##### Table of Contents

---

FORM 10-Q



---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

Or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO

Commission File Number 001-14784



---

INCOME OPPORTUNITY REALTY
INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)



---



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

1755 Wittington Place, Suite 340

Dallas, Texas 75234

(Address of principal executive offices)

(Zip Code)

(469) 522-4200

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last
report)



---

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No ̈.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes ̈.    No  x.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈.    No  x.

APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE

PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes ̈.    No ̈.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the
issuers classes of Common Stock, as of the latest practicable date.



|                             |  |                                  
|---------------------------- |  | ---------------------------------
|Common Stock, $.01 par value |  | 4,168,035                        
|(Class)                      |  | (Outstanding at November 3, 2006)



---



---

##### Table of Contents

INCOME OPPORTUNITY REALTY INVESTORS, INC.

FORM 10-Q

TABLE OF CONTENTS



|                           |  |                                                                                                                   |  |   
|-------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --
|Item 1.                    |  | Financial Statements                                                                                              |  |   
|                           |  |                                                                                                                  
|                           |  | Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005                               |  | 3 
|                           |  |                                                                                                                  
|                           |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 (unaudited) |  | 4 
|                           |  |                                                                                                                  
|                           |  | Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2006 (unaudited)           |  | 5 
|                           |  |                                                                                                                  
|                           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (unaudited)           |  | 6 
|                           |  |                                                                                                                  
|                           |  | Notes to Consolidated Financial Statements                                                                        |  | 7 
|                           |  |                                                                                                                  
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 12
|                           |  |                                                                                                                  
|Item 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 16
|                           |  |                                                                                                                  
|Item 4.                    |  | Controls and Procedures                                                                                           |  | 16
|                           | 
|PART II. OTHER INFORMATION |  |                                                                                                                  
|                           |  |                                                                                                                  
|Item 2.                    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                       |  | 17
|                           |  |                                                                                                                  
|Item 6.                    |  | Exhibits                                                                                                          |  | 17
|                           | 
|SIGNATURE PAGE             |  | 18                                                                                                               



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements as of and for the nine months ended
September 30, 2006 have not been audited by independent certified public accountants but, in the opinion of the management of Income Opportunity Realty Investors, Inc. (IORI or the Company), all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of IORIs consolidated financial position, consolidated results of operations and consolidated cash flows at the dates and for the periods indicated, have been included.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                  |  |                        |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                  |  | September 30, 2006     |         |   | December 31, 2005 |  
|                                                                                                                                                  |  | (Unaudited)            |         |   |                   |  
|                                                                                                                                                  |  | (dollars in thousands) |        
|Assets                                                                                                                                            |  |                        |         |   |                   |   |         |  
|Real estate held for investment                                                                                                                   |  | $                      | 63,230  |   |                   | $ | 35,083  |  
|Lessaccumulated depreciation                                                                                                                     |  |                        | (4,867  | ) |                   |   | (4,311  | )
|                                                                                                                                                  |  |                        |         |   |                   |   |         |  
|                                                                                                                                                  |  |                        | 58,363  |   |                   |   | 30,772  |  
|                                                                                                                                                  |  |                       
|Notes and interest receivable                                                                                                                     |  |                        | 27,368  |   |                   |   | 63,230  |  
|Investment in real estate partnerships                                                                                                            |  |                        | 657     |   |                   |   | 547     |  
|Cash and cash equivalents                                                                                                                         |  |                        | 57      |   |                   |   | 201     |  
|Due from affiliates                                                                                                                               |  |                        | 17,627  |   |                   |   | 1,853   |  
|Other assets                                                                                                                                      |  |                        | 3,954   |   |                   |   | 2,738   |  
|                                                                                                                                                  |  |                        |         |   |                   |   |         |  
|                                                                                                                                                  |  | $                      | 108,026 |   |                   | $ | 99,341  |  
|                                                                                                                                                  |  |                        |         |   |                   |   |         |  
|Liabilities and Stockholders Equity                                                                                                              |  |                        |         |   |                   |   |         |  
|                                                                                                                                                  |  |                       
|Liabilities:                                                                                                                                      |  |                        |         |   |                   |   |         |  
|Notes and interest payable                                                                                                                        |  | $                      | 60,903  |   |                   | $ | 52,817  |  
|Other liabilities                                                                                                                                 |  |                        | 1,473   |   |                   |   | 1,344   |  
|                                                                                                                                                  |  |                        |         |   |                   |   |         |  
|                                                                                                                                                  |  |                        | 62,376  |   |                   |   | 54,161  |  
|                                                                                                                                                  |  |                       
|Commitments and contingencies                                                                                                                     |  |                        |         |   |                   |   |         |  
|                                                                                                                                                  |  |                       
|Minority interest                                                                                                                                 |  |                        | 553     |   |                   |   | 513     |  
|                                                                                                                                                  |  |                       
|Stockholders equity:                                                                                                                             |  |                        |         |   |                   |   |         |  
|Common Stock, $.01 par value; authorized, 100,000,000 shares; issued and outstanding 4,168,035 shares at September 30, 2006 and
December 31, 2005 |  |                        | 42      |   |                   |   | 42      |  
|Additional paid-in capital                                                                                                                        |  |                        | 61,955  |   |                   |   | 61,955  |  
|Accumulated deficit                                                                                                                               |  |                        | (16,900 | ) |                   |   | (17,330 | )
|                                                                                                                                                  |  |                        |         |   |                   |   |         |  
|                                                                                                                                                  |  |                        | 45,097  |   |                   |   | 44,667  |  
|                                                                                                                                                  |  |                        |         |   |                   |   |         |  
|                                                                                                                                                  |  | $                      | 108,026 |   |                   | $ | 99,341  |  
|                                                                                                                                                  |  |                        |         |   |                   |   |         |  

