**			**		96			**			**
Sunchase	Odessa, TX	300 Units/223,048 Sq. Ft.			.54			.51			.49		96			97			96
Tivoli	Dallas, TX	190 Units/168,862 Sq. Ft.			.96			.95			.95		93			92			92
Timbers	Tyler, TX	180 Units/101,666 Sq. Ft.			.61			.60			.60		97			96			92
Treehouse	Irving, TX	160 Units/153,072 Sq. Ft.			.80			.80			*		95			96			*
Verandas at City View	Fort Worth, TX	314 Units/295,170 Sq. Ft.			.92			.92			.60		96			93			92
Vistas at Pinnacle Park	Dallas, TX	332 Units/276,928 Sq. Ft.			.93			.91			**		93			96			**
Vistas at Vance Jackson	San Antonio, TX	240 Units/196,272 Sq. Ft.			.72			**			**		94			**			**
Westwood	Odessa, TX	79 Units/49,001 Sq. Ft.			.54			.46			.44		100			91			100
Wildflower Villas	Temple, TX	220 Units/201,536 Sq. Ft.			.85			**			**		92			**			**
Willow Creek	El Paso, TX	112 Units/103,140 Sq. Ft.			.59			.58			.57		97			97			96
Windsong	Fort Worth, TX	188 Units/169,464 Sq. Ft.			.90			.89			**		96			91			**
Woodview	Odessa, TX	232 Units/165,840 Sq. Ft.			.56			.53			.52		96			93			94

Index to Financial Statements


Property	Location	Units/Square Footage		Rent Per Square Foot						Occupancy %					Location	Units/Sq. Ft.		Rent Per Square Foot						Occupancy %
Property	Location		2005		2004		2003		2005		2004		2003		Location	Units/Sq. Ft.	2006		2005		2004		2006		2005		2004
Spy Glass															Mansfield, TX	256 Units/ 239,264 Sq. Ft.		.98		.97		.96		95		93		92
Stonebridge at City Park															Houston, TX	240 Units/ 207,424 Sq. Ft.		.97		.97		**		94		96		**
Sunchase															Odessa, TX	300 Units/223,048 Sq. Ft.		.59		.54		.51		94		96		97
Tivoli															Dallas, TX	190 Units/168,862 Sq. Ft.		.97		.96		.95		95		93		93
Treehouse															Irving, TX	160 Units/153,072 Sq. Ft.		.80		.80		.80		86		95		97
Verandas at City View															Fort Worth, TX	314 Units/295,170 Sq. Ft.		.94		.92		.92		97		96		94
Vistas at Pinnacle Park															Dallas, TX	332 Units/276,928 Sq. Ft.		.94		.93		.91		94		93		97
Vistas at Vance Jackson															San Antonio, TX	240 Units/196,272 Sq. Ft.		1.02		.72		**		97		94		**
Westwood															Odessa, TX	79 Units/49,001 Sq. Ft.		.60		.54		.46		92		100		91
Wildflower Villas															Temple, TX	220 Units/201,536 Sq. Ft.		.90		.85		**		90		92		**
Willow Creek															El Paso, TX	112 Units/103,140 Sq. Ft.		.60		.59		.58		91		97		97
Windsong															Fort Worth, TX	188 Units/169,464 Sq. Ft.		.92		.90		.89		89		96		91
Woodview															Odessa, TX	232 Units/165,840 Sq. Ft.		.61		.56		.53		96		96		94
Office Buildings		Units/Square Footage
1010 Common	New Orleans, LA	494,579 Sq. Ft.		14.09		14.08		13.63		85		84		82	New Orleans, LA	494,579 Sq. Ft.		14.08		14.09		14.08		77		85		84
225 Baronne	New Orleans, LA	416,834 Sq. Ft.		10.62		10.70		10.63		68		69		65	New Orleans, LA	416,834 Sq. Ft.		10.43		10.62		10.70		47		68		69
600 Las Colinas	Las Colinas, TX	509,829 Sq. Ft.		21.88		*		*		88		*		*	Las Colinas, TX	509,829 Sq. Ft.		20.67		21.88		*		92		88		*
Amoco	New Orleans, LA	378,244 Sq. Ft.		13.78		13.66		13.37		72		69		78	New Orleans, LA	378,244 Sq. Ft.		14.02		13.78		13.66		74		72		69
Eton Square	Tulsa, OK	222,654 Sq. Ft.		10.51		11.09		11.60		60		75		38	Tulsa, OK	222,654 Sq. Ft.		10.70		10.51		11.09		70		60		75
Executive Court	Memphis, TN	41,840 Sq. Ft.		4.51		*		*		10		*		*	Memphis, TN	41,840 Sq. Ft.		4.23		4.51		*		0		10		*
Forum	Richmond, VA	79,791 Sq. Ft.		13.86		13.68		14.23		90		76		61	Richmond, VA	79,791 Sq. Ft.		13.96		13.86		13.68		90		90		76
Lexington Center	Colorado Springs, CO	74,603 Sq. Ft.		10.88		10.56		2.33		58		58		70	Colorado Springs, CO	74,603 Sq. Ft.		11.20		10.88		10.56		39		58		58
One Hickory															Dallas, TX	102,615 Sq. Ft.		11.16		*		*		100		*		*
Park West	Farmers Branch, TX	243,416 Sq. Ft.		10.00		*		*		0		*		*	Farmers Branch, TX	243,416 Sq. Ft.		16.97		10.00		*		64		0		*
Parkway North	Dallas, TX	71,041 Sq. Ft.		15.26		16.58		18.08		31		60		64	Dallas, TX	71,041 Sq. Ft.		14.55		15.26		16.58		69		31		60
Signature Office Building	Dallas, TX	56,532 Sq. Ft.		10.42		10.00		***		100		100		***	Dallas, TX	56,532 Sq. Ft.		10.42		10.00		10.00		100		100		100
Two Hickory	Farmers Branch, TX	96,127 Sq. Ft.		18.29		*		*		89		*		*	Farmers Branch, TX	96,127 Sq. Ft.		20.63		18.29		*		97		89		*
Westgrove Air Plaza	Addison, TX	78,326 Sq. Ft.		11.29		12.68		13.26		79		74		94	Addison, TX	78,326 Sq. Ft.		11.29		11.29		12.68		76		79		74
Industrial Warehouses
5360 Tulane	Atlanta, GA	30,000 Sq. Ft.		2.85		2.85		2.80		100		100		65	Atlanta, GA	30,000 Sq. Ft.		2.85		2.85		2.85		100		100		100
Addison Hanger	Addison, TX	23,650 Sq. Ft.		7.83		7.54		7.94		100		67		100
Addison Hanger II	Addison, TX	29,000 Sq. Ft.		9.05		9.24		9.64		100		92		92
Addison Hangar															Addison, TX	23,650 Sq. Ft.		7.80		7.83		7.54		100		100		67
Addison Hangar II															Addison, TX	29,000 Sq. Ft.		7.72		9.05		9.24		100		100		92
Clarke Garage															New Orleans, LA	600 spaces		11.15		*		*		70		*		*
Encon	Fort Worth, TX	256,410 Sq. Ft.		2.93		3.12		3.17		100		100		100	Fort Worth, TX	256,410 Sq. Ft.		2.80		2.93		3.12		0		100		100
Space Center	San Antonio, TX	101,500 Sq. Ft.		3.36		3.41		3.43		61		61		84	San Antonio, TX	101,500 Sq. Ft.		3.36		3.36		3.41		61		61		61
Shopping Centers
305 Baronne															New Orleans, LA	37,081 Sq. Ft.		4.64		10.62		10.70		90		68		69
Bridgeview Plaza	LaCrosse, WI	116,008 Sq. Ft.		7.23		6.97		7.25		89		89		90	LaCrosse, WI	116,008 Sq. Ft.		7.63		7.23		6.97		88		89		89
Cullman	Cullman, AL	92,466 Sq. Ft.		5.15		3.55		3.53		27		27		95	Cullman, AL	92,466 Sq. Ft.		5.08		5.15		3.55		48		27		27
Dunes Plaza	Michigan City, IN	223,869 Sq. Ft.		5.92		5.91		5.51		53		64		61	Michigan City, IN	223,869 Sq. Ft.		5.75		5.92		5.91		48		53		64
Willowbrook Village	Coldwater, MI	179,741 Sq. Ft.		5.95		*		*		93		*		*	Coldwater, MI	179,741 Sq. Ft.		5.97		5.95		*		94		93		*


			Average Room Rate						Occupancy %			Total Room Revenues Divided By Total Available Rooms								Average Room Rate						Occupancy %			Total Room Revenues Divided By Total Available Rooms
Property	Location	Rooms	2005		2004		2003		2005	2004	2003	2005		2004		2003		Location	Rooms	2006		2005		2004		2006	2005	2004	2006		2005		2004
Hotels
Akademia	Wroclaw, Poland	161 Rooms	$	63.00	$	55.33	$	47.78	73	65	51	$	45.09	$	35.98	$	46.86	Wroclaw, Poland	161 Rooms	$	87.21	$	63.00	$	55.33	62	73	65	$	81.34	$	45.09	$	35.98
City Suites	Chicago, IL	45 Rooms		144.21		126.29		120.16	63	58	58		90.19		71.60		76.78	Chicago, IL	45 Rooms		168.24		144.21		126.29	64	63	58		108.50		90.19		71.60
The Majestic	Chicago, IL	55 Rooms		151.17		129.64		124.47	52	52	48		79.18		65.91		57.86	Chicago, IL	55 Rooms		177.11		151.17		129.64	57	52	52		102.34		79.18		65.91
Willows	Chicago, IL	52 Rooms		141.10		119.84		121.24	57	57	53		80.11		67.62		69.54	Chicago, IL	52 Rooms		167.47		141.10		119.84	59	57	57		98.19		80.11		67.62


Property	Location	Acres
Land
1013 Common	New Orleans, LA	~~.413~~.4 Acres
~~2301 Valley Branch~~217 Rampart	~~Farmers Branch, TX~~New Orleans, LA	~~23.763 Acres~~
~~Addison Park – Residential~~	~~Addison, TX~~	~~3.37 Acres~~
~~Addison Park – Retail~~	~~Addison, TX~~	~~1.93~~.2 Acres
Alliance 8	Tarrant County, TX	8.0 Acres
Alliance 52	Tarrant County, TX	~~51.887~~51.9 Acres
Alliance Airport Land	Tarrant County, TX	~~12.724~~12.7 Acres

Property
Location Acres
Bolivar Estates
Bolivar County, MS 24.8 Acres
Broadway Estates
Broadway County, MS 12.3 Acres
Castleglen
Garland, TX 10.6 Acres
Centura
   Farmers Branch, TX    ~~8.753~~8.8 Acres
Circle C Ranch
Austin, TX 1,092.0 Acres
Creekside Land
Ft. Worth, TX 30.1 Acres
Cooks Lane
   Fort Worth, TX    ~~23.242~~23.2 Acres
Crowley Land
Ft. Worth, TX 24.9 Acres
Dedeaux Road
Gulfport, MS 10.0 Acres
Denton Land
   Denton, TX    ~~25.928~~25.9 Acres
Denton-Andrew B
   Denton, TX    ~~22.918~~22.9 Acres
Denton-Andrew C
   Denton, TX    ~~5.217~~5.2 Acres
Denton-Coonrod
   Denton, TX    ~~82.203~~82.2 Acres
DeSoto Ranch Land
   DeSoto, TX    ~~21.897~~21.9 Acres
Diplomat Drive
Farmers Branch, TX 11.7 Acres
Dominion
   Farmers Branch, TX    ~~14.39~~14.4 Acres
Ewing 8
Addison, TX 17.0 Acres
Fiesta
   San Angelo, TX    ~~.6657~~0.7 Acres
Folsom
   Farmers Branch, TX    ~~36.777~~36.8 Acres
Forney
Kaufman, TX 34.9 Acres
Fruitland
   Fruitland, FL    ~~4.66~~0.7 Acres
Hollywood Casino
   Farmers Branch, TX    ~~42.815~~29.0 Acres
Kaufman Cogen
   Kaufman County, TX    ~~2,567~~2,567.0 Acres

Index to Financial Statements


~~Property~~	~~Location~~	~~Acres~~
Kaufman Taylor	Kaufman County, TX	~~30.99~~31.0 Acres
Keller Springs Lofts	Irving, TX	1.8 Acres
Kinwest (Hackberry Creek)	Irving, TX	8.0 Acres
Lacy Longhorn	Farmers Branch, TX	~~17.115~~17.1 Acres
Ladue/Walker	Farmers Branch, TX	99.0 Acres
Lakeshore Villas	Humble, TX	~~1.36~~1.4 Acres
Lamar/Parmer	Austin, TX	~~17.07~~17.1 Acres
Las Colinas	Las Colinas, TX	4.7 Acres
LCLLP	Las Colinas, TX	~~41.19~~41.2 Acres
Limestone Canyon II	Austin, TX	~~9.96~~10.0 Acres
Lincoln Estates	Carthage, TX	18.0 Acres
Longfellow Land	Longview, TX	13.7 Acres
Lubbock	Lubbock, TX	~~2.866~~2.9 Acres
Luna	Farmers Branch, TX	~~2.61~~2.6 Acres
Mandahl Bay	USU.S. Virgin Islands	~~110.68~~109.2 Acres
Manhattan	Farmers Branch, TX	~~108.892~~108.9 Acres
Mansfield	Mansfield, TX	~~21.892~~21.9 Acres
Marine Creek	Ft. Worth, TX	~~43.43~~43.4 Acres
Mason Park	Houston, TX	1818.0 Acres
Mason Park	Katy, TX	13.0 Acres
McKinney 36	McKinney, TX	~~34.58~~34.6 Acres
McKinney Ranch	McKinney, TX	~~432.69~~264.2 Acres
Mira Lago	Farmers Branch, TX	~~4.152~~4.2 Acres
Nashville	Nashville, TN	~~6.21~~6.2 Acres
Pac Trust	Farmers Branch, TX	~~7.07~~7.1 Acres
Pantaze	Dallas, TX	~~5.997~~6.0 Acres
Parc at Clarksville	Clarksville, TN	10.4 Acres
Parkway Estates	Greenwood, MS	20.0 Acres
Payne I	Las Colinas, TX	~~109.85~~109.9 Acres
Payne II	Las Colinas, TX	~~39.87~~39.9 Acres
Pecan Pointe	Temple, TX	12.8 Acres
Pioneer Crossing	Austin, TX	38.5 Acres
Pulaski	Pulaski County, AR	21.9 Acres
~~Railroad~~RB Land	Dallas, TX	~~.293~~86.2 Acres
Ridgepoint Drive	Irving, TX	0.7 Acres
Ritchie Road	Waco, TX	350.0 Acres
Rochelle I	Las Colinas, TX	~~10.096~~10.1 Acres
Rochelle II	Las Colinas, TX	~~21.269~~21.3 Acres

Property
Location Acres
Rogers
   Rogers, AR    ~~20.08~~20.1 Acres
Seminary West
   Ft. Worth, TX    ~~5.36~~5.4 Acres
Senlac
   Farmers Branch, TX    11.9 Acres
Senlac Hutton Land
Farmers Branch, TX 5.9 Acres
Senlac VHP
   Farmers Branch, TX    ~~3.95~~3.9 Acres
Sheffield Village
   Grand Prairie, TX    13.9 Acres
Southwood Plantation
   Tallahassee, FL    ~~12.95~~13.0 Acres
Southwood Plantation (1894)
Tallahassee, FL 14.5 Acres
Stanley Tools/2301
Valley Ranch, TX 23.8 Acres
Sunflower Estates
Sunflower County, MS 18.7 Acres
Union Pacific Railroad
Dallas, TX 0.3 Acres
Valley Ranch
   Irving, TX    ~~29.9~~30.0 Acres
Valley Ranch 20
Farmers Branch, TX 20.0 Acres
West End
   Dallas, TX    ~~5.34~~5.3 Acres
Waco 42
Waco, TX 42.8 Acres
Whorton
   Benton County, AR    ~~79.68~~79.7 Acres
Wilmer 88
   Dallas, TX    ~~87.62~~87.6 Acres
Woodmont Fairway Office
Dallas, TX 5.9 Acres
Woodmont Galleria East Showcase
Dallas, TX 15.0 Acres
Woodmont Galleria West
Dallas, TX 9.2 Acres
Woodmont Merit Drive
Dallas, TX 9.3 Acres
Yazoo Estates
Yazoo County, MS 15.1 Acres
Total Acres
6,258.4 Acres

Property was purchased in ~~2003,~~ 2004, 2005 or ~~2005.~~2006.

Property was under construction.

~~***~~(1)

~~No applicable data for Signature Athletic Club. TCI sold the athletic club in November 2004 but retained the Signature office building.~~Partially completed, partially occupied construction properties.

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

In ~~2005,~~2006, TCI purchased the following properties:

Property
   Location
Units/
Sq. Ft./Acres

Purchase
Price

Net
Cash
Paid/
(Received)

Debt
Incurred

Interest
Rate

Maturity
Date

Apartments

Foxwood⁽³⁾
   Memphis, TN    220 Units    $ 6,988    $ —      $ 5,609 ⁽¹⁾ 6.54 %    01/08
Legends of El Paso⁽⁴⁾
   El Paso, TX    240 Units    2,247    464    1,774 5.50    01/47
Mission Oaks⁽⁴⁾
   San Antonio, TX    228 Units    573    573    —   5.30    09/46
Parc at Metro Center⁽⁴⁾
   Nashville, TN    144 Units    817    —      817 5.65    09/46
Office Buildings

600 Las Colinas
   Las Colinas, TX    509,829 Sq. Ft.    56,000    17,663    40,487 ⁽⁹⁾ 6.16 ⁽⁹⁾    01/13 ⁽⁹⁾
Park West
   Farmers Branch, TX    243,416 Sq. Ft.    10,000    4,715    6,500 7.50 ⁽²⁾    05/06
Two Hickory⁽³⁾
   Farmers Branch, TX    96,127 Sq. Ft.    11,502    —      7,430 ⁽¹⁾ 4.90 ⁽²⁾    05/06


Property	Location	Units/ Sq. Ft./Acres	Purchase Price		Net Cash Paid/ (Received)		Debt Incurred			Interest Rate		Maturity Date
Apartments
Anderson Estates	Oxford, MS	48 Units	$	1,144	$	148	$	996		9.50	%⁽¹⁾	12/20
David Jordan Phase II	Greenwood, MS	32 Units		743		98		645		8.50	⁽¹⁾	4/19
David Jordan Phase III	Greenwood, MS	40 Units		812		122		690		8.75	⁽¹⁾	7/22
Leflore Estates	Greenwood, MS	104 Units		2,114		337		1,777		7.00	⁽¹⁾	2/22
Monticello III Estates	Monticello, AR	32 Units		644		96		548		7.00	⁽¹⁾	1/22
Riverwalk Phase I	Greenwood, MS	32 Units		455		99		356		8.50	⁽¹⁾	2/19
Riverwalk Phase II	Greenwood, MS	72 Units		1,584		226		1,358		8.25	⁽¹⁾	2/19

				7,496		1,126		6,370

Office Buildings
305 Baronne & 217 Rampart	New Orleans, LA	37,081 Sq. Ft.		3,985		3,483		0
Clark Garage	New Orleans, LA	600 spaces		9,925		564		9,025		9.25	⁽⁸⁾	6/07
One Hickory	Farmers Branch, TX	102,615 Sq. Ft.		12,214		—		—	⁽²⁾			—

				26,124		4,047		9,025

Land
Bolivar Estates	Bolivar City, MS	24.8 Acres		650		649		—		—		—
Broadway Estates	Broadway City, MS	12.3 Acres		210		222		—		—		—
Castleglen	Garland, TX	10.6 Acres		723		690		—		—		—
Circle C Ranch	Austin, TX	1,092 Acres		25,569		101		25,569		8.75		3/08
Copperridge Condo #211	Dallas, TX⁽⁴⁾	1 Unit		41		41		—		—		—
Copperridge Condo #323	Dallas, TX⁽⁴⁾	1 Unit		42		42		—		—		—
Creekside Land	Ft. Worth, TX	30.1 Acres		2,105		2,097		—		—		—
Crowley Land	Ft. Worth, TX	24.9 Acres		1,500		6		—		—		—
Dedeaux Road	Gulfport, MS	10.0 Acres		1,500		—		1,520		13.00		9/07
Diplomat Road	Farmers Branch, TX	11.7 Acres		1,775		—		—	⁽³⁾	—		—
Ewing Land	Addison, TX	16.8 Acres		15,361		3,444		10,752	⁽⁵⁾	5.50		12/09
Forney Land	Kaufman County, TX	34.87 Acres		3,945		3,926		—		—		—

Index to Financial Statements

Property
Location
Units/
Sq. Ft./Acres

Purchase
Price

Net
Cash
Paid/
(Received)

Debt
Incurred

Interest
Rate

Maturity
Date

Shopping Centers

Willowbrook Village
Coldwater, MI 179,741 Sq. Ft.    8,200 2,223 6,495 7.28 02/13
Land

Addison Park – Residential
Addison, TX 1.93 Acres    1,475 381 1,180 8.00 ⁽²⁾ 11/06
Addison Park – Retail
Addison, TX 3.37 Acres    783 201 626 8.00 ⁽²⁾ 11/06
Alliance Airport
Tarrant County, TX 12.724 Acres    850 892 —   —   —
Alliance 8
Tarrant County, TX 8 Acres    657 332 408 7.75 ⁽²⁾ 05/06
Alliance 52
Tarrant County, TX 51.887 Acres    2,538 1,054 1,610 7.75 ⁽²⁾ 05/06
Denton
Denton, TX 25.928 Acres    2,100 862 1,365 7.75 ⁽²⁾ 04/07
Denton-Andrew B
Denton, TX 22.918 Acres    853 345 554 8.00 ⁽²⁾ 06/07
Denton-Andrew C
Denton, TX 5.217 Acres    303 126 197 8.00 ⁽²⁾ 06/07
Kaufman Cogen
Kaufman County, TX 2,567 Acres    5,498 6,110 —   —   —
Kaufman Taylor
Kaufman County, TX 30.999 Acres    465 486 —   —   —
Luna
Farmers Branch, TX 2.606 Acres    250 257 —   —   —
Mandahl Bay
US Virgin Islands 50.4 Acres    7,000 4,101 3,500 7.00 07/05 ⁽⁸⁾
Mandahl Bay (Chung)
US Virgin Islands .75 Acres    95 101 —   —   —
Mandahl Bay (Gilmore)
US Virgin Islands 1.02 Acres    96 104 —   —   —
Mandahl Bay (Inn)
US Virgin Islands 14.992 Acres    2,500 2,731 —   —   —
Mandahl Bay (Marina)
US Virgin Islands 24.02 Acres    2,000 2,101 —   —   —
Mansfield
Mansfield, TX 21.892 Acres    1,450 577 943 7.50 ⁽²⁾ 03/07
McKinney Ranch
McKinney, TX 464.93 Acres    45,975 19,992 28,051 8.00 12/08
Pantaze
Dallas, TX 5.997 Acres    265 276 —   —   —
Payne I & II⁽¹⁰⁾
Las Colinas, TX 149.72 Acres    1,000 1,066 —   —   —
Senlac
Farmers Branch, TX 11.94 Acres    625 643 ⁽⁷⁾ —   —   —
Senlac VHP
Farmers Branch, TX 3.95 Acres    595 623 —   —   —
Southwood Plantation⁽⁵⁾
Tallahassee, FL 12.95 Acres    525 555 —   —   —
TuTu
US Virgin Islands 19.5 Acres    1,350 1,401 —   —   —
West End⁽⁶⁾
Dallas, TX .158 Acres    49 52 —   —   —
Whorton
Benton County, AR 79.68 Acres    4,332 702 3,828 6.08 ⁽²⁾ 01/07
Wilmer 88
Dallas, TX 87.62 Acres    638 668 —   —   —


Property	Location	Units/ Sq. Ft./Acres	Purchase Price		Net Cash Paid/ (Received)		Debt Incurred			Interest Rate		Maturity Date
Galleria East/Showcase	Dallas, TX	15 Acres		25,161		7,106		18,362		9.75	⁽⁸⁾	11/07	⁽⁶⁾
Keller Springs Lofts	Addison, TX	1.75 Acres		697		—		690		8.25	⁽⁸⁾	10/07
Kinwest (Hackberry Creek Office Park )	Irving, TX	8.0 Acres		1,737		101		1,580		10.25	⁽⁸⁾	10/07
LaDue/Walker	Farmers Branch, TX	99 Acres		21,500		—		9,949	⁽³⁾	8.60		8/08
Lincoln Estates	Carthage, MS	18 Acres		156		163		—		—		—
Longfellow	Longview, TX	13.7 Acres		696		719		—		—		—
Mason Park	Katy, TX	13 Acres		2,225		—		—		—		—
Parc at Clarksville	Clarksville, TN	10.4 Acres		541		—		547	⁽⁷⁾	8.00		1/48
Parkway Estates	Greenwood, MS	20.1 Acres		682		364		487		8.50		1/07
Pecan Pointe	Temple, TX	12.8 Acres		1,198		1,195		1,650		8.25		12/07
Pioneer Crossing	Austin, TX	38.5 Acres		614		614		—	⁽³⁾	—		—
RB Land	Dallas, TX	86.2 Acres		668		673		—		—		—
Ridgepoint Drive	Irving, TX	0.6 Acres		179		172		—		—		—
Ritchie Road	Waco, TX	319 & 31 Acres		2,677		897		1,735		8.58	⁽⁸⁾	11/08
Senlac Hutton	Farmers Branch, TX	5.9 Acres		1,050		949		—		—		—
Southwood Plantation	Tallahassee, FL	14.5 Acres		1,150		477		748	⁽¹⁾	8.50		2/08
Sunflower Estates	Sunflower City, MS	18.7 Acres		187		212		—		—		—
Valley Ranch 20	Farmers Branch, TX	20 Acres		4,673		1,892		3,038	⁽¹⁾	8.50		2/08
Waco 42	Waco, TX	42.8 Acres		531		112		398		8.00		5/12
Woodmont Fairway Office	Dallas, TX	5.9 Acres		3,833		1,014		3,000	⁽¹⁾	8.25		1/07
Woodmont Galleria West	Farmers Branch, TX	7.2 Acres		5,846		808		5,230		9.25	⁽⁸⁾	12/07
Woodmont Galleria West	Farmers Branch, TX	2.0 Acres		1,604		184		1,475		9.25	⁽⁸⁾	12/07
Woodmont Merit Drive	Dallas, TX	9.3 Acres		4,560		1,868		2,964		8.00		3/07
Yazoo Estates	Yazoo City, MS	15.1 Acres		120		213		—		—		—

			$	135,706	$	30,951	$	89,694

			$	169,326	$	36,124	$	105,089

(1)

Assumed debt.

(2)

~~Variable rate.~~Property purchased from IORI for extinguishment of note receivable.

(3)

Property ~~received~~purchased from ~~ARI, a related party, for payment of a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”~~ARI.

(4)

~~Initial construction loan funding~~Purchased for interest in condominium community. Intend to ~~purchase land and begin apartment construction. Does not represent actual units purchased.~~develop land.

(5)

~~Purchased a 50% interest in this land tract.~~Financed by seller.

(6)

~~Purchased a 37.5% interest in this land tract.~~Option to extend by paying 1.5% loan fee and 1% consulting fee on 10/07.

(7)

~~Funds for purchase were provided by ARI, a related party.~~Construction loan funding.

(8)

~~Debt was extended to April 2006, with an increase in the interest rate to 8.0%.~~

~~(9)~~

~~Represents two loans on the building: a first lien of $35.3 million at 6.16% that matures in January 2013 and second lien of $5.1 million at 6.16% that matures in January 2013.~~

~~(10)~~

TCI dissolved the 50% Tenant-In-Common interest in the Payne Land, resulting in TCI owning the 109.85 acre Payne I tract and the 39.87 acre Payne II tract. TCI paid an additional $1.0 million for a 30.43 flood plain acreage difference between the two parties.Variable rate.

In ~~2005,~~2006, TCI sold the following properties:


Property	Location	Units/ Acres/ Rooms/ Sq. Ft.	Sales Price		Net Cash Received		Debt Discharged		Gain on Sale		Location	Units/Acres/ Rooms/ Sq. Ft.	Sales Price		Net Cash Received		Debt Discharged		Gain on Sale
Apartments
By The Sea	Corpus Christi, TX	153 Units	$	7,450	$	2,050	$	5,165	$	1,343
Terrace Hills	El Paso, TX	310 Units		12,300		5,467		5,890		6,527
Apple Lane											Lawrence, KS	75 Units	$	2,600	$	1,173	$	1,290	$	1,273
Plantation Apartments											Tulsa, OK	138 Units		2,750		638		2,191		432
Timbers on Broadway											Tyler, TX	180 Units		3,500		—		2,224		1,124
Will-O-Wick Apartments											Pensacola, FL	152 Units		6,500		2,806		2,827		2,860

														15,350		4,617		8,532		5,689

Land
Fruitland Land											Fruitland, FL	4.0 Acres		1,550		1,462		—		1,279
Hollywood Casino											Farmers Branch, TX	10.4 Acres		3,225		—		—		331
Hollywood Casino											Farmers Branch, TX	3.4 Acres		2,006		1,087		900		425
Mandahl Bay											U.S. Virgin Islands	1.5 Acres		525		265		213		236
McKinney Ranch											McKinney, TX	123.9 Acres		16,591		6,004		10,051		3,529
McKinney Ranch											McKinney, TX	44.5 Acres		10,289		10,031		—		5,302
Woodmont Group I and II											Lakeway, TX	4.9 Acres		3,648		1,518		1,806		319

														37,834		20,367		12,970		11,421

													$	53,184	$	24,984	$	21,502	$	17,110

Index
Following is a brief description of the most significant property acquisitions and sales in 2006:
New Orleans Properties
In August 2006, TCI purchased the Clarke Garage at 913 Gravier in New Orleans, Louisiana for $9.0 million cash. The property is adjacent to Financial Statements

Property
   Location    Units/Acres/
Rooms/Sq. Ft.
Sales
Price

Net Cash
Received

Debt
Discharged

Gain
on Sale

Office Buildings

9033 Wilshire
   Los Angeles, CA    44,253 Sq. Ft.    12,000    4,116    6,506 2,162
Bay Plaza I
   Tampa, FL    75,780 Sq. Ft.    4,682    3,253    961 919
Bay Plaza II
   Tampa, FL    78,882 Sq. Ft.    4,719    1,114    3,284 (199 )
Institute Place
   Chicago, IL    144,915 Sq. Ft.    14,460    4,843    7,792 10,061
Industrial Warehouses

5700 Tulane
   Atlanta, GA    67,850 Sq. Ft.    816    738    —   294
Shopping Centers

Promenade
   Highland Ranch, CO    133,558 Sq. Ft.    14,250    6,192    6,651 6,601
Hotels

Majestic Inn
   San Francisco, CA    57 Rooms    7,900    3,487    3,950 3,272
Land

Alamo Springs/Lemmon Carlisle
   Dallas, TX    2.82 Acres    7,674    5,587    1,744 2,394
Granbury Station
   Fort Worth, TX    15.696 Acres    1,003    265    738 ⁽¹⁾ 10
LCLLP
   Las Colinas, TX    4.3 Acres    1,873    511    1,290 1,327
McKinney Ranch
   McKinney, TX    1.328 Acres    347    325    —   191
McKinney Ranch⁽²⁾
   McKinney, TX    27.192 Acres    10,070    2,214    —   —   ⁽³⁾
McKinney Ranch⁽⁴⁾
   McKinney, TX    3.73 Acres    1,381    290    —   —   ⁽⁵⁾
Round Mountain⁽⁶⁾
   Lakeway, TX    10 Acres    1,500    251    —   1,073
West End
   Dallas, TX    .7978 Acres    2,259    2,099    —   1,259
West End
   Dallas, TX    .826 Acres    2,430    213    2,000 1,448

~~(1)~~

~~Assumed debt.~~

~~(2)~~

~~TCI provided $7.6 million of seller financing. See Note 3. “NOTES AND INTEREST RECEIVABLE.”~~

~~(3)~~

~~Gain of $7.0 million deferred due to insufficient initial buyer investment.~~

~~(4)~~

~~TCI provided $1.0 million of seller financing. See Note 3. “NOTES AND INTEREST RECEIVABLE.”~~

~~(5)~~

~~Gain of $307,000 deferred due to insufficient initial buyer investment.~~

~~(6)~~

~~TCI provided $1.1 million of seller financing. See Note 3. “NOTES AND INTEREST RECEIVABLE.”~~

and includes 305 Baronne. 305 Baronne contains approximately 37,000 square feet of retail space and is currently occupied by retail tenants. 225 Baronne consists of approximately 417,000 square feet of office space and was significantly damaged during hurricane Katrina in September 2005. During 2006, TCI reduced the carrying value of 225 Baronne to $1.2 million, which approximated the value of the underlying land. TCI intends to redevelop 225 Baronne into an urban residential facility, which it considers the best and most profitable use of the property. To facilitate the marketability of the property, TCI acquired the Clarke Garage and 305 Baronne to provide additional parking and retail for the residential development.

One Hickory

In October 2003, TCI sold the One Hickory office building in Farmers Branch, Texas to IORI for $12.2 million and financed $12.0 million of the purchase price with a note receivable bearing interest at 5.49 percent per annum, maturing in June 2006. The $12.2 million sales price approximated TCI’s initial cost of acquiring the property in 2002 from ARI. IORI immediately sold One Hickory together with 202 acres of undeveloped land to a partnership, the general partner of which was then an affiliate of ARI for a total sales price of $37.2 million. In May 2006, the partnership sold One Hickory back to TCI in satisfaction of the $12.0 million note payable by IORI.

Circle C

In March 2005, TCI ~~financed/~~entered into an agreement to advance a third party $3.2 million for development costs relating to single-family residential lots in Austin, Texas. These advances are secured by stock in the borrower and hold a second lien on the undeveloped land. The secured note bears interest at 10 percent, requires semi-annual payments, and matures in March 2008. In September 2005, the total amount authorized under this advance was increased to $5.0 million. As of March 31, 2006, TCI had advanced $3.2 million to the borrower. TCI also guaranteed an $18 million loan secured by a first lien on the undeveloped land. In September 2005, TCI purchased for $4.1 million a subsidiary of Tacco Universal, a related party that holds two notes receivable from the borrower for $3.0 and $1.0 million, respectively. These notes are secured by approximately 142 acres of undeveloped land and membership interest in the borrower. These secured notes accrue interest at 12 percent, have an interest reserve for payments that is added to the principal balance on a monthly basis, and matured in June 2005. Both loans were extended to September 2005 and upon maturity were paid under the advance referred to at the beginning of this paragraph. In March 2006, TCI acquired all of the interests in the borrower, including ownership of the Austin, Texas land. The land is secured by the $18 million first mortgage and a $3 million subordinated loan. In March 2006, TCI secured a development loan of $31.3 million (secured by the Austin, Texas land), of which $18 million was used to pay the existing first mortgage. As of December 31, 2006 the development loan balance was approximately $22.8 million. The development loan matures in March 2008 and bears interest at Prime plus one percent. The Company intends to develop the land for sale to single-family residential builders.

Ewing Land

In December 2006, TCI acquired 17.0 acres in North Dallas known as the Ewing Land, for $3.4 million and a note payable of $10.8 million. The land was acquired for future development and borders the cities of Addison and Farmers Branch. The loan matures in December 2009 and requires interest only payments of 5.5 percent until maturity.

Galleria East

In November 2006, TCI acquired approximately 15 acres located at the intersection of the Dallas North Tollway and IH-635 (LBJ Freeway) in Dallas, Texas for a purchase price of $25.2 million. Payment was in the form of $8.8 million cash and a note payable of the $18.4 million due in December 2007. Terms of the note required interest only payments at 6.0 percent until maturity. The property is currently occupied by an automobile dealership which pays TCI a monthly rental for the use of the property. TCI intends to hold the land for future development or resale.

LaDue/Walker

In August 2006, TCI acquired from ARI, 99 acres in Farmers Branch, Texas known as LaDue/Walker for $21.5 million. Payment was made by an increase in the affiliate payable to Prime of $11.2 million and assumption of a $9.5 million note payable. Terms of the note require principal and interest payments monthly at 10.25 percent until maturity in December 2008. TCI intends to hold the land for future development as part of the Mercer Crossing development.

Galleria West

In November 2006, TCI purchased two parcels of land in independent transactions totaling approximately 9.2 acres in North Dallas for a total of approximately $7.5 million. Payment was made in the form of notes payable in the amounts of $1.5 million and $5.2 million. The notes require interest payments at 6.0 percent through maturity in December 2007. TCI intends to hold the land for future development or resale.

Will-O-Wick

In May 2006, TCI sold the Will-O-Wick apartments in Pensacola, Florida, for $6.5 million. The sale resulted in a gain of $2.9 million and net cash received of $2.8 million after payment of outstanding mortgages and costs of sale.

McKinney Ranch

In June 2006, TCI sold, in two separate transactions, a total of 168.8 acres of the McKinney Ranch land in McKinney, Texas for $26.9 million. The sales resulted in total gains of $8.8 million and net cash of $16.0 million after paydown of $10.2 million in notes payable, closing and other costs of sale.

In 2006, TCI refinanced the following properties:

Property
   Location
Sq. Ft./Units/
Rooms/ Acres
   Debt
Incurred
Debt
Discharged

Net
Cash
Received
Interest
Rate Maturity
Date
Apartments

Autumn Chase
   Midland, TX    64 Units    $ 1,166    $ 797    $ 317 5.88 %⁽¹⁾ 05/35
Courtyard
   Midland, TX    133 Units    1,342    966    266 5.88 ⁽¹⁾ 05/35
Southgate
   Odessa, TX    180 Units    1,879    1,712    61 5.88 ⁽¹⁾ 05/35
Westwood
   Odessa, TX    79 Units    500    —      464 5.25 ⁽¹⁾ 12/35
Office Buildings

Bridgeview Plaza
   LaCrosse, WI    116,008 Sq. Ft.    7,197    6,304    649 7.25 ⁽¹⁾ 03/10
Shopping Centers

Dunes Plaza
   Michigan City, IN    223,869 Sq. Ft.    3,750    2,685    658 7.50 ⁽¹⁾ 01/10
Hotels

The Majestic
   Chicago, IL    55 Rooms    3,225    —      3,066 6.40 06/10
Land

2301 Valley Branch
   Farmers Branch, TX    23.763 Acres    2,420    2,841    (385 ) 8.50 ⁽¹⁾ 12/06
Alliance Airport⁽²⁾
   Tarrant County, TX    12.724 Acres    553    —      540 7.25 ⁽¹⁾ 01/07
Centura⁽³⁾
   Farmers Branch, TX    8.753 Acres    6,727    —      6,727 8.50 ⁽¹⁾ 08/07
DeSoto Ranch⁽²⁾
   DeSoto, TX    21.879 Acres    1,635    1,271    336 7.25 ⁽¹⁾ 01/07
McKinney 36
   Collin County, TX    34.58 Acres    4,000    1,747    2,123 6.50 ⁽¹⁾ 12/07
Payne I
   Las Colinas, TX    109.85 Acres    6,732    —      6,550 8.00 12/07
Sheffield Village⁽²⁾
   Grand Prairie, TX    13.9 Acres    975    975    94 7.75 ⁽¹⁾ 03/07
West End⁽²⁾
   Dallas, TX    6.324 Acres    2,000    —      1,951 7.25 ⁽¹⁾ 01/07 ⁽⁴⁾
West End⁽²⁾
   Dallas, TX    5.498 Acres    2,000    —      1,842 8.00 ⁽¹⁾ 06/07


Property	Location	Sq. Ft./Units/ Rooms/ Acres	Debt Incurred		Debt Discharged		Net Cash Received		Interest Rate		Maturity Date
Apartments
4400	Midland, TX	92 Units	$	2,825	$	945	$	2,686	6.75	%	1/37
Ashton Way	Midland, TX	178 Units		2,600		945		2,474	6.75		1/37
Hunters Glen	Midland, TX	212 Units		2,475		1,804		446	8.13	⁽¹⁾	2/09
Woodview.	Odessa, TX	232 Units		5,229		1,839		1,123	6.75		1/37

				13,129		5,533		6,729

Office Buildings
Forum OB	Richmond, VA	79,791 Sq. Ft.		6,000		4,721		1,152	7.75		7/13
One Hickory	Farmers Branch, TX	102,615 Sq. Ft.		9,300		6,858		2,308	6.93		5/10
Two Hickory	Farmers Branch, TX	96,127 Sq. Ft.		9,500		7,331		1,860	7.03		9/11

				24,800		18,910		5,320

Land
Diplomat Tract I	Farmers Branch, TX	3.9 Acres		309		—		293	10.25		5/08
Diplomat Tract II	Farmers Branch, TX	4.0 Acres		321		—		304	10.25		5/08
Diplomat Tract III	Farmers Branch, TX	3.7 Acres		293		—		278	10.25		5/08
Forney Land	Kaufman County, TX	34.9 Acres		302		—		228	10.25		5/08
Hutton Tract	Farmers Branch, TX	2.4 Acres		281		—		265	10.25		5/08
Kaufman Cogen	Kaufman County, TX	2,567.0 Acres		3,573		—		3,447	10.25		5/08
Kaufman Taylor	Kaufman County, TX	30.9 Acres		2,564		—		2,481	10.25		5/08
LaDue/Walker	Farmers Branch, TX	99.0 Acres		10,538		—		334	8.60		8/08
Payne I Land	Las Colinas, TX	109.9 Acres		5,683		—		5,591	9.00		12/07
Payne II	Valley Ranch, TX	39.9 Acres		4,803		—		4,526	10.25		5/08
Pioneer Crossing	Travis County, TX	38.5 Acres		1,514		—		1,484	9.25		6/08
Valley Ranch	Irving, TX	29.9 Acres		2,520		—		2,469	10.25		5/08
West End Land	Dallas, TX	5.3 Acres		8,370		2,000		6,169	9.25	⁽¹⁾	1/07

				41,071		2,000		27,869

			$	79,000	$	26,443	$	39,918

(1)

Variable rate.

In 2005, TCI refinanced the following properties:

Index to Financial Statements


Property	Location	Sq. Ft./Units/ Rooms/ Acres	Debt Incurred		Debt Discharged		Net Cash Received			Interest Rate		Maturity Date
Apartments
Autumn Chase	Midland, TX	64 Units	$	1,166	$	797	$	317		5.88	%⁽¹⁾	5/35
Courtyard	Midland, TX	133 Units		1,342		966		266		5.88	⁽¹⁾	5/35
Southgate	Odessa, TX	180 Units		1,879		1,712		61		5.88	⁽¹⁾	5/35
Westwood	Odessa, TX	79 Units		500		—		464		5.25	⁽¹⁾	12/35

				4,887		3,475		1,108

Office Buildings
Bridgeview Plaza	LaCrosse, WI	116,008 Sq. Ft.		7,197		6,304		649		7.25	⁽¹⁾	3/10

Shopping Centers
Dunes Plaza	Michigan City, IN	223,869 Sq. Ft.		3,750		2,685		658		7.50	⁽¹⁾	1/10

Hotels
The Majestic	Chicago, IL	55 Rooms		3,225		—		3,066		6.40		6/10

Land
2301 Valley Branch	Farmers Branch, TX	23.8 Acres		2,420		2,841		(385	)	8.50	⁽¹⁾	12/06
Alliance Airport⁽²⁾	Tarrant County, TX	12.7 Acres		553		—		540		7.25	⁽¹⁾	1/07
Centura⁽³⁾	Farmers Branch, TX	8.8 Acres		6,727		—		6,727		8.50	⁽¹⁾	8/07
DeSoto Ranch⁽²⁾	DeSoto, TX	21.9 Acres		1,635		1,271		336		7.25	⁽¹⁾	1/07
McKinney 36	Collin County, TX	34.6 Acres		4,000		1,747		2,123		6.50	⁽¹⁾	12/07
Payne I	Las Colinas, TX	109.9 Acres		6,732		—		6,550		8.00		12/07
Sheffield Village⁽²⁾	Grand Prairie, TX	13.9 Acres		975		975		94		7.75	⁽¹⁾	3/07
West End⁽²⁾	Dallas, TX	6.3 Acres		2,000		—		1,951		7.25	⁽¹⁾	1/07	⁽⁴⁾
West End⁽²⁾	Dallas, TX	5.5 Acres		2,000		—		1,842		8.00	⁽¹⁾	6/07

				27,042		6,834		19,778

			$	46,101	$	19,298	$	25,259

(1)

Variable rate.

(2)

Drawn on TCI’s $10 million line of credit for land acquisition and financing.

(3)

IORI purchased the Centura Land for $6.7 million. See Note 8. “RELATED PARTIES.”

(4)

Loan was paid off in November 2005 from a partial sale.

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


Property	Location	Units
Apartments
Bay Walk	Galveston, TX	192 Units
Island Bay	Galveston, TX	458 Units
Marina Landing	Galveston, TX	256 Units
~~Plantation~~	~~Tulsa, OK~~	~~138 Units~~
~~Willow-Wick Gardens~~	~~Pensacola, FL~~	~~152 Units~~

Partnership Properties.TCI is a 30% general partner in Sacramento Nine (“SAC 9”), which owned the Prospect Park #29 Office Building. In December 2004, SAC 9 sold the Prospect Park #29 office building for $3.7 million, of which TCI received $1.1 million after closing costs and fees. TCI recognized a gain from the sale of $882,000.

In December 2004, TCI sold to an unrelated investment group a 95% partnership interest in Garden Centura, L.P. (“Garden Centura”). Garden Centura is the owner of the 410,901 sq. ft. Centura Tower office building located in Farmers Branch, Texas. TCI retained a non-controlling 1% general partner interest and a 4% limited partner interest in Garden Centura, L.P. TCI accounts for its investment in this partnership on the equity method.

Provision for Asset Impairments.TCI recorded no asset impairments ofin 2006, $3.4 million in 2005, and $6.1 million for 2004, ~~and $4.7 million for 2003,~~ representing the write down of certain operating properties to current estimated fair value. The asset impairment for 2005 relates to the following properties:


Property	Location	Units/ Acres	Fair Value		Property Basis		Costs to Sell		Impairment		Location	Units/ Acres	Fair Value		Property Basis		Costs to Sell		Impairment
Apartments
Bay Walk/Island Bay	Galveston, TX	650 Units	$	25,000	$	25,598	$	982	$	1,580	Galveston, TX	650 Units	$	25,000	$	25,598	$	982	$	1,580
Land
Centura	Farmers Branch, TX	8.753 Acres		12,025		13,865		—		1,840	Farmers Branch, TX	8.8 Acres		12,025		13,865		—		1,840

The Bay Walk and Island Bay Apartments are under contract to sell together and the contractual sales price was used as fair value. The impairment losses for these properties are included in 2005 discontinued operations. Centura Land was appraised for its sale to IORI and the appraised value was used as the fair value. The costs to sell are estimated closing costs and commission to be paid by TCI.

The asset impairment for 2004 relates to the following properties:


Property	Location	Sq. Feet	Fair Value		Property Basis		Costs to Sell		Impairment		Location	Sq. Ft.	Fair Value		Property Basis		Costs to Sell		Impairment
Office Building
225 Baronne	New Orleans, LA	416,834 Sq. Ft.	$	8,500	$	10,220	$	—	$	1,720	New Orleans, LA	416,834 Sq. Ft.	$	8,500	$	10,220	$	—	$	1,720
Harmon	Sterling, VA	72,062 Sq. Ft.		6,500		9,080		320		2,900	Sterling, VA	72,062 Sq. Ft.		6,500		9,080		320		2,900
Mimado	Sterling, VA	35,127 Sq. Ft.		4,000		5,367		210		1,577	Sterling, VA	35,127 Sq. Ft.		4,000		5,367		210		1,577

The Harmon and Mimado buildings were sold and the contractual sales prices were used as fair value. The costs to sell were the estimated closing costs and commissions to be paid by TCI. The impairment losses for these properties are included in 2004 discontinued operations. It was determined that the fair value of 225 Baronne was less than the current book value due to the pending loss of a major tenant. The Company ~~determined that future leases on the vacated space will likely be below market rates and the projected future cash flows of~~intends to redevelop 225 Baronne ~~may not be sufficient to recover the current book value.~~as a residential project.

Index to Financial Statements

~~The asset impairment for 2003 relates to the following properties:~~

Property
   Location    Sq. Feet/
Acres
Fair
Value

Property
Basis

Costs to
Sell
   Impairment
Office Building

Brandeis
   Omaha, NE    319,234 Sq. Ft.    $ 8,821    $ 13,630    $ —      $ 4,357
Land

Red Cross
   Dallas, TX    2.89 Acres    8,500    7,679    1,019    198

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

Mortgage Loans

In addition to investments in real estate, a portion of TCI’s assets are invested in mortgage notes receivable, principally secured by real estate. TCI may originate mortgage loans in conjunction with providing purchase money financing of property sales. Management intends to service and hold for investment the mortgage notes in TCI’s portfolio. TCI’s mortgage notes receivable consist of first, wraparound and junior mortgage loans.

Types of Mortgage Activity. TCI has originated its own mortgage loans, as well as acquired existing mortgage notes either directly from builders, developers or property owners, or through mortgage banking firms, commercial banks or other qualified brokers. Premier Funding, LLC, a related party, services TCI’s mortgage notes. TCI’s investment policy is described in ITEM 1. “BUSINESS—Business Plan and Investment Policy.”

Types of Properties Securing Mortgage Notes. The properties securing TCI’s mortgage notes receivable portfolio at December 31, ~~2005,~~2006, consisted of ~~five~~four office buildings, ~~three~~seven apartment properties, two parcels of unimproved land, two retail developments and various partnership and membership interests. Four mortgage notes receivable were unsecured at December 31, ~~2005.~~2006. The Board of Directors may alter the types of properties securing or collateralizing mortgage loans in which TCI invests without a vote of stockholders. TCI’s Articles of Incorporation impose certain restrictions on transactions with related parties, as discussed in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

At December 31, ~~2005,~~2006, TCI’s mortgage notes receivable portfolio included ~~six~~11 mortgage loans with an aggregate principal balance of ~~$35.7~~$22.9 million secured by income-producing real estate located in the Southeast and Southwest regions of the continental United States, ~~six~~two mortgage loans with an aggregate principal balance of ~~$16.0~~$3.5 million secured by unimproved land in the Southwest region of the continental United States, five loans with a principal balance of ~~$7.6~~$6.3 million secured by partnership or membership interests and four unsecured loans with a principal balance of ~~$3.9~~$9.7 million. At December 31, ~~2005, 6.0%~~2006, 3.2% of TCI’s assets were invested in notes and interest receivable.

The following table sets forth the percentages (based on the mortgage note principal balance) by property type and geographic region, of the income producing properties that serve as collateral for TCI’s mortgage notes receivable at December 31, ~~2005.~~2006. Excluded are ~~$27.5~~$16.4 million of mortgage notes that are secured by unimproved land or other security, or are unsecured. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. “CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” for further details of TCI’s mortgage notes receivable portfolio.

Region
   Apartments
Commercial
Properties
Total
Southwest
   0.0 % 48.9 % 48.9 %
Southeast
   0.0 51.1 51.1

   0.0 % 100.0 % 100.0 %

Index to Financial Statements


Region	Apartments		Commercial Properties		Total
Southwest	—		16	%	16	%
Southeast	4		80		84

	4	%	96	%	100	%

A summary of the activity in TCI’s mortgage notes receivable portfolio during ~~2005~~2006 is as follows:


Mortgage notes receivable at January 1, ~~2005~~2006	2320
Loans paid off	(86	)
Loans funded	68

Mortgage notes receivable at December 31, ~~2005~~2006	2122

During ~~2005, $10.8~~2006, $20.8 million was collected in full payment of ~~eight~~six mortgage notes and ~~$1.4~~$2.1 million in principal payments were received on other mortgage notes. At December 31, ~~2005, 1.5%~~2006, less than one percent of TCI’s assets were invested in mortgage notes secured by non-income producing real estate, comprised of a second lien mortgage note secured by 33 acres of unimproved land in Travis County, Texas, a first lien note secured by 13 acres of unimproved land in Harris County, Texas, a second lien note secured by 22.3 acres of unimproved land in Collin County, Texas, a second lien note secured by 1,092 acres in Austin, Texas, and two first lien notes secured by 27.2 and 3.73 acres in McKinney, Texas.estate.

First Mortgage Loans.TCI invests in first mortgage notes with short, medium and long-term maturities. First mortgage loans generally provide for level periodic payments of principal and interest sufficient to substantially repay the loan prior to maturity, but may involve interest-only payments or moderate amortization of principal and a “balloon” principal payment at maturity. With respect to first mortgage loans, the borrower is required to provide a mortgagee’s title policy or an acceptable legal title opinion as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders. TCI may grant participations in first mortgage loans it originates to other lenders.

The following discussion briefly describes first mortgage loans funded in ~~2005,~~2006, as well as events during ~~2005~~2006 that affected previously funded first mortgage loans.

In March 2002, TCI sold the 174,513 Sq. Ft. Hartford Office Building in Dallas, Texas, for $4.0 million, providing $4.0 million in seller financing as well as an additional $1.4 million line of credit for leasehold improvements all in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 8.0% per annum, requires monthly interest only payments and matures in March 2007. As of March 2006, TCI ~~has~~had funded $896,000 of the $1.4 million line of credit. TCI determined during the third quarter of 2005 that it would classify this note as non-performing due to the lack of debt payments received and the probability that no debt payments would be received in the future. ~~Effective~~In the fourth quarter of 2006, TCI and the borrower entered into an assumption and note modification agreement whereby the note receivable was modified to $3.6 million upon TCI’s receipt of approximately $500,000 from the original borrower. The original borrower subsequently transferred interest in the property to a new owner, which assumed the $3.6 million debt. The new note accrues interest at 8.25% for the ~~quarter ended September~~first year, 9.25% thereafter, and matures October 30, ~~2005, TCI no longer accrues interest on this note. The loan is not considered impaired due to management’s opinion that the fair value~~2008. As a result of the ~~collateral is sufficient~~foregoing modification, TCI recorded a charge to ~~cover~~earnings of $1.2 million in the ~~current loan balance and accrued interest at March~~fourth quarter of 2006.

In September 2005, TCI sold 10 acres of unimproved land to a third party for $1.5 million and provided $1.1 million of the purchase price as seller financing. The secured note bore interest at 10%, required monthly interest only payments and matured in September 2008. In December 2005, TCI sold this note to a financial institution for full face value less closing costs, plus accrued interest. TCI and other related parties have also guaranteed the full payment of the note balances, including any outstanding interest and costs incurred by the financial institution.

In December 2005, TCI sold 27.192 acres and 3.73 acres of the McKinney Ranch land to a third party for $10.1 million and $1.4 million, and provided $7.6 million and $1.0 million of seller financing, respectively. Both notes bear interest at 8.0% per annum, require monthly interest only payments and mature in December 2008. In January 2006, TCI sold both notes to a financial institution for full face value less closing costs, plus accrued interest. The financial institution has a Put Option that would require TCI to purchase both notes back under the following conditions: (1) failure to construct agreed upon roads on the property by December ~~2006;~~2006 (the road improvements have been substantially completed); (2) there occurs any event of default by the buyer; (3) certain escrow deposits for the road completion are not sufficient to cover the cost of the road

Index to Financial Statements

construction; (4) any amendment, modification or assignment of certain development and escrow agreements between TCI and the buyer; and (5) failure of TCI to deliver certain documents to the financial institution within a timely manner. TCI and other related parties have also guaranteed the full payment of the note balances, including any outstanding interest and costs incurred by the financial institution.

Junior Mortgage Loans. TCI may invest in junior mortgage loans, secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower. The Board of Directors restricts investment in junior mortgage loans, excluding wraparound mortgage loans, to not more than 10.0% of TCI’s assets. At December 31, ~~2005, 3.5%~~2006, 2.0% of TCI’s assets were invested in junior and wraparound mortgage loans.

The following discussion briefly describes the junior mortgage loans that TCI originated in ~~2005~~2006 as well as events that affected previously funded junior mortgage loans during ~~2005.~~2006.

In August 2001, TCI agreed to ~~fund~~loan Dallas Fund XVII LP up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable ~~bore interest at~~initially had a variable interest rate, required monthly interest ~~only~~ payments and originally matured in January 2003. ~~By March 2004,~~ TCI ~~had~~ funded a total of $4.3 ~~million. On~~million on this note. In January ~~22,~~ 2003, TCI agreed to extend the maturity date ~~until~~to May 1, 2003. The collateral used to secure TCI’s second

lien was subsequently seized by the first lien ~~holder in 2003. On~~holder. In March ~~11,~~ 2004, TCI agreed to accept an assignment of claims in litigation as additional security for the note. ~~In December 2004,~~ TCI later agreed to a ~~Modification Agreement~~modification agreement with the borrower ~~which was~~ effective November 1, 2003. As of the modified effective date, accrued interest of $582,000 was added to the principal balance of the ~~note,~~note; the interest rate was ~~set to a~~ fixed ~~rate of 9.0%~~at nine percent per annum ~~and~~with all principal and interest ~~was~~ due November 2005. TCI also received ~~Pledge~~certain pledge and ~~Security Agreements~~security agreements in various partnership interests belonging to the borrower and received various ~~Assignments~~assignments of ~~Proceeds~~proceeds from asset sales in certain entities owned by the borrower. TCI ~~also agreed to reduce~~reduced accrued interest and principal by $1.5 million from the receipt of notes receivable assigned to TCI by the borrower and by $605,000 from cash received. TCI also received $1.4 million in January 2005 that was applied to accrued interest and principal effective December 30, 2004. ~~As a result of~~TCI received $1.8 million in September 2006 that was applied to accrued interest and principal. Through December 31, 2006, TCI has advanced an additional $3.0 million to the ~~modification, TCI recognized a reduction of $1.4 million for loan losses to expense in 2004.~~borrower. The following notes were assigned to TCI as payment on the ~~note:~~note.

$678,000 from a partnership that owns an apartment building. This note is unsecured, bears no interest and has no maturity date. Distributions made from the partnership operations will be used to pay the principal on the note. TCI received $132,000 in distributions in ~~2005.~~2005 and $27,000 in 2006.

