##### 



FORM 10-Q
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTER ENDED SEPTEMBER 30, 2005
 or
 o
    
    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 0-8187
 INCOME OPPORTUNITY REALTY INVESTORS, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Nevada
    
    75-2615944(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 1755 Wittington Place, Suite 340
Dallas, Texas
 
 (Address of principal executive offices)
 75234
 
 (Zip Code)
 (800) 400-6407
(Registrants telephone number including area code)
 
 (Former name, former address and former fiscal year, if
changed since last report)
 þ  ̈
  ̈ þ
  ̈ þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
  ̈  ̈
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock, $.01 par value
(Class)
    
    4,168,035(Outstanding at September 30, 2005)




---



##### 



ITEM 1. FINANCIAL STATEMENTS
  
 September 30,
    
    
    December 31,2005
    
    
    2004(Restated)(dollars in thousands,except per share)AssetsReal estate held for investment
    
    
    35,068
    
    
    $
    34,988Lessaccumulated depreciation
    
    
    (4,287
    )
    
    
    (3,620
    )30,781
    
    
    
    31,368Notes and interest receivable
    
    
    62,876
    
    
    
    54,911Investment in real estate partnerships
    
    
    560
    
    
    
    604Cash and cash equivalents
    
    
    71
    
    
    
    399Receivables from affiliates
    
    
    1,275
    
    
    
    261Other assets
    
    
    3,010
    
    
    
    3,09598,573
    
    
    $
    90,638Liabilities and Stockholders EquityLiabilities:Notes and interest payable
    
    
    53,089
    
    
    $
    44,571Payables to affiliates
    
    
    
    
    
    
    1,248Other liabilities
    
    
    606
    
    
    
    1,52953,695
    
    
    
    47,348Minority interest
    
    
    475
    
    
    
    Stockholders equity:Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued
and outstanding 4,168,035 shares in
2005 and 4,316,835 shares in 2004
    
    
    42
    
    
    
    14Paid-in capital
    
    
    61,955
    
    
    
    61,983Accumulated deficit
    
    
    (17,594
    )
    
    
    (18,707
    )44,403
    
    
    
    43,29098,573
    
    
    
    90,638
   2




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##### 



For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,(dollars in thousands, except per share)2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Property revenue:Rents
    
    $
    1,688
    
    
    $
    1,662
    
    
    $
    4,830
    
    
    $
    5,091Property expense:Property operations
    
    
    870
    
    
    
    975
    
    
    
    2,516
    
    
    
    2,705Operating income
    
    
    818
    
    
    
    687
    
    
    
    2,314
    
    
    
    2,386Other income (loss):Interest
    
    
    979
    
    
    
    1,017
    
    
    
    2,937
    
    
    
    2,220Equity in income (loss) of equity partnerships
    
    
    (17
    )
    
    
    (20
    )
    
    
    (45
    )
    
    
    (9
    )962
    
    
    
    997
    
    
    
    2,892
    
    
    
    2,211Other expense:Interest
    
    
    989
    
    
    
    828
    
    
    
    2,487
    
    
    
    2,776Depreciation
    
    
    189
    
    
    
    250
    
    
    
    539
    
    
    
    779Advisory fee to affiliate
    
    
    165
    
    
    
    179
    
    
    
    502
    
    
    
    573Net income fee to affiliate
    
    
    25
    
    
    
    4
    
    
    
    92
    
    
    
    246General & Administrative
    
    
    132
    
    
    
    95
    
    
    
    473
    
    
    
    5401,500
    
    
    
    1,356
    
    
    
    4,093
    
    
    
    4,914Net income (loss) from continuing operations
    
    
    280
    
    
    
    328
    
    
    
    1,113
    
    
    
    (317
    )Discontinued operations:(Loss)/Income from discontinued operations
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (182
    )Gain on sale of operations
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    3,6898
    
    
    
    
    
    
    
    3,507Net income (loss)
    
    $
    280
    
    
    $
    336
    
    
    $
    1,113
    
    
    $
    3,190Earnings (loss) per share:Net loss from continuing operations
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.27
    
    
    $
    (0.07
    )Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.81Net income (loss)
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.27
    
    
    $
    0.74Weighted average common shares used in
computing earnings per share
    
    
    4,168,035
    
    
    