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



3



---

##### Table of Contents

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | --------------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                    |  | For the Three Months Ended September 30, |           |   | For the Nine Months Ended September 30, |  
|                                                                    |  | 2006                                     |           |   | 2005                                    |   |           | 2006 |  |   | 2005      |  
|                                                                    |  | (dollars in thousands, except per share) |          
|Property revenue                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Rents and other property revenues                                   |  | $                                        | 2,028     |   |                                         | $ | 1,688     |      |  | $ | 5,648     |   |  | $ | 4,830     |  
|                                                                    |  |                                          |           |  
|Operating expenses                                                  |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Property operations                                                 |  |                                          | 1,196     |   |                                         |   | 870       |      |  |   | 3,032     |   |  |   | 2,516     |  
|Depreciation                                                        |  |                                          | 191       |   |                                         |   | 189       |      |  |   | 551       |   |  |   | 539       |  
|General and administrative                                          |  |                                          | 109       |   |                                         |   | 132       |      |  |   | 391       |   |  |   | 473       |  
|Advisory fees                                                       |  |                                          | 261       |   |                                         |   | 165       |      |  |   | 678       |   |  |   | 502       |  
|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Total operating expenses                                            |  |                                          | 1,757     |   |                                         |   | 1,356     |      |  |   | 4,652     |   |  |   | 4,030     |  
|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Operating income (loss)                                             |  |                                          | 271       |   |                                         |   | 332       |      |  |   | 996       |   |  |   | 800       |  
|                                                                    |  |                                          |           |  
|Other income (expense):                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Interest income                                                     |  |                                          | 707       |   |                                         |   | 979       |      |  |   | 2,705     |   |  |   | 2,937     |  
|Mortgage and loan interest                                          |  |                                          | (1,255    | ) |                                         |   | (989      | )    |  |   | (3,303    | ) |  |   | (2,487    | )
|Net income fee                                                      |  |                                          | 17        |   |                                         |   | (25       | )    |  |   | (38       | ) |  |   | (92       | )
|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Total other income (expense)                                        |  |                                          | (531      | ) |                                         |   | (35       | )    |  |   | (636      | ) |  |   | 358       |  
|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Income before equity in earnings of investees and minority interest |  |                                          | (260      | ) |                                         |   | 297       |      |  |   | 360       |   |  |   | 1,158     |  
|                                                                    |  |                                          |           |  
|Equity in earnings (loss) of investees                              |  |                                          | 29        |   |                                         |   | (17       | )    |  |   | 110       |   |  |   | (45       | )
|                                                                    |  |                                          |           |  
|Minority interest                                                   |  |                                          | 2         |   |                                         |   |          |      |  |   | (40       | ) |  |   |          |  
|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Net income                                                          |  | $                                        | (229      | ) |                                         | $ | 280       |      |  | $ | 430       |   |  | $ | 1,113     |  
|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Earnings per share:                                                 |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Net earnings from continuing operations                             |  | $                                        | (0.06     | ) |                                         | $ | 0.07      |      |  | $ | 0.10      |   |  | $ | 0.27      |  
|                                                                    |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Weighted average common shares used in computing earnings per share |  |                                          | 4,168,035 |   |                                         |   | 4,168,035 |      |  |   | 4,168,035 |   |  |   | 4,168,035 |  

Earnings per share reflect a 3-for-1 forward split of the stock in the form of a 200 percent stock
dividend declared in May 2005.

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



4



---

##### Table of Contents

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the Nine Months Ended September 30, 2006

(Dollars in thousands)

(Unaudited)



|                            |  |              |  |                            |    |                     |   |        |                            |   |         |   |  |   |       
|--------------------------- |  | ------------ |  | -------------------------- | -- | ------------------- | - | ------ | -------------------------- | - | ------- | - |  | - | ------
|                            |  | Common Stock |  | Additional Paid-in Capital |    | Accumulated Deficit |   |        | Total Stockholders Equity
|                            |  | Shares       |  | Amount                     |    |                     |  
|Balance, December 31, 2005  |  | 4,168,035    |  | $                          | 42 |                     | $ | 61,955 |                            | $ | (17,330 | ) |  | $ | 44,667
|Net income                  |  |             |  |                            |   |                     |   |       |                            |   | 430     |   |  |   | 430   
|                            |  |              |  |                            |    |                     |   |        |                            |   |         |   |  |   |       
|Balance, September 30, 2006 |  | 4,168,035    |  | $                          | 42 |                     | $ | 61,955 |                            | $ | (16,900 | ) |  | $ | 45,097
|                            |  |              |  |                            |    |                     |   |        |                            |   |         |   |  |   |       