$264,000, including accrued interest, secured by a second lien on 13 acres of unimproved land. This note bears interest at 9.0% and matured in February 2003. TCI’s parent company, ARI, has taken title to the collateral, giving TCI a first lien position on the collateral. This note is considered performing and no allowance has been established.

$466,000 secured by a second lien on 23.3 acres of unimproved land. This note bears interest at 4.0% and is payable upon demand.

$125,000 secured by a 100% interest in an affiliated company that owns an apartment building. This note bears interest at 12.0% and requires payments only if surplus cash is available and matures in April 2009.

~~In December 2005, TCI advanced $2.5 million under this note to the borrower.~~

In July 2002, TCI entered into an agreement with a third party developer to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum, requires monthly interest only payments and matured in June 2005. This loan was extended to June 2006 in the second quarter of 2005 and was subsequently modified in the fourth quarter 2005. This second modification extends the loan maturity to October 2007 and limits any advances under the line of credit to $25,000 per month. As of ~~March~~December 31, 2006, the borrower had ~~$143,000~~$153,000 of remaining available credit under the credit limit.

Index to Financial Statements

In October 2004, TCI sold the In The Pines apartments to a third party and provided $1.0 million of the purchase price as seller financing in the form of two notes. The first note ~~bore~~accrued interest at 7.0% per annum, required monthly interest only payments and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. In the event of a default, the note is also secured by membership rights in the purchaser’s entity. The second note was unsecured, ~~bore~~accrued interest at 8.5% per annum, required monthly interest only payments and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. Both loans were extended to October 2005 with the payment to TCI of a 2.0% extension fee. Both loans were paid in full, including unpaid interest, in October 2005.

In March 2005, TCI entered into an agreement to advance a third party $3.2 million for development costs relating to ~~single family~~single-family residential lots in Austin, Texas. These advances are secured by ~~membership interests~~stock in the borrower and hold a second lien on ~~1,092 acres of~~the undeveloped land. The secured note bears interest at ~~10%,~~10 percent, requires semi-annual ~~interest~~ payments and matures in March 2008. In September 2005, the total amount authorized under this advance was increased to $5.0 million. As of March 31, 2006, TCI had advanced ~~$4.2~~$3.2 million to the borrower. TCI also guaranteed ~~with full recourse to TCI,~~ an $18 million ~~bank~~ loan ~~for the borrower which is~~ secured by a first lien on the ~~1,092 acres of~~ undeveloped land. In ~~June~~September 2005, TCI

purchased ~~the~~for $4.1 million a subsidiary of Tacco Universal, a related party ~~for $4.1 million~~ that holds two notes receivable from ~~this third party totaling~~the borrower for $3.0 and $1.0 million, respectively. These notes are secured by approximately 142 acres of undeveloped land and membership ~~interests~~interest in the ~~borrowers. The~~borrower. These secured notes bear interest at ~~12.0%,~~12 percent, have an interest reserve for payments that is added to the principal balance on a monthly basis and matured in June 2005. Both loans were extended to September 2005 and upon maturity ~~both loan balances~~ were paid under the advance referred to at the beginning of this paragraph. In March 2006, TCI acquired all of the interests in the borrower, including ownership of the Austin, Texas land. The land is secured by the $18 million first mortgage and a $3 million subordinated loan. In March 2006, TCI secured a development loan of $31.3 million (secured by the Austin, Texas land), of which $18 million was used to pay the existing first mortgage. The development loan matures in March 2008 and bears interest at Prime plus one percent. The Company intends to develop the land for sale to single-family residential builders.

Related Parties. In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation (“Two Hickory”), a wholly-owned subsidiary of ARI, a related party, for $4.4 million. Two Hickory owns the 96,217 sq. ft. Two Hickory Centre Office Building in Farmers Branch, Texas. ARI guaranteed that the asset shall produce at least a 12.0% annual return of the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12.0% annual return, ARI was obligated to pay TCI any shortfall. In addition, if the asset failed to produce the 12.0% return for any calendar year and ARI failed to pay the shortfall, TCI could have required ARI to repurchase the shares of Two Hickory for the original purchase price. Because ARI guaranteed the 12.0% return and TCI had the option of requiring ARI to repurchase the entities, and because ARI is a related party, management classified the consideration paid as a note receivable from ARI. In June 2002, Two Hickory was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI. In January 2005, the guaranty period ended and TCI completed the purchase of Two Hickory by recording the asset and the assumed debt, and removing the note receivable from ARI.

In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation (“One Hickory”), Garden Confederate Point, LP (“Confederate Point”), Garden Foxwood, LP (“Foxwood”), and Garden Woodsong, LP (“Woodsong”), all wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One Hickory owned the 120,615 sq. ft. One Hickory Centre Office Building in Farmers Branch, Texas. Confederate Point owned the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit Woodsong Apartments in Smyrna, Georgia. ARI guaranteed a minimum 12.0% return annually based on the purchase price for a period of three years from the purchase date. If the assets failed to produce the 12.0% return, ARI was required to pay TCI any shortfall. In addition, if the assets failed to produce the 12.0% return for a calendar year and ARI failed to pay the shortfall, TCI had the option of requiring ARI to repurchase the entities for the original purchase price. Because ARI guaranteed the 12.0% return and TCI had the option of requiring ARI to repurchase the entities, management classified the consideration paid as a note receivable from ARI. In July 2002, the Woodsong

Index to Financial Statements

Apartments were sold. ARI received $2.8 million from the proceeds as payment of principal and accrued but unpaid interest on the note receivable. In October 2003, TCI sold One Hickory to IORI for $12.2 million, less prorations, for a wraparound promissory note of $12.0 million. This note bears interest at 5.49% interest, requires monthly interest and principal payments and matures in June 2006. This transaction effectively discharged the note receivable TCI had from ARI for the financing of One Hickory. Also, in November 2003, Confederate Point sold the Confederate Apartments and paid $2.1 million to TCI to pay off the loan and accrued but unpaid interest. In April 2005, the guaranty period ended and TCI completed the purchase of the Foxwood Apartments by recording the asset and removing the note receivable from ARI.

In December 2003, TCI purchased a note receivable secured by a second lien on 33 acres of raw land in Travis County, Texas known as “Pioneer Development”, at par value from ARI for $2.4 million as a paydown on an affiliate loan balance. The note bears interest at ~~10.0%~~ten percent per annum, requires interest only payments beginning in November 2007 and matures in October 2008. Outstanding accrued interest is added to the principal balance on an annual basis until 2007. During 2005 and 2004, $263,000 and $240,000 of accrued interest was added to the principal balance of the note, making the principal balance at December 31, 2005 $2.9 million.

In December 2003, TCI sold a tract of Marine Creek land to a subsidiary of Unified Housing Foundation, Inc. (“UHF”) for $1.5 million, receiving cash and a note receivable. This sale was not recognized due to UHF being a related party and TCI having continuing involvement and control. In February 2004, Marine Creek was refinanced by UHF, which paid in full TCI’s note payable on the land. TCI then recorded the sale of the land and received a note receivable of $270,000, which was the difference between the sales price and the amount of TCI’s note payable. The note bore interest at 6.0%, required quarterly payments from available surplus cash and was due in December 2007. The note was paid in full, including accrued interest, in August 2005.

Other. In July 2003, TCI advanced $2.3 million to the Class A Limited Partners of TCI Countryside, L.P. of which TCI is the general partner. This loan bears interest at 7.25% and matures in January 2007. TCI also

agreed to advance $1.1 million to the Class A Limited Partners by advancing $105,000 in July 2003 and every year thereafter for ten years. This loan bears interest at 7.25% and matures in July 2012. Interest due to TCI will be deducted from the quarterly return owed by TCI to the Class A Limited Partners, eliminating the quarterly payments. In October 2005, TCI agreed to settle the remaining obligations under this loan by paying a lump sum of $425,000, making the total amount advanced $740,000. After January 2007, TCI may redeem the Class A Limited Partners interests in exchange for cancellation of both notes.

In March 2004, TCI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million, including the assumption of debt. TCI also provided $1.3 million of the purchase price as seller financing. The unsecured note bears interest at the prime rate plus 2%, which is currently ~~9.5%~~10.25%, and matured in April 2005. This note was extended to April 2008.

In March 2004, TCI sold a K-Mart in Cary, North Carolina to BCM for $3.2 million, including the assumption of debt. TCI also provided $1.5 million of the purchase price as seller financing. The unsecured note bears interest at the prime rate plus 2%, which is currently ~~9.5%~~10.25%, and matured in April 2005. This note was extended to April 2008.

In December 2004, TCI sold the Centura Tower office building to a partnership and retained a 1% non-controlling general partner interest and a 4% limited partner interest. TCI has certain obligations to fund the partnership for rent abatements, tenant improvements, leasing commissions and other cash shortfalls. $4.1 million of these obligations were escrowed by TCI with the lender at loan closing. Through December 31, ~~2005,~~2006, TCI has funded ~~$4.7~~$6.5 million of these obligations, with ~~$4.1~~$6.5 million recorded ~~as an investment in the partnership and the remainder of $603,000~~ in the form of a note receivable from the partnership. ~~This~~The note ~~has no maturity date, requires no payments, and~~ bears interest at a fixed rate of 7.0% per annum. The note will be paid out of excess cash flow or from sales proceeds, but only after certain partner preferred returns are paid.

At December 31, 2006, TCI owned 746,972 shares of ARI common stock which were primarily purchased in open market transactions in 1990 and 1991 at a total cost of $1.6 million. The executive officers of TCI also serve as executive officers of ARI. Prime also serves as advisor to ARI and at March 23, 2007, ARI owned approximately 82.2% of TCI’s outstanding Common Stock. At December 31, 2006, the market value of the ARI common shares owned by TCI was $6.0 million.

IndexIn November 2006, ARI purchased Windmill Farms, 3,035 acres in Kaufman County, Texas for $52.0 million. The purchase price was funded by $39.1 million debt and $10.0 million Preferred Stock of TCI. In connection with the purchase by ARI, TCI issued $10.0 million of Series D Preferred Stock to Financial Statements

~~Partnership mortgage loans.~~the sellers of the property. The transaction was recorded on the books of TCI ~~owns~~as a ~~60.0% general partner interest~~reduction in the amount payable to affiliate of $10.0 million.

In August 2006, TCI purchased 99 acres in Farmers Branch, Texas known as the LaDue/Walker tract, from ARI for $21.5 million. The transaction was financed by assumption of $9.9 million note payable and ~~IORI owns a 40.0% general partner interest~~an increase in ~~Nakash Income Associates (“NIA”), which owns a wraparound mortgage~~the amount payable to affiliate of $11.2 million.

In May 2006, TCI acquired the 102,615 square feet One Hickory office building in Farmers Branch, Texas from IORI. The purchase price was paid by forgiveness of the $12.2 million note receivable ~~secured by a building occupied by a Wal-Mart in Maulden, Missouri.~~from IORI.

ITEM 3.

LEGAL PROCEEDINGS

During the fourth quarter of the fiscal year covered by this Report, no proceeding previously reported was terminated. ~~During~~

Waters Edge. Shortly before the ~~fiscal year ended December 31, 2005,~~advent of Hurricane Katrina, an apartment complex in Mississippi was sold to Waters Edge Living, LLC but notwithstanding such sale, the ~~Innovo Realty, Inc. proceeding filed August 10, 2004 was resolved in April 2005. See Note 8~~property continued on insurance coverage applicable to ~~the Consolidated Financial Statements.~~

Also, on May 16, 2005, the United States District Court for the Northern District of Texas, Dallas Division, entered its Memorandum Opinion and Order and Judgment dismissing a purported stockholders’ derivative action filed October 5, 2004, by Sunset Management LLC against a number of entities, including the Company. The Court’s Judgment granted a Motion to Dismiss filed by the Defendants, including the Company, and ordered that Plaintiff Sunset Management LLC take nothing by its suit. No appeal was timely filed, and the dismissal of the action is now final. The Sunset Complaint was purportedly filed derivatively on behalf of the Company. With the Judgment dismissing this action, the Company is not, at December 31, 2005, or thereafter through the date of this Report, a direct party to any litigation involving Sunset Management LLC.

Two separate legal proceedings continue to exist which involve matters between Sunset Management LLC and ARI and BCM over a pledge as collateral for certain loans of a number of shares of Common Stock of the Company. Both cases are proceedings associated with the case styled~~In Re: ART Williamsburg, Inc., Debtor, pending in the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division, Case No. 4:03-43909-BTR-11, filed August 22, 2003. The associated cases are~~~~American Realty Trust, et al. v. Sunset Management LLC, et al.~~~~, Adversary Proceeding No. 03-04256 filed September 10, 2003, and~~~~Sunset Management LLC, et al. v. American~~Transcontinental Realty Investors, Inc. (“TCI”) and others. As a result of sorting out various claims,

two items of litigation exist,Waters Edge Living, LLC v. RUSI Indemnity Co., et ~~al.~~al, ~~now~~civil action No. 4:06-CV-00334-RH-WCS pending in the United States District Court for the ~~Eastern District~~Northern district of ~~Texas, Tyler Division, as Case~~Florida andPrime Income Asset Management, Inc., et al v. Waters Edge Living, LLC, et al, civil action No. 4:06-CV-18. Both proceedings involve certain shares of Common Stock of the Company beneficially owned by BCM and ARI and its subsidiaries and matters emanating from certain loans in September 2001 to BCM and three subsidiaries of ARI, Sunset Management LLC’s agreement to extend maturity dates and accept substituted collateral, arrangements which were not honored. Adversary Proceeding No. 03-04256 was removed to the Bankruptcy Court from a Texas state court originally filed in October 2002 alleging breach of contract, misrepresentation, breach of duty of good faith and fair dealing, and slander of title by Sunset Management LLC which also sought certain declaratory relief against Sunset Management LLC, as well as temporary and permanent anti-suit injunctions against Sunset Management LLC. Case No. 4:06-CV-18 was originally filed3:07-CV-0102-D pending in the United States District Court for the Northern ~~District~~district of Texas. TCI is not a direct party in either case. In the Texas ~~Dallas Division, and originally sought to require a conveyance by ARI and/or its~~case, three subsidiaries of ~~certain pledged shares back~~TCI are plaintiffs, Continental Baronne, Inc., Continental Common, Inc. and Continental Amoco, Inc. which own three New Orleans office buildings damaged by Hurricane Katrina. RUSI Indemnity Co. has paid approximately $50.0 million into a trust account held by Merrill Lynch under the supervision of the Florida Court. Of that amount, approximately $32.5 million is money paid on account of the Waters Edge Living, LLC claim and $17.5 million is money paid on the claims of Continental Baronne, Inc. and the other three New Orleans office buildings. Three TCI subsidiaries are intending to ~~pledgors ARI~~intervene in the near future in the Florida proceeding to attempt to obtain prompt return of the $17.5 million, although Prime Income Asset Management, Inc. (“PIAMI”) has pending an emergency motion for return of those funds (which has been pending since February 1, 2007). Of the $32.5 million allegedly allocable to Waters Edge Living, LLC, PIAMI et al are entitled to a refund, at a minimum, of approximately $6.0 million (consisting of $1.9 million previously advanced from PIAMI against the payment of the claim and ~~BCM. Such matter was first transferred~~$4.0 million for flood insurance proceeds, which should be credited against the $32.5 million) and potentially more, depending upon the amount by which the total claims exceed a $100.0 million cap under the applicable policies. While this case is a plaintiff’s case from the perspective of the TCI subsidiaries, funds belonging to the ~~United States Bankruptcy Court for the Eastern District of Texas as an adversary proceeding and then transferred~~TCI subsidiaries are being withheld from those subsidiaries aggregating at least $17.5 million. There is no significant prospect from these cases that TCI will have to ~~the United States District Court for the Eastern District of Texas, Tyler Division.~~pay any additional funds to Waters Edge Living, LLC.

The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of Management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of ~~operations~~operation or liquidity.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders was held on November ~~22, 2005,~~20, 2006, at which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). There was no solicitation in opposition to Management’s nominees listed in the Proxy Statement, all of which were elected. At the Annual meeting stockholders were asked to consider and vote upon the election of Directors and

Index to Financial Statements

the ratification of the selection of the independent public accountants for TCI for the fiscal year ending December 31, ~~2005.~~2006. At the meeting, stockholders elected the following individuals as Directors:


	Shares Voting
Director	For	Withheld Authority
Henry A. Butler	7,377,532	19,607
Sharon Hunt	7,369,895	27,244
Robert A. Jakuszewski	7,380,765	16,374
Ted R. Munselle	7,370,805	26,334
Ted P. Stokely	7,378,217	18,922

There were no abstentions or broker non-votes on the election of Directors. With respect to the ratification of the appointment of Farmer, Fuqua & Huff, P.C. as independent auditors of the Company for the fiscal year ending December 31, ~~2005,~~2006, and any interim period, at least ~~7,380,092~~7,780,097 votes were received in favor of such proposal, ~~3,275~~12,224 votes were received against such proposal, and ~~13,771~~61,673 votes abstained.

Index to Financial Statements

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

TCI’s Common Stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “TCI”. The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE.

Quarter Ended
   High    Low
March 31, 2006 (through March 24, 2006)
   $ 18.79    $ 15.60
March 31, 2005
   20.10    14.20
June 30, 2005
   22.19    18.80
September 30, 2005
   21.45    19.60
December 31, 2005
   19.79    16.50
March 31, 2004
   17.33    14.42
June 30, 2004
   14.59    10.99
September 30, 2004
   13.75    12.40
December 31,2004
   14.59    13.55
Quarter Ended
   High    Low
March 31, 2007 (through March 23, 2007)
   $ 13.91    $ 11.85
March 31, 2006
   18.79    15.60
June 30, 2006
   18.22    13.05
September 30, 2006
   13.72    12.30
December 31, 2006
   16.27    13.05
March 31, 2005
   20.10    14.20
June 30, 2005
   22.19    18.80
September 30, 2005
   21.45    19.60
December 31,2005
   19.79    16.50
On March ~~24, 2006,~~23, 2007, the closing price of TCI’s Common Stock as reported in the consolidated reporting system of the NYSE was ~~$16.90~~$12.75 per share.
As of March ~~24, 2006,~~23, 2007, TCI’s Common Stock was held by ~~4,313~~approximately 4,200 holders of record.
TCI paid no dividends in 2006, 2005 ~~2004~~ or ~~2003.~~2004. The payment of dividends, if any, will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.
In December 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 687,000 shares of TCI’s Common Stock. In ~~October~~June 2000, the Board increased this authorization to 1,409,000 shares. Through December 31, ~~2005,~~2006, a total of 1,189,910 shares have been repurchased at a cost of $15.9 million. No shares were repurchased in ~~2003~~2006 or 2005. In November 2004, the Board approved a private block purchase of 212,800 shares of Common Stock for a total cost of $3.1 million. The following table represents shares repurchased during each of the three months ended December 31, ~~2005:~~2006:


Total Number of
Shares Purchased

Average Price
Paid Per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Program

Maximum Number of
Shares that May Yet
Be Purchased
Under the Program^(a)
Balance as of September 30, ~~2005~~2006
   —      $ —      —      219,090
October 1-31, ~~2005~~2006
   —      —      —      219,090
November 1-30, ~~2005~~2006
   —      —      —      219,090
December 1-31, ~~2005~~2006
   —      —      —      219,090

Total
   —      $ —      —      219,090

(a) On June 23, 2000, the TCI Board of Directors approved a share repurchase program for up to 1,409,000 shares of common stock. The repurchase program has no termination date.
~~Index to Financial Statements~~
ITEM 6. SELECTED FINANCIAL DATA

   For the Years Ended December 31,    For the Years Ended December 31,
   2005 2004 2003 2002 2001    2006 2005 2004 2003 2002
   dollars in thousands    dollars in thousands
EARNINGS DATA

Total operating revenues
   $ 105,444 $ 83,604 $ 68,558 $ 52,631 $ 48,932    $ 128,064 $ 103,076 $ 83,604 $ 68,558 $ 52,631
Total operating expenses
   94,006 85,936 75,066 39,715 30,328    113,238 91,919 85,936 75,066 39,715

Operating loss
   11,438 (2,332 ) (6,508 ) 12,916 18,604
Operating income (loss)
   14,826 11,157 (2,332 ) (6,508 ) 12,916
Other income (expense)
   (37,958 ) (24,658 ) (9,120 ) (39,126 ) (34,918 )    (30,185 ) (37,206 ) (24,658 ) (9,120 ) (39,126 )
Loss before gain on real estate sales, minority interest, and equity in earnings of investees
   (26,520 ) (26,990 ) (15,628 ) (26,210 ) (16,314 )
Loss before gain on real estate sales, minority interest and equity in earnings of investees
   (15,359 ) (26,049 ) (26,990 ) (15,628 ) (26,210 )
Gain on land sales
   7,702 7,110 1,641 666 —      11,421 7,702 7,110 1,641 666
Gain on sale of real estate
   —   —   —   —   48,333
Equity in income (loss) of investees
   968 (1,497 ) (4,291 ) (3,818 ) (8,997 )    890 968 (1,497 ) (4,291 ) (3,818 )
Minority interest
   (112 ) (1,194 ) 2,230 892 67    393 (112 ) (1,194 ) 2,230 892

Net income (loss) from continuing operations
   (17,962 ) (22,571 ) (16,048 ) (28,470 ) 23,089    (2,655 ) (17,491 ) (22,571 ) (16,048 ) (28,470 )
Income tax benefit
   802 10,976 —   —   —      4,608 802 10,976 —   —

Net income (loss) from continuing operations
   (17,160 ) (11,595 ) (16,048 ) (28,470 ) 23,089    1,953 (16,689 ) (11,595 ) (16,048 ) (28,470 )

Discontinued operations, net of taxes
   26,229 35,301 16,721 33,321 (3,278 )    1,553 25,758 35,301 16,721 33,321

Net income (loss)
   9,069 23,706 673 4,851 19,811    3,506 9,069 23,706 673 4,851
Preferred dividend requirement
   (210 ) (210 ) (126 ) (190 ) (172 )    (210 ) (210 ) (210 ) (126 ) (190 )

Net income (loss) applicable to Common shares
   $ 8,859 $ 23,496 $ 547 $ 4,661 $ 19,639
Net income (loss) applicable to common shares
   $ 3,296 $ 8,859 $ 23,496 $ 547 $ 4,661

PER SHARE DATA

Basic:

Net income (loss) from continuing operations
   $ (2.20 ) $ (1.46 ) $ (2.00 ) $ (3.56 ) $ 2.70    $ 0.22 $ (2.14 ) $ (1.46 ) $ (2.00 ) $ (3.56 )
Net income (loss) from discontinued operations
   3.32 4.36 2.07 4.14 (.39 )    .20 3.26 4.37 2.07 4.14

Net income (loss) applicable to Common shares
   $ 1.12 $ 2.90 $ .07 $ .58 $ 2.31
Net income (loss) applicable to common shares
   $ 0.42 $ 1.12 $ 2.91 $ .07 $ .58

Weighted average shares outstanding
   7,900,869 8,082,854 8,078,108 8,057,361 8,478,377
Diluted:

Net income (loss) from continuing operations
   $ 0.21 $ (2.14 ) $ (1.46 ) $ (2.00 ) $ (3.56 )
Net income (loss) from discontinued operations
   .19 3.26 4.37 2.07 4.14

Net income (loss) applicable to common shares
   $ 0.40 $ 1.12 $ 2.91 $ .07 $ .58

Weighted average shares outstanding—Basic
   7,900,869 7,900,869 8,082,854 8,078,108 8,057,361
Weighted average shares outstanding—Diluted
   8,180,401 7,900,869 8,082,854 8,078,108 8,057,361
BALANCE SHEET DATA

Real estate, net
   $ 833,885 $ 658,300 $ 641,022 $ 736,977 $ 622,171    $ 992,454 $ 833,885 $ 658,300 $ 641,022 $ 736,977
Real estate held–for–sale
   40,446 49,878 61,457 22,510 516    54,935 40,446 49,878 61,457 22,510
Real estate subject to sales contract
   68,738 70,350 79,848 —   —      66,027 68,738 70,350 79,848 —
Notes and interest receivable, net
   64,818 56,630 30,741 27,953 22,049    39,566 64,818 56,630 30,741 27,953
Total assets
   1,089,079 920,311 882,784 858,489 709,152    1,250,167 1,089,079 920,311 882,784 858,489
Notes and interest payable
   770,161 644,071 626,465 586,628 461,037    901,464 770,161 644,071 626,465 586,628
Stockholders’ equity
   251,179 240,519 221,758 222,394 216,768    265,929 251,179 240,519 221,758 222,394
Book value per share
   $ 30.96 $ 30.44 $ 27.33 $ 27.55 $ 26.95    $ 32.01 $ 31.41 $ 30.06 $ 26.96 $ 27.18
TCI purchased 47 properties for a total of $169.3 million in 2006; 26 properties for a total of $180.6 million in 2005, 20 properties for a total of $86.7 million in 2004, 10 properties for a total of $36.9 million in 2003, 16 properties for a total of $107.7 million in ~~2002,~~2002. TCI sold four properties and ~~17 properties~~seven land parcels in 2006 for a total of ~~$62.5 million in 2001. TCI~~$53.1 million; sold nine properties and nine parcels of land for
~~Index to Financial Statements~~
~~$107.1~~ $107.1 million in 2005, 20 properties, the two remaining warehouses in the Kelly portfolio and four parcels of land for $276.7 million in 2004, 13 properties, two warehouses in the Kelly portfolio and 5five parcels of land for $86.6 million in 2003, 18 properties and a partial land parcel for a total of $117.6 million in 2002, ~~and 22 properties, one warehouse in the Kelly portfolio and three partial land parcels in 2001 for a total of $161.5 million.~~ See ITEM 2. “PROPERTIES—Real Estate” and ITEM 8. “CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.”
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
This Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments;

failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;

potential liability for uninsured losses and environmental contamination;

risks associated with our dependence on key personnel whose continued service is not guaranteed; and

~~Index to Financial Statements~~
the other risk factors identified in this Form 10-K, including those described under the caption “Risk Factors.”
The risks included here are not exhaustive. Other sections of this report, including “Part I, Item I—Business—Risk Factors,” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess
the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.
Overview
TCI invests in real estate through acquisitions, leases and partnerships and in mortgage loans on real estate, including first, wraparound and junior mortgage loans. TCI is the successor to a California business trust organized on September 6, 1983, which commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of CMET, a real estate company, in a tax-free exchange of shares, issuing 1.181 shares of its Common Stock for each outstanding CMET share. TCI accounted for the merger as a purchase.
Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). During the third quarter of 2000, TCI no longer met the requirement for tax treatment as a REIT due to a concentration of ownership.
~~Today, TCI~~ is an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development. The Company’s portfolio of income-producing properties includes residential apartment communities, office buildings, hotels and other commercial properties. TCI’s investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project. TCI ~~has a preeminent track record as a developer, completing the construction of 19 apartment properties comprising 4,362 units over the last three years. In addition, TCI owns a high-quality portfolio of~~acquires land ~~held for future development and continues to invest in well-located land tracts in high-growth markets~~ primarily in ~~Texas. The Company~~in-fill locations or high-growth suburban markets. TCI is an active buyer and seller and during ~~2005~~2006 acquired over ~~$180.6~~$169 million and sold over ~~$107.1~~$53 million of land and income-producing properties. As of December 31, ~~2005,~~2006, the Company owned approximately ~~10,354~~12,400 units in 5265 residential apartment communities, 2225 commercial properties comprising almost ~~four~~3.9 million rentable square feet and 4four hotels containing a total of 313 rooms. In addition, at December 31, ~~2005,~~2006, TCI owned ~~4,200~~over 6,200 acres of land held for development and had ~~almost 1,100~~over 2,500 apartment units in ~~five~~14 projects under construction. The Company currently owns income-producing properties and land in 15 states as well as in ~~Poland and~~ the U.S. Virgin ~~Islands.~~Islands and Wroclaw, Poland. TCI finances its acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. TCI finances it development projects principally with short-term, variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. The Company will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in certain of its wholly-owned properties. When the Company sells assets, it may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. The Company generates operating revenues primarily by leasing apartment units to residents; leasing office, retail and industrial space to commercial tenants; and renting hotel rooms to guests. TCI is advised by Prime ~~Income Asset Management, LLC (“Prime”)~~under a contractual arrangement that is reviewed annually by TCI’s Board of Directors. TCI’s commercial properties are managed by Regis Commercial while the Company’s ~~external advisor.~~hotels are managed by Regis ~~Property Management, LLC, an affiliate of Prime, manages the Company’s commercial properties. Regis Hotel I, LLC, another Prime affiliate, manages the Company’s hotel investments.~~Hotel. TCI ~~engages various~~currently contracts with five third-party companies to ~~lease~~manage the Company’s apartment communities. Approximately 82% of TCI’s common stock is owned by ARI. TCI is a “C Corporation” for U.S. federal income tax purposes and ~~manage its apartment properties.~~files an annual consolidated income tax return with ARI. TCI does not qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes primarily due to ARI’s majority ownership of the Company.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our
~~Index to Financial Statements~~
judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
Real Estate ~~Held for Investment~~
~~Real~~Upon acquisitions of real estate, ~~held for investment is carried at cost.~~TCI assesses the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, “above-” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. ~~144, “Accounting for~~141, “Business Combinations” and allocates the ~~Impairment~~ purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost.
We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or ~~Disposal~~capitalization rates, as well as available market information. Estimates of ~~Long-Lived Assets” (“SFAS No. 144”), requires that a property be considered impaired if the sum of the expected~~ future cash flows ~~(undiscounted~~are based on a number of factors including the historical operating results, known and ~~without~~anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.
We record acquired “above-” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.
Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.
Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, ~~charges)~~property taxes, insurance, and other project costs incurred during the period of development.
Management reviews its long-lived assets used in operations for impairment when there is ~~less than~~an event or change in circumstances that indicates an impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the ~~property.~~asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. If we determine that impairment ~~exists, an impairment loss~~has occurred, the affected assets must be reduced to their face value.
SFAS No. 144 requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as “held for sale,” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and the Company will not have significant continuing involvement following the sale. The components of the property’s net income that is ~~recognized,~~reflected as discontinued operations include the net gain (or loss) upon the disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). We generally consider assets to be “held for sale” when the transaction has been approved by our Board of Directors, or a ~~charge against earnings, equal~~committee thereof, and there are no known significant contingencies relating to the ~~amount~~sale, such that the property sale within one year is considered probable. Following the classification of a property as “held for sale,” no further depreciation is recorded on the assets.
A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ~~which~~SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting for Costs and the Initial Rental Operations of Real Estate Properties.” The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.
Investment in Unconsolidated Real Estate Ventures
Except for ownership interests in variable interest entities, TCI accounts for our investments in unconsolidated real estate ventures under the equity method of accounting because the Company exercises significant influence over, but does not control, these entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on the ~~property exceeds~~Company’s balance sheet and the ~~fair value less cost to sell the property. If impairment of a property~~underlying equity in net assets is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property’s remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from five to 40 years.
~~Real Estate Held-for-Sale~~
Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. SFAS No. 144 also requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale property’s carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property’s estimated fair value less costs of sale are recordedamortized as an adjustment to equity in earnings of unconsolidated real estate ventures over the ~~property’s carrying amount, but not in excess~~life of the ~~property’s carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated.~~
~~Investments in Equity Investees~~
TCI may be considered to have the ability to exercise significant influence over the operating and investment policies of certain of its investees. Those investees are accounted for using the equity method.related asset. Under the equity method ~~an initial investment, recorded at cost,~~of accounting, TCI’s net equity is ~~increased by a proportionate~~reflected within the Consolidated Balance Sheets, and our share of net income or loss from the ~~investee’s operating~~joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, TCI’s recognition of joint venture income ~~and any additional~~or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment ~~and decreased by a proportionate share of~~return thresholds. For ownership interests in variable interest entities, the ~~investee’s operating losses and distributions received.~~Company consolidates those in which we are the primary beneficiary.
Recognition of Rental Income
Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. In accordance with SFAS 141, we recognize rental revenue of acquired in-place “above-”and “below-market” leases at their fair values over the terms of the respective leases. On our Consolidated Balance Sheets we include as a receivable the excess of rental income recognized over rental payments actually received pursuant to the terms of the individual commercial lease agreements.
Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.
Rental income for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less.
For hotel properties, revenues for room sales and guest services are recognized as rooms are occupied and services are rendered.
An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.
Revenue Recognition on the Sale of Real Estate
Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), as amended by SFAS No. 144. Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using the deposit, installment, cost recovery or financing method, whichever is appropriate. When TCI provides seller
~~Index to Financial Statements~~
financing, gain is not recognized at the time of sale unless the buyer’s initial investment and continuing investment are deemed to be adequate as determined by SFAS 66 guidelines.
Non-performing Notes Receivable
TCI considers a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments. Any new note receivable that results from a modification or extension of a note considered non-performing will also be considered non-performing, without regard to the borrower’s adherence to payment terms.
Interest Recognition on Notes Receivable
Interest income is not recognized 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
A valuation allowance is provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the investment in the note exceeds management’s estimate of fair value of the collateral securing such note.
Fair Value of Financial Instruments
The following assumptions were used in estimating the fair value of ~~its~~TCI’s 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 non-performing notes receivable, the estimated fair value of TCI’s interest in the collateral property was used. For marketable equity securities, fair value was based on the year-end closing market price of each security. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities.
Results of Operations
2006 Compared to 2005.    TCI had net income of $3.5 million in 2006, including gains on land sales totaling $11.4 million and net income from discontinued operations of $1.6 million, compared to $9.1 million of net income in 2005, including gains on land sales of $7.7 million and income from discontinued operations of $25.8 million. TCI defines its same-store universe for each income-producing asset type (apartments, commercial properties and hotels) as properties with stabilized occupancy owned and operated for the entire two-year period beginning January 1, 2005 and ending December 31, 2006. For this time period, TCI had 39 apartment communities, 16 commercial properties and four hotels in its same-store universe.
Rents and other property revenues were $128.1 million in 2006 compared to $103.1 million in 2005, an increase of $25.0 million or 24.2 percent. The overall increase is due to a $10.9 million increase in rental revenues from the Company’s apartment communities, a $11.5 million increase in rental and other property revenues from the Company’s commercial portfolio, a $2.1 million increase in hotel revenues and a $500,000 increase in rents and royalty income related to the Company’s land portfolio. Within the apartment communities
portfolio, $3.4 million of the increase from 2005 to 2006 is due to better performance in TCI’s same store apartment universe (a 6.5 percent increase from 2005 to 2006); $2.0 million is due to acquisitions; and $5.5 million is due to developed projects placed in service during 2005 and 2006. The improvement in rents and other property revenues within TCI’s commercial portfolio was principally comprised of an increase of $12.2 million due to acquisitions of commercial properties in 2005 and 2006 (including TCI’s August 2005 acquisition of 600 Las Colinas Boulevard which represented almost $6.8 million of the $12.2 million increase), offset by a decline in same-store rental revenues of 4.7 million. TCI’s commercial properties in New Orleans, which suffered extensive damage in 2005 from Hurricane Katrina, are included in the same-store universe. TCI’s same-store hotels increased revenues by 22.2 percent or $2.1 million in 2006 compared to 2005, due to both occupancy gains and increases in average room rates. TCI acquired no hotels in 2005 or 2006 and sold one hotel in 2005.
Property operations expenses increased 25.6 percent or $16.1 million from $62.9 million in 2005 to $79.0 million in 2006. The overall increase is due to a $6.2 million increase in operating expenses from the Company’s apartment communities, an $8.5 million increase in operating expenses from the Company’s commercial portfolio, a $1.2 million increase in hotel operating expenses and a $200,000 increase in operating expenses (principally real estate taxes) related to the Company’s land portfolio. Within the apartment communities portfolio, $1.9 million of the increase from 2005 to 2006 is due to TCI’s same store apartment universe (a 6.3 percent increase from 2005 to 2006); $1.0 million is due to acquisitions of existing apartment communities; and $3.3 million is due to developed projects placed in service during 2005 and 2006. The increase in operating expenses within TCI’s commercial portfolio was due to an increase in same-store operating expenses of 20.0 percent or $2.4 million from 2005 to 2006 (primarily because TCI’s New Orleans office buildings which were damaged by Hurricane Katrina, were closed during the last 4 months of 2005 for repairs); $6.1 million of the increase was due to acquisitions of commercial properties in 2005 and 2006 (including TCI’s August 2005 acquisition of 600 Las Colinas Boulevard which represented $4.0 million of the $6.1 million increase). Operating expenses for TCI’s same-store hotels increased by 22.7 percent or $1.2 million in 2006 compared to 2005.
Depreciation and amortization expense increased $5.6 million, to $21.6 million in 2006 from $16.0 million in 2005. Depreciation on TCI’s apartment portfolio increased $2.5 million while depreciation expense for the commercial and hotel portfolios increased $2.7 million and $400,000 respectively. Depreciation expense for the apartment portfolio increased due to 2005 and 2006 acquisitions ($800,000), developed projects placed in service during 2005 and 2006 ($1.6 million) and additions to depreciable assets in the same-store universe ($100,000). Depreciation expense for the commercial portfolio increased due to 2005 and 2006 acquisitions ($1.8 million, of which $1.0 million related to the August 2005 acquisition of 600 Las Colinas Boulevard) and to 2005 revisions to depreciable lives for certain commercial properties ($900,000). Depreciation expense for the hotel portfolio increased $400,000, due principally to additions to depreciable assets at the Company’s hotel in Wroclaw, Poland.
General and administrative expenses were $4.0 million in 2006 compared to $8.3 million in 2005. The decrease in 2006 was due to lower legal and professional fees and reduced state income tax expense, offset by higher cost reimbursements paid to the Advisor.
Advisory fee expense was $8.6 million in 2006 compared to $4.7 million in 2005. The increase from 2005 was due to higher gross assets in 2006 and a 2005 refund of 2004 Advisor cost reimbursements received from Prime. TCI’s advisory agreement with Prime limits the amount of cost reimbursements payable by TCI to Prime. See NOTE 12. “ADVISORY AGREEMENT.”
Interest income declined $1.0 million from $3.7 million in 2005 to $2.7 million in 2006 due principally to lower average notes receivable balances and lower average cash balances.
Interest expense increased $12.7 million to $51.8 million in 2006 from $39.1 million in 2005. The overall increase in interest expense is due to a $2.9 million increase within the apartment portfolio, a $3.6 million increase in the commercial portfolio, a $5.8 million increase in the land portfolio and a $400,000 increase in the
hotel portfolio. Within the apartment portfolio, $600,000 of the increase is due to additional debt incurred as a result of 2005 and 2006 acquisitions while $2.3 million is due to increased debt related to developed projects placed in service in 2005 and 2006. The increase in interest expense for the commercial portfolio is due to a $400,000 increase for the same-store universe (primarily due to rising variable interest rates) and $3.1 million for 2005 and 2006 acquisitions (of which $1.7 million relates to the August 2005 acquisition of 600 Las Colinas Boulevard). Interest expense within the land portfolio increased due to rising variable interest rates, increased debt from refinancing existing land parcels and additional debt incurred to finance 2005 and 2006 land acquisitions. Interest expense for the hotel portfolio increased primarily due to rising variable interest rates.
TCI recorded no asset impairment charges in 2006. In 2005 the Company recorded asset impairment charges of $1.8 million related to the write-down of a certain land tract to its current estimated fair value, as described further in the table below.
Property
   Location    Units/
Acres    Fair
Value    Property
Basis    Costs to
Sell    Impairment
Land

Centura Land
   Farmers Branch, TX    8.753 Acres    $ 12,025    $ 13,865    —      $ 1,840
The Centura Land was appraised for its sale to IORI and the appraised value was determined to be the fair value. The costs to sell are estimated closing costs and commissions paid by TCI.
The 2006 gain on involuntary conversion of $20.5 million relates to damage sustained at the Company’s New Orleans commercial properties from Hurricane Katrina during 2005, principally the Company’s 225 Baronne office building. 225 Baronne property was closed immediately after the storm and the Company intends to redevelop 225 Baronne as a residential property. TCI’s 1010 Common and Amoco buildings suffered hurricane damage as well but have been repaired and have reopened. 1010 Common is presently 77% occupied and Amoco is 89% occupied. In 2005 the Company received $4.2 million in business interruption insurance proceeds which was included in 2005 rental revenues. TCI received approximately $45 million of insurance proceeds in 2006, of which $4.0 million related to business interruption claims and has been included in 2006 rental revenues.
Gain on land sales increased $3.7 million, to $11.4 million in 2006 from $7.7 million in 2005. During 2006 TCI sold 192.6 acres of land in seven separate transactions at an average sales price of $196,000 per acre. The largest land sales in 2006 were the sale of a) 123.9 acres in McKinney, Texas for $134,000 per acre, generating cash proceeds of $6.0 million and a recognized gain of $3.5 million and b) 44.5 acres in McKinney, Texas for $231,000 per acre, generating cash proceeds of $10.0 million and a recognized gain of $5.3 million. In 2005, the Company sold 66.7 acres of land in nine separate transactions at an average sales price of $428,000 per acre.
Net income tax benefit for 2006 was $3.8 million, compared to net income tax expense of $424,000 for 2005. The income tax benefit for 2006 and expense for 2005 was calculated under a Tax Sharing and Compensating Agreement between TCI and ARI, whereby TCI and ARI are eligible to file a consolidated federal tax return. In 2006, ARI had net taxable income and TCI had net taxable losses, thus in accordance with the sharing agreement, TCI recorded a Federal tax benefit in the amount of $3.8 million for 2006.
Income from discontinued operations was $2.4 million in 2006 compared to $27.0 million in 2005. Included for 2006 are four apartment communities sold during 2006 and four apartment communities designated as held for sale or subject to a sales contract (and subsequently sold by TCI in 2007). Included for 2005 are nine properties (two apartment communities, six commercial properties and one hotel) sold during 2005 and five
apartment communities designated as held for sale or subject to a sales contract (two of which were subsequently sold in 2006). The following table summarizes revenue and expense information for these properties.
   2006 2005
Revenue

Rental
   $ 10,251 $ 16,994
Property operations
   6,485 13,785

   3,766 3,209
Expenses

Interest
   4,988 7,158
Depreciation
   2,077 633

   7,065 7,791

Net loss from discontinued operations before gains on sale of real estate
   (3,299 ) (4,582 )
Gain on sale of real estate
   5,689 31,473
Write-down of assets held-for-sale
   —   (1,580 )
Equity in investee’s gain on sale of real estate
   —   1,673

Net income from discontinued operations, before income taxes
   $ 2,390 $ 26,984

The $1.6 million 2005 write-down of assets held for sale relates to impairment losses recorded for the Bay Walk and Island Bay apartments. The contract sales price was deemed to be gain value.
The 2005 $1.7 equity in investee’s gain on sale of real estate relates primarily to TCI’s portion of gain on income-producing properties sold by ARI and IORI.
In 2006 and 2005, TCI recognized gains on sale of real estate totaling $5.7 million and $31.5 million respectively. In 2006, TCI sold four apartment communities comprising 545 units for an average price of $28,000 per unit, generating net cash proceeds of $4.6 million. The four properties were located in Florida, Kansas, Oklahoma and Texas. In 2005, TCI sold two apartment communities (both located in Texas) at an average sales price of $43,000 per unit; six commercial properties at an average sales price of $93 per square foot and one hotel located in San Francisco, CA at a price per room of $139,000. See NOTE 2. “REAL ESTATE.”
2005 Compared to 2004.    TCI had net income of $9.1 million in 2005, including gains on ~~sale of real estate~~land sales totaling ~~$31.5~~$7.7 million and net income from discontinued operations of $25.8 million, compared to $23.7 million of net income in 2004, including gains on ~~sale~~land sales of ~~real estate totaling $63.3~~$7.1 million and income from discontinued operations of $35.3 million. ~~Fluctuations~~TCI defines its same-store universe for each income-producing asset type (apartments, commercial properties and hotels) as properties with stabilized occupancy owned and operated for the entire two-year period beginning January 1, 2004 and ending December 31, 2005. For this time period, TCI had 36 apartment communities, 16 commercial properties and one hotel in ~~the components of revenues and expense between 2005 and 2004 are discussed below.~~its same-store universe.
Rents and other property revenues were ~~$105.4~~$103.1 million in 2005 compared to $83.6 million in ~~2004.~~2004, an increase of $19.5 million or 23.3 percent. The overall increase is due to a $14.2 million increase in rental revenues from the Company’s apartment communities, a $3.4 million increase in rental and other property revenues from the Company’s commercial portfolio and a $1.9 million increase in hotel revenues. Within the apartment communities’ portfolio, $1.8 million of the increase from 2004 to 2005 is due to better performance in TCI’s same store apartment universe (a 4.1 percent increase from 2004 to 2005); $1.3 million is due to acquisitions; and $8.8 million is due to developed projects placed in service during 2004 and 2005. The improvement in rents and other property revenues within TCI’s commercial portfolio was principally comprised of an increase of $4.1 million due to acquisitions of commercial properties in 2004 and 2005 (including TCI’s August 2005 acquisition of 600 Las Colinas Boulevard which represented almost $4.0 million of the $4.1 million
increase). The increase in ~~rents from 2005~~rental revenues for the commercial properties portfolio due to ~~2004 is~~acquisitions was partially offset by a decline in same-store rental revenues of $700,000, which was primarily due to ~~new~~lower rental ~~income from completed apartment projects since 2001, a slight increase~~revenues in ~~commercial rents~~the Company’s New Orleans office buildings due to ~~new purchases~~Hurricane Katrina. TCI’s same-store hotels increased revenues by 25.3 percent or $1.9 million in 2005 ~~and an increase in hotel revenues~~compared to 2004, due to ~~higher~~both occupancy gains and increases in average room ~~rates~~rates. TCI acquired no hotels in 2004 or 2005 and ~~average occupancies during~~sold one hotel in 2005.
Property operations expenses ~~were $64.9~~increased $9.7 million from $53.2 million in 2004 to $62.9 million in 2005. The overall increase is due to a $7.5 million increase in operating expenses from the Company’s apartment communities, a $100,000 increase in operating expenses from the Company’s commercial portfolio, a $1.0 million increase in hotel operating expenses and a $1.1 million increase in operating expenses (principally real estate taxes) related to the Company’s land portfolio. Within the apartment community’s portfolio, $1.6 million of the increase from 2004 to 2005 is due to TCI’s same store apartment universe; $1.4 million is due to acquisitions of existing apartment communities; and $4.5 million is due to developed projects placed in service during 2004 and 2005. Operating expenses within TCI’s commercial portfolio increased $1.7 million due principally to TCI’s August 2005 acquisition of 600 Las Colinas Boulevard; the $1.7 million increase was offset by a $1.6 million decline in same-store operating expenses which was due primarily to the Company’s New Orleans office buildings being closed for a period of time after Hurricane Katrina. Operating expenses for TCI’s same-store hotels increased by $1.0 million in 2005 compared to ~~$53.2 million in~~ 2004. ~~This increase is primarily due to additional operations expense from the completion of apartment projects since 2001, and increases in hotel and land operations during 2005.~~
Depreciation and amortization expense ~~was $16.1~~decreased $700,000, to $16.0 million in 2005 ~~compared to~~from $16.7 million in 2004. Depreciation on TCI’s apartment portfolio increased $1.5 million while depreciation expense ~~decreased slightly in 2005~~for the commercial and hotel portfolios declined $1.4 million and $800,000 respectively. Depreciation expense for the apartment portfolio increased due to ~~lower~~developed projects placed in service during 2004 and 2005 ($800,000) and additions to depreciable assets in the same-store universe ($700,000). Depreciation expense for the commercial portfolio increased $500,000 due to the August 2005 acquisition of 600 Las Colinas Boulevard); however, this increase was offset by a decline in depreciation for the same-store universe of $1.9 million ($600,000 due to certain tenant improvements being fully depreciated in 2004 and $1.3 million due to 2005 revisions to depreciable lives for certain commercial ~~and hotels, offset by increased depreciation from apartment construction projects~~properties). Depreciation expense for the hotel portfolio decreased $800,000, due principally to certain building improvements being ~~completed since 2001.~~fully depreciated in 2004.
~~Index to Financial Statements~~
General and administrative expenses were $8.3 million in 2005 compared to $9.3 million in 2004. The decrease in 2005 was due to a reduction in legal fees and state income taxes, offset by higher professional fees, cost reimbursements to the advisor, and ~~predevelopment expenses~~expensed pursuit costs for ~~projects not being constructed.~~abandoned projects.
Advisory fee expense was $4.7 million in 2005 compared to $6.7 million in 2004. The decrease in 2005 was due to TCI receiving ana 2004 operating expense refund from Prime of $2.4 million in 2005. See NOTE 12. “ADVISORY AGREEMENT.”
Interest income of $3.7 million in 2005 ~~approximated the $3.7 million in~~was unchanged from 2004.
Gain on foreign currency transaction was $292,000 in 2005 compared to $3.8 million in 2004. Gain or loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated in Euros, into the functional currency, the Polish Zloty. The Euro ~~has~~ weakened against the Zloty in 2005 and 2004, which ~~has~~ resulted in TCI recognizing these gains.
Interest expense ~~was $39.9~~increased $8.7 million to $39.2 million in 2005 ~~compared to~~from $30.5 million in ~~2003. Interest~~2004. The overall increase in interest expense ~~increased~~is due to a $6.6 million increase within the apartment portfolio, a $1.3 million increase in the commercial portfolio and a $1.3 million increase in the land portfolio, partially offset by a $500,000 decrease in the hotel portfolio due to certain refinancing costs for three hotels included in 2004 interest expense. Within the apartment portfolio, $300,000 of the increase is due to additional debt incurred as a result of 2005 and 2006 acquisitions while $5.1 million is due to increased debt ~~due from apartment construction~~related to developed projects ~~being completed since 2001. Commercial and land interest was also higher~~placed in
service in 2005 and 2006; the remaining $1.2 million is due to ~~new purchases~~increases in the same-store universe resulting primarily from rising variable interest rates. The increase in interest expense for the commercial portfolio is due to a $500,000 increase for the same-store universe (primarily due to rising variable interest rates) and ~~refinancings during 2005. A large amount~~$800,000 related to the August 2005 acquisition of ~~TCI’s~~600 Las Colinas Boulevard. Interest expense within the land ~~debts have~~portfolio increased due to rising variable interest rates, ~~tied~~increased debt from refinancing existing land parcels and additional debt incurred to ~~the prime rate or other bank rates. These rates have risen throughout~~finance 2004 and 2005 ~~which has also contributed to higher interest expense for TCI’s~~ land ~~holdings. Hotel interest decreased during 2005 due to lower interest rates on refinanced debt.~~acquisitions.
TCI recorded asset impairments of $1.8 million in 2005 and $1.7 million in 2004, representing the write-down of certain operating properties to current estimated fair value.

Property

Location
   Units/
Acres    Fair
Value    Property
Basis    Costs to
Sell    Impairment    Location
Units/
Acres
   Fair
Value    Property
Basis    Costs to
Sell    Impairment
Land

Centura
   Farmers Branch, TX    8.753 Acres    $ 12,025    $ 13,865    —      $ 1,840    Farmers Branch, TX    8.753 Acres    $ 12,025    $ 13,865    $ —      $ 1,840
The Centura Land was appraised for its sale to IORI and the appraised value was used as the fair value. The costs to sell are estimated closing costs and commissions paid by TCI.
The assets for 2004 include the following properties:

Property
   Location    Sq. Feet/
Acres    Fair
Value    Property
Basis    Costs to
Sell    Impairment
Office Building

225 Baronne
   New Orleans, LA    416, 834 Sq. Ft.    $ 8,500    $ 10,220    $ —      $ 1,720
ItManagement concluded that a write-down was ~~determined that~~appropriate due to the fair value of 225 Baronne ~~was~~being less than the current book value due to the pending loss of the anchor ~~tenant. It was determined that~~tenant, future leases on the vacated space ~~will be~~being below market rates and the projected future cash flows of 225 Baronne ~~will not be sufficient~~insufficient to recover the ~~current book~~carrying value.
TCI recorded a reduction to loss provisions of $1.5 million in 2004, representing the removal of the allowance on TCI’s note receivables. All of TCI’s note receivables are performing or are secured by collateral that is equal to or greater than the note balance.
Net income fee to affiliate was $522,000 in 2005 compared to $1.9 million in 2004. The net income fee is payable to TCI’s advisor (Prime) based on 7.5% of TCI’s net income, after certain adjustments. TCI had higher net income, after adjustments, in 2004 as compared to 2005, therefore the net income fee was higher.
~~Index to Financial Statements~~
Other income (expense) was $370,000 in 2005 compared to $555,000 in 2004. Other income in 2004 was higher due to TCI receiving a higher amount of dividend income from its holdings in Realty Korea CR-REIT Co., Ltd. No. 1.
Gain on land sales was $7.7 million in 2005 compared to $7.1 million in 2004. In 2005, the Company sold 66.7 acres of land in nine separate transactions at an average sales price of $428,000 per acre. In 2004, TCI recognized gains on the sale of 517 acres in two separate transactions at an average sales price of $44,000 per acre, including one sale of 492 acres in Allen, Texas for a sales price equal to $41,000 per acre.
Equity in earnings of investees was $968,000 in 2005 compared to equity in loss of investees of $1.5 million in 2004. IORI and ARI both recognized income from continuing operations for 2005, as compared to a loss for ARI from continuing operations in 2004.
Net income tax expense for 2005 was $424,000, compared to $12.5 million for 2004. The income tax expense for 2005 and 2004 was calculated under a Tax Sharing and Compensating Agreement between TCI and ARI, whereby TCI and ARI are eligible to file a consolidated federal tax return. In 2004, ARI had net taxable losses
and TCI had net taxable income, thus in accordance with the sharing agreement, TCI recorded Federal tax expense in the amount of $12.5 million for 2004.
Income from discontinued operations was ~~$27.5~~$27.0 million in 2005 compared to $58.8 million in 2004. Income from discontinued operations relates to 9 operating properties sold during 2005, five apartments designated as held for sale and 22 operating properties TCI sold during 2004. The following table summarizes revenue and expense information for these properties sold and held-for-sale.

   2005 2004
Revenue

Rental
   $ 14,626 $ 36,052
Property operations
   11,777 21,885

   2,849 14,167
Expenses

Interest
   6,407 12,280
Depreciation
   553 5,865

   6,960 18,145

Net loss from discontinued operations before gains on sale of real estate
   (4,111 ) (3,978 )
Gain on sale of real estate
   31,473 63,348
Write-down of assets held-for-sale
   (1,580 ) (4,477 )
Equity in investees gain on sale of real estate
   1,673 3,884

Net income from discontinued operations
   $ 27,455 $ 58,777

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective consolidated statements of operations.
   2005 2004
Revenue

Rental
   $ 16,994 $ 36,052
Property operations
   13,785 21,885

   3,209 14,167
Expenses

Interest
   7,158 12,280
Depreciation
   633 5,865

   7,791 18,145

Net loss from discontinued operations before gains on sale of real estate
   (4,582 ) (3,978 )
Gain on sale of real estate
   31,473 63,348
Write-down of assets held-for-sale
   (1,580 ) (4,477 )
Equity in investees gain on sale of real estate
   1,673 3,884

Net income from discontinued operations
   $ 26,984 $ 58,777

In 2005 and 2004, gains on sale of real estate totaling $31.5 million and $63.3 million were recognized. ~~See NOTE 2. “REAL ESTATE.”~~
In 2005, TCI sold two apartment communities (both located in Texas) at an average sales price of $43,000 per unit; six commercial properties at an average sales price of $93 per square foot and one hotel located in San Francisco at a price per room of $139,000. In 2004 ~~Compared to 2003.~~    ~~TCI had net income of $23.7 million in 2004, including~~recognized gains on the sale of ~~real estate totaling $63.3 million~~two apartment communities at an average sales price of $42,000 per unit and ~~net income~~14 commercial properties at an average sales price of ~~$673,000 in 2003, including gains on~~$121 per square foot (including the December 2004 sale of ~~real estate totaling $21.7 million. Fluctuations in the components of revenues and expense between 2004 and 2003 are discussed below.~~
Rents were $83.6 million in 2004 compared to $68.6 million in 2003. The increase in rents from 2004 to 2003 is primarily due to new rental income from completed apartment projects since 2001 and a slight increase in hotel revenues.
Property operations expenses were $53.2 million in 2004 compared to $49.2 million in 2003. This increase is primarily due to additional operations expense from the completion of apartment projects since 2001, which is offset by decreases in hotel and land operations during 2004.
~~Depreciation expense was $16.7 million in 2004 compared to $11.8 million in 2003. Depreciation expense increased in 2004 primarily due to apartment construction projects being completed since 2001.~~
~~Index to Financial Statements~~
General and administrative expenses were $9.3 million in 2004 compared to $9.1 million in 2003. The increase in 2004 was due to an increase in state income taxes and cost reimbursements to the Advisor, offset by lower legal cost and professional fees.
Advisory fee expense was $6.7 million in 2004 compared to $4.9 million in 2003. The increase in 2004 was due to higher average gross assets during the year. Also, TCI received an operating expense refund from Prime of $1.3 million in 2003. See NOTE 12. “ADVISORY AGREEMENT.”
Interest income was $3.7 million in 2004 compared to $2.9 million in 2003. The increase in 2004 was primarily due to additional interest from an increase in the outstanding notes receivable balances during 2004.
Gain on foreign currency transaction was $3.8 million in 2004, compared to a loss of $3.3 million in 2003. Gain or loss on foreign currency transaction is the result of Hotel Akademia converting long-term debt, which is denominated in Euros, into the functional currency, the Polish Zloty. The Euro weakened against the Zloty during 2004, which has resulted in TCI recognizing this gain.
Interest expense was $30.5 million in 2004 compared to $21.2 million in 2003. Interest expense increased in 2004 primarily due to increased debt due to apartment construction projects being completed since 2001. Changes in other segments interest expense were nominal from 2004 to 2003.
~~TCI recorded asset impairments of $1.7 million in 2004 and $198,000 in 2003, representing the write-down of certain operating properties to current estimated fair value.~~
~~The assets for 2004 include the following properties:~~

Property

Location

Sq. Feet/
Acres
   Fair
Value    Property
Basis    Costs to
Sell    Impairment
Office Building

225 Baronne
   New Orleans, LA    416, 834 Sq. Ft.    $ 8,500    $ 10,220    $ —      $ 1,720
It was determined that the fair value of 225 Baronne was less than the current book value due to the pending loss of the anchor tenant. It was determined that future leases on the vacated space will be below market rates and the projected future cash flows of 225 Baronne will not be sufficient to recover the current book value.
~~The assets for 2003 include the following properties:~~

Property

Location
   Sq. Feet/
Acres    Fair
Value    Property
Basis    Costs to
Sell    Impairment
Land

Red Cross
   Dallas, TX    2.89 Acres    $ 8,500    $ 7,679    $ 1,019    $ 198
~~The Red Cross land was sold on January 30, 2004 and the actual sales price less selling costs was used as the fair value.~~
Net income fee to affiliate was $1.9 million in 2004. The net income fee is payable to TCI’s advisor based on 7.5% of TCI’s net income, after certain adjustments. TCI had a net loss for 2003, therefore no net income fee was due.
~~Gain on settlement of debt was $4.4 million in 2003. The gain resulted from a favorable ruling in a lender dispute regarding the mortgage loans on three office buildings in New Orleans, Louisiana.~~
~~Gain on condemnation award was $4.8 million in 2003, resulting from the settlement of a dispute regarding a land parcel~~Centura Tower in Dallas, ~~Texas.~~
~~Index to Financial Statements~~
~~Other income (expense) was $555,000 in 2004 compared to $3.8 million in 2003. Other income in 2003 was higher due to TCI receiving a litigation settlement of $3.4 million.~~
Equity in loss of investees was $1.5 million in 2004 compared to $4.3 million in 2003. The losses from equity investees are primarily attributed to operating losses for IORI and ARI. IORI and ARI had lower losses from continuing operations in 2004.
Income from discontinued operations was $58.8 million in 2004 compared to $16.7 million in 2003. Income from discontinued operations relates to 22 operating properties sold during 2004 and 15 operating properties TCI sold during 2003. The following table summarizes revenue and expense information for these properties sold and held-for-sale.

