<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                     For The Year Ended December 31, 2000

                        Commission File Number 1-14784

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

                   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.)

               1800 Valley View Lane
              Suite 300, Dallas, Texas                           75234
      (Address of Principal Executive Offices)                 (Zip Code)
</TABLE>

                                (469) 522-4200
             (Registrant's Telephone Number, Including Area Code)

          Securities Registered Pursuant to Section 12(b) of the Act:

<TABLE>
     <S>                             <C>
         Title of each class         Name of each exchange on which registered
     Common Stock, $.01 par value             American Stock Exchange
</TABLE>

          Securities Registered Pursuant to Section 12(g) of the Act:

                                     NONE

  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 at least the past 90 days. Yes [X] No [_]

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

  As of March 2, 2001, the Registrant had 1,514,045 shares of Common Stock
outstanding. Of the total shares outstanding 651,580 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $5,603,588
based on the last trade as reported on the American Stock Exchange on March 2,
2001. The basis of this calculation does not constitute a determination by the
Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.

                     Documents Incorporated by Reference:

                                     NONE

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<PAGE>

                                    INDEX TO
                           ANNUAL REPORT ON FORM 10-K

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
                                 PART I

Item 1. Business.........................................................    3
Item 2. Properties.......................................................    5
Item 3. Legal Proceedings................................................    9
Item 4. Submission of Matters to a Vote of Security Holders..............   10

                                 PART II

Item 5. Market for the Registrant's Shares of Common Stock and Related
 Stockholder Matters.....................................................   11
Item 6. Selected Financial Data..........................................   12
Item 7. Management's Discussion and Analysis of Financial Condition and
 Results of Operations...................................................   12
Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk..   16
Item 8. Financial Statements and Supplementary Data......................   17
Item 9. Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure....................................................   39

                                PART III

Item 10. Directors, Executive Officers and Advisor of the Registrant.....   39
Item 11. Executive Compensation..........................................   44
Item 12. Security Ownership of Certain Beneficial Owners and Management..   46
Item 13. Certain Relationships and Related Transactions..................   46

                                 PART IV

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-
 K.......................................................................   48
Signature Page...........................................................   49
</TABLE>

                                       2
<PAGE>

                                    PART I

ITEM 1. BUSINESS

  Income Opportunity Realty Investors, Inc. ("IORI"), a Nevada corporation, is
the successor to a California business trust organized on December 14, 1984,
which commenced operations on April 15, 1985. IORI has elected to be treated
as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"). IORI has, in the
opinion of management, qualified for federal taxation as a REIT for all
periods since May 1, 1985.

  At December 31, 2000, IORI's real estate consisted of 16 properties held for
investment. In addition, IORI owns interests in two partnerships, each of
which owns a property and a third partnership which holds a wraparound
mortgage note receivable. In 2000, IORI purchased nine properties as well as
sold seven properties. One $1.5 million mortgage loan was funded during 2000.
IORI's real estate portfolio is more fully discussed in ITEM 2. "PROPERTIES."

Business Plan

  IORI's business is investing in equity interests in real estate through
direct equity investments and partnerships, and financing real estate and real
estate related activities through investments in mortgage loans. IORI's real
estate is located in the Pacific, Southeast and Southwest regions of the
continental United States. Information regarding IORI's real estate portfolio
is set forth in ITEM 2. "PROPERTIES," and in Schedule III to the Consolidated
Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA."

  IORI's business is not seasonal. Management has determined to continue to
pursue a balanced investment strategy, seeking both current income and capital
appreciation. With respect to new investments, management's plan of operation
is to acquire higher class apartment and commercial properties in keeping with
the current class of properties in IORI's real estate portfolio. In 2000, IORI
began making higher risk, higher reward investments in unimproved land. In
2001, management intends to focus on income producing property acquisitions to
maintain a balance between income producing and non-income producing
properties. Management does not expect that IORI will seek to fund or acquire
additional mortgage loans. IORI may, however, originate mortgage loans in
conjunction with providing purchase money financing of a property sale.
Management also intends to continue its strategy of maximizing each property's
operating income by aggressive property management through closely monitoring
expenses while at the same time making property renovations and/or
improvements where appropriate. While renovation and/or improvement
expenditures increase the amount of revenue required to cover operating
expenses, management believes that such expenditures are necessary to maintain
or enhance the value of IORI's properties.

  The Board of Directors currently intends to continue its policy of
prohibiting IORI from incurring aggregate secured and unsecured indebtedness
in excess of 300% of IORI's net asset value (defined as the book value of all
assets of IORI minus all of its liabilities); however, the Board may alter
such policy at any time.

Management of the Company

  Although the Board of Directors is directly responsible for managing the
affairs of IORI and for setting the policies which guide it, the day-to-day
operations of IORI are performed by Basic Capital Management, Inc. ("BCM"), a
contractual advisor under the supervision of the Board. The duties of BCM
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities,
as well as financing and refinancing sources. BCM also serves as a consultant
in connection with IORI's business plan and investment decisions made by the
Board.

  BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips serves as a representative of his children's trust,
which owns BCM and, in such capacity had, until June 2000,

                                       3
<PAGE>

substantial contact with the management of BCM and input with respect to its
performance of advisory services to IORI. BCM is more fully described in ITEM
10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The
Advisor."

  BCM has been providing advisory services to IORI since March 28, 1989.
Renewal of BCM's advisory agreement was approved by the Board of Directors on
August 18, 2000. BCM also serves as advisor to Transcontinental Realty
Investors, Inc. ("TCI") and Directors of IORI are also directors of TCI. BCM
also serves as Advisor to American Realty Investors, Inc. ("ARI"). Karl L.
Blaha, President of IORI, also serves as President of ARI, TCI and BCM and the
officers of IORI also serve as officers of ARI, TCI and BCM. As of March 2,
2001, ARI and TCI owned approximately 27.1% and 22.8%, respectively, of IORI's
outstanding shares of Common Stock and BCM owned approximately 7.1% of IORI's
outstanding shares of Common Stock.

