INCOME OPPORTUNITY REALTY INVESTORS INC /TX/ - 10-Q Quarterly Report

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

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2003
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Commission File Number 1-14784
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
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(Exact Name of Registrant as Specified in Its Charter)

NEVADA 75-2615944
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1800 Valley View Lane, Suite 300, Dallas, Texas, 75234
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(Address of Principal Executive Offices) (Zip Code)

(469) 522-4200
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(Registrant's Telephone Number,
Including Area Code)

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ]. No [X].

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 [ ].

Common Stock, $.01 par value 1,438,945
- ---------------------------- ---------------------------------
(Class) (Outstanding at November 1, 2003)

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of Income Opportunity Realty Investors, Inc. ("IORI"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
IORI's consolidated financial position, consolidated results of operations and
consolidated cash flows at the dates and for the periods indicated, have been
included.

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS

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

2

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED

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

3

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

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

4

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

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

5

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended September 30, 2003

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

6

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

7

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

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

8

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
Operating results for the nine month period ended September 30, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the Consolidated Financial
Statements and notes thereto included in IORI's Annual Report on Form 10-K for
the year ended December 31, 2002 (the "2002 Form 10-K"). Dollar amounts in
tables are in thousands, except per share amounts.

Certain balances for 2002 have been reclassified to conform to the 2003
presentation.

On January 1, 2002, IORI adopted Statement 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement superceded
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS No. 121") and Accounting Principles
Board 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" ("APB 30"), for business
segments that are to be disposed. SFAS 144 retains the requirements of SFAS No.
121 relating to the recognition and measurement of an impairment loss and
resolves certain implementation issues resulting from SFAS No. 121. The adoption
of SFAS No. 144 did not have a material impact on the consolidated financial
position or results of operations of IORI.

In April 2002, the FASB issued Statement 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction"
("SFAS No. 145"). Statement 4, "Reporting Gains and Losses from Extinguishment
of Debt" ("SFAS No. 4"), required that gains and losses from the extinguishment
of debt that were included in the determination of net income be aggregated and,
if material, classified as an extraordinary item. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 will require IORI to reclassify prior
period items that do not meet the extraordinary classification. The provisions
of SFAS No. 145 that related to the rescission of SFAS No. 4 became effective in
fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is not
expected to have a material impact on the consolidated financial position or
results of operations of IORI.

9

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 1. BASIS OF PRESENTATION (CONTINUED)

In June 2002, the FASB issued SFAS No. 146, "Accounting for costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force ("EITF") Issue No. 94-3. IORI has adopted
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was recognized at the date of
a company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized.

Effective June 30, 2003 IORI terminated its Advisory Agreement with Basic
Capital Management, Inc. ("BCM"). BCM had served as IORI's advisor since 1989.
On July 1, 2003 IORI entered into an Advisory Agreement with Syntek West, Inc.
("Syntek West"), the owner and holder of approximately 54.3% of IORI's common
stock. All of the issued and outstanding stock of Syntek West is owned by
Gene Phillips. The new advisory agreement with Syntek West contains the same
terms as the old one with BCM.

NOTE 2. REAL ESTATE

In 2003, IORI sold the following property:

In 2002, IORI sold the following property:

10

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 3. NOTES AND INTEREST RECEIVABLE

In October 2003, IORI sold One Hickory Centre and Traveler's Land to Encino
Executive Plaza, a related party. As a result of this transaction, IORI has
obtained a wrap note receivable for approximately $35 million related to the
sale of the property.

In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty
Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owns
the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota.

ARI guaranteed that the asset would produce at least a 12% return annually of
the purchase price for a period of three years from the purchase date. If the
asset failed to produce the 12% return, ARI would pay IORI any shortfall. In
addition, if the asset failed to produce the 12% return for a calendar year,
IORI could require ARI to repurchase the shares of Rosedale for the purchase
price. Management classified this related party transaction as a note receivable
from ARI. In the first quarter of 2002, after reviewing the property's fair
value after costs to sell, even though ARI had guaranteed the 12% return, IORI
recognized a provision for loss on the note receivable of $767,000. In December
2002, the Rosedale Towers Office Building was sold for $7.2 million. ARI
received $3.5 million in proceeds after the payment of the first lien debt and
various closing costs and IORI recognized an additional loss of $801,000 on its
note. The $3.5 million received by ARI is included within other assets in the
accompanying December 31, 2002 Consolidated Balance Sheet. In the second quarter
of 2003, IORI received a $2.0 million paydown from ARI on the receivable. In the
third quarter of 2003, the remaining $1.5 million was collected.