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



5



---

##### Table of Contents

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                             |  |                                         |         |   |      |   |        |  
|---------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                             |  | For the Nine Months Ended September 30, |        
|                                                                             |  | 2006                                    |         |   | 2005 |  
|                                                                             |  | (dollars in thousands)                  |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                         |  |                                         |         |   |      |   |        |  
|Net income                                                                   |  | $                                       | 430     |   |      | $ | 1,113  |  
|Reconciliation of net income to net cash used by operating activities        |  |                                         |         |   |      |   |        |  
|Adjustments to reconcile net income to net cash used in operating activities |  |                                         |         |   |      |   |        |  
|Depreciation                                                                 |  |                                         | 551     |   |      |   | 539    |  
|Amortization                                                                 |  |                                         | 239     |   |      |   | 193    |  
|Loss (gain) on equity partnerships                                           |  |                                         | (110    | ) |      |   | 45     |  
|Minority interest                                                            |  |                                         | 40      |   |      |   |       |  
|Increase in interest receivable                                              |  |                                         | (480    | ) |      |   | (966   | )
|Decrease (increase) in other assets                                          |  |                                         | (1,390  | ) |      |   | 85     |  
|Increase (decrease) in interest payable                                      |  |                                         | 213     |   |      |   | 17     |  
|Increase (decrease) in other liabilities                                     |  |                                         | 273     |   |      |   | (1,284 | )
|                                                                             |  |                                         |         |   |      |   |        |  
|Net cash provided by (used in) operating activities                          |  |                                         | (234    | ) |      |   | (258   | )
|                                                                             |  |                                        
|CASH FLOWS FROM INVESTING ACTIVITIES                                         |  |                                         |         |   |      |   |        |  
|Real estate improvements                                                     |  |                                         | (237    | ) |      |   | 85     |  
|Advances from (payments to) advisor and affiliates                           |  |                                         | (18,024 | ) |      |   | (1,657 | )
|                                                                             |  |                                         |         |   |      |   |        |  
|Net cash provided by (used in) investing activities                          |  |                                         | (18,261 | ) |      |   | (1,572 | )
|                                                                             |  |                                        
|CASH FLOWS FROM FINANCING ACTIVITIES                                         |  |                                         |         |   |      |   |        |  
|Notes payable payments                                                       |  |                                         | 31,352  |   |      |   | (2,110 | )
|Notes payable proceeds                                                       |  |                                         | (13,001 | ) |      |   | 3,612  |  
|                                                                             |  |                                         |         |   |      |   |        |  
|Net cash provided by financing activities                                    |  |                                         | 18,351  |   |      |   | 1,502  |  
|                                                                             |  |                                         |         |   |      |   |        |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             |  |                                         | (144    | ) |      |   | (328   | )
|CASH AND CASH EQUIVALENTS, beginning of period                               |  |                                         | 201     |   |      |   | 399    |  
|                                                                             |  |                                         |         |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, end of period                                     |  | $                                       | 57      |   |      | $ | 71     |  
|                                                                             |  |                                         |         |   |      |   |        |  
|Supplemental Disclosures of Cash Flow Information                            |  |                                         |         |   |      |   |        |  
|                                                                             |  |                                        
|Cash paid for interest                                                       |  | $                                       | 2,560   |   |      | $ | 2,431  |  
|                                                                             |  |                                        
|Acquisition of real estate in exchange for notes receivable                  |  |                                         | 37,200  |   |      |   |       |  
|Sale of office building                                                      |  |                                         | (12,200 | ) |      |   |       |  
|Mortgage note payable assumed on acquisition of real estate                  |  |                                         | (22,802 | ) |      |   |       |  

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



6



---

##### Table of Contents

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying Consolidated
Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Dollar amounts in tables are in thousands, except per share
amounts. Certain balances for 2005 have been reclassified to conform to the 2006 presentation.

Operating results for the nine-month period ended
September 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the Consolidated Financial Statements and notes included in IORIs Annual
Report on Form 10-K for the year ended December 31, 2005 (the 2005 Form 10-K).

Adoption of New Accounting Standards

SFAS 123-R. Effective January 1, 2006 (the Effective Date), the Company adopted SFAS No. 123-R using the modified
prospective method. SFAS No. 123-R must be applied not only to newly awarded stock options but also to previously awarded stock options that were not fully vested on the Effective Date. IORI had no fully vested stock-option grants as
of the Effective Date. Furthermore, IORI had no outstanding stock-option grants that were modified or settled after the Effective Date; therefore, IORI will recognize no additional compensation costs for previously awarded stock-option
grants. In December 2005, the Companys Board of Directors terminated all stock-option plans and has no intent at the present to reinstate any stock-option programs.

EITF 06-3.At its June 2006 meeting, the EITF ratified the consensus regarding Issue No. 06-3 (EITF 06-3),How Taxes Collected from Customers and Remitted to Governmental Authorities Should be
Presented in the Income Statement (That is, Gross versus Net Presentation). EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, with earlier application added, and certain excise taxes. The consensus
indicates that gross vs. net income statement classification of those taxes within its scope is an accounting policy decision. In addition, for taxes within its scope, the consensus requires the following disclosures: the accounting policy elected
for these taxes and the amounts of the taxes reflected gross (as revenue) in the income statement on an interim and annual basis. We do not believe there will be an impact to our financial condition or results of operations from the adoption of EITF
06-3.

FIN 48.On July 13, 2006, the FASB issued Interpretation 48,Accounting for Uncertainty in Income Taxes  An Interpretation of
FASB Statement No. 109, (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with SFAS No. 109,Accounting for Income
Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on
derecognizing, classification, interest, and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, and are to be applied to all tax
positions upon initial adoption of this standard. Only tax positions that meet a more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. We are currently evaluating the
impact, if any, to our financial condition and results of operations from the adoption of FIN 48.



7



---

##### Table of Contents

NOTE 2. REAL ESTATE

On March 31, 2006, IORI acquired a 218-unit apartment complex located in Indianapolis, Indiana (Falcon Point) from Syntek West, Inc. (SWI, a related party) for $3,750,000, which includes the assumption of a $1,500,000
existing mortgage. IORI did not acquire any properties during the nine months ended September 30, 2005.

IORI sold no properties during the nine
months ended September 30, 2006 or 2005 other than the properties discussed in NOTE 7.

The following is a list of
properties owned by IORI on September 30, 2006:



|                     |  |                    |  |                            
|-------------------- |  | ------------------ |  | ---------------------------
|Property             |  | Location           |  | Units / Sq. Ft. / Acres    
|Apartments           |  |                    |  |                            
|Brighton Court       |  | Midland, TX        |  | 60 Units / 90,672 Sq. Ft.  
|Del Mar              |  | Midland, TX        |  | 92 Units / 105,348 Sq. Ft. 
|Enclave              |  | Midland, TX        |  | 68 Units / 89,734 Sq. Ft.  
|Falcon Point         |  | Indianapolis, IN   |  | 218 Units / 162,425 Sq. Ft.
|Meridian             |  | Midland, TX        |  | 280 Units / 264,000 Sq. Ft.
|Signature Place      |  | Midland, TX        |  | 57 Units / 72,480 Sq Ft.   
|Sinclair Place       |  | Midland, TX        |  | 114 Units / 91,529 Sq. Ft. 
|                     |  |                   
|Office Buildings     |  |                    |  |                            
|2010 Valley View     |  | Farmers Branch, TX |  | 40,666 Sq. Ft.             
|                     |  |                   
|Shopping Centers     |  |                    |  |                            
|Parkway Center       |  | Dallas, TX         |  | 28,374 Sq. Ft.             
|                     |  |                   
|Industrial Warehouse |  |                    |  |                            
|Eagle Crest          |  | Farmers Branch, TX |  | 133,000 Sq. Ft.            
|                     |  |                   
|Land                 |  |                    |  |                            
|Three Hickory Centre |  | Farmers Branch, TX |  | 9 Acres                    
|Travelers Land       |  | Farmers Branch, TX |  | 202 Acres                  

NOTE 3. NOTES AND INTEREST RECEIVABLE

Junior Mortgage Loans.Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens either on the simple interest fee or a leasehold interest in real estate. Recourse on
the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.

