<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


              [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998



                          Commission File Number 1-9525



                    INCOME OPPORTUNITY REALTY INVESTORS, INC.
           ---------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)




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



10670 North Central Expressway, Suite 300, Dallas, Texas,       75231
-------------------------------------------------------------------------------
(Address of Principal Executive Offices)                      (Zip Code)



                                 (214) 692-4700
                         -------------------------------
                         (Registrant's Telephone Number,
                              Including Area Code)





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                           1,524,467
----------------------------               ---------------------------------
         (Class)                           (Outstanding at October 30, 1998)





<PAGE>   2



                         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. (the "Company"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company'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


<TABLE>
<CAPTION>

                                                              September 30,     December 31,
                                                                  1998              1997
                                                               ----------        ----------
                                                                  (dollars in thousands)
<S>                                                           <C>               <C>     
                       Assets

Notes and interest receivable
   Performing ..............................................   $       --        $    2,010

Real estate held for investment, net of
   accumulated depreciation ($6,784 in 1998 and
   $5,211 in 1997) .........................................       83,483            81,914

Investment in partnerships .................................        1,619             1,762
Cash and cash equivalents ..................................          481             1,145
Other assets (including $128 in 1998 and $302 in
   1997 from affiliates) ...................................        2,920             3,478
                                                               ----------        ----------
                                                               $   88,503        $   90,309
                                                               ==========        ==========

        Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable .................................   $   60,992        $   61,323
Other liabilities (including $511 in 1998 and
   $468 in 1997 to affiliates) .............................        3,583             3,855
                                                               ----------        ----------
                                                                   64,575            65,178

Commitments and contingencies

Stockholders' equity
Common Stock, $.01 par value;
   authorized, 10,000,000 shares; issued and
   outstanding, 1,522,531 shares in 1998 and
   1,519,888 in 1997 .......................................           15                15
Paid-in capital ............................................       64,833            64,804
Accumulated distributions in excess of accumulated
   earnings ................................................      (40,920)          (39,688)
                                                               ----------        ----------
                                                                   23,928            25,131
                                                               ----------        ----------
                                                               $   88,503        $   90,309
                                                               ==========        ==========

</TABLE>


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




                                        2

<PAGE>   3



                    INCOME OPPORTUNITY REALTY INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>

                                               For the Three Months          For the Nine Months
                                                Ended September 30,          Ended September 30,
                                            --------------------------    --------------------------
                                                1998           1997          1998           1997
                                            -----------    -----------    -----------    -----------
                                                    (dollars in thousands, except per share)
<S>                                         <C>            <C>            <C>            <C>        

INCOME
   Rents ................................   $     3,321    $     3,174    $    10,511    $     8,759
   Interest .............................            33             61            158            203
                                            -----------    -----------    -----------    -----------
                                                  3,354          3,235         10,669          8,962



EXPENSES
   Property operations ..................         1,592          1,518          4,547          4,083
   Interest .............................         1,388          1,081          4,217          2,859
   Depreciation .........................           551            426          1,573          1,131
   Advisory fee to affiliate ............           165            133            500            379
   Net income fee to affiliate ..........            (4)            --             --            218
   General and administrative ...........           206            318            594            755
                                            -----------    -----------    -----------    -----------
                                                  3,898          3,476         11,431          9,425
                                            -----------    -----------    -----------    -----------


(Loss) from operations ..................          (544)          (241)          (762)          (463)

Equity in income (loss) of
   partnerships .........................           (12)           (25)           249             21
Gain on sale of real estate .............            --             --             --          3,322
                                            -----------    -----------    -----------    -----------

Net income (loss) .......................   $      (556)   $      (266)   $      (513)   $     2,880
                                            ===========    ===========    ===========    ===========



Earnings Per Share

   Net income (loss) ....................   $      (.37)   $      (.18)   $      (.34)   $      1.89
                                            ===========    ===========    ===========    ===========




Weighted average Common shares
   used in computing
   earnings per share ...................     1,522,491      1,519,888      1,520,976      1,519,888
                                            ===========    ===========    ===========    ===========