In February 2002, IORI funded a $2.0 million mortgage loan as a participation
agreement with Transcontinental Realty Investors, Inc. ("TCI"), a related party.
The loan was secured by a second lien on a retail center in Montgomery County,
Texas. The note receivable bore interest at 16.0% per annum, required monthly
interest only payments of $47,000 and matured in February 2002. In February
2002, the loan was extended until April 2002. In April 2002, IORI extended the
loan until July 2002, receiving $8,500 as an extension fee. In July 2002, the
loan was extended until September 2002, with IORI receiving $8,500 as an
extension fee. Of the $2.0 million in principal payments, $1.5 million was
received by TCI and $500,000 was received by BCM, an affiliate and, until July
1, 2003, the advisor to IORI. These amounts are included within receivable from
affiliates in the accompanying Consolidated Balance Sheets.

11

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 4. OTHER ASSETS

Related Party. From time-to-time, IORI and its affiliates and related parties
have made advances to each other to fund their respective operations, which
generally have not had specific repayment terms and have been reflected in
IORI's financial statements as other assets.

At September 30, 2003, IORI had receivables of $0, $0, $4.3 million, and $6.5
million from BCM, ARI, and TCI, and Syntek West respectively.

NOTE 5. NOTES AND INTEREST PAYABLE

In August 2003, IORI refinanced the loan for the 2010 Valley View Lane
property, from Town North Bank in the amount of $2,400,000 bearing an interest
rate of 6.25%, payable in monthly installments of $17,936, with the remaining
principal and interest payments due in October 2008, collateralized by the
building.

In April 2002, IORI sold all of its residential properties to partnerships
controlled by Metra Capital, LLC ("Metra"). These properties include: the 60
unit Brighton Court, the 92 unit Del Mar, the 68 unit Enclave, the 280 unit
Meridian, the 57 unit Signature, and the 114 unit Sinclair, located in Midland,
Texas, and the 106 unit Treehouse, located in San Antonio, Texas. Innovo Realty,
Inc., a subsidiary of Innovo Group, Inc. ("Innovo") is a limited partner in the
partnerships that purchased the properties. Joseph Mizrachi, a director until
July 2003 of ARI, a related party, controls approximately 11.67% of the
outstanding common stock of Innovo. The sale constituted 23.39% of the total
assets of IORI as of December 31, 2001. The sales price for the properties
totaled $26.2 million. IORI received $5.4 million in cash after the payoff of
$16.1 million in debt and various closing costs. Management has determined to
account for this sale as a refinancing transaction, in accordance with SFAS No.
66, "Accounting for Sales of Real Estate." IORI will continue to report the
assets and the new debt incurred by the Metra partnerships on the IORI financial
statements. The new debt on the properties totals $21.2 million, bears interest
at 7.57% per annum, requires monthly interest only payments of $135,000 and
matures in May 2012. IORI also received $5.2 million of 8% non-recourse,
non-convertible Series A Preferred Stock ("Preferred Shares") of Innovo.

The dividend on the Preferred Shares will be funded entirely and solely through
member distributions from cash flows generated by the operation and subsequent
sale of the sold properties. In the event the cash flows for the properties are
insufficient to cover the 8% annual dividend, Innovo will have no obligation to
cover any shortfall.

The Preferred Shares have a mandatory redemption feature, and are redeemable
from the cash proceeds received by Innovo from the operation and sale of the
properties. All member distributions that are in excess of current and accrued
8% dividends, must be used by Innovo to redeem the Preferred Shares. Since
redemption of these shares is subject to the above future events, management has
elected to record no basis in the Preferred Shares.

12

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 6. RELATED PARTY TRANSACTIONS

On September 19, 2002, IORI's Board of Directors authorized the Chief Financial
Officer of IORI to advance funds either to or from IORI through BCM, in an
amount up to $5.0 million on the condition that such advances shall be repaid in
cash or transfers of assets within 90 days.

The following table reconciles the beginning and ending balances of Accounts
Receivable from Affiliates as of September 30, 2003.