On September 30,
2004, a Secured Promissory Note in the amount of $1,222,500 given by Unified Housing Foundation, Inc. (UHF) for Unified Housing of Parkside Crossing, LLC to Regis I and the accrued interest receivable of $112,878 were assigned from Regis
I to IORI in partial payment of certain intercompany receivables.

On September 30, 2004, a Secured Promissory Note in the amount of $1,053,616 given
by UHF for Unified Housing of Temple, LLC to Regis I and the accrued interest receivable of $98,338 were assigned from Regis I to IORI in partial payment of certain intercompany receivables.

On September 30, 2004, a Secured Promissory Note in the amount of $835,658 given by UHF for Unified Housing of Terrell, LLC to Regis I and the accrued interest
receivable of $80,223 were assigned from Regis I to IORI in partial payment of certain intercompany receivables.

On September 30, 2004, a Secured
Promissory Note in the amount of $1,770,000 given by UHF for Housing for Seniors of Lewisville, LLC to Regis I and the accrued interest receivable of $174,640 were assigned from Regis I to IORI in partial payment of certain intercompany receivables.



8



---

##### Table of Contents

On May 24, 2004, a Secured Promissory Note in the amount of $2,990,000 given by UHF to Transcontinental Eldorado,
Inc. and was assigned from Transcontinental Realty Investors, Inc. (TCI) to IORI as a partial payment for TCIs repurchase of 100 percent of the outstanding common shares of Treehouse-IR from IORI.

On December 30, 2003, a Secured Promissory Note in the amount of $6,363,360 given by Housing for Seniors of Humble, LLC (Humble) to National Limited
Partners (NLP) was assigned from American Realty Investors, Inc. (ARI) to IORI in partial payment of certain intercompany receivables.

On December 30, 2003, a Secured Promissory Note in the amount of $2,000,000 given by Humble to NLP was assigned from ARI to IORI as additional pay down of certain intercompany receivables.

NOTE 4. NOTES AND INTEREST PAYABLE

On March 31, 2006, the
Company acquired Falcon Point Apartments and assumed a $1.5 million note. In September 2006 the Company reduced the principal amount due on the note to $1.2 million and extended the due date to February 28, 2007. The note bears interest at
prime rate plus three percent.

In August 2006, IORI and a TCI subsidiary, as co-borrowers, obtained a $28.7 million loan which if fully subscribed by
participating lenders would result in a credit facility for up to $42.6 million. The initial $28.7 loan went entirely to IORI. The loan matures in August 2008 and bears interest at a fixed rate of 8.6 percent per annum. The loan requires
quarterly interest payments beginning in October 2006. The loan currently is secured by 202 acres of land owned by IORI (known as the Travelers land) located in Dallas, Texas, and is guaranteed by TCI. If and when additional proceeds are made
available additional collateral of approximately 99 acres of land located in Dallas, Texas and owned by the TCI subsidiary will be included.

Proceeds
received by IORI were used to retire the existing debt on the collateral (including approximately $11 million of existing debt on the 202 acres pledged by IORI) with the remaining proceeds loaned to affiliated companies at an interest rate equal to
Prime + 1%. The loan to affiliated companies will be repaid and the funds used by IORI to invest in additional properties or retire existing debt.

NOTE 5. ADVISORY AGREEMENT

The Company has an Advisory Agreement with Syntek West, Inc. (SWI), wherein SWI is responsible
for the Companys day-to-day operations. SWI must formulate and submit to IORIs Board of Directors for approval an annual budget and business plan containing a twelve month forecast of operations and cash flow with a general plan for
asset sales and purchases, borrowing activity and other investments. SWI reports to the Board quarterly on IORIs performance against the business plan. The Advisory Agreement further places SWI in a fiduciary relationship to IORIs
stockholders and contains a broad standard governing SWIs liability for any losses incurred by IORI.

SWI receives, as compensation for its
management and advice, monthly advisory fees based on 61/2% of IORIs assets annually as well as specific
fees for assisting IORI in obtaining financing and completing acquisitions. If IORIs operating expenses exceed limits specified in the Advisory Agreement SWI is obligated to refund a portion of the advisory fees.

Effective July 1, 2005, the Company and SWI entered into a Cash Management Agreement to further define the administration of the Companys day-to-day
investment operations, relationship contacts, flow of funds and deposit and borrowing of funds. Under the Cash Management Agreement, all funds of the Company are delivered to SWI which has a deposit liability to the Company and is responsible for
investment of all excess funds, which earn interest at the Wall Street Journal Prime Rate plus 1 percent per annum, set quarterly on the first day of each calendar quarter. Borrowings for the benefit of the Company bear the same interest
rate. The term of the Cash Management Agreement is coterminous with the Advisory Agreement, and is automatically renewed each year unless terminated with the Advisory Agreement.

SWI also receives a Net Income Fee calculated as 7.5% of IORIs net income for the year.



