**FORM
        10-Q**
 **UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
  x **QUARTERLY
        REPORT UNDER SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 **FOR
        THE QUARTER ENDED MARCH 31, 2006**
 **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 001-14784**
 **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 75234****(Address
                  of principal executive offices)**
                **(Zip
                  Code)****(469)
                  522-4200****(Registrant’s
                  telephone number, including area code)**___________________________________________________________________________________________**(Former
                  name, former address and former fiscal year, if changed since last
                  report)**
 
 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 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 is a large accelerated filer, an
        accelerated filer or a non-accelerated filer. See definition of accelerated
        filer in Rule 12b-2 of the Exchange Act (Check
        one):
 Large
        accelerated filer ̈Accelerated
        filer ̈Non-accelerated
        filerx
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).    Yes  ̈ .    
        No x .
 
 **APPLICABLE
        ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE**
 **PRECEDING
        FIVE YEARS:**
 
 Indicate
        by check mark whether the registrant has filed all documents and reports
        required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
        Act
        of 1934 subsequent to the distribution of securities under a plan confirmed
        by a
        court. Yes  ̈ .    No  ̈ .
 
 **APPLICABLE
        ONLY TO CORPORATE ISSUERS:**
 
 Indicate
        the number of shares outstanding of each of the issuer’s classes of Common
        Stock, as of the latest practicable date.
 
 **Common
                    Stock, $.01 par value**
                **4,168,035****(Class)**
                **(Outstanding
                    at March 31, 2006)**
  
 
 
 **INCOME
        OPPORTUNITY REALTY INVESTORS, INC.**
 **FORM
        10-Q**
 **TABLE
        OF CONTENTS**
 
 
 
 **PART
                  I:****FINANCIAL
                  INFORMATION**
              **PAGE**Item
                  1.Financial
                  StatementsConsolidated
                  Balance Sheets at March 31, 2006 (unaudited) and December 31,
                  2005
              3Consolidated
                  Statements of Operations for the three months ended March 31, 2006
                  and
                  2005 (unaudited)
              4Consolidated
                  Statement of Shareholders’ Equity for the three months ended March 31,
                  2006 (unaudited)
              5Consolidated
                  Statements of Cash Flows for the three months ended March 31, 2006
                  and
                  2005 (unaudited)
              6Notes
                  to Consolidated Financial Statements
              7Item
                  2.Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              11Item
                  3.Quantitative
                  and Qualitative Disclosures About Market Risk
              15Item
                  4.Controls
                  and Procedures
              15**PART
                  II.****OTHER
                  INFORMATION**Item
                  2.Unregistered
                  Sales of Equity Securities and Use of Proceeds
              16Item
                  6.Exhibits
              16SIGNATURE
                  PAGES
              17
  2
  **PART
        I. FINANCIAL INFORMATION**
 
 **ITEM 1.
        FINANCIAL STATEMENTS**
 
 The
        accompanying Consolidated Financial Statements as of and for the three months
        ended March 31, 2006 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**
  
 **March
                  31,**
                **2006**
              
              **December
                  31,**
                **2005****(unaudited)****(dollars
                  in thousands)****Assets**Real
                  estate held for investment
              
              $
              38,870
              
              $
              35,083Less—accumulated
                  depreciation
              
              
              (4,481
              )
              
              (4,311
              )34,389
              
              
              30,772Related
                  party receivable (including accrued interest of $2,763 and $2,390
                  in 2006
                  and2005,
                  respectively)
              
              
              63,603
              
              
              63,230Investment
                  in real estate partnerships
              
              
              547
              
              
              547Cash
                  and cash equivalents
              
              
              167
              
              
              201Due
                  from affiliates
              
              
              160
              
              
              1,853Other
                  assets
              
              
              3,404
              
              
              2,738$
              102,270
              
              $
              99,341**Liabilities
                  and Stockholders’ Equity**Liabilities:Notes
                  payable (including accrued interest of $172 and $229 for 2006 and
                  2005,
                  respectively)
              
              $
              53,954
              
              $
              52,817Due
                  to affiliates
              
              
              1,538
              
              
              —Other
                  liabilities
              
              
              991
              
              
              1,34456,483
              
              
              54,161Commitments
                  and contingenciesMinority
                  interest
              
              
              526
              
              
              513Stockholders’
                  equity:Common
                  Stock, $.01 par value; authorized, 100,000,000 shares; issued and
                  outstanding4,168,035
                  shares at March 31, 2006 and December 31, 2005
              
              
              42
              
              
              42Additional
                  paid-in capital
              
              
              61,955
              
              
              61,955Accumulated
                  deficit
              
              
              (16,736
              )
              
              (17,330
              )45,261
              
              
              44,667$
              102,270
              
              $
              99,341
  
 The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
  3
  **INCOME
        OPPORTUNITY REALTY INVESTORS, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(unaudited)**
 