Returns on Metra Properties. As described more fully in Note 5, IORI sold all of
its residential properties during 2002 to partnerships controlled by Metra. The
partnership agreement for each of these partnerships states that the Metra
Partners, as defined, receive cash flow distributions at least quarterly in an
amount sufficient to provide them with a fifteen percent cumulative compounded
annual rate of return on their invested capital, as well as a cumulative annual
amount of 0.50% of the average outstanding balance of the mortgage indebtedness
secured by any of these residential properties. These distributions to the Metra
Partners have priority over distributions to any of the other partners.

13

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 7. OPERATING SEGMENTS

Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of general and administrative expenses. Management
evaluates the performance of each of the operating segments and allocates
resources to each of them based on their net operating income and cash flow.
Items of income that are not reflected in the segments are interest, income or
(loss) of equity partnerships, gain on sale of operations, and recovery of loss
provision on receivable from related party which totaled a loss of $1,000 and
income of $2.2 million for the three and nine months ended September 30, 2003,
and income of $246,000 and $7.7 million for the three and nine months ended
September 30, 2002. Expenses that are not reflected in the segments are general
and administrative expenses, advisory and net income fees, provision for losses,
impairment loss on real estate held for sale, and discontinued operations which
totaled $1.1 million and $3.5 million for the three and nine months ended
September 30, 2003, and $1.6 million and $5.2 million for the three and nine
months ended September 30, 2002.

Excluded from operating segment assets are assets of $15.5 million at September
30, 2003, and $16.8 million at September 30, 2002, which are not identifiable
with an operating segment. There are no intersegment revenues and expenses and
all business is conducted in the United States.

Presented below is the operating income of each operating segment for the three
and nine months ended September 30, 2003 and 2002, and each segment's assets at
September 30.

14

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 7. OPERATING SEGMENTS (CONTINUED)

15

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 7. OPERATING SEGMENTS (Continued)
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NOTE 8. PROVISION FOR ASSET IMPAIRMENT

For the three and nine months ended September 30, 2002, IORI recorded an asset
impairment of $366,000, representing the write down of the Westlake Village
Office Building in Westlake, California to its estimated fair value. The
property was sold in September 2002 for $3.8 million.

For the nine months ended September 30, 2003, IORI recorded an asset impairment
of $688,000, representing the write down of the 5600 Mowry Office Building in
Newark, California to its estimated fair value. The property was sold in July
2003 for $5 million.

NOTE 9. ADVISORY FEES, PROPERTY MANAGEMENT, ETC.

Revenue, fees and cost reimbursements to BCM and Syntek West and its affiliates
for the nine months ended:

* Net of property management fees paid to subcontractors, other than GS Realty,
Inc., which is owned by an affiliate of BCM and Syntek West.

16

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 10. DISCONTINUED OPERATIONS

Effective January 1, 2002, IORI adopted Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
which established a single accounting model for the impairment or disposal of
long-lived assets including discontinued operations. This statement requires
that the operations related to properties that have been sold, or properties
that are intended to be sold, be presented as discontinued operations in the
statement of operations for all periods presented, and the properties intended
to be sold are to be designated as "held for sale" on the balance sheet. In the
event of a future asset sale, IORI is required to reclassify portions of
previously reported operations to discontinued operations within the Statements
of Operations.

For the three months and nine months ended September 30, 2003 income from
discontinued operations relates to properties sold or to be sold in 2003.

For the three months and nine months ended September 30, 2002, income from
discontinued operations relates to two properties that IORI sold during 2002 and
a property that IORI sold in 2003. The following table summarizes revenue and
expense information for the properties sold.

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

17

INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 11. COMMITMENTS AND CONTINGENCIES

Liquidity. Although management anticipates that IORI will generate excess cash
from commercial operations in 2003 due to increased rental rates and occupancy
at its properties, such excess, however, will not be sufficient to discharge all
of IORI's debt obligations as they mature. IORI has $6.4 million in debt due
within one year. Management will need to refinance or sell real estate and incur
additional borrowings against real estate to meet IORI's cash requirements.

Litigation. IORI is involved in various lawsuits arising in the ordinary course
of business. Management is of the opinion that the outcome of these lawsuits
will have no material impact on IORI's financial condition, results of
operations or liquidity.

