<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, 1997
                                                          ------------------


                         Commission File Number 1-9525
                                                ------


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




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



    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    .
                                               ---      ---



<TABLE>
<S>                                        <C>
Common Stock, $.01 par value                          1,519,888            
----------------------------              ---------------------------------
         (Class)                           (Outstanding at October 31, 1997)
</TABLE>


                                      1
<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,
                                                                                 1997                   1996    
                                                                             -------------           -----------
                                                                                    (dollars in thousands)
                       Assets
<S>                                                                          <C>                  <C>
Notes and interest receivable
 Performing.......................................                             $     2,007           $     1,998

Foreclosed real estate held for sale, net of
 accumulated depreciation ($20 in 1997 and 1996)..                                   1,029                   914

Real estate under contract for sale, net of
 accumulated depreciation ($1,904 in 1996)........                                      -                  5,709
                                                                             -------------           -----------
                                                                                     1,029                 6,623

Real estate held for investment, net of
 accumulated depreciation ($4,727 in 1997 and
 $5,311 in 1996)..................................                                  67,873                46,693

Investment in partnerships.........................                                  1,729                 2,331
Cash and cash equivalents..........................                                  1,077                 3,186
Other assets (including $125 in 1997 and $256 in
 1996 from affiliates)............................                                   2,550                 2,762
                                                                               -----------           -----------
                                                                               $    76,265           $    63,593
                                                                               ===========           ===========
</TABLE>



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


                                      2
<PAGE>   3
                   INCOME OPPORTUNITY REALTY INVESTORS, INC.
                    CONSOLIDATED BALANCE SHEETS - Continued





<TABLE>
<CAPTION>
                                                                                September 30,         December 31,
                                                                                    1997                 1996    
                                                                               --------------       --------------
                                                                                   (dollars in thousands)

        Liabilities and Stockholders' Equity
<S>                                                                           <C>                  <C>
Liabilities
Notes and interest payable.........................                            $       48,537       $       38,957
Other liabilities..................................                                     2,923                2,255
                                                                               --------------       --------------
                                                                                       51,460               41,212

Commitments and contingencies

Stockholders' equity
Common Stock, $.01 par value;
 authorized, 10,000,000 shares; issued and
 outstanding, 1,519,888 shares in 1997 and
 1996.............................................                                         15                   15
Paid-in capital....................................                                    64,804               64,804
Accumulated distributions in excess of accumulated
 earnings.........................................                                    (40,014)             (42,438)
                                                                               --------------       -------------- 

                                                                                       24,805               22,381
                                                                               --------------       --------------

                                                                               $       76,265       $       63,593
                                                                               ==============       ==============
</TABLE>



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


                                      3
<PAGE>   4
                   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, 
                                          ----------------------------------       --------------------------------
                                               1997                 1996                1997               1996   
                                          --------------      --------------      ---------------     -------------
                                                               (dollars in thousands, except per share)

<S>                                       <C>                 <C>                 <C>                 <C>
INCOME
 Rents.......................             $        3,174      $        2,090      $        8,759     $       6,149
 Interest....................                         61                  83                 203               248
                                          --------------      --------------      --------------     -------------
                                                   3,235               2,173               8,962             6,397
                                                                                   
                                                                                   
                                                                                   
EXPENSES                                                                           
 Property operations.........                      1,518               1,052               4,083             3,198
 Interest....................                      1,081                 652               2,859             1,803
 Depreciation................                        426                 265               1,131               792
 Advisory fee to affiliate...                        133                 105                 379               302
 Net income fee to affiliate.                        -                   -                   218               -
 General and administrative..                        318                 310                 755               918
                                          --------------      --------------      --------------     -------------
                                                   3,476               2,384               9,425             7,013
                                          --------------      --------------      --------------     -------------
                                                                                   
                                                                                   
(Loss) from operations........                      (241)               (211)               (463)             (616)
                                                                                   
Equity in income (loss) of                                                         
 partnerships................                        (25)                 (1)                 21                29
Gain on sale of real estate...                       -                   -                 3,322               -  
                                          --------------      --------------      --------------     -------------
                                                                                   
Net income (loss).............            $         (266)     $         (212)     $        2,880     $        (587)
                                          ==============      ==============      ==============     ============= 
                                                                                   