  **For
                    the Three Months**
                  **Ended
                    March 31,****2006**
                
                **2005****(****amounts
                    in thousands,**
                  **except
                    per share data)**Property
                    RevenueRents
                    and other property revenues
                
                $
                1,697
                
                $
                1,529Operating
                    expensesProperty
                    operations
                
                
                804
                
                
                821Depreciation
                
                
                170
                
                
                177General
                    and administrative
                
                
                150
                
                
                142Advisory
                    fees
                
                
                174
                
                
                166Total
                    operating expenses
                
                
                1,298
                
                
                1,306Operating
                    income
                
                
                399
                
                
                223Other
                    income (expense):Interest
                    income
                
                
                1,154
                
                
                974Mortgage
                    and loan interest
                
                
                (896
                )
                
                (871
                )Net
                    income fee
                
                
                (50
                )
                
                (24
                )Total
                    other income (expense)
                
                
                208
                
                
                79Income
                    before equity in earnings of investees and minority interest
                
                
                607
                
                
                302Equity
                    in earnings (loss) of investees
                
                
                —
                
                
                (9
                )Minority
                    interest
                
                
                (13
                )
                
                —Net
                    income
                
                $
                594
                
                $
                293Earnings
                    per share:Net
                    earnings from continuing operations
                
                $
                0.14
                
                $
                .07Weighted
                    average common shares used in computing earnings per share
                
                
                4,168,035
                
                
                4,168,035
 Earnings
        per share reflect a 3-for-1 forward split of the stock in the form of a 200%
        stock dividend declared in May 2005.
 
  The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
  4
  **INCOME
        OPPORTUNITY REALTY INVESTORS, INC.**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **For
        the Three Months Ended March 31, 2006**
 **(Dollars
        in thousands)**
 **(unaudited)**
 
 
 
 **Common
                  Stock**
              
              **Additional**
                **Paid-in**
              
              **Accumulated**
              
              **Total**
                **Stockholders’****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Equity**Balance,
                  December 31, 2005
              
              
              4,168,035
              
              $
              42
              
              $
              61,955
              
              $
              (17,330
              )
              $
              44,667Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              594
              
              
              594Balance,
                  March 31, 2006
              
              
              4,168,035
              
              $
              42
              
              $
              61,955
              
              $
              (16,736
              )
              $
              45,261
 
 
 
 
 
 
 
 
 
 
 The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
  5
 **INCOME
        OPPORTUNITY REALTY INVESTORS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(unaudited)**
 
 **For
                  the Three Months**
                **Ended
                  March 31,****2006**
              
              **2005****(dollars
                  in thousands)****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              594
              
              $
              293Reconciliation
                  of net income to net cash used by operating activitiesAdjustments
                  to reconcile net income to net cash used in operating
                  activitiesDepreciation
              
              
              170
              
              
              177Amortization
              
              
              63
              
              
              69Loss
                  (gain) on equity partnerships
              
              
              —
              
              
              9Minority
                  interest
              
              
              13Increase
                  in interest receivable
              
              
              (373
              )
              
              (543
              )Decrease
                  (increase) in other assets
              
              
              (729
              )
              
              298Increase
                  (decrease) in interest payable
              
              
              (57
              )
              
              (125
              )Increase
                  (decrease) in other liabilities
              
              
              (351
              )
              
              (538
              )Net
                  cash provided by (used in) operating activities
              
              
              (670
              )
              
              (360
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Acquisition
                  of real estate
              
              
              (3,787
              )
              
              3⁄4Advances
                  from (payments to) advisor and affiliates
              
              
              3,231
              
              
              249Net
                  cash provided by (used in) investing activities
              
              
              (556
              )
              
              249**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Notes
                  payable payments
              
              
              (308
              )
              
              (74
              )Notes
                  payable proceeds
              
              
              1,500
              
              
              3⁄4Net
                  cash (used in) provided by financing activities
              
              
              1,192
              
              
              (74
              )INCREASE
                  (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (34
              )
              
              (185
              )CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              201
              
              
              399CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              167
              
              $
              214Supplemental
                  Disclosures of Cash Flow InformationCash
                  paid for interest
              
              $
              831
              
              $
              978
 
 
 The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
   6
 **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 accounting principles generally accepted in the United States of America
        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 footnotes required by accounting principles generally accepted
        in the United States of America for complete financial statements. Dollar
        amounts in tables are in thousands, except per share amounts. Certain balances
        for 2005 have been reclassified to conform to the 2006
        presentation.
 
 Operating
        results for the three-month period ended March 31, 2006, are not necessarily
        indicative of the results that may be expected for the year ending December
        31,
        2006. For further information, refer to the Consolidated Financial Statements
        and notes included in IORI’s Annual Report on Form 10-K for the year ended
        December 31, 2005 (the “2005 Form 10-K”).
 