    4,316,835
    
    
    
    4,168,035
    
    
    
    4,316,835
   3




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##### 



Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity(dollars in thousands)Balance, January 1, 2005 (Restated)
    
    
    1,389,345
    
    
    $
    14
    
    
    $
    61,983
    
    
    $
    (18,707
    )
    
    $
    43,290Common Stock Dividends
    
    
    2,778,690
    
    
    
    28
    
    
    
    (28
    )
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,113
    
    
    
    1,113Balance, September 30, 2005
    
    
    4,168,035
    
    
    $
    42
    
    
    $
    61,955
    
    
    $
    (17,594
    )
    
    $
    44,403
  4




---



##### 



For the Nine MonthsEnded September 30,2005
    
    
    2004(Restated)(dollars in thousands)Cash Flows from Operating Activities
Net income/(loss)
    
    $
    1,113
    
    
    $
    3,190Reconciliation of net income (loss) to net cash used by operating activities
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization
    
    
    502
    
    
    
    779Gain on sale of real estate
    
    
    
    
    
    
    (3,689
    )Loss (gain) on equity partnerships
    
    
    44
    
    
    
    9Increase in interest receivable
    
    
    (965
    )
    
    
    (391
    )Decrease (Increase) in other assets
    
    
    85
    
    
    
    (8,712
    )Increase in interest payable
    
    
    17
    
    
    
    (15
    )(Decrease) increase in other liabilities
    
    
    (1,054
    )
    
    
    2,591Net cash provided by (used in) operating activities
    
    
    (258
    )
    
    
    (6,238
    )Cash Flows from Investing ActivitiesProceeds from sale of real estate
    
    
    
    
    
    
    3,505Real estate improvements
    
    
    85Advances from (payments to) advisor and affiliates
    
    
    (1,657
    )
    
    
    2,040Net cash provided by (used in) investing activities
    
    
    (1,572
    )
    
    
    5,545Cash Flows from Financing ActivitiesPayments on notes payable
    
    $
    (2,110
    )
    
    $
    (931
    )Advances from affiliate
    
    
    
    
    
    
    497Proceeds on notes payable
    
    
    3,612
    
    
    
    1,193Purchase of treasury stock
    
    
    
    
    
    
    (200
    )Deferred financing costs
    
    
    
    
    
    
    169Net cash (used in) provided by financing activities
    
    
    1,502
    
    
    
    728Net increase in cash and cash equivalents
    
    $
    (328
    )
    
    $
    35Cash and cash equivalents, beginning of period
    
    
    399
    
    
    
    58Cash and cash equivalents, end of period
    
    $
    71
    
    
    $
    93Supplemental Disclosures of Cash Flow InformationCash paid for interest
    
    $
    2,431
    
    
    $
    3,088Note receivable from sale of real estate
    
    
    
    
    
    
    2,990
  5




---



##### 



NOTE 1. BASIS OF PRESENTATION
   
    
    Decrease in interest expense by $28,000 for the three months ended September 30, 2004.
    
    Increase in advisory fee by $2,000 for the three months ended September 30, 2004.
    
    Increase in interest expense by $97,000 for the nine months ended September 30, 2004.
    
    Decrease in advisory fee by $4,000 for the nine months ended September 30, 2004.
 NOTE 2. REAL ESTATE
  Sales
    
    Net Cash
    
    Debt
    
    GainProperty
    
    Location
    
    Units/Sq.Ft.
    
    Price
    
    Received
    
    Discharged
    
    on SaleFirst QuarterApartment BuildingTreehouse
    
    San Antonio, TX
    
    106 Units
    
    $
    5,400
    
    
    $
    1,100
    
    
    $
    3,747
    
    
    $
    3,257Second QuarterApartment BuildingTreehouse (1)
    
    Irving, TX
    
    160 Units
    
    $
    7,500
    
    
    $
    (498
    )
    
    $
    5,018
    
    
    $ (2)Commercial BuildingAkard Plaza
    
    Dallas, TX
    
    42,258 Sq.Ft.
    
    $
    3,900
    
    
    $
    2,007
    
    
    $
    1,849
    
    
    $
    417Third QuarterLandFrankel Land
    
    Midland, TX
    
    1 Acre
    
    $
    63
    
    
    $
    61
    
    
    $
    
    
    
    $
    15Fourth QuarterCommercial BuildingChuck Yeager
    
    Chantilly, VA
    
    60,060 Sq.Ft.
    