   2004 2003
Revenue

Rental
   $ 36,052 $ 55,616
Property operations
   21,885 30,142

   14,167 25,474
Expenses

Interest
   12,280 21,844
Depreciation
   5,865 9,055

   18,145 30,899

Net loss from discontinued operations before gains on sale of real estate
   (3,978 ) (5,425 )
Gain on sale of real estate
   63,348 21,650
Write-down of assets held for sale
   (4,477 ) (4,357 )
Equity in investees gain on sale of real estate
   3,884 4,853

Net income from discontinued operations
   $ 58,777 $ 16,721

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective consolidated statements of operations.
~~In 2004 and 2003, gains on sale of real estate totaling $63.3 million and $21.7 million were recognized.~~Texas). See NOTE 2. “REAL ESTATE.”
Liquidity and Capital Resources
Cash and cash equivalents were $4.8 million, $5.5 million ~~$21.8 million~~ and ~~$6.4~~$21.8 million at December 31, 2006, 2005 ~~2004~~ and ~~2003,~~2004, respectively. The principal reasons for the change in cash are discussed in the paragraphs below.
TCI’s principal sources of cash have been and will continue to be ~~from~~ property operations, proceeds from land and income-producing property sales, ~~and~~ the collection of mortgage notes receivable, receivables from affiliated companies, refinancing of existing mortgage notes payable and additional borrowings, including mortgage notes payable, lines of credit and to a lesser extent, distributions from partnerships. TCI may also issue additional equity securities, including common stock and preferred stock. Management anticipates that TCI’s cash at December 31, ~~2005,~~2006, along with cash that will be generated in ~~2006~~2007 from property operations, ~~will~~may not be sufficient to meet all of TCI’s cash requirements. Management intends to selectively sell land and income producing ~~real estate,~~assets, refinance or extend real estate debt and seek additional borrowings ~~against~~secured by real estate to meet its ~~cash~~liquidity requirements. Historically, management has been successful at extending ~~its~~a portion of the Company’s current maturity obligations. Management also anticipates funding ongoing real estate ~~construction~~development projects and the acquisition of new real estate from cash generated by ~~property~~ sales of land and income-producing properties, debt refinancings or extensions, and additional borrowings.
Net cash provided by operating activities was $5.5 million in ~~operations was $16.7~~2006, compared to $19.9 million in 2005 ~~compared to net cash used~~and $(2.0 million) in ~~operations of $13.2 million in 2004 and net cash provided by operations of $3.7 million in 2003.~~2004. Cash flow from property
~~Index to Financial Statements~~
operations is ~~rents collected,~~largely comprised of rental income less ~~payment for property~~ operating
expenses, or net ~~rental income.~~operating income (sometimes referred to as “NOI”). Net cash provided by operating activities ~~was higher~~declined $14.4 million in 2006 compared to 2005 due primarily to the 2006 payment of certain expenses accrued in 2005 of $33.3 million, increased interest expense of $12.7 million, offset by the receipt of Hurricane Katrina-related insurance proceeds (net of repairs) of $20.5 million and other net sources of operating cash (principally improved NOI) of $2.6 million. Net cash provided by operating activities increased $21.9 million in 2005 compared to 2004 due to ~~higher operating income, increases in accounts~~improved NOI of $9.8 million, the payment deferral of certain 2004 expenses until 2005 ($18.3 million) and other ~~payables and deferred gains on the sale~~net sources of ~~properties. These increases for 2005 were~~operating cash of $2.5 million, offset by ~~lower depreciation being added back, higher~~increased interest payments on notes payable and an increase in other assets. Although operating income was higher in 2004 compared to 2003 due to increased income from residential properties, cash from operations was less in 2004 compared to 2003 due to higher spending on general and administrative expenses, advisory fees and net income fees and an increase in non-cash gains from property sales and foreign currency transactions in 2004 compared to 2003. Management believes that cash flow may decrease from property operations as a resultexpense of ~~selling income producing properties.~~$8.7 million.
Management expects that ~~funds from~~TCI’s existing cash ~~resources,~~balances, selective sales of ~~income producing~~land and income-producing properties, refinancing of ~~real estate,~~ and additional borrowings against the Company’s real estate holdings will be sufficient to meet TCI’s cash requirements associated with its current and anticipated level of operations, maturing debt obligations and existing commitments. To the extent that TCI’s liquidity permits or financing sources are available, and the investments are otherwise deemed to be profitable, management intends to make ~~new~~additional investments in real estate ~~investments.~~or real estate-related projects.
Net cash used in investing activities was ~~$148.5~~$146.8 million in 2006 compared to $219.2 million in 2005 ~~compared to $18.9~~and $95.4 million in ~~2004 compared to $26.9 million~~2004. Cash used in ~~2003. Cash from~~ investing activities decreased $72.4 million in 2006 compared to 2005 due principally to reduced investments in real estate ($34.8 million), higher proceeds from sales of real estate ($24.3 million) and increased net collections of notes receivable ($12.6 million), offset by increased advisory payments of $5.8 million and other net uses of $600,000. Cash used in investing activities increased $123.8 million in 2005 compared to 2004 due primarily to ~~higher amounts of notes receivable funding, significantly more spent on~~increased investments in real estate ~~acquisitions and~~($22.8 million), lower proceeds from real estate ~~sales. These decreases were~~sales ($122.5 million), increased investment in seller financing ($11.0 million) and increased distributions to equity investees of $5.4 million, offset by ~~less cash used for real estate construction and improvements and~~lower payments ~~received from the advisor during 2005 instead of payments made~~ to the advisor ~~as in 2004. Cash from investing activities increased in 2004 compared to 2003 due to higher proceeds from the sales~~ of real estate and collections on notes receivable, reduced by increased spending on real estate construction and improvements and real estate acquisitions, and an increase in payments to TCI’s advisor.$42.9 million.
Net cash provided by financing activities was $137.2 million in 2006 compared to $115.4 million in 2005 and $47.6 million in 2004. Cash provided by financing activities increased $21.8 million in 2006 compared to 2005, due primarily to increased proceeds from additional borrowings of $34.4 million (net of deferred financing costs), offset by higher debt service and loan maturities and other principal payments of $19.3 million. Cash provided by financing activities increased $67.8 million in 2005 compared to ~~$47.6~~2004, principally due to reduced loan maturities and other principal payments of $196.2 million ~~in 2004 compared to $19.0 million in 2003. Cash from financing activities increased~~and no common stock repurchases in 2005 ~~compared to 2004 due to higher~~($3.1 million), offset by fewer proceeds from ~~refinancing~~additional borrowings of ~~notes payable and lower payments made on notes payable. Cash from~~$131.5 million (net of deferred financing activities increased in 2004 compared to 2003 due to higher proceeds from refinancing of notes payable, which was reduced by higher payments on notes payable and the repurchase of TCI’s common stock.costs).
Management reviews the carrying values of TCI’s properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The note receivable review includes an evaluation of the collateral property securing such note. The property review generally includes: (1) selective property inspections; (2) a review of the property’s current rents compared to market rents; (3) a review of the property’s expenses; (4) a review of maintenance requirements; (5) a review of the property’s cash flow; (6) discussions with the manager of the property; and (7) a review of properties in the surrounding area.
Obligations and Commitments
TCI has contractual obligations and commitments primarily with regards to the payment of mortgages.
~~Index to Financial Statements~~
The following table aggregates TCI’s expected contractual obligations and commitments subsequent to December 31, ~~2005.~~2006.

   PAYMENTS DUE BY PERIOD    PAYMENTS DUE BY PERIOD
   Total    Less than
1 Year    1-3 Years    3-5 Years    More than
5 Years    Total    Less than
1 Year    1-3 Years    3-5 Years    More than
5 Years
   dollars in thousands    dollars in thousands
Long-Term Debt⁽¹⁾
   $ 766,651    $ 191,426    $ 124,574    $ 37,415    $ 413,236    $ 766,651    $ 191,426    $ 124,574    $ 37,415    $ 413,236
Capital Lease Obligations
   —      —      —      —      —      —      —      —      —      —
Operating Leases
   —      —      —      —      —      —      —      —      —      —
Purchase Obligations
   —      —      —      —      —      —      —      —      —      —
Other Long-Term Liabilities
   2,163    2,163    —      —      —      2,163    2,163    —      —      —
(1) TCI’s long-term debt may contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the note to become due immediately.
Other long-term liabilities represent TCI’s intentions to purchase the interests of general and limited partners formed to construct residential ~~properties~~properties.
Related Party Transactions
Historically, TCI, ARI, IORI, and others have each engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to TCI as could have been obtained from unrelated parties.
Operating Relationships
TCI received rents of $846,000 in 2006, $56,000 in 2005 and $69,000 in 2004 ~~and $175,000 in 2003~~ from Prime and ~~BCM~~its affiliates for ~~a lease at~~rents of TCI owned properties, including One Hickory, Two Hickory and Addison Hanger. ~~BCM owns a corporate jet that is housed at the hanger and TCI has available space at the hanger.~~
Property Transactions
Activity in 2006 included:
In November 2006, ARI purchased Windmill Farms, 3,035 acres in Kaufman County, Texas for $52.0 million. The purchase price was funded by $39.1 million debt and $10.0 million Preferred Stock of TCI. In connection with the purchase by ARI, TCI issued $10.0 million of Series D Preferred Stock to the sellers of the property. The transaction was recorded on the books of TCI as a reduction in the amount payable to affiliate of $10.0 million.
In August 2006, TCI purchased 99 acres in Farmers Branch, Texas known as the LaDue/Walker tract, from ARI for $21.5 million. The transaction was financed by assumption of $9.9 million note payable and an increase in the amount payable to affiliate of $11.2 million.
In May 2006, TCI acquired the 102,615 square feet One Hickory office building in Farmers Branch, Texas from IORI. The purchase price was paid by forgiveness of the $12.2 million note receivable from IORI.
Activity in 2005 included:
In December 2003, TCI sold six properties to subsidiaries of Unified Housing Foundation, Inc. (“UHF”), a Texas Non-Profit 501(c) 3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, Limestone at Vista Ridge apartments for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone Canyon apartments for $18.0 million, the Sendero Ridge apartments for $29.4 million and the Tivoli apartments for $16.1 million. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis I, an affiliate, is Senior Vice President of UHF. Due to UHF being considered a related party to TCI and TCI having continued involvement and control of these entities, these transactions have not been recorded as sales. Instead, these transactions will be accounted for on the deposit method and the properties and corresponding debt will continue to be consolidated by TCI. The loans on Limestone Canyon apartments, Limestone at Vista Ridge apartments and Tivoli apartments were approved by their prospective lenders for transfer to the purchasing entities. TCI has guaranteed the loans on each of these transfers. Also, Marine Creek land and the Cliffs of El Dorado apartments were recognized as sales during 2004. Management is seeking lender approval on the transfer of the note associated with the Sendero Ridge apartments.
In June 2005, TCI purchased a subsidiary of a related party for $4.1 million, decreasing the affiliate receivable by $4.1 million.
~~Index to Financial Statements~~
In August 2005, TCI sold 8.753 acres to an affiliate for $6.7 million. For a period of one year following closing and 90 days thereafter, the buyer has the right to convey the land to TCI for the original sales price, plus a 12% preferred return per annum accruing from the closing date. This transaction has been treated as a financing by TCI, with a note payable of $6.7 million recorded.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, TCI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.
Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on TCI’s business, assets or results of operations.
Newly Issued Accounting Standards
In ~~December 2004,~~February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial ~~Accounting Standards Board~~Instruments—an Amendment of FASB Statements No. 133 and 140” (“~~FASB”~~SFAS No. 155”) ~~issued Statement~~. The purpose of ~~Financial Accounting Standards (“SFAS”)~~SFAS No. ~~123-R, “Share-Based Payment.” This Statement addresses~~155 is to simplify the accounting for ~~share-based payment transactions in which a company receives employee services in exchange for (a) equity~~certain hybrid financial instruments ~~of the company, such as stock options, or (b) liabilities, such as those related to performance units, that are based on the~~by permitting fair value ~~of the company’s equity instruments or~~re-measurement for any hybrid financial instrument that ~~may be settled by the issuance of such equity instruments.~~
contains an embedded derivative that otherwise would require bifurcation. SFAS No. ~~123-R, which~~155 is effective for all financial instruments acquired or issued after the ~~Company~~ beginning ~~in the~~of an entity’s first ~~quarter of~~ fiscal year ~~2006, eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, and generally requires~~ that such transactions be accounted for using prescribed fair-value-based methods. SFAS No. 123-R permits public companies to adopt its requirements using one of two methods: (a) a “modified prospective” method in which compensation costs are recognized beginning with the effective date based on the requirements of SFAS No. 123-R for all share-based payments grantedbegins after the effective date and based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123-R that remain unvested on the effective date or (b) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits companies to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either for all periods presented or prior interim periods of the year of adoption.
~~The Company has decided to adopt SFAS No. 123-R using the modified prospective method. SFAS No. 123(R) must be applied~~September 15, 2006. We do not only to new awards but to previously granted awards that are not fully vested on the effective date. All of TCI’s options were fully vested as of the effective date, and TCI has no outstanding options that were granted, modified or settled after the effective date, so additional compensation costs for previously granted awards will not be recognized. In December 2005, the Company’s Board of Directors cancelled the stock option plan, and at the present time, the Company has no plans to offer additional stock options. The Company does not believeexpect the adoption of SFAS No. ~~123(R) will have a material impact on its financial statements or results of operations.~~
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (“Statement No. 154”). Statement No. 154, which replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is
~~Index to Financial Statements~~
impracticable to determine the period-specific effects or the cumulative effect of the change. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of Statement No. 154 is not expected155 to have a material impact on our ~~consolidated financial position,~~cash flows, results of operations, financial position, or ~~cash flows of TCI.~~liquidity.
In ~~June 2005,~~March 2006, the FASB ~~ratified the consensus in EITF Issue~~issued SFAS No. ~~04-5, “Determining Whether~~156, “Accounting for Servicing of Financial Assets—an Amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 requires recognition of a ~~General Partner,~~servicing asset or ~~the General Partners~~a servicing liability each time an entity undertakes an obligation to service a financial asset by entering into a servicing contract. SFAS No. 156 also requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value and subsequently measured at fair value at each reporting date. SFAS No. 156 is effective as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“Issue 04-5”), which provides guidance in determining whether a general partner controls a limited partnership. Issue 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the ~~limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership. The adoption~~beginning of ~~Issue 04-5 by us for new or modified limited partnership arrangements is effective June 30, 2005 and for existing limited partnership arrangements effective January 1,~~an entity’s first fiscal year that begins after September 15, 2006. We do not expect ~~that we will be required to consolidate our current unconsolidated joint venture investments nor do we expect Issue 04-5~~the adoption of SFAS No. 156 to have a material ~~effect~~impact on our ~~consolidated~~cash flows, results of operations, financial ~~statements.~~position, or liquidity.
~~At its~~In June ~~2005 meeting,~~2006, the ~~EITF reached~~FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a ~~consensus regarding Issue~~company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. ~~05-6 (EITF 05-6), “Determining the Amortization Period for Leasehold Improvements.” EITF 05-6~~48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for ~~periods~~fiscal years beginning after ~~June 29, 2005.~~December 15, 2006. We do not expect the adoption of FIN No. 48 to have a material impact on our cash flows, results of operations, financial position, or liquidity.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of the effects of prior period misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires the quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as the “dual approach” because it requires quantification of errors under both the iron curtain and the roll-over methods. The ~~guidance requires that leasehold improvements acquired in~~roll-over method focuses primarily on the impact of a ~~business combination or purchased subsequent~~misstatement on the
income statement—including the reversing effect of prior year misstatements—but its use can lead to the ~~inception~~accumulation of ~~a lease be amortized over~~misstatements in the ~~lesser~~balance sheet. The iron-curtain method focuses primarily on the effect of correcting the ~~useful life~~period-end balance sheet with less emphasis on the reversing effects of prior year errors on the ~~assets or a term that includes renewals that are reasonably assured at the date of acquisition or purchase.~~income statement. SAB 108 was effective for financial statements for fiscal years ending after November 15, 2006. The adoption of ~~EITF 05-6~~SAB 108 did not have a material impact on our cash flows, results of operations, financial position or liquidity.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The new FASB rule defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, or GAAP, and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact, if any, to our financial condition or results of ~~operations.~~operations from the adoption of SFAS No. 157.
Inflation
The effects of inflation on TCI’s operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI’s earnings from short-term investments, the cost of new financings ~~as well as~~and the cost of variable interest rate debt will be affected.
Tax Matters
Prior to the year 2000, TCI elected and in the opinion of management, qualified to be taxed as a ~~REIT~~Real Estate Investment Trust (“REIT”) as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. During the third quarter of 2000, due primarily to a concentration in ownership, TCI no longer met the requirements for tax treatment as a ~~REIT~~REIT.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
TCI’s primary market risk exposure consists of changes in interest rates on borrowings under ~~the Code.~~
~~ITEM 7A.~~    ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK~~
our debt instruments that bear interest at variable rates that fluctuate with market interest rates and maturing debt that has to be refinanced. TCI’s future operations, cash flow and fair values of financial instruments are also partially dependent on the then existing market interest rates and market equity prices. ~~Market risk is based on changes in market~~
As of December 31, 2006, our $897.3 million debt portfolio consisted of approximately $643.2 million, or 72%, of fixed-rate debt, with interest rates ranging from 5.06% to 12.0% and ~~prices,~~approximately $254.1 million, or 28%, of variable-rate debt. As of December 31, 2005, our $766.7 million debt portfolio consisted of approximately $590.8 million, or 77%, of fixed-rate debt, with interest rates ranging from 4.9% to 15.5%, and ~~the effect~~approximately $175.9 million, or 23%, of ~~the changes on future operations. Market risk is managed by matching a property’s anticipated net operating income to appropriate financing.~~
~~TCI is exposed to~~variable-rate debt. Our overall weighted average interest rate ~~risk associated with variable rate notes payable~~at December 31, 2006 and maturing debt that has to be refinanced. TCI does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its portfolio of real estate assets. 2005 was 7.12% and 6.85%, respectively.
TCI’s interest rate sensitivity position is managed by TCI’s capital markets department. Interest rate sensitivity is the relationship between changes in
~~Index to Financial Statements~~
market interest rates and the fair value of market rate sensitive assets and liabilities. TCI’s earnings are affected as changes in short-term interest rates ~~impact~~affect its cost of ~~variable rate~~variable-rate debt and maturing ~~fixed rate~~fixed-rate debt. A large portion of TCI’s market risk is exposure to short-term interest rates from variable rate borrowings. The impact on TCI’s financial statements of refinancing fixed debt that matured during 2005 was not material. As permitted, management intends to convert a significant portion of those borrowings from variable rates to fixed rates.
If market interest rates for ~~variable rate~~variable-rate debt average 100 basis points more in ~~2006~~2007 than they did during ~~2005,~~2006, TCI’s interest expense would increase and net income would decrease by ~~$1.8~~$2.54 million. This amount is determined by considering the impact of hypothetical interest rates on TCI’s borrowing cost. The analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment.
Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in TCI’s financial structure.
The following table contains only those exposures that existed at December 31, ~~2005.~~2006. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI’s ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level. Dollars in thousands.

Assets

Notes receivable

Variable interest rate-fair value
$ 6,771 $ 5,624
2006 2007 2008 2009 2010 Thereafter Total 2007 2008 2009 2010 2011 Thereafter Total
Instrument’s maturities
$ —   $ 4,896 $ 2,775 $ —   $ —   $ —   $ 7,671 $ —   $ 3,612 $ 2,775 $ —   $ —   $ —   $ 6,387
Instrument’s amortization
—   —   —   —   —   —   —   —   —   —   —   —   —   —
Interest
920 586 284 —   —   —   1,790 879 592 —   —   —   —   1,471
Average rate
8.9 % 7.8 % 8.7 % —   % —   % —   % 9.3 % 8.2 % 0.0 % 0.0 % 0.0 % 0.0 %
Fixed interest rate-fair value
$ 46,911 $ 27,761
2006 2007 2008 2009 2010 Thereafter Total 2007 2008 2009 2010 2011 Thereafter Total
Instrument’s maturities
$ 27,555 $ 16,819 $ 6,950 $ 140 $ —   $ 4,037 $ 55,501 $ 7,047 $ 17,814 $ 3,219 $ 157 $ —   $ 4,037 $ 32,274
Instrument’s amortization
111 50 —   —   —   —   161 162 49 —   —   —   —   211
Interest
3,443 1,571 434 302 298 1,584 7,632 1,987 532 496 477 477 1,584 5,553
Average rate
7.6 % 8.5 % 8.5 % 7.6 % 7.6 % 7.6 % 8.5 % 11.4 % 11.5 % 11.5 % 11.5 % 7.6 %
Liabilities

Non-trading Instruments-Equity Price Risk

Notes payable

Variable interest rate-fair value
$ 154,956 $ 231,715
2006 2007 2008 2009 2010 Thereafter Total 2007 2008 2009 2010 2011 Thereafter Total
Instrument’s maturities
$ 78,441 $ 32,467 $ 15,323 $ 6,737 $ 12,425 $ 10,993 $ 156,386 $ 112,007 $ 68,274 $ 17,332 $ 16,863 $ —   $ 19,859 $ 234,335
Instrument’s amortization
2,289 1,473 1,372 1,295 1,113 11,942 19,484 6,017 3,064 671 459 372 9,142 19,725
Interest
11,315 5,735 3,543 2,723 1,752 9,532 34,600 16,578 8,267 4,013 2,550 1,738 10,308 43,454
Average rate
7.8 % 7.5 % 7.2 % 7.1 % 6.2 % 5.2 % 8.6 % 8.4 % 7.7 % 7.2 % 6.1 % 5.6 %
Fixed interest rate-fair value
$ 548,453 $ 550,815
2006 2007 2008 2009 2010 Thereafter Total 2007 2008 2009 2010 2011 Thereafter Total
Instrument’s maturities
$ 104,366 $ 25,061 $ 38,645 $ 5,727 $ —   $ 80,703 $ 254,502 $ 143,637 $ 10,782 $ 34,824 $ 9,145 $ 29,710 $ 113,823 $ 341,921
Instrument’s amortization
6,330 5,387 4,846 4,919 5,199 309,598 336,279 5,893 5,195 5,103 5,486 5,463 274,170 301,310
Interest
36,805 31,133 28,972 26,030 25,505 431,296 579,741 34,681 32,517 30,671 28,033 26,560 440,133 592,595
Average rate
6.8 % 6.7 % 6.7 % 6.6 % 6.6 % 6.4 % 6.7 % 6.7 % 6.7 % 6.6 % 6.6 % 6.4 %
~~Index to Financial Statements~~
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   Page
Financial Statements

Report of Independent Registered Public Accounting ~~Firms~~Firm
   4247
Consolidated Balance Sheets—December 31, ~~2005~~2006 and ~~2004~~2005
   4448
Consolidated Statements of Operations—Years Ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004
   4549
Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004
   4751
Consolidated Statements of Cash Flows—Years Ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004
   4852
Notes to Consolidated Financial Statements
   5054
Financial Statement Schedules

Schedule III—Real Estate and Accumulated Depreciation
   8487
Schedule IV—Mortgage Loans on Real Estate
   9196
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.
~~Index to Financial Statements~~
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors of
Transcontinental Realty Investors, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance ~~sheet~~sheets of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, ~~2005~~2006 and ~~2004,~~2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows ~~for~~each of the ~~year then~~years in the three-year period ended December 31, ~~2005 and 2004.~~2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The ~~company~~Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ~~company’s~~Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note ~~23,~~21, Transcontinental Realty Investors, Inc.’s management ~~has indicated its intent~~intends to ~~both~~ sell land and income producing properties and refinance or extend debt secured by real estate to meet ~~its~~the Company’s liquidity needs.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Transcontinental Realty Investors, Inc. as of December 31, ~~2005~~2006 and ~~2004,~~2005, and the results of its operations and its cash flows for each of the years ~~then~~in the three-year period ended December 31, 2006, in conformity with accounting ~~principals~~principles generally accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. Schedules III and IV are presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not a required part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly ~~states,~~state, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
FARMER, FUQUA & HUFF, PC
Plano, Texas
March ~~27, 2006~~30, 2007
~~Index to Financial Statements~~
~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~
~~Board of Directors of~~
~~Transcontinental Realty Investors, Inc.~~
~~Dallas, Texas~~
We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flow of Transcontinental Realty Investors, Inc. for the year ended December 31, 2003. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audit provides a reasonable basis for our opinion.
As described in Note 23, Transcontinental Realty Investors, Inc.’s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate, to meet its liquidity needs.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows of Transcontinental Realty Investors, Inc. for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
~~Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.~~
~~BDO SEIDMAN, LLP~~
~~Dallas, Texas~~
~~March 30, 2004 (except for Notes 18,19 and 21 which are as of March 27, 2006.)~~
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS


December 31,
2005
December 31,
2004
December 31,
2006
December 31,
2005
   (dollars in thousands)    (dollars in thousands)
Assets
Real estate held for investment
   $ 911,981 $ 730,584    $ 1,089,995 $ 911,981
Less—accumulated depreciation
   (78,096 ) (72,284 )    (97,541 ) (78,096 )

   833,885 658,300    992,454 833,885
Real estate held-for-sale
   40,446 49,878
Real estate subject to sales contract
   68,738 70,350
Real estate held-for-sale (net of accumulated depreciation of $5,035 in 2006 and $4,476 in 2005)
   54,935 40,446
Real estate subject to sales contract (net of accumulated depreciation of $7,006 in 2006 and $5,387 in 2005)
   66,027 68,738
Notes and interest receivable

Performing (including $34,370 in 2005 and $40,496 in 2004 from affiliates and related parties)
   59,922 56,630
Performing (including $22,249 in 2006 and $34,370 in 2005 from affiliates and related parties)
   39,566 59,922
Non-performing, non-accruing
   4,896 —      —   4,896

   64,818 56,630    39,566 64,818
Less—allowance for estimated losses
   —   —

   64,818 56,630
Investment in real estate entities
   24,659 17,582
Investment in unconsolidated real estate entities
   30,573 24,659
Marketable equity securities, at market value
   7,446 6,580    9,038 7,446
Cash and cash equivalents
   5,462 21,845    4,803 5,462
Other assets (including $1,103 in 2005 and $14,125 in 2004 from affiliates and related parties)
   43,625 39,146
Other assets (including $320 in 2006 and $1,103 in 2005 from affiliates and related parties)
   52,771 43,625

   $ 1,089,079 $ 920,311    $ 1,250,167 $ 1,089,079

Liabilities and Stockholders’ Equity
Liabilities:

Notes and interest payable (including $6,987 in 2005 to affiliates and related parties)
   $ 657,481 $ 524,670
Notes and interest payable (including $6,769 in 2006 and $6,885 in 2005 to affiliates and related parties)
   $ 799,069 $ 657,481
Liabilities related to assets held for sale
   53,357 59,424    43,579 53,357
Liabilities related to assets subject to sales contract
   59,323 59,977    58,816 59,323
Other liabilities (including $12,272 in 2005 and $2,282 in 2004 to affiliates and related parties)
   66,500 34,840

Other liabilities (including $396 in 2006 and $12,272 in 2005 to affiliates and related parties)
   66,608 66,500
   836,661 678,911
   968,072 836,661
Commitments and contingencies

Minority interest
   1,239 881    16,166 1,239
Stockholders’ equity:

Preferred Stock

Series C; $.01 par value; authorized, issued and outstanding 30,000 shares; (liquidation preference $3,000)
   —   —
Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 7,900,869 in 2005 and 7,900,869 shares in 2004
   81 81
Series C; $.01 par value; authorized, issued and outstanding 30,000 shares (liquidation preference td00 per share)

—   —
Series D; $.01 par value; authorized, issued and outstanding 100,000 shares at December 31, 2006 (liquidation preference $100 per share)
   1 —
Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 7,900,869 shares at December 31, 2006 and 2005
   81 81
Paid-in capital
   256,494 256,704    266,206 256,494
Treasury stock
   (3,086 ) (3,086 )    (3,086 ) (3,086 )
Accumulated deficit
   (1,846 ) (10,915 )
Accumulated other comprehensive loss
   (464 ) (2,265 )
Retained earnings (deficit)
   1,660 (1,846 )
Accumulated other comprehensive income (loss)
   1,067 (464 )

   251,179 240,519    265,929 251,179

   $ 1,089,079 $ 920,311    $ 1,250,167 $ 1,089,079

The accompanying notes are an integral part of these Consolidated Financial Statements.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

   For the Years Ended December 31,    For the Years Ended December 31,
   2005 2004 2003    2006 2005 2004
   dollars in thousands    (dollars in thousands)
Property revenue:

Rents and other property revenues (including $56 in 2005 and $69 in 2004 from affiliates)
   $ 105,444 $ 83,604 $ 68,558
Rents and other property revenues (including $846 in 2006, $56 in 2005 and $69 in 2004 from affiliates) affiliates)
   $ 128,064 $ 103,076 $ 83,604
Operating expenses:

Property operations (including $5,408 in 2005 and $4,849 in 2004 to affiliates and related parties)
   64,885 53,210 49,176
Property operations (including $6,424 in 2006, $5,408 in 2005 and $4,849 in 2004 to affiliates and related parties)
   78,965 62,877 53,210
Depreciation and amortization
   16,130 16,714 11,806    21,641 16,051 16,714
General and administrative (including $2,359 in 2005 and $2,181 in 2004 to affiliates and related parties)
   8,255 9,279 9,149
General and administrative (including $2,778 in 2006, $2,359 in 2005 and $2,181 in 2004 to affiliates and related parties)
   4,006 8,255 9,279
Advisory Fees
   4,736 6,733 4,935    8,626 4,736 6,733

Total operating expenses
   94,006 85,936 75,066    113,238 91,919 85,936
Operating income (loss)
   11,438 (2,332 ) (6,508 )    14,826 11,157 (2,332 )
Other income/(expense):

Interest income (including $2,336 in 2005 and $2,069 in 2004 from affiliates and related parties)
   3,671 3,683 2,857
Gain (loss) on foreign currency transaction
   292 3,766 (3,309 )
Mortgage and loan interest (including $218 in 2005 and $379 in 2004 to affiliates and related parties)
   (39,929 ) (30,463 ) (21,227 )
Other income (expense):

Interest income (including $1,931 in 2006, $2,336 in 2005 and $2,069 in 2004 from affiliates and related parties and related parties)
   2,698 3,671 3,683
Gain on foreign currency transaction
   2 292 3,766
Mortgage and loan interest (including $693 in 2006, $218 in 2005 and $379 in 2004 to affiliates and related parties) and related parties)
   (51,830 ) (39,177 ) (30,463 )
Provision for asset impairment
   (1,840 ) (1,722 ) (198 )    —   (1,840 ) (1,722 )
Provision for losses
   —   1,456 (158 )    —   —   1,456
Discount on sale of note receivables
   —   —   (104 )
Net income fee
   (522 ) (1,933 ) —
Gain on settlement of debt
   —   —   4,392
Gain on condemnation award
   —   —   4,800
Other income/ (expense)
   370 555 3,827
Net income fee paid to advisor
   (972 ) (522 ) (1,933 )
Incentive sales fee
   (1,490 ) —   —
Gain on involuntary conversion
   20,479 —   —
Other income (expense)
   928 370 555

Total other income/(expense)
   (37,958 ) (24,658 ) (9,120 )
Loss before gain on land sales, equity in earnings of investees and minority interest
   (26,520 ) (26,990 ) (15,628 )
Total other income (expense)
   (30,185 ) (37,206 ) (24,658 )
Loss before gain on land sales, equity in earnings (losses) of investees and minority interest
   (15,359 ) (26,049 ) (26,990 )
Gain on land sales
   7,702 7,110 1,641    11,421 7,702 7,110
Equity in earnings (loss) of investees
   968 (1,497 ) (4,291 )    890 968 (1,497 )
Minority interests
   (112 ) (1,194 ) 2,230
Minority interest
   393 (112 ) (1,194 )

   8,558 4,419 (420 )
Loss from continuing operations
   (17,962 ) (22,571 ) (16,048 )
Net income from continuing operations
   (2,655 ) (17,491 ) (22,571 )
Add: income tax benefit (expense)
   802 10,976 —      4,608 802 10,976

Net loss from continuing operations
   (17,160 ) (11,595 ) (16,048 )
Net income (loss) from continuing operations
   1,953 (16,689 ) (11,595 )
Income (loss) from discontinued operations (See Note 19)
   27,455 58,777 16,721    2,390 26,984 58,777
Less: Income tax benefit (expense)
   (1,226 ) (23,476 ) —      (837 ) (1,226 ) (23,476 )

Net income (loss) from discontinued operations
   26,229 35,301 16,721    1,553 25,758 35,301
Net income
   9,069 23,706 673    3,506 9,069 23,706
Preferred dividend requirement
   (210 ) (210 ) (126 )    (210 ) (210 ) (210 )

Net income applicable to common shares
   $ 8,859 $ 23,496 $ 547    $ 3,296 $ 8,859 $ 23,496

The accompanying notes are an integral part of these Consolidated Financial Statements.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)

   For the Years Ended December 31,
   2005 2004 2003
Basic earnings per share:

Net loss from continuing operations
   $ (2.20 ) $ (1.46 ) $ (2.22 )
Correction of accounting error in prior period (See Note 21.)
   —   —   .22
Discontinued operations
   3.32 4.36 2.07

Net income applicable to Common shares
   $ 1.12 $ 2.90 $ .07

Diluted earnings:

Net loss from continuing operations
   $ (2.20 ) $ (1.46 ) $ (2.22 )
Correction of accounting error in prior period (See Note 21.)
   —   —   .22
Discontinued operations
   3.32 4.36 2.07

Net income applicable to Common shares
   $ 1.12 $ 2.90 $ .07

Weighted average Common shares used in computing earnings per share:

Basic
   7,900,869 8,082,854 8,078,108
Diluted
   7,900,869 8,082,854 8,078,108
   For the Years Ended December 31,
   2006    2005 2004
   (dollars in thousands)
Basic earnings per share:

Net income (loss) from continuing operations
   $ 0.22    $ (2.14 ) $ (1.46 )
Discontinued operations
   0.20    3.26 4.37

Net income applicable to Common shares
   $ 0.42    $ 1.12 $ 2.91

Diluted earnings:

Net income (loss) from continuing operations
   $ 0.21    $ (2.14 ) $ (1.46 )
Discontinued operations
   0.19    3.26 4.37

Net income applicable to Common shares
   $ 0.40    $ 1.12 $ 2.91

Weighted average Common shares used in computing earnings per share:

Basic
   7,900,869    7,900,869 8,082,854
Diluted
   8,180,401    7,900,869 8,082,854
The accompanying notes are an integral part of these Consolidated Financial Statements.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock Paid-in
Capital
Treasury
Stock
Accumulated
Deficit Accumulated
Other
Comprehensive
Income Stockholders’
Equity Common Stock Preferred Stock
Paid-in-
Capital
Treasury
Stock
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss) Stockholder’s
Equity
Shares Amount Shares Amount Shares Amount
(dollars in thousands) (dollars in thousands)
Balance, December 31, 2002
8,072,594 $ 81 $ 257,040 $ —   $ (35,294 ) $ 567 $ 222,394
Comprehensive income
—
Unrealized loss on foreign currency translation
—   —   —   —   —   (1,183 ) (1,183 )
Net income
—   —   —   —   673 —   673

—   (510 )
Series A Preferred Stock cash dividends ($5.00 per share)
—   —   (29 ) —   —   —   (29 )
Series C Preferred Stock cash dividends ($6.00 per share)
—   —   (97 ) —   —   —   (97 )
Conversion of 5,829 Series A Preferred Stock into Common Stock
41,075 —   —   —   —   —   —

Balance, December 31, 2003
8,113,669 81 256,914 —   (34,621 ) (616 ) 221,758 8,113,669 $ 81 —   $ —   $ 256,914 $ —   $ (34,621 ) $ (616 ) $ 221,758
Comprehensive income
—
Unrealized loss on foreign currency translation
—   —   —   —   —   (3,229 ) (3,229 ) —   —   —   —   —   —   —   (3,229 ) (3,229 )
Unrealized gain on marketable securities
—   —   —   —   —   1,580 1,580 —   —   —   —   —   —   —   1,580 1,580
Net income
—   —   —   —   23,706 —   23,706 —   —   —   —   —   —   23,706 —   23,706

—   22,057
—
Repurchase of common stock
(212,800 ) —   —   (3,086 ) —   —   (3,086 ) (212,800 ) —   —   —   —   (3,086 ) —   —   (3,086 )
Series C Preferred Stock cash dividends ($7.00 per share)
—   —   (210 ) —   —   —   (210 ) —   —   —   —   (210 ) —   —   —   (210 )

Balance, December 31, 2004
7,900,869 81 256,704 (3,086 ) (10,915 ) (2,265 ) 240,519 7,900,869 81 256,704 (3,086 ) (10,915 ) (2,265 ) 240,519
Comprehensive income
—
Unrealized gain on foreign currency translation
—   —   —   —   —   935 935 —   —   —   —   —   —   —   935 935
Unrealized gain on marketable securities
—   —   —   —   —   866 866 —   —   —   —   —   —   —   866 866
Net income
—   —   —   —   9,069 —   9,069 —   —   —   —   —   —   9,069 —   9,069

10,870
Series C Preferred Stock cash dividends ($7.00 per share)
—   —   (210 ) —   —   —   (210 ) —   —   —   —   (210 ) —   —   —   (210 )

Balance, December 31, 2005
7,900,869 $ 81 $ 256,494 $ (3,086 ) $ (1,846 ) $ (464 ) $ 251,179 7,900,869 81 —   —   256,494 (3,086 ) (1,846 ) (464 ) 251,179
Unrealized loss on foreign currency translation
—   —   —   —   —   —   —   (790 ) (790 )
Unrealized gain on marketable equity securities
—   —   —   —   —   —   —   2,321 2,321
Net income
—   —   —   —   —   —   3,506 —   3,506

Series C Preferred Stock cash dividend ($7.00 per share
—   —   —   —   (210 ) —   —   —   (210 )
Series D Preferred Stock
—   —   100,000 1 9,999 —   —   —   10,000
Series D Preferred Stock dividend (7% per year)
—   —   —   —   (77 ) —   —   —   (77 )

Balance, December 31, 2006
7,900,869 $ 81 100,000 $ 1 $ 266,206 $ (3,086 ) $ 1,660 $ 1,067 $ 265,929

The accompanying notes are an integral part of these Consolidated Financial Statements.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

   For the Years Ended December 31,    For the Years Ended December 31,
   2005 2004 2003    2006 2005 2004
   (dollars in thousands)    (dollars in thousands)
Cash Flows from Operating Activities:

Reconciliation of net loss to net cash used by operating activities

Net Income
   $ 9,069 $ 23,706 $ 673
Reconciliation of net income (loss) to net cash used by operating activities

Net Income from continuing operations
   $ 1,953 $ (16,689 ) $ (11,595 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization
   16,684 22,578 20,860    21,641 16,051 16,714
Provision for loss
   —   (1,456 ) 104    —   —   (1,456 )
Amortization of deferred borrowing costs
   3,985 3,900 3,134    3,049 3,985 3,900
Gain on sale of real estate
   (40,848 ) (74,342 ) (28,144 )
Gain on land sales
   (11,421 ) (10,443 ) (10,994 )
Provision for asset impairment
   3,420 6,199 4,713    —   3,420 6,199
Equity in (income) loss of equity investees
   (968 ) 1,497 4,291    (890 ) (968 ) 1,497
Gain on extinguishment of debt
   —   —   (4,392 )
Gain on condemnation award
   —   —   (4,800 )
(Gain) loss on foreign currency transaction
   (292 ) (3,766 ) 3,309    (2 ) (292 ) (3,766 )
(Gain) loss allocated to minority interest
   112 1,194 (2,230 )    (393 ) 112 1,194
Income tax (benefit)
   (838 ) (803 ) (10,976 )
(Increase) decrease in interest receivable
   1,247 (1,209 ) (683 )    788 1,247 (1,209 )
Decrease in other assets
   782 9,173 1,670
Increase (decrease) in other assets
   (9,146 ) 782 9,173
Increase (decrease) in interest payable
   (269 ) (889 ) 311    664 (269 ) (889 )
Increase in other liabilities
   23,768 195 4,954
Increase (decrease) in other liabilities
   108 23,768 194

Net cash provided by (used in) operating activities
   16,690 (13,220 ) 3,770    5,513 19,901 (2,014 )
Cash Flows from Investing Activities:

Collections on notes receivable (including $2,490 in 2005, $718 in 2004, and $1,241 in 2003 from affiliates)
   6,160 8,851 4,651
Collections on notes receivable (including $2,490 in 2005 and $718 in 2004, from affiliates)
   12,033 6,160 8,851
Funding of notes receivable (including $3,297 in 2004 from affiliates)
   (11,752 ) (3,457 ) (736 )    (5,060 ) (11,752 ) (3,457 )
Acquisitions of real estate
   (170,333 ) (40,140 ) (14,250 )    (150,748 ) (170,333 ) (40,140 )
Real estate improvements
   (3,464 ) (9,328 ) (4,462 )
Real estate construction (including $ 1,714 in 2005, $5,625 in 2004, and $4,050 in 2003 to affiliates)
   (53,303 ) (152,684 ) (59,055 )
Real estate improvements and construction (including $1,714 in 2005, and $5,625 in 2004, to affiliates)
   (34,739 ) (56,767 ) (162,012 )
Proceeds from sale of real estate
   88,248 221,497 56,635    47,869 17,527 145,056
Payments made under interest rate swap agreement
   —   —   (87 )
Purchase of marketable equity securities
   —   —   (5,000 )
Deposits on pending purchase
   (2,670 ) (4,825 ) (9,784 )    (9,446 ) (2,670 ) (4,825 )
Payments (to) from advisor
   3,032 (39,867 ) 5,264    (1,684 ) 3,032 (39,867 )
Distributions (contributions) to equity investees
   (4,374 ) 1,007 (48 )    (5,024 ) (4,374 ) 1,007

Net cash used in investing activities
   (148,456 ) (18,946 ) (26,872 )    (146,799 ) (219,177 ) (95,387 )
Cash Flows from Financing Activities:

Payments on notes payable (including $398 in 2005, and $226 in 2004 to affiliates)
   (79,955 ) (276,137 ) (124,659 )
Payments on notes payable (including $398 in 2005 and $226 in 2004 to affiliates)
   (95,289 ) (79,955 ) (276,137 )
Proceeds from notes payable
   198,142 330,988 146,072    239,285 198,142 330,988
Dividends paid to preferred shareholders
   (210 ) (263 ) (74 )    (288 ) (210 ) (263 )
Repurchase of Common Stock
   —   (3,086 ) —      —   —   (3,086 )
Deferred financing costs
   (2,594 ) (3,925 ) (2,361 )    (6,477 ) (2,594 ) (3,925 )

Net cash provided by financing activities
   115,383 47,577 18,978    137,231 115,383 47,577

Net increase (decrease) in cash and cash equivalents
   (16,383 ) 15,411 (4,124 )    (4,055 ) (83,893 ) (49,824 )
Discontinued Operations:

Cash provided by (used in) operating activities
   (1,221 ) (3,949 ) 1,887
Cash provided by investing activities—sale of real estate
   4,617 71,459 63,348

Net cash provided by discontinued operations
   3,396 67,510 65,235

Cash and cash equivalents, beginning of year
   21,845 6,434 10,558    5,462 21,845 6,434

Cash and cash equivalents, end of year
   $ 5,462 $ 21,845 $ 6,434    $ 4,803 $ 5,462 $ 21,845

The accompanying notes are an integral part of these Consolidated Financial Statements.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

   For the Years Ended
December 31,
   2005    2004    2003
   (dollars in thousands)
Supplemental Disclosures of Cash Flow Information:

Cash paid for interest
   $ 42,081    $ 39,210    $ 43,016
Notes payable assumed on purchase of real estate
   13,006    15,033    2,650
Notes payable assumed by buyer on sale of real estate
   738    21,898    11,291
Funds collected by affiliate on sale of note receivable
   —      —      2,633
Notes receivable received from sale of real estate
   9,713    21,608    4,760
Real estate refinancing proceeds received by affiliate
   —      —      1,226
Real estate received from related party to satisfy debt
   1,631    36,198    10,700
Real estate sold to a related party to satisfy debt
   —      5,000    —
Note payable proceeds used by affiliate for purchase of real estate
   —      1,000    —
Note payable proceeds used by affiliate to satisfy debt
   —      1,260    —
Note payable paid-off on behalf of affiliate
   —      1,851    —
Subsidiary purchased from affiliate decreasing affiliate receivable
   4,101    —      —
Acquisition of real estate to satisfy note receivable
   4,207    —      —
Funds collected by affiliate for property damage insurance reimbursement
   8,182    —      —
Issuance of note payable for which cash proceeds were received by the advisor
   —      —      6,239
Unrealized foreign currency translation loss
   —      3,229    1,183
Unrealized gain on marketable securities
   866    1,580    —
Unrealized foreign currency translation gain
   935    —      —
Asset impairment write-down
   3,420    6,199    —
   For the Years Ended
December 31,
   2006    2005    2004
   (dollars in thousands)
Supplemental Disclosures of Cash Flow Information:

Cash paid for interest
   $ 50,652    $ 42,081    $ 39,210
Notes payable assumed on purchase of real estate
   10,475    13,006    15,033
Notes payable assumed by buyer on sale of real estate
   —      738    21,898
Note payable assumed, decreasing affiliate payable
   5,150    —      —
Notes receivable received from sale of real estate
   —      9,713    21,608
Real estate received from related party to satisfy debt
   12,214    1,631    36,198
Real estate sold to a related party to satisfy debt
   —      —      5,000
Note payable proceeds used by affiliate for purchase of real estate
   —      —      1,000
Note payable proceeds used by affiliate to satisfy debt
   —      —      1,260
Note payable paid-off on behalf of affiliate
   —      —      1,851
Subsidiary purchased from affiliate decreasing affiliate receivable
   —      4,101    —
Acquisition of real estate to satisfy note receivable
   —      4,207    —
Land exchange with non-affiliated party
   1,500    —      —
Funds collected by affiliate for property damage insurance reimbursement
   41,040    8,182    —
Unrealized foreign currency translation loss
   790    —      3,229
Unrealized gain on marketable securities
   2,321    866    1,580
Unrealized foreign currency translation gain (loss)
   —      935    —
Asset impairment write-down
   —      3,420    6,199
Issue of Series D Preferred Stock and reduction of payable to affiliate
   10,000    —      —
Increase in minority interest related to acquisition of real estate
   15,321    —      —
The accompanying notes are an integral part of these Consolidated Financial Statements.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Transcontinental Realty Investors, Inc. and consolidated entities have been prepared in conformity with accounting principles generally accepted in the United States of America, the most significant of which are described in NOTE 1. “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.” The Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts.
Effective March 31, 2003, TCI financial results have been consolidated inwith the American Realty Investors, Inc. (“ARI”) Form 10-K and related consolidated financial statements. As of December 31, ~~2005,~~2006, ARI owned 82.2% of the outstanding TCI common shares.
Certain balances for ~~2003~~2004 and ~~2004~~2005 have been reclassified to conform to the ~~2005~~2006 presentation.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and business.Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, is successor to a California business trust which was organized on September 6, 1983, and commenced operations on January 31, 1984. TCI invests in real estate through direct ownership, leases and partnerships and it also invests in mortgage loans on real estate. In October 2001, TCI announced a preliminary agreement for the acquisition of TCI by American Realty Investors, Inc. (“ARI”). See NOTE 23. “COMMITMENTS AND CONTINGENCIES AND LIQUIDITY.”
Basis of consolidation.The accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in which the Company has a controlling interest, including where the Company has been determined to be a primary beneficiary of a variable interest entity in accordance with the provisions and guidance of Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46(R)”) or meets certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). Controlling interest in an entity is normally determined by the ownership of a majority of the entity’s voting interests; however, other determining factors include, but may not be limited to, whether the Company provides significant financial support and bears a majority of the financial risks, authorizes certain capital transactions such as the purchase, sale or financing of material assets or makes operating decisions that materially affect the entity’s financial ~~results~~results. All significant intercompany balances and transactions have been eliminated in consolidation.
Accounting estimates.In the preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates.
Interest recognition on notes receivable.It is TCI’s policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of the underlying collateral exceeds the carrying value of the receivable.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance for estimated losses.Valuation allowances are provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the Company’s investment in the note exceeds the estimated fair value of the collateral securing such note.
Recent Accounting pronouncements.In ~~December 2004,~~February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial ~~Accounting Standards Board~~Instruments—an Amendment of FASB Statements No. 133 and 140” (“~~FASB”~~SFAS No. 155”) ~~issued Statement~~. The purpose of ~~Financial Accounting Standards (“SFAS”)~~SFAS No. ~~123-R, “Share-Based Payment.” This Statement addresses~~155 is to simplify the accounting for ~~share-based payment transactions in which a company receives employee services in exchange for (a) equity~~certain hybrid financial instruments ~~of the company, such as stock options, or (b) liabilities, such as those related to performance units, that are based on the~~by permitting fair value ~~of the company’s equity instruments or~~re-measurement for any hybrid financial instrument that ~~may be settled by the issuance of such equity instruments.~~
contains an embedded derivative that otherwise would require bifurcation. SFAS No. ~~123-R, which~~155 is effective for all financial instruments acquired or issued after the ~~Company~~ beginning ~~in the~~of an entity’s first ~~quarter of~~ fiscal year ~~2006, eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, and generally requires~~ that such transactions be accounted for using prescribed fair-value-based methods. SFAS No. 123-R permits public companies to adopt its requirements using one of two methods: (a) a “modified prospective” method in which compensation costs are recognized beginning with the effective date based on the requirements of SFAS No. 123-R for all share-based payments grantedbegins after the effective date and based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123-R that remain unvested on the effective date or (b) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits companies to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either for all periods presented or prior interim periods of the year of adoption.
~~The Company has decided to adopt SFAS No. 123-R using the modified prospective method. SFAS No. 123(R) must be applied~~September 15, 2006. We do not only to new awards but to previously granted awards that are not fully vested on the effective date. All of TCI’s options were fully vested as of the effective date, and TCI has no outstanding options that were granted, modified or settled after the effective date, so additional compensation costs for previously granted awards will not be recognized. In December 2005, the Company’s Board of Directors cancelled the stock option plan, and at the present time, the Company has no plans to offer additional stock options. The Company does not believeexpect the adoption of SFAS No. ~~123(R) will have a material impact on its financial statements or results of operations.~~
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (“Statement No. 154”). Statement No. 154, which replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of Statement No. 154 is not expected155 to have a material impact on our ~~consolidated financial position,~~cash flows, results of operations, financial position, or liquidity.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an Amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 requires recognition of a servicing asset or a servicing liability each time an entity undertakes an obligation to service a financial asset by entering into a servicing contract. SFAS No. 156 also requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value and subsequently measured at fair value at each reporting date. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not expect the adoption of SFAS No. 156 to have a material impact on our cash flows, results of ~~TCI.~~operations, financial position, or liquidity.
In June ~~2005,~~2006, the FASB ~~ratified~~issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the ~~consensus~~accounting for uncertainty in ~~EITF Issue~~income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“Issue 04-5”), which48 also provides guidance on description, classification, interest and penalties, accounting in ~~determining whether~~interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN No. 48 to have a ~~general partner controls~~material impact on our cash flows, results of operations, financial position, or liquidity.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of the effects of prior period misstatements in quantifying current year misstatements for the purpose of a ~~limited partnership. Issue 04-5 states that~~materiality assessment. SAB 108 requires the ~~general partner~~quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as the “dual approach” because it requires quantification of errors under both the iron curtain and the roll-over methods. The roll-over method focuses primarily on the impact of a misstatement on the income statement—including the reversing effect of prior year misstatements—but its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. SAB 108 was effective for financial statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnershipmaterial impact on our cash flows, results of operations, financial position or ~~otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in~~liquidity.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~significant decisions that would be expected to be made~~In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. The new FASB rule defines fair value, establishes a framework for measuring fair value in ~~the ordinary course of the limited partnership’s business~~generally accepted accounting principles, or GAAP, and ~~thereby preclude the general partner from exercising unilateral control over the partnership.~~expands disclosures about fair value measurements. The adoption of Issue 04-5 by us for new or modified limited partnership arrangements is effective June 30, 2005 and for existing limited partnership arrangements effective January 1, 2006. We do not expect that we will be required to consolidate our current unconsolidated joint venture investments nor do we expect Issue 04-5 to have a material effect on our consolidated financial statements.
~~At its June 2005 meeting, the EITF reached a consensus regarding Issue No. 05-6 (EITF 05-6), “Determining the Amortization Period for Leasehold Improvements.” EITF 05-6~~statement is effective for ~~periods~~financial statements issued for fiscal years beginning after ~~June 29, 2005. The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to~~November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of acquisition or purchase. The adoption of EITF 05-6 did not have a material impact, if any, to our financial condition or results of ~~operations.~~operations from the adoption of SFAS No. 157.
Real estate held for investment and depreciation.Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”) requires that a property be considered impaired, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value of the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property’s remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from five to 40 years.
Real estate held-for-sale.Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated cost of sale. SFAS No. 144 also requires properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale property’s carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property’s estimated fair value less costs of sale is recorded as an adjustment to the property’s carrying amount, but not in excess of the property’s carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated.
Foreign Currency Translation.    Assets and liabilities of TCI’s foreign subsidiaries are translated using exchange rates as of the current balance sheet date, and revenues and expenses are translated using exchange rates as determined throughout the year. Unrealized gains or losses from translations are included in Accumulated Other Comprehensive Income, as a separate component of the Company’s stockholders’ equity. Gains or losses resulting from foreign currency transactions are translated to local currency at the rates of exchange prevailing at the dates of the transactions. The effect of the transaction’s gain or loss is included in the caption “Gain/(loss) on foreign currency transaction” in TCI’s Consolidated Statement of Operations.
Recognition of Rental Income.Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. Rental income for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less. For hotel properties, revenues for room sales and guest services are recognized as rooms are occupied and services are rendered.
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”
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
(“ (“SFAS No. 66”), as amended by SFAS No. 144. Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using the deposit, installment, cost recovery or financing method, whichever is appropriate. When TCI provides seller financing, gain is not recognized at the time of sale unless the buyer’s initial investment and continuing investment are deemed to be adequate as determined by SFAS 66 guidelines.
Investment in non-controlled equity investees.   ��The equity method is used to account for investments in partnerships which TCI does not control but for which significant influence can be exerted, and for its investment
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
in the shares of common stock of Income Opportunity Realty Investors, Inc., (“IORI”) and ARI. Under the equity method, an initial investment, recorded at cost, is increased by a proportionate share of the investee’s operating income and any additional advances and decreased by a proportionate share of the investee’s operating losses and distributions received.
Operating segments.Management has determined reportable operating segments to be those that are used for internal reporting purposes, which disaggregates operations by type of real estate.
Fair value of financial instruments.The following assumptions were used in estimating the fair value of notes receivable and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For non-performing notes receivable, the estimated fair value of TCI’s interest in the collateral property was used. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities.
Cash equivalents.For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.
Earnings per share.Income (loss) per share is presented in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” Income (loss) per share is computed based upon the weighted average number of shares of Common Stock outstanding during each year. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the year. Dilutive common equivalent shares consist of stock options and convertible preferred stock. The weighted average common shares used to calculate diluted earnings per share for the years ended December 31, 2005 ~~2004~~ and ~~2003~~2004 exclude 240,827, 264,874 and ~~266,686~~ shares relating to options and convertible preferred stock to purchase shares of common stock. These dilutive shares were excluded from the calculation of dilutive earnings per share because the effect of their inclusion would be antidilutive.
Stock-based employee ~~compensation~~compensation.    ~~.    TCI accounts~~The Company previously accounted for its stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, ~~(“APB 25”),~~ “Accounting for Stock Issued to ~~Employees,~~Employees” (“APB 25”). In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payments”, which revised SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements and ~~related interpretations. Accordingly, no compensation expense is recognized for fixed~~forfeitures to be estimated at the grant date rather than as they occur. The Company previously based its estimated forfeiture rate on historical forfeitures of all stock option ~~plans because~~grants. The Company adopted SFAS 123(R) effective January 1, 2006 using the ~~exercise prices~~modified-prospective method and applied the provisions of ~~employee~~SFAS 123(R) to all share-based compensation. All of TCI’s stock options ~~equal~~were fully vested as of January 1, 2006 and TCI had no outstanding stock option grants that were modified or ~~exceed~~settled after January 1, 2006; therefore, the ~~market prices~~adoption of ~~the underlying stock~~SFAS 123(R) had no material effect on the ~~dates~~Company’s results of ~~grant.~~operations for the year ended December 31, 2006.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~The following table represents~~Had the ~~effect~~compensation cost for options issued prior to the Company’s adoption of SFAS 123(R) been determined based on the fair values at the grant dates for awards granted in accordance with the provisions of SFAS 123(R), the Company’s net income and ~~earnings~~net income per share ~~if TCI had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting~~ for ~~Stock-Based Compensation,” to stock-based employee compensation:~~

