##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2004 Commission File Number 1-14784 INCOME OPPORTUNITY REALTY INVESTORS, INC. 
  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)
 (214) 750-5800 
   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 April 30, 2004)
 1




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURE PAGEEXHIBITS TO QUARTERLY REPORT ON FORM 10-QCertification Pursuant to Section 302Certification Pursuant to Section 906    Table of Contents  
 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. 2




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS March 31,
    
    December 31,2004
    
    2003(dollars in thousands, except per share)AssetsReal estate held for investment
    
    $
    53,610
    
    
    $
    53,609Less - accumulated depreciation
    
    
    <5,500
    >
    
    
    <5,127
    >48,110
    
    
    
    48,482Real estate held for sale
    
    
    
    
    
    
    1,883Notes and interest
Receivable
    
    
    45,322
    
    
    
    45,531Investment in real estate partnerships
    
    
    607
    
    
    
    607Cash and cash equivalents
    
    
    112
    
    
    
    58Other assets (including $2,302 in 2004 and $457
in 2003 due from
affiliates)
    
    
    6,791
    
    
    
    4,583$
    100,942
    
    
    $
    101,144Liabilities and Stockholders EquityLiabilitiesNotes and interest payable
    
    $
    57,705
    
    
    $
    56,815Liabilities related to asset held for
sale
    
    
    
    
    
    
    4,010Other liabilities (including $215 in 2004 and $31
in 2003 due to
affiliates)
    
    
    1,495
    
    
    
    1,23059,200
    
    
    
    62,055Commitments and contingenciesStockholders equityCommon Stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
1,438,945 shares in 2004 and 2003
    
    
    14
    
    
    
    14Paid-in capital
    
    
    62,774
    
    
    
    62,774Accumulated deficit
    
    
    <21,046
    >
    
    
    <23,699
    >41,742
    
    
    
    39,089$
    100,942
    
    
    $
    101,144
 The accompanying notes are an integral part of these Consolidated Financial Statements. 3




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS For the Three MonthsEnded March 31,2004
    
    2003(dollars in thousands, except per share)Property revenueRents
    
    $
    2,136
    
    
    $
    2,277Property expenseProperty operations
(including $32 in 2004 and $108 in 2003 to
affiliates and related
parties)
    
    
    1,211
    
    
    
    1,274Operating income
    
    
    925
    
    
    
    1,003Other income <loss>Interest
    
    
    598
    
    
    
    Equity in loss of equity partnerships
    
    
    <1
    >
    
    
    <15
    >597
    
    
    
    <15
    >Other expenseInterest
    
    
    978
    
    
    
    1,175Depreciation
    
    
    342
    
    
    
    397Advisory fee to affiliate
    
    
    193
    
    
    
    167Net income fee to affiliate
    
    
    215
    
    
    
    General and administrative
(including $19 in 2004 and $92 in 2003 to
affiliates and related
parties)
    
    
    270
    
    
    
    2551,998
    
    
    
    1,994Net loss from continuing operations
    
    
    <476
    >
    
    
    <1,006
    >Discontinued operations:(Loss)/Income from discontinued operations
    
    
    <128
    >
    
    
    8Gain on sale of operations
    
    
    3,257
    
    
    
    3,129
    
    
    
    8Net income <loss>
    
    $
    2,653
    
    
    $
    <998
    >Earnings <loss> per shareNet loss from continuing operations
    
    $
    <.33
    >
    
    $
    <.70
    >Discontinued operations
    
    
    2.17
    
    
    
    .01Net income <loss>
    
    $
    1.84
    
    
    $
    <.69
    >Weighted average common shares used
in computing earnings per share
    
    
    1,438,945
    
    
    
    1,438,945
 The accompanying notes are an integral part of these Consolidated Financial Statements. 4




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2004 Common StockPaid-in
    
    Accumulated
    
    Stockholders'Shares
    
    Amount
    
    Capital
    
    Deficit
    
    Equity(dollars in thousands)Balance, January 1, 2004
    
    
    1,438,945
    
    
    $
    14
    
    
    $
    62,774
    
    
    $
    <23,699
    >
    
    $
    39,089Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,653
    
    
    
    2,653Balance, March 31, 2004
    
    
    1,438,945
    
    
    $
    14
    
    
    $
    62,774
    
    
    $
    <21,046
    >
    
    $
    41,742
 The accompanying notes are an integral part of these Consolidated Financial Statements. 5




