##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTER ENDED JUNE 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM            TO
 Commission File Number 001-14784
 
 INCOME OPPORTUNITY REALTY INVESTORS, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Nevada
(State or Other Jurisdiction of
Incorporation or Organization)
    
    75-2615944
(I.R.S. Employer
Identification No.)
 1755 Wittington Place, Suite 340, Dallas, Texas
(Address of Principal Executive Office)
    
    75234
(Zip Code)
 (214) 750-5800
(Registrants Telephone Number, Including Area Code)
  ̈ x
 x  ̈
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock, $.01 par value
(Class)
    
    4,168,035
(Outstanding at July 31, 2005)




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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 1. LEGAL PROCEEDINGSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 6. EXHIBITSSIGNATURE PAGEEXHIBITS TO QUARTERLY REPORT ON FORM 10-QCertification Pursuant to Rule 13a-14/15d-14Certification Pursuant to 18 U.S.C. Section 1350    Table of Contents  
  
 ITEM 1. FINANCIAL STATEMENTS
  
 
 June 30,
    
    
    December 31,2005
    
    
    2004(Restated)(dollars in thousands,except per share)AssetsReal estate held for investment
    
    $
    35,068
    
    
    $
    34,988Lessaccumulated depreciation
    
    
    (3,969
    )
    
    
    (3,620
    )31,099
    
    
    
    31,368Related Party Notes and interest receivable
    
    
    55,627
    
    
    
    54,911Investment in real estate partnerships
    
    
    577
    
    
    
    604Cash and cash equivalents
    
    
    442
    
    
    
    399Receivables from affiliates
    
    
    -0-
    
    
    
    261Other assets
    
    
    3,016
    
    
    
    3,905$
    90,761
    
    
    $
    90,638Liabilities and Stockholders EquityLiabilitiesNotes and interest payable
    
    $
    42,700
    
    
    $
    44,571Payables to affiliates
    
    
    2,461
    
    
    
    1,248Other liabilities
    
    
    1,001
    
    
    
    1,52946,162
    
    
    $
    47,348Commitments and contingenciesMinority Interest
    
    
    475
    
    
    
    -0-Stockholders Equity:Common Stock, $.01 par value; authorized,
10,000,000 shares; issued and outstanding
4,168,035 shares in 2005 and 1,389,345
shares in 2004
    
    
    42
    
    
    
    14Paid-in capital
    
    
    61,955
    
    
    
    61,983Accumulated deficit
    
    
    (17,873
    )
    
    
    (18,707
    )44,124
    
    
    
    43,290$
    90,761
    
    
    $
    90,638
   2




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For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,(dollars in thousands, except per share)2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Property revenue:Rents
    
    $
    1,613
    
    
    $
    1,022
    
    
    $
    3,142
    
    
    $
    2,917Property expense:Property operations (including $44 in 2005 and $78 in 2004
to
affiliates and related parties)
    
    
    825
    
    
    
    449
    
    
    
    1,646
    
    
    
    1,606Operating income
    
    
    788
    
    
    
    573
    
    
    
    1,496
    
    
    
    1,311Other income (loss):Interest
    
    
    984
    
    
    
    605
    
    
    
    1,958
    
    
    
    1,203Recovery of accounts receivable written off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity in income (loss) of equity partnerships
    
    
    (19
    )
    
    
    11
    
    
    
    (28
    )
    
    
    10965
    
    
    
    616
    
    
    
    1,930
    
    
    
    1,213Other expense:Interest
    
    
    562
    
    
    
    750
    
    
    
    1,498
    
    
    
    1,802Depreciation
    
    
    173
    
    
    
    116
    
    
    
    350
    
    
    
    386Advisory fee to affiliate
    
    
    170
    
    
    
    201
    
    
    
    337
    
    
    
    393Net income fee to affiliate
    
    
    55
    
    
    
    30
    
    
    
    67
    
    
    
    245General and administrative (including $36 in 2005 and $36 in
2004 to affiliates and related parties)
    
    
    199
    
    
    
    179
    
    
    
    341
    
    
    
    4461,159
    
    
    
    1,276
    
    
    
    2,593
    
    
    
    3,272Net income (loss) from continuing operations
    
    
    594
    
    
    
    (87
    )
    
    
    833
    
    
    