9



---

##### Table of Contents

|                                                                          |  |                                     |     |      |   |    
|------------------------------------------------------------------------- |  | ----------------------------------- | --- | ---- | - | ---
|                                                                          |  | For Nine Months Ended September 30,
|                                                                          |  | 2006                                |     | 2005
|Revenue, fees, interest on cash advances, and cost reimbursements to SWI: |  |                                     |     |      |   |    
|Fees                                                                      |  |                                     |     |      |   |    
|Advisory                                                                  |  | $                                   | 678 |      | $ | 502
|Net income                                                                |  |                                     | 38  |      |   | 92 
|                                                                          |  |                                     |     |      |   |    
|Cost reimbursements                                                       |  | $                                   |    |      | $ | 36 
|                                                                          |  |                                     |     |      |   |    

NOTE 6. RECEIVABLE FROM AND PAYABLE TO AFFILIATES

From time to time, IORI and its affiliates and related parties have made unsecured advances to each other. In addition, IORI and its affiliates have entered into
transactions involving the purchase, sale, and financing of property. The table below reflects the various transactions between IORI, SWI, and TCI. See NOTE 7. RELATED PARTY TRANSACTIONS.



|                            |  |     |        |   |     |   |     |       |  |   |        |  
|--------------------------- |  | --- | ------ | - | --- | - | --- | ----- |  | - | ------ | -
|                            |  | SWI |        |   | TCI |   |     | Total | 
|Balance, December 31, 2005  |  | $   | 1,776  |   |     | $ | 77  |       |  | $ | 1,853  |  
|Cash received               |  |     | (3,357 | ) |     |   |    |       |  |   | (3,357 | )
|Cash payments               |  |     | 22,207 |   |     |   |    |       |  |   | 22,207 |  
|Other additions             |  |     | (3,786 | ) |     |   | (60 | )     |  |   | (3,846 | )
|Other repayments            |  |     | 298    |   |     |   | 472 |       |  |   | 770    |  
|                            |  |     |        |   |     |   |     |       |  |   |        |  
|Balance, September 30, 2006 |  | $   | 17,138 |   |     | $ | 489 |       |  | $ | 17,627 |  
|                            |  |     |        |   |     |   |     |       |  |   |        |  

NOTE 7. RELATED PARTY TRANSACTIONS

As described in NOTE 2. REAL ESTATE, on March 31, 2006 IORI acquired a 218 unit apartment complex located in Indianapolis, Indiana from SWI for $3,750,000, which includes the assumption of a $1,500,000 existing
mortgage. The $2,250,000 due to the seller was applied to the Due to affiliates balance between IORI and SWI.

On October 14, 2003, IORI
purchased, sold, and conveyed an office building known as One Hickory Centre, and sold 202 acres of unimproved real property known as the Travelers Land in Dallas County, Texas to Encino Executive Plaza, Ltd., an affiliate of ARI. The sales price
for One Hickory Centre was $12,200,000 and Encino Executive Plaza, Ltd. executed a wrap-around promissory note in the amount of $11,973,025 payable to the order of IORI secured by a Deed of Trust encumbering One Hickory Centre. The remaining
difference was a result of pro-rations and various expenses paid by IORI in connection with the closing of the transaction. The note bore interest at 5.49 percent per annum. The sale price for the Travelers Land was $25,000,000. At closing, Encino
Executive Plaza, Ltd. executed an all inclusive wrap-around promissory note payable to IORI in the principal amount of $22,801,987 secured by a Deed of Trust covering the Travelers Land sold and delivered cash to IORI in the amount of $1,946,715. As
with the prior transaction, the difference between the purchase price and the promissory note represented adjustments for various pro-rations. The note bore interest at 5.49 percent per annum. Subsequently, IORI made a loan to Encino Executive
Plaza, Ltd. in the amount of $1,567,232 payable upon demand or if no demand is made prior thereto on September 30, 2006 with a market rate of interest. Encino Executive Plaza, Ltd. executed and delivered a promissory note payable to the order
of IORI in the stated principal amount of $1,567,232. The note bore interest at 5.49 percent per annum.

On May 12, 2006 Encino Executive Plaza Ltd.
transferred One Hickory Center and the 202 acres of unimproved real property known as Travelers land back to IORI in satisfaction of the three notes in the amounts of $11,973,025, $22,801,987 and the $1,567,232 respectively. Further, on May 12,
2006 IORI transferred One Hickory Center to a subsidiary of TCI (a related party) in satisfaction of IORIs debt of $11,973,025 which was secured by One Hickory Centre.

IORI has not recorded any gain or loss with respect to the above transactions.

NOTE 8. OPERATING SEGMENTS

Significant differences among the
accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments
and allocates resources to them based on their operating income and cash flow. There are no intersegment revenues and expenses and IORI conducted all of its business within the United States.



10



---

##### Table of Contents

Presented below is the operating income of each operating segment for the three and nine months ended September 30,
2006 and 2005 and each segments assets at September 30, 2006 (amounts in thousands).