 *Stock-based
        employee compensation.* Effective January 1, 2006 (the “Effective Date”), the Company adopted SFAS
        No. 123-R using the modified prospective method.  SFAS No.
        123-R must
        be applied not only to newly awarded stock options but also to previously
        awarded stock options that were not fully vested on the Effective Date. 
        IORI had no fully vested stock-option grants as of the Effective Date. 
        Furthermore, IORI had no outstanding stock-option grants that were
        modified
        or settled after the Effective Date; therefore, IORI will recognize
        no
        additional compensation costs for previously awarded stock-option grants. 
        In December 2005, the Company’s Board of Directors terminated all stock-option
        plans and has no intent at the present to reinstate any stock-option
        programs.
 
 
 **NOTE 2.
        REAL ESTATE**
 
 On
        March
        31, 2006, IORI acquired a 218 unit apartment complex located in Indianapolis,
        Indiana from Syntek West, Inc. (“SWI," a related party) for $3,750,000, which
        includes the assumption of a $1,500,000 existing mortgage. IORI did not acquire
        any properties during the three months ended March 31, 2005.
 
 IORI
        sold
        no properties during the three months ended March 31, 2006 or 2005.
 
 The
        following is a list of properties owned by IORI on March 31, 2006:
 
 **Property**
              **Location**
              **Units
                  / Sq. Ft. / Acres****Apartments**Brighton
                  Court
              Midland,
                  TX
              60
                  Units / 90,672 Sq. Ft.Del
                  Mar
              Midland,
                  TX
              92
                  Units / 105,348 Sq. Ft.Enclave
              Midland,
                  TX
              68
                  Units / 89,734 Sq. Ft.Falcon
                  Point *
              Indianapolis,
                  IN
              218
                  Units / 162,425 Sq. Ft.Meridian
              Midland,
                  TX
              280
                  Units / 264,000 Sq. Ft.Signature
                  Place
              Midland,
                  TX
              57
                  Units / 72,480 Sq Ft.Sinclair
                  Place
              Midland,
                  TX
              114
                  Units / 91,529 Sq. Ft.**Office
                  Buildings**2010
                  Valley View
              Farmers
                  Branch, TX
              40,666
                  Sq. Ft.**Shopping
                  Centers**Parkway
                  Center
              Dallas,
                  TX
              28,374
                  Sq. Ft.**Industrial
                  Warehouse**Eagle
                  Crest
              Farmers
                  Branch, TX
              133,000
                  Sq. Ft.**Land**Three
                  Hickory Centre
              Farmers
                  Branch, TX
              9
                  Acres
 
 *Falcon
        Point was purchased on March 31, 2006.
 7
 **INCOME
            OPPORTUNITY REALTY INVESTORS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS -
            Continued**
   **NOTE
        3. NOTES AND INTEREST RECEIVABLE**
 
 *Junior
        Mortgage Loans.* Junior
        mortgage loans are loans secured by mortgages that are subordinate to one
        or
        more prior liens either on the simple interest fee or a leasehold interest
        in
        real estate. Recourse on the loans ordinarily includes the real estate which
        secures the loan, other collateral and personal guarantees of the borrower.
 
 On
        September 30, 2004, a Secured Promissory Note in the amount of $1,222,500
        given
        by United Housing Foundation, Inc. ("UHF") for Unified Housing of Parkside
        Crossing, LLC to Regis I and the accrued interest receivable of $112,878
        were
        assigned from Regis I to IORI as a pay down of certain intercompany receivables.
 
 On
        September 30, 2004, a Secured Promissory Note in the amount of $1,053,616
        given
        by UHF for Unified Housing of Temple, LLC to Regis I and the accrued interest
        receivable of $98,338 were assigned from Regis I to IORI as a pay down of
        certain intercompany receivables.
 
 On
        September 30, 2004, a Secured Promissory Note in the amount of $835,658 given
        by
        UHF for Unified Housing of Terrell, LLC to Regis I and the accrued interest
        receivable of $80,223 were assigned from Regis I to IORI as a pay down of
        certain intercompany receivables.
 
 On
        September 30, 2004, a Secured Promissory Note in the amount of $1,770,000
        given
        by UHF for Housing for Seniors of Lewisville, LLC to Regis I and the accrued
        interest receivable of $174,640 were assigned from Regis I to IORI as a pay
        down
        of certain intercompany receivables.
 
 On
        May
        24, 2004, a Secured Promissory Note in the amount of $2,990,000 given by
        UHF for
        UHM to Transcontinental Eldorado, Inc. was assigned from Transcontinental
        Realty
        Investors, Inc. ("TCI") to IORI as a partial payment for TCI’s repurchase of
        100% of the outstanding common shares of Treehouse-IR from IORI.
 
 On
        December 30, 2003, a Secured Promissory Note in the amount of $6,363,360
        given
        by Humble to NLP was assigned from American Realty Investors, Inc. ("ARI")
        to
        IORI as a pay down of certain intercompany receivables.
 
 On
        December 30, 2003, a Secured Promissory Note in the amount of $2,000,000
        given
        by Humble to NLP was assigned from ARI to IORI as additional pay down of
        certain
        intercompany receivables.
 