  Since February 1, 1990, affiliates of BCM have provided property management
services to IORI. Currently Triad Realty Services, Ltd. ("Triad") provides
such property management services. Triad subcontracts with other entities for
the provision of property-level management services to IORI. The general
partner of Triad is BCM. The limited partners of Triad are Gene E. Phillips
and GS Realty Services, Inc. ("GS Realty"), which is a company not affiliated
with Mr. Phillips or BCM. Triad subcontracts the property-level management and
leasing of IORI's seven office buildings and the two commercial properties
owned by real estate partnerships in which IORI and TCI are partners to Regis
Realty, Inc. ("Regis"), a related party, which is a company also owned by GS
Realty. Regis is entitled to receive property and construction management fees
and leasing commissions in accordance with the terms of its property-level
management agreement with Triad.

  Regis also is entitled to receive real estate brokerage commissions in
accordance with the terms of a nonexclusive brokerage agreement as discussed
in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT--The
Advisor."

  IORI has no employees. Employees of BCM render services to IORI.

Competition

  The real estate business is highly competitive and IORI competes with
numerous entities engaged in real estate activities (including certain
entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Related Party Transactions"), some of which have greater
financial resources than those of IORI. Management believes that success
against such competition is dependent upon the geographic location of the
property, the performance of the property-level managers in areas such as
marketing, collection and control of operating expenses, the amount of new
construction in the area and the maintenance and appearance of the property.
Additional competitive factors with respect to commercial properties are the
ease of access to the property, the adequacy of related facilities, such as
parking, and sensitivity to market conditions in setting rent levels. With
respect to apartments, competition is also based upon the design and mix of
units and IORI's ability to provide a community atmosphere for the tenants.
Management believes that beyond general economic circumstances and trends, the
rate at which properties are renovated or the rate new properties are
developed in the vicinity of each of IORI's properties also are competitive
factors.

  To the extent that IORI seeks to sell any of its properties, the sales
prices for such properties may be affected by competition from other real
estate entities and financial institutions also attempting to sell their
properties located in the same areas as well as aggressive buyers attempting
to penetrate or dominate a particular market.

  As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Related Party Transactions," the officers and Directors of IORI
also serve as officers or directors of certain other entities, also advised by
BCM, and which have business objectives similar to those of IORI. IORI's
Directors, officers and advisor owe fiduciary duties to such other entities as
well as to IORI under applicable law. In determining to which entity a
particular investment opportunity will be allocated, the officers, Directors
and advisor consider the respective investment objectives of each entity and
the appropriateness of a particular investment in light of each entity's
existing real estate and mortgage notes receivable portfolios. To the extent

                                       4
<PAGE>

that any particular investment opportunity is appropriate to more than one of
the entities, the investment opportunity will be allocated to the entity which
has funds available for investment for the longest period of time, or, if
appropriate, the investment may be shared among all or some of such entities.

  In addition, as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS---Certain Business Relationships," IORI also competes with other
entities which are affiliates of BCM, which may have investment objectives
similar to IORI's and that may compete with it in the acquisition, sale,
leasing and financing of real estate. In resolving any potential conflicts of
interest which may arise, BCM has informed management that it intends to
continue to exercise its best judgment as to what is fair and reasonable under
the circumstances in accordance with applicable law.

Certain Factors Associated with Real Estate and Related Investments

  IORI is subject to all the risks incident to ownership and financing of real
estate and interests therein, many of which relate to the general illiquidity
of real estate investments. These risks include, but are not limited to,
changes in general or local economic conditions, changes in interest rates and
the availability of permanent mortgage financing which may render the
acquisition, sale or refinancing of a property difficult or unattractive and
which may make debt service burdensome, changes in real estate and zoning
laws, increases in real estate taxes, federal or local economic or rent
controls, floods, earthquakes, hurricanes and other acts of God and other
factors beyond the control of management or BCM. The illiquidity of real
estate investments also may impair the ability of management to respond
promptly to changing circumstances. Management believes that such risks are
partially mitigated by the diversification by geographic region and property
type of IORI's real estate portfolio. However, to the extent property
acquisitions are concentrated in any particular geographic region or property
type, the advantages of diversification may be mitigated.

ITEM 2. PROPERTIES

  IORI's principal offices are located at 1800 Valley View Lane, Suite 300,
Dallas, Texas 75234 and are, in the opinion of management, suitable and
adequate for IORI's present operations.

  IORI's real estate portfolio at December 31, 2000, is set forth in Schedule
III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA." The discussions set forth below under the
headings "Real Estate" provide certain summary information concerning IORI's
real estate portfolio.

  IORI's real estate portfolio consists of 16 owned properties and an
investment in two partnerships each of which owns a commercial property. IORI
holds a fee simple title to the owned properties. IORI holds one mortgage note
receivable, and a partnership in which it is a 40% general partner holds a
wraparound mortgage note. The discussion set forth below under the heading
"Real Estate" provides certain summary information concerning IORI's real
estate and further summary information with respect to its owned properties
and its partnership investments.

  IORI's real estate is geographically diverse. At December 31, 2000, IORI
held equity investments in apartments and office buildings in the Pacific,
Southwest and Southeast regions of the continental United States, as shown
more specifically in the table under "Real Estate" below. The majority of
IORI's properties are, however, located in California and Texas. At December
31, 2000, IORI held a mortgage note secured by a second lien on 165 acres of
unimproved land in The Colony, Texas, as described more specifically under
"Mortgage Loans," below.

  At December 31, 2000, one of IORI's properties, the Travelers land parcel,
exceeded 10% of IORI's total assets. At December 31, 2000, 92% of IORI's
assets consisted of owned properties and less than 1% consisted of investments
in partnerships. The remaining 8% of IORI's assets were cash, cash equivalents
and other assets. The percentage of IORI's assets invested in any one category
is subject to change and no assurance can be given that the composition of
IORI's assets in the future will approximate the percentages listed above. See
ITEM 1. "BUSINESS--Business Plan."

                                       5
<PAGE>

  To continue to qualify for federal taxation as a REIT under the Code, IORI
is required, among other things, to hold at least 75% of the value of its
total assets in real estate assets, government securities, cash and cash
equivalents at the close of each quarter of each taxable year.

Geographic Regions

  IORI has divided the continental United States into the following geographic
regions.

                              [MAP APPEARS HERE]

  Northeast region comprised of the states of Connecticut, Delaware, Maryland,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island
and Vermont, and the District of Columbia. IORI has no properties in this
region.

  Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. IORI has 1
commercial property in this region.

  Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New
Mexico, Oklahoma and Texas. IORI has 7 apartments and 2 commercial properties in
this region.

  Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota, West Virginia and Wisconsin. IORI has no properties in this region.

  Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada,
Utah and Wyoming. IORI has no properties in this region.

  Pacific region comprised of the states of California, Oregon and Washington.
IORI has 4 commercial properties in this region.

  Excluded from above are two parcels of unimproved land in the Southwest
Region, as described below.

Real Estate

  At December 31, 2000, 92% of IORI's assets were invested in real estate, on
a leveraged basis, in the Pacific, Southeast and Southwest regions of the
continental United States. IORI's real estate portfolio consists of 16 owned
properties and an investment in two partnerships, each of which owns a
commercial property.

  Types of Real Estate Investments. IORI's real estate consists of apartments
and commercial properties (office buildings) having established income-
producing capabilities. In selecting real estate for investment, the location,
age and type of property; gross rents; lease terms; financial and business
standing of tenants; operating expenses; fixed charges; land values and
physical condition are considered. IORI may acquire properties subject to, or
assume, existing debt and may mortgage, pledge or otherwise obtain financing
for its properties. The IORI Board may alter the types of and criteria for
selecting new real estate investments and for obtaining financing without a
vote of stockholders.

  IORI has typically invested in developed real estate, although it also may
invest in new construction or development either directly or in partnership
with nonaffiliated parties or affiliates (subject to approval by the Board).
To the extent that IORI invests in construction and development projects, it
will be subject to business risks, such as cost overruns and construction
delays, associated with such higher risk projects.


                                       6
<PAGE>

  In the opinion of management, IORI's properties are adequately covered by
insurance.

  The following table sets forth the percentages, by property type and
geographic region, (other than two parcels of unimproved land, as described
below) of IORI's owned real estate at December 31, 2000.

<TABLE>
<CAPTION>
                                                                      Commercial
   Region                                                  Apartments Properties
   ------                                                  ---------- ----------
   <S>                                                     <C>        <C>
   Pacific................................................    -- %        69%
   Southwest..............................................    100         18
   Southeast..............................................    --          13
                                                              ---        ---
                                                              100%       100%
                                                              ===        ===
</TABLE>

  The foregoing table is based solely on the number of apartment units and
commercial square footage owned and does not reflect the value of IORI's
investment in each region. IORI owns two parcels of unimproved land, 1.01
acres and 241 acres, both in the Southwest region. See Schedule III to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA" for a detailed description of IORI's real estate.

  A summary of the activity in IORI's owned real estate portfolio during 2000
is as follows:

<TABLE>
   <S>                                                                       <C>
   Owned properties at January 1, 2000......................................  14
   Properties purchased.....................................................   9
   Properties sold..........................................................   7
                                                                             ---
   Owned properties at December 31, 2000....................................  16
                                                                             ===
</TABLE>

  Properties Held for Investment. Set forth below are IORI's owned properties
at December 31, 2000, all of which were held for investment and the monthly
rental rate for apartments and the average annual rental rate for office
buildings and occupancy thereof at December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                         Rent Per Square Foot  Occupancy %
                                                                         -------------------- --------------
Property                       Location         Units/ Square Footage     2000   1999   1998  2000 1999 1998
--------                 -------------------- -------------------------- ------ ------ ------ ---- ---- ----
<S>                      <C>                  <C>                        <C>    <C>    <C>    <C>  <C>  <C>
Apartments
Brighton Court.......... Midland, TX             60 Units/90,672 Sq. Ft. $  .53 $    * $    *  93    *    *
Del Mar................. Midland, TX            92 Units/105,348 Sq. Ft.    .50      *      *  98    *    *
Enclave................. Midland, TX             68 Units/89,734 Sq. Ft.    .56      *      *  93    *    *
Meridian................ Midland, TX          280 Units/ 264,000 Sq. Ft.    .41    .46      *  95   69    *
Signature Place......... Midland, TX             57 Units/72,480 Sq. Ft.    .56      *      *  86    *    *
Sinclair Place.......... Midland, TX            114 Units/91,529 Sq. Ft.    .49      *      *  96    *    *
Treehouse............... San Antonio, TX       106 Units/ 88,957 Sq. Ft.    .83    .80    .78  95   96   96

Office Buildings
2010 Valley View........ Farmers Branch, TX               39,568 Sq. Ft.  17.40  16.26  16.50  86   64   19
5600 Mowry.............. Newark, CA                       56,120 Sq. Ft.  24.64  22.94  19.86 100  100   58
Akard Plaza............. Dallas, TX                       42,895 Sq. Ft.  15.46  15.34  13.47  91   92   92
Chuck Yeager............ Chantilly, VA                    60,060 Sq. Ft.  11.21  14.70  13.39  41   41   72
Daley Plaza............. San Diego, CA                   122,795 Sq. Ft.  15.32  14.68  12.53  88   79   74
La Mesa Village......... La Mesa, CA                      92,611 Sq. Ft.  16.87  17.29  16.47  77   88   89
Westlake Village........ Westlake Village, CA             45,500 Sq. Ft.  18.10  16.96  14.44  52   70   79

Land
Frankel................. Midland County, TX                   1.01 Acres
Travelers............... Farmers Branch, TX                    204 Acres
</TABLE>
--------
*  Property was purchased in 1999 or 2000.

                                       7
<PAGE>

  In 2000, IORI purchased the following properties:

<TABLE>
<CAPTION>
                                                                                 Net
                                                                      Purchase  Cash     Debt      Interest Maturity
Property                      Location             Units/Acres         Price    Paid   Incurred      Rate     Date
--------                 ------------------ ------------------------- -------- ------- --------    -------- --------
                                                                       (dollars in thousands)
<S>                      <C>                <C>                       <C>      <C>     <C>         <C>      <C>
Apartments
Frankel Portfolio(1).... Midland, TX        391 Units/123,184 Sq. Ft. $14,034  $ 3,784 $10,875       9.13%   07/03

Land
Etheredge............... Collin County, TX                74.98 Acres   1,875      391   1,406(2)    10.0%   04/01
Fambrough............... Collin County, TX                75.07 Acres   1,877      592   1,408(2)    10.0%   04/01
Frankel................. Midland County, TX                1.01 Acres      41       43     --         --       --
Travelers............... Farmers Branch, TX                 204 Acres  28,650   13,117  12,000       14.0%   12/01
</TABLE>
--------
(1)  Frankel portfolio consisted of five apartments: 60 unit Brighton Court,
     92 unit Del Mar Villas, 68 unit Enclave, 57 unit Signature Place and 114
     unit Sinclair Place.
(2)  Seller financing.