|                                        |  |      |        |   |                       |   |        |            |  |       |        |  |   |        |  
|--------------------------------------- |  | ---- | ------ | - | --------------------- | - | ------ | ---------- |  | ----- | ------ |  | - | ------ | -
|                                        |  | Land |        |   | Commercial Properties |   |        | Apartments |  | Total |       
|Three Months Ended September 30, 2006   |  |      |        |   |                       |   |        |            |  |       |        |  |   |        |  
|Rental and other property revenues      |  | $    |       |   |                       | $ | 349    |            |  | $     | 1,679  |  | $ | 2,028  |  
|Property operating expenses             |  |      |       |   |                       |   | 204    |            |  |       | 992    |  |   | 1,196  |  
|Depreciation                            |  |      |       |   |                       |   | 51     |            |  |       | 140    |  |   | 191    |  
|Interest expense                        |  |      | 921    |   |                       |   | (88    | )          |  |       | 422    |  |   | 1,255  |  
|Segment operating income (loss)         |  |      | (921   | ) |                       |   | 182    |            |  |       | 125    |  |   | (614   | )
|Real estate assets, net of depreciation |  |      | 24,122 |   |                       |   | 12,815 |            |  |       | 21,426 |  |   | 58,363 |  
|                                        |  |      |        |  
|Nine Months Ended September 30, 2006    |  |      |        |   |                       |   |        |            |  |       |        |  |   |        |  
|Rental and other property revenues      |  | $    | 448    |   |                       | $ | 561    |            |  | $     | 4,639  |  | $ | 5,648  |  
|Property operating expenses             |  |      |       |   |                       |   | 524    |            |  |       | 2,508  |  |   | 3,032  |  
|Depreciation                            |  |      |       |   |                       |   | 160    |            |  |       | 391    |  |   | 551    |  
|Interest expense                        |  |      | 1,051  |   |                       |   | 1,121  |            |  |       | 1,131  |  |   | 3,303  |  
|Segment operating income (loss)         |  |      | (603   | ) |                       |   | (1,244 | )          |  |       | 609    |  |   | (1,238 | )
|Real estate assets, net of depreciation |  |      | 24,122 |   |                       |   | 12,815 |            |  |       | 21,426 |  |   | 58,363 |  
|                                        |  |      |        |  
|                                        |  |      |        |   | Commercial Properties |   |        | Apartments |  | Total |       
|Three Months Ended September 30, 2005   |  |      |        |   |                       |   |        |            |  |       |        |  |   |        |  
|Rental and other property revenues      |  |      |        |   |                       | $ | 410    |            |  | $     | 1,278  |  | $ | 1,688  |  
|Property operating expenses             |  |      |        |   |                       |   | 180    |            |  |       | 690    |  |   | 870    |  
|Depreciation                            |  |      |        |   |                       |   | 78     |            |  |       | 111    |  |   | 189    |  
|Interest expense                        |  |      |        |   |                       |   | 571    |            |  |       | 418    |  |   | 989    |  
|Segment operating income (loss)         |  |      |        |   |                       |   | (419   | )          |  |       | 59     |  |   | (360   | )
|Real estate assets, net of depreciation |  |      |        |   |                       |   | 12,857 |            |  |       | 17,924 |  |   | 30,781 |  
|                                        |  |      |        |  
|Nine Months Ended September 30, 2005    |  |      |        |   |                       |   |        |            |  |       |        |  |   |        |  
|Rental and other property revenues      |  |      |        |   |                       | $ | 1,106  |            |  | $     | 3,724  |  | $ | 4,830  |  
|Property operating expenses             |  |      |        |   |                       |   | 611    |            |  |       | 1,905  |  |   | 2,516  |  
|Depreciation                            |  |      |        |   |                       |   | 205    |            |  |       | 334    |  |   | 539    |  
|Interest expense                        |  |      |        |   |                       |   | 1,492  |            |  |       | 995    |  |   | 2,487  |  
|Segment operating income (loss)         |  |      |        |   |                       |   | (1,202 | )          |  |       | 490    |  |   | (712   | )
|Real estate assets, net of depreciation |  |      |        |   |                       |   | 12,857 |            |  |       | 17,924 |  |   | 30,781 |  

The following table reconciles the segment information to the corresponding amounts in the consolidated statements
of operations:



|                                       |  |                                         |        |   |      |   |       |  
|-------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ----- | -
|                                       |  | For the Nine Months Ended September 30, |       
|                                       |  | 2006                                    |        |   | 2005 |  
|Segment operating income               |  | $                                       | (1,238 | ) |      | $ | (712  | )
|Interest income                        |  |                                         | 2,705  |   |      |   | 2,937 |  
|General and administrative             |  |                                         | 391    |   |      |   | 473   |  
|Advisory fees                          |  |                                         | 678    |   |      |   | 502   |  
|Net income fee                         |  |                                         | (38    | ) |      |   | (92   | )
|Equity in earnings (loss) of investees |  |                                         | 110    |   |      |   | (45   | )
|Minority interest                      |  |                                         | (40    | ) |      |   |      |  
|                                       |  |                                         |        |   |      |   |       |  
|Net income                             |  | $                                       | 430    |   |      | $ | 1,113 |  
|                                       |  |                                         |        |   |      |   |       |  

9. COMMITMENTS AND CONTINGENCIES

Liquidity. Management anticipates that IORI will not generate excess fund from operations in 2006 to be sufficient to discharge all of IORIs debt obligations as they mature. Management may selectively
sell income producing assets, refinance real estate, and/or incur additional borrowings against real estate to meet its cash requirements.

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



11



---

##### Table of Contents

ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

WARNING
CONCERNING FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this report.

This Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws,
principally, but not only, under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations. We caution investors that any forward-looking statements in this report, or which management may
make orally or in writing from time to time, are based on managements beliefs and on assumptions made by, and information currently available to, management. When used, the words anticipate, believe, expect,
intend, may, might, plan, estimate, project, should, will, result and similar expressions which do not relate solely to historical matters
are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and
factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution
you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any
responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and
trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results,
performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the factors listed and described at Item 1A. Risk Factors in the Companys Annual Report on
Form 10-K, which investors should review. There have been no changes from the risk factors previously described in the Companys Form 10-K for the fiscal year ended December 31, 2005.

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very
competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such matters; nor can we assess the impact of all such matters on our business or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of
actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms
8-K or otherwise.

Overview

IORI invests in
equity interests in real estate through acquisitions, leases, partnerships and in mortgage loans. IORI is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 10, 1985.

Critical Accounting Policies

The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions.
We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different,
it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time-to-time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to
be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application
or require estimates about matters that are inherently uncertain.



12



---

##### Table of Contents

Real Estate Held for Investment

Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144),
requires that a property be considered impaired if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a
charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value less cost to sell the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount
of the impairment, and a new cost for the property is established. Such new cost is depreciated over the propertys remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from five
to 40 years.

Real Estate Held-for-Sale

Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. SFAS No. 144 also requires that properties held-for-sale be reported at the lower of carrying
amount or fair value less costs of sale. If a reduction in a held for sale propertys carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either
upward or downward, to a held for sale propertys estimated fair value less costs of sale are recorded as an adjustment to the propertys carrying amount, but not in excess of the propertys carrying amount when originally classified
as held-for-sale. A corresponding charge against or credit to earnings is recognized. Properties held-for-sale are not depreciated.

Investments in
Equity Investees

IORI may be considered to have the ability to exercise significant influence over the operating and investment policies of certain
of its investees. Those investees are accounted for using the equity method. Under the equity method, an initial investment, recorded at cost, is increased by a proportionate share of the investees operating income and any additional
investment and decreased by a proportionate share of the investees operating losses and distributions received.