 On
        October 14, 2003, IORI purchased, sold, and conveyed an office building known
        as
        One Hickory Centre, and sold 202 acres of unimproved real property known
        as the
        Travelers Land in Dallas County, Texas to Encino Executive Plaza, Ltd a
        wholly-owned affiliate of ARI. The sale price for One Hickory Centre was
        $12,200,000 and Encino Executive Plaza, Ltd. executed a wrap-around promissory
        note in the amount of $11,973,025 payable to the order of IORI secured by
        a Deed
        of Trust encumbering One Hickory Centre. The remaining difference was a result
        of pro-rations and various expenses paid by IORI in connection with the closing
        of the transaction. The note bears interest at 5.5% per annum. The sale price
        for the Travelers Land was $25,000,000. At closing, Encino Executive Plaza,
        Ltd.
        executed an all inclusive wrap-around promissory note payable to the order
        of
        IORI in the principal amount of $22,801,987 secured by a Deed of Trust covering
        the Travelers Land sold and delivered cash to IORI in the amount of $1,946,715.
        As with the prior transaction, the difference between the purchase price
        and the
        promissory note represented adjustments for various pro-rations. The note
        bears
        interest at 5.5% per annum. Subsequently, IORI made a loan to Encino Executive
        Plaza, Ltd. in the amount of $1,567,232 payable upon demand or if no demand
        is
        made prior thereto on June 30, 2006 with a market rate of interest. Encino
        Executive Plaza, Ltd. executed and delivered a promissory note payable to
        the
        order of IORI in the stated principal amount of $1,567,232. The note bears
        interest at 5.5% per annum.
 
 
 **NOTE 4.
        NOTES AND INTEREST PAYABLE**
 
 During
        the three months ended March 31, 2006, the Company acquired Falcon Point
        Apartments and assumed a $1.5 million note. The note bears interest at prime
        rate plus two percent. The note is due in May 2006 and the Company is currently
        negotiating refinancing.
  8
 **INCOME
              OPPORTUNITY REALTY INVESTORS, INC.**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS -
              Continued**
  **NOTE 5.
        ADVISORY AGREEMENT**
 
 The
        Company has an Advisory Agreement with SWI, wherein SWI is responsible for
        the
        Company’s day-to-day operations. SWI must formulate and submit to IORI’s Board
        of Directors for approval an annual budget and business plan containing a
        twelve
        month forecast of operations and cash flow with a general plan for asset
        sales
        and purchases, borrowing activity and other investments. SWI reports to the
        Board quarterly on IORI’s performance against the business plan. The Advisory
        Agreement further places SWI in a fiduciary relationship to IORI’s stockholders
        and contains a broad standard governing SWI’s liability for any losses incurred
        by IORI.
 
 SWI
        receives, as compensation for its management and advice, monthly advisory
        fees
        based on 71⁄2% of IORI’s assets annually as well as incentive fees for
        performance. If IORI’s operating expenses exceed limits specified in the
        Advisory Agreement SWI is obligated to refund a portion of the advisory
        fees.
 
 Effective
        July 1, 2005, the Company and SWI entered into a Cash Management Agreement
        to
        further define the administration of the Company's day-to-day investment
        operations, relationship contacts, flow of funds and deposit and borrowing
        of
        funds. Under the Cash Management Agreement, all funds of the Company are
        delivered to SWI which has a deposit liability to the Company and is responsible
        for investment of all excess funds, which earn interest at the *Wall
        Street Journal* Prime
        Rate plus 1% per annum, set quarterly on the first day of each calendar quarter.
        Borrowings for the benefit of the Company bear the same interest rate. The
        term
        of the Cash Management Agreement is coterminous with the Advisory Agreement,
        and
        is automatically renewed each year unless terminated with the Advisory
        Agreement.
 
 Revenue,
                    fees, interest on cash advances, and cost
                  reimbursements
                    to SWI:
                
                **For
                    Three Months**
                  **Ended
                    March 31,****2006**
                
                **2005**FeesAdvisory
                
                $
                174
                
                $
                166Interest
                    on cash advances
                
                
                (20
                )
                
                —Net
                    income
                
                
                50
                
                
                24204
                
                
                190Cost
                    reimbursements
                
                $
                —
                
                $
                19
 
 **NOTE
        6. RECEIVABLE FROM AND PAYABLE TO AFFILIATES**
 
 From
        time-to-time, IORI and its affiliates and related parties have made unsecured
        advances to each other. In addition, IORI and its affiliates have entered
        into
        transactions involving the purchase, sale and financing of property. The
        table
        below reflects the various transactions between IORI, SWI and Transcontinental
        Realty Investors, Inc. (“TCI”). See NOTE 6. RELATED PARTY
        TRANSACTIONS.
 