  In 2000, IORI sold the following properties:

<TABLE>
<CAPTION>
                                                                                                   Gain
                                                                     Sales  Net Cash    Debt        on
Property                     Location         Units/Sq.Ft./Acres     Price  Received Discharged    Sale
--------                 ----------------- ------------------------ ------- -------- ----------   ------
                                                                          (dollars in thousands)
<S>                      <C>               <C>                      <C>     <C>      <C>          <C>
Apartments
East Point.............. Mesquite, TX      126 Units/113,138 Sq.Ft. $ 5,575 $ 1,804   $ 3,242     $2,179
La Monte Park........... Houston, TX       128 Units/123,184 Sq.Ft.   5,000   1,066     3,829(1)     903
Renaissance Parc........ Dallas, TX        294 Units/293,654 Sq.Ft.  17,198   4,536    12,265(1)   1,213

Office Buildings
Olympic................. Los Angeles, CA              46,685 Sq.Ft.   8,500   3,811     4,443      1,850
Saratoga................ Saratoga, CA                 89,825 Sq.Ft.  25,000  17,709     6,968     13,056

Land
Etheredge............... Collin County, TX              74.98 Acres   2,341     754     1,406        194
Fambrough............... Collin County, TX              75.07 Acres   2,338     754     1,408        194
</TABLE>
--------
(1)  Debt assumed by purchaser.

  Partnership Properties. Set forth below is the commercial property owned by
each of the two partnerships in which IORI is an equity investee and the
average annual rental rate and occupancy thereof at December 31, 2000, 1999
and 1998:

<TABLE>
<CAPTION>
                                               Rent per Square
                                                     Foot         Occupancy %
                                              ------------------ --------------
Property           Location   Square Footage   2000  1999  1998  2000 1999 1998
--------          ----------- --------------- ------ ----- ----- ---- ---- ----
<S>               <C>         <C>             <C>    <C>   <C>   <C>  <C>  <C>
Shopping Center
Chelsea Square... Houston, TX  70,275 Sq. Ft. $ 9.31 $8.78 $8.58  77  100  100

Office Building
Eton Square...... Tulsa, OK   222,654 Sq. Ft.  10.52  9.77     *  59   87    *
</TABLE>
--------
*  Partnership interest was purchased in 1999.

  IORI owns a 36.3% general partner interest and TCI owns a 63.7% limited
partner interest in Tri-City Limited Partnership ("Tri-City") which in turn
owns Chelsea Square Shopping Center. In February 2000, Tri-City obtained
mortgage financing of $2.1 million secured by the previously unencumbered
shopping center. Tri-City received net cash of $2.0 million after the funding
of required escrows and the payment of various closing

                                       8
<PAGE>

costs. The mortgage bore interest at a fixed rate of 10.24% per annum until
February 2001 and a variable rate thereafter, currently, 10.0% per annum,
requires monthly payments of principal and interest of $20,601 and matures in
February 2005. IORI received a distribution of $739,000 of the net financing
proceeds.

  IORI owns a 10% limited partner interest and TCI owns a 90% general partner
interest in TCI Eton Square, L.P., which owns the Eton Square Building in
Tulsa, Oklahoma.

Mortgage Loans

  Prior to 1991, a substantial portion of IORI's assets had been invested in
mortgage notes secured by income-producing real estate. IORI's mortgage notes
had included first, wraparound and junior mortgage loans. Prior to the third
quarter of 2000, management had not been seeking to fund or acquire new
mortgage loans, other than those which may have originated in conjunction with
IORI's providing purchase money financing of a property sale. See ITEM 1.
"BUSINESS." BCM, in its capacity as a mortgage servicer, services the mortgage
notes.

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

  The following discussion briefly describes the junior mortgage loan funded
in 2000.

  In September 2000, IORI funded a $1.5 million loan, secured by a second lien
on 165 acres of unimproved land in The Colony, Texas. The loan bears interest
at 18.0% per annum, requires monthly payments of interest only and matures in
January 2002.

  Partnership mortgage loans. IORI owns a 40% general partner interest and TCI
owns a 60% general partner interest in Nakash Income Associates ("NIA"), which
holds a wraparound mortgage note receivable secured by a building occupied by
a Wal-Mart in Maulden, Missouri. IORI received distributions of $25,000 from
NIA in 2000, and advanced the partnership $13,000.

ITEM 3. LEGAL PROCEEDINGS

Olive Litigation

  In February 1990, IORI, together with National Income Realty Trust,
Continental Mortgage and Equity Trust ("CMET") and TCI, three real estate
entities with, at the time, the same officers, directors or trustees and
advisor as IORI, entered into a settlement (the "Settlement") of a class and
derivative action entitled Olive et al. v. National Income Realty Trust et
al., relating to the operation and management of each of the entities. On
April 23, 1990, the Court granted final approval of the terms of the
Settlement. The Settlement was modified in 1994 (the "Modification").

  On January 27, 1997, the parties entered into an Amendment to the
Modification effective January 9, 1997 (the "Olive Amendment"). The Olive
Amendment provided for the settlement of additional matters raised by
plaintiffs' counsel in 1996. The Court issued an order approving the Olive
Amendment on July 3, 1997.

  The Olive Amendment provided that IORI's Board retain a
management/compensation consultant or consultants to evaluate the fairness of
the BCM advisory contract and any contract of its affiliates with IORI, CMET
and TCI, including, but not limited to, the fairness to IORI, CMET and TCI of
such contracts relative to other means of administration. In 1998, the Board
engaged a management/compensation consultant to perform the evaluation which
was completed in September 1998.

  In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this
provision of the Olive Amendment. In January 2000, the Board engaged another

                                       9
<PAGE>

management/compensation consultant to perform the required evaluation again.
This evaluation was completed in April 2000 and was provided to plaintiffs'
counsel. The Board believes that any alleged breach of the Olive Amendment has
been fully remedied by the Board's engagement of the second consultant.
Although several status conferences on this matter have been held, there has
been no court order resolving whether there was any breach of the Olive
Amendment.

  In October 2000, plaintiffs' counsel asserted that the stock option
agreement to purchase TCI shares, which was entered into by IORI and ARI, an
affiliate of IORI, in October 2000 with Gotham Partners, breached a provision
of the Modification. As a result of this assertion, IORI assigned all of its
rights to purchase the TCI shares under this stock option agreement to ARI.

