TARRAGON REALTY INVESTORS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM .................... TO ....................

COMMISSION FILE NUMBER 0-22999
-------

TARRAGON REALTY INVESTORS, INC.
-------------------------------
(Exact name of registrant as specified in its charter)

NEVADA 94-2432628
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1775 BROADWAY, 23RD FLOOR, NEW YORK, NY 10019
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 949-5000
--------------

Securities registered pursuant to Section 12 (b) of the Act:
NONE

Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.01 PAR VALUE
10% CUMULATIVE PREFERRED STOCK, $.01 PAR VALUE

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. Yes [X] No [ ]

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the 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 price of
the last trade as reported by the National Association of Securities Dealers
Automated Quotation System as of June 28, 2002 (the last business day of
registrant's most recently completed second fiscal quarter) was an aggregate
value of $70,480,593 based upon a total of 4,547,135 shares held as at June 28,
2002, by persons believed to be non-affiliates of the Registrant. The basis of
this calculation does not constitute a determination by the Registrant that any
persons or entities are affiliates of 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 greater value. As of March 3,
2003, there were 11,799,865 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 2002 Annual Meeting of Shareholders to be held in
June 2003 are incorporated by reference into Part III.

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INDEX TO
ANNUAL REPORT ON FORM 10-K

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PART I

ITEM 1. BUSINESS

General

Tarragon Realty Investors, Inc., is a real estate investor and developer of
for-sale housing and rental communities. We own or have an interest in about
15,000 apartment units and 1.4 million square feet of commercial space located
primarily in Florida, Connecticut, and Texas. While a majority of our assets
consist of stabilized, income real estate, we dedicate increasing amounts of
capital and attention to development of rental and for-sale housing and
condominium conversion activities.

We were incorporated in Nevada on April 2, 1997. We are the ultimate successor
in interest to Vinland Property Trust, a California business trust formed in
July 1973, and National Income Realty Trust, also a California business trust,
organized in October 1978.

Tarragon's common stock is traded on the NASDAQ National Market System under the
symbol "TARR." Our principal executive offices are located at 1775 Broadway,
23rd Floor, New York, New York 10019, and our telephone number is 212-949-5000.

Tarragon has approximately 351 employees, including 234 site-level property
employees (such as property managers and maintenance staff) and 117 corporate
employees. Tarragon has employment contracts with only William S. Friedman,
Robert C. Rohdie, and Robert P. Rothenberg. Mr. Friedman is President and Chief
Executive Officer of Tarragon and Chairman of our Board of Directors. Mr. Rohdie
is President and Chief Executive Officer of Tarragon Development Corporation, a
wholly owned subsidiary of Tarragon, and a member of our Board of Directors
since February 2000. Mr. Rothenberg is Chief Operating Officer of Tarragon and a
member of our Board of Directors since September 2000. The terms of their
employment contracts are contained in our proxy statement to be filed with the
SEC by April 30, 2003, in connection with our annual meeting of stockholders to
be held in June 2003.

Tarragon's web site address is www.tarragonrealty.com. Tarragon makes available,
free of charge, on its website its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission.

Business Plan and Investment Policy

We divide our business into three principal segments - the operation of our
investment portfolio, property development, and for-sale housing. Our objective
for each segment is to increase value for shareholders and to obtain a high
return on investment through the application of management skill, experience,
and capital investment.

Our investment portfolio of stabilized apartment communities and commercial
properties is the largest segment and the one whose operation most resembles
that of traditional real estate investment trusts (REITs). Funds generated by
the operation, sale, or refinancing of properties in the investment portfolio
support our overhead and finance our development activities. The investment
portfolio represents approximately 75% of our real estate assets.

The second segment is property development through which we create new
investment properties, primarily multifamily apartment communities, which, upon
stabilization, become part of our investment portfolio. The development
activities benefit from the insights into market conditions and tenant tastes
provided by our

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property operation and management. In turn, the expertise in construction,
purchasing and financing, which are central to the property development process,
assists our property managers in efficiently maintaining and leasing our
stabilized properties. During the last six years, we have invested increasing
amounts in new construction and development projects, either directly or in
partnership with others, and we expect this trend to continue. Properties under
development, renovation, or repositioning represent approximately 15% of our
real estate assets.

The third segment is the development of housing for sale in which we build or
renovate condominium, townhouse, or traditional homes for sale to residents. In
2002, we began to report on the assets in the For-Sale Housing Division in a
third segment because we have expanded these activities. In 2000 and 2001, these
assets were included in our Development Division. Although it represents just
10% of our real estate assets, this is our most rapidly growing division.

In evaluating future projects, we place the greatest weight on our subjective
forecast of the future return on investment, adjusted for risk. We have
frequently acquired under-managed and under-performing multifamily projects in
areas in which we already had a presence both for the anticipated return from
the asset and to enhance the efficiency of our existing portfolio. The actual
number and mix of types of income-producing real estate and real estate
interests we acquire will depend on market conditions and other circumstances
existing at the time of acquisition, as well as the availability of capital.

We have financed acquisitions, development, and capital improvements largely
through mortgages and internally generated funds and, to a lesser extent,
through property sales and joint ventures. We expect these sources to provide
the bulk of funds for future investments. Nevertheless, the availability and
cost of credit are key factors in our ability to continue to make new
investments.

Competition

Tarragon has not experienced difficulty in locating investment opportunities.
Ownership of land for development and properties in which we invest is highly
fragmented among individuals, partnerships, and public and private entities. No
single entity or person dominates the market for such opportunities. At any
given time, many apartment properties or land parcels suitable for development
are available for purchase in the various markets where we seek additional
investment opportunities. We believe that there is and will continue to be a
strong demand for housing in these markets and that the factors discussed above
provide a market where a sufficient number of attractive investment
opportunities will be available to allow Tarragon to continue to expand through
development and acquisitions. However, since the success of any multifamily real
estate investment is affected by factors outside of our control, including
government regulations and controls, general demand for apartment living,
interest rates, operating costs, and job growth, there can be no assurance that
we will be successful in our strategy to continue to profit through development
and acquisitions.

Tarragon is subject to the risks associated with development, ownership,
operation, and financing of real estate. These risks include, but are not
limited to, liability for environmental hazards; changes in general or local
economic conditions; increases in interest rates and insurance and the
availability of mortgage financing which may render the development,
acquisition, sale, or refinancing of a property difficult or unattractive and
which may make debt service burdensome; changes in real estate and zoning laws;
changes in income taxes, real estate taxes, or federal or local economic or rent
controls; floods, earthquakes, and other acts of nature; acts of terrorism; and
other factors beyond our control. The illiquidity of real estate investments
generally may impair our ability to respond promptly to changing circumstances.
We believe that some of these risks are partially mitigated by the
diversification by geographic region and property type of our real estate.
However, to the extent new investments continue to be concentrated in any
particular region or property type, the advantages of diversification may
diminish.

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Executive Officers of the Registrant

Part III of this 10-K is incorporated by reference to a proxy statement to be
filed with the SEC in connection with our annual meeting of stockholders to be
held in June 2003. Information required by Item 10. "DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT" with respect to Directors will be included in our
proxy statement. The following discussion sets forth information required by
Item 10. "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" with respect to
Tarragon's executive officers.

William S. Friedman (59) has served as President, Chief Executive Officer and a
director of Tarragon since April 1997. He has also been Chairman of the Board of
Directors since December 2000. He previously served as a Trustee (from March
1988), Chief Executive Officer (from December 1993), President (from December
1988), acting Chief Financial Officer (from May 1990 to February 1991),
Treasurer (from August to September 1989), and acting Principal Financial and
Accounting Officer (from December 1988 to August 1989) of Vinland Property Trust
(until July 1997) and National Income Realty Trust (until November 1998).

Robert C. Rohdie (62) has been a director of Tarragon and President and Chief
Executive Officer of Tarragon Development Corporation, a wholly owned subsidiary
of Tarragon responsible for real estate development and renovation projects,
since February 2000. Since 1988, Mr. Rohdie has also served as President of
Rohdhouse Investments, Inc., his wholly owned real estate development company,
which acted as Tarragon's joint venture partner in new construction and
development projects from 1997 through 2000. Mr. Rohdie has been an attorney at
law since 1965.

Robert P. Rothenberg (44) has been a director and the Chief Operating Officer of
Tarragon since September 2000. Mr. Rothenberg has been the managing member of
APA Management LLC, a real estate investment and management company, since 1994.
He is also a Managing Member of Ansonia LLC, which together with Tarragon has
acquired close to 2600 apartments in the State of Connecticut since 1997. Mr.
Rothenberg was a co-managing member of Accord Properties Associates, LLC, which
managed the Ansonia portfolio in Connecticut and was acquired by Tarragon in
January 2001.

Chris Clinton (56) has been Senior Vice President - Commercial Asset Management
of Tarragon and its predecessors, Vinland Property Trust and National Income
Realty Trust, since March 1994. He also served as Vice President of Vinland
Property Trust and National Income Realty Trust from October 1988 to March 1994.

Kathryn Mansfield (42) has been Executive Vice President of Tarragon since
December 1998 and Secretary and Corporate Counsel of Tarragon since May 1998.
She also served as Vice President of Tarragon and its predecessor, National
Income Realty Trust, from May 1998 to December 1998. Prior to joining Tarragon,
she was Vice President and Senior Counsel for CB Richard Ellis, Inc., formerly
CB Commercial Real Estate Group, Inc., from October 1994 to May 1998. Ms.
Mansfield has been an attorney at law since 1984.

Todd C. Minor (44) has been Executive Vice President of Tarragon since November
2001 and Treasurer of Tarragon and its predecessors, Vinland Property Trust and
National Income Realty Trust, since December 1996. He also served as Senior Vice
President of Tarragon and its predecessors from March 1994 to December 1998 and
Vice President from April 1991 to July 1993.

Erin D. Pickens (41) has been Executive Vice President and Chief Financial
Officer of Tarragon since December 1998. She previously served as Vice President
and Chief Accounting Officer for Tarragon and its predecessors, Vinland Property
Trust and National Income Realty Trust, from September 1996 to November 1998.
She served as Accounting Manager of Vinland Property Trust and National Income
Realty Trust from June 1995 to August 1996. Ms. Pickens has been a Certified
Public Accountant since 1990.

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Charles Rubenstein (44) has been Executive Vice President of Tarragon since
December 1998 and General Counsel since September 1998. He also served as Senior
Vice President for Tarragon and its predecessor, National Income Realty Trust,
from September 1998 to December 1998. Prior to joining Tarragon, he was employed
as General Counsel for Simpson Housing Limited Partnership in Denver, Colorado
from January 1996 to February 1998. Mr. Rubenstein has been an attorney at law
since 1984.

Todd M. Schefler (46) became Executive Vice President - Development for Tarragon
in January 2003. He also served as Senior Vice President - Development from May
2001 to December 2002, and as Vice President - Structured Transactions of
Tarragon from January 2000 through May 2001. Prior to joining Tarragon, Mr.
Schefler was employed by Burroughs Development Corporation of Paramus, New
Jersey as a Senior Vice President - Acquisitions and Finance from April 1998 to
December 1999, and as Vice President from April 1994 to August 1997. He also
served as President of TMS Realty Inc., a real estate finance and development
consulting firm, from September 1997 to April 1998.