                                                                                   
                                                                                   
Earnings Per Share                                                                 
                                                                                   
 Net income (loss)...........             $        (.18)      $         (.14)     $         1.89     $       ( .38)
                                          =============       ==============      ==============     ============= 
                                                                                   
                                                                                   
                                                                                   
                                                                                   
Weighted average Common shares                                                     
 used in computing                                                                 
 earnings per share..........                  1,519,888           1,519,888           1,519,888         1,533,406
                                          ==============      ==============      ==============     =============
</TABLE>





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


                                      4
<PAGE>   5
                   INCOME OPPORTUNITY REALTY INVESTORS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  For the Nine Months Ended September 30, 1997





<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, 1997....       1,519,888     $         15    $     64,804     $       (42,438)     $       22,381



Dividends ($.30 per share)               -                -               -                  (456)               (456)


Net income.................              -                -               -                 2,880               2,880
                               -------------      -----------    ------------     ---------------      --------------



Balance, September 30,
       1997................        1,519,888      $        15    $     64,804     $       (40,014)     $       24,805
                               =============      ===========    ============     ===============      ==============
</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

<TABLE>
<CAPTION>
                                                                                    For the Nine Months
                                                                                    Ended September 30,   
                                                                             ----------------------------------
                                                                                1997                1996   
                                                                             --------------       -------------
                                                                                   (dollars in thousands)
<S>                                                                          <C>                  <C>
Cash Flows from Operating Activities
 Rents collected..................................                           $        8,444       $        6,148
 Interest collected...............................                                      194                  239
 Interest paid....................................                                   (2,491)              (1,632)
 Payments for property operations.................                                   (3,525)              (2,794)
 Advisory and net income fee paid to affiliate....                                     (617)                (267)
 General and administrative expenses paid.........                                     (875)                (901)
 Distributions from equity partnerships' operating
    cash flow......................................                                     218                  163
 Other............................................                                     (441)              (1,426)
                                                                             --------------       -------------- 

    Net cash provided by (used in) operating
    activities...................................                                       907                 (470)


Cash Flows from Investing Activities
 Acquisition of real estate.......................                                   (8,713)              (7,510)
 Proceeds from sale of real estate................                                    6,773                  -
 Real estate improvements.........................                                     (512)                (223)
 Funding of equity partnerships...................                                     (222)                 (12)
                                                                             --------------       -------------- 

    Net cash (used in) investing activities........                                  (2,674)              (7,745)


Cash Flows from Financing Activities
 Payments on notes payable........................                                     (519)                (315)
 Proceeds from notes payable......................                                      -                 12,011
 Deferred borrowing costs.........................                                      (15)                (402)
 Distributions from equity partnerships' financing
    cash flow......................................                                     627                  -
 Repurchase of Common Stock.......................                                      -                   (621)
 Dividends to stockholders........................                                     (456)                (471)
 Payments (to)/from advisor.......................                                       21                 (249)
                                                                             --------------       -------------- 

    Net cash provided by (used in) financing
    activities...................................                                      (342)               9,953


Net increase (decrease) in cash and cash
 equivalents......................................                                   (2,109)               1,738
Cash and cash equivalents, beginning of period.....                                   3,186                2,987
                                                                             --------------       --------------

Cash and cash equivalents, end of period...........                          $        1,077       $        4,725
                                                                             ==============       ==============
</TABLE>



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


                                      6
<PAGE>   7
                   INCOME OPPORTUNITY REALTY INVESTORS, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued




<TABLE>
<CAPTION>
                                                                                     For the Nine Months
                                                                                     Ended September 30,   
                                                                             -----------------------------------
                                                                                   1997                1996   
                                                                             --------------       --------------
                                                                                   (dollars in thousands)
<S>                                                                          <C>                  <C>
Reconciliation of net income (loss) to net cash
 provided by (used in) operating activities
Net income (loss)..................................                          $        2,880       $         (587)
Adjustments to reconcile net income  (loss) to net
    cash provided by (used in) operating activities
 Gain on sale of real estate......................                                   (3,322)                 -
 Depreciation and amortization....................                                    1,208                  860
 Equity in loss (income) of partnerships..........                                      (21)                 (29)
 Distributions from equity partnerships' operating
    cash flow......................................                                     218                  163
 (Increase) in other assets.......................                                     (895)              (1,456)
 Increase in interest payable.....................                                      282                   94
 Increase in other liabilities....................                                      557                  485
                                                                             --------------       --------------
    Net cash provided by (used in) operating
    activities...................................                            $          907       $         (470)
                                                                             ==============       ============== 



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.