  The Board believes that the provisions of the Settlement, Modification and
the Olive Amendment terminated on April 28, 1999. However, in September 2000,
the Court ruled that certain provisions of the Modification continue to be
effective after the termination date. This ruling has been appealed to the
United States Court of Appeals for the Ninth Circuit by IORI and TCI.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  Not applicable.

                                      10
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF COMMON STOCK AND RELATED
        SHAREHOLDER MATTERS

  IORI's Common Stock is traded on the American Stock Exchange ("AMEX") under
the symbol "IOT". The following table sets forth the high and low prices for
IORI's Common Stock as reported on the AMEX.

<TABLE>
<CAPTION>
   QUARTER ENDED                                            HIGH         LOW
   -------------                                            ----         ---
   <S>                                                      <C>          <C>
   March 31, 2001 (through March 2, 2001).................. $  9/5///32/ $7 3/4

   March 31, 2000..........................................   7 1/2       5 1/4
   June 30, 2000...........................................   7 1/2        2
   September 30, 2000......................................  10 1/4       6 3/4
   December 31, 2000.......................................   9 1/4        8

   March 31, 1999..........................................    8          6 3/8
   June 30, 1999...........................................   7 3/4       5 5/8
   September 30, 1999......................................   7 1/8       5 1/8
   December 31, 1999.......................................   5 7/8       4 3/4
</TABLE>

  As of March 2, 2001, the closing price of IORI's Common Stock on the AMEX
was $8.60 per share.

  As of March 2, 2001, IORI's Common Stock was held by 1,503 holders of
record.

  IORI paid dividends in 2000 and 1999 as follows:

<TABLE>
<CAPTION>
                                                                       Amount
     Date Declared         Record Date            Payable Date        Per Share
   -----------------    ------------------     ------------------     ---------
   <S>                  <C>                    <C>                    <C>
   February 10, 2000    March 15, 2000         March 31, 2000           $.15
   June 6, 2000         June 15, 2000          June 30, 2000             .15
   September 8, 2000    September 19, 2000     September 29, 2000        .15

   March 4, 1999        March 15, 1999         March 31, 1999           $.15
   June 2, 1999         June 14, 1999          June 30, 1999             .15
   September 9, 1999    September 20, 1999     October 5, 1999           .15
   November 22, 1999    December 15, 1999      December 31, 1999         .15
</TABLE>

  IORI reported to the Internal Revenue Service that 100% of the dividends
paid in 2000 represented capital gains and that 100% of the dividends paid in
1999 represented a return of capital.

  On December 5, 1989, the Board of Directors approved a share repurchase
program, authorizing the repurchase of a total of 200,000 shares of IORI's
Common Stock. In June 2000, the Board increased this authorization to 300,000
shares. Through December 31, 2000, a total of 218,804 shares had been
repurchased at a cost of $1.9 million. 19,900 shares were repurchased in 2000
at a total cost of $134,000.

                                      11
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                    For the Years Ended December 31,
                         --------------------------------------------------------
                            2000        1999       1998        1997       1996
                         ----------  ---------- ----------  ---------- ----------
                                (dollars in thousands, except per share)
<S>                      <C>         <C>        <C>         <C>        <C>
EARNINGS DATA
Rents................... $   13,731  $   15,968 $   14,326  $   12,221 $    8,666
Property expense........      6,969       6,768      6,462       5,900      4,358
                         ----------  ---------- ----------  ---------- ----------
Operating income........      6,762       9,200      7,864       6,321      4,308

Interest income.........        319          29        172         266        339
Income (loss) from
 equity partnerships....        (61)        148        113          52         85
                         ----------  ---------- ----------  ---------- ----------
Gain on sale of real
 estate.................     20,878       1,525        180       3,953        --
                         ----------  ---------- ----------  ---------- ----------
                             21,136       1,702        465       4,271        424

Other expense...........     11,104       9,580      9,008       7,275      5,300
                         ----------  ---------- ----------  ---------- ----------
Net income (loss)....... $   16,794  $    1,322 $     (679) $    3,317 $     (568)
                         ==========  ========== ==========  ========== ==========
PER SHARE DATA
Net income (loss)....... $    11.03  $      .87 $     (.44) $     2.18 $     (.37)
                         ==========  ========== ==========  ========== ==========
Dividends per share..... $      .45  $      .60 $      .60  $      .40 $      .40
Weighted average Common
 shares outstanding.....  1,522,510   1,527,386  1,521,832   1,519,888  1,530,008
<CAPTION>
                                              December 31,
                         --------------------------------------------------------
                            2000        1999       1998        1997       1996
                         ----------  ---------- ----------  ---------- ----------
                                (dollars in thousands, except per share)
<S>                      <C>         <C>        <C>         <C>        <C>
BALANCE SHEET DATA
Real estate held for
 investment, net........ $   86,277  $   86,542 $   83,691  $   81,914 $   46,693
Real estate held for
 sale, net..............        --          --         --          --       6,623
Notes and interest
 receivable, net........      1,500         --         --        2,010      1,998
Total assets............     96,519      91,185     88,695      90,309     63,593
Notes and interest
 payable................     54,206      62,852     60,786      61,323     38,957
Stockholders' equity....     39,998      23,991     23,560      25,131     22,381
Book value per share.... $    26.42  $    15.69 $    15.44  $    16.53 $    14.63
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Introduction

  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.

Liability and Capital Resources

  Cash and cash equivalents at December 31, 2000, totaled $2.1 million
compared to $722,000 at December 31, 1999. IORI's principal sources of cash
have been and will continue to be property operations, proceeds from property
sales and refinancings and partnership distributions. Although management
anticipates that IORI will generate excess cash from operations in 2001 due to
increased rental rates and occupancy at its properties, such excess, however,
will not be sufficient to discharge all of IORI's debt obligations as they
mature. Management intends to selectively sell income producing real estate,
refinance real estate and incur additional borrowings against real estate to
meet its cash requirements.

  Net cash used in operating activities was $1.9 million in 2000 as compared
to $3.3 million provided by operating activities in 1999. The primary factors
affecting cash flow from operating activities are discussed in the following
paragraphs.