NOTE 12. SUBSEQUENT EVENTS

On October 14, 2003, IORI purchased One Hickory Centre from TRI, for
$12,200,000, by delivery of a promissory note of such amount secured by the
property. Subsequent to the purchase, IORI sold One Hickory Centre for
approximately $12.2 million and 202 acres of land referred to as Traveler's Land
for approximately $25 million to Encino Executive Plaza, Ltd., a related party
in a tax free transaction structured as an IRS Code Section 1031 exchange
between related parties. As a result of this transaction, IORI has obtained a
wrap note receivable related to the sale in the amount of approximately $35
million, and received cash in the amount of approximately $1.9 million, and
deferred a gain of approximately $203,000.

18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

INTRODUCTION

IORI invests in equity interests in real estate through acquisitions, leases and
partnerships and also invests in mortgage loans. IORI is the successor to a
California business trust organized on December 14, 1984, which commenced
operations on April 10, 1985.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that are both important to the
presentation of IORI's financial condition and results of operations and require
management's most difficult, complex or subjective judgments. IORI's critical
accounting policies relate to the evaluation of impairment of long-lived assets
and the evaluation of the collectibility of accounts and notes receivable.

If events or changes in circumstances indicate that the carrying value of a
rental property to be held and used or land held for development may be
impaired, management performs a recoverability analysis based on estimated
undiscounted cash flows to be generated from the property in the future. If the
analysis indicates that the carrying value is not recoverable from future cash
flows, the property is written down to estimated fair value and an impairment
loss is recognized. If management decides to sell rental properties or land held
for development, management evaluates the recoverability of the carrying amounts
of the assets. If the evaluation indicates that the carrying value is not
recoverable from estimated net sales proceeds, the property is written down to
estimated fair value less costs to sell and an impairment loss is recognized
within income from continuing operations. IORI's estimates of cash flow and fair
values of the properties are based on current market conditions and consider
matters such as rental rates and occupancies for comparable properties, recent
sales data for comparable properties and, where applicable, contracts or the
results of negotiations with purchasers or prospective purchasers. IORI's
estimates are subject to revision as market conditions and IORI's assessments of
them change.

IORI's allowance for doubtful accounts receivable and notes receivable is
established based on analysis of the risk of loss on specific accounts. The
analysis places particular emphasis on past due accounts. Management considers
such information as the nature and age of the receivable, the payment history of
the tenant or other debtor, the financial condition of the tenant or other
debtor and IORI's assessment of its ability to meet its lease or interest
obligations. IORI's estimate of the required allowance, which is reviewed on a
quarterly basis, is subject to revision as these factors change and is sensitive
to the effects of economic and market conditions.

19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents at September 30, 2003, were $359,000, compared with
$10,000 at December 31, 2002. IORI's principal sources of cash have been, and
will continue to be property operations, proceeds from property sales,
financings and refinancings and partnership distributions. Management
anticipates that IORI will generate excess cash from operations in 2003 due to
increased rental receipts at its properties, however, such excess will not be
sufficient to discharge all of IORI's debt obligations as they mature.
Management intends to selectively sell income producing real estate, refinance
real estate and incur additional borrowings against real estate to meet its cash
requirements.

The Company reported a net loss of $1.3 million for the nine months ended
September 30, 2003, which included the following non-cash charges: depreciation
and amortization of $1.4 million, loss of equity partnerships of $23,000, loss
on sale of real estate of $688,000, increase in other assets of $1.2 million,
decrease of interest receivable of $85,000, decrease in other liabilities of
$178,000, and decrease in interest payable of $5,000. Net cash provided by
operating activities amounted to $1.7 million for the nine months ended
September 30, 2003. During the nine months ended September 30, 2003 the increase
in other assets was due to an increase in accounts receivable from affiliates
and the increase in other liabilities was due to an increase in accrued property
taxes. Net cash used in investing activities of $400,000 was comprised of real
estate improvements of $400,000. Net cash used in financing activities of
$995,000 was comprised of payments on notes payable of $828,000 and deferred
financing costs and other costs of $167,000.

Management reviews the carrying values of IORI's properties at least annually
and whenever events or a change in circumstances indicate that impairment may
exist. Impairment is considered to exist if, in the case of a property, the
future cash flow from the property (undiscounted and without interest) is less
than the carrying amount of the property. If impairment is found to exist, a
provision for loss is recorded by a charge against earnings. The property review
generally includes selective property inspections, discussions with the manager
of the property, visits to selected properties in the area and a review of the
following: (1) the property's current rents compared to market rents, (2) the
property's expenses, (3) the property's maintenance requirements, and (4) the
property's cash flows.