 **SWI**
              
              **TCI**Balance,
                  December 31, 2005
              
              $
              1,776
              
              $
              77Cash
                  received
              
              
              (1,676
              )
              
              —Cash
                  payments
              
              
              848
              
              
              —Other
                  additions
              
              
              (2,506
              )
              
              83Other
                  repayments
              
              
              20
              
              
              —Balance,
                  March 31, 2006
              
              $
              (1,538
              )
              $
              160
 
 
 **NOTE 7.
        RELATED PARTY TRANSACTIONS**
 
 As
        described in NOTE 2. REAL ESTATE, on March 31, 2006 IORI acquired a 218 unit
        apartment complex located in Indianapolis, Indiana from SWI for $3,750,000,
        which includes the assumption of a $1,500,000 existing mortgage. The $2,250,000
        due to the seller was applied to the ‘Due to affiliates’ balance between IORI
        and SWI.
  9
 **INCOME
              OPPORTUNITY REALTY INVESTORS, INC.**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS -
              Continued**
  
 
 **NOTE 8.
        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 administrative expenses. Management evaluates the performance
        of
        each of the operating segments and allocates resources to them based on their
        operating income and cash flow.   There are no intersegment
        revenues and expenses and IORI conducted all of its business within the United
        States.
 
 Presented
        below is the operating income of each operating segment for the three months
        ended March 31, 2006 and March 31, 2005 and each segment’s assets at March 31,
        2006.
 
 **Three
                  Months Ended March 31, 2006**
              
              **Land**
              
              **Commercial**
                **Properties**
              
              **Apartments**
              
              **Total**Rental
                  and other property revenues
              
              $
              —
              
              $
              359
              
              $
              1,338
              
              $1,697Property
                  operating expenses
              
              
              —
              
              
              168
              
              
              636
              
              804Depreciation
              
              
              —
              
              
              59
              
              
              111
              
              170Interest
                  expense
              
              
              239
              
              
              309
              
              
              348
              
              896Real
                  estate assets, net of depreciation
              
              
              —
              
              
              12,790
              
              
              21,599
              
              34,389**Three
                  Months Ended March 31, 2005**Rental
                  and other property revenues
              
              $
              3⁄4
              
              $
              322
              
              $
              1,207
              
              $1,529Property
                  operating expenses
              
              
              3⁄4
              
              
              211
              
              
              610
              
              821Depreciation
              
              
              3⁄4
              
              
              66
              
              
              111
              
              177Interest
                  expense
              
              
              221
              
              
              326
              
              
              324
              
              871Real
                  estate assets, net of depreciation
              
              
              3⁄4
              
              
              12,979
              
              
              17,793
              
              30,772
 
 
 **NOTE
        9. COMMITMENTS AND CONTINGENCIES**
 
 *Liquidity* .
        Management anticipates that IORI will generate excess cash from operations
        in
        2006 due to increased rental rates and occupancy at its properties. However,
        such excess may not be sufficient to discharge all of IORI’s debt obligations as
        they mature. Management may selectively sell income producing assets, refinance
        real estate and/or incur additional borrowings against real estate to meet
        its
        cash requirements.
 
 *Litigation.* IORI
        is
        also 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 the Company’s financial condition, results of operations or
        liquidity.
 
 
  10
   **ITEM
        2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 
 ***WARNING
        CONCERNING FORWARD LOOKING STATEMENTS***
 
 The
        following discussion should be read in conjunction with the financial statements
        and notes thereto appearing elsewhere in this report.
 
 This
        Report on Form 10-Q may contain forward-looking statements within the meaning
        of
        the federal securities laws, principally, but not only, under the caption
        “Management’s Discussion and Analysis of Financial Condition and Results of
        Operations.” We caution investors that any forward-looking statements in this
        report, or which management may make orally or in writing from time to time,
        are
        based on management’s beliefs and on assumptions made by, and information
        currently available to, management. When used, the words “anticipate,”“believe,”“expect,”“intend,”“may,”“might,”“plan,”“estimate,”“project,”“should,”“will,”“result”
        and similar expressions which do not relate solely to historical matters
        are
        intended to identify forward-looking statements. These statements are subject
        to
        risks, uncertainties, and assumptions and are not guarantees of future
        performance, which may be affected by known and unknown risks, trends,
        uncertainties, and factors, that are beyond our control. Should one or more
        of
        these risks or uncertainties materialize, or should underlying assumptions
        prove
        incorrect, actual results may vary materially from those anticipated, estimated,
        or projected. We caution you that, while forward-looking statements reflect
        our
        good faith beliefs when we make them, they are not guarantees of future
        performance and are impacted by actual events when they occur after we make
        such
        statements. We expressly disclaim any responsibility to update our
        forward-looking statements, whether as a result of new information, future
        events or otherwise. Accordingly, investors should use caution in relying
        on
        past forward-looking statements, which are based on results and trends at
        the
        time they are made, to anticipate future results or trends.
 