                                      12
<PAGE>

  Cash flow from property operations (rents collected less payments for
property operating expenses) decreased to $6.6 million in 2000 from $9.7
million in 1999. A decrease of $3.2 million was due to the sale of three
apartments and two office buildings in 2000. The decrease was offset in part
by an increase of $900,000 from the purchase of six apartments in 2000 and
1999.

  Interest collected increased to $310,000 in 2000 from $29,000 in 1999. This
increase was due to an increase in short-term investment income and the
funding of one mortgage note receivable in 2000.

  Interest paid on notes payable decreased to $5.0 million in 2000 from $5.5
million in 1999. A decrease of $1.6 million in interest payments was due to
the sale of five properties in 2000 and one property in 1999. The decrease was
offset in part by an increase of $971,000 from the purchase of eight
properties in 2000 and 1999. Management believes that interest paid on notes
payable will increase as IORI continues to acquire properties on a leveraged
basis.

  Advisory and net income fee paid to affiliate increased to $2.6 million in
2000 from $388,000 in 1999. The increase is due to an increase in the net
income fee paid due to an increase in IORI's net income, the basis for such
fee. The remaining increase was due to an increase in gross assets and no
advisory fee refund in 2000. See NOTE 8. "ADVISORY AGREEMENT."

  In 2000, IORI made improvements to its properties totaling $1.9 million,
purchased five apartments and four parcels of land for a total of $46.5
million, paying $17.9 million in cash and obtaining mortgage financing of
$25.7 million, and sold three apartments, two office buildings and two parcels
of land for a total of $66.0 million, receiving net cash of $30.4 million
after the payoff of $33.6 million in mortgage debt and the payment of various
closing costs.

  In 2000, IORI did not refinance any properties. During 2000, IORI made
scheduled mortgage principal payments totaling $18.2 million.

  Scheduled principal payments on notes payable of $14.6 million are due in
2001. For those mortgages that come due in 2001, it is management's intent to
either seek an extension of the due dates one or more years, or refinance the
debt on a long-term basis, or pay off the debt at maturity, or selectively
sell income producing real estate. Management believes it will continue to be
successful in obtaining loan extensions and/or refinancings.

  Management expects that funds from existing cash resources, selective sales
of income producing properties, refinancing of real estate, and additional
borrowings against real estate will be sufficient to meet IORI's cash
requirements associated with its current and anticipated level of operations,
maturing debt obligations and existing commitments. To the extent that IORI's
liquidity permits or financing sources are available, management intends to
make new real estate investments.

  IORI owns a 36.3% general partner interest in the Tri-City partnership. In
2000, IORI received no distributions from Tri-City's operating cash flow, but
did receive a distribution of $739,000 from its financing cash flow and
advanced $45,000 to the partnership. IORI owns a 40% general partner interest
in the NIA partnership. In 2000, IORI received distributions of $25,000 from
NIA and made a $13,000 contribution to the partnership. IORI owns a 10%
limited partnership interest in the TCI Eton Square partnership. IORI received
no distributions and made no contributions to the partnership in 2000. See
NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."

  IORI paid dividends to stockholders totaling $685,000 or $.45 per share in
2000 and $908,000 or $.60 per share in 1999. In December 2000, the Board of
Directors determined not to pay a fourth quarter dividend to holders of IORI's
Common Stock. The non-payment decision was based on the Board determining that
IORI needed to retain cash for acquisitions that are anticipated in 2001 and
that IORI had no REIT taxable income that required a distribution.

  In 2000, stockholders purchased 5,037 shares of Common Stock through the
dividend reinvestment program for a total of $32,000. IORI repurchased 19,900
shares of Common Stock on the open market in 2000 for a total of $134,000. No
shares were repurchased in 1999.

                                      13
<PAGE>

  Management reviews the carrying values of IORI's properties at least
annually and whenever events or a change in circumstances indicate that
impairment may exist. Impairment is considered to exist if the future cash
flow from a 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 and visits to selected properties in the area and a
review of (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

  2000 Compared to 1999. IORI reported net income of $16.8 million in 2000, as
compared to net income of $1.3 million in 1999. Net income included gains on
sale of real estate of $20.9 million in 2000 and gains on sale of real estate
of $1.5 million in 1999. Fluctuations in these and the other components of
revenue and expense are discussed in the following paragraphs.

  Rents decreased to $13.7 million in 2000 from $16.0 million in 1999. A
decrease of $4.9 million was due to the sale of six income producing
properties in 2000 and 1999. The decrease was offset in part by an increase of
$1.4 million from the acquisition of six income producing properties in 2000
and fourth quarter of 1999 and an additional $1.2 million was from an increase
in occupancy and rental rates at IORI's apartments and office buildings. Rents
in 2001 are expected to increase from a full year of operations of the
apartments purchased in 2000, and from increased occupancy and rental rates at
IORI's office buildings.

  Interest income increased to $319,000 in 2000 from the $29,000 in 1999. This
increase was due to an increase in short-term investments, and from the
funding of a note receivable in 2000. Interest income is expected to be
minimal in 2001.

  Property operations expense increased to $7.0 million in 2000 from $6.8
million in 1999. An increase in property operations expense of $1.7 million
was due to six income producing properties being purchased in 2000 and the
fourth quarter of 1999, offset by a decrease of $1.6 million from the sale of
six income producing properties in 2000 and 1999.

  Interest expense decreased to $5.1 million in 2000 from $5.7 million in
1999. A decrease of $1.6 million was from the sale of eight properties subject
to debt in 2000 and 1999 and offset by $1.0 million from the purchase of nine
properties in 2000 and 1999. Interest expense in 2001 is expected to decrease
from 2000 due to a decrease in outstanding debt.

  Depreciation expense decreased to $2.5 million in 2000 from $2.7 million in
1999. A decrease of $775,000 is from the sale of six properties in 2000 and
1999, offset by an increase of $297,000 from the purchase of five properties
in 2000 and 1999 and an increase of $205,000 is from tenant improvements.
Depreciation expense in 2001 is expected to approximate 2000.

  Advisory fee to affiliate increased to $664,000 in 2000 from $371,000 in
1999. The increase was attributable to a decrease in the operating expense
limitation refund. The advisory fee is expected to approximate 2000. See NOTE
8. "ADVISORY AGREEMENT."

  The net income fee to affiliate increased to $1.4 million in 2000, from
$81,000 in 1999. The increase was attributable to the increase in IORI's net
income. The net income fee is based on 7.5% of IORI's net income.