</TABLE>


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



                                        3

<PAGE>   4



                    INCOME OPPORTUNITY REALTY INVESTORS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  For the Nine Months Ended September 30, 1998



<TABLE>
<CAPTION>

                                                                                 Accumulated
                                                                                Distributions
                                              Common Stock                       in Excess of
                                       -------------------------     Paid-In     Accumulated   Stockholders'
                                          Shares       Amount        Capital       Earnings       Equity
                                       -----------   -----------   -----------   -----------    -----------
                                                                    (dollars in thousands)
<S>                                    <C>           <C>           <C>           <C>            <C>        

Balance, January 1, 1998 ...........     1,519,888   $        15   $    64,804   $   (39,688)   $    25,131



Sale of Common Stock under
   dividend reinvestment
   plan ............................         2,643            --            29            --             29

Dividends ($.45 per share) .........            --            --            --          (719)          (719)


Net (loss) .........................            --            --            --          (513)          (513)
                                       -----------   -----------   -----------   -----------    -----------



Balance, September 30,
   1998 ............................     1,522,531   $        15   $    64,833   $   (40,920)   $    23,928
                                       ===========   ===========   ===========   ===========    ===========

</TABLE>


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


                                        4

<PAGE>   5



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

<TABLE>
<CAPTION>

                                                                              For the Nine Months
                                                                              Ended September 30,
                                                                       ------------------------------
                                                                           1998               1997
                                                                       ----------          ----------
                                                                           (dollars in thousands)
<S>                                                                    <C>                 <C>       

Cash Flows from Operating Activities
   Rents collected ...........................................         $   10,806          $    8,444
   Interest collected ........................................                168                 194
   Interest paid .............................................             (4,072)             (2,491)
   Payments for property operations ..........................             (4,615)             (3,301)
   Advisory and net income fee paid to affiliate .............               (570)               (617)
   General and administrative expenses paid ..................               (895)               (875)
   Distributions from equity partnerships' operating
      cash flow ..............................................                 --                 218
   Other .....................................................                (24)                240
                                                                       ----------          ----------

      Net cash provided by operating activities ..............                798               1,812


Cash Flows from Investing Activities
   Acquisition of real estate ................................                 --             (31,258)
   Proceeds from sale of real estate .........................                 --              21,989
   Real estate improvements ..................................             (3,143)               (512)
   Funding of equity partnerships ............................                 (7)               (222)
   Distributions from equity partnerships'
      investing cash flow ....................................                399                  --
                                                                       ----------          ----------

      Net cash (used in) investing activities ................             (2,751)            (10,003)


Cash Flows from Financing Activities
   Payments on notes payable .................................             (1,180)            (15,735)
   Proceeds from notes payable ...............................                800              21,640
   Collection on notes receivable ............................              2,000                  --
   Deferred borrowing costs ..................................                (24)                (15)
   Distributions from equity partnerships' financing
      cash flow ..............................................                 --                 627
   Sale of Common Stock under dividend reinvestment
      plan ...................................................                 29                  --
   Dividends to stockholders .................................               (719)               (456)
   Advances from advisor .....................................                383                  21
                                                                       ----------          ----------

      Net cash provided by financing activities ..............              1,289               6,082


Net (decrease) in cash and cash equivalents ..................               (664)             (2,109)
Cash and cash equivalents, beginning of period ...............              1,145               3,186
                                                                       ----------          ----------

Cash and cash equivalents, end of period .....................         $      481          $    1,077
                                                                       ==========          ==========

</TABLE>


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



                                        5

<PAGE>   6



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



<TABLE>
<CAPTION>

                                                                            For the Nine Months
                                                                            Ended September 30,
                                                                       ----------------------------
                                                                          1998               1997
                                                                       ---------          ---------
                                                                          (dollars in thousands)
<S>                                                                    <C>                <C>      