 Some
        of
        the risks and uncertainties that may cause our actual results, performance,
        or
        achievements to differ materially from those expressed or implied by
        forward-looking statements include, among others, the factors listed and
        described at Item 1A. “Risk Factors” in the Company’s Annual Report on Form
        10-K, which investors should review. There have been no changes from the
        risk
        factors previously described in the Company’s Form 10-K for the fiscal year
        ended December 31, 2005 (the “Form 10-K”).
 
 Other
        sections of this report may also include suggested factors that could adversely
        affect our business and financial performance. Moreover, we operate in a
        very
        competitive and rapidly changing environment. New risks emerge from time
        to time
        and it is not possible for management to predict all such matters; nor can
        we
        assess the impact of all such matters on our business or the extent to which
        any
        factor, or combination of factors, may cause actual results to differ materially
        from those contained in any forward-looking statements. Given these
        uncertainties, investors should not place undue reliance on forward-looking
        statements as a prediction of actual results. Investors should also refer
        to our
        quarterly reports on Form 10-Q for future periods and current reports on
        Form
        8-K as we file them with the SEC, and to other materials we may furnish to
        the
        public from time-to-time through Forms 8-K or otherwise.
 
 
 ***Overview***
 
 IORI
        invests in equity interests in real estate through acquisitions, leases,
        partnerships and 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***
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America, or GAAP, requires management
        to use judgment in the application of accounting policies, including making
        estimates and assumptions. We base our estimates on historical experience
        and on
        various other assumptions believed to be reasonable under the circumstances.
        These judgments affect the reported amounts of assets and liabilities and
        disclosure of contingent assets and liabilities at the dates of the financial
        statements and the reported amounts of revenue and expenses during the reporting
        periods. If our judgment or interpretation of the facts and circumstances
        relating to various transactions had been different, it is possible that
        different accounting policies would have been applied resulting in a different
        presentation of our financial statements. From time-to-time, we evaluate
        our
        estimates and assumptions. In the event estimates or assumptions prove to
        be
        different from actual results, adjustments are made in subsequent periods
        to
        reflect more current information. Below is a discussion of accounting policies
        that we consider critical in that they may require complex judgment in their
        application or require estimates about matters that are inherently
        uncertain.
 
 
  11
  ***Real
        Estate Held for Investment***
 
 Real
        estate held for investment is carried at cost. Statement of Financial Accounting
        Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived
        Assets” (“SFAS No. 144”), requires that a property be considered impaired if the
        sum of the expected future cash flows (undiscounted and without interest
        charges) is less than the carrying amount of the property. If impairment
        exists,
        an impairment loss is recognized, by a charge against earnings, equal to
        the
        amount by which the carrying amount of the property exceeds the fair value
        less
        cost to sell the property. If impairment of a property is recognized, the
        carrying amount of the property is reduced by the amount of the impairment,
        and
        a new cost for the property is established. Such new cost is depreciated
        over
        the property’s remaining useful life. Depreciation is provided by the
        straight-line method over estimated useful lives, which range from five to
        40
        years.
 
 
 ***Real
        Estate Held-for-Sale***
 
 Foreclosed
        real estate is initially recorded at new cost, defined as the lower of original
        cost or fair value minus estimated costs of sale. SFAS No. 144 also requires
        that properties held- for-sale be reported at the lower of carrying amount
        or
        fair value less costs of sale. If a reduction in a held for sale property’s
        carrying amount to fair value less costs of sale is required, a provision
        for
        loss is recognized by a charge against earnings. Subsequent revisions, either
        upward or downward, to a held for sale property’s estimated fair value less
        costs of sale are recorded as an adjustment to the property’s carrying amount,
        but not in excess of the property’s carrying amount when originally classified
        as held-for-sale. A corresponding charge against or credit to earnings is
        recognized. Properties held-for-sale are not depreciated.
 
 
 ***Investments
        in Equity Investees***
 
 IORI
        may
        be considered to have the ability to exercise significant influence over
        the
        operating and investment policies of certain of its investees. Those investees
        are accounted for using the equity method. Under the equity method, an initial
        investment, recorded at cost, is increased by a proportionate share of the
        investee’s operating income and any additional investment and decreased by a
        proportionate share of the investee’s operating losses and distributions
        received.
 
 
 ***Recognition
        of Rental Income***
 
 Rental
        income for commercial property leases is recognized on a straight-line basis
        over the respective lease terms. Rental income for residential property leases
        is recorded when due from residents and is recognized monthly as earned,
        which
        is not materially different than on a straight-line basis as lease terms
        are
        generally for periods of one year or less. For hotel properties, revenues
        for
        room sales and guest services are recognized as rooms are occupied and services
        are rendered.
 
 
 ***Revenue
        Recognition on the Sale of Real Estate***
 
 Sales
        of
        real estate are recognized when and to the extent permitted by Statement
        of
        Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate”
        (“SFAS No. 66”), as amended by SFAS No. 144. Until the requirements of SFAS No.
        66 for full profit recognition have been met, transactions are accounted
        for
        using the deposit, installment, cost recovery or financing method, whichever
        is
        appropriate. When IORI provides seller financing, gain is not recognized
        at the
        time of sale unless the buyer’s initial investment and continuing investment are
        deemed to be adequate as determined by SFAS 66 guidelines.
 