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three MonthsEnded March 31,2004
    
    2003(dollars in thousands)Cash Flows from Operating ActivitiesNet income <loss>
    
    $
    2,653
    
    
    $
    <998
    >Reconciliation of net income <loss> to net
cash used in operating activitiesAdjustments to reconcile net income <loss>
to net cash used in operating activitiesDepreciation
    
    
    347
    
    
    
    407Gain on sale of real estate
    
    
    <3,257
    >
    
    
    <Gain> loss of equity partnerships
    
    
    1
    
    
    
    15Decrease in interest receivable
    
    
    209
    
    
    
    <Increase> decrease in other assets
    
    
    <129
    >
    
    
    356Increase in interest payable
    
    
    17
    
    
    
    Increase <decrease> in other liabilities
    
    
    245
    
    
    
    <134
    >Net cash provided by <used in>
operating activities
    
    
    86
    
    
    
    <354
    >Cash Flows from Investing ActivitiesFunding of equity partnerships
    
    
    
    
    
    
    <6
    >Real estate improvements
    
    
    
    
    
    
    <210
    >Proceeds from sale of real estate
    
    
    1,437
    
    
    
    Advances from <payments to> advisor
    
    
    <2,081
    >
    
    
    935Net cash provided by <used in> investing
activities
    
    
    <644
    >
    
    
    719Cash Flows from Financing ActivitiesPayments on notes payable
    
    $
    <586
    >
    
    $
    <183
    >Proceeds on notes payable
    
    
    1,193
    
    
    
    Deferred financing costs
    
    
    5
    
    
    
    <16
    >Net cash provided by <used in>
financing activities
    
    
    612
    
    
    
    <199
    >Net increase in cash and cash equivalents
    
    $
    54
    
    
    $
    166Cash and cash equivalents, beginning of period
    
    
    58
    
    
    
    10Cash and cash equivalents, end of period
    
    $
    112
    
    
    $
    176Supplemental Disclosures of Cash Flow InformationCash paid for interest
    
    $
    1,107
    
    
    $
    1,058
 The accompanying notes are an integral part of these Consolidated Financial Statements. 6




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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. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, certain
information and footnote disclosures, including a description of
significant accounting policies normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations. Operating results for the three month period ended March 31, 2004,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. 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, 2003 (the 2003 Form 10-K). Dollar
amounts in tables are in thousands, except per share amounts. Certain balances for 2003 have been reclassified to conform to the 2004
presentation. NOTE 2. REAL ESTATE In 2004, IORI sold the following property: Sales
    
    Net Cash
    
    Debt
    
    GainProperty
    
    Location
    
    Sq.Ft.
    
    Price
    
    Received
    
    Discharged
    
    on SaleFirst QuarterApartment Building
Treehouse
    
    San Antonio, TX
    
    88,957 Sq.Ft.
    
    $
    5,400
    
    
    $
    1,100
    
    
    $
    3,747
    
    
    $
    3,257
 For
the quarter ended March 31, 2003, IORI did not sell any properties. NOTE 3. NOTES AND INTEREST RECEIVABLE There were no new notes funded in 2004. Junior Mortgage Loans.Junior mortgage loans are loans secured by mortgages
that are subordinate to one or more prior liens either on the 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 October 14, 2003, IORI sold and conveyed the office building known as One
Hickory Centre and 202 acres of unimproved real property known as the Travelers
Land in Dallas County, Texas to Encino Executive Plaza, Ltd. The sale price for
One Hickory Centre was $12,200,000 and Encino 7




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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 note bore interest at 5.5% per annum. As with the prior
transaction, the difference between the purchase price and the promissory note
represented adjustments for various prorations. 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,
the remaining difference of which was as a result of prorations and various
expenses paid by IORI in connection with the closing of the transaction. The
note bore 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
bore interest at 5.5% per annum. On December 30, 2003, a Promissory Note in the amount of $6,363,360 given by
Housing for Seniors of Humble (Housing), LLC to NLP Lakeshore Villas, LLC
(NLP) was assigned from American Realty Investors, Inc. (ARI) to IORI as a
paydown of certain intercompany receivables. On December 30, 2003, a Promissory Note in the amount of $2,000,000 given by
Housing to NLP was assigned from ARI to IORI as additional paydown of certain
intercompany receivables. 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 March 31, 2004, IORI had
receivables of $2.5 million, $0, and $261,000 from its advisor Syntek West,
Inc. (SWI), ARI, and Transcontinental Realty Investors, Inc. (TCI),
respectively. NOTE 5. NOTES AND INTEREST PAYABLE 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, 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 of
ARI, a 8