                                      7
<PAGE>   8
                   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,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.  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, 1996 (the "1996 Form
10-K").

NOTE 2.   REAL ESTATE

In January 1997, the Company purchased the Chuck Yeager Building, a 60,060
square foot industrial/office building in Chantilly, Virginia, for $5.1
million.  The Company paid $2.0 million in cash and obtained new mortgage
financing of $3.1 million.  The mortgage bears interest at a variable rate,
currently 10.75% per annum, requires monthly payments of principal and interest
of $72,017, and matures in January 1999.  The Company paid a real estate
brokerage commission of $171,000 to Carmel Realty, Inc. ("Carmel Realty"), an
affiliate of Basic Capital Management, Inc. ("BCM"), the Company's advisor, and
a real estate acquisition fee of $51,000 to BCM based on the $5.1 million
purchase price of the property.

In March 1997, the Company completed the sale of the Plumtree Apartments, a 116
unit apartment complex in Martinez, California, that was under contract for
sale at December 31, 1996.  The apartment complex was sold for $7.8 million in
cash, the Company receiving net cash of $1.6 million after the payoff of $5.7
million in existing mortgage debt and the payment of various closing costs
associated with the sale.  The Company paid a real estate brokerage commission
of $226,000 to Carmel Realty based on the $7.8 million sales price of the
property.  The Company recognized a gain of $1.8 million on the sale.

In May 1997, the Company purchased the La Mesa Village Plaza Office Building, a
92,611 square foot office building in La Mesa, California, for $8.1 million.
The Company paid $2.1 million in cash and obtained new mortgage financing of
$6.0 million.  The mortgage bears interest at 9.1875% per annum, requires
monthly payments of principal and interest of $51,124 and matures in June 2007.
The Company paid a real estate brokerage commission of $232,000 to Carmel
Realty and a real estate acquisition fee of $81,000 to BCM based on the $8.1
million purchase price of the property.

In June 1997, the Company sold the Porticos Apartments, a 256 unit apartment
complex in Milwaukee, Wisconsin, for $15.2 million in cash.  The Company
received net cash of $5.2 million after the payoff of $9.6



                                      8
<PAGE>   9
                   INCOME OPPORTUNITY REALTY INVESTORS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2.   REAL ESTATE AND DEPRECIATION (Continued)

in existing mortgage debt and the payment of various closing costs associated
with the sale.  The Company paid a real estate brokerage commission of $348,000
to Carmel Realty based on the $15.2 million sales price of the property.  The
Company recognized a gain of  $1.5 million on the sale.

In June 1997, the Company purchased Renaissance Parc, a 294 unit apartment
complex in Dallas, Texas, for $15.7 million.  The Company paid $3.2 million in
cash and obtained new mortgage financing of $12.5 million.  The mortgage bears
interest at 8.375% per annum, requires monthly payments of principal and
interest of $95,161 and matures in July 2007.  The Company paid a real estate
brokerage commission of $355,000 to Carmel Realty and a real estate acquisition
fee of $157,000 to BCM based on the $15.7 million purchase price of the
property.

Also in June 1997, the Company purchased LaMonte Park, a 128 unit apartment
complex in Houston, Texas, for $3.7 million.  The Company paid $200,000 cash
and assumed the existing mortgage of $3.5 million.  The mortgage bears interest
at a variable rate, currently 8.6% per annum, requires monthly payments of
principal and interest of $30,333 and matures in July 2001.  The Company paid a
real estate brokerage commission of $132,000 to Carmel Realty and a real estate
acquisition fee of $37,000 to BCM based on the $3.7 million purchase price of
the property.

In September 1997, the Company purchased Valley View Center, a partially
complete four story office building in Farmers Branch, Texas, for $565,000 in
cash.  The Company paid a real estate brokerage commission of $22,600 to Carmel
Realty and a real estate acquisition fee of $5,650 to BCM based on the $565,000
purchase price of the property.