Recognition of Rental Income

Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. Rental income for residential
property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less. For hotel properties, revenues for
room sales and guest services are recognized as rooms are occupied and services are rendered.

Revenue Recognition on the Sale of Real Estate

Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, Accounting
for Sales of Real Estate (SFAS No. 66), as amended by SFAS No. 144. Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using the deposit, installment, cost
recovery or financing method, whichever is appropriate. When IORI provides seller financing, gain is not recognized at the time of sale unless the buyers initial investment and continuing investment are deemed to be adequate as determined by
SFAS 66 guidelines.

Non-performing Notes Receivable

IORI considers a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments. Any new note receivable that results from a modification or extension of a
note considered non-performing will also be considered non-performing, without regard to the borrowers adherence to payment terms.

Interest
Recognition on Notes Receivable

Interest income is not recognized on notes receivable that have been delinquent for 60 days or more. In addition,
accrued but unpaid interest income is only recognized to the extent that the net realizable value of the underlying collateral exceeds the carrying value of the receivable.



13



---

##### Table of Contents

Allowance for Estimated Losses

A valuation allowance is provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due under the terms of the note will not be
collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the investment in the note exceeds managements estimate of fair value of the collateral securing such note.

Fair Value of Financial Instruments

The following assumptions
were used in estimating the fair value of its notes receivable, marketable equity securities, and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar
loans. For non-performing notes receivable, the estimated fair value of IORIs interest in the collateral property was used. For marketable equity securities, fair value was based on the year-end closing market price of each security. For notes
payable, the fair value was estimated using current rates for mortgages with similar terms and maturities.

Liquidity and Capital Resources

Cash and cash equivalents at September 30, 2006 were $57,000 compared to $201,000 at December 31, 2005. IORIs principal sources of
cash have been and will continue to be property operations, proceeds from asset sales, interest earned on notes receivable, financings and refinancings and partnership distributions. Management anticipates that IORI will generate excess cash from
operations in 2006 due to increased rental receipts at its properties. However, such excess may not be sufficient to discharge all of IORIs debt obligations as they mature. Management may selectively sell income producing assets, refinance
real estate, and/or incur additional borrowings against real estate to meet its cash requirements.

The Company reported net income of $430,000 for the
nine months ended September 30, 2006, which included the following items for the period: depreciation and amortization of $551,000, an increase in other assets of $1.4 million, a decrease in notes and interest receivable of $480,000, an
increase in notes and interest payable of $208,000, an increase in other liabilities of $273,000 and minority interest of $40,000. Net cash used in operating activities totaled $234,000 for the nine months ended September 30, 2006. During the
nine months ended September 30, 2006 net cash used in investing activities was $18.3 million, which is almost entirely advances to the Companys Advisor under the terms of the Cash Management Agreement. See Note 5. Cash Management
Agreement. Net cash provided by financing activities was $18.4 million which is the net funds received from refinancing of properties.

Management reviews
the carrying values of IORIs properties at least annually or whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the
property (undiscounted and without interest) is less than the carrying amount of the property. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The property review generally includes selective property
inspections, discussions with the manager of the property, visits to selected properties in the area and a review of the following: (1) the propertys current rents compared to market rents, (2) the propertys expenses,
(3) the propertys maintenance requirements and (4) the propertys cash flows.

Results of Operations

IORI had net income (loss) of ($229,000) and $430,000 for the three and nine months ended September 30, 2006 as compared to net income of $280,000 and $1.1 million
for the corresponding periods in 2005. Fluctuations in components of revenue and expense between 2006 and the corresponding periods in 2005 are discussed below.

Rental incomes for the three and nine months ended September 30, 2006 were $2.0 million and $5.6 million as compared to $1.7 million and $4.8 million in the corresponding periods in 2005. The increase is primarily due to revenue from
the Falcon Point Apartments which was acquired on March 31, 2006.

Property operating expense for the three and nine months ended September 30,
2006 was $1.2 million and $3.0 million as compared to $870,000 and $2.5 million for the corresponding periods in 2005. The increase is primarily due to operating expenses from the Falcon Point Apartments.

Interest income for the three and nine months ended September 30, 2006 was $707,000 and $2.7 million compared to $979,000 million and $2.9 million for the
corresponding periods in 2005. Decreases were due to the overall reduction in notes receivable held by the Company.



14



---

##### Table of Contents

As more fully discussed in Note 7. RELATED PARTY TRANSACTIONS, on May 12, 2006 Encino Executive Plaza Ltd.
transferred One Hickory Center and the 202 acres of unimproved real property known as Travelers land back to IORI in satisfaction of the three notes in the amounts of $11,973,025, $22,801,987 and $1,567,232 respectively. Interest income received by
IORI on the Encino Notes through May 12, 2006 was $720,000. Interest income on the Encino Notes for the nine months ended September 31, 2005 was $1,496,000.

The overall loss of interest income was partially offset by interest income from a $6,700,000 loan to TCI on September 30, 2005. Interest income on this note for the nine months ended September 30, 2006 was
$512,000 compared to zero for 2005.

Interest expense for the three and nine months ended September 30, 2006 was $1.3 million and $3.3 million
compared to $989,000 and $2.5 million for the corresponding periods in 2005. The increase was primarily due to the additional debt incurred by IORI during 2005 and 2006 due to new loans, refinancings and the acquisition of Falcon Point. The increase
was also due to increased interest rates for IORIs variable interest rate debt.

The overall increase in interest expense was partially offset by the
elimination of interest expense on the debt to TCI, which was cancelled when One Hickory Center was transferred to TCI.

Depreciation expense for the three
and nine months ended September 30, 2006 was $191,000 and $551,000 compared to $189,000 and $539,000 for the corresponding periods in 2005.

Advisory
fees to affiliate for the three and nine months ended September 30, 2006 were $261,000 and $678,000 compared to $165,000 and $502,000 for the corresponding periods in 2005. The increase was due to a net increase in gross assets which is the
basis of the advisory fee. The increase was also due to fees for refinancing certain mortgage obligations. These increases were offset by interest paid by the advisor to IORI under a cash management agreement between the advisor and IORI. See NOTE
5. ADVISORY AGREEMENT.