  General and administrative expense increased to $1.5 million in 2000 from
$747,000 in 1999. This increase was primarily due to an increase in legal
fees, consultant fees, taxes and advisor cost reimbursements.

  Equity in income of partnerships was a loss of $61,000 in 2000 compared to
income of $148,000. The decrease was due to the sale of two commercial
properties by the Tri-City partnership in 1999.

                                      14
<PAGE>

  In 2000, gains on sale of real estate totaling $20.9 million were realized:
$903,000 on the sale of La Monte Park Apartments, $1.2 million on the sale of
Renaissance Parc Apartments, $1.9 million on the sale of Olympic Office
Building, $13.1 million on the sale of Saratoga Office Building, $2.2 million
on the sale of Eastpoint Apartments, $388,000 on the sale of Etheredge and
Fambrough land and $1.3 million recognition of a deferred gain. In 1999, IORI
recognized gains on sale of real estate totaling $1.5 million, $1.0 million
being IORI's equity share of the gain recognized by Tri-City on the sale of
two commercial properties, and $490,000 on IORI's sale of Town Center Plaza
Shopping Center. See NOTE 2. "REAL ESTATE" and NOTE 4. "INVESTMENT IN EQUITY
METHOD PARTNERSHIPS."

  1999 Compared to 1998. IORI reported net income of $1.3 million in 1999, as
compared to a net loss of $679,000 in 1998. Net income in 1999 included gains
on sale of real estate of $1.5 million whereas 1998's net loss included gains
on sale of real estate of $180,000. The primary factors contributing to IORI's
1999 net income are discussed in the following paragraphs.

  Rents increased to $16.0 million in 1999 from $14.3 million in 1998. Of this
increase, $1.6 million was due to higher rents and occupancy rates, primarily
at IORI's office buildings and $251,000 was attributable to a full year of
operations of an office building construction of which was completed in 1998.
This increase was partially offset by a decrease of $182,000 due to one office
building being sold in 1999.

  Interest income decreased to $29,000 in 1999 from the $172,000 in 1998. This
decrease was due to a decrease in short-term investment income and the August
1998 collection of a note receivable.

  Property operations expense increased to $6.8 million in 1999 from $6.5
million in 1998. This increase was attributable to a full year of operations
of an office building construction of which was completed in 1998.

  Interest expense of $5.7 million in 1999 approximated the $5.8 million in
1998.

  Depreciation expense increased to $2.7 million in 1999 from $2.2 million in
1998. This increase was primarily due to an increase in the completion of
office building construction.

  Advisory fee increased to $371,000 in 1999 from $329,000 in 1998. Such
increase was attributable to an increase in IORI's gross assets, the basis for
the fee and a decrease in the operating expense limitation refund. See NOTE 8.
"ADVISORY AGREEMENT."

  A net income fee of $81,000 was earned by the advisor in 1999, the result of
IORI having net income. No fee was incurred in 1998.

  General and administrative expense of $747,000 in 1999 approximated the
$755,000 in 1998.

  Equity in income of partnerships increased to $148,000 in 1999 from $113,000
in 1998. The increase was due to an equity partnership acquisition of Eton
Square and to increased rental rates at the partnership's commercial
properties.

  In 1999, IORI recognized gains on sale of real estate totaling $1.5 million,
$1.0 million being IORI's equity share of the gain recognized by Tri-City on
the sale of two commercial properties, and $490,000 on IORI's sale of Town
Center Plaza in November. See NOTE 2. "REAL ESTATE" and NOTE 4. "INVESTMENT IN
EQUITY METHOD PARTNERSHIPS." In 1998, IORI recognized gains on sale of real
estate totaling $180,000, its equity share of the gain recognized by Tri-City
on the sale of two apartments.

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

                                      15
<PAGE>

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.

Inflation

  The effects of inflation on IORI's operations are not quantifiable. Revenues
from property operations tend to fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of
inflation also affect the sales values 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.

Taxes

  For the years 1998, 1999 and 2000, IORI elected and in the opinion of
management qualified to be taxed as a REIT as defined under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended. To continue to
qualify for federal taxation as a REIT, IORI is required to hold at least 75%
of the value of its total assets in real estate assets, government securities,
cash and cash equivalents at the close of each quarter of each taxable year.
As a REIT, IORI is also required to distribute at least 95% of its REIT
taxable income plus 95% of its net income from foreclosure property on an
annual basis to stockholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

  IORI's future operations, cash flow and fair values of financial instruments
are partially dependent upon the then existing market interest rates and
market equity prices. Market risk is the changes in the market rates and
prices and the affect of the changes on future operations. Market risk is
managed by matching the property's anticipated net operating income to an
appropriate financing.

  The following table contains only those exposures that existed at December
31, 2000. Anticipation of exposures or risk on positions that could possibly
arise was not considered. IORI's ultimate interest rate risk and its affect on
operations will depend on future capital market exposures, which cannot be
anticipated with a probable assurance level. (Dollars in thousands.)

Liabilities

<TABLE>
<S>                                                                     <C>
Notes payable
Variable interest rate-fair value...................................... $42,344
</TABLE>

<TABLE>
<CAPTION>
                           2001     2002     2003     2004   2005   Thereafter  Total
                          -------  -------  -------  ------  -----  ---------- -------
<S>                       <C>      <C>      <C>      <C>     <C>    <C>        <C>
Instrument's
 maturities.............  $14,070  $11,435  $10,433  $2,732  $ --    $   225   $38,895
Instrument's
 amortization...........      303      319      216      82     23     1,510     2,453
  Interest..............    4,215    2,210    1,402     428    183     2,063    10,501
  Average rate..........     11.2%     9.4%     9.2%    9.5%  10.4%     10.4%
Fixed interest rate-fair
 value..................                                                       $11,212
<CAPTION>
                           2001     2002     2003     2004   2005   Thereafter  Total
                          -------  -------  -------  ------  -----  ---------- -------
<S>                       <C>      <C>      <C>      <C>     <C>    <C>        <C>
Instrument's
 maturities.............  $   --   $   --   $   --   $  --   $ --    $11,178   $11,178
Instrument's
 amortization...........      188      199      186     235    257       340     1,405
  Interest..............    1,119    1,102    1,083   1,063  1,047     1,478     6,892
Average rate............      9.0%     9.0%     9.0%    9.0%   9.0%      9.2%
</TABLE>

                                      16
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Certified Public Accountants.......................   18

Consolidated Balance Sheets--December 31, 2000 and 1999..................   19

Consolidated Statements of Operations--Years Ended December 31, 2000,
 1999 and 1998...........................................................   20

Consolidated Statements of Stockholders' Equity--Years Ended December 31,
 2000, 1999 and 1998.....................................................   21

Consolidated Statements of Cash Flows--Years Ended December 31, 2000,
 1999 and 1998...........................................................   22

Notes to Consolidated Financial Statements...............................   24

Schedule III--Real Estate and Accumulated Depreciation...................   35

Schedule IV--Mortgage Loans on Real Estate...............................   37
</TABLE>

  All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Financial Statements
or the notes thereto.