NOTE 3.   INVESTMENTS IN EQUITY METHOD REAL ESTATE PARTNERSHIPS

The Company owns a 40% general partner interest in Nakash Income Associates,
which in turn owns a wrap around mortgage note receivable secured by a shopping
center in Maulden, Missouri.  The shopping center is owned by Mountain Home
Associates ("MHA").  In August 1997, MHA refinanced the matured mortgage debt
secured by a shopping center in the amount of $850,000.  The new mortgage bears
interest at a variable rate, currently 9.5% per annum, requires monthly
payments of principal and interest of $13,000 and matures in May 2005.

The Company owns a 36.3% general partner interest in Tri-City Limited
Partnership ("Tri-City"), which owns five properties in Texas.  In September
1997, Tri-City obtained first mortgage financing of $1.9 million secured by the
previously unencumbered Oaks of Inwood and Inwood Green Apartments.  The
mortgage bears interest at 7.905% per annum, requires monthly payments of
principal and interest of $14,415 and matures in September 2007.  The Company
received $627,000 of the net


                                      9
<PAGE>   10
                   INCOME OPPORTUNITY REALTY INVESTORS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3.   INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)

financing proceeds.  In conjunction with the financing, Tri-City paid a
mortgage brokerage and equity refinancing fee of $18,830 to BCM, based on the
$1.9 million financing.

NOTE 4.   COMMITMENTS AND CONTINGENCIES

The Company is involved in various lawsuits arising in the ordinary course of
business.  The Company's 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.

NOTE 5.   SUBSEQUENT EVENTS

In October 1997, the Company refinanced, at maturity, the mortgage debt secured
by the Daley Plaza Corporate Center in San Diego, California in the amount of
$7.0 million.  The Company received net cash of $3.3 million after the payoff
of $3.7 million in existing mortgage debt and accrued interest and the payment
of various closing costs associated with the refinancing.  The new mortgage
bears interest at a variable rate, currently 9.75% per annum, requires monthly
payments of principal and interest of $62,380 and matures in October 2002.  The
Company paid a mortgage brokerage and equity refinancing of $70,000 to BCM
based on the $7.0 million refinancing.

                           _________________________


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, including first, wraparound, and
junior mortgage loans.  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, 1997 aggregated $1.1 million,
compared with $3.2 million at December 31, 1996.  The Company's principal
sources of cash have been and will continue to be property operations, proceeds
from property sales, financings and refinancings, collection of interest on its
mortgage note receivable and, to a lesser extent, distributions from
partnerships.  The Company's business plan provides for the Company's use of
approximately $1.4 million of its anticipated available cash for a property
acquisition during the remainder of 1997.  At September 30, 1997, the Company
had a firm


                                      10
<PAGE>   11
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

earnest money deposit to purchase the Westlake Office Building, a 45,500 square
foot office building in Westlake Village, California, for $3.9 million,
approximately $1.4 million in cash and the assumption of the existing mortgage
debt.  The Company anticipates that after closing such acquisition, it will
have sufficient available cash sources to meet its various cash requirements
including the payment of distributions, debt service obligations and property
maintenance and improvements.

In January 1997, the Company purchased the Chuck Yeager Building in Chantilly,
Virginia, for $5.1 million.  The Company paid $2.0 million in cash and obtained
new mortgage financing of $3.1 million.

In March 1997, the Company sold the Plumtree Apartments in Martinez,
California, for $7.8 million.  The Company received net cash of $1.6 million
after the payoff of $5.7 million in existing mortgage debt and the payment of
various closing costs associated with the sale.

In May 1997, the Company purchased the La Mesa Village Plaza Office Building in
La Mesa, California, for $8.1 million.  The Company paid $2.1 million in cash
and obtained new mortgage financing of $6.0 million.

In June 1997, the Company sold the Porticos Apartments in Milwaukee, Wisconsin,
for $15.2 million.  The Company received net cash of $5.2 million after the
payoff of $9.6 million in existing mortgage debt and the payment of various
closing costs associated with the sale.

