NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Significant Accounting Policies and Practices:

Description of the Business

The Intergroup Corporation ("Intergroup" or the "Company") was formed to buy, develop, operate and dispose of real property and to engage in various investment activities to benefit the Company and its shareholders.

The Company's Chairman and President is the Chairman and President of Santa Fe Financial Corporation ("Santa Fe") and two of the Company's directors and officers serve as directors of the three member Board of Directors of Santa Fe. As of June 30, 1997, the Company owned 37.5% and the Company's Chairman and President owned an additional 3.7% of the outstanding Common Stock of Santa Fe. Santa Fe was previously accounted for under the equity method.

During the year ended June 30, 1998 the Company acquired an additional 87,396 shares of Santa for cash and an additional 63,600 shares in exchange for a 55.4% interest in the Company's Cincinnati, Ohio property resulting in a 46.9% ownership in Santa Fe. On June 30, 1998, the Company's Chairman and President entered into a voting trust agreement with the Company giving the Company the power to vote the shares of the Santa Fe common stock that he owns. As a result of this agreement, the Company now has the power to vote 50.6% of the voting shares as of June 30, 1998 and accordingly has consolidated Santa Fe.

Santa Fe's revenue is primarily generated through its 65.5% interest in Portsmouth Square, Inc. ("PSI"), which derives its revenue primarily through its 49.8% interest in Justice Investors ("Justice"), a limited partnership. Justice owns the land improvements and leasehold known as the Financial District Holiday Inn, a 556-room hotel in San Francisco, California.

The acquisitions were accounted for under the purchase method. The results of operations of Santa Fe have been consolidated with those of the Company as if it had occurred at the beginning of the current fiscal year. Minority nterest includes preacquisition income of non Intergroup shareholders of both Santa Fe and Portsmouth prior to June 30, 1998. Equity income or (loss) of Santa Fe prior to June 30, 1998 included in earnings aggregated ($22,000) and $232,000 for the year ended June 30, 1998 and 1997, respectively.

Principles of Consolidation and Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation. Investments in companies in which the Company maintains an ownership interest of 20% to 50% or exercises significant influence are accounted for under the equity method. The cost method is used where the Company maintains ownership interest of less than 20% and does not exercise significant influence over the investee.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the reporting period. Actual results could differ from those estimates.

On June 5, 1998, the Company's Board of Directors approved a three-for-two stock split of the company's $.01 par value Common Stock in the form of a 50% stock dividend. The dividend was paid on June 30, 1998 to shareholders of record as of June 16, 1998. The result of the stock split increased the number of outstanding shares of the Company's $.01 par value Common Stock from 944,149 to 1,419,950 as of June 30, 1998. Where applicable, the Company's financial statements have been restated to reflect the impact of the stock split.

During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No.128 specifies the computation, presentation and disclosure requirements for basic and fully diluted earnings per share. The Company reported earnings per share in accordance with SFAS 128 for the year ended June 30, 1998 and 1997.

During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"). SFAS No. 129 reinstates various securities disclosure requirements previously in effect under Accounting Principals Board Opinion No. 15, which has been superseded by SFAS No. 128. The adoption of SFAS No. 129 did not have a material effect on the financial position or results of operations of the Company.

During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The adoption of SFAS No. 130 did not have a material effect on the financial position or results of operations of the Company.

During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. The adoption of SFAS No. 131 did not have a material effect on the financial position or results of operations of the Company.

During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 addresses the accounting for derivative instruments, including derivative instruments embedded in other contracts and hedging activities. The adoption of SFAS No. 133 did not have a material effect on the financial position or results of operations of the Company.

Real Estate and Depreciation

Investments in real estate are stated at cost. Depreciation of buildings, improvements and equipment is provided on the straight-line method based upon estimated useful lives of five to ten years for buildings and improvements and five to forty years for equipment. Expenditures for repairs and maintenance are charged to expense as incurred and improvements are capitalized.