Saul Spitz (51) joined Tarragon as Executive Vice President of Acquisitions in
September 2000. He has been a member of APA Management LLC, a real estate
investment and management company, since September 1994. He has also been a
member of Ansonia LLC, which together with Tarragon has acquired close to 2600
apartments in the state of Connecticut, since November 1997. Mr. Spitz was a
co-managing member of Accord Properties Associates, LLC, which managed the
Ansonia portfolio in Connecticut, from 1998 through January 2001, when it was
acquired by Tarragon.

Eileen A. Swenson (52) joined Tarragon as President of Tarragon Management, Inc.
in September 2000. Ms. Swenson founded and served as President of Accord
Properties Associates, LLC and its predecessor, Accord Ventures, Inc., from
August 1994 through January 2001, when it was acquired by Tarragon. Ms. Swenson
has been a Certified Property Manager since 1987.

William M. Thompson (43) became Executive Vice President - Operations in March
2003. He joined Tarragon as Executive Vice President and Chief Information
Officer in September 2000. He served as Chief Financial Officer of Accord
Properties Associates, LLC from August 1998 through January 2001, when it was
acquired by Tarragon. Mr. Thompson was previously Chief Financial Officer of
Myers Northeast, a Connecticut based property management firm, from November
1992 until August 1998. Mr. Thompson has been a Certified Public Accountant
since 1982.

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ITEM 2. PROPERTIES

At December 31, 2002, our real estate portfolio consisted of 99 properties,
including 68 apartment communities (three currently under construction), eight
office buildings, 11 retail properties, two condominium conversions, three
condominium developments, and seven tracts of land. Of these properties, five
were included in For-Sale Housing inventory, and three properties were held for
sale. The remaining 91 properties were held for investment. Unconsolidated joint
ventures owned 26 of the 99 properties. Most of our properties are pledged to
secure mortgages. We believe our properties are adequately covered by liability
and casualty insurance, consistent with industry standards.

The following tables summarize information about our Investment Division
apartment portfolio and communities in our Development and For-Sale Housing
Divisions, including those owned through unconsolidated joint ventures.

Tarragon Realty Investors, Inc.
Investment Division Apartments
Summarized by Market
December 31, 2002

7

TARRAGON REALTY INVESTORS, INC.
INVESTMENT DIVISION APARTMENTS
DECEMBER 31, 2002

8

TARRAGON REALTY INVESTORS, INC.
INVESTMENT DIVISION APARTMENTS
DECEMBER 31, 2002

9

TARRAGON REALTY INVESTORS, INC.
INVESTMENT DIVISION APARTMENTS
DECEMBER 31, 2002

(1) Tarragon owns 49% of the partnerships that own these properties but
consolidates them because it controls them.

(2) These properties were sold in the first quarter of 2003.

(3) For properties owned by unconsolidated joint ventures, this balance
represents the net carrying value on the books of the joint venture.

The Investment Division also has 15 commercial properties with a total of
1,063,770 square feet.

TARRAGON REALTY INVESTORS, INC.
DEVELOPMENT DIVISION APARTMENTS
DECEMBER 31, 2002

The Development Division also has one community with 524 apartments and four
commercial properties with a total of 373,131 square feet under reposition.
Reposition is defined as extensive renovation to the interior or exterior of the
property or implementation of significant management strategies to increase
economic occupancy and revenue of the property.

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TARRAGON REALTY INVESTORS, INC.
FOR SALE HOUSING COMMUNITIES
DECEMBER 31, 2002

Projects in the For-Sale Housing Division's pipeline include second phases of
both Las Olas River House and Pine Crest and developments in Fort Myers,
Florida, and Hoboken, New Jersey. Pine Crest is an existing property we are
renovating and converting to homes for sale, and renovation of the second phase
is planned to commence in April 2003 and to include 118 homes. We have obtained
approval from the City of Fort Lauderdale, Florida, for 48,000 square feet of
retail space in the second phase of Las Olas River House. We are also seeking
approval for a 25-story tower above the retail space that will include 44 homes.
We plan to begin construction in the summer of 2003. We expect to begin
construction of a 131-unit condominium project in Ft. Myers, Florida, in April
2003 on land purchased in December 2002. Tarragon has formed joint ventures, in
which it owns interests ranging from 40% to 50%, to develop a total of 1,000
condominium homes and 137 affordable apartments in Hoboken, New Jersey. In
February 2003, one of our joint ventures obtained site plan approval from the
City of Hoboken, New Jersey for three luxury condominium projects with a total
of 436 units. Another of our Hoboken joint ventures also received Developer
designation, and are awaiting site plan approval from the City of Hoboken for an
additional 351 condominium homes and 87 affordable rental apartments.

ITEM 3. LEGAL PROCEEDINGS

Tarragon is a party to various claims and routine litigation arising in the
ordinary course of business. We do not believe that the results of these claims
and litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position, or results of operations.

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

During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.

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PART II

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

Our common stock is listed on the NASDAQ National Market System under the symbol
"TARR." The following table sets forth the high and low bid quotations of our
common stock reported by the NASDAQ system for the periods indicated.
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and may not necessarily represent actual
transactions. The quotations have been restated to give effect to a 10% stock
dividend paid in April 2002 and a three-for-two stock split effective February
14, 2003.

According to the transfer agent's records, at March 3, 2003, our common stock
was held by approximately 5,318 holders, including beneficial holders. On March
3, 2003, the closing price of our common stock was $13.58.

No cash dividends were paid to common stockholders in 2002 and 2001. In 2000,
the Board of Directors discontinued cash dividends on Tarragon's common stock.
In December 2001, the Board of Directors authorized a 10% common stock dividend
that was paid on April 26, 2002, to holders of record on April 15, 2002. In
January 2003, the Board of Directors approved a three-for-two stock split
effective February 14, 2003.

[This space intentionally left blank.]

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ITEM 6. SELECTED FINANCIAL DATA

Please read the following information along with the Consolidated Financial
Statements and Notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.
Dollar amounts are in thousands, except per share amounts.

- ----------

(1) Per share data have been restated to give effect to the 10% stock dividends
declared in December 2000 and December 2001 and a three-for-two stock split
in February 2003.

(2) Prior to 2002, For-sale housing inventory was presented with Real estate
held for sale.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Please read this discussion along with the Consolidated Financial Statements and
Notes found at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K

In addition to historical information, this Form 10-K contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us, estimates, and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements, which include, among
other things, our anticipated financings and sales of properties and For-Sale
Housing inventory.

Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, including future
economic, competitive, and market conditions, our forward-looking statements are
not guarantees of future performance. They are subject to risks, uncertainties,
and errors in assumptions that could cause our actual results to differ
materially from those reflected in our forward-looking statements. We believe
that the assumptions underlying our forward-looking statements are reasonable.
However, you should not place undue reliance on these forward-looking
statements. They only reflect our view and expectations as of the date of this
Form 10-K. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or
otherwise.

CRITICAL ACCOUNTING POLICIES

Asset Impairment

We periodically review the carrying values of our properties. Accounting
principles generally accepted in the United States of America ("GAAP") requires
that the carrying value of a property held for sale not exceed the lower of its
cost or its estimated fair value less costs to sell. In instances where a
property's estimated fair value less costs to sell is less than its carrying
value at the time of evaluation, we provide an allowance for loss by making a
charge against operations. Our review of properties held for sale generally
includes selective site inspections, comparing the property's current rents to
market rents, reviewing the property's expenses and maintenance requirements,
discussions with the property manager, and a review of the surrounding area. We
may make adjustments to estimated fair values based on future reviews.

We also evaluate our properties held for investment for impairment whenever
events or changes in circumstances indicate that a property's carrying value may
not be recoverable. This evaluation generally consists of reviewing the
property's cash flow and current and projected market conditions, as well as
changes in general and local economic conditions. If we conclude that a property
has been impaired, its carrying value is written down to estimated fair value
with a charge against current earnings.

Investments in Joint Ventures Accounted for Using the Equity Method

We use the equity method to account for investments in partnerships and joint
ventures over which we exercise significant influence but do not control. Under
the equity method, our initial investments are increased by our proportionate
share of the partnerships' operating income and additional advances and
decreased by our proportionate share of the partnerships' operating losses and
distributions received. All significant intercompany transactions are
eliminated.

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We have investments in 21 partnerships or joint ventures in which we hold
noncontrolling interests or our outside partners have significant participating
rights, as defined by the Financial Accounting Standards Board's Emerging Issues
Task Force in its 96-16 Abstract. The net effect of not consolidating these
joint ventures has been to reduce consolidated total assets, total liabilities,
and gross revenues and expenses but has had no effect on reported net income or
loss except in instances where we have received distributions from a joint
venture in excess of our investment in the joint venture, with the excess
recorded as income.

Revenue Recognition

Rental, interest, and management fee revenue are recognized when earned. Revenue
from long term laundry and cable service contracts is deferred and amortized to
income on the straight-line basis over the terms of the contracts.

Gains on sales of real estate are recognized when and to the extent permitted by
SFAS No. 66 - "Accounting for Sales of Real Estate." 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," which, among other things, rescinded SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS No. 4
required gains and losses from extinguishments of debt to be classified as
extraordinary items, if material. Under SFAS No. 145, gains and losses on
extinguishments of debt will no longer be classified as extraordinary unless
they meet the unusual in nature and infrequency of occurrence criteria in the
Accounting Principles Board's Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
which is expected to be rare. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. Upon our adoption of SFAS No. 145 in January 2003,
prepayment penalties or exit fees and the write-off of deferred financing
expenses in connection with repayment of debt prior to maturity will no longer
be classified as extraordinary items, but there will be no impact on our
reported net income or loss. Such expenses were $846,000 during 2002, $605,000
in 2001, and $2.7 million in 2000. We also recognized an extraordinary gain on
debt forgiveness of $420,000 in October 2001 upon the discounted payoff of the
mortgage secured by Orlando Central Park.

In November 2002, the FASB issued Interpretation (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5,
"Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures," and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." FIN 45
requires guarantors to recognize a liability at the inception of guarantee
arrangements within its scope. Guarantors are also required to provide
additional disclosures for guarantees. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. The initial recognition and measurement provisions are applicable
prospectively to all guarantees issued or modified after December 31, 2002. We
are currently evaluating the effect that adoption of this pronouncement will
have on our financial statements.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements," for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is

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determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. We are in the process of
determining what impact, if any, the adoption of the provisions of FIN 46 will
have upon our financial condition or results of operations.

ENVIRONMENTAL MATTERS

Under federal, state, and local environmental laws, ordinances, and regulations,
Tarragon may be liable for removal or remediation costs, as well as other costs
(such as fines or injuries to persons and property) where our employees may have
arranged for removal, disposal, or treatment of hazardous or toxic substances.
In addition, environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties can seek recovery
from Tarragon for personal injury associated with those materials. We are not
aware of any liability relating to these matters that would have a material
adverse effect on our business, financial position, or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of cash are property operations, borrowings, and proceeds
from the sale of properties. We believe these sources will continue to meet our
cash requirements, including debt service payments, property maintenance and
improvements, development costs for properties under construction, projected
purchases of existing properties, dividends on preferred stock, and planned
repurchases of common stock. Although we expect these sources of cash to be
sufficient to fund planned uses of cash, we can make no assurance that the
expected sales and refinancings of properties will be completed as planned.