    (748
    )Discontinued operations:Income/(loss) from discontinued operations
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (78
    )Gain on sale of operations
    
    
    
    
    
    
    417
    
    
    
    
    
    
    
    3,674
    
    
    
    421
    
    
    
    
    
    
    
    3,596Net income
    
    $
    594
    
    
    $
    334
    
    
    $
    833
    
    
    $
    2,848Earnings (loss) per share:Net income (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.20
    
    
    $
    (0.17
    )Discontinued operations
    
    
    
    
    
    
    0.10
    
    
    
    
    
    
    
    0.83Net income
    
    $
    0.14
    
    
    $
    0.08
    
    
    $
    0.20
    
    
    $
    0.66Weighted average common shares used in computing earnings per
share
    
    
    4,168,035
    
    
    
    4,316,835
    
    
    
    4,168,035
    
    
    
    4,316,835
   3




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Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity(dollars in thousands)Balance, January 1, 2005 (Restated)
    
    
    1,389,345
    
    
    $
    14
    
    
    $
    61,983
    
    
    $
    (18,707
    )
    
    $
    43,290Common Stock Dividends
    
    
    2,778,690
    
    
    
    28
    
    
    
    (28
    )
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    833
    
    
    
    833Balance, June 30, 2005
    
    
    4,168,035
    
    
    $
    42
    
    
    $
    61,955
    
    
    $
    (17,874
    )
    
    $
    44,123
  4




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For the Six MonthsEnded June 30,2005
    
    
    2004(Restated)(dollars in thousands)Cash Flows from Operating ActivitiesNet income/(loss)
    
    $
    833
    
    
    $
    2,848Reconciliation of net income (loss) to net cash used by operating activitiesAdjustments to reconcile net income (loss) to net cash used in operating activitiesDepreciation and amortization
    
    
    482
    
    
    
    636Gain on sale of real estate
    
    
    
    
    
    
    (3,674
    )Loss (gain) on equity partnerships
    
    
    28
    
    
    
    (11
    )Increase in interest receivable
    
    
    (543
    )
    
    
    (317
    )Decrease (Increase) in other assets
    
    
    232
    
    
    
    (1,876
    )Increase in interest payable
    
    
    45
    
    
    
    15(Decrease) increase in other liabilities
    
    
    (553
    )
    
    
    231Net cash provided by (used in) operating activities
    
    
    524
    
    
    
    (2,148
    )Cash Flows from Investing ActivitiesProceeds from sale of real estate
    
    
    
    
    
    
    3,444Advances from (payments to) advisor and affiliates
    
    
    1,436
    
    
    
    (2,057
    )Net cash provided by (used in) investing activities
    
    
    1,436
    
    
    
    1,387Cash Flows from Financing ActivitiesPayments on notes payable
    
    $
    (1,917
    )
    
    $
    (462
    )Proceeds on notes payable
    
    
    
    
    
    
    1,193Deferred financing costs
    
    
    
    
    
    
    90Net cash (used in) provided by financing activities
    
    
    (1,917
    )
    
    
    821Net increase in cash and cash equivalents
    
    $
    43
    
    
    $
    60Cash and cash equivalents, beginning of period
    
    
    399
    
    
    
    58Cash and cash equivalents, end of period
    
    $
    442
    
    
    $
    118Supplemental Disclosures of Cash Flow InformationCash paid for interest
    
    $
    1,727
    
    
    $
    2,232Note receivable from sale of real estate
    
    
    
    
    
    
    2,990
  
 5




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NOTE 1. BASIS OF PRESENTATION
   
    
    Decrease in interest expense by $15,000 for the three months ended June 30, 2004.
    
    Decrease in advisory fee by $1,000 for the three months ended June 30, 2004.
    
    Increase in interest expense by $125,000 for the six months ended June 30, 2004.
    
    Decrease in advisory fee by $2,000 for the six months ended June 30, 2004.
 NOTE 2. REAL ESTATE
    Sales
    
    
    Net Cash
    
    
    Debt
    
    
    GainProperty
    
    Location
    
    
    Units/Sq.Ft.
    
    
    Price
    
    
    Received
    
    
    Discharged
    
    
    on SaleApartment BuildingTreehouse(1)
    
    Irving, TX
    
    160 Units
    
    $
    8,017
    
    
    
    ($498
    )
    
    $
    5,018
    
    
    $
    -
    (2)Commercial BuildingAkard Plaza
    
    Dallas, TX
    
    42,258 Sq.Ft.
    