The carrying value of real estate is assessed regularly by management based on the operating performance of each property, including the review of occupancy levels, operating budgets, estimated useful life and estimated future cash flows. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairment losses have been recognized during the years ended June 30, 1998 and 1997.

Marketable Securities

Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. All marketable securities are defined as trading securities or available-for-sale securities under the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities".

The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designations at each balance sheet date. Securities classified as available-for-sale are carried at fair market value, with the unrealized holding gains and losses reported as a separate component of shareholders' equity.

Certain securities are classified as trading securities when they are transferred to cover corresponding obligations of the same security sold short. These securities and the related obligations are marked to market with unrealized holding gains and losses included in earnings.

The cost of investments sold is determined on the specific identification or the first-in, first-out method.

Obligation for Securities Sold

Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in earnings.

Rental Income

Rental income is recognized as earned. Revenue recognition from apartment rentals commences when an apartment unit is placed in service and occupied by a rent-paying tenant.

Income Taxes

Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by statutory tax rates. Deferred tax expense is the result of changes in the asset and/or liability for deferred taxes.

Basic Earnings Per Share

Basic earnings per share is calculated based upon the weighted average number of common shares outstanding during each fiscal year.

Cash Equivalents and Restricted Cash

For purposes of the statement of cash flows, the Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement reserves of the operating properties and tenant security deposits that are invested in certificates of deposit.

2. Investment in Real Estate:

At June 30, 1998, investments in real estate consisted of twelve multi-family apartment projects located throughout the United States and approximately 27.8 acres of primarily unimproved land held for sale or development. All of the projects are completed operating properties that are directly owned by the Company and its subsidiary, Santa Fe.

3. Marketable Equity Securities:

Available-for-Sale

At June 30, 1998, the aggregate market value of marketable equity securities held for sale exceeded the aggregate cost by $8,356,000. The net unrealized gain is comprised of gross unrealized gains of $11,145,000 reduced by gross unrealized losses of $2,789,000. The net unrealized gain of $5,147,000, net of deferred taxes of $3,209,000, is included as a separate item in shareholders' equity. Proceeds from sales of securities were $48,591,000 and $16,422,000 during the years ended June 30, 1998 and 1997, respectively. Gross realized gains and losses, determined using FIFO costs, were $12,864,000 and $10,513,000, respectively.

Trading

For the year ended June 30, 1998 and 1997 gross gains from transfers of marketable equity securities from available-for-sale classification to a trading classification aggregated $1,069,000 and $3,297,000 respectively. Proceeds from sales of securities were $7,228,000 and $3,256,000 during the years ended June 30, 1998 and 1997, respectively. The net unrealized holding gain or (loss) for both the trading securities and the corresponding obligation for sale of securities aggregated ($1,449,000) and $39,000 at June 30, 1998 and 1997, respectively.

Securities sold but not yet purchased included $16,000 related to naked short positions as of June 30, 1998. There were no naked positions as of June 30, 1997.

4. Investment in Justice:

The consolidated accounts include a 49.8% interest in Justice Investors ("Justice"), a limited partnership. Justice owns the land improvements and leasehold known as the Financial District Holiday Inn, a 556-room hotel in San Francisco, California. PSI is both a limited and general partner in Justice and records its investment in Justice on the equity basis.

Condensed financial statements for Justice Investors are as follows.

Total current assets                                        $ 1,126,000
Property, plant and equipment, net of accumulated
 depreciation                                                 5,772,000
Loan fees and deferred lease costs, net of
 accumulated depreciation                                       209,000
   Total Assets                                             -----------
                                                            $ 7,107,000
                                                            ===========

Liabilities and partners' capital                           $    79,000
Total current liabilities                                     2,012,000
Long-term debt                                                5,016,000
                                                            -----------
   Total Liabilities and Partners' Capital                  $ 7,107,000
                                                            ===========
                          Justice Investors
        Condensed Results of Operations for the year ended June 30,

                                               1998             1997
                                          -----------     ------------
Revenues                                  $ 6,861,000     $  5,727,000
Net Income                                  5,840,000        4,605,000

5. Other Investments:

Other investments primarily consist of investments in corporations and securities that are not traded on any exchange.