Also in June 1997, the Company purchased (i) the Renaissance Parc Apartments in
Dallas, Texas, for $15.7 million, consisting of $3.2 million in cash and new
mortgage financing of $12.5 million and (ii) the LaMonte Park Apartments in
Houston, Texas, for $3.7 million, consisting of $200,000 in cash and an assumed
mortgage of $3.5 million.

In September 1997, the Company purchased Valley View Center, a partially
complete four story office building in Farmers Branch, Texas for $565,000 in
cash.

Also in September 1997, Tri-City Limited Partnership obtained mortgage
financing of $1.9 million on the previously unencumbered Oaks of Inwood and
Inwood Green Apartments.  The Company received $627,000 of the net financing
proceeds.

In the first nine months of 1997, the Company paid regular quarterly dividends
of $.30 per share or a total of $456,000.

The Company's management reviews the carrying values of the Company's
properties and mortgage note receivable 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.  For notes receivable


                                      11
<PAGE>   12
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (Continued)


Liquidity and Capital Resources (Continued)

impairment is considered to exist if it is probable that all amounts due under
the terms of the note will not be collected.  In those instances  where
impairment is found to exist, a provision for loss is recorded by a charge
against earnings.  The Company's mortgage note receivable review includes an
evaluation of the collateral property securing such note.  The property review
generally includes selective property inspections, a review of the property's
current rents compared to market rents, a review of the property's expenses, a
review of maintenance requirements, a review of the property's cash flow,
discussions with the manager of the property and a review of properties in the
surrounding area.

Results of Operations

For the three and nine months ended September 30, 1997, the Company had a net
loss of $266,000 and net income of $2.9 million, respectively, as compared with
a net loss of $212,000 and $587,000 in the corresponding periods in 1996.  Net
income for the nine months ended September 30, 1997 includes gains on sale of
real estate of $3.3 million. Fluctuations in this and other components of the
Company's revenues and expenses between the 1996 and 1997 periods are discussed
below.

Rents in the three and nine months ended September 30, 1997 were $3.2 million
and $8.8 million as compared to $2.1 million and $6.1 million in the
corresponding periods in 1996.  Of the increases, $1.9 million and $3.7 million
for the three and nine months ended September 30, 1997 is due to seven
properties being acquired subsequent to September 30, 1996 and $71,000 and
$224,000 for the three and nine months ended September 30, 1997 is due to an
increase in rental rates at four of the Company's properties.  These increases
are partially offset by a decrease of $869,000 and $1.3 million for the three
and nine months ended September 30, 1997 due to the sale of two of the
Company's apartment complexes in 1997.  Rents for the remainder of 1997 are
expected to increase as the Company continues to benefit from the operations of
the properties acquired in 1997.

Property operations expense in the three and nine months ended September 30,
1997 was $1.5 million and $4.1 million as compared to $1.1 million and $3.2
million in the corresponding periods in 1996.  The increase is primarily due to
the acquisition of seven properties subsequent to September 30, 1996, partially
offset by the sale of two apartment complexes in 1997.

Interest income decreased from $83,000 and $248,000 in the three and nine
months ended September 30, 1996 to $61,000 and $203,000 in the three and nine
months ended September 30, 1997.  The decreases are due to a decrease in
interest earned on the short term investment of the Company's excess cash.
Interest income for the remainder of 1997 is expected to be comparable to that
of the third quarter of 1997.


                                      12
<PAGE>   13
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

Interest expense increased from $652,000 and $1.8 million in the three and nine
months ended September 30, 1996 to $1.1 million and $2.9 million in the three
and nine months ended September 30, 1997.  Of these increases, $737,000 and
$1.4 million for the three and nine months ended September 30, 1997 is due to
the debt incurred or assumed on six of the seven properties acquired subsequent
to September 30, 1996, and $25,000 and $232,000 for the three and nine months
ended September 30, 1997 is due to financing obtained on properties previously
unencumbered.  These increases are partially offset by a decrease of $322,000
and $527,000 for the three and nine months ended September 30, 1997 due to the
sale of two apartment complexes in 1997.  Interest expense for the remainder of
1997 is expected to be comparable to that of the third quarter of 1997.