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related party, controls approximately 11.67% of the outstanding common stock of
Innovo. The sale constituted 23% 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 $21.4 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. As mentioned on Note 2, the Treehouse apartment property was sold for $5.4
million. All the existing mortgage payable amount was discharged at the
closing. In 2004, IORI refinanced the following property: Net CashDebt
    
    Debt
    
    Received/
    
    Interest
    
    MaturityProperty
    
    Location
    
    Sq.Ft./Acrs
    
    Incurred
    
    Discharged
    
    (Paid)
    
    Rate
    
    DateOffice BuildingYeager Building
    
    Chantilly, VA
    
    60,060 Sq.Ft.
    
    $
    5,500
    
    
    $
    4,307
    
    
    $
    1,179
    
    
    
    5.00
    %(1)
    
    
    12/06
 (1) variable rate. 9




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NOTE 6. RELATED PARTY TRANSACTIONS On December 30, 2003, a Promissory Note in the amount of $6.3 million given by
Housing to NLP was assigned from ARI to IORI. On December 30, 2003, a
Promissory Note in the amount of $2.0 million given by Housing to NLP was
assigned from ARI to IORI. These assignments were payments on certain
intercompany receivables due to IORI. On December 18, 2003, IORI purchased 100% of the outstanding common shares of
Transcontinental Brewery Corporation (Brewery), a wholly-owned subsidiary of
TCI, a related party, for $4.0 million for a reduction of intercompany debt in
the same amount. Brewery owns the 19.96 acres of land and the 133,000 sq. ft.
Eagle Crest Warehouse Building in Farmers Branch, Texas. On December 18, 2003, IORI purchased 100% of the outstanding common shares of
Transcontinental Parkway Corporation (Parkway), a wholly-owned subsidiary of
TCI, for $4.0 million for reduction of intercompany debt in the amount of $2.4
million subject to mortgage lien in the amount of $1.6 million. Parkway owns
the 28,374 sq. ft. Parkway Shopping Center in Dallas, Texas. On September 19, 2002, IORIs Board of Directors authorized the Chief Financial
Officer of the Company to advance funds either to or from the Company, through
the advisor, 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 March 31, 2004. SWI
    
    RR*
    
    ARI
    
    TCIBalance, December 31, 2003
    
    $
    302
    
    
    
    
    
    
    $
    367
    
    
    $
    261Cash transfers
    
    
    3,436
    
    
    
    
    
    
    
    
    
    
    
    Cash repayments
    
    
    (957
    )
    
    
    
    
    
    
    (367
    )
    
    
    Other additions
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    Other repayments
    
    
    (397
    )
    
    
    (473
    )
    
    
    
    
    
    
    Balance, March 31, 2004
    
    
    2,514
    
    
    $
    (473
    )
    
    $
    
    
    
    $
    261
 * Regis Realty I, LLC 10




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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. 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 the operating segments and allocates resources to
each of them based on their operating income and cash flow. Items of income
that are not reflected in the segments are interest and equity in partnerships
totaling $597,000 income and $15,000 loss for 2004 and 2003, respectively.
Expenses that are not reflected in the segments are general and administrative
expenses, advisory fees, and net income fees totaling $678,000 and $422,000 for
2004 and 2003, respectively. Excluded from operating segment assets are assets
of $52.8 million at March 31, 2004 and $14.3 million at March 31, 2003, 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 and assets of each operating segment. Three Months Ended
    
    
    
    
    
    CommercialMarch 31, 2004
    
    Land
    
    Properties
    
    Apartments
    
    TotalRents
    
    $
    
    
    
    $
    722
    
    
    $
    1,414
    
    
    $
    2,136Property operating expenses
    
    
    
    
    
    
    388
    
    
    
    823
    
    
    
    1,211Operating income (loss)
    
    $
    
    
    