6. Mortgage Notes Payable:

At June 30, 1998, the Company had mortgage debt outstanding of $39,044,000. Mortgage debt includes amortizing first mortgages maturing from May 2000 through December 2008 of $39,018,000 at fixed rates ranging from 6.734% to 9.500%, and an amortizing second mortgage of $26,000 maturing in February 2001. Each mortgage is secured by its respective land and building. The annual combined aggregate principal payments on the mortgage notes payable for the five-year period commencing July 1, 1998 are as follows:

Year Ending June 30,
         1999               $    523,000
         2000                  5,784,000
         2001                    508,000
         2002                    543,000
         2003                  4,981,000
     Thereafter               26,705,000
                             -----------
        Total               $ 39,044,000
                             ===========

7. Due to Securities Broker:

Various security brokers have advanced funds for the purchase of, and secured by, marketable securities under standard margin agreements in accordance with and subject to the limitations of 17CFR Section 240.15c3-3 under the Securities Exchange Act of 1934 and Section #220.6 of Regulation T issued by the Board of Governors of the Federal Reserve System. The interest rate on advances or cash on deposit can vary daily with money market rates. The interest rate on margin balances is based on the Federal Funds rate plus 0.875% (7.125% at June 30, 1998). The interest rate on cash or deposits is based on the Federal Funds rate less 0.5% (5.75% at June 30, 1998). The interest rate on interest rebates in connection with short positions is based on the Federal Funds rate less 0.375% (5.875% at June 30, 1998).

8. Income Taxes:

The provision for the Company's income taxes is comprised of the following:

                                                                           Year Ended June 30,
                                               1998             1997
                                          -----------       -----------
Current tax expense                        $  978,000       $   106,000
Deferred taxes expense (benefit)              (44,000)        1,333,000
                                          -----------       -----------
                                           $  934,000       $ 1,439,000
                                          ===========       ===========

The components of the deferred tax liability as of June 30, 1998, are as follows:

Marketable securities basis differences                     $ 2,519,000
Depreciation and fixed asset basis differences                1,530,000
Minority interests                                              235,000
                                                             ----------
   Gross deferred tax liabilities                             4,284,000
                                                             ----------
State income taxes                                              (48,000)
NOL and credit carryovers                                      (870,000)
Miscellaneous                                                  (320,000)
                                                             -----------
   Gross deferred tax (assets)                               (1,238,000)

Net deferred tax liability                                  $ 3,046,000
                                                            ============

The provision for income taxes differs from the amount of income tax computed by applying the federal statutory income tax rate to income before taxes as a result of the following differences:

                                                                                                              Year Ended June 30,
                                                       1998       1997
                                                  ----------  -----------
Income tax at federal statutory rates             $  635,000  $ 1,125,000
State income taxes, net of federal benefit           122,000      203,000
Change in valuation allowance and restatement
 of deferred liabilities                               2,000      111,000
Other                                                175,000            -
                                                   ---------  -----------
   Total income tax expense                        $ 934,000  $ 1,439,000
                                                   =========  ===========

At June 30, 1998, the Company has federal and state net operating loss carryforwards of approximately $2,313,000 and $2,446,000, respectively. The carryforwards expire in varying amounts through the year 2011. The tax laws related to the utilization of loss carryforwards are complex and the amount of the Company's loss carryforward that will ultimately be available to offset future taxable income may be limited.

9. Supplemental Cash Flow Information:

Cash paid for margin interest for the year ended June 30, 1998 and 1997 was $994,000 and $368,000, respectively. Cash paid for interest on mortgage notes payable for the year ended June 30, 1998 and 1997 was $2,972,000 and $2,742,000, respectively. Cash paid for income taxes aggregated $1,126,000 and $162,000 for the year ended June 30, 1998 and 1997, respectively.