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS

IORI had a net loss of $977,000 for the three months ended September 30, 2003,
and a net loss of $1.3 million for the nine months ended September 30, 2003,
which included an impairment loss on sale of real estate of $688,000 and a
recovery of a previous impairment of an asset of $1.6 million, as compared to
net loss of $1.2 million and net income of $2.9 million for the corresponding
periods in 2002. Fluctuation in components of revenue and expense between the
2003 and 2002 periods are discussed below.

Rents in the three and nine months ended September 30, 2003, were $2.0 million
and $5.9 million as compared to $1.7 million and $5.8 million in the
corresponding periods in 2002. This overall increase was due to an overall
increase in occupancy in IORI's commercial and residential properties. Rental
income for the remaining quarters of 2003 may decline when IORI selectively
sells properties.

Property operations expense in the three and nine months ended September 30,
2003 were $1.2 million and $3.2 million, as compared to $972,000 and $2.9
million in the corresponding periods in 2002. This increase was due to increased
repairs and property replacement costs. Property operations expense for the
remainder of 2003 may decline when IORI selectively sells properties.

Interest income in the three and nine months ended September 30, 2003 were
$12,000 and $626,000 as compared to $185,000 and $533,000 in the corresponding
periods in 2002. The year to date increase reflects additional interest income
earned on the reinstated note receivable previously written off in 2002, but
collected in 2003.

For the nine months ended September 30, 2003, IORI recorded a Recovery of loss
provision on receivable from related party in the amount of $1.5 million. This
represents the amounts received from a related party of an amount that was
written off in late 2002.

Interest expense in the three and nine months ended September 30, 2003 were
$523,000 and $1.8 million, as compared to $416,000 and $1.6 million in the
corresponding periods in 2002. The increase was due to refinancing IORI's
residential properties and a parcel of unimproved land. Interest expense for the
remaining quarters of 2003 may decrease due to lower variable interest rates and
the paydown of debt.

Depreciation expense in the three and nine months ended September 30, 2003 were
$178,000 and $909,000, as compared to $218,000 and $895,000 in the corresponding
periods in 2002.

21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED)

Advisory fee expense in the three and nine months ended September 30,2003 were
$164,000, and $498,000 as compared to $197,000 and $544,000 in the corresponding
periods in 2002. The advisory fee is based on IORI's gross assets. Advisory fees
for the remainder of 2003 are expected to decrease when IORI selectively sells
properties.

Net income fee was $411,000 in the first quarter of 2002. The net income fee is
payable to IORI's advisor based on 7.5% of IORI's net income.

For the nine months ended September 30, 2003, IORI recorded an impairment loss
on sale of real estate of $688,000 representing the sale of the 5600 Mowry
Building in Newark, California to its estimated fair value. The property was
sold in July 2003 for $5.0 million.

General and administrative expense in the three and nine months ended September
30, 2003 were $323,000 and $692,000, as compared to $291,000 and $929,000 in the
corresponding periods in 2002. The year to date decrease was primarily due to a
decrease in insurance costs and investor relations expenses, partially offset by
an increase in legal fees in 2003.

RELATED PARTY TRANSACTIONS

Historically, IORI, ARI, BCM and TCI have each engaged in and may continue to
engage in business transactions, including real estate partnerships with related
parties. Management believes that all of the related party transactions
represented the best investments available at the time and were at least as
advantageous to IORI as could have been obtained from unrelated third parties.

PROPERTY TRANSACTIONS

In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation from ARI, for $5.1 million. See NOTE 3. "NOTES AND INTEREST
RECEIVABLE." The purchase price was determined based upon the market value of
the property exchanged, using a market rate multiple of net operating income
("cap rate") of 7.0%. The business purpose of the transaction was for IORI to
make an equity investment in Rosedale anticipating a profitable return.

In February 2002, IORI purchased a $2.0 million senior participation interest in
a loan from TCI. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." Management
determined that IORI could benefit from the favorable interest rate payments on
the note.