Reconciliation of net income to net cash
   provided by operating activities
Net income (loss) ............................................         $    (513)         $   2,880
Adjustments to reconcile net income to net cash
      provided by operating activities
   (Gain) on sale of real estate .............................                --             (3,322)
   Depreciation and amortization .............................             1,666              1,208
   Equity in (income) of partnerships ........................              (249)               (21)
   Distributions from equity partnerships' operating
      cash flow ..............................................                --                218
   Decrease in interest receivable ...........................                17                 --
   (Increase) decrease in other assets .......................               483               (547)
   Increase in interest payable ..............................                45                282
   Increase (decrease) in other liabilities ..................              (651)             1,114
                                                                       ---------          ---------

      Net cash provided by operating activities ..............         $     798          $   1,812
                                                                       =========          =========

Schedule of noncash investing and financing
   activities

Notes payable from purchase of real estate....................         $      --           $  3,470


</TABLE>



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



                                        6

<PAGE>   7



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



NOTE 1.  BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
Operating results for the nine month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the Consolidated Financial
Statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (the "1997 Form 10-K").

Certain balances for 1997 have been reclassified to conform to the 1998
presentation.

NOTE 2.  NOTES AND INTEREST RECEIVABLE

In August 1998, the Company's remaining mortgage note receivable with a
principal balance of $2,000,000 was collected in full. Net cash of $1.5 million
was received, after the pay off of $500,000 in underlying debt.

NOTE 3.  INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES

The Company owns a 36.3% general partner interest in Tri-City Limited
Partnership ("Tri-City"), which owned five properties in Texas. In May 1998,
Tri-City sold two of its apartment complexes for a total of $3.3 million in
cash. Tri-City received net cash of $1.4 million after the payoff of $1.9
million in existing mortgage debt and the payment of various closing costs
associated with the sale. The Company received a distribution of $399,000 of
such net cash. Tri-City paid a real estate brokerage commission of $119,000 to
Carmel Realty, Inc., an affiliate of Basic Capital Management, Inc. ("BCM"), the
Company's advisor, based on the $3.3 million sales price of the properties.
Tri-City recognized a gain of $496,000 on the sale of which, the Company's
equity share was $180,000.

NOTE 4.  NOTES AND INTEREST PAYABLE

In August 1998, the Company obtained mortgage financing of $816,000 secured by
the previously unencumbered Valley View Center Office Building in Farmers
Branch, Texas. Net cash of $778,000 was received, after the payment of various
closing costs associated with the financing. The mortgage bears interest at 9.1%
per annum, requires monthly payments of interest only and matures in August
2000. A mortgage brokerage and equity refinancing fee of $8,000 was paid to BCM
based on the $816,000 refinancing.



                                        7

<PAGE>   8



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



NOTE 5.  COMMITMENTS AND CONTINGENCIES

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


                          ----------------------------


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


Introduction

Income Opportunity Realty Investors, Inc. (the "Company") invests in equity
interests in real estate through acquisitions, leases and partnerships and has
invested in mortgage loans on real estate. The Company is the successor to a
California business trust organized on December 14, 1984 which commenced
operations on April 10, 1985.

Liquidity and Capital Resources

Cash and cash equivalents at September 30, 1998, were $481,000, compared with
$1.1 million at December 31, 1997. The Company's principal sources of cash have
been, and will continue to be property operations, proceeds from property sales,
financings and refinancings and, to a lesser extent, distributions from
partnerships.

The Company's cash flow from property operations (rents collected less payments
for expenses applicable to rental income) increased from $4.7 million in the
first nine months of 1997 to $6.0 million in the first nine months of 1998. Of
this increase $1.8 million is due to the purchase of eight income producing
properties during 1997 and $153,000 is due to increased rental and occupancy
rates at the Company's commercial properties. These increases were partially
offset by a decrease of $700,000 due to the sale of three apartment complexes
during 1997.

In August 1998, the Company received net cash of $1.5 million from the payoff of
its one remaining mortgage note receivable.