    $
    334
    
    
    $
    591
    
    
    $
    925Depreciation
    
    $
    
    
    
    $
    188
    
    
    $
    154
    
    
    $
    342Interest
    
    
    325
    
    
    
    324
    
    
    
    329
    
    
    
    978Real estate improvements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assets
    
    
    44
    
    
    
    21,917
    
    
    
    26,149
    
    
    
    48,110
 11




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Three Months Ended
    
    
    
    
    
    CommercialMarch 31, 2003
    
    Land
    
    Properties
    
    Apartments
    
    TotalRents
    
    $
    
    
    
    $
    1,141
    
    
    $
    1,136
    
    
    $
    2,277Property operating expenses
    
    
    80
    
    
    
    597
    
    
    
    597
    
    
    
    1,274Operating income (loss)
    
    $
    <80
    >
    
    $
    544
    
    
    $
    539
    
    
    $
    1,003Depreciation
    
    $
    
    
    
    $
    291
    
    
    $
    106
    
    
    $
    397Interest
    
    
    368
    
    
    
    364
    
    
    
    443
    
    
    
    1,175Real estate improvements
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    210Assets
    
    
    24,929
    
    
    
    28,607
    
    
    
    21,017
    
    
    
    74,553
 NOTE 8. ADVISORY FEES, PROPERTY MANAGEMENT, ETC. Revenue, fees and cost reimbursements to its advisors and affiliates for the
three months ended: For the Three MonthsEnded March 31,2004
    
    2003FeesAdvisory
    
    $
    193
    
    
    $
    167Net income
    
    
    215
    
    
    
    Property and construction management and
leasing commissions
    
    
    32
    
    
    
    108$
    440
    
    
    $
    275Cost reimbursements
    
    $
    19
    
    
    $
    92
 12




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NOTE 9. 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 ended March 31, 2004, income from
discontinued operations relates to one property that IORI sold during 2004.
The following table summarizes revenue and expense information for the
properties sold. For the Three MonthsEnded March 31,2004
    
    2003RevenueRental
    
    $
    168
    
    
    $
    199Property Operations
    
    
    172
    
    
    
    104Operating <loss>/income
    
    
    <4
    >
    
    
    95ExpensesInterest
    
    
    119
    
    
    
    77Depreciation
    
    
    5
    
    
    
    10Total expenses
    
    
    124
    
    
    
    87Net <loss>/income from discontinued operations before
gains on sale of operations
    
    
    <128
    >
    
    
    8Gain on sale of operations
    
    
    3,257
    
    
    
    Net income from discontinued operations
    
    $
    3,129
    
    
    $
    
 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. 13




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NOTE 10. COMMITMENTS AND CONTINGENCIES Liquidity.Management anticipates that IORI will generate excess cash from
operations in 2004 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 intends to selectively sell
income producing real estate, refinance real estate and incur additional
borrowings against real estate to meet its cash requirements. Other Litigation.IORI is also involved in various other 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. 14




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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. Typically, IORIs 15




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notes receivable are collateralized by income producing real estate. IORI had
$44.7 million notes receivable at March 31, 2004 and at December 31, 2003. Liquidity and Capital Resources Cash and cash equivalents at March 31, 2004 were $112,000, compared with
$58,000 at December 31, 2003. 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 2004 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 net income of $2.7 million for the three months ended
March 31, 2004, which included the following non-cash changes: depreciation of
$347,000, increases in other assets of $129,000 and increases in other
liabilities of $245,000. Net cash provided by operating activities amounted to
$86,000 for the three months ended March 31, 2004. During the quarter ended
March 31, 2004, the increase in other liabilities was primarily due to an
increase in accrued net income fee and the increase in other assets was
primarily due to an increase in accounts receivable. Net cash used in
investing activities of $644,000 was comprised of proceeds from sale of real
estate of $1.4 million and advances to SWI of $2.1 million. Net cash provided
by financing activities of $612,000 was comprised of payments on notes payable
of $586,000, proceeds on notes payable of $1.2 million and an increase in
deferred financing expense of $5,000. In the first quarter of 2004, IORI sold one apartment building for $5.4
million, receiving net cash of $1.1 million after the payoff of existing debt
and the payment of various closing costs. 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. 16