10. Stock Options and Employee Stock Ownership Plan and Trust:

During the year ended June 30, 1998 the Company granted options to a consulting firm to purchase 15,000 shares of its Common Stock, at exercise prices ranging from $33 to $67 per share giving effect to the three-for-two stock split which occurred in June 1998. The options vested immediately and expire on February 22, 2001.

In April 1986, the Company established an Employee Stock Ownership Plan and Trust ("ESOP" or the "Plan"), effective July 1985, which enabled eligible employees to receive an ownership interest in stock of the Company. The Company did not make ESOP contributions during fiscal 1998 or 1997. The Company distributed 777 shares to terminated employees during fiscal 1998 and made no stock distributions during fiscal year 1997.

11. Stock Split in the Form of a Dividend:

On June 5, 1998 the Board of Directors approved a three-for-two stock split of the Company's $.01 par value Common Stock in the form of a stock dividend. The dividend was paid in shares of the Company's Common Stock on June 30, 1998 to shareholders of record as of June 16, 1998. In the future the Company may elect to declare dividends or retain all or a portion of the annual earnings to finance expansions or acquisitions or to establish a reserve for unexpected contingencies, capital requirements and operating expenses.

12. Commitments and Contingencies:

The lease on the Company's corporate headquarters expires May 31, 1999. Rent expense was approximately $166,000 in 1998 and $162,000 in 1997. Minimum annual rentals under all leases aggregate $172,000 for the year ending June 30, 1999.

On February 22, 1995, the Company was named as a defendant in a shareholders' derivative suit filed against Santa Fe and certain directors of Santa Fe, arising out of the Company's investment in Santa Fe. On December 31, 1996, a final judgment was entered in favor of the Company. On June 9, 1997, the Company was awarded $296,000 in attorneys' fees and costs as a prevailing party in that litigation, effective as of April 25, 1997. The judgment and the award of attorneys have been appealed. The action will continue to be vigorously defended and every effort will be made by the Company to recover the fees and costs it incurred.

On July 3, 1997, the Court of Appeal, granted the director defendants' petition for a writ of mandate and directed the trial court to vacate its prior order denying the director defendants' motion for summary judgment and to enter a new order granting the motion. The Court of Appeal's decision became final on August 2, 1997; however, plaintiffs filed a petition for review to the California Supreme Court on August 12, 1997. That petition was denied by the Supreme Court on October 15, 1997.

As prevailing parties, the director defendants and Santa Fe also made application to the Superior Court for recovery of the attorneys' fees and costs expended in their successful defense of this litigation. On March 13, 1998, the trial court confirmed a prior tentative ruling and granted the applications for attorneys' fees and costs in the total amount of $936,000. On March 24, 1998 a judgment was entered in favor of the director defendants and Santa Fe which made the award of costs effective as of February 20, 1998. That judgment was appealed and is waiting to be briefed.

On March 27, 1998, a wrongful termination action was filed. The Complaint was filed by an ex-employee, officer and director against the Company and its President and Chairman. The Complaint, as originally filed, sought an award of back and future pay, employee benefits, restitution, unspecified punitive and special damages and attorneys' fees. In June of 1998, a demurrer to the Complaint was sustained without leave to amend, with respect to plaintiff's tort claim for breach of implied covenant of good faith. On or about August 3, 1998, a demurrer to a First Amended Complaint was sustained without leave to amend with respect to plaintiff's claim of violation of section 17200 et seq. of the California Business and Professions Code. The case is in its very early stages and discovery has just commenced, so it is not possible to predict the outcome at this time.

As an officer and director, the Company's President and Chairman has requested indemnification from the Company as permitted by law and under the Bylaws and Articles of the Company. The case will be vigorously defended and there may be insurance coverage for all or part of the costs of the defense of this action and for all or part of any liability that may be imposed on the Company.