    $
    7,600
    
    
    $
    2,174
    
    
    $
    5,230
    
    
    $
    1,967
 
 (1)
    
    Property sold to TCI, a related party, for assumption of debt and a note receivable, less
$498,000 in cash paid.(2)
    
    Excludes a $56,000 deferred gain from a related party sale. NOTE 3. NOTES AND INTEREST RECEIVABLE
 Junior Mortgage Loans.
 6




---



##### 



NOTE 4. RECEIVABLE FROM AND PAYABLE TO AFFILIATES
 Related Party.
 NOTE 5. NOTES AND INTEREST PAYABLE
  NOTE 6. RELATED PARTY TRANSACTIONS
   7




---



##### 



SWI
    
    
    Prime
    
    
    ARI
    
    
    TCIBalance, December 31,
2004
    
    $
    (1,248
    )
    
    $
    
    
    
    $
    
    
    
    $
    261Cash transfers
    
    
    (9,104
    )
    
    
    
    
    
    
    475
    
    
    
    141Cash repayments
    
    
    11,926
    
    
    
    22
    
    
    
    
    
    
    
    (261
    )Other additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other repayments
    
    
    (440
    )
    
    
    (22
    )
    
    
    (475
    )
    
    
    Balance, June 30, 2005$
    1,134
    
    
    $
    
    
    
    $
    
    
    
    $
    141
 8




---



##### 



NOTE 7. OPERATING SEGMENTS
   Three Months Ended
    
    CommercialSeptember 30, 2005
    
    Properties
    
    
    Apartments
    
    
    TotalRents
    
    $
    410
    
    
    $
    1,278
    
    
    $
    1,688Property operating expenses
    
    
    165
    
    
    
    685
    
    
    
    850Operating income (loss)
    
    $
    245
    
    
    $
    593
    
    
    $
    838Depreciation
    
    $
    78
    
    
    $
    111
    
    
    $
    189Interest
    
    
    571
    
    
    
    418
    
    
    
    989Real estate improvements
    
    
    85
    
    
    
    
    
    
    
    Assets
    
    
    12,857
    
    
    
    17,924
    
    
    
    30,781
 Nine Months EndedSeptember 30, 2005Rents
    
    $
    1,106
    
    
    $
    3,724
    
    
    $
    4,830Property operating expenses
    
    
    611
    
    
    
    1,905
    
    
    
    2,516Operating income (loss)
    
    $
    495
    
    
    $
    1,819
    
    
    $
    2,314Depreciation
    
    $
    205
    
    
    $
    334
    
    
    $
    539Interest
    
    
    1,492
    
    
    
    997
    
    
    
    2,487Real estate improvements
    
    
    
    
    
    
    
    
    
    
    Assets
    
    
    12,857
    
    
    
    17,924
    
    
    
    30,781
 9




---



##### 



Three Months EndedSeptember 30, 2004
    
    
    
    
    
    Commercial(Restated)
    
    Land
    
    
    Properties
    
    
    Apartments
    
    
    TotalRents
    
    $
    
    
    
    $
    490
    *
    
    $
    1,172
    
    
    $
    1,662
    *Property operating expenses
    
    
    
    
    
    
    262
    *
    
    
    713
    
    
    
    975
    *Operating income (loss)
    
    $
    
    
    
    $
    228
    *
    
    $
    459
    
    
    $
    687
    *Depreciation
    
    $
    
    
    
    $
    139
    *
    
    $
    111
    
    
    $
    250
    *Interest
    
    
    63
    
    
    
    446
    *
    
    
    319
    *
    
    
    828
    *Real estate improvements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assets
    
    
    
    
    
    
    18,321
    
    
    
    18,481
    
    
    
    36,802
 Six Months EndedJune 30, 2004(Restated)Rents
    
    $
    
    
    
    $
    1,609
    *
    
    $
    3,482
    
    
    $
    5,091
    *Property operating expenses
    
    
    
    
    
    
    720
    *
    
    
    1,985
    
    
    
    2,705
    *Operating income (loss)
    
    $
    
    
    