22

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

TAX MATTERS

As more fully discussed in IORI's 2002 Form 10-K, for the year 2002 IORI elected
and qualified to be treated as a Real Estate Investment Trust ("REIT"), as
defined in Sections 856 and 860 of the Internal Revenue Code of 1986, as amended
(the "Code"), and as such was not taxed for federal income tax purposes on that
portion of its taxable income which is distributed to stockholders. Due to the
completion of the tender offer by ARI, an affiliate, and the resulting
concentration of ownership, IORI no longer met the requirements for tax
treatment as a REIT under the Code as of January 1, 2003, and is prohibited for
re-qualifying for REIT status for at least five years.

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
IORI had a loss for federal income tax purposes in the first nine months of
2003; therefore, it recorded no provision for income taxes.

At September 30, 2003, IORI had a net deferred tax asset of approximately $5.5
million due to tax deductions available to it in future years. However, as
management cannot determine that it is more likely than not that IORI will
realize the benefit of the deferred tax asset, a 100% valuation allowance has
been established.

INFLATION

The effects of inflation on IORI's operations are not quantifiable. Revenues
from apartment operations tend to fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of inflation
also affect the sales value of properties and the ultimate gain to be realized
from property sales. To the extent that inflation affects interest rates,
earnings from short-term investments and the cost of new financings, as well as
the cost of variable interest rate debt, will be affected.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

ENVIRONMENTAL MATTERS

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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

At September 30, 2003, IORI's exposure to a change in interest rates on its debt
is as follows:

ITEM 4. CONTROLS AND PROCEDURES

(a) Within the 90 days prior to the date of this report, IORI carried out
an evaluation, under the supervision and with the participation of
IORI's management, including IORI's Acting Principal Executive Officer
and principal accounting officer, of the effectiveness of the design
and operation of IORI's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon the evaluation, IORI's Acting
Principal Executive Officer and principal accounting officer concluded
that IORI's disclosure controls and procedures are effective in timely
alerting him to material information relating to IORI (including its
consolidated subsidiaries) required to be included in IORI's periodic
SEC filings.

(b) There have been no significant changes in IORI's internal controls or
in other factors that could significantly affect IORI's internal
controls subsequent to the date IORI carried out this evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

OLIVE LITIGATION SETTLEMENT

On November 15, 2002, ARI commenced tender offers for shares of common stock of
IORI and TCI. The price per share to be paid was $19.00 for IORI shares and
$17.50 for TCI shares. The tender offers were made as an alternative under
settlement resulting from a failure of timely completion of the SEC review
process of a registration statement for proposed mergers among ARI subsidiaries
and IORI and TCI.

The tender offers were completed on March 19, 2003. Pursuant to the tender
offers, ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The
completion of the tender offers fulfilled the remaining obligations under the
Olive Settlement and the Olive Litigation has been dismissed with prejudice.

For further information refer to NOTE 17. "COMMITMENTS AND CONTINGENCIES AND
LIQUIDITY," included in IORI's Form 10-K for the year ended December 31, 2002.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

(b) Reports on Form 8-K as follows:

A Current Report on Form 8-K, dated July 1, 2003, was filed with
respect to Item 4. "Changes in Registrant's Certifying Accountant" and
Item 5. "Other Events and Regulation FD Disclosure" which reports the
change of IORI's certifying accountant from BDO Seidman to Farmer,
Fuqua & Huff, P.C. and the termination of IORI's advisory agreement
with Basic Capital Management, Inc. and the establishment of IORI's
advisory agreement with Syntek West, Inc.

A Current Report on Form 8-K/A, dated July 1, 2003, was filed with
respect to Item 4. "Changes in Registrant's Certifying Accountant" and
Item 5. "Other Events and Regulation FD Disclosure" which reports the
change of IORI's certifying accountant from BDO Seidman to Farmer,
Fuqua & Huff, P.C. and the termination of IORI's advisory agreement
with Basic Capital Management, Inc. and the establishment of IORI's
advisory agreement with Syntek West, Inc. The Form 8-K/A was filed to
include an additional exhibit related to the change in certifying
accountants.

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SIGNATURE PAGE

Pursuant to the requirements 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.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

Date: November 14, 2003 By: /s/ Ronald E. Kimbrough
----------------- ---------------------------------------
Ronald E. Kimbrough
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer
and Acting Principal Executive Officer)

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INCOME OPPORTUNITY REALTY INVESTORS, INC.

EXHIBITS TO

QUARTERLY REPORT ON FORM 10-Q

For the Quarter ended September 30, 2003