Depreciation expense increased from $265,000 and $792,000 for the three and
nine months ended September 30, 1996 to $426,000 and $1.1 million in the three
and nine months ended September 30, 1997.  The increases are due to seven
properties acquired subsequent to September 30, 1996 partially offset by the
sale of two apartment complexes in 1997.  Depreciation expense is expected to
continue to increase as the Company acquires additional properties.

Advisory fee expense increased from $105,000 and $302,000 in the three and nine
months ended September 30, 1996 to $133,000 and $379,000 for the three and nine
months ended September 30, 1997.  The increases are due to an increase in the
Company's gross assets, the basis for such fee.  Advisory fee expense is
expected to continue to increase as the Company acquires additional properties.

Net income fee of $218,000 was incurred for the nine months ended September 30,
1997.  Such fee is payable to the Company's advisor based on 7.5% of the
Company's net income.  No such fee was incurred in 1996.

General and administrative expense was $318,000 and $755,000 in the three and
nine months ended September 30, 1997 compared to $310,000 and $918,000 in the
corresponding periods in 1996.  The decrease is primarily due to costs incurred
in 1996 relating to the Company's incorporation and a decrease in legal fees
relating to the Olive litigation.  General and administrative expense for the
remainder of 1997 is expected to be comparable to that of the third quarter of
1997.

Tax Matters

As more fully discussed in the Company's 1996 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


                                     13
<PAGE>   14
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (Continued)

Tax Matters (Continued)

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 of properties and,
correspondingly, the ultimate realizable value of the Company's real estate and
notes receivable portfolios.  Inflation also has an effect on the Company's
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 from the Company for personal injury
associated with such materials.

The Company's 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.

                     _____________________________________


                          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.


                                      14
<PAGE>   15
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 Modification, and during August
and September 1996, the Court held evidentiary hearings to assess compliance
with the terms of the 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 Modification.  On January 27,
1997, the parties entered into an Amendment to the Modification effective
January 9, 1997 (the "Amendment"), which was submitted to the Court for
approval on January 29, 1997.  The 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 Amendment.  As a result of the
hearing, the parties entered into a revised Amendment.  The Court issued an
order approving the Amendment on July 3, 1997.

The Amendment provides for the addition of four new unaffiliated members to the
Company's Board of Directors and sets 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 Modification shall be settled by mutual agreement of the
parties or, lacking such agreement, by an arbitration proceeding.

Under the Amendment, all shares of the Company owned by Gene E. Phillips or any
of his affiliates shall be voted at all stockholders' meetings held until April
28, 1999 in favor of all new Board members added under the Amendment.  The
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.




                     [THIS SPACE INTENTIONALLY LEFT BLANK.]


                                      15
<PAGE>   16
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 May 14, 1997, was filed with
        respect to Item 2. "Acquisition or Disposition of Assets," and Item 7.
        "Financial Statements and Exhibits," which reports the acquisition of
        LaMesa Village Plaza, the Chuck Yeager Building and the sale of
        Plumtree Apartments.

        A Current Report on Form 8-K, dated June 11, 1997, was filed with
        respect to Item 2. "Acquisition or Disposition of Assets," and Item 7.
        "Financial Statements and Exhibits," which reports the acquisition of
        Renaissance Parc Apartments and LaMonte Park Apartments and the sale of
        Porticos Apartments, which was amended on Form 8-K/A, filed August 20,
        1997.


                                      16
<PAGE>   17

                                 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 3, 1997              By:  /s/ Randall M. Paulson 
     ------------------------              -----------------------------
                                           Randall M. Paulson
                                           President
                                       
                                       
                                       
                                       
                                       
Date:    November 3, 1997              By:  /s/ Thomas A. Holland    
     ------------------------              ----------------------------
                                           Thomas A. Holland
                                           Executive Vice President and
                                           Chief Financial Officer
                                           (Principal Financial and
                                           Accounting Officer)
                                           

                                      17
<PAGE>   18
                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                                  EXHIBITS TO
                         QUARTERLY REPORT ON FORM 10-Q

                  For the Nine Months Ended September 30, 1997





<TABLE>
<CAPTION>
Exhibit                                                           Page
Number                           Description                      Number
-------        ------------------------------------------------   ------
 <S>           <C>                                                <C>
 27.0          Financial Data Schedule.                           19
</TABLE>





                                       18