 
 ***Non-performing
        Notes Receivable***
 
 IORI
        considers a note receivable to be non-performing when the maturity date has
        passed without principal repayment and the borrower is not making interest
        payments. Any new note receivable that results from a modification or extension
        of a note considered non-performing will also be considered non-performing,
        without regard to the borrower’s adherence to payment terms.
 
 
 ***Interest
        Recognition on Notes Receivable***
 
 Interest
        income is not recognized on notes receivable that have been delinquent for
        60
        days or more. In addition, accrued but unpaid interest income is only recognized
        to the extent that the net realizable value of the underlying collateral
        exceeds
        the carrying value of the receivable.
  12
  
 
 ***Allowance
        for Estimated Losses***
 
 A
        valuation allowance is provided for estimated losses on notes receivable
        considered to be impaired. Impairment is considered to exist when it is probable
        that all amounts due under the terms of the note will not be collected.
        Valuation allowances are provided for estimated losses on notes receivable
        to
        the extent that the investment in the note exceeds management’s estimate of fair
        value of the collateral securing such note.
 
 
 ***Fair
        Value of Financial Instruments***
 
 The
        following assumptions were used in estimating the fair value of its notes
        receivable, marketable equity securities, and notes payable. For performing
        notes receivable, the fair value was estimated by discounting future cash
        flows
        using current interest rates for similar loans. For non-performing notes
        receivable, the estimated fair value of IORI’s interest in the collateral
        property was used. For marketable equity securities, fair value was based
        on the
        year-end closing market price of each security. For notes payable, the fair
        value was estimated using current rates for mortgages with similar terms
        and
        maturities.
 
 
 ***Liquidity
        and Capital Resources***
 
 Cash
        and
        cash equivalents at March 31, 2006 were $167,000 compared to $201,000 at
        December 31, 2005. IORI’s principal sources of cash have been and will continue
        to be property operations, proceeds from asset sales, interest earned on
        notes
        receivable, financings and refinancings and partnership distributions.
        Management anticipates that IORI will generate excess cash from operations
        in
        2006 due to increased rental receipts at its properties. However, such excess
        may not be sufficient to discharge all of IORI’s debt obligations as they
        mature. Management may selectively sell income producing assets, refinance
        real
        estate, and/or incur additional borrowings against real estate to meet its
        cash
        requirements.
 
 The
        Company reported net income of $594,000 for the three months ended
        March 31, 2006, which included the following items for the
        period:  depreciation and amortization of $233,000, increases in other
        assets of $729,000, increases in interest receivable of $373,000, a decrease
        in
        interest payable of $57,000, decreases in other liabilities of $351,000 and
        minority interest of $13,000. Net cash used in operating activities totaled
        $670,000 for the three months ended March 31, 2006. During the three
        months
        ended March 31, 2006 net cash used in investing activities was $556,000
        due
        principally to the acquisition of Falcon Point Apartments offset by net advances
        from SWI of $3.2 million. Net cash provided by financing activities of
        $1.2 million was proceeds from assuming the existing $1.5 million
        mortgage
        on Falcon Point Apartments in excess of payments on obligations.
 
 Management
        reviews the carrying values of IORI’s properties at least annually or 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.
 
 
 ***Results
        of Operations***
 
 IORI
        had
        net income of $594,000 for the three months ended March 31, 2006 as
        compared to net income of $293,000 for the corresponding period in 2005.
        Fluctuations in components of revenue and expense between the three months
        ended
        March 31, 2006 and the corresponding period in 2005 are discussed below.
 
 Rents
        in
        the three months ended March  31, 2006 were $1.7 million as
        compared
        to $1.5 million in the corresponding period in 2005. The increase is primarily
        due to rental increases.
 
 Property
        operating expenses in the three months ended March 31, 2006 were $804,000
        compared to $821,000 in the corresponding period in 2005.
 
 Interest
        income for the three months ended March 31, 2006 was $1.2 million
        compared to $1 million in the corresponding period in 2005. The increase
        was due to additional interest earned from additional notes receivable obtained
        from affiliates of IORI. Interest income is expected to exceed the previous
        year
        for the remainder of 2006 due to the increase in notes receivable.
 
 13
 Interest
        expense in the three months ended March 31, 2006 was $896,000 compared
        to
        $871,000 in the corresponding period in 2005. The increase was primarily
        due to
        the additional debt incurred by IORI during 2005. Interest expense is expected
        to exceed the previous year for the remainder of 2006 due to the increase
        in
        notes payable.
 
 Depreciation
        expense for the three months ended March 31, 2006 was $170,000 compared to
        $177,000 for the corresponding period in 2005.
 