Proceeds from borrowings are expected to continue to be a key source of cash for
Tarragon. In 2003, we expect to generate net proceeds from mortgage borrowings
on consolidated and unconsolidated properties of $30 million. We have a $20
million unsecured line of credit with affiliates of William S. Friedman, our
President and Chief Executive Officer and Chairman of our Board of Directors.
The line of credit matures in January 2004. All of these funds are available to
us as of December 31, 2002, as there was no outstanding balance. We have an
additional $10.3 million available under two lines of credit that mature in
2004.

We have sold four consolidated properties since December 31, 2002, for $26.4
million, receiving net proceeds of $12.6 million. We expect to generate an
additional $5 million in net proceeds from the sale of consolidated properties
during the remainder of 2003.

At December 31, 2002, we had entered into contracts to sell 15 of the remaining
27 units at 5600 Collins Avenue for an aggregate contract price of $4.4 million.
We had also entered into contracts to sell 28 units at Pine Crest Village I at
Victoria Park for an aggregate contract price of $6.5 million. We began the
conversion of Pine Crest to homes for sale in 2002 and expect to begin closing
sales in the second quarter of 2003. In 2003, we expect to generate net cash
proceeds of $25 million from the sale of For-Sale Housing inventory from both
5600 Collins and Pine Crest.

16

Contractual Commitments

The following table summarizes information regarding contractual commitments (in
thousands).

Of the 2003 scheduled debt maturities, the loans provide for extension options
of two years for $19.8 million and one year for $7.7 million. Of the 2004 and
2005 scheduled maturities, the loans provide for extension options of two years
for $29.8 million and one year for $10.2 million, and $6 million of the 2004
scheduled maturities was repaid in January 2003. We intend to extend the loans
or pay them off as they come due largely through refinancings. We believe we can
arrange such new financing as may be needed to repay maturing notes.

We have guaranteed $7.8 million of mortgages on three unconsolidated properties.
$925,000 relates to a mortgage that matures in 2012, $2.8 million relates to a
mortgage that matures in 2003, and $4.1 million relates to a mortgage that
matures in 2004. We have also guaranteed construction loans totaling $168.4
million on four unconsolidated properties, including the $90 million
construction loan for the Las Olas River House condominium development. This
loan was closed in March 2002, has a December 31, 2002, balance of $6.9 million,
and matures in 2005. The construction loan provides for a one-year extension.
The aggregate balance of the other construction loans at December 31, 2002, is
$71.4 million. These construction loans mature in 2003 or 2004 and have one- or
two-year extension options.

Cash Flows from Operating Activities

Our net cash flow provided by operating activities increased by $10 million in
2002 compared to 2001. Net cash flow provided by operating activities increased
by $19.5 million in 2001 compared to 2000. These increases were primarily due to
increases in the excess of For-sale housing inventory sales collected over
renovation costs of the condominium conversion. Additionally, the lease-up of
newly constructed apartment communities contributed to the increases.

Cash Flows from Investing Activities

During 2002, net cash used in investing activities decreased $24 million
compared to 2001 principally related to unconsolidated partnerships and joint
ventures. In 2002, Tarragon received its share of net proceeds from the sale of
five partnership properties totaling $13.2 million. In 2001, one partnership
property was sold, and Tarragon received $1.8 million. Additionally, in 2001,
Tarragon advanced $8.1 million to One Las Olas in connection with development of
its luxury condominium project. In 2002, the partnership obtained construction
financing and repaid Tarragon $4.8 million, although Tarragon advanced an
additional $4.6 million to the partnership that plans to develop the second
phase of this project. Excluding amounts advanced or received related to Las
Olas, we advanced funds for development costs of joint venture properties of
$2 million in 2002 and $4.1 million in 2001. We spent $29.5 million in 2002 and
$43.8 million in 2001 on development costs for consolidated properties under
construction.

Cash flows from investing activities were very similar for 2001 compared to
2000. In 2000, we advanced $5.4 million to joint ventures for property
development costs and spent $35.7 million on development costs for consolidated
properties.

17

See "Sales of Consolidated Properties" below for the detail of net cash proceeds
from the sale of consolidated properties during the last three years.

Cash Flows from Financing Activities

Cash provided by financing activities decreased $30 million in 2002 compared to
2001 chiefly due to net repayments of advances under our line of credit with
affiliates of William S. Friedman in 2002 of $12.2 million, while we borrowed
net advances of $5 million during 2001. We received $7.1 million from
unconsolidated partnerships and joint ventures representing our share of net
financing proceeds in 2002. In 2001, such distributions totaled $10.4 million.
Cash provided by financing activities decreased $17 million in 2001 compared to
2000, as distributions from partnerships' financing activities totaled $29
million in 2000.

As stated previously, proceeds from borrowings are a significant source of cash
for Tarragon. In 2002, we received net proceeds of $15.4 million from financings
of consolidated properties. We also received $30.7 million from construction
loan borrowings. In 2001, net cash proceeds from financing were $11.6 million,
and construction loan borrowings were $43.2 million. In 2000, net cash proceeds
from financing were $22.3 million, and construction loan borrowings were $34.2
million.

Common Stock Repurchase Program

The Board of Directors has authorized a common stock repurchase program. We
intend to continue to repurchase shares of our common stock as long as we
believe the fair market value of our net assets per share is substantially
greater than the market price of our common stock. We repurchased 326,982 shares
of our common stock in open market and negotiated transactions in 2002 at a cost
of $4.7 million. We repurchased 265,708 shares in 2001 and 549,652 shares in
2000 for an aggregate $3.2 million in 2001 and $5.7 million in 2000. Subject to
market conditions, we expect to repurchase shares of our common stock in 2003 at
a rate consistent with that of the prior three years. As of December 31, 2002,
Tarragon had authority to repurchase an additional 630,406 common shares.

18

Sales of Consolidated Properties

The following table summarizes sales of consolidated properties during the last
three years (in thousands). In accordance with SFAS No. 144, the gains on sale
of Collegewood Apartments and English Village Apartments were presented in
discontinued operations for the year ended December 31, 2002.

19

For-Sale Housing Inventory Sales

The following table summarizes the sales of For-sale housing inventory for 2000
through 2002. Due to an increase in estimated costs to complete the condominium
conversion of 5600 Collins Avenue, we recorded For-sale housing inventory
write-downs in 2002 totaling $2.7 million.

RESULTS OF OPERATIONS

2002 COMPARED TO 2001

Consolidated Properties

At December 31, 2002, our consolidated apartment communities included 9,815
operating units, and our consolidated commercial properties had an aggregate 1.2
million square feet. The following table summarizes the components of aggregate
property level net operating results for all of our consolidated properties for
the years ended December 31, 2002 and 2001.

20

The following table presents the changes in property level revenues and expenses
caused by properties consolidated, deconsolidated, or sold during the two-year
period and new development properties in lease-up.

- ----------

(a) In connection with a change in control, Antelope Pines and Woodcreek Garden
were consolidated beginning April 2002.

(b) Includes three commercial properties and four apartment communities.

(c) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001.

(d) Includes six properties recently completed or under construction that began
lease-up in 2001 or 2002.

Other increases in rental revenue are due to a 1% increase in scheduled rents
and a 6% decrease in vacancy losses. Other increases in property operating
expenses are chiefly due to property tax refunds received in 2001, higher costs
of insurance in 2002, and increased management fee expense since out-sourcing
management to many of our properties in 2001 and 2002. These increased expenses
were partially offset by lower utility costs in 2002. Other decreases in
interest expense are due to paying off or paying down several mortgages and
decreases in interest rates on our variable rate debt.

The following table presents operating information about our portfolio of 41
consolidated apartment properties with 8,151 units owned for all of 2002 and
2001.

Rental revenue increased chiefly due to generally higher rental rates, as well
as decreased vacancy losses due to higher occupancy at several properties.
Average overall economic occupancy increased slightly from 90% in 2001 to 91.5%
in 2002. The increase in property operating expenses was due to higher property
management fees and property insurance costs, partially offset by lower utility
expenses, as discussed above.

Unconsolidated Partnerships and Joint Ventures

The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for 2002 and 2001.

21

Gain on sale of real estate for 2002 includes a $25.2 million gain on the sale
of Devonshire Apartment Owners' sole property, The Villages at Gateway. The
reduction in gain recognized for distributions in excess of investment
recognized in 2000 relates to Devonshire Apartment Owners. This income was
recognized in connection with the transfer of ownership of The Villages at
Gateway to the joint venture in July 2000 and represented distribution of
financing proceeds in excess of our investment in the joint venture.

Discontinued operations include the net operating results of Stone Creek
Associates and the gain on sale of its only property in December 2002.

Distributions in excess of investment are primarily related to distributions of
financing proceeds of joint ventures in which we have recovered our investment.
In these situations, the joint ventures' debt is non-recourse to Tarragon, and
Tarragon has not committed to fund any cash flow deficits of the joint ventures.

The following table presents the effect of properties consolidated,
deconsolidated, or sold during the two-year period and new development
properties in lease-up on aggregate joint ventures' property level revenues and
expenses.

- ----------

(a) In connection with a change in control, Antelope Pines and Woodcreek Garden
were consolidated beginning April 2002.

(b) Includes four apartment communities sold in 2002. Operating results for a
fifth property sold have been presented in discontinued operations.

(c) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001.

(d) Includes three partnerships with properties recently completed or under
construction that began lease-up in 2001 or 2002.

22

Corporate Expenses

Corporate general and administrative expenses increased $963,000 for 2002
compared to 2001. We incurred $531,000 of expenses in connection with potential
acquisitions or development projects or financing transactions that were not
selected for further investment. Additionally, we recognized expense of $317,000
in 2002 in connection with stock options granted. We adopted the fair value
expense recognition provisions of SFAS No. 123 effective July 1, 2002, and we
recognized no expense in 2001 for stock options granted. Partially offsetting
these increases was a $796,000 decrease due to ceasing amortization of goodwill
in connection with the adoption of SFAS No. 142 in January 2002. The bulk of the
remaining increase is related to development-related personnel additions and
compensation increases.

Property general and administrative expenses decreased $409,000 for 2002
compared to 2001, primarily due to a change to third party property management
for certain of our properties and a related reduction in property management
staff during 2001 and 2002.

2001 COMPARED TO 2000

Consolidated Properties

At December 31, 2001, our consolidated apartment communities included 9,837
operating units, and our consolidated operating commercial properties had an
aggregate 1.1 million square feet. The following table summarizes the components
of aggregate property level net operating results for all of our consolidated
properties for the years ended December 31, 2001 and 2000.

The following table presents the changes in property level revenues and expenses
caused by properties acquired, deconsolidated, or sold during the two-year
period and new development properties in lease-up.

- ----------

(a) Includes three apartment communities in which we bought out our outside
partners' interests in February 2000.

(b) Includes three commercial properties and seven apartment communities.

(c) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001, and The Villages at
Gateway (formerly known as Devonshire Apartments) was deconsolidated in
2000.

(d) Includes four properties recently completed that began lease-up in 2000 or
2001.