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Results of Operations For the first quarter of 2004, IORI had a net income of $2.7 million, as
compared to net loss of $998,000 for the corresponding period in 2003, The net
income in 2004 included gains on sale of real estate totaling $3.3 million.
Fluctuations in components of revenue and expense between the 2004 and 2003
periods are discussed below. Rents for the first quarter of 2004, decreased to $2.1 million versus $2.3
million in the corresponding period in 2003. Rental income for the remaining
quarters of 2004 may be expected to decrease if IORI selectively sells
properties. Property operations expense was $1.2 million in 2004 versus $1.3 million in
2003. Property operations expense may be expected to decrease in the remaining
2004 if IORI selectively sells properties. Interest income was $598,000 in 2004 versus no interest income in 2003. The
increase in 2003 from 2002 was due to interest income earned from the
wraparound promissory notes with Encino Executive Plaza and the promissory
notes with Housing for Seniors of Humble. Interest expense was $978,000 in 2004 versus $1.2 million in 2003. The
decrease in 2004 from 2003 was due to sale of two commercial properties
partially offset by purchase of one commercial property and one residential
property. Interest expense in 2004 is expected to remain constant or decrease
if IORI selectively sells properties. Depreciation expense was $342,000 in 2004 versus $397,000 in 2003. The
decrease in 2004 from 2003 was due to sale of two commercial properties and
fully depreciated tenant improvements. Advisory fee to affiliate was $193,000 in 2004 versus 167,000 in 2003. The
change was due to changes in gross assets, the basis of the fee. See NOTE 8.
ADVISORY FEES. IORI paid a net income fee of $215,000 in 2004. The net income fee is based on
7.5% of IORIs net income. General and administrative expense was $270,000 in 2004 versus $255,000 in
2003. The slight increase in 2004 resulted from an increase in property
insurance and rental expense. Related Party Transactions Historically, IORI, ARI, RR, 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, RR, and TCI as could have been obtained
from unrelated third parties. 17




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Taxes For the tax years prior to 2003, 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 a 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 after the use of net
operating loss carryforwards in the first quarter of 2004 and the first quarter
of 2003; therefore, it recorded no provision for income taxes. At March 31, 2004, IORI had a net deferred tax asset of $3.6 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. 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. 18




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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. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK At March 31, 2004, IORIs exposure to a change in interest rates on its debt is
as follows: Weighted
    
    Effect of 1%Average
    
    Increase InBalance
    
    Interest Rate
    
    Base RatesWholly-owned debt:Variable rate
    
    $
    17,404
    
    
    
    7.18
    %
    
    $
    174Total decrease in IORIs annual
Net income
    
    
    
    
    
    
    
    
    
    $
    174Per share
    
    
    
    
    
    
    
    
    
    $
    .12
 
 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. 19




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PART II. OTHER INFORMATION 20




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ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES Total Number ofShares
    
    Maximum NumberPurchased as
    
    of Shares thatPart of
    
    May Yet beTotal Number of
    
    Average Price
    
    Publicaly
    
    PurchasedShares
    
    Paid per
    
    Announced
    
    Under thePeriod
    
    Purchased
    
    Share
    
    Program
    
    Program(a)January 1-31, 2004.
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    February 1-29, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    206,500
  (a)
    
    On June 23, 2000, the IORI Board of Directors approved plans to
implement a share repurchase program for up to 500,000 shares of our
common stock. This repurchase program has no termination date. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits: ExhibitNumber
    
    Description31.1
    
    Certification Pursuant to Rules 13a-14 and 15d-14 Under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
  (b)
    
    Reports on Form 8-K as follows: During the quarter for which
this report is filed, the following current Reports 
Form 8-K were filed for events occurring on the dates indicated
below covering the items set forth below:  (i)
    
    Current Report on
Form 8-K for event occurring February 19, 2004 reporting
under Item 5 the election of two directors.(ii)
    
    Current Report on
Form 8-K for event occurring March 15, 2004 reporting under
Item 5 the resignation of a director and the election of a
director. 21




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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: May 14, 2004
    
    By:
    
    /s/ Ronald E. KimbroughRonald E. KimbroughExecutive Vice President and ChiefFinancial Officer (PrincipalFinancial and Accounting Officer
and Acting Principal Executive
Officer)
 22




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended March 31, 2004 Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number31.1
    
    Certification Pursuant to Rules 13a-14 and 15d-14
Under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 23