Also in August 1998, the Company obtained mortgage financing in the amount of
$816,000 secured by the unencumbered Valley View Center Office Building. Net
cash of $778,000 was received, after the payment of various closing costs
associated with the financing. $1.7 million was expended in 1998 to complete
construction of the building.

         

                                        8

<PAGE>   9



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


Liquidity and Capital Resources (Continued)

In the first nine months of 1998, quarterly dividends of $.45 per share or a
total of $719,000 were paid, and 2,643 shares of Common Stock were sold through
the dividend reinvestment program for a total of $29,000.

Management reviews the carrying values of the Company'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. In those instances
where impairment is found to exist, a provision for loss is recorded by a charge
against earnings. The property review generally includes selective property
inspections, which includes discussions with the manager of the property and
visits to selected properties in the surrounding area and a review of the
following: (i) the property's current rents compared to market rents; (ii) the
property's expenses; (iii) the property's maintenance requirements; and, (iv)
the property's cash flow.


Results of Operations

For the three and nine months ended September 30, 1998, the Company had net
losses of $556,000 and $513,000 as compared with a net loss of $266,000 and net
income of $2.9 million in the corresponding periods in 1997. Net income for the
nine months ended September 30, 1997, included gains on sale of real estate of
$3.3 million. Fluctuations in this and other components of revenues and expenses
between the 1997 and 1998 periods are discussed below.

Rents in the three and nine months ended September 30, 1998, were $3.3 million
and $10.5 million as compared to $3.2 million and $8.8 million in the
corresponding periods in 1997. Of the increases, $427,000 and $3.7 million for
the three and nine months ended September 30, 1998, is due to eight properties
being acquired during 1997. These increases were partially offset by a decrease
of $244,000 and $2.0 million for the three and nine months ended September 30,
1998, due to the sale of three apartment complexes in 1997. Rents for the
remainder of 1998 are expected to increase as the Company continues to benefit
from the operations of the properties acquired in the second half of 1997.

Property operations expense in the three and nine months ended September 30,
1998, was $1.6 million and $4.5 million as compared to $1.5 million and $4.1
million in the corresponding periods in 1997. Of the increases, $327,000 and
$1.9 million for the three and nine months ended September 30, 1998, is due to
the acquisition of eight properties during 1997. These increases were partially
offset by a decrease of $208,000 and $1.3 million for the three and nine months
ended September 30, 1998 due to the sale of three apartment complexes in 1997.




                                        9

<PAGE>   10



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


Results of Operations (Continued)

Interest income decreased to $33,000 and $158,000 in the three and nine months
ended September 30, 1998 compared to the $61,000 and $203,000 in the
corresponding periods in 1997. In August 1998, the Company collected its
remaining mortgage note receivable. Interest income for the fourth quarter of
1998 is expected to be minimal due to the payoff of such mortgage note
receivable.

Interest expense increased to $1.4 million and $4.2 million in the three and
nine months ended September 30, 1998, compared to the $1.1 million and $2.9
million in the corresponding periods in 1997. Of these increases, $207,000 and
$1.5 million for the three and nine months ended September 30, 1998, was due to
the debt incurred or assumed on the eight properties acquired during 1997, and
an additional $118,000 and $352,000 for the three and nine months was due to the
refinancing of a property. These increases were partially offset by a decrease
of $1,000 and $444,000 for the nine months ended September 30, 1998 due to the
sale of three apartment complexes during 1997. Interest expense for the fourth
quarter of 1998 is expected to be comparable to that of the third quarter of
1998.

Depreciation expense increased to $551,000 and $1.6 million for the three and
nine months ended September 30, 1998, compared to $426,000 and $1.1 million in
the corresponding periods in 1997. These increases were due to eight properties
being acquired during 1997 partially offset by the sale of three apartment
complexes during 1997. Depreciation expense is expected to remain constant for
the fourth quarter of 1998 as no additional properties are expected to be
acquired during 1998.

Advisory fee expense increased to $165,000 and $500,000 in the three and nine
months ended September 30, 1998 compared to $133,000 and $379,000 for the
corresponding periods in 1997. These increases were due to an increase in the
Company's gross assets, the basis for such fee. Advisory fee expense is expected
to decline in the fourth quarter of 1998, as a result of a decline in the
Company's gross assets due to the August 1998 collection of its remaining note
receivable.