23

Other increases in property operating expenses are primarily due to higher
utility and insurance costs and increased management fee expense since
out-sourcing management to many of our properties in 2001. Other decreases in
interest expense are due to paying off or paying down several mortgages and
decreases in interest rates on our variable rate debt.

The following table presents operating information about our portfolio of 40
consolidated apartment properties with 7,699 units owned for all of 2001 and
2000.

Unconsolidated Partnerships and Joint Ventures

The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for 2001 and 2000.

Distributions in excess of investment are primarily related to distributions of
financing proceeds of joint ventures in which we have recovered our investment.
In these situations, the joint ventures' debt is non-recourse to Tarragon, and
Tarragon has not committed to fund any cash flow deficits of the joint ventures.

24

The following table presents the effect of properties deconsolidated during the
two-year period and renovated properties that were stabilized in 2000 on
aggregate joint ventures' property level revenues and expenses.

- ----------

(a) In connection with a change in control in connection with forming
joint ventures, The Club at Danforth, The Links at Georgetown, The
Liberty Building, and The Vineyard at Eagle Harbor were deconsolidated
in 2001, and the Villages at Gateway was deconsolidated in 2000.

(b) Includes four Ansonia properties that were renovated and stabilized in
2000.

Corporate Expenses

Corporate general and administrative expenses increased $1.8 million for 2001
compared to 2000 primarily due to additional positions relating to development
and higher rent in the corporate office in New York, which was relocated in June
2000.

SEGMENT OPERATING RESULTS

Investment Division

Net operating income (rental revenue less property operating expenses) for our
41 same store Investment Division apartment communities with 7,185 units
(consolidated and unconsolidated) increased $1.1 million, or 4.7%, in 2002
compared to 2001 and increased $489,000, or 2.2% in 2001 compared to 2000. These
increases were mostly due to increases in revenues: 3.7% in 2002 compared to
2001 and 4.3% in 2001 compared to 2000. Net operating income as a percentage of
rental revenue for these properties was 45.1% in 2002, 44.7% in 2001, and 45.6%
in 2000.

The 18 (ten consolidated and eight unconsolidated) apartment communities
stabilized during 2000, 2001, or 2002, contributed net operating income of $25.2
million in 2002 and $8 million in 2001 to the Investment Division. Prior to
their stabilization, their operating results were presented in the Development
Division.

Tarragon uses funds from operations ("FFO") along with net income or loss
computed in accordance with GAAP to measure the performance of the properties in
its Investment Division. See NOTE 16. "SEGMENT REPORTING" in the Notes to
Consolidated Financial Statements for the definition of FFO. The 41 same store
apartment communities with 7,185 units, both consolidated and unconsolidated,
reported an increase of $2 million, or 26%, in FFO in 2002 compared to 2001 and
an increase of $751,000, or 11%, in 2001 compared to 2000.

The 18 apartment communities stabilized during 2000, 2001, or 2002 contributed
FFO of $9.3 million in 2002 and $3.3 million in 2001 to the Investment Division.

25

Development Division

Tarragon measures the performance of its Development Division primarily by net
profit from third party and intercompany sales. Net profit from intercompany
sales is the excess of the properties' estimated fair values over their net
carrying values at the date they are determined to be stabilized and moved into
the Investment Division. Gains on transfers of assets between segments do not
represent gains recognizable in accordance with GAAP and, accordingly, are
eliminated for purposes of consolidated reporting.

In 2002, the Development Division reported net profit of $51.7 million on the
transfer of 11 consolidated and five unconsolidated properties to the Investment
Division upon the determination that they were stabilized. In 2001, the
Development Division reported net profit of $12.2 million on the transfer of
properties that had become stabilized (five consolidated and five
unconsolidated) to the Investment Division.

For-Sale Housing Division

Tarragon also measures the performance of its For-Sale Housing Division
primarily by net profit from third party and intercompany sales. Although it is
our smallest division, it is expected to be our most rapidly growing division.
Prior to 2002, the assets currently in our For-Sale Housing Division were
reported along with the Development Division.

26

Estimated Fair Market Value of Net Assets Per Common Share

Tarragon also measures its performance by changes in estimated fair market value
of net assets per common share, as presented in the following table. All per
share amounts have been restated to give effect to the February 14, 2003,
three-for-two stock split.

- ----------

(1) Book value per common share represents total stockholders equity less
preferred stock liquidation preference divided by shares outstanding.
Amounts have been restated to give effect to the April 2002 10% stock
dividend and the February 2003 three-for-two stock split.

(2) Estimated fair market values have been determined using the following
procedures. For properties with appraisals ordered by lenders in connection
with mortgage financing performed within two years for 2000 and within one
year for 2001 and 2002, the appraised values are used. We have estimated
the fair market value of our condominium conversions using the unit
contract or offering prices less estimated selling costs and remaining
costs of unit renovations. For 2000, we estimated the fair market value of
one property that was sold in February 2001 at such sale price, and we
estimated the fair market values of two properties using current written
offers to purchase from third parties. For 2001, we estimated the fair
market values of ten properties then under contract for sale at such
contract sale prices. Six of these were sold in 2002. We estimated the fair
market value of a nearly completed commercial property under construction
at the amount of a written offer less estimated costs to complete
construction. For 2001, we estimated the fair market values of four
properties using contract prices from recently terminated sale contracts
with third parties. For 2002, we estimated the fair market value of five
properties under contract at such contract prices. Three of these
properties were sold in the first quarter of 2003. Also for 2002, we
estimated the fair market values of two properties based on written offers
to purchase from third parties. For land and all other properties under
development or construction or in initial lease-up, the historical cost
basis net carrying values are used. For all other properties, we engaged
Marcus & Millichap, a national real estate investment brokerage company, to
perform Broker's Opinions of Value, and these values are used. Estimated
fair market values of investments in and advances to partnerships reflect
Tarragon's interest in the estimated fair market values of the net assets
(real estate value less mortgage debt).

(3) The estimated fair market value of our net assets is computed by adding the
excess of our estimated fair market values of our real estate and
investments in and advances to partnerships over their book values to and
subtracting intangible assets and deferred charges from book value equity.
Estimated fully diluted fair market value of net assets per common share
has been computed assuming all outstanding stock options have been
exercised. Per share amounts have been restated to give effect to the April
2002 10% stock dividend and the February 2003 three-for-two stock split.

27

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Tarragon is exposed to market risk from changes in interest rates that may
adversely affect our financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage such
exposure through our regular operating and financing activities. We do not trade
or speculate in financial instruments. In addition, we may incur losses due to
declines in the market price of our stock because of a put agreement described
below.

At December 31, 2002, Tarragon had four interest rate caps with aggregate
notional values of $35.7 million that mature between May 2005 and December 2006.
The carrying values of the caps are adjusted quarterly to their estimated fair
values, with the changes in value charged or credited to interest expense. At
December 31, 2002, if the rates on which the fair values are based had been 100
basis points lower, our interest expense for 2002 would have been higher by
$40,000. If the rates on which the fair values are based had been 100 basis
points higher, our interest expense would have been lower by $56,000.

At December 31, 2002, Tarragon had approximately $241 million of variable rate
debt. The primary base rate is the 30-day LIBOR. Using this balance of debt, if
LIBOR or any other indexes on which the rates are based increased by 100 basis
points (1%), our pre-tax earnings would decrease by approximately $2.37 million
(based on our expected level of interest capitalized) and cash flows would
decrease by approximately $2.34 million (based on our currently available
interest reserves). On the other hand, if interest rates decreased by 100 basis
points, our pre-tax earnings would increase by approximately $2.37 million and
cash flows would increase by approximately $2.20 million.

At December 31, 2002, unconsolidated partnerships had approximately $131 million
of variable rate debt. A 100 basis point increase in the index on which the
rates are based would reduce our pre-tax earnings by approximately $857,000
(based on our current operations-sharing ratios in the partnerships and the
expected level of interest capitalized), while a 100 basis point decrease would
increase our pre-tax earnings by approximately $857,000. Assuming these
partnerships distribute all of their available cash to the partners, our cash
flow would decrease by $832,000 if interest rates increase by 1%, and would
increase by $621,000 if interest rates decrease by 1%, (based on our currently
available interest reserves).

In 2002, we sold a put option for $10,000 to an unaffiliated investor. During a
period of one year expiring June 2003, the investor has the right to sell and we
have an obligation to purchase up to a total of 150,000 shares of our common
stock then owned or held by the investor at $10 per share. Any exercise of the
put option by the investor must be in a minimum amount of 7,500 shares per
delivery. The sale price was recorded as a liability as of the date of sale. If
the price of our common stock falls below $10 during the term of the put
agreement, the difference between the market price of the stock and the $10 put
price multiplied by 150,000 shares will be recorded as a charge to earnings and
a corresponding increase to the liability. At March 3, 2003, the closing price
of our common stock was $13.58.

[This space intentionally left blank.]

28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

29

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of Tarragon Realty Investors, Inc.

We have audited the accompanying consolidated balance sheet of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 2002. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 2002, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statements of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets," No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," and the fair value accounting method of No. 123 "Accounting
for Stock-Based Compensation" in 2002.

We have also audited Schedule III for the year ended December 31, 2002. In our
opinion, this schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information therein.

/s/ GRANT THORNTON, LLP
Dallas, Texas
February 28, 2003

30

This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with Tarragon Realty Investors, Inc., and Subsidiaries Annual Report
on Form 10-K for the year ended December 31, 2001. This audit report has not
been reissued by Arthur Andersen LLP in connection with this filing on Form
10-K. The Consolidated Balance Sheet as of December 31, 2000, and the
Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows for
the year ended December 31, 1999, referred to in this report have not been
included in the accompanying Consolidated Financial Statements.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Tarragon Realty Investors, Inc.

We have audited the accompanying consolidated balance sheets of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tarragon Realty Investors,
Inc., and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.

As explained in Note 1 to the accompanying consolidated financial statements,
the Company changed its method of accounting for derivative instruments
effective January 1, 2001.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule III is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.

/s/ Arthur Andersen LLP
Dallas, Texas
March 29, 2002

31

TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS

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

32

TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

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

33

TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

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

34

TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

35

TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

36

TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

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

37

TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

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

38

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of Tarragon Realty Investors,
Inc., its subsidiaries, and consolidated partnerships and joint ventures have
been prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"), the most significant of which are described
in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." The preparation of
financial statements in accordance with GAAP requires us 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. 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 years then ended
unless otherwise indicated. Dollar amounts in tables are in thousands, except
per share amounts. Certain balances for 2000 and 2001 have been reclassified to
conform to the 2002 presentation.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation. The Consolidated Financial Statements include the
accounts of Tarragon, its subsidiaries, and partnerships and joint ventures it
controls. All significant intercompany transactions and balances have been
eliminated.

Real estate and depreciation. Real estate held for investment is carried at cost
unless an impairment is determined to exist. We periodically evaluate whether
events or changes in circumstances indicate that the carrying value of any of
our properties held for investment may not be recoverable. This evaluation
generally consists of a review of the property's cash flow and current and
projected market conditions, as well as any changes in general and local
economic conditions. If an impairment loss exists based on the results of this
review, the asset's carrying value is written down to estimated fair value with
a charge against current earnings. In December 2000, we recorded an impairment
charge of $1.6 million to write down the carrying value of Jackson Square
Shopping Center to its estimated fair value.