    $
    3,900
    
    
    $
    2,007
    
    
    $
    1,849
    
    
    $
    417
 
 (1)
    
    Property sold to TCI, a related party, for assumption of debt and a note receivable, less
$498,000 in cash paid.(2)
    
    Excludes a $56,000 deferred gain from a related party sale. NOTE 3. NOTES AND INTEREST RECEIVABLE
 Junior Mortgage Loans.
 6




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




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SWI
    
    
    Prime
    
    
    ARI
    
    
    TCIBalance, December
31, 2004
    
    $
    (1,248
    )
    
    $
    
    
    
    $
    
    
    
    $
    261Cash transfers
    
    
    5,112
    
    
    
    
    
    
    
    475
    
    
    
    Cash repayments
    
    
    (5,863
    )
    
    
    
    
    
    
    
    
    
    
    (261
    )Other additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other repayments
    
    
    (440
    )
    
    
    (22
    )
    
    
    (475
    )
    
    
    Balance, June 30, 2005
    
    $
    (2,439
    )
    
    $
    (22
    )
    
    $
    
    
    
    $
    
 8




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NOTE 7. OPERATING SEGMENTS
   Three Months Ended
    
    CommercialJune 30, 2005
    
    Properties
    
    
    Apartments
    
    
    TotalRents
    
    $
    374
    
    
    $
    1,239
    
    
    $
    1,613Property operating expenses
    
    
    215
    
    
    
    610
    
    
    
    825Operating income (loss)
    
    $
    159
    
    
    $
    629
    
    
    $
    788Depreciation
    
    $
    112
    
    
    $
    61
    
    
    $
    173Interest
    
    
    143
    
    
    
    190
    
    
    
    562Real estate improvements
    
    
    36
    
    
    
    
    
    
    
    36Assets
    
    
    12,952
    
    
    
    18,147
    
    
    
    31,099Six Months EndedJune 30, 2005Rents
    
    $
    696
    
    
    $
    2,446
    
    
    $
    3,142Property operating expenses
    
    
    426
    
    
    
    1,220
    
    
    
    1,646Operating income (loss)
    
    $
    270
    
    
    $
    1,226
    
    
    $
    1,496Depreciation
    
    $
    127
    
    
    $
    223
    
    
    $
    350Interest
    
    
    469
    
    
    
    579
    
    
    
    1,498Real estate improvements
    
    
    
    
    
    
    
    
    
    
    Assets
    
    
    12,952
    
    
    
    18,147
    
    
    
    31,099
 9




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Three Months EndedJune 30, 2004
    
    
    
    
    
    Commercial(Restated)
    
    Land
    
    
    Properties
    
    
    Apartments
    
    
    TotalRents
    
    $
    
    
    
    $
    126
    *
    
    $
    896
    
    
    $
    1,022
    *Property operating expenses
    
    
    
    
    
    
    --
    *
    
    
    449
    
    
    
    449
    *Operating income (loss)
    
    $
    
    
    
    $
    126
    *
    
    $
    447
    
    
    $
    573
    *Depreciation
    
    $
    
    
    
    $
    47
    *
    
    $
    69
    
    
    $
    116
    *Interest
    
    
    244
    
    
    
    173
    *
    
    
    333
    *
    
    
    750
    *Real estate improvements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assets
    
    
    44
    
    
    
    18,458
    
    
    
    18,592
    
    
    
    37,094Six Months EndedJune 30, 2004(Restated)Rents
    
    $
    
    
    
    $
    607
    *
    
    $
    2,310
    
    
    $
    2,917
    *Property operating expenses
    
    
    
    
    
    
    334
    *
    
    
    1,272
    
    
    
    1,606
    *Operating income (loss)
    
    $
    
    
    
    $
    273
    *
    
    $
    1,038
    
    
    $
    1,311
    *Depreciation
    
    $
    
    
    
    $
    163
    *
    
    $
    223
    
    
    $
    386
    *Interest
    
    
    569
    
    
    
    431
    *
    
    
    802
    *
    
    
    1,802
    *Real estate improvements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assets
    
    
    44
    
    
    
    18,458
    
    
    