Net income fee in the nine months ended September 30, 1997, was $218,000. No
such fee was incurred for the nine months ended September 30, 1998. The fee is
payable to the Company's advisor based on 7.5% of the Company's net income.

General and administrative expense decreased to $206,000 and $594,000 in the
three and nine months ended September 30, 1998, compared to the $318,000 and
$755,000 in the corresponding periods in 1997. The decrease is mainly due to a
decrease in legal fees related to the Olive litigation. General and
administrative expense for the fourth quarter of 1998 is expected to be
comparable to that of the third quarter of 1998.



                                       10

<PAGE>   11



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

Tax Matters

As more fully discussed in the Company's 1997 Form 10-K, the Company has elected
and, in management's opinion, qualified, to be taxed as a real estate investment
trust ("REIT"), as defined under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, (the "Code"). To continue to qualify for
federal taxation as a REIT under the Code, the Company is required to hold at
least 75% of the value of its total assets in real estate assets, government
securities, cash and cash equivalents at the close of each quarter of each
taxable year. The Code also requires a REIT to distribute at least 95% of its
REIT taxable income plus 95% of its net income from foreclosure property, all as
defined in Section 857 of the Code, on an annual basis to shareholders.

Inflation

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

Environmental Matters

Under various federal, state and local environmental laws, ordinances and
regulations, the Company 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 the Company's business,
assets or results of operations.

Year 2000

Basic Capital Management, Inc. ("BCM"), the Company's advisor, has
informed the Company that its computer hardware operating system and
computer software have been certified as year 2000 compliant.

Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of
BCM, that performs property management services for the Company's
properties, has informed the Company that it is currently testing year




                                       11

<PAGE>   12



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


Year 2000 (Continued)

2000 compliant property management computer software for the Company's
commercial properties. Carmel, Ltd. expects to begin utilizing such software
January 1, 1999. With regards to the Company's apartment complexes, Carmel, Ltd.
has informed the Company that its subcontractors either have in place or will
have in place in the first quarter of 1999, year 2000 compliant property
management computer software.

The Company has not incurred, nor does it expect to incur, any costs related to
its accounting and property management computer software being modified,
upgraded or replaced in order to make it year 2000 compliant. Such costs have
been or will be borne by either BCM, Carmel, Ltd. or the property management
subcontractors of Carmel, Ltd.

Management has not completed its evaluation of the Company's computer controlled
building systems, such as security, elevators, heating and cooling, etc., to
determine what systems may not be year 2000 compliant. Management does not
believe that any necessary modifications to such systems will require
significant expenditures or cause interruptions in operations, as such enhanced
operating systems are readily available.

The Company has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks the Company faces are that certain of its vendors
will not be able to supply goods or services and that financial institutions and
taxing authorities will not be able to accurately apply payments made to them.
Management believes that other vendors are readily available and that financial
institutions and taxing authorities will, if necessary, apply monies received
manually. The likelihood of the above having a significant impact on the
Company's operations is negligible.


                       -----------------------------------

                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

Olive Litigation. In February 1990, the Company, together with Continental
Mortgage and Equity Trust ("CMET"), National Income Realty Trust and
Transcontinental Realty Investors, Inc. ("TCI"), three real estate entities
with, at the time, the same officers, directors or trustees and advisor as the
Company, entered into a settlement of a class and derivative action entitled
Olive et al. v. National Income Realty Trust et al. pending before the United
States District Court for the Northern District of California and relating to
the operation and management of each of the entities (the "Olive Litigation").
On April 23, 1990, the Court granted final approval of the terms of a
Stipulation of Settlement.




                                       12

<PAGE>   13



ITEM 1.  LEGAL PROCEEDINGS (Continued)

On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and that modified certain provisions of the April 1990 settlement.
The Olive Modification was preliminarily approved by the Court on July 1, 1994,
and final court approval was entered on December 12, 1994. The effective date of
the Olive Modification was January 11, 1995.