We capitalize property improvements and major rehabilitation projects that
increase the value of the respective property and have useful lives greater than
one year, except for individual expenditures less than $10,000 that are not part
of a planned renovation project. Under this policy, during 2002, expenditures of
$9 million were capitalized, and property replacements of $3.6 million were
expensed. Property replacements expensed include, but are not limited to, such
items as landscaping, common area improvements, and apartment upgrades.
Depreciation is provided against real estate held for investment by the
straight-line method over the estimated useful lives of the assets, ranging from
three to 40 years. Real estate held for sale is not depreciated.

We capitalize interest on funds used in constructing property from the date of
initiation of construction activities through the time the property is ready for
leasing or sale. Interest of $850,000, $2.8 million, and $3.9 million was
capitalized during 2002, 2001, and 2000, respectively.

Properties we believe have peaked in value or can no longer operate efficiently
within our portfolio have been placed on the market for sale. Properties for
which executed contracts for sale are in place are reclassified to held for
sale. We cease depreciating the properties in the month following their
reclassification to held for sale. These properties remain classified as held
for sale until sold or until we decide to discontinue marketing efforts. When
properties are reclassified from held for sale to held for investment, we resume
depreciating them in the month of their reclassification, and depreciation
expense is adjusted to record depreciation for the time during which the
properties were classified as held for sale.

39

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Real estate held for sale is carried at the lower of cost or estimated fair
value less estimated costs to sell. During 2000, we reversed a previously
established allowance against the carrying values of properties held for sale of
$801,000, which was determined to be no longer required.

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which, among other things,
requires operating results for assets held for sale to be presented as
discontinued operations for current and all prior years presented. SFAS No. 144
also changed the rules for impairment testing of real estate held for investment
by requiring the use of a probability weighted approach to determine the holding
period for purposes of estimating undiscounted cash flows. We adopted this
statement January 1, 2002. The adoption had no effect on our reported net
income. For the year ended December 31, 2002, the operations of properties for
which a plan of disposal was implemented after the adoption of SFAS No. 144 have
been reported in discontinued operations. Total revenues included in
discontinued operations for the year ended December 31, 2002, were $2.4 million.
These operations were previously reported in the Investment Division. We have
not restated operating results for the years ended December 31, 2001 and 2000,
to present the operations of these properties in discontinued operations due to
immateriality.

Cash equivalents. We consider all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.

Restricted cash. Restricted cash is primarily escrow accounts, generally held by
the lenders of certain of our mortgage notes payable, for taxes, insurance, and
property repairs and replacements.

Other assets. Other assets consist primarily of notes and interest receivable,
tenant accounts receivable, deferred borrowing costs, and prepaid leasing
commissions. Deferred borrowing costs are amortized on the straight-line method
(which has approximated the effective interest method) over the related loan
terms, and such amortization is included in interest expense. Prepaid leasing
commissions are amortized to leasing commission expense, included in property
operating expenses, on the straight-line method over the related lease terms.

Goodwill. Goodwill was recorded in connection with the acquisitions of Tarragon
Realty Advisors and Accord Properties Associates and, until December 31, 2001,
was amortized on the straight-line method. We adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," on January 1, 2002. SFAS No. 142 requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized as expenses of operations but rather carried on the balance sheet as
permanent assets. These assets will be subject to at least annual assessment for
impairment by applying a fair-value-based test. We have determined there was no
transitional impairment loss at January 1, 2002. Amortization of goodwill
amounted to $796,000 and $630,000 for 2001 and 2000, respectively. See NOTE 18.
"GOODWILL" for a presentation of income (loss) from continuing operations, net
income, earnings per common share, and earnings per common share - assuming
dilution for 2001 and 2000, adjusted to exclude amortization expense related to
goodwill.

Revenue recognition. Rental, interest, and management fee revenue are recognized
when earned. Included in "Other liabilities" in the accompanying Consolidated
Balance Sheet as of December 31, 2002, is deferred revenue of $538,000 primarily
related to long-term laundry and cable service contracts. This deferred revenue
is being amortized to income on the straight-line basis over the terms of the
contracts.

40

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Gains on sales of real estate are recognized when and to the extent permitted by
SFAS No. 66, "Accounting for Sales of Real Estate." 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.

Investments in noncontrolled partnerships and joint ventures. We use the equity
method to account for investments in partnerships and joint ventures over which
we exercise significant influence but do not control. Under the equity method,
our initial investments are increased by our proportionate share of the
partnerships' operating income and additional advances and decreased by our
proportionate share of the partnerships' operating losses and distributions
received. All significant intercompany transactions have been eliminated.

Stock split and dividend. In January 2003, the Board of Directors approved a
three-for-two stock split effective February 14, 2003. In April 2002, a 10%
stock dividend was paid. Weighted average shares of common stock outstanding and
stock options outstanding, granted, exercised, and forfeited in NOTE 9. "STOCK
OPTIONS" have been restated to give effect to the stock split and dividend.

Earnings per common share. Net income per share of common stock is computed
based upon the weighted average number of shares outstanding during each year.
All share and per share data have been restated to give effect to the 10% stock
dividend paid in April 2002 and the three-for-two stock split on February 14,
2003. See NOTE 8. "EARNINGS PER COMMON SHARE."

Fair value of financial instruments. Disclosure about fair value of financial
instruments is based on pertinent information available to us as of December 31,
2002 and 2001. Considerable judgment is necessary to interpret market data and
develop estimated fair values. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
values. For these reasons, the estimated fair values presented may differ
significantly from the actual amounts we may realize or pay.

As of December 31, 2002 and 2001, we estimate that the carrying amounts for cash
and cash equivalents and restricted cash approximate fair value because of the
short maturities of those instruments. In addition, the carrying amounts of
notes receivable and other liabilities approximate fair value. The fair values
of notes payable are estimated by discounting future expected cash flows using
current rates for loans with similar terms and maturities. See NOTE 5. "NOTES,
DEBENTURES, AND INTEREST PAYABLE" for the disclosure of fair values of notes
payable.

Stock option plans. Effective July 1, 2002, we adopted the fair value method
defined in SFAS No. 123, "Accounting for Stock-Based Compensation," in
accounting for our stock option plans, where previously we applied Accounting
Principles Board's Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees," and related Interpretations. SFAS No. 123 indicates that the fair
value method is the preferable method of accounting, and we have elected to
apply it prospectively for all options granted since the beginning of 2002.
Under APB No. 25, compensation costs related to stock options issued pursuant to
compensatory plans are measured based on the difference between the quoted
market price of the stock at the measurement date (ordinarily the date of grant)
and the exercise price and should be charged to expense over the periods during
which the grantee performs the related services. No stock-based employee
compensation expense was recognized in 2001 or 2000.

41

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In December 2002, the FASB amended SFAS No. 123 by issuing SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure," which we
adopted upon issuance. SFAS No. 148 is effective for financial statements for
years ending after December 15, 2002, and provides alternative methods of
transition for entities that voluntarily change to the fair value based method
of accounting for stock-based employee compensation. For entities that elect to
adopt the recognition provisions of SFAS No. 123 in years beginning before
December 16, 2003, the change in accounting principle can be reported using any
one of three methods. We elected to apply the "prospective method" and have
applied the recognition provisions to all options granted or modified since the
beginning of 2002. SFAS No. 148 also amended the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on reported net income
of an entity's accounting policy decisions with respect to stock-based employee
compensation. Because some awards under the plans vest over periods ranging from
one to five years, the cost related to stock-based employee compensation
included in the determination of net income for 2002 is less than that which
would have been recognized if the fair value based method had been applied to
all awards since the original effective date of SFAS No. 123. The following
table illustrates the effect on net income and earnings per common share if the
fair value based method had been applied to all outstanding and unvested awards
in each period. For more information about our stock option plans, See NOTE 9.
"STOCK OPTIONS."

42

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivatives. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This pronouncement
establishes accounting and reporting standards requiring that a derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. We adopted this pronouncement effective
January 1, 2001. Our reverse repurchase agreement with an investment bank,
terminated in 2001, was a derivative. The initial valuation adjustment of
$326,000 was recorded as a cumulative effect of a change in accounting principle
in 2001. Changes in the fair value of the underlying derivative instrument were
recorded in current earnings during 2001 through the date we terminated the
agreement. We have entered into four interest rate cap agreements in connection
with mortgage financings. These caps are presented with "Other assets" in the
accompanying Consolidated Balance Sheet as of December 31, 2002. The carrying
values of the caps are adjusted quarterly to fair value with a corresponding
charge or credit to interest expense.

In 2002, we sold a put option for $10,000 to an unaffiliated investor. During a
period of one year expiring June 2003, the investor has the right to sell and we
have an obligation to purchase up to a total of 150,000 shares of our common
stock then owned or held by the investor at $10 per share. Any exercise of the
put option by the investor must be in a minimum amount of 7,500 shares per
delivery. The sale price was recorded as a liability as of the date of sale. If
the price of our common stock falls below $10 during the term of the put
agreement, the difference between the market price of the stock and the $10 put
price multiplied by 150,000 shares will be recorded as a charge to earnings and
a corresponding increase to the liability. At March 3, 2003, the closing price
of our common stock was $13.58.

Advertising costs. Advertising costs incurred in connection with new development
properties in lease-up are deferred and amortized to property operating expenses
over two years. Advertising costs incurred in connection with For-Sale Housing
inventory is deferred and recorded as cost of sales when sales are closed. All
other advertising costs are recorded to property operating expenses as incurred.

Employee benefit plan. Tarragon has a defined contribution plan covering
substantially all of its employees. Tarragon's contributions are 401(k) matches
determined based on 100% of the first 3% and 50% of the next 2% of the
employees' salary deferrals. Total plan expense was $273,000 in 2002, $291,000
in 2001, and $198,000 in 2000 and is included in Corporate and Property general
and administrative expenses in the accompanying Consolidated Statements of
Operations.

Income taxes. We recognize deferred tax assets and liabilities based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted statutory tax rate. A valuation allowance is
recorded to the extent realization of deferred tax assets is uncertain.

43

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent accounting pronouncements. In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections," which, among other things, rescinded SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt." SFAS No. 4 required
gains and losses from extinguishments of debt to be classified as extraordinary
items, if material. Under SFAS No. 145, gains and losses on extinguishments of
debt will no longer be classified as extraordinary unless they meet the unusual
in nature and infrequency of occurrence criteria in the Accounting Principles
Board's Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," which is expected to be rare.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Upon
our adoption of SFAS No. 145 in January 2003, prepayment penalties or exit fees
and the write-off of deferred financing expenses in connection with repayment of
debt prior to maturity will no longer be classified as extraordinary items, as
described in the next paragraph, but there will be no impact on our reported net
income or loss.

Except for an extraordinary gain on debt forgiveness of $420,000 in 2001,
extraordinary items in the accompanying Consolidated Statements of Operations
include exit fees or prepayment penalties and the write-off of deferred
financing expenses in connection with refinancings. For the years ended December
31, 2002, 2001, and 2000, $401,000, $100,000, and $1 million of the
extraordinary items represent our share of such expenses of unconsolidated
partnerships.