   2005 2004 2003
   (dollars in thousands)
Net income (loss) applicable to common shares, as reported
   $ 8,859 $ 23,496 $ 547
Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects
   (154 ) (137 ) (109 )

Proforma net income applicable to common shares
   $ 8,705 $ 23,359 $ 438

Net income (loss) per share:

Basic, as reported
   $ 1.12 $ 2.90 $ .07
Basic, pro forma
   $ 1.10 $ 2.88 $ .05
Diluted, as reported
   $ 1.12 $ 2.90 $ .07
Diluted, pro forma
   $ 1.10 $ 2.88 $ .05
~~The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:~~

   2005 2004
Dividend yield
   —   —
Expected volatility
   34.00 % 35.10 %
Risk-free interest rate
   4.26 % 4.04 %
Expected lives (in years)
   9.0 9.0
~~The weighted average fair value per share of options granted in~~ 2005 and 2004 ~~was $9.35 and $11.82, respectively.~~
would have decreased to the proforma amounts indicated in the following table:
~~Index to Financial Statements~~
   2005 2004
   (dollars in thousands,
except per share
amounts)
Net income (loss) applicable to common shares, as reported
   $ 8,859 $ 23,496
Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects
   (154 ) (137 )

Proforma net income applicable to common shares
   $ 8,705 $ 23,359

Net income (loss) per share:

Basic, as reported
   $ 1.12 $ 2.91
Basic, pro forma
   $ 1.10 $ 2.88
Diluted, as reported
   $ 1.12 $ 2.91
Diluted, pro forma
   $ 1.10 $ 2.88
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~NOTE 2.~~
NOTE 2.REAL ESTATE
In 2006, TCI purchased the following properties:
Property
Location
Units/
Sq. Ft./Acres

Purchase
Price

Net Cash
Paid/
(Received)
Debt
Incurred Interest
Rate Maturity
Date
Apartments

Anderson Estates
Oxford, MS 48 Units $ 1,144 $ 148 $ 996 9.50 %⁽¹⁾ 12/20
David Jordan Phase II
Greenwood, MS 32 Units 743 98 645 8.50 ⁽¹⁾ 4/19
David Jordan Phase III
Greenwood, MS 40 Units 812 122 690 8.75 ⁽¹⁾ 7/22
Leflore Estates
Greenwood, MS 104 Units 2,114 337 1,777 7.00 ⁽¹⁾ 2/22
Monticello III Estate
Monticello, AR 32 Units 644 96 548 7.00 ⁽¹⁾ 1/22
Riverwalk Phase I
Greenwood, MS 32 Units 455 99 356 8.50 ⁽¹⁾ 2/19
Riverwalk Phase II
Greenwood, MS 72 Units 1,584 226 1,358 8.25 ⁽¹⁾ 2/19

7,496 1,126 6,370

Office Buildings

305 Baronne & 217 Rampart
New Orleans, LA 1.1 Acres &
7,897 Sq.Ft. 3,985 3,483 —   —   —
Clark Garage
New Orleans, LA 600 spaces 9,925 564 9,025 9.25 ⁽⁸⁾ 6/07
One Hickory
Farmers Branch, TX 102,615 Sq. Ft. 12,214 —   — ⁽²⁾ —   —

26,124 4,047 9,025

Land

Bolivar Estates
Bolivar City, MS 24.8 Acres 650 649 —   —  —   —
Broadway Estates
Broadway City, MS 12.3 Acres 210 222 —   —  —   —
Castleglen
Garland, TX 10.6 Acres 723 690 —   —  —   —
Circle C Ranch
Austin, TX 1,092 Acres 25,569 101 25,569 8.75 3/08
Copperridge Condo #211
Dallas, TX 1 Unit 41 ⁽⁴⁾ 41 —   —   —
Copperridge Condo #323
Dallas, TX 1 Unit 42 ⁽⁴⁾ 42 —   —   —
Creekside Land
Ft. Worth, TX 30.1 Acres 2,105 2,097 —   —   —
Crowley Land
Ft. Worth, TX 24.9 Acres 1,500 6 —   —   —
Dedeaux Road
Gulfport, MS 10.0 Acres 1,500 —   1,520 13.00 9/07
Diplomat Road
Farmers Branch, TX 11.7 Acres 1,775 —   —   —   —
Ewing 8
Addison, TX 16.8 Acres 15,361 3,444 10,752 ⁽⁵⁾ 5.5 12/09
Forney Land
Kaufman County,TX 34.87 Acres 3,945 3,926 —   —   —
Galleria East Showcase
Dallas, TX 15 Acres 25,161 7,106 18,362 9.75 ⁽⁸⁾ 11/07 ⁽⁶⁾
Keller Springs Lofts
Addison, TX 1.75 Acres 697 —   690 9.25 ⁽⁸⁾ 10/07
Kinwest (Hackberry Creek Office Park)
Irving, TX 8.0 Acres 1,737 101 1,580 10.25 ⁽⁸⁾ 10/07
LaDue/Walker
Farmers Branch, TX 99 Acres 21,500 —   9,949 ⁽³⁾ 8.6 8/08
Lincoln Estates
Carthage, MS 18 Acres 156 163 —   —   —
Longfellow
Longview, TX 13.7 Acres 696 719 —   —   —
Mason Park
Katy, TX 13 Acres 2,225 —   —   —   —
Parc at Clarksville
Clarksville, TN 10.4 Acres 541 —   547 ⁽⁷⁾ 8.00 1/48
Parkway Estates
Greenwood, MS 20.1 Acres 682 364 487 8.50 1/07
Pecan Pointe
Temple, TX 12.8 Acres 1,198 1,195 1,650 8.25 12/07
Pioneer Crossing
Austin, TX 38.5 Acres 614 614 —   —   —
RB Land
Dallas, TX 86.2 Acres 668 673 —   —   —
Ridgepoint Drive
Irving, TX 0.6 Acres 179 172 —   —   —
Ritchie Road
Waco, TX 319&31 Acres 2,677 897 1,735 8.58 ⁽⁸⁾ 11/08
Senlac Hutton
Farmers Branch, TX 5.9 Acres 1,050 949 —   —   —
Southwood Plantation
Tallahassee, FL 14.5 Acres 1,150 477 748 ⁽¹⁾ 8.50 2/08
Sunflower Estates
Sunflower City, MS 18.7 Acres 187 212 —   —   —
Valley Ranch 20
Farmers Branch, TX 20 Acres 4,673 1,892 3,038 8.50 2/08
Waco 42
Waco, TX 42.8 Acres 531 112 398 8.00 5/12
Woodmont Fairway Office
Dallas, TX 5.9 Acres 3,833 1,014 3,000 ⁽¹⁾ 8.25 1/07
Woodmont Galleria West
Farmers Branch, TX 7.2 Acres 5,846 808 5,230 9.25 ⁽⁸⁾ 12/07
Woodmont Galleria West
Farmers Branch, TX 2.0 Acres 1,604 184 1,475 9.25 ⁽⁸⁾ 12/07
Woodmont Merit Drive
Dallas, TX 9.3 Acres 4,560 1,868 2,964 ⁽²⁾ 8.0 3/07
Yazoo Estates
Yazoo City, MS 15.1 Acres 120 213 —   —   —

135,706 30,951 89,694

$ 169,326 $ 36,124 $ 105,089

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) Assumed debt.
(2) Property purchased from IORI for extinguishment of note receivable.
(3) Property purchased from ARI.
(4) Purchased for interest in condominium community. Intend to develop land.
(5) Financed by seller.
(6) Option to extend by paying 1.5% loan fee and 1% consulting fee on 10/07.
(7) Construction loan funding.
(8) Variable rate.
In 2005, TCI purchased the following properties:

Property

Location

Units/
Sq. Ft./Acres

Purchase
Price

Net Cash
Paid/
(Received)

Debt
Incurred
Interest
Rate
Maturity
Date

Location

Units/
Sq. Ft./Acres

Purchase
Price

Net Cash
Paid/
(Received)
Debt
Incurred Interest
Rate Maturity
Date
Apartments

Foxwood⁽³⁾
   Memphis, TN    220 Units    $ 6,988    $ —   $ 5,609 ⁽¹⁾ 6.54 % 01/08    Memphis, TN    220 Units    $ 6,988    $ —   $ 5,609 ⁽¹⁾ 6.54 % 1/08
Legends of El Paso⁽⁴⁾
   El Paso, TX    240 Units    2,247    464 1,774 5.50 01/47    El Paso, TX    240 Units    2,247    464 1,774 5.50 1/47
Mission Oaks⁽⁴⁾
   San Antonio, TX    228 Units    573    573 —   5.30 09/46    San Antonio, TX    228 Units    573    573 —   5.30 9/46
Parc at Metro Center⁽⁴⁾
   Nashville, TN    144 Units    817    —   817 5.65 09/46    Nashville, TN    144 Units    817    —   817 5.65 9/46

         10,625    1,037 8,200

Office Buildings

600 Las Colinas
   Las Colinas, TX    509,829 Sq. Ft.    56,000    17,663 40,487 ⁽⁹⁾ 6.16 ⁽⁹⁾ 01/13 ⁽⁹⁾    Las Colinas, TX    509,829 Sq. Ft.    56,000    17,663 40,487 ⁽⁹⁾ 6.16 ⁽⁹⁾ 1/13 ⁽⁹⁾
Park West
   Farmers Branch, TX    243,416 Sq. Ft.    10,000    4,715 6,500 7.50 ⁽²⁾ 05/06    Farmers Branch, TX    243,416 Sq. Ft.    10,000    4,715 6,500 7.50 ⁽²⁾ 5/06
Two Hickory⁽³⁾
   Farmers Branch, TX    96,127 Sq. Ft.    11,502    —   7,430 ⁽¹⁾ 4.90 ⁽²⁾ 05/06    Farmers Branch, TX    96,127 Sq. Ft.    11,502    —   7,430 ⁽¹⁾ 4.90 ⁽²⁾ 5/06

         77,502    22,378 54,417

Shopping Centers

Willowbrook Village
   Coldwater, MI    179,741 Sq. Ft.    8,200    2,223 6,495 7.28 02/13    Coldwater, MI    179,741 Sq. Ft.    8,200    2,223 6,495 7.28 2/13

         8,200    2,223 6,495

Land

Addison Park – Residential
   Addison, TX    1.93 Acres    1,475    381 1,180 8.00 ⁽²⁾ 11/06    Addison, TX    1.9 Acres    1,475    381 1,180 8.00 ⁽²⁾ 11/06
Addison Park – Retail
   Addison, TX    3.37 Acres    783    201 626 8.00 ⁽²⁾ 11/06    Addison, TX    3.4 Acres    783    201 626 8.00 ⁽²⁾ 11/06
Alliance Airport
   Tarrant County, TX    12.724 Acres    850    892 —   —   —      Tarrant County, TX    12.7 Acres    850    892 —   —   —
Alliance 8
   Tarrant County, TX    8 Acres    657    332 408 7.75 ⁽²⁾ 05/06    Tarrant County, TX    8 Acres    657    332 408 7.75 ⁽²⁾ 5/06
Alliance 52
   Tarrant County, TX    51.887 Acres    2,538    1,054 1,610 7.75 ⁽²⁾ 05/06    Tarrant County, TX    51.9 Acres    2,538    1,054 1,610 7.75 ⁽²⁾ 5/06
Denton
   Denton, TX    25.928 Acres    2,100    862 1,365 7.75 ⁽²⁾ 04/07    Denton, TX    25.9 Acres    2,100    862 1,365 7.75 ⁽²⁾ 4/07
Denton-Andrew B
   Denton, TX    22.918 Acres    853    345 554 8.00 ⁽²⁾ 06/07    Denton, TX    22.9 Acres    853    345 554 8.00 ⁽²⁾ 6/07
Denton-Andrew C
   Denton, TX    5.217 Acres    303    126 197 8.00 ⁽²⁾ 06/07    Denton, TX    5.2 Acres    303    126 197 8.00 ⁽²⁾ 6/07
Kaufman Cogen
   Kaufman County, TX    2,567 Acres    5,498    6,110 —   —   —      Kaufman County, TX    2,567 Acres    5,498    6,110 —   —   —
Kaufman Taylor
   Kaufman County, TX    30.999 Acres    465    486 —   —   —      Kaufman County, TX    31 Acres    465    486 —   —   —
Luna
   Farmers Branch, TX    2.606 Acres    250    257 —   —   —      Farmers Branch, TX    2.6 Acres    250    257 —   —   —
Mandahl Bay
   US Virgin Islands    50.4 Acres    7,000    4,101 3,500 7.00 07/05 ⁽⁸⁾    U.S. Virgin Islands    50.4 Acres    7,000    4,101 3,500 7.00 7/05 ⁽⁸⁾
Mandahl Bay (Chung)
   US Virgin Islands    .75 Acres    95    101 �� —   —   —      U.S. Virgin Islands    .8 Acres    95    101 —   —   —
Mandahl Bay (Gilmore)
   US Virgin Islands    1.02 Acres    96    104 —   —   —      U.S. Virgin Islands    1.0 Acres    96    104 —   —   —
Mandahl Bay (Inn)
   US Virgin Islands    14.992 Acres    2,500    2,731 —   —   —      U.S. Virgin Islands    15.0 Acres    2,500    2,731 —   —   —
Mandahl Bay (Marina)
   US Virgin Islands    24.02 Acres    2,000    2,101 —   —   —      U.S. Virgin Islands    24.0 Acres    2,000    2,101 —   —   —
Mansfield
   Mansfield, TX    21.892 Acres    1,450    577 943 7.50 ⁽²⁾ 03/07    Mansfield, TX    21.9 Acres    1,450    577 943 7.50 ⁽²⁾ 3/07
McKinney Ranch
   McKinney, TX    464.93 Acres    45,975    19,992 28,051 8.00 12/08    McKinney, TX    464.9 Acres    45,975    19,992 28,051 8.00 12/08
Pantaze
   Dallas, TX    5.997 Acres    265    276 —   —   —      Dallas, TX    6.0 Acres    265    276 —   —   —
Payne I & II⁽¹⁰⁾
   Las Colinas, TX    149.72 Acres    1,000    1,066 —   —   —      Las Colinas, TX    149.7 Acres    1,000    1,066 —   —   —
Senlac
   Farmers Branch, TX    11.94 Acres    625    643 ⁽⁷⁾ —   —   —      Farmers Branch, TX    11.9 Acres    625    643 ⁽⁷⁾ —   —   —
Senlac VHP
   Farmers Branch, TX    3.95 Acres    595    623 —   —   —      Farmers Branch, TX    4.0 Acres    595    623 —   —   —
Southwood Plantation⁽⁵⁾
   Tallahassee, FL    12.95 Acres    525    555 —   —   —      Tallahassee, FL    13.0 Acres    525    555 —   —   —
TuTu
   US Virgin Islands    19.5 Acres    1,350    1,401 —   —   —      U.S. Virgin Islands    19.5 Acres    1,350    1,401 —   —   —
West End⁽⁶⁾
   Dallas, TX    .158 Acres    49    52 —   —   —      Dallas, TX    .16 Acres    49    52 —   —   —
Whorton
   Benton County, AR    79.68 Acres    4,332    702 3,828 6.08 ⁽²⁾ 01/07    Benton County, AR    79.7 Acres    4,332    702 3,828 6.08 ⁽²⁾ 1/07
Wilmer 88
   Dallas, TX    87.62 Acres    638    668 —   —   —      Dallas, TX    87.6 Acres    638    668 —   —   —

         84,267    46,739 42,262

         $ 180,594    $ 72,377 $ 111,374

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) Assumed debt.
(2) Variable rate.
(3) Property received from ARI, a related party, for payment of a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
(4) Initial construction loan funding to purchase land and begin apartment construction. Does not represent actual units purchased.
(5) Purchased a 50% interest in this land tract.
(6) Purchased a 37.5% interest in this land tract.
(7) Funds for purchase were provided by ARI, a related party.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
(8) Debt was extended to April 2006, with an increase in the interest rate to 8.0%.
(9) Represents two loans on the building: A first lien of $35.3 million at 6.16% that matures in January 2013. A second lien of $5.1 million at 6.16% that matures in January 2013.
(10) TCI dissolved the 50% Tenant-In-Common interest in the Payne Land, resulting in TCI owning the 109.85 acre Payne I tract and the 39.87 acre Payne II tract. TCI paid an additional $1.0 million for a 30.43 flood plain acreage difference between the two parties.
In ~~2004,~~2006, TCI ~~purchased~~sold the following properties:

Property

Location

Units/
Sq. Ft./Acres

Purchase
Price

Net Cash
Paid/
(Received)

Debt
Incurred
Interest
Rate
Maturity
Date

Apartments

288 City Park⁽¹⁾
   Houston, TX    240 Units    $ 3,056    $ 612 $ 2,444 5.95 % 04/45
Blue Lake Villas II⁽¹⁾
   Waxahachie, TX    70 Units    729    (164 ) 729 5.80 04/45
Bridges on Kinsey⁽¹⁾
   Tyler, TX    232 Units    2,291    596 1,687 5.74 08/45
Dakota Arms⁽¹⁾
   Lubbock, TX    208 Units    2,472    681 1,791 5.85 06/45
Laguna Vista⁽¹⁾
   Farmers Branch, TX    206 Units    2,424    902 1,522 5.50 09/46
Lake Forest⁽¹⁾
   Houston, TX    240 Units    2,316    (470 ) 2,316 5.60 03/45
Parc at Maumelle⁽¹⁾
   Maumelle, AR    240 Units    3,120    916 2,204 5.37 07/46
Treehouse⁽²⁾
   Irving, TX    160 Units    7,519    (498 ) 5,027 ⁽³⁾ 5.00 08/13
Vistas of Vance Jackson⁽¹⁾
   San Antonio, TX    240 Units    3,550    771 2,779 5.78 06/45
Wildflower Villas⁽¹⁾
   Temple, TX    220 Units    2,045    79 1,966 5.99 10/45
Commercial

Executive Court⁽⁴⁾
   Memphis, TN    41,840 Sq. Ft.    1,970    —   —   —   —
Land

Cooks Lane land
   Ft. Worth, TX    23.242 Acres    1,000    1,034 —   —   —
Denton-Coonrod land
   Denton, TX    82.203 Acres    1,644    1,046 840 6.25 11/06
DeSoto land
   DeSoto, TX    21.897 Acres    2,516    1,364 1,265 6.25 11/06
Granbury Station land
   Ft. Worth, TX    15.696 Acres    923    236 738 7.00 09/07
Lacy Longhorn land⁽⁵⁾
   Farmers Branch, TX    17.115 Acres    4,474    —   —   —   —
Los Colinas land⁽⁶⁾
   Los Colinas, TX    239.2 Acres    39,145    —   10,006 ⁽⁷⁾ —   ⁽⁷⁾ —   ⁽⁷⁾
Lubbock land
   Lubbock, TX    2.866 Acres    224    224 —   —   —
Railroad land
   Dallas, TX    .293 Acres    708    704 —   —   —
Rogers land
   Rogers, AR    20.08 Acres    1,390    619 1,130 10.50 04/05
Vista Ridge land⁽⁸⁾
   Lewisville, TX    14.216 Acres    2,585    —   —   —   —
West End land⁽⁹⁾
   Dallas, TX    .158 Acres    71    71 —   —   —
~~(1)~~ ~~Initial construction loan funding to purchase land and begin apartment construction. Does not represent actual units purchased.~~
~~(2)~~ ~~Purchased from IORI, a related party, for assumption of debt and a note receivable, less $498,000 in cash received.~~
~~(3)~~ ~~Assumed debt.~~
~~(4)~~ ~~Property received from ARI, a related party, for payment of a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”~~
~~(5)~~ ~~Property received from ARI, a related party, for a decrease of $4.5 million to TCI’s affiliate receivable with Prime.~~
~~(6)~~ The following tracts of land were purchased from ARI, a related party, for a decrease of $29.1 million to TCI’s affiliate receivable from Prime: Payne, LCLLP, Rochelle I & II and Valley Ranch. TCI owns a 50% Tenant-in-Common interest in the 268 acre Payne tract.
~~(7)~~ Includes $3.1 million assumed debt on the LCLLP tract with an interest rate of 7.0% and a maturity date of 12/06 and $6.9 million assumed debt on the Rochelle I & II and Valley Ranch tracts with an interest rate of prime plus 3.0% (currently 10.5%) and a maturity date of 11/05. The debt on Rochelle I & II and Valley Ranch was extended to 11/06.
Property
   Location    Units/Acres/
Rooms/Sq. Ft.    Sales
Price
Net Cash
Received
   Debt
Discharged    Gain
on Sale
Apartments

Apple Lane
   Lawrence, KS    75 Units    $ 2,600    $ 1,173    $ 1,290    $ 1,273
Plantation
   Tulsa, OK    138 Units    2,750    638    2,191    432
Timbers on Broadway
   Tyler, TX    180 Units    3,500    —      2,224    1,124
Will-O-Wick
   Pensacola, FL    152 Units    6,500    2,806    2,827    2,860

         15,350    4,617    8,532    5,689

Land

Fruitland Land
   Fruitland, FL    4.0 Acres    1,550    1,462    —      1,279
Hollywood Casino
   Farmers Branch, TX    10.4 Acres    3,225    —      —      331
Hollywood Casino
   Farmers Branch, TX    3.4 Acres    2,006    1,087    900    425
Mandahl Bay
   U.S. Virgin Islands    1.5 Acres    525    265    213    236
McKinney Ranch
   McKinney, TX    123.9 Acres    16,591    6,004    10,051    3,529
McKinney Ranch
   McKinney, TX    44.5 Acres    10,289    10,031    —      5,302
Woodmont Group I and II
   Dallas, TX    4.9 Acres    3,648    1,518    1,806    319

         37,834    20,367    12,970    11,421

         $ 53,184    $ 24,984    $ 21,502    $ 17,110

~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~(8)~~ ~~Property received from ARI, a related party, for a decrease of $2.6 million to TCI’s affiliate receivable from Prime.~~
~~(9)~~ ~~TCI purchased a 50% interest in this land tract.~~
In 2005, TCI sold the following properties:

Property

Location
   Units/ Acres/
Rooms/Sq. Ft.    Sales
Price
Net Cash
Received

Debt
Discharged
Gain
on Sale
Location
   Units/Acres/
Rooms/Sq. Ft.
Sales
Price
   Net Cash
Received Debt
Discharged Gain
on Sale
Apartments

By The Sea
   Corpus Christi, TX    153 Units    $ 7,450    $ 2,050 $ 5,165 $ 1,343    Corpus Christi, TX    153 Units    $ 7,450    $ 2,050 $ 5,165 $ 1,343
Terrace Hills
   El Paso, TX    310 Units    12,300    5,467 5,890 6,527    El Paso, TX    310 Units    12,300    5,467 5,890 6,527

         19,750    7,517 11,055 7,870

Office Buildings

9033 Wilshire
   Los Angeles, CA    44,253 Sq. Ft.    12,000    4,116 6,506 2,162    Los Angeles, CA    44,253 Sq. Ft.    12,000    4,116 6,506 2,162
Bay Plaza I
   Tampa, FL    75,780 Sq. Ft.    4,682    3,253 961 919    Tampa, FL    75,780 Sq. Ft.    4,682    3,253 961 919
Bay Plaza II
   Tampa, FL    78,882 Sq. Ft.    4,719    1,114 3,284 (199 )    Tampa, FL    78,882 Sq. Ft.    4,719    1,114 3,284 (199 )
Institute Place
   Chicago, IL    144,915 Sq. Ft.    14,460    4,843 7,792 10,061    Chicago, IL    144,915 Sq. Ft.    14,460    4,843 7,792 10,061

         35,861    13,326 18,543 12,943

Industrial Warehouses

5700 Tulane
   Atlanta, GA    67,850 Sq. Ft.    816    738 —   294    Atlanta, GA    67,850 Sq. Ft.    816    738 —   294

Shopping Centers

Promenade
   Highland Ranch, CO    133,558 Sq. Ft.    14,250    6,192 6,651 6,601    Highland Ranch, CO    133,558 Sq. Ft.    14,250    6,192 6,651 6,601

Hotels

Majestic Inn
   San Francisco, CA    57 Rooms    7,900    3,487 3,950 3,272    San Francisco, CA    57 Rooms    7,900    3,487 3,950 3,272

Land

Alamo Springs/Lemmon Carlisle
   Dallas, TX    2.82 Acres    7,674    5,587 1,744 2,394    Dallas, TX    2.8 Acres    7,674    5,587 1,744 2,394
Granbury Station
   Fort Worth, TX    15.696 Acres    1,003    265 738 ⁽¹⁾ 10    Fort Worth, TX    15.7 Acres    1,003    265 738 ⁽¹⁾ 10
LCLLP
   Las Colinas, TX    4.3 Acres    1,873    511 1,290 1,327    Las Colinas, TX    4.3 Acres    1,873    511 1,290 1,327
McKinney Ranch
   McKinney, TX    1.328 Acres    347    325 —   191    McKinney, TX    1.3 Acres    347    325 —   191
McKinney Ranch
   McKinney, TX    27.192 Acres    10,070    2,214 ⁽²⁾ —   —   ⁽³⁾    McKinney, TX    27.2 Acres    10,070    2,214 ⁽²⁾ —   — ⁽³⁾
McKinney Ranch
   McKinney, TX    3.73 Acres    1,381    290 ⁽⁴⁾ —   —   ⁽⁵⁾    McKinney, TX    3.7 Acres    1,381    290 ⁽⁴⁾ —   — ⁽⁵⁾
Round Mountain
   Lakeway, TX    10 Acres    1,500    251 ⁽⁶⁾ —   1,073    Lakeway, TX    10.0 Acres    1,500    251 ⁽⁶⁾ —   1,073
West End
   Dallas, TX    .7978 Acres    2,259    2,099 —   1,259    Dallas, TX    .8 Acres    2,259    2,099 —   1,259
West End
   Dallas, TX    .826 Acres    2,430    213 2,000 1,448    Dallas, TX    .8 Acres    2,430    213 2,000 1,448

         28,537    11,755 5,772 7,702

         $ 107,114    $ 43,015 $ 45,971 $ 38,682

(1) Assumed debt.
(2) TCI provided $7.6 million of seller financing. See Note 3. “NOTES AND INTEREST RECEIVABLE.”
(3) Gain of $7.0 million deferred due to insufficient initial buyer investment.
(4) TCI provided $1.0 million of seller financing. See Note 3. “NOTES AND INTEREST RECEIVABLE.”
(5) Gain of $307,000 deferred due to insufficient initial buyer investment.
(6) TCI provided $1.1 million of seller financing. See Note 3. “NOTES AND INTEREST RECEIVABLE.”
Following is a brief description of the most significant property acquisitions and sales in 2006:
~~Index~~New Orleans Properties
In August 2006, TCI purchased the Clarke Garage at 913 Gravier in New Orleans, Louisiana for $9.0 million cash. The property is adjacent to ~~Financial Statements~~
305 Baronne. 305 Baronne was purchased in August 2006 for $4.0 million cash and contains approximately 37,000 square feet of retail space currently occupied by retail tenants. 225 Baronne consists of approximately 417,000 square feet of office space and was significantly damaged during hurricane Katrina in September 2005. In 2006, TCI reduced the carrying value of 225 Baronne to $1.2 million, which approximates the value of the underlying land. TCI intends to redevelop 225 Baronne into an urban residential
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

facility, which it considers the best and most profitable use of the property. To facilitate the marketability of the property, TCI acquired the Clarke Garage and 305 Baronne to provide additional parking and retail for the residential development.
The 2006 gain on involuntary conversion of $20.5 million relates to damage sustained at the Company’s New Orleans commercial properties from Hurricane Katrina during 2005. 225 Baronne property was closed immediately after the storm and the Company intends to redevelop 225 Baronne as a residential property. TCI’s 1010 Common and Amoco buildings suffered hurricane damage as well but have been repaired and have reopened. 1010 Common is presently 77% occupied and Amoco is 89% occupied. In ~~2004,~~2005 the Company received $4.2 million in business interruption insurance proceeds which was included in 2005 rental revenues. TCI received approximately $45 million of insurance proceeds in 2006, of which $4.0 million related to business interruption claims and has been included in 2006 rental revenues.
One Hickory
In October 2003, TCI sold the ~~following properties:~~One Hickory office building in Farmers Branch, Texas to IORI for $12.2 million and financed $12.0 million of the purchase price with a note receivable bearing interest at 5.49%, maturing in June 2006. The $12.2 million sales price approximated TCI’s initial cost of acquiring the property in 2002 from ARI. IORI immediately sold One Hickory together with 202 acres of undeveloped land to a partnership, the general partner of which was then an affiliate of ARI for a total sales price of $37.2 million. In May 2006, the partnership sold One Hickory back to TCI in satisfaction of the $12.0 million note payable by IORI.

Property

Location

Units/
Sq. Ft./Acres

Sales
Price

Net Cash
(Received)

Debt
Discharged

Gain/(Loss)
On Sale

Apartments

Cliffs of El Dorado⁽²⁾
   McKinney, TX    208 Units    $ 13,442    $ 10 $ 10,323 ⁽¹⁾ $    —   ⁽³⁾
In The Pines
   Gainesville, FL    242 Units    11,300    3,547 ⁽⁴⁾ 5,201 5,136
Sandstone
   Mesa, AZ    238 Units    8,650    2,687 5,531 1,136
Waters Edge IV⁽⁵⁾
   Gulfport, MS    80 Units    5,000    —   —   —   ⁽⁶⁾
Office Building

4135 Beltline
   Addison, TX    90,000 Sq. Ft.    4,900    2,472 2,009 345
Atrium
   Palm Beach, FL    74,603 Sq. Ft.    5,775    1,667 3,772 328
Ambulatory Surgery Center
   Sterling, VA    33,832 Sq. Ft.    8,675    5,448 2,856 202
Brandeis⁽⁷⁾
   Omaha, NE    319,234 Sq. Ft.    —      —   8,750 ⁽¹⁾ (92 )
Centura Tower⁽⁸⁾
   Farmers Branch, TX    410,901 Sq. Ft.    84,075    36,350 49,878 31,550
Corporate Pointe
   Chantilly, VA    69,918 Sq. Ft.    9,000    5,025 3,609 5,239
Countryside Harmon
   Sterling, VA    72,062 Sq. Ft.    9,150    4,608 3,865 1,931
Countryside Retail
   Sterling, VA    133,422 Sq. Ft.    27,100    3,408 22,800 5,475
Countryside Mimado
   Sterling, VA    35,127 Sq. Ft.    4,000    102 941 72
Durham Centre⁽⁹⁾
   Durham, NC    207,171 Sq. Ft.    21,300    6,703 —   —   ⁽¹⁰⁾
One Steeplechase
   Sterling, VA    103,376 Sq. Ft.    11,900    3,743 7,654 6,184
Venture Center
   Atlanta, GA    38,272 Sq. Ft.    4,000    997 2,550 1,167
Industrial Warehouse

Kelly (Cash Road)
   Dallas, TX    97,150 Sq. Ft.    1,500    1,077 422 127
Kelly (Pinewood)
   Dallas, TX    100,000 Sq. Ft.    1,650    65 1,376 153
Ogden Industrial
   Ogden, UT    107,112 Sq. Ft.    2,600    668 1,775 1,374
Texstar Warehouse⁽¹²⁾
   Arlington, TX    97,846 Sq. Ft.    2,400    —   1,148 ^(1)(17) —   ⁽¹³⁾
Other

Signature Athletic Club⁽¹¹⁾
   Dallas, TX    N/A    120    (154 ) 88 (47 )
Shopping Center

K-Mart⁽¹²⁾
   Cary, NC    92,033 Sq. Ft.    3,200    —   1,677 ^(1)(17) —   ⁽¹⁴⁾
Sadler Square
   Amelia Island, FL    70,295 Sq. Ft.    4,500    1,876 2,680 1,673
Land

Allen
   Collin County, TX    492.531 Acres    19,962    7,956 4,088 7,056
Marine Creek⁽¹⁵⁾
   Ft. Worth, TX    10.73 Acres    1,488    1,198 991 —   ⁽¹⁶⁾
Rasor
   Plano, TX    24.5 Acres    2,600    2,600 —   53
Red Cross
   Dallas, TX    2.89 Acres    8,500    2,842 4,450 —
~~(1)~~ ~~Assumed debt.~~
~~(2)~~ ~~Property initially sold to Unified Housing Foundation, Inc. (“UHF”), a related party, in 2003. See NOTE 8. “RELATED PARTY TRANSACTIONS.”~~
~~(3)~~ ~~Excludes a $1.7 million deferred gain from a related party sale.~~
~~(4)~~ ~~TCI provided $1.0 million of the purchase price as seller financing. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”~~
~~(5)~~ ~~Property sold to ARI, a related party, for an increase of $5.0 million to the affiliate receivable balance from Prime.~~
~~(6)~~ ~~Excludes a $494,000 deferred gain from a related party sale.~~
~~(7)~~ ~~Brandeis was returned to lender via a deed in lieu of foreclosure process. See NOTE 7. “NOTES AND INTEREST PAYABLE.”~~
~~(8)~~ ~~TCI sold a 95% limited partnership interest, retaining a 1% general partner and 4% limited partner interest.~~
~~(9)~~ ~~Property sold to Edina Park Plaza Associates, L.P., of which the managing general partner is a subsidiary of ARI, a related party, for a wraparound note of $14.5 million and cash.~~
Circle C
~~Index~~In March 2005, TCI entered into an agreement to ~~Financial Statements~~
advance a third party $3.2 million for development costs relating to single family residential lots in Austin, Texas. These advances were secured by membership interests in the borrower and a second lien on 1,092 acres of undeveloped land. In September 2005, the total amount authorized under this advance was increased to $5.0 million. As of March 31, 2006, TCI had advanced $4.2 million to the borrower. TCI also guaranteed, with full recourse to TCI, an $18 million bank loan for the borrower which was secured by a first lien on the 1,092 acres of undeveloped land. In June 2005, TCI purchased the subsidiary of a related party for $4.1 million that held two notes receivable from the borrower for $3.0 and $1.0 million. These notes were secured by approximately 142 acres of undeveloped land and membership interests in the borrowers. In March 2006, TCI acquired the 1,092 acres for forgiveness of the $4.2 million and assumed the existing debt on the property. TCI intends to develop the property and sell the individual lots to home builders.
Ewing Land
In December 2006, TCI acquired 16,792 acres in North Dallas known as the Ewing Land, for $3.4 million cash and a note payable of $10.8 million. The land was acquired for future development and borders the cities of Addison and Farmers Branch. The loan matures in December 2009 and requires interest only payments of 5.5 percent until maturity.
Galleria East
In November 2006, TCI acquired approximately 15 acres located at the intersection of the Dallas North Tollway and IH-635 (LBJ Freeway) in Dallas, Texas for a purchase price of $25.2 million. Payment was in the
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~(10)~~ ~~Excludes a $4.0 million deferred gain from a related party sale.~~
~~(11)~~ ~~Signature Athletic Club was sold for the assumption of capital leases by purchaser. Net cash paid is from prepaid dues and unearned revenues due purchaser.~~
~~(12)~~ ~~Property sold to Basic Capital Management (“BCM”), a related party, for assumption of debt and a note receivable. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”~~
~~(13)~~ ~~Excludes a $1.0 million deferred gain from a related party sale.~~
~~(14)~~ ~~Excludes $355,000 deferred gain from a related party sale.~~
~~(15)~~ ~~Property sold to UHF, a related party, for cash and a note receivable. See NOTE 8. “RELATED PARTY TRANSACTIONS.”~~
~~(16)~~ ~~Excludes a $581,000 deferred gain from a related party sale.~~
~~(17)~~ ~~Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.~~
form of $8.8 million cash and a note payable of $18.4 million due in December 2007. Terms of the note required interest only payments at 6.0 percent until maturity. The property is currently occupied by an automobile dealership which pays TCI a monthly rental for the use of the property. TCI intends to hold the land for future development or resale.
Ladue/Walker
In August 2006, TCI acquired from ARI, 99 acres in Farmers Branch, Texas known as Ladue/Walker for $21.5 million. Payment was made by an increase in the affiliate payable to Prime of $11.2 million and assumption of a $9.9 million note payable. Terms of the note require principal and interest payments monthly at 10.25 percent until maturity in December 2008. TCI intends to hold the land for future development as part of the Mercer Crossing development.
Galleria West
In November 2006, TCI purchased two parcels of land in independent transactions totaling approximately 9.2 acres in North Dallas for a total of approximately $7.5 million. Payment was made in the form of notes payable in the amounts of $1.5 million and $5.2 million. The notes require interest payments at 6.0 percent through maturity in December 2007. TCI intends to hold the land for future development or resale.
Will-O-Wick
In May 2006, TCI sold the Will-O-Wick apartments in Pensacola, Florida, for $6.5 million. The sale resulted in a gain of $2.9 million and net cash received of $2.8 million after payment of outstanding mortgages and costs of sale.
McKinney Ranch
In June 2006, TCI sold, in two separate transactions, a total of 168.8 acres of the McKinney Ranch land in McKinney, Texas for $26.9 million. The sales resulted in total gains of $8.8 million and net cash of $16.0 million after paydown of $10.2 million in notes payable, closing and other costs of sale.
At December 31, ~~2005,~~2006, TCI had the following properties under construction:

Property
   Location    Units    Amount
Expended    Additional
Amount
to Expend    Construction
Loan
Funding
Location
   Units    Amount
Expended
Additional
Amount
to Expend

Construction
Loan
Funding
Apartments

Laguna Vista
   Farmers Branch, TX    206 Units    $ 8,308    $ 12,797    $ 17,741    Farmers Branch, TX    206 Units    9,969    12,232    14,719
Legends of El Paso
   El Paso, TX    240 Units    5,319    12,765    16,040    El Paso, TX    240 Units    6,430    15,461    14,988
Mission Oaks
   San Antonio, TX    228 Units    12,072    5,397    15,636    San Antonio, TX    228 Units    14,241    —      11,376
Parc at Maumelle
   Maumelle, AR    240 Units    11,805    6,894    16,829    Maumelle, AR    240 Units    18,921    —      13,015
Parc at Metro Center
   Nashville, TN    144 Units    3,328    9,287    11,141    Nashville, TN    144 Units    4,373    6,768    8,340
Parc at Rogers
   Rogers, AR    152 Units    973    19,852    3,563
Park at Clarksville
   Clarksville, TN    206 Units    889    13,002    5,624
Pecan Pointe
   Temple, TX    232 Units    1,991    14,846    180
Mason Park
   Houston, TX    312 Units    1,991    17,409    3,349
Lago Vista
   Farmer’s Branch, TX    212 Units    5,091    21,359    2,079
Bolivar Homes
   Cleveland, MS    65 Units    1,218    7,390    1,300
Broadway Estates
   Greenville, MS    104 Units    788    7,569    850
Sunflower Estates
   Indianola, MS    65 Units    755    7,674    810
Yazoo Estates
   Yazoo City, MS    96 Units    31    8,314    835
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
No properties were completed during 2006.
For the ~~period~~year ended December 31, 2005, TCI completed the 70 unit Blue Lake Villas II in Waxahachie, Texas, the 272 unit Bluffs at Vista Ridge in Lewisville, Texas, the 232 unit Bridges on Kinsey in Tyler, Texas, the 208 unit Dakota Arms in Lubbock, Texas, the 240 unit Lake Forest in Houston, Texas, the 220 unit Wildflower Villas in Temple, Texas, the 398 unit Kingsland Ranch Apartments in Houston, Texas, the 240 unit Stonebridge at City Park Apartments in Houston, Texas, and the 240 unit Vistas of Vance Jackson in San Antonio, Texas.
For the ~~period ending~~year ended December 31, 2004, TCI completed the 248 unit DeSoto Ranch Apartments in DeSoto, Texas, the 314 unit Verandas at Cityview Apartments in Fort Worth, Texas, the 216 unit Mariposa Villas (Echo Valley) in Dallas, Texas, the 176 unit Breakwater Bay Apartments in Beaumont, Texas, the 156 unit Capitol Hill Apartments in Little Rock, Arkansas and the 332 unit Vistas of Pinnacle Park Apartments in Dallas, Texas.
In November 2004, TCI agreed to swap 69,903 square feet of Centura land with 71,393 square feet of land TXU Electric Delivery Company (“TXU”) owns adjacent to Centura land for the relocation of electric transmission and distribution facilities. TCI has agreed to pay the actual costs of relocation, which is estimated at $453,000. ARI paid $216,361 of this cost on TCI’s behalf in November 2004 and this amount was used to reduce TCI’s receivable from Prime. Prime paid the remaining $216,361 on TCI’s behalf in September 2005. TCI will also pay an additional $36,000 to TXU for the difference in the size of the TCI property and the TXU property.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

NOTE 3. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:

   2005    2004
   Estimated
Fair
Value    Book
Value    Estimated
Fair
Value    Book
Value
Notes receivable

Performing
   $ 49,225    $ 58,437    $ 53,246    $ 53,895
Non-performing, non-accruing
   4,457    4,896    —      —

   $ 53,682    63,333    $ 53,246    53,895

Interest receivable
      1,485       2,735

      $ 64,818       $ 56,630

Notes receivable at December 31, 2005, mature from 2006 through 2017 with interest rates ranging from 4.0% to 12.0% per annum, with a weighted average rate of 7.57%. Notes receivable are generally non-recourse and are generally collateralized by real estate. Scheduled principal maturities of $27.7 million are due in 2006.
~~Unless otherwise noted, all of TCI’s notes receivables are secured by real estate assets.~~
Borrower
Maturity
Date Interest
Rate Amount
Security
Performing loans:

Edina Park Plaza Associates, LP⁽¹⁾
Sep-2017 7.63 % $ 14,519 Office building, Durham, NC
Edina Park Plaza Associates, LP⁽¹⁾
Sep-2017 7.63 3,297 Office building, Durham, NC
Dallas Fund XVII LP
Oct-2006 9.00 2,983 Partnership interests and lawsuit proceeds
Pioneer Austin Development
Oct-2008 10.00 3,177 33 acres undeveloped land, Austin, TX
Countryside LP
Jan-2007 7.25 2,300 Class A LP units
Basic Capital Management⁽¹⁾
Apr-2008 Prime + 2.00 1,523 Retail building, Cary, NC
Garden Centura LP
N/A 7.00 6,492 Excess cash flow from partnership
Basic Capital Management
Apr-2008 Prime + 2.00 1,252 Industrial building, Arlington, TX
400 St. Paul
Jul-2006 8.00 3,612 Office building, Dallas, TX
Miscellaneous related party notes
Various Various 2,960 Various security interests
Accrued interest
697
Allowance for estimated losses
(3,246 )

Total
$ 39,566

(1) Related party.
In December 2005, TCI sold 27.192 acres and 3.73 acres to a third party for $10.1 million and $1.4 million, and provided $7.6 million and $1.0 million of seller financing, respectively. Both notes bear interest at 8.0% per annum, require monthly interest only payments and mature in December 2008. In JanuaryMarch 2006, TCI sold both notes to a financial institution for full face value less closing costs, plus accrued interest. The financial institution has a Put Option that would require TCI to purchase both notes back under the following conditions: (1) failure to construct agreed upon roads on the property by December 2006; (2) there occurs any event of default by the buyer; (3) certain escrow deposits for the road completion are not sufficient to cover the cost of the road construction; (4) any amendment, modification or assignment of certain development and escrow agreements between TCI and the buyer; and (5) failure of TCI to deliver certain documents to the financial institution within a timely manner. TCI and other related parties have also guaranteed the full payment of the note balances, including any outstanding interest and costs incurred by the financial institution.
~~In September 2005, TCI sold 10~~10.5 acres of ~~unimproved~~undeveloped land ~~to a third party~~in Farmers Branch, Texas, known as the Hollywood Casino land for ~~$1.5~~$3.2 million, ~~and provided $1.1~~financing $1.5 million of the ~~purchase~~sales price ~~as seller financing. The secured~~in the form of a demand note ~~bore~~bearing interest at ~~10%, required monthly interest only payments and matured~~the rate of ten percent per year. In July 2006, the $1.5 million note was satisfied in ~~September 2008. In December 2005, TCI sold this note to a financial institution~~full in exchange for ~~full face value less closing costs, plus accrued interest. TCI and other related parties have also guaranteed the full payment~~24.9 acres of ~~the note balances, including any outstanding interest and costs incurred by the financial institution.~~undeveloped land in Crowley, Texas.
In March 2005, TCI entered into an agreement to advance a third party $3.2 million for development costs relating to ~~single family~~single-family residential lots in Austin, Texas. These advances are secured by ~~membership interests~~stock in the borrower and hold a second lien on ~~1,092 acres of~~the undeveloped land. The secured note bears interest at ~~10%,~~ten percent, requires semi-annual ~~interest~~ payments, and matures in March 2008. In September 2005, the total amount authorized under this advance was increased to $5.0 million. As of March 31, 2006, TCI had advanced ~~$4.2~~$3.2 million to the borrower. TCI also guaranteed ~~with full recourse to TCI,~~ an $18 million ~~bank~~ loan ~~for the borrower which is~~ secured by a first lien on ~~1,092 acres of~~the undeveloped land. In ~~June~~September 2005, TCI purchased ~~the~~for $4.1 million a subsidiary of Tacco Universal, a related party ~~for $4.1 million~~ that holds two notes receivable from ~~this third party~~the borrower for $3.0 and
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
~~$1.0~~ $1.0 million, respectively. These notes are secured by approximately 142 acres of undeveloped land and membership interest in the ~~borrowers.~~borrower. These secured notes bear interest at ~~12.0%,~~12 percent, have
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
an interest reserve for payments that is added to the principal balance on a monthly basis, and matured in June 2005. Both loans were extended to September 2005 and upon maturity ~~both loan balances~~ were paid under the advance referred to at the beginning of this paragraph.
In ~~October 2004,~~March 2006, TCI ~~sold the In The Pines apartments to a third party and provided $1.0 million~~acquired all of the ~~purchase price as seller financing~~interests in the ~~form~~borrower, including ownership of ~~two notes.~~the Austin, Texas land. The land is secured by the $18 million first ~~note bore~~mortgage and a $3 million subordinated loan. In March 2006, TCI secured a development loan of $31.3 million (secured by the Austin, Texas land) of which $18 million was used to pay the existing first mortgage. The development loan matures in March 2008 and bears interest at ~~7.0% per annum, required monthly interest only payments and matured in January 2005.~~Prime plus one percent. The ~~Purchaser extended this note~~Company intends to ~~March 2005 by paying 1.0% of~~develop the ~~outstanding principal balance as an extension fee and then extended the note an additional 30 days~~land for sale to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. In the event of a default, the note is also secured by membership rights in the purchaser’s entity. The second note was unsecured, bore interest at 8.5% per annum, required monthly interest only payments and matured in January 2005. The Purchaser extended this note to March 2005 by paying 1.0% of the outstanding principal balance as an extension fee and then extended the note an additional 30 days to April 2005 by paying an extension fee of 0.5% of the outstanding principal balance. Both loans were extended to October 2005 with the payment to TCI of a 2.0% extension fee. Both loans were paid in full, including unpaid interest, in October 2005.single-family residential builders.
In December 2004, TCI sold the Centura Tower office building located in Dallas, Texas to ~~a partnership~~Garden Centura LP and retained a 1%one percent non-controlling general partner interest and a 4%four percent limited partner interest. TCI has certain obligations to ~~fund~~loan the ~~partnership~~buyer funds for rent abatements, tenant improvements, leasing commissions and other cash ~~shortfalls. $4.1~~requirements. Through December 31, 2006, TCI has funded $6.5 million of these obligations ~~were escrowed by TCI with the lender at loan closing. Through December 31, 2005, TCI~~and has ~~funded $4.7 million of these obligations, with $4.1 million~~ recorded ~~as an investment in the partnership and the remainder of $603,000 in the form of~~ a note receivable from the partnership. This note ~~has no maturity date, requires no payments, and~~ bears interest at a fixed rate of ~~7.0% per annum.~~seven percent. The note will be paid out of excess cash flow or from sales proceeds, but only after certain partner preferred returns are paid.
In December 2003, TCI purchased from ARI a note receivable secured by a second lien on 33 acres of undeveloped land located in Austin, Texas, referred to as “Pioneer Development”. TCI acquired the loan from ARI for $2.4 million in satisfaction of certain loans made by TCI to ARI. The loan bears interest at the rate of ten percent per annum. Monthly interest only payments are required beginning in November 2007. The loan matures in October 2008.
In July 2003, TCI advanced $2.3 million to the Class A Limited Partners of TCI Countryside ~~L.P.~~LP of which TCI is the general partner. ~~This~~The loan bears interest at ~~7.25%~~the rate of 7.25 percent per annum and matures in January 2007. TCI also agreed to advance $1.1 million to the Class A Limited Partners by advancing $105,000 in July 2003 and every year thereafter for ten years. This loan bears interest at ~~7.25%~~7.25 percent and matures in July 2012. ~~Interest due to~~As of September 2005, TCI ~~will be deducted from the quarterly return owed by TCI to the Class A Limited Partners, eliminating the quarterly payments.~~had advanced $315,000. In October 2005, TCI agreed to settle the remaining obligations under this loan by paying a lump sum of $425,000, making the total advanced $740,000. After January 2007, TCI may ~~redeem~~retire the Class A Limited Partners ~~interests~~interest in exchange for cancellation of ~~both notes.~~
~~In June 2003, TCI sold~~ the 104 unit Willo-Wick Gardens Apartments in North Augusta, South Carolina, for $2.7 million and provided $42,000 of the purchaser’s closing costs as seller financing. The note bore interest at a fixed rate of 5.0% and required all interest and principal payments be paid at maturity on December 2003. This loan was extended until February 2004 and $10,000 was received in March 2004. This note, including accrued but unpaid interest, was paid in June 2004. TCI discounted the note $2,000 and recognized a loss of $2,000.note.
In March 2002, TCI sold the 174,513 ~~sq. ft.~~Sq. Ft. Hartford Office Building located at 400 St. Paul in Dallas, Texas, for $4.0 million and provided ~~the~~ $4.0 million ~~purchase price as~~in seller financing ~~and~~plus an additional $1.4 million line of credit for leasehold improvements all in the form of a first lien mortgage note. The note bears interest at a variable interest rate, ~~currently 8.0% per annum,~~ requires monthly interest only payments, and matures in March 2007. As of ~~March 2006,~~September 2005, TCI ~~has~~ funded $896,000 of the ~~$1.4 million~~additional line of credit. TCI determined during the third quarter of 2005 ~~that it would~~to classify this note as ~~non-performing due to~~non-performing. In the ~~lack~~fourth quarter of ~~debt payments received~~2006, TCI and the
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
probability that no debt payments would be received in the future. Effective for the quarter ended September 30, 2005, TCI no longer accrues interest on this note. The loan is not considered impaired due to management’s opinion that the fair value of the collateral is sufficient to cover the current loan balance and accrued interest at March 2006.
~~In July 2002, TCI~~ borrower entered into an assumption and note modification agreement whereby the note receivable was modified to ~~fund up to $300,000 under a revolving line~~$3.6 million upon TCI’s receipt of ~~credit secured by 100%~~approximately $500,000 from the original borrower. The original borrower subsequently transferred interest in the property to a ~~partnership~~new owner, which assumed the $3.6 million debt. The new note accrues interest at 8.25% for the first year, 9.25% thereafter, and matures October 30, 2008. As a result of the ~~borrower. The line~~foregoing modification, TCI recorded a charge to earnings of credit bears interest at 12.0% per annum and requires monthly interest only payments, and originally matured in June 2005. This loan was extended to June 2006 in the second quarter of 2005 and was subsequently modified$1.2 million in the fourth quarter ~~2005. This second modification extends the loan maturity to October 2007 and limits any advances under the line~~ of ~~credit to $25,000 per month. As of March 2006, the borrower had $143,000 of remaining available credit under the credit limit.~~2006.
In August 2001, TCI agreed to ~~fund~~loan Dallas Fund XVII LP up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable ~~bore interest at~~initially had a variable interest rate, ~~(then 9.0% per annum),~~ required monthly interest ~~only~~ payments and originally matured in January 2003. ~~By March 2004,~~ TCI ~~had~~ funded a total of $4.3 ~~million. On~~million on this note. In January ~~22,~~ 2003, TCI agreed to extend the maturity date ~~until~~to May 1, 2003. The collateral used to secure TCI’s second lien was subsequently seized by the first lien holder. OnIn March ~~11,~~ 2004, TCI agreed to accept an assignment of claims in litigation as additional security for the note. ~~In December 2004,~~ TCI later agreed to a ~~Modification Agreement~~modification agreement with the
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
borrower ~~which was~~ effective November 1, 2003. As of the modified effective date, accrued interest of $582,000 was added to the principal balance of the ~~note,~~note; the interest rate was ~~set to a~~ fixed ~~rate of 9.0%~~at nine percent per annum ~~and~~with all principal and interest is due November 2005. TCI also received ~~Pledge~~certain pledge and ~~Security Agreements~~security agreements in various partnership interests belonging to the borrower and received various ~~Assignments~~assignments of ~~Proceeds~~proceeds from asset sales in certain entities owned by the borrower. TCI ~~also agreed to reduce~~reduced accrued interest and principal by $1.5 million from the receipt of notes receivable assigned to TCI by the borrower and by $605,000 from cash received. TCI also received $1.4 million in January 2005 that was applied to accrued interest and principal effective December 30, 2004. ~~As a result of this modification,~~ TCI ~~recognized a reduction of~~received $1.4 million ~~for loan losses~~in September 2006 that was applied to ~~expense in 2004. The following notes were assigned to TCI as payment on the note:~~
~~$678,000 from a partnership that owns an apartment building. This note is unsecured, bears no~~accrued interest and principal. Through December 31, 2006, TCI has ~~no maturity date. Distributions made from the partnership operations will be used to pay the principal on the note. TCI received $132,000 in distributions in 2005.~~
$264,000 secured by a second lien on 13 acres of unimproved land. This note bears interest at 9.0% and matured in February 2003. TCI’s parent company, ARI, has taken title to the collateral, giving TCI a first lien position on the collateral. This note is considered performing and no allowance has been established.
~~$466,000 secured by a second lien on 23.3 acres of unimproved land. This note bears interest at 4.0% and is payable upon demand.~~
~~$125,000 secured by a 100% interest in~~advanced an ~~affiliated company that owns an apartment building. This note bears interest at 12.0%, only requires payments if surplus cash is available and matures in April 2009.~~
~~In December 2005, TCI advanced $2.5~~additional $2.73 million ~~under this note~~ to the borrower.
Related ~~Party.~~Party Transactions.
In ~~October 2004,~~November 2006, ARI purchased Windmill Farms, 3,035 acres in Kaufman County, Texas for $52.0 million. The purchase price was funded by $39.1 million debt and $10.0 million Preferred Stock of TCI. In connection with the purchase by ARI, TCI ~~contemplated~~issued $10.0 million of Series D Preferred Stock to the ~~sale~~sellers of the ~~common stock~~property. The transaction was recorded on the books of TCI ~~Lexington Corporation, which owns~~as a reduction in the ~~Lexington Center~~amount payable to affiliate of $10.0 million. In addition, to facilitate the transaction, TCI guaranteed the debt incurred on the purchase.
In August 2006, TCI purchased 99 acres in Farmers Branch, Texas known as the LaDue/Walker tract, from ARI for $21.5 million. The transaction was financed by assumption of $9.9 million note payable and an increase in the amount payable to affiliate of $11.2 million.
In May 2006, TCI acquired the 102,615 square feet One Hickory office building in ~~Colorado Springs, Colorado,~~Farmers Branch, Texas from IORI. The purchase price was paid by forgiveness of the $12.2 million note receivable from IORI.
In 2006, TCI paid Prime, its affiliates and related parties $11.1 million in advisory, incentive and net income fees, $0.7 million in mortgage brokerage and equity refinancing fees, $3.64 million in property acquisition fees, $1.4 million in real estate brokerage commissions, $2.0 million in construction supervision fees and $2.35 million in property and construction management fees and leasing commissions, net of property management fees paid to ~~One Realco Office Investors, Inc.,~~subcontractors, other than affiliates of Prime. In addition, as provided in the Advisory Agreement, Prime received cost reimbursements of $2.8 million.
In August 2005, TCI sold 8.8 acres in Dallas, Texas known as the “Centura Land” to IORI for $6.7 million. For a ~~related party,~~period of one year following closing and 90 days thereafter, IORI has the right to convey the land to TCI for the ~~assumption~~original sales price, plus a 12 percent preferred return per annum accruing from the closing date. This transaction has been treated as a financing by TCI, with a note payable of ~~debt of $4.9~~$6.7 million ~~which was subject to lender approval, and~~recorded. TCI granted IORI a ~~seller note of $237,000. The assumption of debt by One Realco Office Investors, Inc. was not~~
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
~~approved by the lender; therefore, TCI’s Board of Directors rescinded their approval~~one-year extension of the ~~transaction. TCI extended the loan on the Lexington Center with the lender~~note payable in ~~December 2004.~~November 2006.
In October 2004, TCI sold the Durham Centre in Durham, North Carolina to Edina Park Plaza Associates, LP, a limited partnership ofin which the managing general partner is a subsidiary of ARI, for $21.3 million ~~for~~ cash ~~and~~plus an all-inclusive ~~wraparound~~wrap-around note of $14.5 million. The note bears interest at a fixed rate of ~~7.63%,~~7.63 percent, requires monthly interest payments, and matures in September 2007. TCI also made a loan to the partnership for $3.3 million. The note bears interest at a fixed rate of ~~7.63%,~~7.63 percent, requires monthly interest payments, and matures in September 2017.
In March 2004, TCI sold a K-Mart in Cary, North Carolina to Basic Capital Management (“BCM”) for $3.2 million, including the assumption of debt. TCI also provided $1.5 million of the purchase price as seller financing. The unsecured note bears interest at Prime plus two percent and matures in April 2008.
In March 2004, TCI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million, including the assumption of debt. TCI also provided $1.3 million of the purchase price as seller financing. The unsecured note bears interest at ~~the prime rate~~Prime plus ~~2%, which is currently 9.5%, and matured in April 2005. This note was extended to April 2008.~~
In March 2004, TCI sold a K-Mart in Cary, North Carolina to BCM for $3.2 million, including the assumption of debt. TCI also provided $1.5 million of the purchase price as seller financing. The unsecured note bears interest at the prime rate plus 2%, which is currently 9.5%, and matured in April 2005. This note was extended to April 2008.
In December 2003, TCI sold a tract of Marine Creek land to a subsidiary of Unified Housing Foundation, Inc. (“UHF”) for $1.5 million, receiving cash and a note receivable. This sale was not recognized as a sale at that time because UHF is a related party and TCI has continuing involvement and control. In February 2004, Marine Creek was refinanced by UHF, which paid in full TCI’s note payable on the land. TCI then recorded the sale of the land and received a note receivable of $270,000, which was the difference between the sales price and the amount of TCI’s note payable. The note bore interest at 6.0%, required quarterly payments from available surplus cash and was due in December 2007. The note was paid in full, including accrued interest, in August 2005. TCI recorded the sale of the Marine Creek land tract due to the payment received on the note receivable. See Note 8. “RELATED PARTY TRANSACTIONS.”
In December 2003, TCI purchased a note receivable secured by a second lien on 33 acres of raw land in Travis County, Texas at par value from ARI for $2.4 million as a paydown on an affiliate loan balance. This note bears interest at 10.0%, requires interest only payments in November 2007two percent and matures in ~~October~~April 2008. Outstanding accrued interest is added to the principal balance on an annual basis until 2007. During 2005 and 2004, $263,000 and $240,000 of accrued interest was added to the principal balance of the note, making the principal balance at December 31, 2005 $2.9 million.
In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation (“Two Hickory”), a wholly-owned subsidiary of ARI for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory Centre Office Building in Farmers Branch, Texas. ARI guaranteed that the asset shall produce at least a 12.0% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12.0% annual return, ARI was obligated to pay TCI any shortfall. In addition, if the asset fails to produce the 12.0% return for any calendar year and ARI failed to pay the shortfall, TCI could have required ARI to repurchase the shares of Two Hickory for the original purchase price. Because ARI guaranteed the 12.0% return and TCI had the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In June 2002, Two Hickory was refinanced. TCI received $1.3 million of the proceeds as a principal reduction on its note receivable from ARI. In January 2005, the guaranty period ended and TCI completed the purchase of Two Hickory by recording the asset and the assumed debt, and removing the note receivable from ARI.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In April 2002, TCI purchased 100% of the following entities: ART One Hickory Corporation (“One Hickory”), Garden Confederate Point, LP (“Confederate Point”), Garden Foxwood, LP (“Foxwood”), and Garden Woodsong, LP (“Woodsong”), all wholly-owned subsidiaries of ARI for $10.0 million. One Hickory owned the 120,615 sq. ft. One Hickory Centre Office Building in Farmers Branch, Texas. Confederate Point owned the 206 unit Confederate Apartments in Jacksonville, Florida. Foxwood owns the 220 unit Foxwood Apartments in Memphis, Tennessee. Woodsong owned the 190 unit Woodsong Apartments in Smyrna, Georgia. ARI guaranteed that these assets shall produce at least a 12.0% return annually of the purchase price for a period of three years from the purchase date. If the assets collectively failed to produce the 12.0% return, ARI was required to pay TCI any shortfall. In addition, if the assets fail to produce the 12.0% return for a calendar year and ARI failed to pay the shortfall, TCI had the option of requiring ARI to repurchase the entities for the original purchase price. Because ARI guaranteed the 12.0% return and TCI has the option of requiring ARI to repurchase the entities, management has classified this related party transaction as a note receivable from ARI. In July 2002, the Woodsong Apartments were sold. ARI received $2.8 million from the proceeds as payment of principal and accrued but unpaid interest on the note receivable. In October 2003, TCI sold One Hickory to IORI for $12.2 million, less prorations, for a wraparound promissory note of $12.0 million. This note bears interest at 5.49% interest, requires monthly interest and principal payments and matures in June 2006. This transaction effectively discharged the note receivable TCI had from ARI for the financing of One Hickory. Also, in November 2003, Confederate Point sold the Confederate Apartments and paid $2.1 million to TCI to pay off the loan and unpaid interest. In April 2005, TCI completed the purchase of the Foxwood Apartments by recording the asset and removing the note receivable from ARI.
In December 2001, TCI purchased 100% of the outstanding common shares of National Melrose, Inc. (“NM”), a wholly-owned subsidiary of ARI, a related party, for $2.0 million cash. NM owns the 41,840 sq. ft. Executive Court Office Building in Memphis, Tennessee. ARI has guaranteed the asset will produce at least a 12.0% annual return of the purchase price for a period of three years from the purchase date. If the asset fails to produce the 12.0% annual return, ARI will pay TCI any shortfall. In addition, if the asset fails to produce 12.0% return for a calendar year, TCI may require ARI to repurchase the shares of NM for the purchase price. Management has classified this related party transaction as a note receivable from ARI. In December 2004, TCI recorded the purchase of the Executive Court Office Building by recording the asset and removing the note receivable from ARI.

NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:

       2005        2004 2003
Balance January 1,
   $ —      $ 1,456 $ 1,337
Provision for loss
   —      —   —
Fully reserved notes receivable
   —      —   119
Decrease in provision
   —      (1,456 ) —

Balance December 31,
   $ —      $ —   $ 1,456

~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
       2006            2005            2004
Balance January 1,
   $ —      $ —      $ 1,456
Provision for loss
   —      —      —
Fully reserved notes receivable
   —      —      —
Decrease in provision
   —      —      (1,456 )

Balance December 31,
   $ —      $ —      $ —


NOTE 5. INVESTMENT IN ~~EQUITY METHOD~~UNCONSOLIDATED REAL ESTATE ENTITIES
Investment in equity method real estate entities consisted of the following:

   2005    2004    2006    2005
American Realty Investors, Inc. (“ARI”)
   $ 12,114    $ 9,870    $ 12,757    $ 12,114
Income Opportunity Realty Investors, Inc. (“IORI”)
   6,155    5,765    6,345    6,155
Garden Centura, L.P.
   6,048    1,925    1,944    1,937
Other
   342    22    9,527    4,453

   $ 24,659    $ 17,582    $ 30,573    $ 24,659

TCI owns an approximate ~~6.5%~~seven percent interest in ARI, a publicly held real estate company, having a current market value of $108.9 million at December 31, 2005. At December 31, 2005, ARI had total assets of $505.0 million and owned 12 apartments, seven commercial properties, seven hotels and 35 parcels of unimproved land. In 2005, ARI sold eight apartments and 19 parcels of unimproved land for a total of $126.9 million, receiving net cash of $35.7 million after paying off or being relieved of $42.5 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $26.0 million on the sales of which TCI’s equity share was $1.7$88.3 million. In 2004, ARI sold four apartments, three commercial properties, and 13 parcels of unimproved land for a total of $112.5 million, receiving net cash of $18.3 million after paying off or being relieved of $58.6 million in mortgage debt and the payment of various closing costs. ARI recognized gains of $25.5 million on the sales of which TCI’s equity share was $1.7 million.
Based on the ownership percentage of TCI’s investment in ARI and ARI’s current market value, TCI’s investment in ARI has a current market value of approximately ~~$6.0 million at December 31, 2005.~~$6.1 million. The carrying value of this investment is approximately ~~$12.2~~$12.8 million at December 31, ~~2005.~~2006. Management continues to believe the ~~market~~net asset value of ARI ~~temporarily undervalues~~exceeds its ~~assets~~market value and therefore, no impairment of TCI’s investment in ARI has been recorded.
TCI owns an approximate 24.0% interest in IORI, a publicly held real estate company. At December 31, 2005, IORI had total assets of $99.1 million and owned six apartments, one office building, one shopping center, one industrial warehouse, and one parcel of unimproved land, all within the State of Texas. IORI did not sell any properties during 2005. Since IORI recognized no gains on the sale of property during 2005, TCI had no equity share on property sales. In 2004, IORI sold two office buildings, two office buildings and a parcel of unimproved land for a total of $24.5 million, receiving net cash of $4.8 million after paying off $15.8 million in mortgage debt and the payment of various closing costs. IORI recognized gains of $5.5 million on the sales of which TCI’s equity share was $1.3 million. Based on the ownership percentage of TCI’s investment in IORI and IORI’s market value, TCI’s investment in IORI has a market value of approximately ~~$6.5~~$6.9 million at December 31, ~~2005.~~2006. The carrying value of this investment is approximately ~~$6.2~~$6.3 million at December 31, ~~2005.~~2006.
In December 2004, TCI sold a 95% interest in Garden Centura, L.P., a limited partnership that owns the ~~410,901~~411,000 sq. ft. Centura Tower office building located in Farmers Branch, Texas. TCI retained a non-controlling 1%one percent general partner and 4%four percent limited partner interest in Garden Centura, L.P. TCI accounts for its investment in this partnership on the equity method. TCI ~~contributed~~advanced approximately $4.1 million to Garden Centura, L.P. during 2005 for rent abatements and tenant improvements. ~~These funds are held in escrow with the lender and available for~~ TCI ~~to receive repayment after the contributions are made to the partnership. TCI also~~ contributed an additional ~~$602,000~~$600,000 and $1.8 million to Garden Centura, L.P. for cash shortfalls in ~~2005.~~2005 and 2006. These funds are recorded as ~~a note receivable~~an interest–bearing loan due from the partnership.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Prior to the first quarter of 2002, TCI accounted for its investments in Tri-City, Nakash and Jor-Trans on the equity method. TCI was a 63.7% limited partner and IORI was a 36.3% general partner in Tri-City, and TCI is a 60.0% general partner and IORI is a 40.0% limited partner in Nakash. TCI owns a 55% limited and general partnership interest in Jor-Trans. TCI makes all partnership operating and policy decisions of the partnerships and TCI has the right to approve the sale or refinancing of principal assets, or approve the acquisition of partnership assets. For Tri-City, IORI as general partner only had protective rights in the partnership. TCI and IORI share one of the same members of the Board of Directors. Consequently, because TCI has a greater than 50.0% ownership over the operations of Tri- City, Nakash and Jor-Trans, the operations of the partnership have been consolidated. In the first quarter of 2002, TCI began accounting for its investment in Tri-City, Nakash and Jor-Trans using a consolidated basis. The effect of these consolidations increased TCI’s assets, liabilities, and minority interest in 2002 by $5.4 million, $3.9 million and $1.5 million, respectively. In November 2002, Tri-City sold its only asset, a shopping center, for $4.2 million. Tri-City received net cash of $1.9 million after the payment of various closing costs. TCI received a distribution of $1.2 million of the net proceeds and recognized a gain of $431,000 on its investment in Tri-City. Also, in July 2003, TCI sold the Jor-Trans partnership, which owned the Lincoln Court Apartments, to the 45.0% limited partner in Jor-Trans for $1.8 million. TCI recognized a gain of $1.7 million on this transaction and has withdrawn from the partnership.
TCI is a non-controlling 30.0% general partner in SAC 9. In December 2004, SAC 9 sold the Prospect Park #29 office building for $3.7 million, of which TCI received $1.1 million after closing costs and fees. TCI recognized a gain on the sale of investment in SAC 9 of $882,000 relating to this transaction.
Set forth below are summarized financial data for the entities accounted for using the equity method:

   2005 2004
Real estate, net of accumulated depreciation ($80,146 in 2005 and $89,967 in 2004)

$ 387,628 $ 338,181
Notes receivable

97,953 95,189
Other assets

210,953 169,027
Notes payable

(394,678 ) (383,342 )
Other liabilities

(113,290 ) (101,288 )

Shareholders equity/partners’ capital

$ 188,566 $ 117,767

   2005 2004 2003
Rents and interest and other income
   $ 122,550 $ 142,324 $ 114,529
Depreciation
   (10,753 ) (8,287 ) (9,308 )
Operating expenses
   (103,209 ) (118,854 ) (117,167 )
Gain on land sales
   31,868 3,844 41,865
Interest expense
   (29,747 ) (39,020 ) (39,245 )

Income (loss) from continuing operations
   10,709 (19,993 ) (9,326 )
Income (loss) from discontinued operations
   (1,660 ) (2,235 ) (15,010 )
Gain from sale of discontinued operations
   27,633 31,028 26,546

Net income
   $ 36,682 $ 8,800 $ 2,210

TCI’s equity share of:

   2005 2004 2003
Income (loss) before gain on sale of real estate
   $ 968 $ (1,497 ) $ (4,291 )
Gain on sale of real estate
   1,673 3,884 4,853

Net income (loss)
   $ 2,641 $ 2,387 $ 562

~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
2006 2005
Real estate, net of accumulated depreciation

$ 317,137 $ 296,037
Notes receivable

58,509 98,138
Other assets

219,883 210,323
Notes payable

(307,417 ) (236,566 )
Other liabilities

(132,231 ) (219,814 )

Shareholders equity/partners’ capital

$ 155,881 $ 148,118

   2006 2005 2004
Rents and interest and other income
   $ 73,864 $ 112,983 $ 127,910
Depreciation
   (5,226 ) (7,722 ) (7,884 )
Operating expenses
   (61,258 ) (99,415 ) (105,073 )
Gain on land sales
   12,218 31,868 3,844
Interest expense
   (29,452 ) (27,487 ) (38,528 )

Income (loss) from continuing operations
   (9,854 ) 10,227 (19,731 )
Income (loss) from discontinued operations
   20,123 25,973 23,036

Net income
   $ 10,269 $ 36,200 $ 3,305

TCI’s equity share of:

   2006 2005 2004
Income (loss) before gain on sale of real estate
   $ (610 ) $ 906 $ (1,275 )
Gain on sale of real estate
   1,308 1,688 1,497

Net income (loss)
   $ 698 $ 2,594 $ 222


NOTE 6. MARKETABLE EQUITY SECURITIES
In March 2003, TCI acquired equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 for $5.0 million, representing approximately a 9.2% ownership interest. This investment is considered an available-for-sale security. TCI has recognized unrealized gains of ~~$866,000~~approximately $1.6 million, $900,000 and $1.6 million during 2006, 2005 and 2004, respectively, due to increases in market price since December 31, 2003.

NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:

   2005    2004    2006    2005
   Estimated
Fair Value    Book
Value    Estimated
Fair Value
Book
Value
   Estimated
Fair Value    Book
Value    Estimated
Fair Value
Book
Value
Notes payable
   $ 703,409    $ 766,651    $ 594,551    $ 640,011    $ 782,529    $ 897,291    $ 703,409    $ 766,651

Interest payable
      3,510       4,060       4,174       3,510

      $ 770,161       $ 644,071       $ 901,465       $ 770,161

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Scheduled principal payments are due as follows:

2006
   $ 191,426
2007
   64,388    $ 267,554
2008
   60,186    87,315
2009
   18,678    57,930
2010
   18,737    31,953
2011
   35,545
Thereafter
   413,236    416,994

   $ 766,651    $ 897,291

Notes payable at December 31, ~~2005, bore~~2006, accrue interest at rates ranging from ~~4.14%~~5.06% to ~~16.4%~~16.39% per annum, and mature between ~~2006~~2007 and 2045. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of ~~$916.0~~$1.119 million.
Circle C
In March 2006, TCI received a development loan in the amount of $31.3 million secured by the Circle C land in Austin, Texas. The development loan matures in March 2008 and bears interest at Prime plus one percent. The Company intends to develop the land for sale to single-family residential builders.
Ewing
In December 2006, TCI received a loan in the amount of $10.8 million for the purchase of approximately 16.8 acres in North Dallas known as the Ewing land. The land was acquired for future development and borders the cities of Addison and Farmers Branch, Texas. The loan matures in December 2009 and requires interest only payments at five and one-half percent until maturity.
Galleria East
In November 2006, TCI received a loan in the amount of $18.4 million in connection with the purchase of the Galleria East/Showcase Chevrolet property in North Dallas. The note requires interest only payments at six percent until maturity in December 2007.
Galleria West
In November 2006 TCI received approximately $5.2 million and 1.5 million in separate transactions for adjoining parcels of land in North Dallas totaling approximately nine acres. The notes require interest only payments at six percent until maturity in December 2007.
TCI received approximately $26.8 million in short-term financing from an independent investor during 2006. TCI repaid approximately $17.8 million on the loan during 2006. The remaining balance of $9.0 million is outstanding at December 21, 2006. Interest accrues at 12.5 percent.
In July 2005, TCI secured a line of credit with Colonial Bank for $10.0 million for the acquisition and financing of land tracts. The line of credit bears interest at the prime rate plus 1.0%, ~~which is currently 8.5%,~~on 9.25% at December 31, 2006, requires interest only payments and matures in three years. Each land tract funding has a $2.0 million limit on the loan amount, requires interest only payments at the line of credit’s variable rate, and has a maturity date of 18 months. ~~TCI has used all $10 million~~As of December 31, 2006, the total amount due on the line of credit ~~for land purchases as of December 31, 2005.~~was $9.9 million.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In May 2005, TCI received a loan in the amount of $4.0 million. The note ~~bears~~accrued interest at the prime rate plus 2.0%, ~~which is currently 9.5%, requires~~required monthly interest only payments and ~~matures~~matured in ~~one year.~~May 2006. The loan iswas collateralized by TCI’s equity holdings in Realty Korea CR-REIT Co., Ltd. No. 1 and by equity securities owned by an affiliate. The loan was paid in full in the second quarter of 2006.
In February 2005, TCI received a loan in the amount of $5.0 million. The note bears interest at 8.0% per annum, requires semi-annual interest payments, and matures in July 2006. TCI is currently negotiating an extension on the note. The loan is collateralized by certain partnership interests that hold apartments owned by TCI. Anytime before maturity, the lender has the option to convert the outstanding loan balance into general and limited partnership units in each of the partnerships, subject to HUD approval.
In 2006, TCI refinanced the following properties:
~~Index~~
Property
   Location
Sq. Ft./Units/
Rooms/ Acres
   Debt
Incurred
Debt
Discharged

Net Cash
Received
   Interest
Rate Maturity
Date
Apartments

4400
   Midland, TX    92 Units    $ 2,825    $ 945    $ 2,686    6.75 % 1/37
Ashton Way
   Midland, TX    178 Units    2,600    945    2,474    6.75 1/37
Hunters Glen
   Midland, TX    212 Units    2,475    1,804    446    8.13 ⁽¹⁾ 2/09
Woodview
   Odessa, TX    232 Units    5,229    1,839    1,123    6.75 1/37

         13,129    5,533    6,729

Office Buildings

Forum OB
   Richmond, VA    79,791 Sq. Ft.    6,000    4,721    1,152    7.75 7/13
One Hickory
   Farmers Branch, TX    102,615 Sq. Ft.    9,300    6,858    2,308    6.93 5/10
Two Hickory
   Farmers Branch, TX    96,127 Sq. Ft.    9,500    7,331    1,860    7.03 9/11

         24,800    18,910    5,320

Land

Diplomat Tract I
   Farmers Branch, TX    3.9 Acres    309    —      293    10.25 5/08
Diplomat Tract II
   Farmers Branch, TX    4.0 Acres    321    —      304    10.25 5/08
Diplomat Tract III
   Farmers Branch, TX    3.7 Acres    293    —      278    10.25 5/08
Forney Land
   Kaufman County, TX    34.9 Acres    302    —      228    10.25 5/08
Hutton Tract
   Farmers Branch, TX    2.4 Acres    281    —      265    10.25 5/08
Kaufman Cogen
   Kaufman County, TX    2,567.0 Acres    3,573    —      3,447    10.25 5/08
Kaufman Taylor
   Kaufman County, TX    30.9 Acres    2,564    —      2,481    10.25 5/08
LaDue/Walker
   Farmers Branch, TX    99.0 Acres    10,538    —      334    8.60 8/08
Payne I Land
   Las Colinas, TX    109.9 Acres    5,683 �� —      5,591    9.00 12/07
Payne II
   Valley Ranch, TX    39.9 Acres    4,803    —      4,526    10.25 5/08
Pioneer Crossing
   Travis County, TX    439.1 Acres    1,514    —      1,484    9.25 6/08
Valley Ranch
   Irving, TX    29.9 Acres    2,520    —      2,469    10.25 5/08
West End Land
   Dallas, TX    5.3 Acres    8,370    2,000    6,169    9.25 ⁽¹⁾ 1/07

         41,071    2,000    27,869

         $ 79,000    $ 26,443    $ 39,918

(1) Variable rate
A brief discussion of the most significant refinancing transactions of 2006 follows:
Woodview Apartments
In December 2006, TCI refinanced the Woodview Apartments in Odessa, Texas in the principal amount of $5.2 million from Union Bank of California. Terms of the note require monthly interest only payments through January 2010 and commencing February 2010 monthly principal interest payments based on a twenty-seven year amortization. The interest rate is fixed for the first five years at 6.75% then converts to ~~Financial Statements~~
a variable rate at the six month LIBOR rate plus 2.25% adjusted quarterly. The loan matures in January 2037.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Forum Office Building
In ~~February 2004,~~June 2006, TCI obtained replacement financing for the ~~Brandeis office~~Forum Office building ~~was returned to the lender via a Deed~~ in ~~Lieu of Foreclosure process. The outstanding debt and accrued interest was $8.8 million. TCI recorded a net impairment of $4.4 million~~Richmond, Virginia in the ~~fourth quarter~~principal amount of ~~2003~~$6.0 million from Woori Bank in Richmond, Virginia. Terms of the note require monthly principal and interest payments based on a twenty-year amortization. The interest rate is fixed for ~~this transaction.~~the first five years at 7.75% and then converts to a variable rate at Prime plus 0.5%, adjusted quarterly. The loan matures in July 2013.
One Hickory
In ~~February 2004,~~May 2006, TCI ~~received a loan for $1.0 million that~~refinanced the property at 1800 Valley View Lane in Farmers Branch, Texas known as One Hickory, in the principal amount of $9.3 million. TCI’s principal offices are located in this facility. The lender is ~~cross defaulted and cross collateralized with ARI’s purchase of land~~Cathay Bank in ~~Portage County, Ohio.~~Houston, Texas. The loan ~~bears interest at the prime rate plus .5%, which is currently 8.0%,~~matures in 2010 and requires monthly principal and requires monthly principal and interest payments based on a 20-year amortization. The interest rate is fixed and ~~matured~~based on the five-year Treasury Note plus 2%.
Two Hickory
In July 2006, TCI refinanced the property at 1750 Valley View Lane in ~~February 2005. This~~Farmers Branch, Texas known as Two Hickory, in the principal amount of $9.5 million. The lender is Cathay Bank in Houston, Texas. The loan matures in September 2011 and requires monthly principal and interest payments based on a 25-year amortization. The interest rate is fixed and based on the five-year Treasury Note plus 2%.
LaDue/Walker
In October 2006, TCI refinanced the 99-acre tract in Farmers Branch, Texas known as LaDue/Walker. The gross amount of the loan was $13.9 million, which was reduced by $3.4 million previously escrowed for participations. The net proceeds after payoff of the previous loan were $0.3 million. Terms of the loan call for interest at 8.6% and maturity in August 2008.
Payne I Land
In April 2006, TCI obtained an additional $5.7 million in financing on the 109-acre tract of land located at State Highway 114 and Belt Line Road in Irving, Texas known as Payne I Land, or TCI 109 Beltline. The loan from Bank Midwest accrues interest at 9% and matures in December 2007 and is secured by a first and second lien on the subject property. Terms require interest only payments monthly and the balance at maturity.
West End Land
In March 2006, TCI refinanced the 5.34 acre tract in Dallas, Texas known as West End Land, in the principal amount of $8.37 million. The loan from U.S. Bank accrues interest at the Prime rate plus 1% and matures January 2007. In 2007, the loan was extended until March 2008.
Kaufman and Dallas County Land
In November 2006, TCI, through a subsidiary company, closed on the initial round of funding for a $15 million secured line of credit provided by a California-based lending institution. Proceeds for the initial funding were $14.3 million, net of closing costs and fees of $700,000. The net proceeds were used primarily to fund acquisitions and ~~paid~~operations. Advances under the line of credit are presently secured by 11 separate tracts of land
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
located in ~~full~~Dallas County and Kaufman County, Texas, the largest of which is a 2,700 acre tract of land in ~~August 2005.~~Kaufman County. The advances accrue interest at the rate of Prime plus 200 basis points; interest is payable monthly. Monthly principal payments equal to 1/72nd of the outstanding advances are required in months 4-12 following the advance; additional principal payments equal to 1/36th of the outstanding advances are required in months 13-18 following the advance. All unpaid principal and interest is due on the earlier of a) 18 months after the advance or b) November 2010. The loan is guaranteed by TCI and TCI is required to meet certain net worth and coverage ratios on a quarterly and annual basis.
In 2005, TCI ~~financed/~~refinanced the following properties:

Property

Location

Sq. Ft./Units/
Rooms/ Acres
   Debt
Incurred
Debt
Discharged

Net Cash
Received
Interest
Rate Maturity
Date    Location
Sq. Ft./Units/
Rooms/ Acres
   Debt
Incurred
Debt
Discharged

Net
Cash
Received
Interest
Rate Maturity
Date
Apartments

Autumn Chase
   Midland, TX    64 Units    $ 1,166    $ 797    $ 317 5.88 %⁽¹⁾ 05/35    Midland, TX    64 Units    $ 1,166    $ 797    $ 317 5.88 ⁽¹⁾ 5/35
Courtyard
   Midland, TX    133 Units    1,342    966    266 5.88 ⁽¹⁾ 05/35    Midland, TX    133 Units    1,342    966    266 5.88 ⁽¹⁾ 5/35
Southgate
   Odessa, TX    180 Units    1,879    1,712    61 5.88 ⁽¹⁾ 05/35    Odessa, TX    180 Units    1,879    1,712    61 5.88 ⁽¹⁾ 5/35
Westwood
   Odessa, TX    79 Units    500    —      464 5.25 ⁽¹⁾ 12/35    Odessa, TX    79 Units    500    —      464 5.25 ⁽¹⁾ 12/35

         4,887    3,475    1,108

Office Buildings

Bridgeview Plaza
   LaCrosse, WI    116,008 Sq. Ft.    7,197    6,304    649 7.25 ⁽¹⁾ 03/10    LaCrosse, WI    116,008 Sq. Ft.    7,197    6,304    649 7.25 ⁽¹⁾ 3/10
Shopping Centers

Dunes Plaza
   Michigan City, IN    223,869 Sq. Ft.    3,750    2,685    658 7.50 ⁽¹⁾ 01/10    Michigan City, IN    223,869 Sq. Ft.    3,750    2,685    658 7.50 ⁽¹⁾ 1/10
Hotels

The Majestic
   Chicago, IL    55 Rooms    3,225    —      3,066 6.40 06/10    Chicago, IL    55 Rooms    3,225    —      3,066 6.40 6/10
Land

2301 Valley Branch
   Farmers Branch, TX    23.763 Acres    2,420    2,841    (385 ) 8.50 ⁽¹⁾ 12/06    Farmers Branch, TX    23.8 Acres    2,420    2,841    (385 ) 8.50 ⁽¹⁾ 12/06
Alliance Airport⁽²⁾
   Tarrant County, TX    12.724 Acres    553    —      540 7.25 ⁽¹⁾ 01/07    Tarrant County, TX    12.7 Acres    553    —      540 7.25 ⁽¹⁾ 1/07
Centura⁽³⁾
   Farmers Branch, TX    8.753 Acres    6,727    —      6,727 8.50 ⁽¹⁾ 08/07    Farmers Branch, TX    8.8 Acres    6,727    —      6,727 8.50 ⁽¹⁾ 8/07
DeSoto Ranch⁽²⁾
   DeSoto, TX    21.879 Acres    1,635    1,271    336 7.25 ⁽¹⁾ 01/07    DeSoto, TX    21.9 Acres    1,635    1,271    336 7.25 ⁽¹⁾ 1/07
McKinney 36
   Collin County, TX    34.58 Acres    4,000    1,747    2,123 6.50 ⁽¹⁾ 12/07    Collin County, TX    34.6 Acres    4,000    1,747    2,123 6.50 ⁽¹⁾ 12/07
Payne I
   Las Colinas, TX    109.85 Acres    6,732    —      6,550 8.00 12/07    Las Colinas, TX    109.8 Acres    6,732    —      6,550 8.00 12/07
Sheffield Village⁽²⁾
   Grand Prairie, TX    13.9 Acres    975    975    94 7.75 ⁽¹⁾ 03/07    Grand Prairie, TX    13.9 Acres    975    975    94 7.75 ⁽¹⁾ 3/07
West End⁽²⁾
   Dallas, TX    6.324 Acres    2,000    —      1,951 7.25 ⁽¹⁾ 01/07 ⁽⁴⁾    Dallas, TX    6.3 Acres    2,000    —      1,951 7.25 ⁽¹⁾ 1/07 ⁽⁴⁾
West End⁽²⁾
   Dallas, TX    5.498 Acres    2,000    —      1,842 8.00 ⁽¹⁾ 06/07    Dallas, TX    5.5 Acres    2,000    —      1,842 8.00 ⁽¹⁾ 6/07

         27,042    6,834    19,778

         $ 46,101    $ 19,298    $ 25,259

(1) Variable rate.
(2) Drawn on TCI’s $10 million line of credit for land acquisition and financing.
(3) IORI purchased the Centura Land for $6.7 million. See Note 8. “RELATED PARTIES.”
(4) Loan was paid off in November 2005 from a partial sale.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
~~In 2004, TCI financed/refinanced the following properties:~~

Property

Location

Sq. Ft./Units/
Rooms/Acres
   Debt
Incurred
Debt
Discharged

Net Cash
Received
Interest
Rate Maturity
Date
Apartments

Mountain Plaza
   El Paso, TX    188 Units    $ 5,184 $ 4,257    $ 370 5.16 % 12/34
Paramount Terrace
   Amarillo, TX    181 Units    3,176 2,663    323 5.15 06/37
Treehouse
   Irving, TX    160 Units    5,780 5,027    138 5.06 07/34
Office Buildings

1010 Common
   New Orleans, LA    494,579 Sq. Ft.    16,250 ⁽³⁾ 8,000    7,829 4.03 ⁽¹⁾ 07/07
225 Baronne
   New Orleans, LA    416,834 Sq. Ft.    500 ⁽⁴⁾ —      —   5.75 ⁽¹⁾ 10/05
Amoco
   New Orleans, LA    378,244 Sq. Ft.    1,500 ⁽⁴⁾ —      —   5.75 ⁽¹⁾ 10/05
Centura Tower
   Farmers Branch, TX    410,901 Sq. Ft.    34,000 ⁽⁵⁾ 36,889    (4,588 ) 5.50 ⁽¹⁾ 04/04
Centura Tower⁽²⁾
   Farmers Branch, TX    410,901 Sq. Ft.    3,800 ⁽⁵⁾ —      3,737 5.75 ⁽¹⁾ 04/06
Centura Tower
   Farmers Branch, TX    410,901 Sq. Ft.    50,000 37,594    2,989 4.94 10/09
Warehouses

Addison Hangers I & II⁽⁶⁾
   Addison, TX    52,650 Sq. Ft.    4,500 2,592    1,635 10.00 09/14
Hotels

City Suites
   Chicago, IL    45 Rooms    3,640 —      3,548 6.75 ⁽¹⁾ 09/09
Majestic Inn
   San Francisco, CA    57 Rooms    2,000 ⁽⁴⁾ 5,138    (1,278 ) 5.75 ⁽¹⁾ 10/05
Willows
   Chicago, IL    52 Rooms    3,500 —      3,411 6.75 ⁽¹⁾ 09/09
Land

Centura
   Farmers Branch, TX    8.753 Acres    4,485 4,400    (183 ) 7.00 ⁽¹⁾ 02/05 ⁽⁸⁾
Cooks Lane
   Fort Worth, TX    23.242 Acres    550 —      527 6.25 11/06
Hollywood, Dominion & Mira Lago
   Farmers Branch, TX    66.085 Acres    6,985 6,222    (67 ) 7.00 ⁽¹⁾ 02/05 ⁽⁹⁾
Lacy Longhorn
   Farmers Branch, TX    17.115 Acres    1,965 ⁽³⁾ —      78 4.03 ⁽¹⁾ 07/07
Marine Creek
   Fort Worth, TX    28.437 Acres    1,785 ⁽³⁾ —      1,746 4.03 ⁽¹⁾ 07/07
~~(1)~~ ~~Variable rate.~~
~~(2)~~ 2^nd ~~lien advance on Centura Tower.~~
~~(3)~~ ~~The 1010 Common office building, certain tracts of Marine Creek and the Lacy Longhorn land are cross collateralized.~~
~~(4)~~ ~~The Majestic Inn, 225 Baronne office building and Amoco office building are cross collateralized. The debt incurred by 225 Baronne and Amoco are 2~~^nd ~~lien loans.~~
~~(5)~~ ~~Debt was paid off by September 2004 refinancing.~~
~~(6)~~ The Addison Hangers were sold in September 2004 to a third party but were then leased back for 10 years on a triple net lease basis. This transaction has been recorded as a financing transaction for accounting purposes.
~~(7)~~ ~~The Hollywood Casino, Dominion and Mira Lago tracts are cross collateralized.~~
~~(8)~~ ~~Debt was paid off in February 2005.~~
~~(9)~~ ~~Debt was extended to February 2006.~~

NOTE 8. RELATED PARTY TRANSACTIONS
Throughout the period in which TCI qualified as a REIT for tax purposes, TCI charged rent to Regis Hotel Corporation, a related party, for TCI’s four hotel properties that were managed by Regis Hotel Corporation. As of December 31, 2000, when TCI no longer qualified as a REIT, the receivable from these rents totaled $2.1 million. During 2004 and 2005, this receivable was reduced by management fees earned by Regis Hotel Corporation. During 2006, TCI wrote off approximately $577,000 of the receivable which pertained to the Majestic Inn in San Francisco, California, which was sold in 2005. As of December 31, ~~2004~~2006 and 2005, the receivable from Regis Hotel Corporation was ~~$1.4~~$403 million and $1.1 million, respectively.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In December 2003, TCI’s Board of Directors approved the payment to Regis of a six percent ~~(6.0%)~~ construction management fee on all construction projects in progress at December 31, 2003 and thereafter, to be applied to all construction costs incurred during 2003 and thereafter on each project. ~~Construction~~TCI incurred construction management and supervision fees of $2.6 million for 2006 and $1.7 million for ~~2005 and $5.6 million for 2004 were treated as reductions in the affiliate receivable balance from Prime.~~2005.
In December 2003, TCI sold six properties to subsidiaries of Unified Housing Foundation, Inc. (“UHF”), a Texas Non-Profit 501(c)3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, the Limestone at Vista Ridge apartments for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone Canyon apartments for $18.0 million, the Sendero Ridge apartments for $29.4 million and Tivoli apartments for $16.1 million. All of the transactions included the assumption of debt and notes receivable for seller financing to TCI for the remainder of the purchase price. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis Realty I, LLC, an affiliate, is Senior Vice President of UHF. Due to UHF being ~~considered~~ a related party to TCI and TCI having ~~continued~~continuing involvement and control of these entities, these transactions have not been recorded as sales. Instead, these transactions ~~will be~~have been accounted for onusing the deposit method and the properties and corresponding debt will continue to be consolidated by TCI. All of these transactions were approved by TCI’s Board of Directors. Mr. Stokely abstained from voting on all of these transactions. The loans on Limestone Canyon, ~~apartments,~~ Limestone at Vista Ridge ~~apartments~~ and Tivoli ~~apartments~~ were approved by their prospective lenders for transfer to the purchasing entities. TCI has guaranteed the loans on ~~both of~~ these transfers. ~~Also,~~ Marine Creek land and the Cliffs of El Dorado apartments were recognized as sales during 2004. See NOTE 2. “REAL ESTATE.” Management is currently seeking lender approval on the transfer of the note associated with the Sendero Ridge apartments.
In ~~January 2004, TCI purchased 14.216 acres of land from ARI with a net purchase price of $2.6 million, decreasing the affiliate receivable balance from Prime by $2.6 million.~~
~~In February 2004, TCI incurred a debt for $1.0 million used for the purchase of land by ARI, increasing the affiliate receivable balance from Prime by $1.0 million.~~
Also in February 2004, TCI recorded the sale of a tract of Marine Creek land originally sold to a related party in December 2003. This transaction was not recorded as a sale for accounting purposes in December 2003 and was recorded as a TCI refinancing transaction in February 2004. TCI received $1.2 million in cash from the related party in February 2004 as payment on the land. TCI had a note receivable balance of $270,000 remaining that bore interest at 6.00%, required quarterly payments from available surplus cash, and was due in December 2007. TCI recorded the sale of the Marine Creek land tract due to the payment received on the note receivable. See Note 3. “NOTES AND INTEREST RECEIVABLE.”
In May 2004, TCI purchased the Treehouse Apartments from an affiliate with a net purchase price of $7.5 million for the assumption of debt and a note receivable, less cash received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of El Dorado Apartments was not recorded as a sale for accounting purposes. TCI recorded the sale of the Cliffs of El Dorado in May 2004 due to full payment received for the Cliffs of El Dorado note receivable.
~~In June 2004, TCI purchased 17.115 acres of land from ARI with a net purchase price of $4.5 million, reducing the affiliate receivable balance from Prime by $4.5 million.~~
~~Also in June 2004, TCI sold apartments to ARI with a net purchase price of $5.0 million, increasing the affiliate receivable balance from Prime by $5.0 million.~~
Again in June 2004, TCI refinanced an office building and two parcels of land. TCI paid-off an existing note payable for ARI for $1.9 million, increasing the affiliate receivable balance from Prime by $1.9 million.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
In September 2004, TCI sold 9.96 acres ~~of land~~known as Limestone Canyon II to ~~an affiliate~~UHF for a purchase price of $720,000 for a note receivable. Due to no cash received and common control, TCI has elected to account for this sale on the deposit method until the requirements for a sale have been met. No sale was recognized and no note receivable has been recorded for this transaction.
In December 2004, TCI purchased five tracts of land from ARI, including the LCLLP tract (45.49 acres); the Payne tract (268 acres), of which TCI owns a 50% Tenant-In-Common interest; the Rochelle I tract (10.096 acres); the Rochelle II tract (21.269 acres); and the Valley Ranch tract (29.9 acres) for $39.1 million, including the assumption of debt and a reduction to the affiliate receivable balance from Prime of $29.1 million.
In June 2005, TCI purchased a subsidiary of a related party for $4.1 million, decreasing the affiliate receivable by $4.1 million.
In August 2005, TCI sold ~~8.753~~8.8 acres, known as “Centura Land” to ~~an affiliate~~IORI for $6.7 million. For a period of one year following closing and 90 days thereafter, the buyer has the right to convey the land to TCI for the original sales price, plus a 12% preferred return per annum accruing from the closing date. This transaction has been treated as a financing by TCI, with a note payable of $6.7 million recorded. The put option was extended for one year and expires in November 2007.
In October 2003, TCI sold the One Hickory office building in Farmers Branch, Texas to IORI, a related party. TCI owns approximately 25 percent of the outstanding common shares of IORI. TCI sold One Hickory to IORI for $12.2 million and financed $12.0 million of the purchase price with a note receivable bearing interest at 5.49 percent per annum and maturing in June 2006. The $12.2 million sales price approximated TCI’s initial cost of acquiring the property in 2002 from American Realty Investors, Inc. (“ARI”), a related party. ARI owns approximately 82 percent of the outstanding common shares of TCI. IORI immediately sold One Hickory together with 202 acres of undeveloped land to a partnership, the general partner of which was then an affiliate of ARI for a total sales price of $37.2 million. In May 2006, the partnership sold One Hickory and the undeveloped land back to IORI for $37.2 million. IORI in turn sold One Hickory back to TCI, in satisfaction of the $12.0 million note payable to IORI.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In November 2006, ARI purchased Windmill Farms, 3,035 acres in Kaufman County, Texas for $52.0 million. The purchase price was partially funded by $39 million debt and $10.0 million Preferred Stock of TCI. In connection with the purchase by ARI, TCI issued $10.0 million of Series D Preferred Stock to the sellers of the property. The transaction was recorded on the books of TCI as a reduction in the amount payable to affiliate of $10.0 million.
In August 2006, TCI purchased 99 acres in Farmers Branch, Texas known as the LaDue/Walker tract, from ARI for $21.5 million. The transaction was financed by assumption of $9.9 million note payable and an increase in the amount payable to affiliate of $11.2 million.
During 2002, TCI’s Board of Directors authorized the Chief Financial Officer of the Company to advance funds either to or from the Company, through BCM (then the advisor to the Company), in an amount up to $15.0 million, on the condition that such advances shall be repaid in cash or transfers of assets within 90 days. These advances are unsecured, generally have not had specific repayment terms, and have been reflected in TCI’s financial statements as other assets or other liabilities. Several property transfers from BCM or Prime were made during 2005 and 2004 to reduce the affiliate balance. Each of these transactions was approved by TCI’s Board of Directors. Effective July 1, 2005, TCI and the advisor agreed to charge interest on the outstanding balance of funds advanced to or from TCI. The interest rate, set at the beginning of each quarter, is the prime rate plus 1% on the average daily cash balances advanced.
Affiliate receivable with Regis Hotel Corporation are included within Other Assets and the affiliate payable to Prime and IORI is included within Other Liabilities in the accompanying consolidated balance sheet. Prime replaced BCM as the contractual advisor in July 2003 and assumed all of BCM’s affiliate balances and obligations from TCI. The following table reconciles the beginning and ending balances of affiliate receivables (payables) as of December 31, ~~2005.~~2006.

   Prime IORI    Prime
Balance, December 31, 2004
   $ (829 ) $ (260 )
Balance, December 31, 2005
   $ (11,668 )
Cash transfers
   56,046 —      76,682
Cash repayments
   (59,078 ) 260    (84,412 )
Repayments through property transfers
   (11,638 ) —      20,079
Fees payable to affiliates
   (4,340 ) —      (22,747 )
Insurance proceeds received by Advisor
   8,182 —      11,272
Litigation settlement received by Advisor
   2,442
Sale proceeds received by Advisor
   1,462
Repayment for income tax reimbursement
   —   —      3,771
Payables clearing through Prime
   (10 ) —
TCI expenses paid by Prime
   (2,558 )

Balance, December 31, 2005
   $ (11,667 ) $ —
Balance, December 31, 2006
   $ (5,677 )

Other Assets ~~includes~~of December 31, 2006 and 2005 include $351,000 and $1.1 million respectively due from Regis Hotel Corporation, a related party. ~~In addition, TCI owes $3.0 million to Prime and Regis Property Management for management fees, brokerage sales and acquisition commissions, and refinancing fees.~~
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
~~Returns on Metra Properties.~~    In April 2002, TCI sold 12 apartment properties to partnerships controlled by Metra Capital, LLC (“Metra”). Innovo Group, Inc. (“Innovo”) is a limited partner in the partnerships that purchased the properties. Joseph Mizrachi, then a Director of ARI, a related party, controlled approximately 11.67% of the outstanding common stock of Innovo. Management determined to treat the sales as financing transactions, and TCI continued to report the assets and the new debt incurred by Metra on its financial statements. The partnership agreements for each of these partnerships state that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15% cumulative compounded annual rate of return on their invested capital, as well as a cumulative compounded annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these properties. These distributions to the Metra Partners have priority over distributions to any other partners. In August 2004, ARI, TCI, and IORI instituted an action in Texas State District Court regarding the transaction. During April 2005, resolution of the litigation occurred, settling all liabilities remaining from the original partnership arrangements which included a return of investor equity, cessation of preferential returns, prospective asset management fees and miscellaneous fees and transactions costs from the Plaintiffs as a prepayment of a preferred return, along with a delegation of management and corresponding payment of management fees to Prime, and a motion to dismiss the action as a part of the resolution. Of the prepayment, the Company recognized expenses of $462,000 and a reduction in liabilities of $2.1 million during the second quarter of 2005.

NOTE 9. PREFERRED STOCK
TCI’s Series A Cumulative Convertible Preferred Stock consists of a maximum of 6,000 shares with a par value of $.01 per share and a liquidation preference of $100.00 per share. Dividends are payable at the rate of $5.00 per year or $1.25 per quarter to stockholders of record on the 15^th day of each March, June, September and December when and as declared by the Board of Directors. The Series A Preferred Stock may be converted after November 1, 2003, into Common Stock at the daily average closing price of the Common Stock for the prior five trading days. At December 31, 2002 and 2001, 5,829 shares of Series A Preferred Stock were issued and outstanding. On November 13, 2003, the 5,829 shares of Series A Preferred Stock outstanding were converted into 41,075 share of TCI common stock. The Series A Preferred Stock was eliminated on November 21, 2003.
In conjunction with the purchase of the Baywalk, Island Bay and Marina Landing Apartments, all located in Galveston, Texas, TCI issued 30,000 shares of Series C Preferred Stock. TCI’s Series C Cumulative Convertible Preferred Stock consists of a maximum of 30,000 shares with a liquidation preference of $100.00 per share. Dividends are payable at the annual rate of $5.00 per share or $1.25 per quarter through September 2002, then $6.00 per share annually or $1.50 per quarter through September 2003, then $7.00 per share annually or $1.75 per quarter thereafter. After September 30, 2006, the Series C Preferred Stock may be converted into Common
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock at 90.0% of the daily average closing price of the Common Stock for the prior five trading days. The Series C Preferred Stock is redeemable for cash at any time at the option of TCI. At December 31, ~~2005,~~2006, 30,000 shares of Series C Preferred Stock were issued and outstanding.
In November 2006, TCI acquired approximately 3,000 acres of partially developed land in Forney, Texas, known as Windmill Farms for approximately $50.2 million. Forney is a suburb east of the Dallas Fort Worth Metroplex. The purchase price was paid by issuance of $10 million in TCI Series D Preferred Stock, as well as additional financing arranged by Prime. Immediately upon closing, TCI sold its interest in the property to ARI, for an amount equal to its investment in the property, at no gain or loss. ARI assumed all of the liabilities incurred associated with the purchase. The net $10 million proceeds from the sale to ARI were applied to reduce the balance due to Prime. The Series D Preferred Stock, which is not convertible into any other security, requires dividends payable at the initial rate of seven percent annually. The dividend rate increases ratably from seven to nine percent in future periods.
NOTE 10.    DIVIDENDS
TCI paid no dividends on its Common Stock in 2006, 2005 ~~2004~~ or ~~2003.~~2004. The payment of dividends, if any, will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.
NOTE 11.STOCK OPTIONS
In October 2000, TCI’s stockholders approved the 2000 Stock Option Plan (“2000 Plan”). The 2000 Plan is administered by the Stock Option Committee, which currently consists of two Independent Directors of TCI. The
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
exercise price per share of an option will not be less than 100% of the fair market value per share on the date of grant thereof. As of December 31, ~~2005,~~2006, TCI had 300,000 shares of Common Stock reserved for issuance under the 2000 Plan. No options have been granted under the 2000 Plan.
In October 2000, TCI’s stockholders approved the Director’s Stock Option Plan (the “Director’s Plan”) which provides for options to purchase up to 140,000 shares of TCI’s Common Stock. Options granted pursuant to the Director’s Plan are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. Each Independent Director was granted an option to purchase 5,000 Common shares at an exercise price of $14.875 per share on October 10, 2000, the date stockholders approved the plan. On January 1, 2005, 2004 and 2003, each Independent Director was granted an option to purchase 5,000 Common shares. The exercise price was $14.25, $16.73 and $17.64 per Common shares for 2005, 2004 and 2003, respectively. ~~Each Independent Director will be awarded an option to purchase an additional 5,000 shares on January 1 of each year.~~ On December 15, 2005, the Board of Directors terminated the Director’s Plan.

   2005    2004    2006    2005
   Number
of Shares Exercise
Price    Number
of Shares    Exercise
Price
Number
of Shares
   Exercise
Price
Number
of Shares
Exercise
Price
Outstanding at January 1,
   30,000 $ 17.19    15,000    $ 17.64    40,000    $ 16.01    30,000 $ 17.19
Granted
   20,000 14.25    15,000    16.73    —      —      20,000 14.25
Exercised
   —   —      —      —      —      —      —   —
Canceled
   (10,000 ) 17.19    —      —
Cancelled
   —      —      (10,000 ) 17.19

Outstanding at December 31,
   40,000 $ 16.01    30,000    $ 17.19    40,000    $ 16.01    40,000 $ 16.01

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 12.    ADVISORY AGREEMENT
Basic Capital Management, Inc. (“BCM”) served as advisor to TCI from March 28, 1989 to June 30, 2003. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by Prime Asset Management, Inc., (“PAMI”). PAMI is owned by Realty Advisors (80.0%) and Syntek West (20.0%), related parties. Syntek West is owned by Gene E. Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (“PIAMI”). On October 1, 2003, Prime Income Asset Management, LLC (“Prime”), which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. Realty Advisors, Inc. is owned by a trust established for the benefit of the children of Gene E. Phillips. Mr. Phillips is not an officer or director of BCM or PIAMI or Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.
Under the Advisory Agreement, Prime is required to annually formulate and submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity and other investments. Prime is required to report quarterly to the Board on TCI’s performance against the business plan. In addition, all transactions require prior Board approval unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to Prime by the Board.
The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that Prime shall be deemed to be in a fiduciary relationship to the stockholders and contains a broad standard governing Prime’s liability for losses incurred by TCI.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
The Advisory Agreement provides for Prime to be responsible for the day-to-day operations and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves), and an annual net income fee equal to 7.5% of net income, after certain adjustments.
The Advisory Agreement also provides for Prime to receive an annual incentive sales fee. Prime or an affiliate of Prime is to receive an acquisition commission for supervising the purchase or long-term lease of real estate. Prime or an affiliate of Prime is also to receive a mortgage brokerage and equity refinancing fee for obtaining loans to or refinancing of TCI’s properties. In addition, Prime receives reimbursement of certain expenses incurred by it, in the performance of advisory services for TCI.
The Advisory Agreement requires Prime or any affiliate of Prime to pay to TCI one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI.
Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement. In 2003 and 2005, Prime was required to refund to TCI $1.3 million and $2.4 million of Prime’s advisory fees. Prime was not required to refund any of its 2004 or 2006 advisory fees.
Additionally, if management were to request that Prime render services other than those required by the Advisory Agreement, Prime or an affiliate of Prime would be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 13. “PROPERTY MANAGEMENT,” Triad Realty Services, Ltd. (“Triad”), an affiliate of Prime, provides property management ~~services and as~~services. As discussed in NOTE 14. “REAL ESTATE ~~BROKERAGE.” Since~~BROKERAGE”, since January 1, 2003, Regis Realty I, LLC (“Regis I”), a related party, provided, on a non-exclusive basis, brokerage services.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 13.PROPERTY MANAGEMENT
Triad provides property management services for a fee of 6.0% or less of the monthly gross rents collected on residential properties and 3.0% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for property-level management services at various rates. The general partner of Triad is PIAMI. The limited partner of Triad is Highland Realty Services, Inc. (“Highland”), a related party. Triad subcontracts the property-level management and leasing of 2224 of TCI’s commercial properties (office buildings, shopping centers and industrial warehouses) and three of its hotels to Regis I. Regis I receives property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Since January 1, 2003, Regis Hotel I, LLC has managed TCI’s three hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland.
During ~~2003,~~ 2004, 2005 and ~~2005,~~2006, Regis I provided construction management and supervision services for TCI’s properties under construction. Regis I charged fees of 6.0% of certain construction costs. Those fees totaled ~~$4.1~~$6.2 million, ~~$5.6~~$2.0 million and ~~$1.7~~$2.6 million for ~~2003,~~ 2004, 2005 and ~~2005,~~2006, respectively.
NOTE 14.REAL ESTATE BROKERAGE
Regis I also provides brokerage services on a non-exclusive basis and is entitled to receive a commission for property purchases and sales, in accordance with a sliding scale of total brokerage fees to be paid by TCI.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
NOTE 15.    ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Revenue, fees and cost reimbursements to ~~BCM~~ or Prime and ~~their~~its affiliates:

   2005    2004    2003    2006    2005    2004
Fees:

Advisory fee
   $ 4,735    $ 6,733    $ 4,935    $ 8,626    $ 4,735    $ 6,733
Sales incentive fee
   1,490    —      —
Net income fee
   522    1,933    —      972    522    1,933
Property acquisition
   1,076    94    26    980    1,076    94
Mortgage brokerage and equity refinancing
   202    1,361    845    678    202    1,361

   $ 6,535    $ 10,121    $ 5,806    $ 12,746    $ 6,535    $ 10,121

Cost reimbursements
   $ 2,359    $ 2,181    $ 1,630    $ 2,778    $ 2,359    $ 2,181

Rent revenue
   $ 56    $ 69    $ 175    $ 846    $ 56    $ 69

Cost reimbursements incurred by BCM and Prime related to TCI and ARI are allocated based on the relative market values of each company’s assets.
Fees paid to Triad, an affiliate, Regis I and related parties:

   2005    2004    2003    2006    2005    2004
Fees:

Property acquisition
   $ 2,452    $ 328    $ 91    $ 2,664    $ 2,452    $ 328
Real estate brokerage
   1,878    6,320    1,451    1,878    1,878    6,320
Construction supervision
   1,714    5,625    4,050    1,714    1,714    5,625
Property and construction management and leasing commissions
   1,613    2,293    2,122    2,353    1,613    2,293

   $ 7,657    $ 14,566    $ 7,714    $ 8,609    $ 7,657    $ 14,566

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 16.INCOME TAXES
The company formerly qualified for tax treatment as a Real Estate Investment Trust (REIT), as defined by Sections 856 through 860 of the Internal Revenue Code of 1986, as Amended (the “Code”). Effective during the third quarter of 2000, TCI no longer met these requirements due to a concentration of ownership. Under the “Code”, TCI is prohibited from re-qualifying for REIT status for at least 5 years.
For ~~2005,~~2006, TCI has a taxable ~~income before~~loss without the use of operating loss carry ~~forwards and owes alternative minimum tax (AMT) of $424,000 for Federal tax purposes. This~~forwards. A net operating loss amount represents a credit toward ~~regulr~~regular Federal income tax liabilities in future years. As management cannot determine that it is more likely than not that TCI will realize the benefit of the deferred tax asset created by ~~the payment of the AMT,~~a net operating loss, a 100% valuation allowance has been established.
Effective January 1, 2004, the company was eligible to file a consolidated return with ARI. ~~Income~~The income tax benefit for 2006 and the income tax expense for 2004 in the accompanying financial statement ~~has been~~were calculated under ~~an agreement, whereby TCI has agreed to reimburse~~a Tax Sharing and Compensating Agreement (Agreement). In 2006, ARI ~~for the tax effect of TCI’s~~had net income onand TCI had net losses, thus, TCI recorded a current Federal tax benefit in the ~~consolidated net income~~amount of ~~ARI.~~$3,771,000. Since in 2004, TCI had net income and ARI had net losses, TCI recorded a current Federal tax liability in the amount of ~~$12,500,000~~$12,500,000. The benefit in 2006 and the expense in 2004 were based on the amount of ~~ARI~~ losses absorbed by ~~TCI’s~~ taxable income multiplied by the maximum statutory tax rate of 35%.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
Current income tax expense is attributable to:

   2005 2004    2006 2005 2004
Income from continuing operations
   $ 802 $ 10,976    $ (4,608 ) $ (802 ) $ (10,976 )
Income from discontinued operations
   (1,226 ) (23,476 )    837 1,226 23,476

   $ (424 ) $ (12,500 )    $ (3,771 ) $ 424 $ 12,500

There was no deferred tax ~~(expense) benefit~~expense <benefit> recorded for the period as a result of the uncertainty of the future use of the deferred tax asset.
The Federal income tax expense differs from the amount computed by the applying the corporate tax rate of 35% to the income before income taxes as follows:

   2005 2004    2006 2005 2004
Computed “expected” income tax <benefit> expense
   $ 3,322 $ 12,200    $ 1,227 $ 3,322 $ 12,200
Book to tax differences from partnerships not consolidated for tax purposes.
   265 4,300    (2,619 ) 265 4,300
Book to tax differences of depreciation and amortization
   729 (4,000 )    811 729 1,900
Book to tax differences in gains on sale of property
   2,935 1,900    (1,107 ) 2,935 (4,000 )
Book to tax differences from insurance proceeds
   (7,139 ) —   —
Use of Net Operating Loss carryforward
   (7,944 ) (1,200 )    —   (7,944 ) (1,200 )
Partial reduction allowance against current net operating loss benefit
   6,317 —   —
Other
   693 (700 )    (1,261 ) 693 (700 )

   $ —   $ 12,500    $ (3,771 ) $ —   $ 12,500

Alternative Minimum Tax
   $ 424 $ —      $ —   $ 424 $ —

TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The tax effect of temporary differences that give rise to the deferred tax asset are as follows:

   2005 2004    2006 2005 2004
Net Operating Losses
   $ 7,792 $ 14,852    $ 18,281 $ 7,792 $ 14,852
AMT Carryforward Credits
   1,347 923
AMT Credits
   1,210 1,347 923
Basis difference of:

Real Estate Holdings
   (7,797 ) (7,285 )    (21,975 ) (7,797 ) (7,285 )
Notes Receivable
   4,711 2,721    4,711 4,711 2,721
Investments
   (6,922 ) (2,720 )    (7,844 ) (6,922 ) (2,720 )
Notes Payable
   22,791 27,866    21,918 22,791 27,866
Deferred Gains
   14,235 6,387    14,069 14,235 6,387

Total
   36,157 42,744    30,370 36,157 42,744
Deferred Tax Valuation Allowance
   (36,157 ) (42,744 )    (30,370 ) (36,157 ) (42,744 )

Net Deferred Tax Asset
   $ —   $ —      $ —   $ —   $ —

TCI has ~~prior~~ tax net operating ~~losses~~loss carryforwards of approximately ~~$39~~$48.1 million expiring through the year ~~2019.~~
TCI’s tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, depreciation on owned properties and investments in joint venture partnerships. At December 31, 2005, TCI’s tax basis in its net assets was exceeded by their net basis for financial statement purposes by approximately $87.4 million and TCI’s tax basis in its net liabilities was exceeded by their net basis for financial statement purposes by approximately $91.9 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes by approximately $4.5 million. TCI’s state income tax expense is included in general and administrative expenses on the Income Statement.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
2026.
NOTE 17.FUTURE MINIMUM RENTAL INCOME UNDER OPERATING LEASES
TCI’S real estate operations include the leasing of commercial properties (office buildings, industrial warehouses and shopping centers). The leases thereon expire at various dates through 2020. The following is a schedule of minimum future rents on non-cancelable operating leases at December 31, ~~2005:~~2006:

2006
   $ 21,519
2007
   16,145    $ 24,864
2008
   12,975    $ 22,286
2009
   10,471    $ 19,221
2010
   6,841    $ 14,485
2011
   $ 10,193
Thereafter
   26,586    $ 50,375

   $ 94,537    $ 141,424

NOTE 18.    OPERATING SEGMENTS
Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of general and administrative expenses. Management evaluates the performance of the operating segments and allocates resources to each of them based on their operating income and cash flow. Items of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation award, equity in partnerships, and ~~equity~~ gains on sale of real estate totaling $25.0 million, $7.0 million and $10.4 million for 2006, 2005 and ~~$16.4 million for 2005,~~ 2004, ~~and 2003,~~ respectively. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, minority interests, foreign currency transaction loss and net loss from discontinued operations before gains on sale of real estate totaling ~~$17.7~~$16.5 million, ~~$21.7~~$19.8 million and ~~$19.7~~$21.9 million for 2006, 2005 ~~2004~~ and ~~2003,~~2004, respectively. Excluded from operating segment assets are assets of $133.0 million at December 31, 2006 and $146.0 million at December 31, 2005, ~~and $141.8 million at December 31, 2004,~~ which are not identifiable with an operating segment. There are no intersegment revenues and expenses and TCI conducted all of its business within the United States, with the exception of Hotel Akademia, a 161 room hotel in Wroclaw, Poland, which began operations in 2002. See “NOTE 2. “REAL ESTATE” and NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Presented below is the operating income of each operating segment and each ~~segments’~~segment’s assets for the years 2006, 2005 ~~2004~~ and ~~2003.~~2004.