The Court retained jurisdiction to enforce the Olive Modification, and during
August and September 1996, the Court held evidentiary hearings to assess
compliance with the terms of the Olive Modification by various parties. The
Court issued no ruling or order with respect to the matters addressed at the
hearings.

Separately, in 1996, legal counsel for the plaintiffs notified the Company's
Board of Directors that he intended to assert that certain actions taken by the
Board of Directors breached the terms of the Olive Modification. On January 27,
1997, the parties entered into an Amendment to the Olive Modification effective
January 9, 1997 (the "Olive Amendment"), which was submitted to the Court for
approval on January 29, 1997. The Olive Amendment provides for the settlement of
all matters raised at the evidentiary hearings and by plaintiffs' counsel in his
notices to the Company's Board of Directors. On May 2, 1997, a hearing was held
for the Court to consider approval of the Olive Amendment. As a result of the
hearing, the parties entered into a revised Olive Amendment. The Court issued an
order approving the Olive Amendment on July 3, 1997.

The Olive Amendment provided for the addition of four new unaffiliated members
to the Company's Board of Directors and set forth new requirements for the
approval of any transactions with certain affiliates until April 28, 1999. In
addition, the Company, CMET, TCI and their shareholders released the defendants
from any claims relating to the plaintiffs' allegations and matters which were
the subject of the evidentiary hearings. The plaintiffs' allegations of any
breaches of the Olive Modification shall be settled by mutual agreement of the
parties or, lacking such agreement, by an arbitration proceeding.

Under the Olive Amendment, all shares of the Company owned by Gene E. Phillips
or any of his affiliates shall be voted at all stockholder meetings of the
Company held until April 28, 1999 in favor of all new Board members added under
the Olive Amendment. The Olive Amendment also requires that, until April 28,
1999, all shares of the Company owned by Gene E. Phillips or his affiliates in
excess of forty percent (40%) of the Company's outstanding shares shall be
voted in proportion to the votes cast by all non-affiliated shareholders of the
Company.

In accordance with the Olive Amendment, Richard W. Douglas, Larry E. Harley and
R. Douglas Leonhard were added to the Company's Board of Directors in January
1998 and Murray Shaw was added to the Company's Board of Directors in February
1998.



                                       13

<PAGE>   14

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


(a)      Exhibits:


<TABLE>
<CAPTION>

Exhibit
Number                                Description
------                                -----------

<S>            <C> 
 27.0          Financial Data Schedule, filed herewith.

</TABLE>


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

         A Current Report on Form 8-K, dated December 30, 1997, was filed
         January 9, 1998, with respect to Item 2. "Acquisition or Disposition of
         Assets," and Item 7. "Financial Statements and Exhibits," which reports
         the acquisition of Akard Plaza and Fireside Thrift Building, as amended
         by Form 8-K/A, filed August 5, 1998.



                                       14

<PAGE>   15






                                 SIGNATURE PAGE



Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                           INCOME OPPORTUNITY REALTY INVESTORS,
                                           INC.







Date:    November 9, 1998                  By:  /s/ Randall M. Paulson
     ------------------------                 ------------------------
                                              Randall M. Paulson
                                              President






Date:    November 9, 1998                  By:  /s/ Thomas A. Holland
     ------------------------                 -----------------------
                                              Thomas A. Holland
                                              Executive Vice President and
                                              Chief Financial Officer
                                              (Principal Financial and
                                              Accounting Officer)



                                       15

<PAGE>   16






                    INCOME OPPORTUNITY REALTY INVESTORS, INC.

                                   EXHIBITS TO
                          QUARTERLY REPORT ON FORM 10-Q

                  For the Three Months Ended September 30, 1998




<TABLE>
<CAPTION>

Exhibit                                                              Page
Number                          Description                         Number
------                          -----------                         ------
<S>               <C>                                                <C>

 27.0             Financial Data Schedule.                           17

</TABLE>