In November 2002, the FASB issued Interpretation (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5,
"Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures," and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." FIN 45
requires guarantors to recognize a liability at the inception of guarantee
arrangements within its scope. Tarragon has previously not recorded a liability
when guaranteeing obligations unless performance under the guarantee became
probable. Guarantors are also required to provide additional disclosures for
guarantees. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The initial
recognition and measurement provisions are applicable prospectively to all
guarantees issued or modified after December 31, 2002. We are currently
evaluating the effect that adoption of this pronouncement will have on our
financial statements. Disclosures required by FIN 45 are included in the
accompanying Consolidated Financial Statements.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements," for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity's expected losses, receives a majority of
its expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. Our initial determination is that the adoption
of the provisions of FIN 46 will not have a material impact upon our financial
condition or results of operations.

44

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. MINORITY INTERESTS

In February 2000, Tarragon acquired the interests of Robert C. Rohdie and
certain of his affiliates in ten apartment communities for a total value of up
to $10 million. Simultaneously, he became a member of our Board of Directors and
Chief Executive Officer of Tarragon Development Corporation, a wholly-owned
subsidiary of Tarragon. Mr. Rohdie, Tarragon's joint venture partner in the
development of these projects, contributed his equity interests to an operating
partnership formed by Tarragon in exchange for a preferred interest in the
operating partnership, initially valued at $5 million, based on the value of
five of the ten properties that had been completed. In 2001, on completion and
lease up of four identified apartment communities under construction or in
advanced stages of development planning at February 2000, Mr. Rohdie received
additional preferred interests in the operating partnership of $3.75 million.
Mr. Rohdie's preferred interest will be increased by an additional $1.25 million
for one final apartment community in May 2003.

Mr. Rohdie's preferred interest earns a guaranteed return. For 80% of the
preferred interest, it is a guaranteed fixed return of 5% for the first two
years, increasing by 1% per year until it reaches 10% in year seven. The
remaining 20% of the preferred interest is due an amount equal to cash dividends
payable, if any, on 311,779 shares of Tarragon common stock. Mr. Rohdie received
distributions of $130,000 in 2000, $267,500 in 2001, $375,889 in 2002, and
$97,500 in January 2003 in payment of his guaranteed return.

Mr. Rohdie can convert his preferred interest in the operating partnership into
356,318 shares of our common stock and preferred stock with a face value of $8
million and a like dividend to his guaranteed fixed return from the operating
partnership. If we do not have available an issue of preferred stock outstanding
at the time of the conversion, or at our discretion, we may pay the cash value
of Mr. Rohdie's preferred interest over three years. In February 2006, Mr.
Rohdie may elect to convert his preferred interest into cash, payable over three
years.

Mr. Rohdie's interest in the operating partnership is presented as a minority
interest. The guaranteed fixed return payable to Mr. Rohdie is being recorded
based on an annual effective yield of 8.51% and is reflected in "Minority
interests in income of consolidated partnerships" in the accompanying Statements
of Operations for the years ended December 31, 2002, 2001, and 2000.

Since April 2002, Tarragon has included in its Consolidated Financial Statements
its interests in Antelope Pines Estates, L.P., and Woodcreek Garden Apartments,
L.P., because of a change in control in these partnerships. These interests,
acquired in 1998 from affiliates of Mr. Dennis French, were previously accounted
for using the equity method. The affiliates of Mr. French continue to hold
preferred interests in the partnerships of $3.5 million for Antelope Pines
Estates, L.P., and $5.6 million for Woodcreek Garden Apartments, L.P. His
preferred interests earn preferred returns of 8% in 2002 and 9% in 2003 and
thereafter, payable quarterly. The affiliates of Mr. French have a preference on
allocations of net income from the partnerships to the extent of the quarterly
payments. If the preferred return is not paid when due, the affiliates of Mr.
French may elect to become the managing general partners and Tarragon's
interests would convert to that of limited partners. The interests of the
affiliates of Mr. French are presented as minority interests. The quarterly
payments of the preferred return and the preference on allocations of net income
are reflected in "Minority interests in income of consolidated partnerships" in
the accompanying Statement of Operations for the year ended December 31, 2002.

45

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES

Investments in and advances to partnerships and joint ventures consisted of the
following at December 31:

We exercise significant influence over but hold noncontrolling interests in each
of the above partnerships or joint ventures or our outside partners have
significant participating rights, as defined in the Financial Accounting
Standard Board's Emerging Issues Task Force's 96-16 Abstract. Therefore, we
account for our investments in these partnerships using the equity method.

Ansonia Apartments, L.P. Our joint venture partner in Ansonia Apartments is
Ansonia LLC, the principals of which are Robert Rothenberg, Saul Spitz, Richard
Frary, and Joel Mael. In 2001, the principals of Ansonia LLC met their
obligation to pay Tarragon 30% of the amounts it contributed to the partnership
plus a preferred return through a contribution, made in cash of $232,000 and
issuance of notes totaling $5.3 million in the aggregate. The notes bore
interest at 12%, were secured by pledges of partnership interests, and were
payable from 30% of Ansonia Apartments' net cash flow. In 2002, the notes were
paid in full, as described below. Messrs. Rothenberg and Spitz became executive
officers of Tarragon, and Mr. Rothenberg was appointed to our Board of
Directors, in September 2000.

46

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)

In 2002, Ansonia Apartments sold three properties for a total of $14.7 million
and recognized gains totaling $2.1 million. Tarragon's proportionate share of
the gains was $1.5 million. Aggregate net cash proceeds of $3.9 million were
distributed to the partners, with Tarragon receiving $2.8 million. Also in 2002,
Ansonia received aggregate net cash proceeds of $8.7 million from refinanced and
supplemental mortgages on six properties, of which $6 million was distributed to
Tarragon. From the cash proceeds of the property sales, the mortgage
refinancings, the supplemental mortgages, and from operations, distributions
were made for the accounts of the outside partners which were used first to pay
off their notes payable to Tarragon, with cash in excess of the note balances
paid to the partners. Tarragon's share of the distributions was in excess of our
investment balance, and $5.3 million is included in equity in income of
partnerships in the accompanying Consolidated Statements of Operations for the
year ended December 31, 2002.

During 2001, Ansonia received net cash proceeds of $7.1 million from refinanced
and supplemental mortgages on four properties, all of which was paid to
Tarragon, $5.6 million as distributions, with the remaining $1.5 million applied
to the outside partners' notes as interest and principal. Also in 2001, Ansonia
sold one property, receiving net cash proceeds of $2.6 million and realizing a
gain of $1.2 million. The net cash proceeds were paid to Tarragon, $1.8 million
as a distribution; the remainder was applied to the partners' notes as interest
and principal.

Antelope Pines Estates, L.P., and Woodcreek Garden Apartments, L.P. In 2002,
Tarragon has included in its Consolidated Financial Statements its interests in
Antelope Pines Estates, L.P., and Woodcreek Garden Apartments, L.P., because of
a change in control. See NOTE 2. "MINORITY INTERESTS."

Devonshire Apartment Owners, L.L.C. In February 2002, Devonshire sold it only
property, Villages at Gateway Apartments, for $33.2 million and recognized a
gain of $25.2 million. Net cash proceeds of $8.3 million were distributed to the
partners, with Tarragon receiving $8 million. Our share of the gain was $8.3
million, after reduction for income recognized in 2000 from distributions from
Devonshire in excess of our investment, and is included in equity in income of
partnerships in the accompanying Consolidated Statement of Operations for the
year ended December 31, 2002.

One Las Olas, Ltd. In 2002, One Las Olas closed a $90 million construction loan
and a $25 million mezzanine loan on its Las Olas River House condominium
development. Tarragon has guaranteed the construction loan, which had a balance
at December 31, 2002, of $6.9 million and matures in 2005. The construction loan
provides for a one-year extension.

Stone Creek Associates I, L.L.C. In December 2002, Stone Creek Apartments was
sold for $28 million, with a gain on sale of $6.8 million. From net proceeds of
$11.3 million, Tarragon received a distribution of $2.5 million. Our equity in
the income of the partnership, presented in the accompanying Consolidated
Statement of Operations for the year ended December 31, 2002, includes $1.4
million from the gain on sale and $347,000 of cash distributions in excess of
our investment.

Loan Guarantees for Unconsolidated Properties. Tarragon has guaranteed $7.8
million of mortgages on three unconsolidated properties. $925,000 relates to a
mortgage that matures in 2012, $2.8 million relates to a mortgage that matures
in 2003, and $4.1 million relates to a mortgage that matures in 2004. In
addition to the $90 million construction loan for the Las Olas River House
condominium development discussed above, we have guaranteed construction loans
totaling $78.4

47

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)

million on three other unconsolidated properties. The aggregate balance of the
other construction loans at December 31, 2002, is $71.4 million; the loans
mature in 2003 or 2004 and have one- or two-year extension options. Tarragon has
recorded no liability in connection with these guarantees.

Below are unaudited summarized financial data for Ansonia, Devonshire, and our
other partnership and joint venture interests as of and for the periods
indicated.

- ----------

(1) Includes revenue of $3,369.

48

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)

- ----------

(2) Includes revenue of $3,230.

49

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)

- ----------
(3) Includes revenue of $2,639.

NOTE 4. INVESTMENTS IN MARKETABLE EQUITY SECURITIES

In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," investments in marketable equity securities were considered
available for sale and carried at fair value. Unrealized holding gains and
losses were included in other comprehensive income (loss). As of December 31,
2000, we had disposed of all of such investments.

Unrealized holding gains and losses, securities sold, and realized losses on the
sale of marketable equity securities for the year ended December 31, 2000, were
as follows:

Unrealized holding gains............................................... $ 13
Unrealized holding losses.............................................. (35)
Marketable equity securities sold...................................... 488
Cost basis of marketable equity securities sold........................ 550
Realized losses on sale of marketable equity securities................ 62

50

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE

Notes, debentures, and interest payable consisted of the following at December
31:

Notes payable at December 31, 2002, bear interest at fixed rates from 5.93% to
10% per annum and variable rates currently ranging from .95% to 5.25% and mature
from 2003 through 2031. The mortgage notes are generally nonrecourse, with the
exception of construction loans, and are collateralized by deeds of trust on
real estate with an aggregate net carrying value of $425.3 million.

Debentures are unsecured, bear interest at 9% per annum, mature June 30, 2003,
and are redeemable at any time at 100% of the principal amount together with
accrued but unpaid interest. Interest is payable semiannually in June and
December. Debentures were issued in 1993 in connection with a dividend to
stockholders. In January 2003, Tarragon redeemed the debentures.

Other notes payable for both years include an $8.4 million loan secured by
interests in joint ventures and $6 million outstanding under a $10 million line
of credit that matures in December 2004. Advances under the line of credit bear
interest at 175 basis points over the 30-day LIBOR. Payments terms are interest
only monthly. Included with mortgage notes payable at December 31, 2002, is $1.7
million advanced under this line of credit. At December 31, 2002, we have $2.3
million available to borrow under the $10 million line of credit. We also have a
$2 million line of credit with no outstanding balance at December 31, 2002. This
line of credit matures in May 2004. Payment terms are interest only monthly at
240 basis points over the 30-day LIBOR. We also have $20 million available under
a line of credit with affiliates of William S. Friedman, our President and Chief
Executive Officer and Chairman of our Board of Directors. The outstanding
balance at December 31, 2001, of $11.8 million was included in Other notes
payable. There was no outstanding balance at December 31, 2002. For the terms of
this line of credit, see NOTE 10. "RELATED PARTY TRANSACTIONS."