   Land Commercial
Properties Apartments Hotels Total
2006

Rents
   $ 1,091 $ 39,309 $ 76,303 $ 11,361 $ 128,064
Property operating expenses
   2,819 24,131 45,425 6,590 78,965
Depreciation
   6 9,264 11,094 1,277 21,641
Interest
   10,838 11,045 27,926 2,021 51,830
Provision for asset impairment
   —   —   —   —   —
(Gain) on land sales
   (11,421 ) —   —   —   (11,421 )

Segment income (loss)
   $ (1,151 ) $ (5,131 ) $ (8,142 ) $ 1,473 $ (12,951 )

Real estate improvements and construction
   4,980 10,146 17,832 1,781 34,739
Assets
   338,989 201,531 488,909 29,062 1,058,491
Property Sales

Sales price
   $ 37,834 $ —   $ 15,350 —   $ 53,184
Cost of sales
   (26,413 ) —   (9,661 ) —   (36,074 )

Gain on sale
   $ 11,421 $ —   $ 5,689 $ —   $ 17,110

   Land Commercial
Properties Apartments Hotels Total    Land Commercial
Properties Apartments Hotels Total
2005

Rents
   $ 580 $ 27,857 $ 67,714 $ 9,293 $ 105,444    $ 571 $ 27,857 $ 65,355 $ 9,293 $ 103,076
Property operating expenses
   2,713 15,670 41,185 5,317 64,885    2,630 15,664 39,210 5,373 62,877
Depreciation
   31 6,541 8,656 902 16,130    —   6,571 8,578 902 16,051
Interest
   4,923 7,448 25,950 1,608 39,929    5,050 7,448 25,071 1,608 39,177
Provision for asset impairment
   1,840 —   —   —   1,840    1,840 —   —   —   1,840
Gain on land sales
   (7,702 ) —   —   —   (7,702 )
(Gain) on land sales
   (7,702 ) —   —   —   (7,702 )

Segment income (loss)
   $ (1,225 ) $ (1,802 ) $ (8,077 ) $ 1,466 $ (9,638 )    $ (1,247 ) $ (1,826 ) $ (7,504 ) $ 1,410 $ (9,167 )

Real estate improvements and construction
   909 2,514 53,303 41 56,767    909 2,514 53,303 41 56,767
Assets
   212,357 182,175 520,023 28,514 943,069    212,357 182,175 520,023 28,514 943,069
Property Sales

Sales price
   $ 28,537 $ 50,927 $ 19,750 $ 7,900 $ 107,114    $ 28,537 $ 50,927 $ 19,750 $ 7,900 $ 107,114
Cost of sales
   (13,492 ) (31,089 ) (11,880 ) (4,628 ) (61,089 )    (13,492 ) (31,089 ) (11,880 ) (4,628 ) (61,089 )
Deferral of gains on current period sales
   (7,343 ) —   —   —   (7,343 )    (7,343 ) —   —   —   (7,343 )
Recognition of previously deferred gains
   —   —   (493 ) —   (493 )    —   —   493 —   493

Gain on sale
   $ 7,702 $ 19,838 $ 8,363 $ 3,272 $ 39,175    $ 7,702 $ 19,838 $ 8,363 $ 3,272 $ 39,175

   Land Commercial
Properties Apartments Hotels Total    Land Commercial
Properties Apartments Hotels Total
2004

Rents
   $ 564 $ 24,499 $ 51,127 $ 7,414 $ 83,604    $ 564 $ 24,499 $ 51,127 $ 7,414 $ 83,604
Property operating expenses
   1,548 15,574 31,713 4,375 53,210    1,548 15,574 31,713 4,375 53,210
Depreciation
   46 7,833 7,093 1,742 16,714    46 7,833 7,093 1,742 16,714
Interest
   3,736 6,107 18,459 2,161 30,463    3,736 6,107 18,459 2,161 30,463
Provision for asset impairment
   —   1,722 —   —   1,722    —   1,722 —   —   1,722
Gain on land sales
   (7,110 ) —   —   —   (7,110 )
(Gain) on land sales
   (7,110 ) —   —   —   (7,110 )

Segment income (loss)
   $ 2,344 $ (6,737 ) $ (6,138 ) $ (864 ) $ (11,395 )    $ 2,344 $ (6,737 ) $ (6,138 ) $ (864 ) $ (11,395 )

Real estate improvements and construction
   410 4,828 152,684 4,090 162,012    410 4,828 152,684 4,090 162,012
Assets
   134,575 127,528 480,492 35,933 778,528    134,575 127,528 480,492 35,933 778,528
Property Sales

Sales price
   $ 32,550 $ 205,725 $ 38,392 $ 276,667    $ 32,550 $ 205,725 $ 38,392 $ —   $ 276,667
Cost of sales
   (24,859 ) (143,826 ) (29,316 ) (198,001 )    (24,859 ) (143,826 ) (29,316 ) —   (198,001 )
Deferred gain on sale
   (581 ) (5,455 ) (2,172 ) (8,208 )    (581 ) (5,455 ) (2,172 ) —   (8,208 )

Gain on sale
   $ 7,110 $ 56,444 $ 6,904 $ 70,458    $ 7,110 $ 56,444 $ 6,904 $ —   $ 70,458

   Land
Commercial
Properties
Apartments Hotels Total
2003

Rents
   $ 761 $ 24,672 $ 36,217 $ 6,908 $ 68,558
Property operating expenses
   2,167 16,064 26,314 4,631 49,176
Depreciation
   45 7,192 2,950 1,619 11,806
Interest
   3,696 5,707 9,857 1,967 21,227
Provision for asset impairment
   198 —   —   —   198
Gain on land sales
   (1,641 ) —   —   —   (1,641 )

Segment income (loss)
   $ (3,704 ) $ (4,291 ) $ (2,904 ) $ (1,309 ) $ (12,208 )

Real estate improvements and construction
   322 4,436 79,286 2,939 86,983
Assets
   144,098 252,319 351,699 34,211 782,327
Property Sales

Sales price
   $ 11,807 $ 40,994 $ 34,290 $ 87,091
Cost of sales
   (8,450 ) (31,232 ) (22,402 ) (62,084 )
Deferred gain on sale
   (1,716 ) —   —   (1,716 )

Gain on sale
   $ 1,641 $ 9,762 $ 11,888 $ 23,291

~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The tables below reconcile the segment information to the corresponding amounts in the Consolidated Statements of Operations:

   2005 2004 2003    2006 2005 2004
Segment operating income (loss)
   $ (9,638 ) $ (11,395 ) $ (12,208 )    $ (12,951 ) $ (9,167 ) $ (11,395 )
Other non-segment items of income/(expense):

General and administrative
   (8,255 ) (9,279 ) (9,149 )    (4,006 ) (8,255 ) (9,279 )
Advisory fees
   (4,736 ) (6,733 ) (4,935 )    (8,626 ) (4,736 ) (6,733 )
Interest income
   3,671 3,683 2,857    2,698 3,671 3,683
Gain/(loss) on foreign currency transaction
   292 3,766 (3,309 )    2 292 3,766
Provision for losses
   —   1,456 (158 )    —   —   1,456
Discount on sale of note receivable
   —   —   (104 )    —   —   —
Net income fee
   (522 ) (1,933 ) —      (972 ) (522 ) (1,933 )
Incentive Fees
   (1,490 ) —
Other income (expense) items
   370 555 13,019    21,407 370 555
Equity in earnings of investees
   968 (1,497 ) (4,291 )    890 968 (1,497 )
Minority interests
   (112 ) (1,194 ) 2,230    393 (112 ) (1,194 )

Loss from continuing operations
   $ (17,962 ) $ (22,571 ) $ (16,048 )
Income (loss) from continuing operations
   $ (2,655 ) $ (17,491 ) $ (22,571 )

NOTE 19.    DISCONTINUED OPERATIONS
Effective January 1, 2002, TCI adopted Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. This statement requires that the operations related to properties that have been sold or properties that are intended to be sold, be presented as discontinued operations in the statement of operations for all periods presented, and properties intended to be sold are to be designated as “held for sale” on the balance sheet.
For 2006, 2005 ~~2004~~ and ~~2003,~~2004, income (loss) from discontinued operations relates to 13nine operating properties sold in ~~2005~~2006 or to be sold in ~~2006,~~2007, 13 operating properties sold during 2005 and 22 operating properties sold during ~~2004 and 13 operating properties sold during 2003.~~2004. The following table summarizes revenue and expense information for these properties sold.

   2005 2004 2003    2006 2005 2004
Revenue

Rental
   $ 14,626 $ 36,052 $ 55,616    $ 10,252 $ 16,994 $ 36,052
Property operations
   11,777 21,885 30,142    6,485 13,785 21,885

   2,849 14,167 25,474    3,767 3,209 14,167
Expenses

Interest
   6,407 12,280 21,844    4,988 7,158 12,280
Depreciation
   553 5,865 9,055    2,077 633 5,865

   6,960 18,145 30,899    7,065 7,791 18,145

Net loss from discontinued operations before gains on sale of real estate
   (4,111 ) (3,978 ) (5,425 )    (3,298 ) (4,582 ) (3,978 )
Gain on sale of real estate
   31,473 63,348 21,650    5,688 31,473 63,348
Write-down of assets held-for-sale
   (1,580 ) (4,477 ) (4,357 )    —   (1,580 ) (4,477 )
Equity in investees gain on sale of real estate
   1,673 3,884 4,853    —   1,673 3,884

Net income from discontinued operations
   $ 27,455 $ 58,777 $ 16,721    $ 2,390 $ 26,984 $ 58,777

~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 20.    QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of TCI’s quarterly results of operations for the years ~~2005~~2006 and ~~2004~~2005 (unaudited):

   Three Months Ended    Three Months Ended
   March 31, June 30, September 30, December 31,    March 31, June 30, September 30, December 31,
2005

2006

Rents and other property revenues
   $ 22,597 $ 24,834 $ 27,656 $ 30,357    $ 29,399 $ 29,883 $ 33,225 $ 35,557
Operating expenses
   21,485 23,154 23,846 25,521    26,249 25,058 30,368 31,563

Operating income
   1,112 1,680 3,810 4,836    3,150 4,825 2,857 3,994
Other income/(expense)
   (7,891 ) (7,721 ) (10,838 ) (11,508 )    (11,193 ) (11,766 ) (11,770 ) 4,544

Loss before gain on land sales, equity in earnings of investees and minority interest
   (6,779 ) (6,041 ) (7,028 ) (6,672 )
Income (loss) before gain on land sales, equity in earnings of investees and minority interest
   (8,043 ) (6,941 ) (8,913 ) 8,538
Gain on land sales
   10 2,394 2,331 2,967    331 8,690 2,973 (573 )
Equity in earnings (loss) of investees
   1,191 (45 ) (170 ) (8 )    103 (173 ) (256 ) 1,216
Minority interests
   155 (181 ) 33 (119 )    (172 ) 361 355 (151 )

Loss from continuing operations
   (5,423 ) (3,873 ) (4,834 ) (3,832 )
Income (loss) from continuing operations
   (7,781 ) 1,937 (5,841 ) 9,030
Income tax benefit
   —   —   —   802    2,731 1,196 646 35

Net loss from continuing operations
   (5,423 ) (3,873 ) (4,834 ) (3,030 )
Net income (loss) from continuing operations
   (5,050 ) 3,133 (5,195 ) 9,065
Discontinued operations, net of income tax
   9,771 206 1,207 15,045    (3,441 ) 1,517 881 2,596

Net income (loss)
   4,348 (3,667 ) (3,627 ) 12,015    (8,491 ) 4,650 (4,314 ) 11,661
Preferred dividend requirement
   (53 ) (52 ) (53 ) (52 )    (53 ) (53 ) (53 ) (51 )

Net income (loss) attributable to Common shares
   $ 4,295 $ (3,719 ) $ (3,680 ) $ 11,963    $ (8,544 ) $ 4,597 $ (4,367 ) $ 11,610

Earnings (Loss) Per Share

Net income (loss) from continuing operations
   $ (.69 ) $ (.50 ) $ (.62 ) $ (.39 )    $ (.65 ) $ .39 $ (.66 ) $ 1.14
Discontinued operations
   1.24 .03 .15 1.90    (.44 ) .19 .11 (.33 )

Net income (loss) applicable to Common shares
   $ .55 $ (.47 ) $ (.47 ) $ 1.51    $ (1.09 ) $ .58 $ (.55 ) $ 1.47

2004

Rents and other property revenues
   $ 19,645 $ 20,332 $ 21,703 $ 21,924
Operating expenses
   21,033 19,171 21,061 24,671

Operating income
   (1,388 ) 1,161 642 (2,747 )
Other income/(expense)
   (6,736 ) (4,340 ) (5,886 ) (7,696 )

Loss before gain on land sales, equity in earnings of investees and minority interest
   (8,124 ) (3,179 ) (5,244 ) (10,443 )
Gain on land sales
   2,106 —   747 4,257
Equity in earnings (loss) of investees
   (570 ) (940 ) (197 ) 210
Minority interests
   (324 ) (389 ) (154 ) (327 )

Loss from continuing operations
   (6,912 ) (4,508 ) (4,848 ) (6,303 )
Income tax benefit
   —   —   —   10,976

Net loss from continuing operations
   (6,912 ) (4,508 ) (4,848 ) 4,673
Discontinued operations, net of income tax
   8,976 1,519 (5,730 ) 30,536

Net income (loss)
   2,064 (2,989 ) (10,578 ) 35,209
Preferred dividend requirement
   (53 ) (52 ) (53 ) (52 )

Net income (loss) attributable to Common shares
   $ 2,011 $ (3,041 ) $ (10,631 ) $ 35,157

Earnings (Loss) Per Share

Net income (loss) from continuing operations
   $ (.86 ) $ (.56 ) $ (.60 ) $ .56
Discontinued operations
   1.11 .19 (.71 ) 3.77

Net income (loss) applicable to Common shares
   $ .25 $ (.37 ) $ (1.31 ) $ 4.33

   Three Months Ended
   March 31, June 30, September 30, December 31,
2005

Rents and other property revenues
   $ 22,291 $ 24,359 $ 26,932 $ 29,494
Operating expenses
   21,150 22,727 23,392 24,649

Operating income
   1,141 1,632 3,540 4,845
Other income/(expense)
   (7,816 ) (7,611 ) (10,647 ) (11,132 )

Loss before gain on land sales, equity in earnings of investees and minority interest
   (6,675 ) (5,979 ) (7,107 ) (6,287 )
Gain on land sales
   10 2,394 2,331 2,967
Equity in earnings (loss) of investees
   1,191 (45 ) (170 ) (8 )
Minority interests
   155 (181 ) 33 (119 )

Loss from continuing operations
   (5,319 ) (3,811 ) (4,913 ) (3,447 )
Income tax benefit
   —   —   —   802

Net loss from continuing operations
   (5,319 ) (3,811 ) (4,913 ) (2,645 )
Discontinued operations, net of income tax
   9,667 143 1,287 14,661

Net income (loss)
   4,348 (3,668 ) (3,626 ) 12,016
Preferred dividend requirement
   (53 ) (52 ) (53 ) (52 )

Net income (loss) attributable to Common shares
   $ 4,295 $ (3,720 ) $ (3,679 ) $ 11,964

Earnings (Loss) Per Share

Net income (loss) from continuing operations
   $ (.68 ) $ (.49 ) $ (.63 ) $ (.34 )
Discontinued operations
   1.22 .02 .16 1.86

Net income (loss) applicable to Common shares
   $ .54 $ (.47 ) $ (.47 ) $ 1.52

~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Quarterly results presented differ from those previously reported in TCI’s Form 10-Q due to the reclassification of the operations of properties sold or held for sale to discontinued operations in accordance with SFAS 144.
NOTE 21.    ~~CORRECTION OF ACCOUNTING ERROR IN PRIOR PERIOD~~
Subsequent to March 31, 2004, but prior to filing the Form 10-Q for the quarter ended June 30, 2004, TCI discovered an error in the depreciation calculation for a shopping center TCI had purchased in March 2003 for $8.7 million. The amount subject to depreciation was $7.8 million and was to be depreciated straight-line over 40 years or 480 months. Instead, the property was depreciated over 40 months instead of 480 months, resulting in depreciation expense being overstated by $1.8 million for 2003. The Consolidated Statements of Operations for the year ending December 31, 2003, reflects the correction of the impact of this error on depreciation expense of $1.8 million. The Consolidated Statement of Stockholders’ Equity for December 31, 2003 has been revised to reflect the correction of the error through a decrease in the December 31, 2003 balance of accumulated deficit and total stockholders’ equity of $1.8 million. All 2003 schedules in this Form 10-K reflect the prior period adjustment discussed in this note. TCI does not intend to restate any previously issued Form 10-Q or Form 10-K for previous periods because, in the opinion of management, the effect is not material to the results of operations for any period previously reported on.
~~NOTE 22.~~    ~~DERIVATIVE FINANCIAL INSTRUMENTS~~
During the first quarter of 2002, TCI entered into an interest rate swap agreement with a bank. This agreement contains a notional amount of $12.8 million and requires TCI to pay the bank a fixed rate of 4.3%, and requires the bank to pay to TCI based on the 30 day LIBOR rate. This agreement was entered in order to effectively fix the rate on TCI’s debt associated with the Limestone Canyon property. In December 2003, TCI sold the Limestone Canyon apartments to UHF, a related party. The swap agreement expired on December 9, 2004.
~~TCI has not designated the interest rate swap agreement as a hedge, as defined within Statement of Financial Accounting Standards No. 133,~~~~“Accounting for Derivative Instruments and Hedging Activities,”~~ ~~and as such, changes in the fair value of the swap agreement are recognized in earnings during the period of change and reflected in the statement of operations as interest expense.~~
~~NOTE 23.~~COMMITMENTS AND CONTINGENCIES AND LIQUIDITY
In February 1990, TCI, together with National Income Realty Trust, CMET and IORI, three real estate entities which, at the time, had the same officers, directors or trustees and advisor as TCI, entered into a settlement (the “Settlement”) of a class and derivative action entitled~~Olive et al. v. National Income Realty Trust et al.~~ (the “Olive Litigation”), relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. The Settlement was modified in 1994 (the “Modification”), which was amended on January 27, 1997, by Amendment to the Modification, effective January 9, 1994 (the “First Amendment”).
In October 2000, plaintiffs’ counsel asserted that loans made by TCI to BCM and American Realty Trust, Inc. breached the Modification. The Board believes that the provisions of the Settlement, Modification and the First Amendment terminated on April 28, 1999. However, the Court ruled that certain provisions continue to be effective after the termination date. This ruling was appealed by TCI and IORI.
~~Index to Financial Statements~~
~~TRANSCONTINENTAL REALTY INVESTORS, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~
On October 23, 2001, TCI, IORI and ARI jointly announced a preliminary agreement with the plaintiff’s legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval of the proposed settlement (the “Second Amendment”). Under the Second Amendment, the appeal was dismissed with prejudice and ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding common shares of IORI and TCI not currently owned by ARI. At that time, TCI had the same advisor as ARI and IORI. One of the directors of IORI also serves as a director for ARI and TCI.
On November 15, 2002, ARI commenced, through subsidiaries, a tender offer for shares of common stock of TCI and IORI. The price per share was $17.50 for TCI shares and $19.00 for IORI shares. The tender offers were completed on March 19, 2003. ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offer fulfilled the obligations under the Second Amendment and the Olive Litigation was dismissed with prejudice.
Partnership Obligations.    TCI is the limited partner in 10 partnerships that are currently constructing residential properties. As permitted in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to ~~buyout~~buy out the nonaffiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements. The total amount of the expected buyouts as of December 31, ~~2005~~2006 is approximately ~~$2.2~~$2.1 million. ~~TCI is a non-controlling general and limited partner in a real estate partnership and is obligated to fund approximately $1.1 million through June 30, 2006, for certain partnership obligations.~~
Commitments.    In September 2005, TCI deposited $1.8 million with a seller for the purchase of partnership and member interests in 14 separate apartments and apartment developments located in the Southeast. Each partnership or membership purchase will be closed separately, pending lender approval and other conditions. TCI’s total cash investment can be up to $3.6 million if all interests are purchased. TCI has formed a number ofpartnerships with ICON Partners (formerly Woodmont Development) to develop various residential and commercial projects. Generally, TCI is a 75% general partner in these partnerships, and is obligated to advance any required equity.
Liquidity.    ~~Although management anticipates~~Management believes that TCI ~~may~~will generate excess cash from property operations in ~~2006,~~2007; such excess, however, will not be sufficient to discharge all of TCI’s ~~debt~~ obligations as they become due. Management intends to ~~selectively~~ sell income producing ~~real estate,~~assets, refinance real estate and ~~incur~~obtain additional borrowings ~~against~~primarily secured by real estate to meet its ~~cash~~liquidity requirements.
Guarantees.    In February 2004, various subsidiaries of TCI guaranteed a $10 million line of credit for its parent, ARI. The subsidiaries of TCI also pledged and assigned assets, in the form of securities and partnership interests in construction properties, as additional collateral for this line of credit.
In November 2004, TCI guaranteed the $13.0 million note payable on the Limestone Ranch Apartments purchased from TCI by a subsidiary of Unified Housing Foundation, Inc. (“UHF”) in December 2003. TCI has guaranteed the payment obligations of the note balance, all interest accrued and payable, all other costs and fees associated with the note and any future collection expenses. The lender approved the transfer of the note to UHF’s subsidiary as part of this transaction.
In August 2005, TCI guaranteed the $10.0 million note payable on the Tivoli Apartments purchased from TCI by a subsidiary of UHF in December 2003. TCI has guaranteed the payment obligations of the note balance, all interest accrued and payable, all other costs and fees associated with the note and any future collection expenses. The lender approved the transfer of the note to UHF’s subsidiary as part of this transaction.
In September 2005, TCI guaranteed a loan of $1.6 million for a subsidiary of UHF. This loan is secured by a first lien on 22.3 acres of land ~~held~~known as Chase Oaks in Plano, Texas, owned by the related party.
In November 2005, TCI sold a note receivable for $1.1 million known as Round Mountain to a third party financial institution for full face value and accrued interest. TCI has guaranteed the payment obligations of the note balance, all interest accrued and payable, all other costs and fees associated with the note and any future collection expenses.
~~Index to Financial Statements~~
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In ~~November~~December 2005, TCI sold ~~a note~~two notes receivable on McKinney Ranch land for ~~$1.1~~$8.9 million to a third party financial institution for full face value and accrued interest. TCI has guaranteed the payment obligations of the note balance, all interest accrued and payable, all other costs and fees associated with the note and any future collection expenses.
In ~~December 2005,~~October 2006, Realty Advisors, Inc. (“RAI”), an affiliate of TCI ~~sold two note receivables~~and the parent company of BCM, borrowed $8 million from a South Korea commercial bank for ~~$8.9 million to~~the purpose of partially funding an investment in SH Chemical Co., Ltd. (“SH”) a ~~third party financial institution for full face value~~public company based in South Korea and ~~accrued interest. TCI has guaranteed the payment obligations~~a manufacturer of expanded polystyrene resin products. RAI purchased approximately 34% of the ~~note balance, all interest accrued~~outstanding common stock of SH. The $8 million commercial bank loan is collateralized by RAI’s investment in SH and ~~payable, all other costs and fees associated with the note and any future collection expenses.~~is guaranteed by TCI.
Other Litigation.    TCI is also involved in various other lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on TCI’s financial condition, results of operations or liquidity.
In January 2001, TCI exercised its option under the loan documents to extend the maturity date of three loans with a principal balance of $30.0 million secured by three office buildings in New Orleans, Louisiana. The lender has disputed TCI’s right to extend the loans. This dispute was the subject of litigation pending in the United States District Court for the Eastern District of Louisiana. On September 11, 2003, TCI settled with the lender. On September 18, 2003, TCI paid $5.0 million to the lender, which gave TCI the right to retire the remaining debt outstanding on the three office buildings on or before December 10, 2003 for $20.0 million. TCI paid the remaining $20.0 million on December 10, 2003, which resulted in a $4.4 million gain on extinguishment of debt. BCM also agreed to enter into a time sharing agreement with the lender for use of BCM’s airplane for 200 hours. BCM requested that TCI reimburse BCM for these costs at the rate of $2,750 per hour, which was approved by TCI’s Board of Directors. TCI recorded $550,000 in 2003 in general and administrative expenses for this reimbursement to BCM.
NOTE ~~24.~~22.    SUBSEQUENT EVENTS
Activities subsequent to December 31, ~~2005~~2006 not already reflected elsewhere in this 10-K are disclosed below.
In ~~2006,~~2007, TCI purchased the following ~~property:~~properties:

Property

Location

Sq. Ft./
Acres

Purchase
Price

Net Cash
Paid

Debt
Incurred
   Interest
Rate
Maturity
Date
Land

Woodmont Fairway Office
   Dallas, TX    5.866 Acres    $ 3,833    $ 1,014    $ 3,000    8.25 %⁽¹⁾ 01/07
Woodmont Merit Drive
   Dallas, TX    9.28 Acres    4,560    1,868    2,964
Southwood 1394
   Tallahassee, FL    14.52 Acres    1,150    477    748    8.50 ⁽¹⁾ 02/08
Valley Ranch 20
   Farmers Branch, TX    20 Acres    4,673    1,892    3,038    8.50 ⁽¹⁾ 02/08
Property

Location

Sq. Ft./ Acres
   Purchase
Price    Net Cash
Paid    Debt
Incurred    Interest
Rate Maturity
Date
Commercial

Parkwest I
   Farmers Branch, TX    383,114 Sq. Ft.    $ 39,350    $ 1,587    $ 35,000    6.06 ⁽¹⁾% 1/09
Parkwest II
   Farmers Branch, TX    707,559 Sq. Ft.    67,750    8,106    62,000    9.32 ⁽¹⁾ 1/13
Land

Keller Springs
   Addison, TX    5.7 Acres    2,526    539    2,021    9.25 ⁽¹⁾ 2/08
Woodmont Group VIII

~~(1) Assumed Debt.~~In 2007, TCI sold the following properties:
~~(2) Variable Interest Rate.~~
Property

Location

Units/Acres/
Rooms/Sq. Ft.
   Sales
Price    Net Cash
Received    Debt
Discharged    Gain on
Sale
Land

McKinney Ranch Land
   McKinney, TX    15.0 Acres    $ 2,789    $ 793    $ 1,850    $ 1,122
Apartments

Bluffs at Vista Ridge
   Lewisville, TX    272 Units    24,650    3,128    15,518    3,648
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In ~~2006,~~2007, TCI refinanced or financed the following ~~property:~~properties:

Property

Location

Sq. Ft./Units/
Rooms/Acres
   Debt
Incurred
Debt
Discharged

Net Cash
Received
   Interest
Rate Maturity
Date
Apartments

Hunters Glen
   Midland, TX    212 Units    $ 2,475    $ 1,804    $ 421    7.23 %⁽¹⁾ 02/09
Land

West End
   Dallas, TX    5.34 Acres    9,000    2,000    6,079    8.00 ⁽¹⁾ 03/07
Property

Location

Sq. Ft./Units/
Rooms/Acres
   Debt
Incurred
Debt
Discharged

Net Cash
Received
   Interest
Rate Maturity
Date
Hotels

City Suites Hotel
   Chicago, IL    45 Rooms    $ 7,300    $ 3,551    $ 3,841    —   % —
Land

Manhattan Land
   Farmers Branch, TX    108.9 Acres    7,000    —      6,620    10.0 1/08
Crowley & Wilmer Land
   Crowley&Wilmer, TX    142.6 Acres    3,390    —      2,633    9.75 7/07
(1) Variable rate.
~~Index to Financial Statements~~
SCHEDULE III
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, ~~2005~~2006

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Life on
Which
Depreciation
In Latest
Statement
of Operation
is Computed Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land Building &
Improvements Improvements Other Land
Building &
Improvements
(1)
Total Accumulated
Depreciation Date of
Construction Date
Acquired Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements
(1)
Total
(dollars in thousands) (dollars in thousands)
Held for Investment:

Properties Held for Investment

Apartments

4400, Midland, TX
$ 972 $ 349 $ 1,396 $ —   $ —   $ 349 $ 1,396 $ 1,745 $ 268 1981 04/98 40 years $ 2,825 $ 349 $ 1,396 $ —   $ — ⁽⁴⁾ $ 349 $ 1,396 $ 1,745 $ 303 1981 4/98 40 years
Apple Lane, Lawrence, KS
1,292 168 1,259 —   —   168 1,259 1,427 195 1989 01/00 40 years
Anderson Estates, Oxford, MS
984 691 2,683 —   —   691 2,683 3,374 99 2001 1/06 40 years
Arbor Point, Odessa, TX
1,827 321 1,285 525 —   321 1,810 2,131 801 1975 08/96 5-40 years 1,807 321 1,285 526 —   321 1,811 2,132 835 1975 8/96 5-40 years
Ashton Way, Midland, TX
972 384 1,536 52 —   384 1,588 1,972 376 1978 04/98 5-40 years 2,600 384 1,536 52 —   384 1,588 1,972 414 1978 4/98 5-40 years
Autumn Chase, Midland, TX
1,152 141 1,265 —   —   141 1,265 1,406 182 1985 04/00 40 years 1,138 141 1,265 —   — ⁽⁴⁾ 141 1,265 1,406 214 1985 4/00 40 years
Blue Lake Villas, Waxahachie, TX
10,611 762 10,521 —   —   526 10,757 11,283 740 2002 01/02 40 years 10,555 762 10,521 —   —   526 10,757 11,283 982 2002 1/02 40 years
Blue Lake Villas II, Waxahachie, TX
4,079 287 4,451 —   —   287 4,451 4,738 107 2005 01/05 40 years 4,050 287 4,451 —   —   287 4,451 4,738 111 2005 1/04 40 years
Bluffs At Vista Ridge, Lewisville, TX
15,518 2,585 18,832 —   —   2,585 18,832 21,417 —   2005 05/03 40 years
Breakwater Bay, Beaumont, TX
9,784 740 10,435 —   —   740 10,435 11,175 231 2003 05/03 40 years 9,709 740 10,435 —   —   740 10,435 11,175 485 2003 5/03 40 years
Bridges on Kinsey, Tyler, TX
14,380 862 15,849 —   —   862 15,849 16,711 166 2005 02/04 40 years 14,283 862 15,849 150 —   862 15,999 16,861 769 2005 2/04 40 years
Capitol Hill, Little Rock, AR
9,368 932 8,875 —   —   932 8,875 9,807 305 2003 03/03 40 years 9,297 932 8,875 —   —   1,860 7,948 9,808 530 2003 3/03 40 years
Courtyard, Midland, TX
1,327 151 1,359 —   —   151 1,359 1,510 159 1976 05/01 40 years 1,311 151 1,359 —   —   151 1,359 1,510 193 1976 5/01 40 years
Coventry, Midland, TX
1,162 236 369 173 —   236 542 778 259 1977 08/96 5-40 years 1,145 236 369 173 —   236 542 778 269 1977 8/96 5-40 years
Curtis Moore/Leflore, Greenwood, MS
1,757 847 5,774 —   —   847 5,774 6,621 225 2003 1/06 40 years
Dakota Arms, Lubbock, TX
12,493 921 12,888 —   —   921 12,888 13,809 187 2005 01/04 40 years 12,410 921 12,888 —   (76 )⁽²⁾ 921 12,812 13,733 533 2005 1/04 40 years
David Jordan Phase 2, Greenwood, MS
641 277 1,521 —   —   277 1,521 1,798 52 1999 1/06 40 years
David Jordan Phase3, Greenwood, MS
684 439 2,115 —   —   439 2,115 2,554 81 2003 1/06 40 years
DeSoto Ranch, DeSoto, TX
16,098 1,472 17,856 —   —   1,472 17,856 19,328 851 2002 05/02 40 years 16,008 1,472 17,856 —   —   1,472 17,856 19,328 1,276 2002 5/02 40 years
El Chapparal, San Antonio, TX
4,035 279 2,821 —   (402 )⁽²⁾ 279 2,419 2,698 1,131 1963 01/88 5-40 years
El Chaparral, San Antonio, TX
3,983 279 2,821 —   (402 ) 279 2,419 2,698 1,213 1963 1/88 5-40 years
Fairway View Estates, El Paso, TX
4,556 548 4,530 261 —   548 4,791 5,339 994 1977 03/99 40 years 3,105 548 4,530 261 —   548 4,791 5,339 578 1980 3/93 5-40 years
Fairways, Longview, TX
3,139 657 1,532 119 (266 )⁽²⁾ 657 1,385 2,042 550 1980 03/93 5-40 years 4,507 657 1,532 119 (266 )⁽²⁾ 657 1,386 2,043 1,126 1977 3/99 40 years
Falcon Lakes, Arlington, TX
13,509 1,437 15,375 —   —   1,437 15,375 16,812 1,239 2001 10/01 40 years 13,433 1,437 15,375 —   —   1,438 15,376 16,814 1,691 2001 10/01 40 years
Fountain Lake, Texas City, TX
2,945 861 2,585 19 (254 )⁽²⁾ 861 2,350 3,211 725 1975 12/94 5-40 years 2,913 861 2,585 19 (254 ) 861 2,350 3,211 778 1975 12/94 5-40 years
Fountains of Waterford, Midland, TX
1,550 311 852 1,538 —   311 2,390 2,701 1,584 1977 05/98 5-40 years 1,533 311 852 1,538 —   311 2,390 2,701 1,717 1974 4/05 5-40 years
Foxwood Apartments, Memphis, TN
5,540 699 6,289 —   —   699 6,289 6,988 39 1974 04/05 40 years 5,441 699 6,289 —   —   699 6,289 6,988 197 1977 5/98 5-40 years
Harper’s Ferry, Lafayette, LA
3,023 349 1,398 223 —   429 1,541 1,970 646 1972 02/92 5-40 years
Heather Creek, Mesquite, TX
11,930 1,100 12,241 —   —   1,326 12,015 13,341 501 2003 03/03 40 years
Hunters Glen, Midland, TX
1,804 519 2,075 321 —   519 2,396 2,915 736 1982 01/98 5-40 years
Kingsland Ranch, Houston, TX
21,790 1,188 23,387 —   —   1,188 23,387 24,575 536 2005 03/03 40 years
Laguna Vista, Farmers Branch, TX
5,148 288 6,638 —   —   288 6,638 6,926 —   —   ⁽⁹⁾ 12/04 —
Lake Forest, Houston, TX
12,728 335 13,708 —   —   335 13,708 14,043 —   2005 01/04 40 years
Legends of El Paso, El Paso, TX
4,204 1,318 4,009 —   —   1,318 4,009 5,327 —   —   ⁽⁹⁾ 07/05 —
Limestone Canyon, Austin, TX
12,213 1,998 12,247 —   1,895 ⁽⁴⁾ 1,998 14,142 16,140 1,942 1997 07/98 40 years
Limestone Ranch, Lewisville, TX
12,471 1,620 13,058 —   —   1,620 13,058 14,678 1,192 2001 05/01 40 years
Mariposa Villas, Dallas, TX
12,243 788 13,130 —   —   788 13,130 13,918 607 2002 01/02 40 years
Mission Oaks, San Antonio, TX
10,945 —   12,073 —   —   —   12,073 12,073 —   —   ⁽⁹⁾ 05/05 —
~~Index to Financial Statements~~
SCHEDULE III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Life on
Which
Depreciation
In Latest
Statement
of Operation
is Computed
Property/Location
Encumbrances Land Building &
Improvements Improvements Other Land
Building &
Improvements
(1)
Total Accumulated
Depreciation Date of
Construction Date
Acquired
(dollars in thousands)
Mountain Plaza, El Paso, TX
$ 5,110 $ 837 $ 3,347 $ 139 $ —   $ 837 $ 3,486 $ 4,323 $ 808 1972 01/98 5-40 years
Oak Park IV, Clute, TX
902 224 674 27 (95 )⁽²⁾ 224 606 830 201 1981 06/94 5-40 years
Paramount Terrace, Amarillo, TX
3,119 340 3,061 —   —   340 3,061 3,401 547 1983 05/00 40 years
Parc at Maumelle, Maumelle, AR
9,447 1,153 10,096 —   —   1,153 10,096 11,249 —   —   ⁽⁹⁾ 12/04 —
Parc at Metro Center, Nashville, TN
1,956 960 2,284 —   —   960 2,284 3,244 —   —   ⁽⁹⁾ 05/05 —
Quail Oaks, Balch Springs, TX
2,553 90 2,160 152 (187 )⁽²⁾ 125 2,090 2,215 1,173 1982 02/87 5-40 years
River Oaks, Wiley, TX
9,708 590 11,768 —   —   590 11,768 12,358 1,312 2001 10/01 40 years
Sendero Ridge, San Antonio, TX
24,178 2,635 26,725 —   —   2,635 26,725 29,360 1,312 2001 11/01 40 years
Somerset, Texas City, TX
2,722 936 2,811 179 (452 )⁽²⁾ 936 2,538 3,474 884 1985 12/93 5-40 years
Southgate, Odessa, TX
1,860 335 1,338 318 —   335 1,656 1,991 630 1976 08/96 5-40 years
Spy Glass, Mansfield, TX
15,856 1,376 15,963 —   —   1,280 16,059 17,339 1,021 2002 03/02 40 years
Stonebridge @ City Park,
Houston, TX
14,452 1,545 14,883 —   —   1,545 14,883 16,428 233 2005 01/04 40 years
Sunchase, Odessa, TX
3,178 742 2,842 458 —   753 3,289 4,042 1,001 1981 10/97 5-40 years
Timbers, Tyler, TX
2,240 497 1,988 —   —   497 1,988 2,485 382 1973 12/97 40 years
Tivoli, Dallas, TX
9,824 1,355 12,592 —   —   1,355 12,592 13,947 940 2001 12/01 40 years
Treehouse, Irving, TX
5,668 312 2,807 —   —   312 2,807 3,119 105 1974 05/04 5-40 years
Verandas at City View,
Fort Worth, TX
19,229 2,545 20,599 —   —   2,545 20,599 23,144 1,027 2001 09/01 40 years
Vistas at Pinnacle Park, Dallas, TX
18,979 1,750 19,820 —   —   1,750 19,820 21,570 710 2003 10/02 40 years
Vistas at Vance Jackson,
San Antonio, TX
15,196 1,265 15,776 —   —   1,265 15,776 17,041 13 2005 01/04 40 years
Westwood, Odessa, TX
500 85 341 91 —   85 432 517 178 1977 08/96 5-40 years
Wildflower Villas, Temple, TX
13,065 1,119 14,482 —   —   1,119 14,482 15,601 7 2005 04/04 40 years
Willow Creek, El Paso, TX
2,133 608 1,832 76 (156 )⁽²⁾ 608 1,752 2,360 563 1972 05/94 5-40 years
Windsong, Fort Worth, TX
10,636 790 11,526 —   —   790 11,526 12,316 532 2003 07/03 40 years
Woodview, Odessa, TX
1,890 716 2,864 102 —   716 2,966 3,682 651 1974 05/98 5-40 years
Office Buildings

1010 Commons, New Orleans, LA
16,151 2,113 15,010 20,145 (1,218 )⁽²⁾ 2,127 33,923 36,050 14,134 1971 03/98 5-40 years
225 Baronne, New Orleans, LA
5,130 1,162 10,457 6,274 (3,013 )⁽²⁾⁽³⁾ 1,162 13,718 14,880 7,106 1960 03/98 5-40 years
600 Las Colinas, Las Colinas, TX
40,087 5,751 51,759 —   —   5,751 51,759 57,510 539 1984 08/05 5-40 years
Amoco, New Orleans, LA
8,269 894 3,582 7,085 (1,149 )⁽²⁾ 1,233 9,179 10,412 5,651 1974 06/97 5-40 years
Eton Square, Tulsa, OK
10,012 1,469 13,217 2,585 —   1,469 15,802 17,271 2,627 1985 09/99 5-40 years
Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements
(1)
Total
(dollars in thousands)
Harper’s Ferry, Lafayette, LA
2,991 349 1,398 223 —   429 1,541 1,970 677 1972 2/92 5-40 years
Heather Creek, Mesquite, TX
11,846 1,100 12,241 —   —   1,326 12,015 13,341 801 2003 3/03 40 years
Hunters Glen, Midland, TX
2,457 519 2,075 321 —   519 2,396 2,915 788 1982 1/98 5-40 years
Kingsland Ranch, Houston, TX
22,338 1,188 23,387 238 136 ⁽²⁾ 2,011 22,938 24,949 1,132 2005 3/03 5-40 years
Laguna Vista, Farmers Branch, TX
5,149 288 6,638 —   1,660 ⁽⁹⁾⁽²⁾ 288 8,298 8,586 —   2006 12/04 —
Lake Forest, Houston, TX
12,542 335 13,708 — — ⁽⁹⁾⁽²⁾ 334 13,709 14,043 457 2005 1/04 5-40 years
Legends of El Paso, El Paso, TX
4,204 1,318 4,009 —   1,132 ⁽⁹⁾ 1,318 5,138 6,456 —   2006 7/05 —
Limestone Canyon, Austin, TX
12,032 1,998 12,247 —   1,895 ⁽⁴⁾ 1,997 14,142 16,139 2,296 1997 7/98 40 years
Limestone Ranch, Lewisville, TX
12,206 1,620 13,058 —   —   1,620 13,058 14,678 1,525 2001 5/01 40 years
Mariposa Villas, Dallas, TX
12,170 788 13,130 —   —   788 13,131 13,919 859 2002 1/02 40 years
Mason Park Apartments, Houston, TX
554 2,225 554 —   —   2,225 554 2,779 —   — ⁽⁹⁾ 8/06 —
Mission Oaks, San Antonio, TX
12,140 —   12,073 2,309 —   —   14,382 14,382 —   — ⁽⁹⁾ 5/05 —
Monticello Estates, Monticello, AR
542 285 1,508 —   —   285 1,508 1,793 62 2002 1/06 —
Mountain Plaza, El Paso, TX
5,031 837 3,347 139 —   837 3,486 4,323 892 1972 1/98 5-40 years
Oak Park IV, Clute, TX
891 224 674 27 (95 )⁽²⁾ 224 605 829 214 1981 6/94 5-40 years
Paramount Terrace, Amarillo, TX
3,078 340 3,061 —   —   340 3,061 3,401 624 1983 5/00 40 years
Parc at Maumelle, Maumelle, AR
15,909 1,153 10,096 340 6,995 ⁽⁹⁾⁽²⁾ 1,153 10,929 18,584 —   — ⁽⁹⁾ 12/04 —
Parc at Metro Center Apartments, Nashville, TN
1,938 960 2,284 800 263 ⁽⁹⁾⁽²⁾ 960 3,347 4,307 —   ⁽⁹ ⁾ 5/05 —
Parc at Rogers, Rogers, AR
406 1,749 774 199 —   1,749 973 2,722 —   — ⁽⁹⁾ 4/04 —
Pecan Pointe, Temple, TX
1,650 1,744 —   —   —   1,744 —   1,744 —   — ⁽⁹⁾ 10/06 —
Quail Oaks, Balch Springs, TX
2,525 90 2,160 152 (187 )⁽²⁾ 125 2,090 2,215 1,214 1982 2/87 5-40 years
River Oaks, Wiley, TX
9,651 590 11,768 —   —   590 11,768 12,358 1,862 2001 10/01 40 years
Riverwalk Phase I, Greenville, MS
352 198 1,537 —   —   198 1,537 1,735 55 2000 1/06 40 years
Riverwalk Phase II, Greenville, MS
1,342 414 4,029 —   —   414 4,029 4,443 144 2002 1/06 40 years
Sendero Ridge, San Antonio, TX
24,044 2,635 26,725 —   655 ⁽²⁾ 2,635 27,379 30,014 1,941 2001 11/01 40 years
Somerset, Texas City, TX
2,636 936 2,811 —   (274 )⁽²⁾ 936 2,537 3,473 1000 1985 12/93 5-40 years
Southgate, Odessa, TX
1,838 335 1,338 318 —   335 1,656 1,991 664 1976 8/96 5-40 years
Spy Glass, Mansfield, TX
15,778 1,376 15,963 —   —   1,291 16,048 17,339 1,431 2002 3/02 40 years
Stonebridge at City Park, Houston, TX
14,357 1,545 14,883 —   —   1,545 14,883 16,428 583 2005 1/04 40 years
Sunchase, Odessa, TX
3,144 742 2,842 457 —   753 3,288 4,041 1,085 1981 10/97 5-40 years
Tivoli, Dallas, TX
9,725 1,355 12,592 —   —   1,355 12,592 13,947 1,244 2001 12/01 40 years
~~Index to Financial Statements~~
SCHEDULE III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Life on
Which
Depreciation
In Latest
Statement
of Operation
is Computed
Property/Location
Encumbrances Land Building &
Improvements Improvements Other Land
Building &
Improvements
(1)
Total Accumulated
Depreciation Date of
Construction Date
Acquired
(dollars in thousands)
Executive Court, Memphis, TN
$ —   $ 197 $ 1,773 $ 17 $ —   $ 197 $ 1,790 $ 1,987 $ 46 1980 12/04 5-40 years
Forum, Richmond, VA
4,775 1,360 5,439 1,336 —   1,360 6,775 8,135 2,495 1987 10/92 2-40 years
Lexington Center,
Colorado Springs, CO
3,768 1,103 4,413 711 —   1,103 5,124 6,227 1,467 1986 12/97 3-40 years
Park West, Dallas, TX
5,976 1,036 9,324 —   —   1,036 9,324 10,360 175 1984 04/05 5-40 years
Parkway North, Dallas, TX
3,439 1,173 4,692 1,040 —   1,173 5,732 6,905 1,806 1980 02/98 2-40 years
Signature Office Building,
Dallas, TX
2,257 1,075 2,921 1,384 (1,272 )⁽²⁾ 1,075 3,033 4,108 825 1985 02/99 5-40 years
Two Hickory, Farmers Branch, TX
7,331 1,150 10,352 113 —   1,150 10,465 11,615 65 2000 01/05 5-40 years
Westgrove Air Plaza, Addison, TX
2,928 211 1,898 311 —   211 2,209 2,420 699 1982 10/97 5-40 years
Industrial Warehouses

5360 Tulane, Atlanta, GA
353 95 514 129 (44 )⁽²⁾ 127 567 694 345 1970 11/97 5-40 years
Addison Hangar, Addison, TX
4,308 928 1,481 51 —   1,616 844 2,460 261 1992 12/99 5-40 years
Addison Hanger II, Addison, TX
—   —   1,150 248 —   —   1,398 1,398 764 2000 12/99 5-40 years
Encon, Fort Worth, TX
3,336 984 3,934 67 —   984 4,001 4,985 838 1958 10/97 5-40 years
Space Center, San Antonio, TX
1,025 247 1,332 112 (131 )⁽²⁾ 329 1,231 1,560 871 1970 11/97 5-40 years
Shopping Centers

Bridgeview Plaza, LaCrosse, WI
7,093 870 7,830 130 —   870 7,960 8,830 465 1979 03/03 5-40 years
Cullman SC, Cullman, AL
1,284 200 1,800 —   —   200 1,800 2,000 251 1979 03/03 5-40 years
Dunes Plaza, Michigan City, IN
3,749 1,230 5,430 2,054 (482 )⁽⁵⁾ 1,529 6,703 8,232 2,917 1978 03/92 5-40 years
Fiesta, San Angelo, TX
—   44 —   —   —   44 —   44 —   —   12/91 —
Willowbrook Village, Coldwater, MI
6,496 852 7,663 —   —   852 7,663 8,515 32 1991 10/05 5-40 years
Hotels

Akademia, Wroclaw, Poland
20,967 2,184 17,187 —   —   �� 2,184 17,187 19,371 2,446 2001 02/01 40 years
The Majestic, Chicago, IL
3,186 572 2,287 1,617 —   572 3,904 4,476 1,390 1995 12/98 5-40 years
City Suites, Chicago, IL
3,587 950 3,847 1,129 —   950 4,976 5,926 1,641 1995 12/98 5-40 years
Willows, Chicago, IL
3,449 945 3,779 1,490 —   945 5,269 6,214 1,996 1995 12/98 5-40 years
Land

1013 Commons, New Orleans, LA
—   615 —   718 (36 )⁽²⁾ 579 718 1,297 114 —   08/98 —
2301 Valley Branch,
Farmers Branch, TX
2,420 4,169 —   84 —   4,253 —   4,253 —   —   09/02 —
Addison Park Retail, Addison, TX
1,180 1,555 —   —   —   1,555 —   1,555 —   —   11/05 —
Initial Cost Cost Capitalized
Subsequent to
Acquisition Gross Amounts of Which
Carried at End of Year Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements
(1)
Total
(dollars in thousands)
Treehouse, Irving, TX
5,578 312 2,807 —   —   312 2,807 3,119 175 1974 5/04 5-40 years
Verandas at City View, Fort Worth, TX
19,125 2,545 20,599 —   —   2,545 20,598 23,143 1,540 2001 9/01 40 years
Vistas at Pinnacle Park, Dallas, TX
18,850 1,750 19,820 —   —   1,750 19,820 21,570 1,203 2003 10/02 40 years
Vistas at Vance Jackson, San Antonio, TX
15,899 1,265 15,776 654 168 1,265 16,598 17,863 491 2005 1/04 40 years
Westwood, Mary Ester, FL
494 85 341 91 —   85 432 517 188 1977 08/06 5-40 years
Wildflower Villas, Temple, TX
12,972 1,119 14,482 285 —   1,119 14,767 15,886 33 2005 4/04 40 years
Willow Creek, El Paso, TX
2,110 608 1,832 76 (156 )⁽²⁾ 608 1,752 2,360 607 1972 5/94 5-40 years
Windsong, Fort Worth, TX
10,580 790 11,526 —   —   790 11,526 12,316 821 2003 7/03 40 years
Woodview, Odessa, TX
5,229 716 2,864 102 —   716 2,966 3,682 723 1974 5/98 5-40 years

Total Apartments
442,422 53,030 457,119 9,569 11,194 54,811 469,597 530,911 42,002
Office Buildings

1010 Commons, New Orleans, LA
15,906 2,113 15,010 20,717 (1,218 )⁽²⁾ 2,127 34,495 36,662 17,191 1971 3/98 5-40 years
225 Baronne, New Orleans, LA
5.079 1,162 13,718 —   —   1,162 7,718 8,880 7,641 1960 3/98 5-40 years
600 Las Colinas, Irving, TX
39,227 5,751 51,759 2,686 —   5,751 54,445 60,196 2,040 1984 8/05 5-40 years
Amoco, New Orleans, LA
8,187 894 3,582 7,533 (1,149 )⁽²⁾ 1,233 9,627 10,860 6,002 1974 6/97 5-40 years
Clarke Garage, New Orleans, LA
—   1,033 9,293 —   —   1,033 9,293 10,326 97 —   8/06 —
Eton Square, Tulsa, OK
9,981 1,469 13,217 2,835 —   1,469 16,052 17,521 3,190 1985 9/99 5-40 years
Executive Court, Memphis, TN
—   197 1,773 17 —   197 1,790 1,987 94 1980 12/04 5-40 years
Forum, Richmond, VA
5,947 1,360 5,439 1,486 —   1,360 6,925 8,285 2,760 1987 10/92 2-40 years
Lexington Center, Colorado Springs, CO
3,654 1,103 4,413 733 —   1,103 5,146 6,249 1,624 1986 12/97 3-40 years
One Hickory Center, Farmers Branch, TX
9,244 1,221 10,993 —   —   1,221 10,993 12,214 183 1998 5/07 7-40 years
Park West, Dallas, TX
5,920 1,036 9,324 4,697 —   1,036 14,021 15,057 573 1984 4/05 5-40 years
Parkway North, Dallas, TX
3,393 1,173 4,692 1,735 —   1,173 6,427 7,600 2,025 1980 2/98 2-40 years
Signature, Dallas, TX
2,148 1,075 2,921 1,384 (1,272 )⁽²⁾ 1,075 3,033 4,108 915 1985 2/99 5-40 years
Two Hickory Center, Farmers Branch, TX
9,469 1,150 10,352 192 —   1,150 10,544 11,694 352 2000 1/05 5-40 years
Westgrove Air Plaza, Addison, TX
2,853 211 1,898 3,723 (3,391 )⁽²⁾ 211 2,230 2,441 888 1982 10/97 5-40 years

Total Office Buildings
121,008 20,948 158,384 47,738 (7,030 21,301 192,739 214,040 45,575
~~Index to Financial Statements~~
SCHEDULE III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Life on
Which
Depreciation
In Latest
Statement
of Operation
is Computed
Property/Location
Encumbrances Land Building &
Improvements Improvements Other Land
Building &
Improvements
(1)
Total Accumulated
Depreciation Date of
Construction Date
Acquired
(dollars in thousands)
Addison Park Townhomes,
Addison, TX
$ 626 $ 825 $ —   $ —   $ —   $ 825 $ —   $ 825 $ —   —   11/05 —
Alliance Airport, Tarrant County, TX
553 895 —   —   —   895 —   895 —   —   05/05 —
Alliance 8, Tarrant County, TX
408 738 —   —   —   738 —   738 —   —   10/05 —
Alliance 52, Tarrant County, TX
1,610 2,656 —   —   —   2,656 —   2,656 —   —   10/05 —
Centura, Farmers Branch, TX
6,769 13,300 —   555 (1,810 )⁽³⁾ 11,751 294 12,045 —   —   12/02 —
Cooks Lane, Ft. Worth, TX
550 1,046 —   —   —   1,046 —   1,046 —   —   06/04 —
Denton, Denton, TX
1,365 2,234 —   —   —   2,234 —   2,234 —   —   10/05 —
Denton Andrew B, Denton, TX
554 895 —   —   —   895 —   895 —   —   12/05 —
Denton Andrew C, Denton, TX
197 318 —   —   —   318 —   318 —   —   12/05 —
Denton Coonrod, Denton, TX
840 1,886 —   14 —   1,900 —   1,900 2 —   10/04 —
DeSoto, DeSoto, TX
1,635 2,651 —   25 —   2,676 —   2,676 —   —   10/04 —
Dominion, Dallas, TX
1,275 3,931 —   —   —   3,931 —   3,931 —   —   03/99 —
Folsom, Dallas, TX
—   1,781 —   450 —   2,231 —   2,231 —   —   10/00 —
Fruitland, Fruitland Park, FL
—   253 —   15 (100 )⁽⁶⁾ 153 15 168 2 —   05/92 —
Hollywood Casino,
Farmers Branch, TX
4,710 16,987 —   22 —   17,009 —   17,009 —   —   06/02 —
Kaufman Cogen,
Kaufman County, TX
—   6,109 —   —   —   6,109 —   6,109 —   —   12/05 —
Kaufman Taylor,
Kaufman County, TX
—   486 —   —   —   486 —   486 —   —   11/05 —
Lacy Longhorn,
Farmers Branch, TX
1,926 4,474 —   —   —   4,474 —   4,474 —   —   06/04 —
Lakeshore Villas,
Harris County, TX
—   84 —   —   —   84 —   84 —   —   03/02 —
Lamar Parmer/Limestone II,
Austin, TX
—   1,999 —   564 —   1,999 564 2,563 —   —   01/00 —
Las Colinas, Las Colinas, TX
—   995 —   5 —   1,000 —   1,000 —   —   01/96 —
LCLLP, Los Colinas, TX
1,831 4,950 —   26 (470 )⁽⁸⁾ 4,506 —   4,506 —   —   12/04 —
Lubbock, Lubbock, TX
—   234 —   —   —   234 —   234 —   —   01/04 —
Luna Road, Farmers Branch, TX
—   261 —   —   —   261 —   261 —   —   07/05 —
Mandahl Bay, US Virgin Islands
3,500 14,660 —   —   —   14,660 —   14,660 —   —   11/05 —
Manhattan, Farmers Branch, TX
—   11,186 —   888 —   12,074 —   12,074 34 —   02/00 —
Mansfield, Mansfield, TX
943 1,520 —   —   —   1,520 —   1,520 —   —   09/05 —
Initial Cost Cost Capitalized
Subsequent to
Acquisition Gross Amounts of Which
Carried at End of Year Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements
(1)
Total
(dollars in thousands)
Hotels