The net income fee to affiliates for the three and nine months ended September 30, 2006 was ($17,000) and $38,000 as compared
to $25,000 and $92,000 for the corresponding periods in 2005. The net income fee is based on 71/2percent of
IORIs net income. See NOTE 5. ADVISORY AGREEMENT.

General and administrative expenses for the three and nine months ended September 30,
2006 was $109,000 and $391,000 as compared to $132,000 and $473,000 for the corresponding periods in 2005.

Related Party Transactions

Historically, IORI, ARI, Regis Realty I, LLC (Regis I), and TCI have each engaged in and may continue to engage in business
transactions, including real estate partnerships with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to IORI, ARI, Regis I and
TCI as could have been obtained from unrelated third parties.

Taxes

Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of
discounts on notes receivable and payable and the difference in the allowance for estimated losses. IORI had taxable loss for the first nine months of 2006 and for the first nine months of 2005; therefore, it recorded no provision for income taxes.

At September 30, 2006, IORI had a net deferred tax asset of approximately $1.0 million due to tax deductions available to it in future years.
However, as management cannot determine that it is more likely than not that IORI will realize the benefit of the deferred tax asset, a 100% valuation allowance has been established.

Inflation

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



15



---

##### Table of Contents

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, IORI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances
(including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for
release of asbestos-containing materials into the air and third parties may seek recovery for personal injury associated with such materials.

Management
is not aware of any environmental liability relating to the above matters that would have a material adverse effect on IORIs business, assets or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

At
September 30, 2006 IORIs exposure to a change in interest rates on its debt was as follows:



|                                           |  |         |           |                                |       |   |                                     |   |       
|------------------------------------------ |  | ------- | --------- | ------------------------------ | ----- | - | ----------------------------------- | - | ------
|                                           |  | Balance |           | Weighted Average Interest Rate |       |   | Effect of 1% Increase In Base
Rates
|Notes payable:                             |  |         |           |                                |       |   |                                     |   |       
|Variable rate                              |  | $       | 7,000,000 |                                | 10.25 | % |                                     | $ | 70,000
|                                           |  |         |           |                                |       |   |                                     |   |       
|Total decrease in IORIs annual net income |  |         |           |                                |       |   |                                     |   | 70,000
|                                           |  |         |           |                                |       |   |                                     |   |       
|Per share                                  |  |         |           |                                |       |   |                                     | $ | .02   
|                                           |  |         |           |                                |       |   |                                     |   |       

ITEM 4. CONTROLS AND PROCEDURES

Based upon their most recent evaluation, which was completed as of the end of the period
covered by this Report, the Acting Principal Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective at September 30, 2006 to ensure that information required to be
disclosed in reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time period specified in Securities and Exchange Commission rules and forms. There were no
changes in the Companys internal controls over financial reporting during the quarter ended September 30, 2006 that have materially affected or are reasonably likely to materially affect the Companys internal controls over financial
reporting.



16



---

##### Table of Contents

PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period of time covered by the Report,
Income Opportunity Realty Investors, Inc. did not repurchase any of its equity securities. The following table sets forth a summary for the quarter indicating no repurchases were made, and that at the end of the period covered by this Report, a
specified number of shares may yet be purchased under the programs specified below:



|                            |  |                                  |   |                              |   |                                                                        |  |                                                                         |  |        
|--------------------------- |  | -------------------------------- | - | ---------------------------- | - | ---------------------------------------------------------------------- |  | ----------------------------------------------------------------------- |  | -------
|Period                      |  | Total Number of Shares Purchased |   | Average Price Paid per Share |   | Total Number of Shares Purchased as Part of Publicly Announced Program |  | Maximum Number of Shares that May Yet be
Purchased Under the Program(a)
|Balance as of June 30, 2006 |  |                                  |   |                              |   |                                                                        |  |                                                                         |  | 219,090
|July 1-31, 2006             |  | $                                |  |                              | $ |                                                                       |  |                                                                        |  | 219,090
|August 1-31, 2006           |  |                                  |  |                              |   |                                                                       |  |                                                                        |  | 219,090
|September 1-30, 2006        |  |                                  |  |                              |   |                                                                       |  |                                                                        |  | 219,090
|Total                       |  | $                                |  |                              | $ |                                                                       |  |                                                                        |  |        

---

|(a) | On June 23, 2000, the IORI Board of Directors approved a share repurchase program for up to 1,409,000 shares of our common stock. This repurchase program has no termination
date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 6. EXHIBITS

The following documents are filed herewith as exhibits or incorporated
by reference as indicated:



|               |  |                                                                                                                                                                                                                                    
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                        
|3.0            |  | Articles of Incorporation of Income Opportunity Realty Investors, Inc., (incorporated by reference to Appendix C to the Registrants Registration Statement on Form S-4, dated February 12,
1996).                                 
|               | 
|3.1            |  | Bylaws of Income Opportunity Realty Investors, Inc. (incorporated by reference to Appendix D to the Registrants Registration Statement on Forms S-4 dated February 12,
1996).                                                     
|               | 
|10.0           |  | Advisory Agreement dated as of July 1, 2003 between Income Opportunity Realty Investors, Inc. and Syntek West, Inc. (incorporated by reference to Exhibit 10.0 to the registrants current on
Form 10-Q for event of July 1, 2003).
|               | 
|31.1*          |  | Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                            
|               | 
|32.1*          |  | Certification pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                  

---

|* | filed herewith
|- | --------------



17



---

##### Table of Contents

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 14, 2006 |  | By:                                       |  | /s/ Steven A. Abney                                 
|                        |  |                                           |  | Steven A. Abney                                     
|                        |  |                                           |  | Executive Vice President and Chief Financial Officer
|                        |  |                                           |  | (Principal Financial and Accounting Officer and     
|                        |  |                                           |  | Acting Principal Executive Officer)                 



18