    18,592
    
    
    
    37,094
 
 *
    
    These are the restated numbers which reflect corrections for the discontinued operations, the
issuance of 3-for-1 stock
dividends and the accounting error related to a deferral of operating income and/or expense.
See NOTE 1. BASIS OF
PRESENTATION. NOTE 8. ADVISORY FEES, PROPERTY MANAGEMENT, ETC.
  For the Six MonthsEnded June 30,2005
    
    
    2004(Restated)FeesAdvisory
    
    $
    337
    
    
    $
    393Net income
    
    
    67
    
    
    
    245Property and construction management and leasing commission
    
    
    44
    
    
    
    78$
    448
    
    
    $
    716Cost reimbursements
    
    $
    36
    
    
    $
    36
 10




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NOTE 9. DISCONTINUED OPERATIONS
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,Revenue
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Rental
    
    $
    
    
    
    $
    1,076
    
    
    $
    
    
    
    $
    1,485Property Operations
    
    
    
    
    
    
    639
    
    
    
    
    
    
    
    865Operating income
    
    
    
    
    
    
    437
    
    
    
    
    
    
    
    620ExpenseInterest
    
    
    
    
    
    
    262
    
    
    
    
    
    
    
    447Depreciation
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    251Total expenses
    
    
    
    
    
    
    436
    
    
    
    
    
    
    
    698Net gain from discontinued
operations before gains on sale of
operations
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (78
    )Gain on sale of operations
    
    
    
    
    
    
    417
    
    
    
    
    
    
    
    3,674Net income/(loss) from discontinued
operations
    
    $
    
    
    
    $
    418
    
    
    $
    
    
    
    $
    3,596
  NOTE 10. COMMITMENTS AND CONTINGENCIES
 Liquidity.
 Other Litigation.
 
 11




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




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Results of Operations
          Related Party Transactions
  Taxes
  13




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Inflation
  Environmental Matters
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
  Weighted
    
    
    Effect of 1%Average
    
    
    Increase InBalance
    
    
    Interest Rate
    
    
    Base RatesWholly-owned debt:Variable rate
    
    $
    9,425
    
    
    
    8.23
    %
    
    $
    94Total decrease in IORIs annualNet income
    
    
    
    
    
    
    
    
    
    $
    94Per share
    
    
    
    
    
    
    
    
    
    $
    0.02
 14




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




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16




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ITEM 1. LEGAL PROCEEDINGS
 Innovo Realty, Inc. American Realty Investors, Inc., Transcontinental Realty Investors, Inc. and
Income Opportunity Realty Investors, Inc., Plaintiffs v. Innovo Realty, Inc. and Innovo Group,
Inc., Involuntary Plaintiffs v. Innovo Realty, Inc., Metra Capital LLC, Innovo Group, Inc., Joseph
Mizrachi, Simon Mizrachi, Herbert Guez, Third Millennium Partners LLC, Third Millennium Partners,
Inc., Third Millennium Group LLC and Sunridge Management, Inc., Defendants
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number ofShares
    
    
    Maximum NumberPurchased as
    
    
    of Shares that MayTotal Number of
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Yet be PurchasedShares
    
    
    Paid per
    
    
    Announced
    
    
    Under thePeriod
    
    Purchased
    
    
    Share
    
    
    Program
    
    
    Program(1)April 1-30, 2005
    
    
     ̄
    
    
    $
     ̄
    
    
    
     ̄
    
    
    
     ̄May 1-31, 2005
    
    
     ̄
    
    
    
     ̄
    
    
    
     ̄
    
    
    
     ̄June 1-30, 2005
    
    
     ̄
    
    
    
     ̄
    
    
    
     ̄
    
    
    
     ̄Total
    
    
     ̄
    
    
    $
     ̄
    
    
    
     ̄
    
    
    
    31,596
 
 (1)
    
    On September 23, 2000, the IORI Board of Directors approved a share repurchase program for
up to 300,000 shares of our common stock. This repurchase program has no termination date. 17




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




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INCOME OPPORTUNITY REALTY INVESTORS, INC.Date:  August 15, 2005
    By:
    /s/ Robert N. Crouch IIRobert N. Crouch IIExecutive Vice President, Chief Financial Officer,
and Acting Principal Executive Officer 19




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Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number31.1
    
    Certification Pursuant to Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350.