51

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)

At December 31, 2002, scheduled principal payments on notes and debentures
payable are due as follows:

2003............................................... $ 61,322
2004............................................... 101,903
2005............................................... 37,508
2006............................................... 12,470
2007............................................... 36,942
Thereafter......................................... 176,880
------------
$ 427,025
============

NOTE 6. COMMON STOCK REPURCHASE PROGRAM

The Board of Directors has authorized a common stock repurchase program. In
2002, 2001, and 2000, Tarragon repurchased 1.1 million shares of its common
stock in open market and negotiated transactions at a cost of $13.3 million. Our
cumulative cost of common stock repurchases is $36.6 million. As of December 31,
2002, Tarragon had authorization to repurchase an additional 630,406 common
shares.

NOTE 7. 10% CUMULATIVE PREFERRED STOCK

The 10% Cumulative Preferred Stock pays a fixed dividend of $1.20 per year and
has a liquidation value of $12 per share. Shares may be redeemed at Tarragon's
option at any time after June 30, 2003, at the liquidation value plus a premium
of $0.50 per share which declines by $0.10 per share each year thereafter. No
mandatory redemption or "sinking fund" is required.

NOTE 8. EARNINGS PER COMMON SHARE

Following is a reconciliation of the weighted average shares of common stock
outstanding used in the computation of earnings per share and earnings per share
- - assuming dilution. The information presented for 2001 and 2000 has been
restated to give effect to the stock dividend paid in April 2002 and the
three-for-two stock split on February 2003.

52

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8. EARNINGS PER COMMON SHARE (Continued)

The convertible preferred interest of minority partner in consolidated
partnership represents the preferred interest of Mr. Rohdie in a partnership we
consolidate (see NOTE 2. "MINORITY INTERESTS.") His preferred interest became
convertible in February 2001. For the year ended December 31, 2002, his interest
was convertible into 356,318 shares. However, their effect is not reflected in
weighted average shares of common stock outstanding - assuming dilution because
their effect is antidilutive due to a loss from continuing operations allocable
to common stockholders.

On a weighted average basis, options to purchase 2,755,117 shares of common
stock at a price of $6.89 were outstanding during 2002. Their effect is not
reflected in the computation of weighted average shares of common stock
outstanding - assuming dilution because their effect is antidilutive due to a
loss from continuing operations allocable to common stockholders. During 2002,
the exercise prices of all options were less than the market prices of the
common stock on a weighted average basis. The options expire between 2005 and
2012, with a weighted average contractual life of 6.7 years.

On a weighted average basis, options to purchase 1,095,806 shares at $7.60 per
share and 1,550,002 shares at $7.51 per share in 2001 and 2000, respectively,
were outstanding during those years but were not reflected in the computation of
weighted average shares of common stock outstanding - assuming dilution because
their effect was antidilutive because the options' exercise prices were greater
than the average market prices of the common stock.

NOTE 9. STOCK OPTIONS

Tarragon has an Independent Director Stock Option Plan (the "Director Plan") and
a Share Option and Incentive Plan (collectively, the "Option Plans"). Under
Tarragon's Director Plan, Independent Directors receive annual awards of options
to purchase up to 2,000 shares of Tarragon common stock on January 1 of each
year. The options are immediately exercisable and expire on the earlier of the
first anniversary of the date on which the director ceases to serve as a
director or ten years from the date of grant.

Under Tarragon's Share Option and Incentive Plan, incentive stock options have
been awarded to officers and employees of Tarragon and its subsidiaries. These
stock options vest between one and five years from the date of grant and expire
between five and ten years thereafter, unless the optionees's relationship with
Tarragon terminates earlier. The number of shares granted, exercised, forfeited,
and outstanding under the Option Plans presented for the years ended December
31, 2001 and 2000, have been adjusted to reflect the effect of a 10% stock
dividend paid in April 2002 and a three-for-two stock split in February 2003.

As of December 31, 2002, a total of 145,022 shares of common stock were
available for grant under the Director Plan, and a total of 710,341 shares of
common stock were available under the Share Option and Incentive Plan.

Tarragon granted options to purchase 326,700 shares in connection with the
purchase of interests in Accord Properties Associates, LLC, in January 2001. See
NOTE 17. "ACQUISITION OF ACCORD PROPERTIES ASSOCIATES, LLC." The fair value of
these options, estimated using the Black-Scholes pricing model, represents a
portion of the purchase consideration in the acquisition of Accord.

53

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. STOCK OPTIONS (Continued)

The following table summarizes stock option activity:

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:

The following table summarizes information about the options outstanding at
December 31, 2002:

In January 2003, we granted options covering 15,000 shares under the Director
Plan, all of which were immediately exercisable, and 90,000 under the Stock
Option and Incentive Plan. Also, 2,904 of the options outstanding at December
31, 2002, were exercised in the first quarter of 2003.

54

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. RELATED PARTY TRANSACTIONS

Notes payable at December 31, 2001, included $11.8 million advanced by
affiliates of William S. Friedman, our President and Chief Executive Officer and
Chairman of our Board of Directors, under a $20 million line of credit
arrangement approved by the Board of Directors. The funds were used to
facilitate investments by Tarragon and the partnerships in which it holds
interests. Advances under the line of credit bear interest at LIBOR plus 1% per
annum, which totaled $228,000 in 2002, $397,000 in 2001, and $425,000 in 2000.
As of December 31, 2002, there was no balance outstanding. The line of credit
matures in January 2004.

As an accommodation to Tarragon, Mr. Friedman or his affiliates have pledged
approximately 1.2 million shares of Tarragon common stock to secure a line of
credit of $10 million with a bank. In addition, Mr. Friedman or his affiliates
have pledged approximately 300,000 shares of Tarragon common stock to secure a
line of credit of $2 million with another bank. Tarragon has indemnified Mr.
Friedman or his affiliates from any loss, cost, or liability associated with the
accommodation pledges or the lines of credit. As collateral for the
indemnification obligations, Tarragon has agreed to pledge to Mr. Friedman and
his affiliates an equal number of shares of Tarragon treasury stock.

During 2002, Tarragon received payment in full on notes receivable of $1.6
million and $541,000, respectively, from Robert P. Rothenberg, Chief Operating
Officer and a member of the Board of Directors of Tarragon, and Saul Spitz,
Executive Vice President of Acquisitions for Tarragon. These loans were made to
Messrs. Rothenberg and Spitz in connection with their required contributions to
Ansonia Apartments, L.P., in 2001. The notes were paid from the proportionate
share of distributions to Messrs. Rothenberg and Spitz from Ansonia. Tarragon
recognized interest income totaling $136,000 in 2002 and $130,000 in 2001 from
these two notes.

Tarragon provides property management services for several properties owned by
affiliates of Mr. Friedman. Tarragon received property management fees of
$28,000, $145,000, and $279,000 for 2002, 2001, and 2000, respectively, from
these properties. In addition, in 2002, Tarragon received $97,000 for services
in refinancing several properties owned by affiliates of Mr. Friedman.

NOTE 11. INCOME TAXES

No current or deferred income tax expense was recognized in 2002, 2001, or 2000
due to the application of net operating loss carryforwards. A reconciliation of
computed income taxes to actual income taxes follows:

55

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11. INCOME TAXES (Continued)

The following table discloses the components of the deferred tax amounts at
December 31, 2002, 2001, and 2000:

At December 31, 2002, Tarragon had Federal net operating loss carryforwards
(NOLs) of approximately $50.3 million. If not utilized, the NOLs will expire
between years 2003 and 2020. The future availability of the NOLs may be limited
if Tarragon experiences an ownership change of more than 50 percent, as defined
by IRS regulations. Tarragon's stock is publicly traded, and we cannot assure
that future trading will not result in an ownership change, as defined by IRS
regulations, which would limit availability of the NOLs. Due to these
uncertainties regarding possible utilization of the NOLs, as well as Tarragon's
history of operating losses, a valuation allowance was recorded to fully reserve
the computed net deferred tax assets.

56

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12. RENTALS UNDER OPERATING LEASES

Tarragon's rental operations include the leasing of office buildings and
shopping centers subject to leases with terms greater than one year. The leases
thereon expire at various dates through 2020. The following is a schedule of
future minimum rentals on non-cancelable operating leases as of December 31,
2002:

2003................................................. 9,182
2004................................................. 8,328
2005................................................. 6,633
2006................................................. 4,646
2007................................................. 3,523
Thereafter........................................... 17,517
---------
$ 49,829
=========

NOTE 13. COMMITMENTS AND CONTINGENCIES

Tarragon is party to various claims and routine litigation arising in the
ordinary course of business. We do not believe that the results of such claims
and litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position, or results of operations.

Tarragon is not aware of any liability relating to federal, state, and local
environmental laws, ordinances, and regulations that would have a material
adverse effect on our business, financial position, or results of operations.

The following is a schedule of future minimum lease payments due on a ground
lease in Paramus, New Jersey, that expires in 2061, and on leases for office
space occupied by Tarragon that expire in 2009. Under terms of the ground lease,
the minimum lease payments increase by 10% every fifth year. Tarragon has the
right to acquire the land on expiration of the lease at 70% of its fair market
value as determined at that time.

NOTE 14. INSURANCE AND OTHER CLAIMS

In October 2000, we completed reconstruction of a building at a property in
Tulsa, Oklahoma. We recognized income of $1.1 million representing the excess of
the insurance proceeds over the portion of the property's net carrying value
written off prior to rebuilding.

57

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. LITIGATION SETTLEMENT

In June 2001, Tarragon received a net distribution of $2.3 million, after
deducting attorney's fees and expenses, in connection with the settlement of a
derivative lawsuit.

NOTE 16. SEGMENT REPORTING

Our business is divided into three principal segments - the operation of our
investment portfolio, property development, and for-sale housing (formerly
referred to as homebuilding). Our investment portfolio of stabilized apartment
communities and commercial properties is the largest segment and the one whose
operation most resembles that of traditional real estate investment trusts.
Funds generated by the operation, sale, or refinancing of properties in the
investment portfolio support our overhead and finance our development
activities. The second segment is property development through which we create
new investment properties, primarily apartment communities, which, upon
stabilization, become part of our investment portfolio. Our activities in the
third segment, for-sale housing, encompass condominium conversions of existing
apartment communities and the development of town homes and new, high-rise
condominiums for sale to residents. In 2000 and 2001, assets in the for-sale
housing group were included in our development group. In 2002, because of
expansion of these activities, we began to report on the assets in the for-sale
housing category in a third segment. We reclassify properties from the
development division to the investment division once they have achieved
stabilized operations, as defined below. We reclassify properties for which we
have initiated renovation or reposition activities from the investment division
to the development division. We reclassify properties for which we have
initiated condominium conversion activities from the investment division to the
for-sale housing division.

o Development. Assets in this division are under development or in initial
lease-up, under renovation, or land held for development or sale.

o Investment. This division includes properties with stabilized operations.
We define these as completed properties with stabilized market rate
occupancy at market rents for comparable product in the property's market
and which are subject to neither renovation nor repositioning.

o For-Sale Housing. Assets in this division include luxury high-rise
condominiums, senior housing communities, and townhouses under development
and existing apartment communities under conversion to condominiums.