Akademia, Wroclaw, Poland
23,665 2,184 17,187 1,719 63 2,184 18,969 21,153 3,292 2001 2/01 5-40 years
City Suites, Chicago, IL
3,553 950 3,847 1,146 —   950 4,993 5,943 1,777 1995 12/98 5-40 years
The Majestic, Chicago, IL
3,104 572 2,287 1,643 —   572 3,930 4,502 1,559 1995 12/98 5-40 years
Willows, Chicago, IL
3,416 945 3,779 1,491 —   945 5,270 6,215 2,123 1995 12/98 5-40 years

Total Hotels
33,738 4,651 27,100 5,999 63 4,651 33,162 37,813 8,751
Industrial Warehouses

5360 Tulane, Atlanta, GA
349 95 514 141 (44 )⁽²⁾ 127 579 706 372 1970 11/97 5-40 years
Addison Hangar, Addison, TX
—   928 1,481 51 —   1,616 844 2,460 302 1992 12/99 5-40 years
Addison Hangar II, Addison, TX
—   —   1,150 248 —   —   1,398 1,398 872 2000 12/99 5-40 years
Encon, Fort Worth, TX
3,295 984 3,934 67 —   984 4,001 4,985 943 1958 10/97 5-40 years
Space Center, San Antonio, TX
1,010 247 1,332 112 (131 )⁽²⁾ 329 1,231 1,560 899 1970 11/97 5-40 years

Total Industrial Warehouses
4,654 2,254 8,411 619 (175 ) 3,056 8,053 11,109 3,388
Shopping Centers

305 Baronne, New Orleans, LA
—   211 1,903 —   —   211 1,903 2,114 20 1902 8/06 5-40 years
Bridgeview Plaza, LaCrosse, WI
6,965 870 7,830 129 —   870 7,960 8,830 704 1979 3/03 5-40 years
Cullman, Cullman, AL
1,274 200 1,800 300 —   200 2,100 2,300 527 1979 3/03 5-40 years
Dunes Plaza, Michigan City, IN
3,626 1,230 5,430 1,566 —   1,529 6,697 8,226 3,164 1978 3/92 5-40 years
Willowbrook Village, Coldwater, MI
6,224 852 7,663 —   —   851 7,663 8,514 224 1991 10/05 5-40 years

Total Shopping Centers
18,089 3,363 24,626 1,995 —   3,661 26,323 29,984 4,639
Land

1013 Commons, New Orleans, LA
—   615 —   123 559 579 718 1,297 136 —   8/98 —
217 Rampart, New Orleans, LA
—   2,076 —   —   —   2,076 —   2,076 —   —   8/06 —
2301 Valley Branch
2,400 4,253 —   —   —   4,253 —   4,253 —   —   2/04 —
Alliance Airport 8, Tarrant County, TX
553 738 —   —   —   738 —   738 —   —   10/05 —
Alliance Airport 52, Tarrant County, TX
408 2,656 —   —   —   2,656 —   2,656 —   —   5/05 —
Alliance Airport Land, Tarrant County, TX
1,610 895 —   —   —   895 —   895 —   —   10/05 —
Bolivar Estates, Bolivar City, MS
1,196 684 385 —   —   684 385 1,069 —   —   10/06 —
Broadway Estates, Broadway City, MS
758 232 383 —   —   232 383 615 —   —   11/06 —
~~Index to Financial Statements~~
SCHEDULE III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Life on
Which
Depreciation
In Latest
Statement
of Operation
is Computed
Property/Location
Encumbrances Land Building &
Improvements Improvements Other Land
Building &
Improvements
(1) Total Accumulated
Depreciation Date of
Construction Date
Acquired
(dollars in thousands)
Marine Creek, Ft. Worth, TX
$ 1,750 $ 2,923 $ —   $ 231 $ —   $ 2,923 $ 231 $ 3,154 $ —   —   06/02 —
Mason Park, Houston, TX
—   2,790 —   326 (1,188 )⁽⁸⁾ 1,602 326 1,928 —   —   06/02 —
McKinney 36,
Collin County, TX
3,995 2,203 —   —   (230 )⁽²⁾ 1,973 —   1,973 —   —   01/98 —
McKinney Ranch,
McKinney, TX
28,051 47,327 —   —   (3,882 )⁽⁸⁾ 43,445 —   43,445 —   —   12/05 —
Mira Lago, Farmers Branch, TX
—   253 —   —   —   253 —   253 —   —   05/01 —
Nakash
—   113 —   —   —   113 —   113 —   —   —
Nashville, Nashville, TN
—   1,890 —   34 (994 )⁽⁸⁾ 930 —   930 —   —   06/02 —
Pac-Trust, Dallas, TX
—   1,232 —   —   —   1,232 —   1,232 —   —   10/01 —
Pantaze, Dallas, TX
—   275 —   —   —   275 —   275 —   —   11/05 —
Payne I & II, Los Colinas, TX
6,732 17,500 —   1,091 —   18,591 —   18,591 —   —   12/04 —
Pulaski, Pulaski County, AR
1,257 2,095 —   —   —   2,095 —   2,095 —   —   06/03 —
Railroad, Dallas, TX
—   782 —   55 —   837 —   837 —   —   03/04 —
Rochelle I, Las Colinas, TX
2,547 3,750 —   —   —   3,750 —   3,750 —   —   12/04 —
Rochelle II, Las Colinas, TX
4,338 6,445 —   —   —   6,445 —   6,445 —   —   12/04 —
Rogers, Rogers, AR
—   1,749 —   —   —   1,749 —   1,749 —   —   04/04 —
Seminary West, Fort Worth, TX
—   234 —   —   —   234 —   234 —   —   07/01 —
Senlac, Farmers Branch, TX
—   656 —   —   —   656 —   656 —   —   08/05 —
Senlac VHP,
Farmers Branch, TX
—   622 —   —   —   622 —   622 —   —   12/05 —
Sheffield Village,
Grand Prairie, TX
975 1,643 —   —   —   1,643 —   1,643 —   —   09/03 —
Southwood Plantation,
Tallahassee, FL
—   556 —   —   —   556 —   556 —   —   06/05 —
Valley Ranch, Irving, TX
—   6,500 —   —   —   6,500 —   6,500 —   —   12/04 —
West End, Dallas, TX
2,000 11,405 —   77 (5,756 )⁽⁷⁾⁽⁸⁾ 5,649 77 5,726 —   —   08/97 —
Whorton, Dallas, TX
3,828 4,530 —   —   —   4,530 —   4,530 —   —   07/05 —
Wilmer 88, Dallas, TX
—   668 —   —   —   668 —   668 —   —   08/05 —

Investment Properties
696,530 298,040 651,774 57,981 (21,692 ) 288,003 698,100 986,103 83,483

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements
(1)
Total
(dollars in thousands)
Castleglen, Garland, TX
—   760 —   —   —   760 —   760 —   10/06 —
Centura, Farmers Branch, TX
6,769 13,300 —   633 (1,810 )⁽³⁾ 11,779 �� 344 12,123 —   —   12/02 —
Circle C Land, Austin, TX
25,820 26,259 1,614 —   —   26,259 1,614 27,873 —   —   3/06 —
Cooks Lane, Ft. Worth, TX
550 1,046 —   —   —   1,046 —   1,046 —   —   6/04 —
Creekside, Ft. Worth, TX
—   2,201 —   —   —   2,201 —   2,201 —   —   7/06 —
Crowley, Ft. Worth, TX
—   1,569 —   —   —   1,569 —   1,569 —   —   7/06 —
Dedeaux Road, Gulfport, MS
1,520 1,612 —   —   —   1,612 —   1,612 —   —   10/06 —
Denton Coonrod, Denton, TX
316 1,886 —   14 —   1,900 —   1,900 5 —   12/05 —
Denton Land, Denton, TX
197 2,234 —   —   —   2,234 —   2,234 —   —   12/05 —
Denton Andrew B Land, Denton, TX
840 895 —   —   —   895 —   895 —   —   10/04 —
Denton Andrew C Land, Denton, TX
1,365 318 —   —   —   318 —   318 —   —   10/05 —
DeSoto, DeSoto, TX
1,635 2,651 —   25 —   2,676 —   2,676 —   —   10/04 —
Diplomat Drive, Farmers Branch, TX
924 1,775 —   —   —   1,775 —   1,775 —   —   12/06 —
Dominion, Dallas, TX
1,275 3,931 —   —   —   3,931 —   3,931 —   —   3/99 —
Ewing Land
10,752 15,952 —   —   —   15,952 —   15,952 —   —   12/06 —
Fiesta Mart, San Angelo, TX
—   44 —   —   —   44 —   44 —   —   1/93 —
Folsom, Dallas, TX
—   1,781 —   1,666 (1,217 )⁽²⁾ 2,230 —   2,230 —   —   10/00 —
Forney Land, Kaufman County, TX
2,564 4,119 —   —   —   4,119 —   4,119 —   —   6/06 —
Fruitland, Fruitland Park, FL
—   253 —   15 (229 )⁽⁶⁾⁽⁸⁾ 23 16 39 5 —   5/92 —
Hollywood Casino, Farmers Branch, TX
3,210 16,987 —   115 (5,940 )⁽⁸⁾ 11,162 —   11,162 —   —   6/02 —
Icon East Center Retail, Dallas, TX
18,348 26,120 —   —   477 ⁽¹⁰⁾ 26,120 477 26,597 —   —   11/06 —
Icon Town Center Hotel, Dallas, TX
—   —   —   —   52 ⁽¹⁰⁾ —   52 52 —   —   11/06 —
Icon Town Center Office, Dallas, TX
—   —   —   —   — ^(10)(2) —   —   —   —   —   11/06 —
Icon Town Center Residential, Dallas, TX
—   —   —   —   — ^(10)(2) —   —   —   —   —   11/06 —
Kaufman Cogen Land, Kaufman, TX
3,573 6,109 —   —   —   6,109 —   6,109 —   —   12/05 —
Kaufman Taylor Land, Kaufman, TX
302 486 —   —   —   486 —   486 —   —   11/05 —
Keller Springs Lofts, Addison, TX
690 732 —   —   361 ⁽¹⁰⁾ 732 361 1,093 —   —   10/06 —
Kinwest, Las Colinas, TX
1,580 1,819 —   —   203 ⁽¹⁰⁾ 1,819 203 2,022 —   —   10/06 —
Lacy Longhorn, Farmers Branch, TX
1,897 4,474 —   —   —   4,474 —   4,474 —   —   6/04 —
Ladue/Walker, Farmers Branch, TX
10,538 21,500 —   —   —   21,500 —   21,500 —   —   9/06 —
Lago Vista, Farmers Branch, TX
1,574 2,694 —   —   3,646 ⁽¹⁰⁾ 2,694 3,646 6,340 —   —   9/06 —
~~Index to Financial Statements~~
SCHEDULE III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Life on
Which
Depreciation
In Latest
Statement
of Operation
is Computed
Property/Location
Encumbrances Land Building &
Improvements Improvements Other Land
Building &
Improvements
(1) Total Accumulated
Depreciation Date of
Construction Date
Acquired
(dollars in thousands)
Properties Held for Sale

Baywalk, Galveston, TX
$ 5,243 $ 679 $ 6,106 $ —   $ (386 )⁽³⁾ $ 679 $ 5,720 $ 6,399 $ 522 1979 09/01 40 years
Island Bay, Galveston, TX
14,748 2,095 18,852 —   (1,193 )⁽³⁾ 2,095 17,659 19,754 1,612 1973 09/01 40 years
Marina Landing,
Galveston, TX
12,565 1,240 11,161 —   —   1,240 11,161 12,401 929 1985 09/01 40 years
Plantation, Tulsa, OK
2,214 344 2,396 —   —   344 2,396 2,740 496 1968 12/99 40 years
Willo-Wick, Pensacola, FL
2,852 747 2,990 174 (281 )⁽²⁾ 747 2,883 3,630 917 1974 05/95 5-40 years

Properties Held for Sale
37,622 5,105 41,505 174 (1,860 ) 5,105 39,819 44,924 4,476

$ 734,152 $ 303,145 $ 693,279 $ 58,155 $ (23,552 ) $ 293,108 $ 737,919 $ 1,031,027 $ 87,959

Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements
(1)
Total
(dollars in thousands)
Lakeshore Villas, Harris County, TX
—   84 —   —   —   81 3 84 —   —   3/02 —
Lamar Parmer/Limestone II, Austin, TX
—   1,999 —   564 —   2,017 546 2,563 —   —   1/00 —
Las Colinas Apartments/Lofts, Las Colinas, TX
—   —   —   —   75 ⁽¹⁰⁾ —   75 75 —   —   11/06 —
Las Colinas Condos, Las Colinas, TX
—   —   —   —   74 ⁽¹⁰⁾ —   74 74 —   —   11/06 —
Las Colinas High Rise Apartments, Las Colinas, TX
—   —   —   —   194 ⁽¹⁰⁾ —   194 194 —   —   11/06 —
Las Colinas High Rise Office, Las Colinas, TX
—   —   —   —   45 ⁽¹⁰⁾ —   45 45 —   —   11/06 —
Las Colinas Townhomes, Las Colinas, TX
—   —   —   —   55 ⁽¹⁰⁾ —   55 55 —   —   11/06 —
Las Colinas, Las Colinas, TX
—   995 —   5 —   1,000 —   1,000 —   —   1/96 —
LCLLP, Las Colinas, TX
1,831 4,950 —   26 (470 )⁽⁸⁾ 4,506 —   4,506 —   —   12/04 —
Lincoln Estates, Carthage, MS
—   175 —   —   —   175 —   175 —   —   12/06 —
Longfellow Arms, Longview, TX
1,345 1,352 —   —   —   1,352 —   1,352 —   —   12/06 —
Lubbock, Lubbock, TX
—   234 —   —   —   234 —   234 —   —   1/04 —
Luna Rd Land, Farmers Branch, TX
—   261 —   —   —   261 —   261 —   —   7/05 —
Mandahl Bay Land, U.S. Virgin Islands
3,287 14,660 —   609 (226 )⁽⁸⁾ 14,623 420 15,043 —   —   11/05 —
Manhattan, Farmers Branch, TX
—   11,186 —   8,314 (7,426 )⁽²⁾ 12,074 —   12,074 34 —   2/00 —
Mansfield Land, Mansfield, TX
943 1,520 —   —   —   1,520 —   1,520 —   —   9/05 —
Marine Creek, Ft. Worth, TX
1,727 2,923 —   244 —   3,143 24 3,167 —   —   6/02 —
Mason Park, Houston, TX
—   2,790 —   326 (1,188 )⁽⁸⁾ 1,602 326 1,928 —   —   6/02 —
McKinney 36, Collin County, TX
3,995 2,203 —   —   (230 )⁽²⁾ 1,973 —   1,973 —   —   1/98 —
McKinney Ranch Land, Collin County, TX
18,000 47,327 —   —   (20,755 )⁽⁸⁾ 26,572 —   26,572 —   —   12/05 —
Mercer Apartments/Lakeside Lofts, Farmers Branch, TX
—   —   —   —   —   ^(10)(2) —   —   —   —   —   11/06 —
Mercer Townhomes, Farmers Branch, TX
—   —   —   —   —   ^(10)(2) —   —   —   —   —   11/06 —
SCHEDULE III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005
Initial Cost Cost Capitalized
Subsequent to
Acquisition Gross Amounts of Which
Carried at End of Year Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements
(1)
Total
(dollars in thousands)
Mira Lago, Farmers Branch, TX
—   253 —   13 —   266 —   266 —   —   5/01 —
Nakash, Malden, MO
—   113 —   —   —   113 —   113 —   —   1/93 —
Nashville, Nashville, TN
—   1,890 —   34 (994 )⁽⁸⁾ 930 —   930 —   —   6/02 —
Pac-Trust, Dallas, TX
—   1,232 —   2,868 (2,855 ) 1,245 —   1,245 —   —   10/01 —
Pantaze Land, Dallas, TX
—   275 —   15 —   290 —   290 —   —   11/05 —
Parc at Clarksville, Clarksville, TN
541 571 —   —   —   571 —   571 — ⁽⁹⁾ —   5/06 —
Parkway Place, Greenwood, MS
487 884 —   —   —   884 —   884 —   —   12/06 —
Payne I and II, Las Colinas, TX
14,935 17,500 —   1,275 —   18,775 —   18,775 —   —   12/04 —
Pioneer Crossing, Austin, TX
1,515 614 — — — 614 — 614 — — 3/06 —
Plaza at Chase Oaks, Plano, TX
—   —   —   —   8 ⁽¹⁰⁾ —   8 8 —   —   11/06 —
Polo Estates at Bent Tree, Dallas, TX
2,149 4,003 —   —   573 ⁽¹⁰⁾ 4,003 573 4,576 —   —   11/06 —
Polo Estates at Park Forest, Dallas, TX
1,286 4,807 —   —   1,476 ⁽¹⁰⁾ 4,807 1,476 6,283 —   —   11/06 —
Polo Estates Signature Place, Dallas, TX
—   —   —   —   93 ⁽¹⁰⁾ —   93 93 —   —   11/06 —
Pulaski, Pulaski County, AR
1,257 2,095 —   —   —   2,095 —   2,095 —   —   6/03 —
Ranchview, Irving, TX
—   —   —   —   13 ⁽¹⁰⁾ —   13 13 —   —   11/06 —
RB Land, Dallas, TX
—   703 —   —   —   703 —   703 —   —   11/06 —
Ridgepoint Drive, Irving, TX
—   189 —   —   —   189 —   189 —   —   12/06 —
Rochelle I, Las Colinas, TX
2,547 3,750 —   —   —   3,750 —   3,750 —   —   12/04 —
Rochelle II, Las Colinas, TX
4,338 6,445 —   —   —   6,445 —   6,445 —   —   12/04 —
Seminary West, Fort Worth, TX
—   234 —   —   —   234 —   234 —   —   7/01 —
Senlac Land, Farmers Branch, TX
—   656 —   —   —   656 —   656 —   —   12/05 —
Senlac VHP Land, Farmers Branch, TX
—   622 —   —   —   622 —   622 —   —   8/05 —
Sheffield Village, Grand Prairie, TX
975 1,643 —   —   —   1,643 —   1,643 —   —   9/03 —
Southwood 1394 Land, Tallahassee, FL
748 1,209 —   —   —   1,209 —   1,209 —   —   2/06 —
Southwood Plantation, Tallahassee, FL
—   556 —   —   —   556 —   556 —   —   6/05 —
Sunflower Estates, Sunflower City, MS
733 221 365 —   —   221 365 586 —   — ⁽⁹⁾ 10/06 —
Union Pacific Railroad Land, Dallas, TX
—   837 —   —   —   837 —   837 —   —   3/04 —
Valley Ranch, Irving, TX
4,803 6,500 —   —   —   6,500 —   6,500 —   —   12/04 —
Valley View 20, Farmers Branch, TX
3,038 4,896 —   —   —   4,896 —   4,896 —   —   2/06 —
Valley View Common Park, Farmers Branch, TX
281 1,111 —   —   —   1,111 —   1,111 —   —   5/06 —
W Lofts, Farmers Branch, TX
6,705 7,775 —   —   472 ⁽¹⁰⁾ 7,775 472 8,247 —   —   11/06 —
SCHEDULE III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005
Initial Cost Cost Capitalized
Subsequent to
Acquisition
Gross Amounts of Which
Carried at End of Year
Accumulated
Depreciation Date of
Construction Date
Acquired Life on
Which
Depreciation
In Latest
Statement of
Operation is
Computed
Property/Location
Encumbrances Land
Building &
Improvements
Improvements Other Land
Building &
Improvements

(1)
Total

(dollars in thousands)
Waco 42/Breezy, Waco, TX
390 557 —   —   —   557 —   557 —   —   5/06 —
Waco, Swanson, Waco, TX
1,735 2,805 —   —   —   2,805 —   2,805 —   —   8/06 —
West End, Dallas, TX
8,808 11,405 —   77 (5,694 )⁽⁸⁾ 5,711 77 5,788 —   —   8/97 —
Whorton Land Dallas, TX
3,828 4,530 —   —   —   4,530 —   4,530 —   —   7/05 —
Wilmer 88 Land Dallas, TX
—   668 —   5 —   673 —   673 —   —   8/05 —
Yazoo Estates, Yazoo City, MS
—   219 —   —   31 ⁽⁹⁾ 219 31 250 —   — ⁽⁹⁾ 10/06 —
Total Land
195,391 360,083 2,747 16,966 (40,627 ) 326,100 13,069 339,169 180 —

Total Investment Properties
815,302 444,329 678,387 82,886 (36,054 ) 413,580 742,943 1,163,026 104,535

Properties Held for Sale

Baywalk Galveston, TX
5,177 679 6,106 —   (386 ) 679 5,720 6,399 675 1979 9/01 5-40 years
Bluffs At Vista Ridge, Lewisville, TX
15,518 2,285 18,832 —   —   2,585 18,832 21,417 1,039 2005 5/03 40 years
Island Bay, Galveston, TX
14,571 2,095 18,853 —   (1,193 ) 2,095 17,660 19,755 1,847 1973 9/01 40 years
Marina Landing, Galveston, TX
12,414 1,240 11,160 —   —   1,240 11,161 12,400 1,486 1985 9/01 40 years

Total Properties Held for Sale
47,680 6,599 54,951 —   (1,579 ) 6,599 53,373 59,971 5,047

$ 862,982 $ 450,928 $ 733,338 $ 82,886 $ (36,574 ) $ 420,179 $ 796,316 $ 1,222,997 $ 109,582

(1) The aggregate cost for federal income tax purposes is $978.7 million.
(2) Purchase accounting basis adjustment.
(3) Write-down of property to estimated net realizable value.
(4) Construction period interest and taxes.
(5) Forgiveness of debt and cash received deducted from the basis of the property, offset by land acquired in 1992.
(6) Cash received for easement deducted from the basis of the property.
(7) Cash received for condemnation of part of property.
(8) Sale or contribution of portion of property.
(9) Property under construction.
(10) Property acquired by TCI subsidiary for future development.
~~Index to Financial Statements~~
SCHEDULE III
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION

   2005 2004 2003    2006 2005 2004
   (dollars in thousands)    (dollars in thousands)
Reconciliation of Real Estate

Balance at January 1,
   $ 863,815 $ 873,619 $ 841,146    $ 1,031,028 $ 863,815 $ 873,619
Additions

Purchases, improvements and construction
   242,660 222,789 113,561    239,295 242,660 222,789
Deductions

Sale of real estate
   (72,027 ) (226,396 ) (76,081 )    (45,942 ) (72,027 ) (226,396 )
Asset impairments
   (3,420 ) (6,197 ) (5,007 )    (1,384 ) (3,420 ) (6,197 )

Balance at December 31 ,
   $ 1,031,028 $ 863,815 $ 873,619
Balance at December 31,
   $ 1,222,997 $ 1,031,028 $ 863,815

Reconciliation of Accumulated Depreciation

Balance at January 1,
   $ 85,287 $ 91,291 $ 81,659    $ 87,959 $ 85,287 $ 91,291
Additions

Depreciation
   16,684 22,578 20,860    23,718 16,684 22,578
Deductions

Sale of real estate
   (14,013 ) (28,582 ) (11,228 )    (2,095 ) (14,013 ) (28,582 )

Balance at December 31,
   $ 87,958 $ 85,287 $ 91,291    $ 109,582 $ 87,958 $ 85,287

~~Index to Financial Statements~~
SCHEDULE IV
TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOAN RECEIVABLES ON REAL ESTATE
December 31, ~~2005~~2006

Description
Interest
Rate Final
Maturity
Date
Periodic Payment Terms
Prior
Liens Face
Amount of
Mortgage Carrying
Amounts of
Mortgage⁽¹⁾ Principal
Amount of
Loans
Subject to
Delinquent
Principal
or Interest
(dollars in thousands)
FIRST MORTGAGE LOANS

400 St. Paul
Secured by an office building in Dallas, TX. Includes LOC of $250,000.
7.0 % 03/07 Monthly interest only payments. $ —   $ 5,400 $ 4,896 $ —
Today McKinney Ranch, L.P.
Secured by 27.192 acres of unimproved land in McKinney, TX.
8.0 12/07 Monthly interest only payments. —   7,552 7,552 —
Today McKinney Ranch, L.P.
Secured by 3.73 acres of unimproved land in McKinney, TX.
8.0 12/07 Monthly interest only payments. —   1,036 1,036 —
WRAPAROUND MORTGAGE LOANS

Pinemont
Secured by an office building in Houston, TX.
10.4 07/08 Monthly principal and interest payments of $6,281. 152 467 161 —
Nakash
Secured by a shopping Center in Malden, MO.
Monthly interest only payments of $13,000. —   902 902 —
Durham Centre
Secured by an office building in Durham, NC.
7.63 09/07 Monthly interest only payments. 10,201 14,536 14,519 —
JUNIOR MORTGAGE LOANS

Dallas Fund XVII
Secured by an assignment of partnership interests and litigation proceeds.
9.0 10/06 Principal and interest due at maturity. —   4,303 4,402 —
Pioneer Development
Secured by 33.33 acres of unimproved land
in Travis County, TX.
10.0 10/08 Interest only payments start in November 2007. 12,000 2,386 2,889 —
One Hickory
Secured by an office building in Farmers
Branch, TX.
5.49 06/06 Excess property cash flow payments. 6,903 11,974 11,974 —
Durham Centre
2^nd line on office building in Durham, NC.
7.63 09/17 Monthly interest only payments. 10,201 3,297 3,297 —
JMJ Circle, LLC
2^nd lien on 1,092 acres in Austin, TX and membership interests in the borrower.
10.0 03/08 Principal and interest due at maturity. 18,000 3,200 3,953 —
Description

Interest
Rate

Final
Maturity
Date

Periodic Payment Terms

Prior
Liens

Face
Amount of
Mortgage
Carrying
Amounts of
Mortgage⁽¹⁾ Principal
Amount of
Loans
Subject to
Delinquent
Principal
or Interest
(dollars in thousands)
FIRST MORTGAGE LOANS

400 St. Paul
Secured by an office building in Dallas, TX. Includes LOC of $250,000.
8.25 % 10/08 Monthly interest only payments. $ —   $ 3,612 * $ 3,612 $ —
Bolivar Homes, LLC
9.25 10/06 Upon maturity. —   177 ⁽¹⁾ 177 —
Yazoo Estates, LLC
9.25 10/06 Upon maturity. —   177 ⁽¹⁾ 177 —
Broadway Estates, LLC
9.25 10/06 Upon maturity. —   166 ⁽¹⁾ 166 —
Sunflower Estates, LLC
9.25 10/06 Upon maturity. —   177 ⁽¹⁾ 177 —
Parkway Place, LLC
9.25 10/06 Upon maturity. —   100 ⁽¹⁾ 100 —
Audubon Terrace, LLC
9.25 10/06 Upon maturity. —   103 ⁽¹⁾ 103 —
Lincoln Estates, LLC
9.25 10/06 Upon maturity. —   95 ⁽¹⁾ 95 —
WRAPAROUND MORTGAGE LOANS

Pinemont
Secured by an office building in Houston, TX.
10.4 07/08 Monthly principal and interest payments of $6,281. 152 467 105 —
Durham Centre
Secured by an office building in Durham, NC.
7.63 09/07 Monthly interest only payments. 10,201 14,536 14,519 —
JUNIOR MORTGAGE LOANS

Dallas Fund XVII
Secured by an assignment of partnership interest and litigation proceeds.
9.0 10/06 Principal and interest due at maturity. —   4,303 2,983 —
Pioneer Development
Secured by 33.33 acres of unimproved land in Travis County, TX.
10.0 10/08 Interest only payments start in November 2007. 12,000 2,386 3,177 —
Durham Centre
2^nd lien on office building in Durham, NC.
7.63 09/17 Monthly interest only payments. 10,201 3,297 3,297 —
Unified Housing of Chase
Oaks
2^nd lien on 22 acres of land in Collin County, TX.

4.0

Demand

Excess property cash flow payments.

—

341

341

—
OTHER

BCM—K-Mart Cary
Unsecured.
9.25 04/08 Monthly interest payments. —   1,523 1,523 —
BCM—Texstar Warehouse
Unsecured.
9.25 04/08 Monthly interest payments. —   1,252 1,252 —
Countryside, L.P.
Secured by Class A partnership units in TCI Countryside, LP.
7.25 01/07 Quarterly interest payments. —   2,300 2,300 —
Countryside, L.P.
Secured by Class A partnership units in TCI Countryside, LP.
7.25 07/12 Quarterly interest payments. —   1,050 740 —
~~Index to Financial Statements~~
SCHEDULE IV
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOAN RECEIVABLES ON REAL ESTATE
December 31, ~~2005~~2006

Description
Interest
Rate Final
Maturity
Date
Periodic Payment Terms
Prior
Liens Face
Amount of
Mortgage Carrying
Amounts of
Mortgage (1) Principal
Amount of
Loans
Subject to
Delinquent
Principal
or Interest
(dollars in thousands)
NAP Mason Park
2^nd lien on 13 acres of land in Harris County, TX.
9.0 02/03 Principal and interest due at maturity. —   200 200 —
Unified Housing of Chase Oaks
2^nd lien on 22 acres of land in Collin County, TX.
4.0 Demand Excess property cash flow payments. —   341 341 —
OTHER

BCM—K-Mart Cary
Unsecured.
9.25 04/08 Monthly interest payments. —   1,523 1,523 —
BCM—Texstar Warehouse
Unsecured.
9.25 04/08 Monthly interest payments. —   1,252 1,252 —
Countryside, L.P.
Secured by Class A partnership units in TCI Countryside, LP.
7.25 01/07 Quarterly interest payments. —   2,300 2,300 —
Countryside, L.P.
Secured by Class A partnership units in TCI Countryside, LP.
7.25 07/12 Quarterly interest payments. —   1,050 740 —
Garden Centura, L.P.
Unsecured.
7.0 None Excess property cash flow payments or property sales proceeds. —   —   603 —
UHF Kensington
100% interest in UH of Kensington, LLC.
12.0 04/09 Excess property cash flow payments. —   125 140 —
Today Forest Park Investments
Unsecured.
0.0 None Partnership distributions as available. —   678 546 —
Apartment Development Services
Secured by 100% interest in partnership.
12.0 06/06 Principal and interest at maturity. —   300 107 —

$ 36,456 $ 62,822 63,333 $ —

Interest
1,485
Allowance for estimated losses
—

$ 64,818

Description

Interest
Rate

Final
Maturity
Date

Periodic Payment Terms

Prior
Liens

Face
Amount of
Mortgage
Carrying
Amounts of
Mortgage⁽¹⁾ Principal
Amount of
Loans
Subject to
Delinquent
Principal
or Interest
(dollars in thousands)
Garden Centura, L.P.
Unsecured.
7.0 None Excess property cash flow payments or property sales proceeds. —   —   6,492 —
UHF Kensington
100% interest in UH of Kensington, LLC.
12.0 04/09 Excess property cash flow payments. —   125 157 —
Today Forest Park Investments
Unsecured.
0.0 None Partnership distributions as available. —   678 475 —
Apartment Development
Services Secured by 100% interest in
partnership.
12.0 06/06 Principal and interest at maturity. —   300 147 —

$ 32,554 $ 37,165 42,115 $ —

Interest
697
Allowance for estimated losses
(3,246 )

$ 39,566

~~The aggregate cost for federal income tax purposes is $63.3 million.~~
(1) Carrying amount of these notes was converted to equity in the respective partnerships in the first quarter of 2007.
* Original note became non-performing in August 2005. In October 2006, the old note of $4.8 million was modified to $3.6 million and assumed by the new owner of the property. See Note 3. “NOTES AND INTEREST RECEIVABLE.”
~~Index to Financial Statements~~
SCHEDULE IV
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOANS ON REAL ESTATE
December 31, ~~2005~~2006

   2005 2004 2003    2006 2005 2004
   (dollars in thousands)    (dollars in thousands)
Balance at January 1,
   $ 53,895 $ 30,671 $ 28,447    $ 67,437 $ 53,895 $ 30,671
Additions

New mortgage loans
   26,051 58,543 14,692    10,894 30,155 58,543
Deductions

Collections of principal
   (16,613 ) (11,563 ) (12,364 )    (32,262 ) (16,613 ) (11,563 )
Mortgages eliminated from consolidation of partnerships
   —   (23,754 ) —      (3,954 ) —   (23,754 )
Discount on sale of note receivable
   —   (2 ) (104 )    —   —   (2 )

Balance at December 31,
   $ 63,333 $ 53,895 $ 30,671    $ 42,115 $ 67,437 $ 53,895

~~Index to Financial Statements~~
ITEM 9.    CHANGES ~~CHANGES~~ IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. ~~During 2004, a change~~
ITEM 9A(T).    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by management under the supervision and with the participation of the Acting Principal Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 as of December 31, 2006. Based upon that most recent evaluation, which was completed as of the end of the period covered by this Form 10-K, the Acting Principal Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at December 31, 2006 to ensure that information required to be disclosed in ~~accountants occurred as previously reported from BDO Seidman LLP to Farmer, Fuqua & Huff, P.C., and no disagreement existed between~~reports that the Company files submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and ~~BDO Seidman LLP concerning any matter~~timely reported as provided in the Securities and Exchange Commission (“SEC”) rules and forms. As a result of ~~accounting principles or practices, financial statement disclosure or auditing scope or procedure.~~
~~ITEM 9A.~~    ~~CONTROLS AND PROCEDURES~~
~~The~~this evaluation, there were no significant changes in the Company’s internal control over financial reporting during the three months ended December 31, 2006 that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with ~~Generally Accepted Accounting Principles~~accounting principles generally accepted in the United States (“GAAP, US”) and includes those policies and procedures that:
pertain to the maintenance of ~~America (“GAAP”).~~ records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of a company;
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, US and that receipts and expenditures of a company are being made only in accordance with authorizations and management and directors of a company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls, material misstatements may not be prevented or detected on a timely basis. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes and conditions or that the degree of compliance with policies or procedures may deteriorate. Accordingly, even internal controls ~~determined~~determine to be effective can provide only reasonable assurance that information required to be disclosed in and reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and represented within the time periods required. ~~Furthermore, projections of any evaluation~~
Management of the effectiveness to future periods are subject to the risks that such controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
~~Evaluation of Disclosure Controls and Procedures~~
~~Management, under the supervision and with the participation of the acting Principal Executive Officer and Chief Financial Officer, evaluated~~Company has assessed the effectiveness of its internal control over financial reporting at December 31, 2006. To make this assessment, the ~~Company’s disclosure controls and procedures~~Company used the criteria for effective internal control over financial reporting described in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management of the Company believes that as of December 31, ~~2005. Based upon that most recent evaluation, which was completed as~~2006, the internal control system over financial reporting met those criteria.
This annual report does not include an attestation report of the ~~end~~Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the ~~period covered by this Form 10-K, the acting Principal Executive Officer and Chief Financial Officer have concluded~~SEC that ~~the Company’s disclosure controls and procedures were effective at December 31, 2005 to ensure that information required to be disclosed in reports that~~permit the Company ~~files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified~~to provide only management’s report in ~~Securities and Exchange Commission Rules and Forms.~~this annual report.
Changes in Internal Control Over Financial Reporting
There ~~have~~has been no ~~changes~~change in the Registrant’s internal control over financial reporting during the quarter ended December 31, ~~2005,~~2006 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
~~ITEM 9B.~~    ~~OTHER INFORMATION~~
Item 9B.    OTHER INFORMATION
Not applicable.
~~Index to Financial Statements~~
PART III
~~ITEM 10.~~    ~~DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT~~
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The affairs of Transcontinental Realty Investors, Inc. (“TCI”) are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved.
After December 31, 2003, a number of changes occurred in the composition of the Board of Directors of TCI, including the creation of certain Board committees, the adoption of Committee charters, the adoption of a Code of Ethics for Senior Financial Officers, and the adoption of Guidelines for Director Independence. Also, the composition of the members of the Board of Directors changed with the resignation of Earl D. Cecil (on February 29, 2004) as well as the election of independent directors, Ted R. Munselle and Sharon Hunt on February 20, 2004, and Robert A. Jakuszewski on November 22, 2005.
It is the Board’s objective that a majority of the Board ~~consist~~consists of independent directors. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with TCI. The Board has established guidelines to assist it in determining director independence which conform to, or are more exacting than, the independence requirements in the New York Stock Exchange listing rules. The independence guidelines are set forth in TCI’s “Corporate Governance Guidelines.” The text of this document has been posted on TCI’s internet website athttp://www.transconrealty-invest.com and is available in print to any shareholder who requests it. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independent determination.
TCI has adopted a code of conduct that applies to all Directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Stockholders may find our code of conduct on our website by going to our website address athttp://www.transconrealty-invest.com. We will post any amendments to the code of conduct, as well as any waivers that are required to be disclosed by the rules of the SEC or the New York Stock Exchange on our website.
Our Board of Directors has adopted charters for our Audit, Compensation and Governance and Nominating Committees of the Board of Directors. Stockholders may find these documents on our website by going to the website address athttp://www.transconrealty-invest.com. You may also obtain a printed copy of the materials referred to by contacting us at the following address:
Transcontinental Realty Investors, Inc.
Attn: Investor Relations
1800 Valley View Lane, Suite 300
Dallas, Texas 75234
Telephone: 469-522-4200
All members of the Audit Committee and Nominating and Corporate Governance Committees must be independent directors. Members of the Audit Committee must also satisfy additional independence requirements, which provide (i) that they may not accept, directly or indirectly, any consulting, advisory, or compensatory fee from TCI or any of its subsidiaries other than their director’s compensation (other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other committee of the Board), and (ii) no member of the Audit Committee may be an “affiliated person” of TCI or any of its subsidiaries, as defined by the Securities and Exchange Commission.
The current directors of TCI are listed below, together with their ages, terms of service, all positions and offices with TCI or its former advisor, BCM or Prime, which took over as contractual advisor for BCM on July 1,
~~Index to Financial Statements~~
2003, their principal occupations, business experience and directorships with other companies during the last five
years or more. The designation “Affiliated”, when used below with respect to a director, means that the director is an officer, director or employee of BCM, Prime or an officer of TCI or an officer or director of an affiliate of TCI. The designation “Independent”, when used below with respect to a director, means that the director is neither an officer of TCI nor a director, officer or employee of BCM or Prime, although TCI may have certain business or professional relationships with such director as discussed in ITEM 13. “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS—Certain Business Relationships.”
TED P. STOKELY:Age ~~72,~~73, Director (Affiliated) (since April 1990) and Chairman of the Board (since January 1995).
General Manager (since January 1995) of ECF Senior Housing Corporation, a nonprofit corporation; General Manager (since January 1993) of Housing Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid consultant (since January 1993) and paid consultant (April 1992 to December 1992) of Eldercare Housing Foundation (“Eldercare”), a nonprofit corporation; General Manager (since April 2002) of Unified Housing Foundation, Inc., a nonprofit corporation; Director and Chairman of the Board of ARI (since November 2002); and Director (since April 1990) and Chairman of the Board (since January 1995) of IORI.
HENRY BUTLER:Age ~~55,~~56, Director (Affiliated) (since December 2001).
Broker—Land Sales (since July 2003) for Prime and 1992 to June 2003 for BCM; Owner/Operator (1989 to 1991) of Butler Interests, Inc.; Director (since July 2003) of ARI; and Director (December 2001 to July 2003) of IORI.
SHARON HUNT:    Age ~~63,~~64, Director (Independent) (since February 2004).
Licensed Realtor in Dallas, Texas with Virginia Cook Realtors; President and Owner of Sharon’s Pretzels, Inc. (until sold in 1997); Director (since 1991) of a 501(c)(3) non-profit corporation involved in the acquisition, renovation and operation of real estate; and Director (since February 2004) of ARI.
ROBERT A. JAKUSZEWSKI:Age ~~43,~~44, Director (Independent) (since November 2005)
Vice President—Sales and Marketing (since September 1998) of New Horizons Communications, Inc. Mr. Jakuszewski was a Consultant (January 1998 – September 1998) for New Horizon Communications, Inc.; Regional Sales Manager (1996-1998) of Continental Funding; Territory Manager (1992-1996) of Sigvaris, Inc.; Senior Sales Representative (1988-1992) of Mead Johnson Nutritional Division, USPNG; Sales Representative (1986-1987) of Muro Pharmaceutical, Inc. Mr. Jakuszewski has been a director of IORI since March 16, 2004.
TED R. MUNSELLE:    Age ~~50,~~51, Director (Independent) (since February 2004).
Vice President and Chief Financial Officer (since October 1998) of Landmark Nurseries, ~~Inc.; Employed~~Inc; President (since December 2004) of Applied Educational Opportunities, LLC, an educational organization which has career training schools located in the cities of Richardson and Tyler, Texas; Certified Public Accountant employed in the public accounting industry from 1977 until ~~October 1998; Certified Public Accountant in the State of Texas; and~~1998 when he entered his current employment; Director (since February 2004) of ARI.
Board Committees
The Board of Directors held 911 meetings during ~~2005.~~2006. For such year, no incumbent director attended fewer than 75.0% of the aggregate of (1) the total number of meetings held by the Board during the period for which he or she had been a director and (2) the total number of meetings held by all committees of the Board on which he or she served during the period that he served.
The Board of Directors has standing Audit, Compensation and Governance and Nominating Committees.
~~Index to Financial Statements~~
Audit Committee.    The current Audit Committee was formed on February 19, 2004, and its function is to review TCI’s operating and accounting procedures. A Charter of the Audit Committee has also been adopted by the Board. The charter of the Audit Committee was adopted on February 19, 2004, and is available on the Company’s Investor Relations website(www.transconrealty-invest.com). The Audit Committee is an “audit committee” for purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. The current members of the Audit Committee, all of whom are independent within the meaning of the SEC Regulations, the listing standards of the New York Stock Exchange, Inc. and TCI’s Corporate Governance Guidelines, are Messrs. Jakuszewski and Munselle (Chairman) and Ms. Hunt. Mr. Ted R. Munselle, a member of the Committee, is qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the Board has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the New York Stock Exchange, Inc. All of the members of the Audit Committee meet the experience requirements of the listing standards of the New York Stock Exchange. The Audit Committee met ~~nine~~eight times during ~~2005.~~2006.
Governance and Nominating Committee.    The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of TCI’s Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. The Charter of the Governance and Nominating Committee was adopted on March 22, 2004 and is available on the Company’s Investor Relations website (www.transconrealty-invest.com). The members of the Committee are Messrs. Munselle, Jakuszewski (Chairman) ~~and Jakuszewski~~ and Ms. Hunt.
Compensation Committee.    The Compensation Committee is responsible for overseeing the policies of the Company relating to compensation to be paid by the Company to the Company’s principal executive officer and any other officers designated by the Board and make recommendations to the Board with respect to such policies, produce necessary reports and executive compensation for inclusion in the Company’s Proxy Statement in accordance with applicable rules and regulations and to monitor the development and implementation of succession plans for the principal executive officers and other key executives and make recommendations to the Board with respect to such plans. The charter of the Compensation Committee was adopted on March 22, 2004, and is available on the Company’s Investor Relations website (www.transconrealty-invest.com). The current members of the Compensation Committee are Ms. Hunt (Chairman) and Messrs. Jakuszewski and Munselle. All of the members of the Compensation Committee are independent within the meaning of the listing standards of the NYSE and the Company’s Corporate Governance Guidelines. The Compensation Committee is to be comprised of at least two directors who are independent of Management and the Company. The Compensation Committee met ~~one time~~two times during ~~2005.~~2006.
The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:


Audit Committee

Governance and
Nominating Committee
   Compensation Committee
Ted P. Stokely

Henry A. Butler

Sharon Hunt
   ü    ü    ü
Robert A. Jakuszewski
   ü    ü    ü
Ted R. Munselle
   ü    ü    ü
Presiding Director
In March 2004, the Board created a new position of presiding director, whose primary responsibility is to preside over periodic executive sessions of the Board in which Management directors and other members of
~~Index to Financial Statements~~
Management do not participate. The presiding director also advises the Chairman of the Board and, as
appropriate, Committee Chairs with respect to agendas and information needs relating to Board and Committee meetings, provides advice with respect to the selection of Committee Chairs and performs other duties that the Board may from time to time delegate to assist the Board in fulfillment of its responsibilities.
Martin L. White, a director until November 22, 2005, served in such position from March 2004 through November 22, 2005. On November 22, 2005, the non-Management members of the Board designated Ted R. Munselle to serve in this position until the Company’s Annual Meeting of Stockholders to be held following the fiscal year ending December 31, ~~2005.~~2006.
Determination of Director’s Independence
In February 2004, the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during that year by the New York Stock Exchange. The full text of the Guidelines can be found on the Company’s Investor Relations website (www.transcontrealty-invest.com). Pursuant to the Guidelines, the Board undertook its annual review of director independence inon February, ~~2004,~~2006 and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and TCI and its subsidiaries and affiliates, including those reported under Certain Relationships and Related Transactions below. The Board also examined transactions and relationship between directors or their affiliates and members of TCI’s senior management or their affiliates. As provided in the Guidelines, the purpose of such review was to determine whether such relationships or transactions were inconsistent with the determination that the director is independent.
As a result of this review, the Board affirmatively determined of the then directors, Messrs. Munselle and Jakuszewski and Ms. Hunt are each independent of the Company and its Management under the standards set forth in the Corporate Governance Guidelines.
Executive Officers
Executive officers of the Company are Steven A. Abney, Executive Vice President and Chief Financial Officer, Mark W. Branigan, Executive Vice President—Multi-Family Construction, and Louis J. Corna, Executive Vice President—Tax, General Counsel/Tax Counsel and Secretary,listed below, all of whom are employed by Prime. None of the executive officers receive any direct remuneration from the Company nor do any hold any options granted by the Company. Their positions with the Company are not subject to a vote of stockholders. The ages, terms of service and all positions and offices with the Company, Prime, BCM, other affiliated entities, other principal occupations, business experience and directorships with other publicly-held companies during the last five years or more are set forth below.
~~Steven~~DANIEL J. MOOS, 56
President and Chief Operating Officer (effective April 2007) of ARI, TCI, IORI and (effective March 2007) of Prime; Senior Vice President and Business Line Manager for U.S. Bancorp (NYSE:USB) working out of their offices in Houston, Texas from 2003 to April 2007: Executive Vice President and Chief Financial Officer, Fleetcor Technologies a privately held transaction processing company that was headquartered in New Orleans, Louisiana from 1998 to 2003; Senior Vice President and Chief Financial Officer, ICSA a privately held internet security and information company headquartered in Carlisle, Pennsylvania from 1996 to 1998; and for more than ten years prior thereto was employed in various financial and operating roles for PhoneTel Technologies, Inc. which was a publicly traded telecommunication company on the American Stock Exchange headquartered in Cleveland, Ohio (1992-1996) and LDI Corporation which was a publicly traded computer equipment sales/service and asset leasing company listed on the NASDAQ and headquartered in Cleveland, Ohio.
REAGAN K. VIDAL, 46
Executive Vice President, Managing Director of Capital Markets (since February 2007) of ARI, TCI and IORI; Senior Vice President, Guaranty Bank of Dallas, Texas from 1996 to January 2007; Vice President, U.S. Real Estate Group of Societe Generale, a France-based multi-national financial institution with U.S. real estate operations based in Dallas, Texas; and for more than five years prior thereto was Vice President, Western Region Commercial of Lomas Management, Inc., an advisor and manager to Lomas & Nettleton Mortgage Investors and Lomas Financial Corporation, then two publicly-traded real estate investment trusts.
LOUIS J. CORNA, 59
Executive Vice President—General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice President—Tax (October 2001 to February 2004), Executive Vice President—Tax and Chief Financial Officer (June 2001 to October 2001) and Senior Vice President—Tax (December 2000 to June 2001) of the Company, ARI, IORI and BCM; Executive Vice President, General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice President—Tax (July 2003 to February 2004) of Prime and PIAMI; Private Attorney (January 2000 to December 2000); Vice President—Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; Vice President—Taxes (July 1991 to February 1998) of Whitman Corporation.
ALFRED CROZIER, 54
Executive Vice President—Residential Construction (since November 2006) of ARI, TCI and IORI; Managing Director of Development for Woodmont Investment Company GP, LLC of Dallas, Texas from November 2005 to November 2006; President of Sterling Builders, Inc. of Spring, Texas from October 2003 to November 2005; Vice president of Westchase Construction, Ltd of Houston, Texas from August 2001 to September 2003. For more than five years prior thereto, Mr. Crozier was employed by various firms in the construction industry including Trammell Crow Residential (February 1995 through February 2000) and The Finger Companies (August 1991 through February 1995). Mr. Crozier is a licensed architect.
STEVEN A. ~~Abney, 50~~ABNEY, 51
Executive Vice President and Chief Financial Officer (since September 2005) of ARI, TCI, BCM, PIAMI, and Prime; Executive Vice President and Chief Financial Officer (since December 2005) of IORI; Vice President Finance and Chief Accounting Officer/Principal Financial Officer (from November 2001 to February 2005) of and employed (from November 2001 to August 2005) by CRT Properties, Inc. (f/k/a Koger Equity, Inc.). For more than four years prior thereto, Mr. Abney was Executive Vice President and Chief Financial Officer (from December 1997 to November 2001) of Konover and Associates, Inc., a privately-held real estate developer based in Farmington, Connecticut. Mr. Abney has been a certified public accountant since 1980.
~~James D. Canon, III, 44~~
Executive Vice President—Multi-Family Construction (effective April 1, 2006) of the Company, ARI, IORI and Prime. Managing Director (June 2003 to March 2006) of Tarragon Corporation, a New York City-based real
~~Index to Financial Statements~~
estate homebuilder and developer which has securities listed on the NASDAQ National Market System. Prior thereto (from November 2000 to March 2003), he was Vice President of Southwest Housing Management, Inc., a Dallas, Texas-based real estate company, and prior thereto and for more than five years, Senior Vice President (February 1992 to October 2000) of BCM.
~~Louis J. Corna, 58~~
Executive Vice President—General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice President—Tax (October 2001 to February 2004), Executive Vice President—Tax and Chief Financial Officer (June 2001 to October 2001) and Senior Vice President—Tax (December 2000 to June 2001) of the Company, ARI, IORI and BCM; Executive Vice President, General Counsel/Tax Counsel and Secretary (since February 2004), Executive Vice President—Tax (July 2003 to February 2004) of Prime and PIAMI; Private Attorney (January 2000 to December 2000); Vice President—Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; Vice President—Taxes (July 1991 to February 1998) of Whitman Corporation.
~~Mark W. Branigan, 51~~
Executive Vice President—Multi-Family Construction (since September 2004) resigned effective March 31, 2006 to pursue other opportunities. He was Executive Vice President—Residential (June 2001 to September 2004), Director (September 2000 to June 2001) and Executive Vice President and Chief Financial Officer (August 2000 to June 2001 of TCI, ARI, IORI and BCM. Prior thereto, he was Executive Vice President—Multi-Family Construction (September 2004 to March 31, 2006), and Executive Vice President—Residential (July 2003 to September 2004) of Prime and PIAMI; Vice President—Director of Construction (August 1999 to August 2000) and for more than five years prior thereto, Executive Vice President—Residential Asset Management of BCM, TCI and OIRI.
In addition to the foregoing executive officers, the Company has several vice presidents and assistant secretaries who are not listed herein.
Code of Ethics
TCI has adopted a code of ethics entitled “Code of Business Conduct and Ethics” that applies to all directors, officers, and employees (including those of the contractual Advisor to TCI). In addition, TCI has adopted a code of ethics entitled “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer, president, principal financial officer, chief financial officer, principal accounting officer, and controller.
The text of these documents has been posted on TCI’s internet website athttp://www.transconrealty-invest.com and are available in print to any stockholder who requests them.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the directors, executive officers, and any persons holding more than ten percent of TCI’s shares of Common Stock are required to report their share ownership and any changes in that ownership to the Securities and Exchange Commission (the “Commission”). Specific due dates for these reports have been established and TCI is required to report any failure to file by these dates. All of these filing requirements were satisfied by TCI’s directors, executive officers, and ten percent holders during the fiscal year ending December 31, ~~2005.~~2006. In making these statements, TCI has relied on the written representations of its incumbent directors and executive officers and its ten percent holders and copies of the reports they have filed with the Commission.
~~Index to Financial Statements~~
The Advisor
Although the Board of Directors is directly responsible for managing the affairs of TCI and for setting the policies which guide it, TCI’s day-to-day operations are performed by Prime under the supervision of the Board. The duties of Prime include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities as well as financing and refinancing sources. Prime also serves as a consultant to the Board in connection with the business plan and investment decisions made by the Board.
BCM served as TCI’s advisor from March 1989 to June 30, 2003. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by PAMI under the same terms as BCM’s advisory agreement. PIAMI is owned by Realty Advisors, Inc. (80.0%) and Syntek West, Inc. (20.0%), related parties. Syntek West, Inc. is owned by Gene Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (“PIAMI”). On October 1, 2003, Prime, which is owned 100% by PIAMI, replaced PIAMI as the advisor to TCI. The duties of Prime include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities, as well as financing and refinancing sources. Prime also serves as a consultant in connection with TCI’s business plan and investment decisions made by the Board.
Prime is a company of which Messrs. ~~Branigan,~~Crozier, Vidal, Moos, Corna, and Abney serve as executive officers. Prime is 80% indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of Prime, but serves as a representative of the trust, is an officer of SWI and is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.
Under the Advisory Agreement, Prime is required to annually formulate and submit, for Board approval, a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity, and other investments, and Prime is required to report quarterly to the Board on TCI’s performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to Prime by the Board.
The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that Prime shall be deemed to be in a fiduciary relationship to the TCI stockholders; contains a broad standard governing Prime’s liability for losses incurred by TCI; and contains guidelines for Prime’s allocation of investment opportunities as among itself, TCI and other entities it advises.
The Advisory Agreement provides for Prime to be responsible for the day-to-day operations of TCI and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of TCI’s net income, after certain adjustments.
The Advisory Agreement also provides for Prime to receive an annual incentive sales fee equal to 10.0% of the amount, if any, by which the aggregate sales consideration for all real estate sold by TCI during such fiscal year exceeds the sum of: (1) the cost of each such property as originally recorded in TCI’s books for tax purposes (without deduction for depreciation, amortization or reserve for losses), (2) capital improvements made to such assets during the period owned, and (3) all closing costs, (including real estate commissions) incurred in the sale of such real estate; provided, however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8.0% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating income and sales consideration and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5.0% higher in the current fiscal year than in the prior fiscal year.
~~Index to Financial Statements~~
Additionally, pursuant to the Advisory Agreement Prime or an affiliate of Prime is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of (1) up to 1.0% of the cost of acquisition, inclusive of commissions, if any, paid to non-affiliated brokers or (2) the compensation customarily charged in arm’s-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property’s appraised value at acquisition. Prime does not receive such a commission on acquisitions from an affiliated or related party.
The Advisory Agreement requires Prime or any affiliate of Prime to pay to TCI, one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI; provided, however, that the compensation retained by Prime or any affiliate of Prime shall not exceed the lesser of (1) 2.0% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.
The Advisory Agreement also provides that Prime or an affiliate of Prime is to receive a mortgage or loan acquisition fee with respect to the acquisition or purchase of any existing mortgage loan by TCI equal to the lesser of (1) 1.0% of the amount of the loan purchased or (2) a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by TCI.
Under the Advisory Agreement, Prime or an affiliate of Prime also is to receive a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of (1) 1.0% of the amount of the loan or the amount refinanced or (2) a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from Prime or an affiliate of Prime without the approval of TCI’s Board of Directors. No fee shall be paid on loan extensions.
The Advisory Agreement also provides that for all activities in connection with or related to construction for the Company and its subsidiaries, Prime shall receive a fee equal to 6% of the so-called “hard costs” only of any costs of construction on a completed basis, based upon amounts set forth as approved on any architect certificate issued in connection with such construction, which fee is payable at such time as the applicable architect certifies other costs for payment to third parties. The phrase “hard costs” means all actual costs of construction paid to contractors, subcontractors and third parties for materials or labor performed as part of the construction but does not include items generally regarded as “soft costs,” which are consulting fees, attorneys’ fees, architectural fees, permit fees and fees of other professionals.
Under the Advisory Agreement, Prime receives reimbursement of certain expenses incurred by it in the performance of advisory services.
Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if the Operating Expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement based on the book value, net asset value and net income of TCI during the fiscal year. ~~Price~~Prime was required to refund $1.3 million of the 2003 advisory fee under this provision, and $2.4 million of the 2005 advisory fee under this provision. Prime was not required to refund any of the 2004 advisory fees to TCI.
Additionally, if management were to request that Prime render services to TCI other than those required by the Advisory Agreement, Prime or an affiliate of Prime separately would be compensated for such additional services on terms to be agreed upon from time to time. As discussed below, under “Property Management,” TCI has hired Triad Realty Services, Ltd. (“Triad”), an affiliate of BCM, to provide property management services for TCI’s properties. Also as discussed below, under “Real Estate Brokerage” TCI had engaged, on a non-exclusive basis, Regis Realty, Inc. (“Regis”), a related party, to perform brokerage services for TCI until December 2002. Beginning January 1, 2003, Regis Realty I LLC performs brokerage services for TCI.
~~Index to Financial Statements~~
Effective July 1, 2005, the Company and Prime entered into a Cash Management Agreement to further define the administration of the Company’s day-to-day investment operations, relationship contacts, flow of funds and deposit and borrowing of funds. Under the Cash Management Agreement, all funds of the Company are delivered to Prime which has a deposit liability to the Company and is responsible for payment of all payables and investment of all excess funds which earn interest at the Wall Street Journal Prime Rate plus 1% per annum, as set quarterly on the first day of each calendar quarter. Borrowings for the benefit of the Company bear the same interest rate. The term of the Cash Management Agreement is coterminous with the Advisory Agreement, and it is automatically renewed each year unless terminated with the Advisory Agreement.
Prime may assign the Advisory Agreement only with the prior consent of TCI.
The directors and principal executive officers of Prime are set forth below.