 Advisory
        fees to affiliate for the three months ended March 31, 2006 was $174,000
        compared to $166,000 in the corresponding period in 2005. The increase was
        due
        primarily to a net increase in gross assets which is the basis of the advisory
        fee. See NOTE 3. “ADVISORY AGREEMENT.”
 
 The
        net
        income fee to affiliates was $50,000 for the three months ended March 31,
        2006 as compared to $24,000 in the corresponding period in 2005. The net
        income
        fee is based on 71⁄2% of IORI’s net income. See NOTE 3 “ADVISORY
        AGREEMENT”.
 
 General
        and administrative expense for the three months ended March 31, 2006 was
        $150,000 as compared to $142,000 in the corresponding period in 2005.
 
 
 ***Related
        Party Transactions***
 
 Historically,
        IORI, ARI, Regis Realty I, LLC (“Regis I”), 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, ARI, Regis I, and TCI as could have been obtained
        from unrelated third parties.
 
 
 ***Income
        Taxes***
 
 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
        has
        alternative minimum tax credit carryforwards available for the first three
        months of 2006 and had a loss for federal income tax purposes after the use
        of
        net operating loss carryforwards for the first three months of 2005; therefore,
        it recorded no provision for income taxes.
 
 At
        March 31, 2006, IORI had a net deferred tax asset of approximately
        $511,000
        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.
 
 
 ***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.
 
 
 
  14
   **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET
        RISK**
 
 At
        March
        31, 2006, IORI’s exposure to a change in interest rates on its debt is as
        follows:
 
 **Balance**
              
              **Weighted****Average****Interest
                  Rate**
              
              **Effect
                  of 1%**
                **Increase
                  In**
                **Base
                  Rates**Notes
                  payable:Variable
                  rate
              
              $
              17,875,000
              
              
              9.40
              %
              $
              178,750Total
                  decrease in IORI’s annual net income
              
              
              
              
              
              
              
              
              178,750Per
                  share
              
              
              
              
              
              
              
              $
              0.043
 
 
 **ITEM
        4. CONTROLS AND PROCEDURES**
 
 Based
        upon their most recent evaluation, which was completed as of the end of the
        period covered by this Report, the Acting Principal Executive Officer and
        Chief
        Financial Officer concluded that the Company’s disclosure controls and
        procedures were effective at March 31, 2006 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 period specified in Securities and Exchange Commission rules
        and
        forms. There were no changes in the Company’s internal controls over financial
        reporting during the quarter ended March 31, 2006 that have materially affected
        or are reasonably likely to materially affect the Company’s internal controls
        over financial reporting.
 
  15
 **PART
            II.  OTHER INFORMATION**
 
 
 **ITEM 2.
            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
            PROCEEDS**
 
 During
            the period of time covered by the Report, Income Opportunity Realty Investors,
            Inc. (the “Company”) did not repurchase any its equity securities. The following
            table sets forth a summary for the quarter indicating no repurchases
            were made,
            and that at the end of the period covered by this Report, a specified
            number of
            shares may yet be purchased under the programs specified below:
 
 
 **Period**
                  **Total
                      Number of****Shares Purchased**
                  **Average
                      Price**
                    **Paid
                      per Share**
                  **Total
                      Number of**
                    **Shares
                      Purchased**
                    **as
                      Part of Publicly**
                    **Announced
                      Program**
                  **Maximum
                      Number of**
                    **Shares
                      that May**
                    **Yet
                      be Purchased**
                    **Under
                      the Program****(a)**Balance
                      as of December 31, 2005
                  
                  
                  
                  219,090January
                      1-31, 2006
                  –
                  $–
                  –
                  219,090February
                      1-28, 2006
                  –
                  –
                  –
                  219,090March
                      1-31,2006
                  –
                  –
                  –
                  219,090Total
                  –
                  $–
                  –
 
 (a)  On
            June
            23, 2000, the IORI Board of Directors approved a share repurchase program
            for up
            to 1,409,000 shares of our common stock. This repurchase program has
            no
            termination date.
 
 
 **ITEM 6.
            EXHIBITS**
 
 The
            following document are filed herewith as exhibits or incorporated by
            reference
            as indicated;
 
 **Exhibit**
                    **Number**
                  **Description**3.0
                  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 Forms S-4 dated
                      February 12, 1996).10.0
                  Advisory
                      Agreement dated as of July 1, 2003 between Income Opportunity
                      Realty
                      Investors, Inc. and Syntek West, Inc. (incorporated by reference
                      to
                      Exhibit 10.0 to the registrant’s current on Form 10-Q for event of July 1,
                      2003).31.1*
                  Certification
                      Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange
                      Act of
                      1934, as amended.32.1*
                  Certification
                      pursuant to 18 U.S.C. Section 1350.
 16
  **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:
              May
                  15, 2006
              By:
              /s/
                  Steven A. AbneySteven
                  A. AbneyExecutive
                  Vice President and Chief Financial Officer(Principal
                  Financial and Accounting Officer andActing
                  Principal Executive Officer)
 
  17