    $
    889
    *
    
    $
    1,497
    
    
    $
    2,386
    *Depreciation
    
    $
    
    
    
    $
    445
    *
    
    $
    334
    
    
    $
    779
    *Interest
    
    
    778
    
    
    
    877
    *
    
    
    1,121
    *
    
    
    2,776
    *Real estate improvements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assets
    
    $
    
    
    
    
    18,321
    
    
    
    18,481
    
    
    
    36,802
 
 *
    
    These are the restated numbers which reflect corrections for the discontinued operations, the
issuance of 3-for-1 stock
dividends, and the accounting error related to a deferral of operating income and/or expense.
See NOTE 1. BASIS OF
PRESENTATION. NOTE 8. ADVISORY FEES, PROPERTY MANAGEMENT, ETC.
  For the Nine MonthsEnded September 30,2005
    
    
    2004(Restated)FeesAdvisory
    
    $
    502
    
    
    $
    573Net income
    
    
    9
    
    
    
    246$
    511
    
    
    $
    819Cost reimbursements
    
    $
    36
    
    
    $
    58
 10




---



##### 



NOTE 9. DISCONTINUED OPERATIONS
  For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004RevenueRental
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    973Property Operations
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    748Operating income
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    225ExpenseInterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301Depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106Total expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    407Net gain from discontinued
operations before gains on sale of
operations
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (182
    )Gain on sale of operations
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    3,689Net income/(loss) from discontinuedoperations
    
    $
    
    
    
    $
    8
    
    
    $
    
    
    
    $
    3,507
  NOTE 10. COMMITMENTS AND CONTINGENCIES
 Liquidity.
 Other Litigation.
 11




---



##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Introduction
  Critical Accounting Policies
    Liquidity and Capital Resources
    12




---



##### 



Results of Operations
          Related Party Transactions
  Taxes
    13




---



##### 



Inflation
  Environmental Matters
   ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
  Weighted
    
    
    Effect of 1%Average
    
    
    Increase InBalance
    
    
    Interest Rate
    
    
    Base RatesWholly-owned debt:Variable rate
    
    $
    11,125
    
    
    
    8.03
    %
    
    $
    111Total decrease in IORIs annual
Net income
    
    
    
    
    
    
    
    
    
    $
    111Per share
    
    
    
    
    
    
    
    
    
    $
    0.03
 14




---



##### 



ITEM 4. CONTROLS AND PROCEDURES
        WARNING CONCERNING FORWARD LOOKING STATEMENTS
  15




---



##### 



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    
    Maximum NumberShares Purchased
    
    
    of Shares that Mayas Part of Publicly
    
    
    Yet be PurchasedTotal Number of
    
    
    Average Price
    
    
    Announced
    
    
    Under thePeriod
    
    Shares Purchased
    
    
    Paid per Share
    
    
    Program
    
    
    Program(1)July 1-30, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 1-31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1-30, 2005.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    31,596
 
 (1)
    
    On September 23, 2000, the IORI Board of Directors approved a share repurchase program for
up to 300,000 shares of
our common stock. This repurchase program has no termination date. 16




---



##### 



ITEM 6. EXHIBITS
  Exhibit No.
    
    Exhibit Designation3.0
    
    Articles of Incorporation of Income Opportunity Realty
Investors, Inc. (incorporated by reference to Appendix C to
the Registrants Registration Statement on Form S-4 dated
February 12, 1996).3.1
    
    Bylaws of Income Opportunity Realty Investors, Inc.
(incorporated by reference to Appendix D to the
Registrants Registration Statement on Form S-4 dated
February 12, 1996).31.1
    
    * Certification pursuant to Rule 13a-14 and 15d-14 under the
Securities Exchange Act of 193432.1
    
    * Certification pursuant to 18 U.S.C. 1350.
 
 *Filed herewith. 17




---



##### 



INCOME OPPORTUNITY REALTY INVESTORS, INC.Date:
    
    November 14, 2005
    
    By:
    
    /s/ Robert N. Crouch IIRobert N. Crouch IIExecutive Vice President, Chief Financial Officer, and
Acting Principal Executive Officer
 18




---



##### 



Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number31.1
    
    Certification Pursuant to Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934.
    
    
    2032.1
    
    Certification Pursuant to 18 U.S.C. Section 1350.
    
    
    21
 19