Mickey N. Phillips:

Director
Ryan T. Phillips:

Director
~~Steven~~ A. ~~Abney:~~Cal Rossi, Jr.:

~~Acting Principal Executive Officer,~~Senior Executive Vice President ~~and Chief Financial Officer~~
~~Mark W. Branigan:~~Daniel J. Moos:

~~Executive Vice President—Residential~~
President and Chief Operating Officer
Louis J. Corna:

Executive Vice President—General Counsel, Executive Vice President—Tax, Secretary
Reagan K. Vidal:
Executive Vice President, Managing Director of Capital Markets
Steven A. Abney:
Executive Vice President and Chief Financial Officer
Mickey N. Phillips is Gene E. Phillips’ brother and Ryan T. Phillips is Gene E. Phillips’ son. Gene E. Phillips serves as a representative of the trust established for the benefit of his children, which indirectly owns Prime and, in such capacity, has substantial contact with the management of Prime and input with respect to its performance of advisory services to TCI.
Property Management
Since February 1, 1990, affiliates of BCM have provided property management services to TCI. Currently, Triad provides such property management services. Triad subcontracts with other entities for the provision of property-level management services to TCI. The general partner of Triad is PIAMI. The limited partner of Triad is Highland Realty Services, Inc. Triad subcontracts the property-level management and leasing of 2224 of TCI’s commercial properties to Regis I, which is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis I also receives real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Regis Hotel I, LLC, a related party, manages TCI’s four hotels. The sole member of Regis I and Regis Hotel I, LLC is Highland.
Real Estate Brokerage
Regis I also provides real estate brokerage services to TCI (on a non-exclusive basis), and is entitled to receive a real estate commission for property purchases and sales in accordance with the following sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% is to be paid to Regis I or affiliates; (2) maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of which no more than 3.0% is to be paid to Regis I or affiliates; (3) maximum fee of 2.5% on transaction amounts between $5.0 million-$10.0 million of which no more than 2.0% is to be paid to Regis I or affiliates; and (4) maximum fee of 2.0% on transaction amounts in excess of $10.0 million of which no more than 1.5% is to be paid to Regis I or affiliates.
ITEM 11.    EXECUTIVE COMPENSATION
~~ITEM 11.~~    ~~EXECUTIVE~~ ~~COMPENSATION~~
TCI has no employees, payroll or benefit plans and pays no compensation to its executive officers. The executive officers of TCI, who are also officers or employees of Prime, TCI’s advisor, are compensated by
~~Index to Financial Statements~~
Prime. Such executive officers perform a variety of services for Prime and the amount of their compensation is determined solely by Prime. Prime does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See ITEM 10. “DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT—The Advisor” for a more detailed discussion of the compensation payable to Prime.
The only remuneration paid by TCI is to the directors who are not officers or directors of Prime or its affiliated companies. The Independent Directors (1) review the business plan of TCI to determine that it is in the best interest of TCI’s stockholders, (2) review the advisory contract, (3) supervise the performance of the advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) review the reasonableness of the total fees and expenses of TCI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired.
Each Independent Director receives compensation in the amount of $30,000 per year, plus reimbursement for expenses. The Chairman of the Board receives an additional fee of $3,000 per year. In addition, each Independent Director receives an additional $250 for each Audit Committee meeting attended, plus each Independent Director receives an additional fee of $1,000 per day for any special services rendered by him to TCI outside of his ordinary duties as director, plus reimbursement of expenses.
During ~~2005, $133,498~~2006, $123,500 was paid to the Independent Directors in total directors’ fees for all services, including the annual fee for service during the period January 1, ~~2005~~2006 through December 31, ~~2005,~~2006, and ~~2005~~2006 special service fees as follows: Sharon Hunt, ~~$32,500;~~$30,000; Robert A. Jakuszewski, ~~$0;~~$30,000; Ted R. Munselle, ~~$32,500;~~$30,000; and Ted P. Stokely, ~~$33,250; and Martin L. White (a director until November 22, 2005), $35,698.~~$33,000.
Director’s Stock Option Plan
TCI ~~has~~ established a Director’s Stock Option Plan (“Director’s Plan”) for the purpose of attracting and retaining Directors who are not officers or employees of TCI or Prime or BCM. The Director’s Plan provides for the grant of options that are exercisable at fair market value of TCI’s Common Stock on the date of grant. The Director’s Plan was approved by stockholders at their annual meeting on October 10, 2000, following which each then-serving Independent Director was granted options to purchase 5,000 shares of Common Stock of TCI. On January 1 of each year, each Independent Director receives options to purchase 5,000 shares of Common Stock. The options are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. The Director’s Plan was terminated by the Board of Directors on December 15, 2005.
As of March ~~1, 2006,~~23, 2007, options covering 40,000 shares of TCI Common Stock were outstanding.
~~Index to Financial Statements~~
Performance Graph
The following performance graph compares the cumulative total stockholder return on TCI’s shares of Common Stock with the US Total Market Index (“Total Market Index”) and the Real Estate Investment Index (“Real Estate Index”). The comparison assumes that $100 was invested on December 31, 1998, in TCI’s shares of Common Stock and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.
   Cumulative Total Return    Cumulative Total Return
   2000    2001    2002    2003    2004    2005    2001    2002    2003    2004    2005    2006
TRANSCONTINENTAL REALTY INVESTORS INC.
   100.00    180.85    198.76    188.51    160.56    187.61    100.00    109.91    104.24    88.79    103.74    86.60
DOW JONES US TOTAL MARKET
   100.00    88.08    68.64    89.74    100.52    106.88    100.00    77.92    101.88    114.12    121.34    140.23
DOW JONES US REAL ESTATE
   100.00    111.80    115.86    158.61    208.12    228.18    100.00    103.63    141.87    186.15    204.09    276.53
~~Index to Financial Statements~~
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, ~~2005~~2006 regarding compensation plans (including individual compensation arrangements) under which equity securities of TCI are authorized for issuance.


Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
   Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights    Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a)
Plan Category
   (a)    (b)    (c)
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
(a)
   Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a)
(c)
2000 Stock Option Plan approved by stockholders
   —      —      300,000    —      —      300,000
Directors Stock Option Plan approved by stockholders
   40,000    $ 16.01    —      40,000    $    —

Total
   40,000    $ 16.01    300,000    40,000    $    300,000

Security Ownership of Certain Beneficial Owners
The following table sets forth the ownership of TCI’s Common Stock, both beneficially and of record, both individually and in the aggregate, for those persons or entities known to be beneficial owners of more than 5.0% of the outstanding shares of Common Stock as of the close of business on March ~~24, 2006.~~23, 2007.

Name and Address of Beneficial Owner
   Amount and
Nature
of Beneficial
Ownership    Approximate
Percent of
Class⁽¹⁾
Amount and
Nature
of Beneficial
Ownership
   Approximate
Percent of
Class⁽¹⁾
EQK Holdings, Inc.⁽²⁾
1800 Valley View Lane
Suite 300
Dallas, Texas 75234
   5,278,149    66.8 %    5,278,149    66.8 %
Transcontinental Realty Acquisition Corporation⁽³⁾
1800 Valley View Lane
Suite 100
Dallas, Texas 75234
   1,213,226    15.4 %    1,213,226    15.4 %
(1) Percentage is based upon ~~7,900,869~~7,898,869 shares of Common Stock outstanding at March ~~24, 2006.~~23, 2007.
(2) EQK Holdings, Inc. (“EQK”) is a wholly-owned subsidiary of ART, which is a wholly-owned subsidiary of ARI.
(3) Transcontinental Realty Acquisition Corporation (“TRAC”) is a wholly-owned subsidiary of ARI.
~~Index to Financial Statements~~
Security Ownership of Management.
The following table sets forth the ownership of TCI’s Common Stock, both beneficially and of record, both individually and in the aggregate, for the directors and executive officers of TCI as of the close of business on March ~~24, 2006.~~23, 2007.

Name of Beneficial Owner
   Amount
and Nature of
of Beneficial
Ownership
Approximate
Percent of
Class⁽¹⁾

Steven A. Abney
~~6,491,375~~ ⁽²⁾ ~~82.2~~ %
~~Mark W. Branigan~~
   6,491,375 ⁽²⁾ 82.2 %
Henry A. Butler
   6,491,375 ⁽³⁾ 82.2 %
Louis J. Corna
   6,491,375 ⁽²⁾ 82.2 %
Sharon Hunt
   6,496,375 ^(3)(6)(5) 82.2 %
Robert A. Jakuszewski
   6,491,375 ⁽³⁾ 82.2 %
Ted Munselle
   6,496,375 ^(3)(7)(6) 82.2 %
Ted P. Stokely
   6,506,375 ⁽³⁾⁽⁴⁾ 82.4 %
Reagan K. Vidal
6,506,375 ^{(2)(3)(4)(5)(6)} 82.4 %
Alfred Crozier
6,506,375 ^{(2)(3)(4)(5)(6)} 82.4 %
All Directors and Executive Officers as a group (8(9 individuals)
   6,506,375 ^{(2)(3)(4)(5)(6)(7)} 82.4 %
(1) Percentage is based upon 7,900,869 shares of Common Stock outstanding at March ~~24, 2006~~23, 2007 and ~~20,000~~25,000 shares which may be issued under existing Director Stock Options.
(2) Includes 5,278,149 shares owned by EQK and 1,213,226 shares owned by TRAC. Each of the executive officers of TCI may be deemed to be beneficial owners of such shares by virtue of their positions as executive officers of TCI and its subsidiaries, EQK and TRAC. The executive officers of TCI disclaim such beneficial ownership.
(3) Includes 5,278,149 shares owned by EQK and 1,213,226 shares owned by TRAC. Messrs. Butler, Stokely, Jakuszewski, and Munselle and Ms. Hunt may be deemed to be beneficial owners of such shares by virtue of their positions as directors of TCI. Messrs. Butler, Stokely, Jakuszewski, and Munselle and Ms. Hunt disclaim such beneficial ownership.
(4) Includes 15,000 shares which may be acquired by Mr. Stokely pursuant to the Director Stock Option Plan.
(5) Includes 5,000 shares which may be acquired by Ms. Hunt pursuant to the Director Stock Option Plan.
(6) Includes 5,000 shares which may be acquired by Mr. Munselle pursuant to the Director Stock Option Plan.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Business Relationships
In February 1989, the Board of Directors voted to retain BCM as TCI’s advisor. See ITEM 10. “DIRECTORS AND EXECUTIVE OFFICERS TOOF THE REGISTRANT—The Advisor.” Effective July 1, 2004, Prime replaced BCM as the contractual advisor to TCI. Prime is indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer or director of Prime, but serves as a representative of the trust, is involved in daily consultation with the officers of Prime and has significant influence over the conduct of Prime’s business, including the rendering of advisory services and the making of investment decisions for itself and for TCI.
Since February 1, 1991, affiliates of BCM have provided property management services to TCI. Currently, Triad provides such property management services. Triad subcontracts the property-level management and leasing of 22 of TCI’s commercial properties to Regis I and three of its ~~three~~four hotels to Regis Hotel I, LLC.
Regis I also provides real estate brokerage services for TCI, on a non-exclusive basis, and receives brokerage commissions in accordance with the brokerage agreement.
~~Two~~One of TCI’s Directors ~~(Ted Stokely and Robert~~(Robert Jakuszewski) also serves as a director of IORI. The Director owes fiduciary duties to IORI as well as to TCI under applicable law. At December 31, ~~2005,~~2006, TCI
~~Index to Financial Statements~~
owned approximately 24.0%
of the outstanding common shares of IORI. Prime also serves as advisor to ARI. All of TCI’s directors also serve as Directors of ARI. Messrs. ~~Branigan, Canon,~~Vidal, Moos, Corna, and Abney serve as executive officers of ARI, Prime and IORI.
Related Party Transactions
Historically, TCI has engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to TCI as could have been obtained from unrelated third parties.
Operating Relationships
In the year ended December 31, ~~2005,~~2006, TCI received ~~$56,000~~$70,000 in rent from Prime for a lease at Addison ~~Hanger.~~Hangar. An affiliate of BCM owns a corporate jet that is housed at the ~~hanger~~hangar and TCI has available space at the ~~hanger.~~hangar.
Property Transactions Update
In January 2002, TCI purchased 100% of the outstanding common shares of ART Two Hickory Corporation from ARI, for $4.4 million. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.” The purchase price was determined based upon the market value of the property exchanged, using a market rate multiple of net operating income (“cap rate”) of 7.0%. The business purpose of the transaction was for TCI to make an equity investment in Two Hickory anticipating a profitable return.
In April 2002, TCI purchased 100% of the following entities from ARI: Garden Confederate Point, L.P., Garden Foxwood, L.P., Garden Woodsong, L.P. and ART One Hickory Corporation for $10.0 million. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.” The purchase price for these entities was determined based on a cap rate of 8.41% for the partnerships and 7.0% for ART One Hickory Corporation. The business purpose of the transaction was for TCI to make an equity investment in the entities anticipating a profitable return.
During 2002, TCI’s Board of Directors authorized the Chief Financial Officer of the Company to advance funds either to or from the Company, through BCM, in an amount up to $15.0 million, on the condition that such advances shall be repaid in cash or transfers of assets within 90 days. Several property transfers from BCM or Prime were made during 2004 and 2003 to reduce the affiliate balance. Each of these transactions was approved by TCI’s Board of Directors.
In March 2003, TCI purchased the Bridgeview Plaza and Cullman shopping centers from ARI for $8.7 million and $2.0 million, respectively, to satisfy debt. The purchase price was determined using a market rate multiple of net operation income. TCI assumed debt of $2.7 million on Cullman. TCI received $5.1 million in cash on the subsequent financing of the shopping center.
~~In March 2003, TCI sold a note receivable for $2.6 million to a third party. The proceeds of this sale were received by BCM. The funds increased TCI’s affiliate receivable from BCM.~~
~~In May 2003, TCI sold its Solco-Valley Ranch land parcel. The proceeds of the sale were received by BCM. The funds increased TCI’s affiliate receivable from BCM $2.0 million.~~
~~In June 2003, TCI received the proceeds from the refinancing of an ARI property. This transaction reduced TCI’s affiliate receivables from BCM by $757,000.~~
~~In July 2003, TCI paid $1.7 million to BCM for a pro-rata share of prior year’s legal fees in the defense of Gene E. Phillips. Mr. Phillips is a related party and advisor to TCI.~~
~~Index to Financial Statements~~
In September 2003, TCI sold the Oak Tree Village shopping center to a third party. The proceeds of the sale were received by ARI. The funds were used to increase TCI’s affiliate receivable from Prime by $1.6 million.
~~In September 2003, TCI sold Palm Desert land parcel. The proceeds of the sale were received by ARI. The funds increased TCI’s affiliate receivable from Prime by $2.6 million.~~
~~In November 2003, TCI financed the Rasor land parcel. The proceeds of the financing were received by ARI. The funds increased TCI’s affiliate receivable from Prime by $1.2 million.~~
In November 2003, ARI paid $6.3 million in principal, accrued interest and closing costs on behalf of TCI as payment of the notes payable on TCI’s Allen land parcels. These funds decreased TCI’s affiliate receivable from Prime.
In November 2003, TCI received ARI’s sales proceeds on the sale of the Confederate Point apartments. $2.1 million was used to pay off TCI’s note receivable from ARI and $1.1 million reduced TCI’s affiliate receivable from Prime.
In December 2003, TCI sold Treehouse Apartments and Parkway Centre to IORI for $11.5 million, including the assumption of debt. This transaction increased TCI’s affiliate receivable from Prime by $4.8 million.
~~In December 2003, TCI sold Eagle Crest land to IORI for $4.0 million. This transaction decreased TCI’s intercompany payable to IORI.~~
In December 2003, TCI purchased a note receivable from ARI that is secured by a second lien on raw land for $2.4 million. This transaction was approved by TCI’s Board of Directors. TCI’s affiliate receivables from ARI and Prime were reduced by $2.4 million as a result of this transaction. See NOTE 3. “NOTES AND INTEREST RECEIVABLE.”
In December 2003, TCI sold six properties to subsidiaries of Unified Housing Foundation, Inc. (“UHF”), a Texas Non-Profit 501(c)3 Corporation. TCI sold 10.72 acres of Marine Creek land for $1.5 million, the Limestone at Vista Ridge apartments for $19.0 million, the Cliffs of El Dorado apartments for $13.4 million, the Limestone Canyon apartments for $18.0 million, the Sendero Ridge apartments for $29.4 million, and Tivoli apartments for $16.1 million. All of the transactions include the assumption of debt and notes receivable to TCI for the remainder of the purchase price. Ted Stokely, Chairman of the Board of TCI, is the General Manager of UHF. Richard Humphrey, who is employed by Regis Realty I, LLC, an affiliate, is Senior Vice President of UHF. Due to UHF being considered a related party to TCI and TCI having continued involvement and control of these entities, these transactions will not be recorded as sales. Instead, these transactions will be accounted for on the deposit method and the properties and corresponding debt will continue to be consolidated by TCI. All of these transactions were approved by TCI’s Board of Directors. Mr. Stokely abstained from voting on all of these transactions. The loans on Limestone Canyon apartments, Limestone at Vista Ridge apartments and Tivoli apartments were approved by their prospective lenders for transfer to the purchasing entities. TCI has guaranteed the loans on both of these transfers. Also, Marine Creek land and the Cliffs of El Dorado apartments were recognized as sales during 2004. See NOTE 2. “REAL ESTATE.” Management is currently seeking lender approval on the transfer of the note associated with the Sendero Ridge apartments.
In December 2003, TCI sold the Lamar/Parmer land parcel to a subsidiary of UHF for $2.0 million in the form of a seller note receivable. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met. No sale has recognized and no note receivable has been recorded.
In January 2004, TCI purchased the Vista Ridge land tract from ARI for $2.6 million. This transaction decreased TCI’s affiliate receivable with Prime by $2.6 million. See NOTE 2. “REAL ESTATE.”
~~Index to Financial Statements~~
In February 2004, TCI incurred a debt for $1.0 million used for the purchase of land by ARI. This transaction increased TCI’s affiliate receivable with Prime by $2.6 million.
In February 2004, TCI recorded the sale of a tract of Marine Creek land originally sold to a related party in December 2003. This transaction was not recorded as a sale for accounting purposes in December 2003 and was recorded as a TCI refinancing transaction in February 2004. TCI received $1.2 million in cash from the related party in February 2004 as payment on the land. TCI has a note receivable balance of $270,000 remaining that bears interest at 12.00% and matures in April 2009. TCI recorded the sale of the Marine Creek land tract due to the payment received on the note receivable. See NOTE 2. “REAL ESTATE.”
In May 2004, TCI purchased the Treehouse Apartments from an affiliate with a net purchase price of $7.5 million for the assumption of debt and a note receivable, less cash received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of El Dorado Apartments was not recorded as a sale for accounting purposes. TCI recorded the sale of the Cliffs of El Dorado in May 2004 due to payment received for the Cliffs of El Dorado note receivable. See NOTE 2. “REAL ESTATE.”
In January 2004, TCI purchased the Lacy Longhorn land tract from ARI for $4.5 million. This transaction decreased TCI’s affiliate receivable with Prime by $4.5 million. See NOTE 2. “REAL ESTATE.”
In June 2004, TCI sold Waters Edge IV apartments to ARI for $5.0 million. This transaction increased TCI’s affiliate receivable with Prime by $5.0 million. See NOTE 2. “REAL ESTATE.”
In June 2004, TCI refinanced the 1010 Common office building, Lacy Longhorn land and certain tracts of Marine Creek land. TCI paid-off an existing note payable for ARI for $1.9 million, increasing the affiliate receivable balance by $1.9 million.
In September 2004, TCI sold Limestone Canyon II land to a subsidiary of UHF for $720,000 in the form of a seller note receivable. Due to no cash received and common control, TCI has elected to continue consolidating this tract of land until the requirements for a sale have been met. No sale was recognized and no note receivable has been recorded.
In December 2003, TCI’s Board of Directors approved the payment to Regis I of a six percent ~~(6%)~~ construction management fee on all construction projects in progress at December 31, 2003 and thereafter, to be applied to all costs incurred during 2003 and thereafter, on each project. Construction management fees of ~~$1.7~~2.6 million for 2006, 2.0 million for 2005 ~~$5.6~~and 6.2 million for 2004 ~~and $4.1 million for 2003~~ were treated as ~~reductions~~increases in the affiliate ~~receivable~~payable balance ~~from~~to Prime.
As more fully described in ITEM 2. “PROPERTIES-Real Estate,” TCI is a partner with IORI in Nakash Income Associates. TCI owns 345,728 shares of IORI’s Common Stock, an approximate 24.0% interest. At December 31, ~~2005,~~2006, the market value of the IORI common shares was ~~$6.5~~$2.3 million.
At December 31, ~~2004,~~2006, TCI owned 746,972 shares of ARI common stock which were primarily purchased in open market transactions in 1990 and 1991 at a total cost of $1.6 million. The executive officers of TCI also serve as executive officers of ARI. Prime also serves as advisor to ARI and at March ~~24, 2006,~~23, 2007, ARI owned approximately 82.2% of TCI’s outstanding Common Stock. At December 31, ~~2005,~~2006, the market value of the ARI common shares owned by TCI was $6.0 million.
In ~~2004,~~November 2006, ARI purchased Windmill Farms, 3,035 acres in Kaufman County, Texas for $52.0 million. The purchase price was funded by $39.1 million debt and $10.0 million Preferred Stock of TCI. In connection with the purchase by ARI, TCI issued $10.0 million of Series D Preferred Stock to the sellers of the property. The transaction was recorded on the books of TCI as a reduction in the amount payable to affiliate of $10.0 million.
In August 2006, TCI purchased 99 acres in Farmers Branch, Texas known as the LaDue/Walker tract, from ARI for $21.5 million. The transaction was financed by assumption of $9.9 million note payable and an increase in the amount payable to affiliate of $11.2 million.
In May 2006, TCI acquired the 102,615 square feet One Hickory office building in Farmers Branch, Texas from IORI. The purchase price was paid by forgiveness of the $12.2 million note receivable from IORI.
In 2006, TCI paid Prime, its affiliates and related parties ~~$5.3~~$11.1 million in advisory, incentive and net income fees, ~~$202,000~~$0.7 million in mortgage brokerage and equity refinancing fees, ~~$3.5~~$3.64 million in property acquisition fees, ~~$1.9~~$1.4 million in real estate brokerage commissions, ~~$1.7~~$2.0 million in construction supervision fees and ~~$1.6~~$2.35 million in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors, other than affiliates of Prime. In addition, as provided in the Advisory Agreement, Prime received cost reimbursements of ~~$2.4~~$2.8 million.
~~Index to Financial Statements~~
In addition, from time-to-time, TCI and its affiliates have made advances to each other, which generally have not had specific repayment terms and have been reflected in TCI’s financial statements as other assets or other liabilities. At December 31, ~~2005,~~2006, TCI had receivables of ~~$1.1 million~~$351,000 from Regis Hotel Corporation. Also at December 31, ~~2005,~~2006, TCI owed ~~$11.7 million, and $3.0~~$5.7 million to ~~Prime, and Regis I, respectively.~~Prime.
~~During April 2005, in~~In connection with the resolution of certain litigation filed August 10, 2004 by the Company, ARI and IORI, the Company owns 48.8% of Midland Odessa Properties, Inc. (formerly Innovo Realty, Inc.) (“MOPI”), the balance of which is owned by ARI (31.3%) and IOT (19.9%). MOPI in turn is a 30% limited partner in several “Metra” partnerships formed in 2002 when IORI, ARI and the Company sold certain residential properties to partnerships controlled by Metra Capital LLC. The original sale transactions were accounted for as refinancing transactions with the Company continuing to report the assets and new debt incurred by the “Metra” partnerships on the Company’s financial statements. As properties are sold to independent third parties, the transactions are reported as sales. See Note 8 to the Consolidated Financial Statements.
Restrictions on Related Party Transactions
Article FOURTEENTH of TCI’s Articles of Incorporation provides that TCI shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of TCI, (2) any director, officer or employee of the advisor, (3) the advisor or (4) any affiliate or associate (as such terms are defined in ~~Rule 12b-2~~Rule12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by the Board of Directors or the appropriate committee thereof and (b) the Board of Directors or committee thereof determines that such contract or transaction is fair to TCI and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of TCI entitled to vote thereon. Article FOURTEENTH defines an “Independent Director” as one who is neither an officer or employee of TCI nor a director, officer or employee of TCI’s advisor.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets for the aggregate fees for professional services rendered to or for TCI by Farmer, Fuqua and Huff, L.P. and BDO Seidman, LLP for ~~2005~~2006 and ~~2004:~~2005:

   2005    2004    2006    2005
Type of Fee
   Farmer, Fuqua
& Huff    BDO
Seidman    Farmer, Fuqua
& Huff    BDO
Seidman
Farmer,
Fuqua & Huff
   BDO
Seidman
Farmer,
Fuqua & Huff
   BDO
Seidman
Audit Fees
   $ 280,971    $ 15,000    $ 86,148    $ 102,184    $ 347,894    $ —      $ 280,971    $ 102,184
Audit Related Fees
   36,500    —      —      —      1,755    —      36,500    —
Tax Fees
   34,405    12,913    9,550    50,021    37,005    7,317    34,405    50,021
All Other Fees
   —      —      —      —      —      —      —      —

Total
   $ 351,876    $ 27,913    $ 95,698    $ 152,205    $ 386,654    $ 7,317    $ 351,876    $ 152,205

The audit fees for ~~2005~~2006 and ~~2004,~~2005, respectively, were for professional services rendered for the audits and reviews of the consolidated financial statements of TCI. Tax fees for ~~2005~~2006 and ~~2004,~~2005, respectively, were for services related to federal and state tax compliance and advice.
~~Index to Financial Statements~~
All services rendered by the principal auditors are permissible under applicable laws and regulations and were pre-approved by either the Board of Directors or the Audit Committee, as required by law. The fees paid the principal auditors for services as described in the above table fall under the categories listed below:
Audit Fees.    These are fees for professional services performed by the principal auditor for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s 10-Q filings and services that are normally provided in connection with statutory and regulatory filing or engagements.
Audit-Related Fees.    These are fees for assurance and related services performed by the principal auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements. These services include attestations by the principal auditor that are not required by statute or regulation and consulting on financial accounting/reporting standards.
Tax Fees.    These are fees for professional services performed by the principal auditor with respect to tax compliance, tax planning, tax consultation, returns preparation and review of returns. The review of tax returns includes the Company and its consolidated subsidiaries.
All Other Fees.    These are fees for other permissible work performed by the principal auditor that do not meet the above category descriptions.
These services are actively monitored (as to both spending level and work content) by the Audit Committee to maintain the appropriate objectivity and independence in the principal auditor’s core work, which is the audit of the Company’s consolidated financial statements.
The Audit Committee has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The Audit Committee has the responsibility to engage and terminate TCI’s independent auditors, to pre-approve their performance of audit services and permitted non-audit services, to approve all audit and non-audit fees, and to set guidelines for permitted non-audit services and fees. All fees for 2005 and 2004 were pre-approved by the Audit Committee or were within the pre-approved guidelines for permitted non-audit services and fees established by the Audit Committee, and there were no instances of waiver of approved requirements or guidelines during the same periods.
Under the Sarbanes-Oxley Act of 2002 (the “SO Act”), and the rules of the Securities and Exchange Commission (the “SEC”), the Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of the work of the independent auditor. The purpose of the provisions of the SO Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SO Act, the SEC issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committee’s administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor’s independence. Accordingly, the Audit Committee has adopted a pre-approval policy of audit and non-audit services (the “Policy”), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be pre-approved. Consistent with the SEC rules establishing two different approaches to pre-approving non-prohibited services, the Policy of the Audit Committee covers Pre-approval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and ~~the~~will approve or reject each
~~Index to Financial Statements~~
service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. Typically, in addition to the generally pre-approved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to pre-approve services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session.
~~Index to Financial Statements~~
PART IV

ITEM 15.    EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES

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

1. Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets—December 31, ~~2005~~2006 and ~~2004~~2005
Consolidated Statements of Operations—Years Ended December 31, 2006, 2005, ~~2004~~ and ~~2003~~2004
Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2006, 2005, ~~2004~~ and ~~2003~~2004
Consolidated Statements of Cash Flows—Years Ended December 31, 2006, 2005, ~~2004~~ and ~~2003~~2004
Notes to Consolidated Financial Statements

2. Financial Statement Schedules
Schedule III—Real Estate and Accumulated Depreciation
Schedule IV—Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto.

3. Incorporated Financial Statements
Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. (incorporated by reference to Item 8 of Income Opportunity Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, ~~2005)~~2006).
Consolidated Financial Statements of American Realty Investors, Inc. (incorporated by reference to Item 8 of American Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, ~~2005)~~2006).
~~Index to Financial Statements~~
~~(c)~~(b) Exhibits
The following documents are filed as Exhibits to this Report:
Exhibit
Number
Description
3.0 Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.1 Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).
3.2 Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
3.3 Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
3.4 Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, Preferences, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
3.5 Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
3.6 Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
3.7 By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.8 Certificate of designation of Transcontinental Realty Investors, Inc. setting forth the Voting Powers, Designations, Preferences Limitations, Restrictions and Relative rights of Series D Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrants current report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof.
10.0 Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring October 1, 2003).
10.1 Inc. Leman Development Ltd. and Kaufman Land Partners, Ltd. (incorporated by reference to Registrant’s current report in Form 8-K dated November 21, 2006 at Exhibit 10.1 thereof.
14.0 * Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
21.0 * Subsidiaries of the Registrant.
31.1 * Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
32.1 * Certification pursuant to 18 U.S.C. Section 1350.
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRANSCONTINENTAL REALTY INVESTORS, INC.
Dated: April 2, 2007
By:
/s/    STEVEN A. ABNEY
Steven A. Abney
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
and Acting Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/    TED P. STOKELY
Ted P. Stokely
Chairman of the Board and Director
April 2, 2007
/s/    HENRY A. BUTLER
Henry A. Butler
Director
April 2, 2007
/s/    SHARON HUNT
Sharon Hunt
Director
April 2, 2007
/s/    ROBERT A. JAKUSZEWSKI
Robert A. Jakuszewski
Director
April 2, 2007
/s/    TED R. MUNSELLE
Ted R. Munselle
Director
April 2, 2007
/s/    STEVEN A. ABNEY
Steven A. Abney
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
April 2, 2007
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
For the Year Ended December 31, 2006

Exhibit
Number

Description
3.0    Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.1    Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).
3.2    Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
3.3    Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
3.4    Certificate of Designation of Transcontinental Realty Investors, Inc., setting ~~for~~forth the Voting Powers, Designations, ~~References,~~Preferences, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
3.5    Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
3.6    Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
3.7    By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
3.8 Certificate of designation of Transcontinental Realty Investors, Inc. setting forth the Voting Powers, Designations, Preferences Limitations, Restrictions and Relative rights of Series D Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrants current report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof.
10.0    Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring October 1, 2003).
10.1 Inc. Leman Development Ltd. and Kaufman Land Partners, Ltd. (incorporated by reference to Registrant’s current report in Form 8-K dated November 21, 2006 at Exhibit 10.1 thereof.
14.0 *    Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
21.0 *    Subsidiaries of the Registrant.
31.1 *    Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
32.1 *    Certification pursuant to 18 U.S.C. Section 1350.
•* Filed herewith.
~~Index to Financial Statements~~
~~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.
T~~RANSCONTINENTAL~~ R~~EALTY~~ I~~NVESTORS, I~~NC.
~~Dated: March 31, 2006~~
~~By:~~
~~/s/    STEVEN~~ ~~A. ABNEY~~
~~Steven A. Abney~~
~~Executive Vice President and~~
~~Chief Financial Officer~~
~~(Principal Financial and Accounting Officer~~
~~and Acting Principal Executive Officer)~~
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
~~Signature~~
~~Title~~
~~Date~~
~~/s/    T~~ED ~~P. STOKELY~~
~~Ted P. Stokely~~
~~Chairman of the Board and Director~~
~~March 31, 2006~~
~~/s/    HENRY~~ ~~A. BUTLER~~
~~Henry A. Butler~~
~~Director~~
~~March 31, 2006~~
~~/s/    SHARON~~ H~~UNT~~
~~Sharon Hunt~~
~~Director~~
~~March 31, 2006~~
~~/s/    ROBERT~~ ~~A. JAKUSZEWSKI~~
~~Robert A. Jakuszewski~~
~~Director~~
~~March 31, 2006~~
~~/s/    T~~ED ~~R. MUNSELLE~~
~~Ted R. Munselle~~
~~Director~~
~~March 31, 2006~~
~~/s/    STEVEN~~ ~~A. ABNEY~~
~~Steven A. Abney~~
~~Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer)~~
~~March 31, 2006~~
~~Index to Financial Statements~~
~~ANNUAL REPORT ON FORM 10-K~~
~~EXHIBIT INDEX~~
~~For the Year Ended December 31, 2005~~
~~Exhibit~~
~~Number~~
~~Description~~
~~3.0~~ Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
~~3.1~~ ~~Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).~~
~~3.2~~ Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
~~3.3~~ Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
~~3.4~~ Certificate of Designation of Transcontinental Realty Investors, Inc., setting for the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
~~3.5~~ Certificate of Designation of Transcontinental Realty Investors, Inc., Setting for the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
~~3.6~~ Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc. Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
~~3.7~~ ~~By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).~~
~~10.0~~ Advisory Agreement dated as of October 1, 2003, between Transcontinental Realty Investors, Inc. and Prime Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring October 1, 2003).
~~14.0~~ * ~~Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).~~
~~21.0~~ * ~~Subsidiaries of the Registrant.~~
~~31.1~~ * ~~Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.~~
~~32.1~~ * ~~Certification pursuant to 18 U.S.C. Section 1350.~~
~~Filed herewith.~~

~~116~~120


Nevada		95-6565852
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification Number)

1800 Valley View Lane, Suite 300 Dallas, Texas		75234
(Address of principal executive offices)		(Zip Code)


Title of Each Class		Name of each exchange on which registered
Common Stock, $0.01 par value		New York Stock Exchange


		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	10
Item 2.	Properties	10
Item 3.	Legal Proceedings	2426
Item 4.	Submission of Matters to a Vote of Security Holders	2427

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2628
Item 6.	Selected Financial Data	2729
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2830
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	3944
Item 8.	Consolidated Financial Statements and Supplementary Data	4146
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	9499
Item ~~9A.~~9A(T).	Controls and Procedures	9499
Item 9B.	Other Information	94100

PART III

Item 10.	Directors, ~~and~~ Executive Officers ~~of the Registrant~~and Corporate Governance	95101
Item 11.	Executive Compensation	~~102~~109
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~105~~111
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~106~~112
Item 14.	Principal Accountant Fees and Services	~~110~~115

PART IV

Item 15.	Exhibits and Consolidated Financial Statements Schedules	~~113~~117
Signature Page		~~115~~119


Property	Location	Units/Acres/ Rooms/Sq. Ft.	Sales Price	Net Cash Received	Debt Discharged		Gain on Sale
Office Buildings
9033 Wilshire	Los Angeles, CA	44,253 Sq. Ft.	12,000	4,116	6,506		2,162
Bay Plaza I	Tampa, FL	75,780 Sq. Ft.	4,682	3,253	961		919
Bay Plaza II	Tampa, FL	78,882 Sq. Ft.	4,719	1,114	3,284		(199	)
Institute Place	Chicago, IL	144,915 Sq. Ft.	14,460	4,843	7,792		10,061
Industrial Warehouses
5700 Tulane	Atlanta, GA	67,850 Sq. Ft.	816	738	—		294
Shopping Centers
Promenade	Highland Ranch, CO	133,558 Sq. Ft.	14,250	6,192	6,651		6,601
Hotels
Majestic Inn	San Francisco, CA	57 Rooms	7,900	3,487	3,950		3,272
Land
Alamo Springs/Lemmon Carlisle	Dallas, TX	2.82 Acres	7,674	5,587	1,744		2,394
Granbury Station	Fort Worth, TX	15.696 Acres	1,003	265	738	⁽¹⁾	10
LCLLP	Las Colinas, TX	4.3 Acres	1,873	511	1,290		1,327
McKinney Ranch	McKinney, TX	1.328 Acres	347	325	—		191
McKinney Ranch⁽²⁾	McKinney, TX	27.192 Acres	10,070	2,214	—		—	⁽³⁾
McKinney Ranch⁽⁴⁾	McKinney, TX	3.73 Acres	1,381	290	—		—	⁽⁵⁾
Round Mountain⁽⁶⁾	Lakeway, TX	10 Acres	1,500	251	—		1,073
West End	Dallas, TX	.7978 Acres	2,259	2,099	—		1,259
West End	Dallas, TX	.826 Acres	2,430	213	2,000		1,448


Property	Location	Sq. Feet/ Acres	Fair Value		Property Basis		Costs to Sell		Impairment
Office Building
Brandeis	Omaha, NE	319,234 Sq. Ft.	$	8,821	$	13,630	$	—	$	4,357
Land
Red Cross	Dallas, TX	2.89 Acres		8,500		7,679		1,019		198


Quarter Ended	High		Low
March 31, 2006 (through March 24, 2006)	$	18.79	$	15.60

March 31, 2005		20.10		14.20
June 30, 2005		22.19		18.80
September 30, 2005		21.45		19.60
December 31, 2005		19.79		16.50

March 31, 2004		17.33		14.42
June 30, 2004		14.59		10.99
September 30, 2004		13.75		12.40
December 31,2004		14.59		13.55


Quarter Ended	High		Low
March 31, 2007 (through March 23, 2007)	$	13.91	$	11.85

March 31, 2006		18.79		15.60
June 30, 2006		18.22		13.05
September 30, 2006		13.72		12.30
December 31, 2006		16.27		13.05

March 31, 2005		20.10		14.20
June 30, 2005		22.19		18.80
September 30, 2005		21.45		19.60
December 31,2005		19.79		16.50


	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program^(a)
Balance as of September 30, ~~2005~~2006	—	$	—	—	219,090
October 1-31, ~~2005~~2006	—		—	—	219,090
November 1-30, ~~2005~~2006	—		—	—	219,090
December 1-31, ~~2005~~2006	—		—	—	219,090

Total	—	$	—	—	219,090


	For the Years Ended December 31,															For the Years Ended December 31,
	2005			2004			2003			2002			2001			2006			2005			2004			2003			2002
	dollars in thousands															dollars in thousands
EARNINGS DATA
Total operating revenues	$	105,444		$	83,604		$	68,558		$	52,631		$	48,932		$	128,064		$	103,076		$	83,604		$	68,558		$	52,631
Total operating expenses		94,006			85,936			75,066			39,715			30,328			113,238			91,919			85,936			75,066			39,715

Operating loss		11,438			(2,332	)		(6,508	)		12,916			18,604
Operating income (loss)																	14,826			11,157			(2,332	)		(6,508	)		12,916
Other income (expense)		(37,958	)		(24,658	)		(9,120	)		(39,126	)		(34,918	)		(30,185	)		(37,206	)		(24,658	)		(9,120	)		(39,126	)
Loss before gain on real estate sales, minority interest, and equity in earnings of investees		(26,520	)		(26,990	)		(15,628	)		(26,210	)		(16,314	)
Loss before gain on real estate sales, minority interest and equity in earnings of investees																	(15,359	)		(26,049	)		(26,990	)		(15,628	)		(26,210	)
Gain on land sales		7,702			7,110			1,641			666			—			11,421			7,702			7,110			1,641			666
Gain on sale of real estate		—			—			—			—			48,333
Equity in income (loss) of investees		968			(1,497	)		(4,291	)		(3,818	)		(8,997	)		890			968			(1,497	)		(4,291	)		(3,818	)
Minority interest		(112	)		(1,194	)		2,230			892			67			393			(112	)		(1,194	)		2,230			892

Net income (loss) from continuing operations		(17,962	)		(22,571	)		(16,048	)		(28,470	)		23,089			(2,655	)		(17,491	)		(22,571	)		(16,048	)		(28,470	)
Income tax benefit		802			10,976			—			—			—			4,608			802			10,976			—			—

Net income (loss) from continuing operations		(17,160	)		(11,595	)		(16,048	)		(28,470	)		23,089			1,953			(16,689	)		(11,595	)		(16,048	)		(28,470	)

Discontinued operations, net of taxes		26,229			35,301			16,721			33,321			(3,278	)		1,553			25,758			35,301			16,721			33,321

Net income (loss)		9,069			23,706			673			4,851			19,811			3,506			9,069			23,706			673			4,851
Preferred dividend requirement		(210	)		(210	)		(126	)		(190	)		(172	)		(210	)		(210	)		(210	)		(126	)		(190	)

Net income (loss) applicable to Common shares	$	8,859		$	23,496		$	547		$	4,661		$	19,639
Net income (loss) applicable to common shares																$	3,296		$	8,859		$	23,496		$	547		$	4,661

PER SHARE DATA
Basic:
Net income (loss) from continuing operations	$	(2.20	)	$	(1.46	)	$	(2.00	)	$	(3.56	)	$	2.70		$	0.22		$	(2.14	)	$	(1.46	)	$	(2.00	)	$	(3.56	)
Net income (loss) from discontinued operations		3.32			4.36			2.07			4.14			(.39	)		.20			3.26			4.37			2.07			4.14

Net income (loss) applicable to Common shares	$	1.12		$	2.90		$	.07		$	.58		$	2.31
Net income (loss) applicable to common shares																$	0.42		$	1.12		$	2.91		$	.07		$	.58

Weighted average shares outstanding		7,900,869			8,082,854			8,078,108			8,057,361			8,478,377
Diluted:
Net income (loss) from continuing operations																$	0.21		$	(2.14	)	$	(1.46	)	$	(2.00	)	$	(3.56	)
Net income (loss) from discontinued operations																	.19			3.26			4.37			2.07			4.14

Net income (loss) applicable to common shares																$	0.40		$	1.12		$	2.91		$	.07		$	.58

Weighted average shares outstanding—Basic																	7,900,869			7,900,869			8,082,854			8,078,108			8,057,361
Weighted average shares outstanding—Diluted																	8,180,401			7,900,869			8,082,854			8,078,108			8,057,361

BALANCE SHEET DATA
Real estate, net	$	833,885		$	658,300		$	641,022		$	736,977		$	622,171		$	992,454		$	833,885		$	658,300		$	641,022		$	736,977
Real estate held–for–sale		40,446			49,878			61,457			22,510			516			54,935			40,446			49,878			61,457			22,510
Real estate subject to sales contract		68,738			70,350			79,848			—			—			66,027			68,738			70,350			79,848			—
Notes and interest receivable, net		64,818			56,630			30,741			27,953			22,049			39,566			64,818			56,630			30,741			27,953
Total assets		1,089,079			920,311			882,784			858,489			709,152			1,250,167			1,089,079			920,311			882,784			858,489
Notes and interest payable		770,161			644,071			626,465			586,628			461,037			901,464			770,161			644,071			626,465			586,628
Stockholders’ equity		251,179			240,519			221,758			222,394			216,768			265,929			251,179			240,519			221,758			222,394
Book value per share	$	30.96		$	30.44		$	27.33		$	27.55		$	26.95		$	32.01		$	31.41		$	30.06		$	26.96		$	27.18


	2006			2005
Revenue
Rental	$	10,251		$	16,994
Property operations		6,485			13,785

		3,766			3,209
Expenses
Interest		4,988			7,158
Depreciation		2,077			633

		7,065			7,791

Net loss from discontinued operations before gains on sale of real estate		(3,299	)		(4,582	)
Gain on sale of real estate		5,689			31,473
Write-down of assets held-for-sale		—			(1,580	)
Equity in investee’s gain on sale of real estate		—			1,673

Net income from discontinued operations, before income taxes	$	2,390		$	26,984


	PAYMENTS DUE BY PERIOD										PAYMENTS DUE BY PERIOD
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	dollars in thousands										dollars in thousands
Long-Term Debt⁽¹⁾	$	766,651	$	191,426	$	124,574	$	37,415	$	413,236	$	766,651	$	191,426	$	124,574	$	37,415	$	413,236
Capital Lease Obligations		—		—		—		—		—		—		—		—		—		—
Operating Leases		—		—		—		—		—		—		—		—		—		—
Purchase Obligations		—		—		—		—		—		—		—		—		—		—
Other Long-Term Liabilities		2,163		2,163		—		—		—		2,163		2,163		—		—		—


Assets
Notes receivable
Variable interest rate-fair value																			$	6,771																			$	5,624

	2006			2007			2008			2009			2010			Thereafter			Total		2007			2008			2009			2010			2011			Thereafter			Total
Instrument’s maturities	$	—		$	4,896		$	2,775		$	—		$	—		$	—		$	7,671	$	—		$	3,612		$	2,775		$	—		$	—		$	—		$	6,387
Instrument’s amortization		—			—			—			—			—			—			—		—			—			—			—			—			—			—
Interest		920			586			284			—			—			—			1,790		879			592			—			—			—			—			1,471
Average rate		8.9	%		7.8	%		8.7	%		—	%		—	%		—	%				9.3	%		8.2	%		0.0	%		0.0	%		0.0	%		0.0	%
Fixed interest rate-fair value																			$	46,911																			$	27,761

	2006			2007			2008			2009			2010			Thereafter			Total		2007			2008			2009			2010			2011			Thereafter			Total
Instrument’s maturities	$	27,555		$	16,819		$	6,950		$	140		$	—		$	4,037		$	55,501	$	7,047		$	17,814		$	3,219		$	157		$	—		$	4,037		$	32,274
Instrument’s amortization		111			50			—			—			—			—			161		162			49			—			—			—			—			211
Interest		3,443			1,571			434			302			298			1,584			7,632		1,987			532			496			477			477			1,584			5,553
Average rate		7.6	%		8.5	%		8.5	%		7.6	%		7.6	%		7.6	%				8.5	%		11.4	%		11.5	%		11.5	%		11.5	%		7.6	%

Liabilities
Non-trading Instruments-Equity Price Risk
Notes payable
Variable interest rate-fair value																			$	154,956																			$	231,715

	2006			2007			2008			2009			2010			Thereafter			Total		2007			2008			2009			2010			2011			Thereafter			Total
Instrument’s maturities	$	78,441		$	32,467		$	15,323		$	6,737		$	12,425		$	10,993		$	156,386	$	112,007		$	68,274		$	17,332		$	16,863		$	—		$	19,859		$	234,335
Instrument’s amortization		2,289			1,473			1,372			1,295			1,113			11,942			19,484		6,017			3,064			671			459			372			9,142			19,725
Interest		11,315			5,735			3,543			2,723			1,752			9,532			34,600		16,578			8,267			4,013			2,550			1,738			10,308			43,454
Average rate		7.8	%		7.5	%		7.2	%		7.1	%		6.2	%		5.2	%				8.6	%		8.4	%		7.7	%		7.2	%		6.1	%		5.6	%
Fixed interest rate-fair value																			$	548,453																			$	550,815

	2006			2007			2008			2009			2010			Thereafter			Total		2007			2008			2009			2010			2011			Thereafter			Total
Instrument’s maturities	$	104,366		$	25,061		$	38,645		$	5,727		$	—		$	80,703		$	254,502	$	143,637		$	10,782		$	34,824		$	9,145		$	29,710		$	113,823		$	341,921
Instrument’s amortization		6,330			5,387			4,846			4,919			5,199			309,598			336,279		5,893			5,195			5,103			5,486			5,463			274,170			301,310
Interest		36,805			31,133			28,972			26,030			25,505			431,296			579,741		34,681			32,517			30,671			28,033			26,560			440,133			592,595
Average rate		6.8	%		6.7	%		6.7	%		6.6	%		6.6	%		6.4	%				6.7	%		6.7	%		6.7	%		6.6	%		6.6	%		6.4	%


		Page
Financial Statements
Report of Independent Registered Public Accounting ~~Firms~~Firm		4247
Consolidated Balance Sheets—December 31, ~~2005~~2006 and ~~2004~~2005		4448
Consolidated Statements of Operations—Years Ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004		4549
Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004		4751
Consolidated Statements of Cash Flows—Years Ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004		4852
Notes to Consolidated Financial Statements		5054

Financial Statement Schedules
Schedule III—Real Estate and Accumulated Depreciation		8487
Schedule IV—Mortgage Loans on Real Estate		9196


	December 31, 2005			December 31, 2004			December 31, 2006			December 31, 2005
	(dollars in thousands)						(dollars in thousands)
Assets
Real estate held for investment	$	911,981		$	730,584		$	1,089,995		$	911,981
Less—accumulated depreciation		(78,096	)		(72,284	)		(97,541	)		(78,096	)

		833,885			658,300			992,454			833,885
Real estate held-for-sale		40,446			49,878
Real estate subject to sales contract		68,738			70,350
Real estate held-for-sale (net of accumulated depreciation of $5,035 in 2006 and $4,476 in 2005)								54,935			40,446
Real estate subject to sales contract (net of accumulated depreciation of $7,006 in 2006 and $5,387 in 2005)								66,027			68,738
Notes and interest receivable
Performing (including $34,370 in 2005 and $40,496 in 2004 from affiliates and related parties)		59,922			56,630
Performing (including $22,249 in 2006 and $34,370 in 2005 from affiliates and related parties)								39,566			59,922
Non-performing, non-accruing		4,896			—			—			4,896

		64,818			56,630			39,566			64,818
Less—allowance for estimated losses		—			—

		64,818			56,630
Investment in real estate entities		24,659			17,582
Investment in unconsolidated real estate entities								30,573			24,659
Marketable equity securities, at market value		7,446			6,580			9,038			7,446
Cash and cash equivalents		5,462			21,845			4,803			5,462
Other assets (including $1,103 in 2005 and $14,125 in 2004 from affiliates and related parties)		43,625			39,146
Other assets (including $320 in 2006 and $1,103 in 2005 from affiliates and related parties)								52,771			43,625

	$	1,089,079		$	920,311		$	1,250,167		$	1,089,079

Liabilities and Stockholders’ Equity
Liabilities:
Notes and interest payable (including $6,987 in 2005 to affiliates and related parties)	$	657,481		$	524,670
Notes and interest payable (including $6,769 in 2006 and $6,885 in 2005 to affiliates and related parties)							$	799,069		$	657,481
Liabilities related to assets held for sale		53,357			59,424			43,579			53,357
Liabilities related to assets subject to sales contract		59,323			59,977			58,816			59,323
Other liabilities (including $12,272 in 2005 and $2,282 in 2004 to affiliates and related parties)		66,500			34,840

Other liabilities (including $396 in 2006 and $12,272 in 2005 to affiliates and related parties)								66,608			66,500
		836,661			678,911
								968,072			836,661
Commitments and contingencies

Minority interest		1,239			881			16,166			1,239
Stockholders’ equity:
Preferred Stock
Series C; $.01 par value; authorized, issued and outstanding 30,000 shares; (liquidation preference $3,000)		—			—
Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 7,900,869 in 2005 and 7,900,869 shares in 2004		81			81
Series C; $.01 par value; authorized, issued and outstanding 30,000 shares (liquidation preference td00 per share)
								—			—
Series D; $.01 par value; authorized, issued and outstanding 100,000 shares at December 31, 2006 (liquidation preference $100 per share)								1			—
Common Stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 7,900,869 shares at December 31, 2006 and 2005								81			81
Paid-in capital		256,494			256,704			266,206			256,494
Treasury stock		(3,086	)		(3,086	)		(3,086	)		(3,086	)
Accumulated deficit		(1,846	)		(10,915	)
Accumulated other comprehensive loss		(464	)		(2,265	)
Retained earnings (deficit)								1,660			(1,846	)
Accumulated other comprehensive income (loss)								1,067			(464	)

		251,179			240,519			265,929			251,179

	$	1,089,079		$	920,311		$	1,250,167		$	1,089,079


	Common Stock				Paid-in Capital				Treasury Stock				Accumulated Deficit				Accumulated Other Comprehensive Income				Stockholders’ Equity				Common Stock					Preferred Stock			Paid-in- Capital			Treasury Stock			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Stockholder’s Equity
	Shares		Amount						Treasury Stock				Accumulated Deficit			Shares	Accumulated Other Comprehensive Income							Amount			Shares		Amount				Paid-in- Capital			Treasury Stock			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Stockholder’s Equity
	(dollars in thousands)																								(dollars in thousands)
Balance, December 31, 2002	8,072,594		$	81	Paid-in Capital			$	257,040			$	—			$	(35,294	)		$	Stockholders’ Equity	567			$	222,394
Comprehensive income										—
Unrealized loss on foreign currency translation	—			—		—				—				—				(1,183	)			(1,183	)
Net income	—			—		—				—				673				—				673

										—												(510	)
Series A Preferred Stock cash dividends ($5.00 per share)	—			—		(29	)			—				—				—				(29	)
Series C Preferred Stock cash dividends ($6.00 per share)	—			—		(97	)			—				—				—				(97	)
Conversion of 5,829 Series A Preferred Stock into Common Stock	41,075			—		—				—				—				—				—

Balance, December 31, 2003	8,113,669			81		256,914				—				(34,621	)			(616	)			221,758			8,113,669			$	81	—	$	—	$	256,914		$	—		$	(34,621	)	$	(616	)	$	221,758
Comprehensive income										—
Unrealized loss on foreign currency translation	—			—		—				—				—				(3,229	)			(3,229	)		—				—	—		—		—			—			—			(3,229	)		(3,229	)
Unrealized gain on marketable securities	—			—		—				—				—				1,580				1,580			—				—	—		—		—			—			—			1,580			1,580
Net income	—			—		—				—				23,706				—				23,706			—				—	—		—		—			—			23,706			—			23,706

										—												22,057
										—
Repurchase of common stock	(212,800	)		—		—				(3,086	)			—				—				(3,086	)		(212,800	)			—	—		—		—			(3,086	)		—			—			(3,086	)
Series C Preferred Stock cash dividends ($7.00 per share)	—			—		(210	)			—				—				—				(210	)		—				—	—		—		(210	)		—			—			—			(210	)

Balance, December 31, 2004	7,900,869			81		256,704				(3,086	)			(10,915	)			(2,265	)			240,519			7,900,869				81					256,704			(3,086	)		(10,915	)		(2,265	)		240,519
Comprehensive income										—
Unrealized gain on foreign currency translation	—			—		—				—				—				935				935			—				—	—		—		—			—			—			935			935
Unrealized gain on marketable securities	—			—		—				—				—				866				866			—				—	—		—		—			—			—			866			866
Net income	—			—		—				—				9,069				—				9,069			—				—	—		—		—			—			9,069			—			9,069

																						10,870
Series C Preferred Stock cash dividends ($7.00 per share)	—			—		(210	)			—				—				—				(210	)		—				—	—		—		(210	)		—			—			—			(210	)

Balance, December 31, 2005	7,900,869		$	81	$	256,494			$	(3,086	)		$	(1,846	)		$	(464	)		$	251,179			7,900,869				81	—		—		256,494			(3,086	)		(1,846	)		(464	)		251,179
Unrealized loss on foreign currency translation																									—				—	—		—		—			—			—			(790	)		(790	)
Unrealized gain on marketable equity securities																									—				—	—		—		—			—			—			2,321			2,321
Net income																									—				—	—		—		—			—			3,506			—			3,506

Series C Preferred Stock cash dividend ($7.00 per share																									—				—	—		—		(210	)		—			—			—			(210	)
Series D Preferred Stock																									—				—	100,000		1		9,999			—			—			—			10,000
Series D Preferred Stock dividend (7% per year)																									—				—	—		—		(77	)		—			—			—			(77	)

Balance, December 31, 2006																									7,900,869			$	81	100,000	$	1	$	266,206		$	(3,086	)	$	1,660		$	1,067		$	265,929


	For the Years Ended December 31,
	2005		2004		2003
	(dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	42,081	$	39,210	$	43,016

Notes payable assumed on purchase of real estate		13,006		15,033		2,650
Notes payable assumed by buyer on sale of real estate		738		21,898		11,291
Funds collected by affiliate on sale of note receivable		—		—		2,633
Notes receivable received from sale of real estate		9,713		21,608		4,760
Real estate refinancing proceeds received by affiliate		—		—		1,226
Real estate received from related party to satisfy debt		1,631		36,198		10,700
Real estate sold to a related party to satisfy debt		—		5,000		—
Note payable proceeds used by affiliate for purchase of real estate		—		1,000		—
Note payable proceeds used by affiliate to satisfy debt		—		1,260		—
Note payable paid-off on behalf of affiliate		—		1,851		—
Subsidiary purchased from affiliate decreasing affiliate receivable		4,101		—		—
Acquisition of real estate to satisfy note receivable		4,207		—		—
Funds collected by affiliate for property damage insurance reimbursement		8,182		—		—
Issuance of note payable for which cash proceeds were received by the advisor		—		—		6,239
Unrealized foreign currency translation loss		—		3,229		1,183
Unrealized gain on marketable securities		866		1,580		—
Unrealized foreign currency translation gain		935		—		—
Asset impairment write-down		3,420		6,199		—


	2005		2004
Dividend yield	—		—
Expected volatility	34.00	%	35.10	%
Risk-free interest rate	4.26	%	4.04	%
Expected lives (in years)	9.0		9.0


	2005			2004
	(dollars in thousands, except per share amounts)
Net income (loss) applicable to common shares, as reported	$	8,859		$	23,496
Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(154	)		(137	)

Proforma net income applicable to common shares	$	8,705		$	23,359


Net income (loss) per share:
Basic, as reported	$	1.12		$	2.91
Basic, pro forma	$	1.10		$	2.88
Diluted, as reported	$	1.12		$	2.91
Diluted, pro forma	$	1.10		$	2.88