On March 27, 1996 an action was filed against the Company and others arising out of alleged construction defects in two Indio, California apartment complexes formerly owned by the Company. The Complaint alleges damages in the amount of $2,000,000. The Company has filed cross-complaints against the subcontractors and the architect. The case is still in its early stages and only limited discovery has taken place. Accordingly, it is not possible to assess what exposure, if any, the Company may have at this time. There may be insurance coverage for all of part of the costs of defense and for all or part of any liability that may be imposed on the Company.

On October 15, 1997, a related action for Declaratory Relief was filed by the insurance carrier alleging that the Company has no coverage with respect to at least one of the apartment complexes. The Company has filed an answer and cross-complaint for breach of contract, breach of the covenant of good faith and fair dealing and for declaratory relief. Truck Insurance Company has filed a motion to strike the punitive damages claims in the cross-complaint, which was heard on September 10, 1998 and was taken under submission by the court. To date, no discovery has occurred. The Company intends to vigorously defend against the complaint and prosecute its cross-complaint in this action. It is not possible to predict the outcome of this action at this time.

The Company maintains a "phantom" stock program, which provides for the issuance of 60,000 units with each unit equivalent to one share of Common Stock. Participating members of the program are credited with the incremental value in shares of Common Stock and dividend equivalents over a five-year period from the date of award. One-fifth of such credits in the participants' accounts will vest on the first anniversary date of the award and an additional one-fifth vest on each of the next four anniversary dates. As of June 30, 1998, no granted units are outstanding.

On January 13, 1998 the Company's Board of Directors approved the repurchase, from time to time, of up to 150,000 shares of its Common Stock. Such repurchases, together with previously authorized repurchases of up to 72,000 shares which remain under a prior repurchase program, may be made in the discretion of management and depending upon market conditions. The Company acquired 14,250 and 8,550 shares during the years ended June 30, 1998 and 1997, respectively.

13. Related Party Transactions:

In May 1996, the Company's President exercised options to purchase 250,000 shares of Common Stock at a price of $11.50 per share through a full recourse note due the Company on demand, but in no event later than May 2001. The note bears interest floating at the lower of 10% or the prime rate (8.50% at June 30, 1998) with interest payable quarterly. The balance of the note receivable of $1,437,500 is reflected as a reduction of shareholders' equity at June 30, 1998. During the fiscal year ended June 30, 1998 and 1997, the President of the Company made interest payments of approximately $122,000 and $134,000, respectively in connection with the note relating to his 1996 exercise of stock options.

The Company's President is the trustee of the Employee Stock Ownership Plan. In his role as trustee, he has the power to vote the shares of stock allocated to participants' accounts when directions are not provided to the trustee on a timely basis.

14. Subsequent Event:

On August 18, 1998 the Company entered into a contract to sell its Harrisburg, Pennsylvania property for gross sales price of $3,763,000. The sale is expected to close in early October, 1998.

On August 31, 1998 the Company's Board of Directors authorized, subject to shareholder approval, an amendment to the Company's Certificate of Incorporation which would increase the number of shares of Common Stock, $.01 par value per share that the Company is authorized to issue from 1,500,000 shares to 4,000,000 shares. The proposed amendment would also increase the authorized number of shares of Preferred Stock and authorize a Class A Common Stock. The Board of Directors also set a date of October 2, 1998, for a Special Meeting of Shareholders to consider and vote on the proposed amendment. On August 31, 1998 the Company's Board of Directors declared a three-for-two forward stock split of the Company's Common Stock, $.01 par value per share, to be paid in the form of a stock dividend on October 9, 1998 to shareholders of record as of September 23, 1998. The payment of the stock dividend will be subject to shareholder approval of the amendment to the Company's Certificate of Incorporation. These actions are being taken to help the Company achieve and sustain long term compliance with the applicable maintenance criteria for continued listing on the NASDAQ National Market.

15. Extraordinary Item:

During the year ended June 30, 1998 the Company refinanced three of its properties. The Company incurred $436,000 in prepayment penalties and $111,000 in expense related to the write-off of deferred loan costs associated with loans paid off in connection with the refinancings. These expenses are partially offset by a $219,000 income tax benefit.