58

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

The following table summarizes apartment units and commercial square footage in
the development and investment divisions. The for-sale housing division includes
two consolidated properties under renovation and scheduled for sale as 284
condominium homes and a land parcel on which we plan to build a 131-unit
condominium project. It also includes a 42-story luxury condominium project
under development and a mixed-use retail and residential condominium project
owned through unconsolidated joint ventures.

The following tables summarize operating data through income (loss) from
continuing operations and identifiable assets of our real estate and investments
in partnerships for the three divisions and net operating income (rental revenue
less property operating expenses) and funds from operations for our Investment
Division. Dollar amounts in the tables are in thousands. Operating data for 2001
and 2000 have been restated to present the For-Sale Housing Division separately
from the Development Division consistent with the 2002 presentation.

We use funds from operations, as defined below, to measure the performance of
our Investment Division. We measure the performance of our Development and
For-Sale Housing Divisions primarily by net profit from third party and
intercompany sales. Intercompany sales for 2002 include transfers on January 1,
2002, from the Development Division to the Investment Division of properties
with 2,970 apartment units and 355,737 square feet of commercial space that were
stabilized during 2001, and transfers on April 1, 2002, from the Development
Division to the Investment Division of properties with 737 apartment units and
34,381 square feet of commercial space that were stabilized in the first quarter
of 2002. Intercompany sales for 2001 include transfers on January 1, 2001, from
the Development Division to the Investment Division of properties with 2,172
apartment units that were stabilized during 2000. The sale prices for these
properties were their estimated

59

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

fair market values as of the date of transfer, and the cost of sales was their
net carrying values as of the same date. Three commercial properties with
253,460 square feet were targeted for reposition in 2001. The January 1, 2001,
transfer of these properties from the Investment Division to the Development
Division is shown as an intercompany sale in the operating data for the year
ended December 31, 2001. The gain to the Investment Division is the excess of
the properties' aggregate estimated fair market values over their aggregate net
carrying values as of December 31, 2000. Gains on transfers of assets between
segments do not represent gains recognizable in accordance with GAAP and,
accordingly, are eliminated for purposes of consolidated reporting.

We allocate our general and administrative expenses among our three segments
based on the functions of the corporate departments. We allocate other corporate
items, including interest, management fee, and other revenue, minority interests
in income of consolidated partnerships, litigation settlement and insurance and
other claim income, and, prior to January 1, 2002, amortization of goodwill in
the same proportions as general and administrative expenses are allocated.

60

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

61

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

62

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

63

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

64

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

- ----------

(1) Tarragon considers funds from operations ("FFO") to be an appropriate
measure of the performance of our investment portfolio but not of our other
assets. FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), equals net income (loss), computed in
accordance with GAAP, excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures
are calculated to reflect FFO on the same basis. Effective January 1, 2002,
NAREIT clarified that FFO related to assets held for sale, sold, or
otherwise transferred and included in results of discontinued operations
should continue to be included in consolidated FFO. FFO reported above has
been computed in accordance with this clarification. We believe that a
clear understanding of the operating results of our investment portfolio
requires examining FFO along with net income (loss) as shown in the
Consolidated Financial Statements and Notes. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not an
alternative to net income as an indication of our operating performance or
to cash flow as a measure of liquidity, nor is it necessarily indicative of
cash available to fund cash needs and cash dividends. Our calculation of
FFO may be different from the methods used by other companies and,
therefore, may not be comparable to other companies.

65

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT REPORTING (Continued)

NOTE 17. ACQUISITION OF ACCORD PROPERTIES ASSOCIATES, LLC

Pursuant to an Acquisition Agreement dated November 15, 2000, but effective
January 1, 2001, Tarragon acquired 100% of the membership interest in Accord
Properties Associates, LLC, a Connecticut limited liability company, from Robert
Rothenberg, Saul Spitz, and Eileen Swenson. Accord managed the Ansonia portfolio
and other properties in Connecticut.

Tarragon acquired the membership interest in Accord for $300,000 in cash, 25,000
shares of Tarragon 10% Cumulative Preferred Stock, and options to acquire
326,700 shares of Tarragon common stock (adjusted to give effect to the February
2003 three-for-two stock split) issued to Messrs. Rothenberg and Spitz and Ms.
Swenson under Tarragon's Share Option and Incentive Plan. The options vest over
three years, have a ten-year term, and have an exercise price of $5.79. The fair
value of the options was estimated using the Black-Scholes pricing model. The
total fair value of the purchase consideration was $1.6 million.

Mr. Rothenberg, Ms. Swenson, and Mr. Spitz joined Tarragon as executive officers
in September 2000, and Mr. Rothenberg was appointed as a member of Tarragon's
Board of Directors on September 25, 2000.

NOTE 18. GOODWILL

Goodwill was recorded in connection with the acquisitions of Tarragon Realty
Advisors and Accord Properties Associates and, until December 31, 2001, was
amortized on the straight-line method. We adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," on January 1, 2002. SFAS No. 142 requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized as expenses of operations but rather carried on the balance sheet as
permanent assets. These assets are subject to at least annual assessment for
impairment by applying a fair-value-based test. We have determined there is no
transitional impairment loss at January 1, 2002.

Following is a presentation of income (loss) from continuing operations, net
income, earnings per common share, and earnings per common share - assuming
dilution for 2001 and 2000, adjusted to exclude amortization expense related to
goodwill.

66

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 18. GOODWILL (Continued)

67

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 19. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of the quarterly results of operations for the
years ended December 31, 2002 and 2001 (unaudited). The quarterly results of
operations for 2002 have been restated to present the operating results of a
property sold in December 2002 in discontinued operations in accordance with
SFAS No. 144 and to reflect the adoption of the fair value expense recognition
provisions of SFAS No. 123 effective July 1, 2002.

- ----------

(1) Restated for three-for-two stock split in February 2003.

68

TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 19. QUARTERLY RESULTS OF OPERATIONS (Continued)

- ----------

(1) Restated for 10% stock dividend paid in April 2002 and three-for-two stock
split in February 2003.

69

SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

70

SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

71

SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

72

SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

73

SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

(A) Includes property improvements, impairment charges, and amounts written off
in connection with sales of portions of certain properties.

(B) Property was under construction at December 31, 2002.

(C) The loan is collateralized by both portions of this property.

(D) This property has been pledged as additional collateral for the $1.95
million loan which financed the acquisition of the 820 land in Ft. Worth,
TX.

74

SCHEDULE III
(Continued)
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION

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

On August 8, 2002, Tarragon filed a Current Report on Form 8-K (dated August 5,
2002, and amended on August 16, 2002) to report the change of our independent
certified public accountants from Arthur Andersen LLP to Grant Thornton LLP.
There were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.

75

PART III

The information required by Part III has been omitted from this report. We will
file a definitive proxy statement with the SEC pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
Certain information to be included in the proxy statement is incorporated by
reference into this report. Only those sections of the proxy statement which
specifically address Items 10 through 13 below are incorporated by reference.
Such incorporation does not include the performance graph included in the proxy
statement.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2003.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2003.

ITEM 14. CONTROLS AND PROCEDURES

Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-K, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in reports that
the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no significant
changes in the Company's internal controls or other factors that could
significantly affect these disclosure controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

76

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

1. Consolidated Financial Statements

Reports of Independent Public Accountants - Grant Thornton LLP
Arthur Andersen LLP

Consolidated Balance Sheets - December 31, 2002 and 2001

Consolidated Statements of Operations -
Years Ended December 31, 2002, 2001, and 2000

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 2002, 2001, and 2000

Consolidated Statements of Cash Flows -
Years Ended December 31, 2002, 2001, and 2000

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Schedule III - Real Estate and Accumulated Depreciation

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. Exhibits

The following documents are filed as Exhibits to this report:

Exhibit
Number Description

2.1 Agreement and Plan of Merger dated June 5, 1998, by and
between Tarragon Realty Investors, Inc., and National Income
Realty Trust (incorporated by reference to Exhibit 3.6 to
Registration Statement No. 333-60527 on Form S-4).

2.2 Stock Purchase Agreement dated June 5, 1998, among Tarragon
Realty Investors, Inc., Tarragon Realty Advisors, Inc.,
William S. Friedman, and Lucy N. Friedman (incorporated by
reference to Exhibit 3.7 to Registration Statement No.
333-60527 on Form S-4).

3.1 Articles of Incorporation of Tarragon Realty Investors, Inc.
(incorporated by reference to Exhibit 3.2 to Form 8-K dated
July 10, 1997).

77

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Exhibit
Number Description

3.2 Bylaws of Tarragon Realty Investors, Inc. (incorporated by
reference to Exhibit 3.3 to Form 8-K dated July 10, 1997).

4.1 Indenture Agreement dated September 15, 1993, between Vinland
Property Trust and American Stock Transfer and Trust Company
(incorporated by reference to Exhibit 4.7 to Registration
Statement No. 33-66294 on Form S11).

10.1 Limited Liability Company Agreement of Tarragon Development
LLC dated February 7, 2000, between Tarragon Realty Investors,
Inc., and The Rohdie Family LLC (incorporated by reference to
Exhibit 10.1 to Form 10-K for the fiscal year ended December
31, 1999).

10.2 Employment Agreement dated February 7, 2000, between Tarragon
Realty Investors, Inc., and Robert C. Rohdie (incorporated by
reference to Exhibit 10.2 to Form 10-K for the fiscal year
ended December 31, 1999).

10.3 Employment Agreement dated September 25, 2000, between
Tarragon Realty Investors, Inc., and Robert P. Rothenberg
(incorporated by reference to Exhibit 10.7 to Form 10-K for
the fiscal year ended December 31, 2000).

21.1* Subsidiaries of the Registrant.

99.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2* Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.3* Consolidated Financial Statements of Ansonia Apartments, L.P.

* Filed herewith

(b) No reports on Form 8-K were filed during the fourth quarter covered by
this report or with respect to events occurring after the period
covered by this report but prior to the filing of this report.

78

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.

TARRAGON REALTY INVESTORS, INC.

Dated: March 17, 2003 By: /s/ William S. Friedman
----------------------- ---------------------------------
William S. Friedman
President, Chief Executive
Officer, Director, and Chairman
of the Board

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.

79

CERTIFICATION

I, William S. Friedman, President/CEO, certify that:

1. I have reviewed this annual report on Form 10-K of Tarragon Realty
Investors, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 17, 2003 /s/ William S. Friedman
----------------------------- ------------------------------------
William S. Friedman, President
and Chief Executive Officer

80

CERTIFICATION

I, Erin D. Pickens, Executive Vice President/CFO, certify that:

1. I have reviewed this annual report on Form 10-K of Tarragon Realty
Investors, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 17, 2003 /s/ Erin D. Pickens
----------------------------- ------------------------------------
Erin D. Pickens
Executive Vice President and
Chief Financial Officer

81

TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS

* Filed herewith

82