                                      17
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
Income Opportunity Realty Investors, Inc.

  We have audited the accompanying consolidated balance sheets of Income
Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. We have also audited the schedules listed in the accompanying index.
These financial statements and the schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedules.
We believe our audits provide a reasonable basis for our opinion.

  As described in Note 15, Income Opportunity Realty Investors, Inc.'s
management has indicated its intent to both sell income producing properties
and refinance or extend debt secured by real estate, to meet its liquidity
needs.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Income Opportunity Realty Investors, Inc. and Subsidiaries as of December
31, 2000 and 1999, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000,
in conformity with generally accepted accounting principles.

  Also, in our opinion, the schedules referred to above presents fairly, in
all material respects, the information set forth therein.

                                          BDO SEIDMAN, LLP

Dallas, Texas
March 15, 2001

                                      18
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               December 31,
                                                              ----------------
                                                               2000     1999
                                                              -------  -------
                                                                (dollars in
                                                                thousands,
                                                                except per
                                                                  share)
<S>                                                           <C>      <C>
                           Assets
Real estate held for investment.............................  $91,837  $96,051
Less--Accumulated depreciation..............................   (5,560)  (9,509)
                                                              -------  -------
                                                               86,277   86,542

Notes receivable............................................    1,500      --
Investment in real estate partnerships......................      141      907
Cash and cash equivalents...................................    2,087      722
Other assets (including $3,862 in 2000 and $107 in 1999 from
 affiliates)................................................    6,514    3,014
                                                              -------  -------
                                                              $96,519  $91,185
                                                              =======  =======
            Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable..................................  $54,206  $62,852
Other liabilities (including $721 in 1999 to affiliates)....    2,315    4,342
                                                              -------  -------
                                                               56,521   67,194
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000 shares;
 issued and outstanding 1,514,045 shares in 2000 and
 1,528,908 shares in 1999...................................       15       15
Paid-in capital.............................................   64,772   64,874
Accumulated distributions in excess of accumulated
 earnings...................................................  (24,789) (40,898)
                                                              -------  -------
                                                               39,998   23,991
                                                              -------  -------
                                                              $96,519  $91,185
                                                              =======  =======
</TABLE>


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

                                       19
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                 For the Years Ended December
                                                              31,
                                                 ------------------------------
                                                   2000       1999      1998
                                                 ---------  --------- ---------
                                                 (dollars in thousands, except
                                                          per share)
<S>                                              <C>        <C>       <C>
Property revenue
 Rents.......................................... $  13,731  $  15,968 $  14,326
Property expense
 Property operations (including $602 in 2000,
  $618 in 1999 and $634 in 1998 to affiliates
  and related parties)..........................     6,969      6,768     6,462
                                                 ---------  --------- ---------
Operating income................................     6,762      9,200     7,864

Other income
 Interest.......................................       319         29       172
 Income (loss) from equity partnerships.........       (61)       148       113
 Gain on sale of real estate....................    20,878      1,525       180
                                                 ---------  --------- ---------
                                                    21,136      1,702       465
Other expense
 Interest.......................................     5,079      5,658     5,756
 Depreciation...................................     2,450      2,723     2,168
 Advisory fee to affiliate......................       664        371       329
 Net income fee to affiliate....................     1,362         81       --
 General and administrative (including $287 in
  2000, $260 in 1999 and $228 in 1998 to
  affiliate)....................................     1,549        747       755
                                                 ---------  --------- ---------
                                                    11,104      9,580     9,008
                                                 ---------  --------- ---------
Net income <loss>............................... $  16,794  $   1,322 $   <679>
                                                 =========  ========= =========
Earnings per share
 Net income <loss>.............................. $   11.03  $     .87 $   <.44>
                                                 =========  ========= =========
Weighted average shares of Common Stock used in
 computing earnings per share................... 1,522,510  1,527,386 1,521,832
                                                 =========  ========= =========
</TABLE>



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

                                       20
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                     Accumulated
                                                    Distributions
                           Common Stock             in Excess of
                         ----------------- Paid-in   Accumulated  Stockholders'
                          Shares    Amount Capital    Earnings       Equity
                         ---------  ------ -------  ------------- -------------
                                (dollars in thousands, except shares)
<S>                      <C>        <C>    <C>      <C>           <C>
Balance, January 1,
 1998................... 1,519,888   $ 15  $64,804    $(39,688)      $25,131
Sale of Common Stock
 under dividend
 reinvestment plan......     6,155    --        53         --             53
Dividends ($.60 per
 share).................       --     --       --         (945)         (945)
Net (loss)..............       --     --       --         (679)         (679)
                         ---------   ----  -------    --------       -------
Balance, December 31,
 1998................... 1,526,043     15   64,857     (41,312)       23,560
Sale of Common Stock
 under dividend
 reinvestment plan......     2,865    --        17         --             17
Dividends ($.60 per
 share).................       --     --       --         (908)         (908)
Net income..............       --     --       --        1,322         1,322
                         ---------   ----  -------    --------       -------
Balance, December 31,
 1999................... 1,528,908     15   64,874     (40,898)       23,991
Sale of Common Stock
 under dividend
 reinvestment plan......     5,037    --        32         --             32
Repurchase of Common
 Stock..................   (19,900)   --      (134)        --           (134)
Dividends ($.45 per
 share).................       --     --       --         (685)         (685)
Net income..............       --     --       --       16,794        16,794
                         ---------   ----  -------    --------       -------
Balance, December 31,
 2000................... 1,514,045   $ 15  $64,772    $(24,789)      $39,998
                         =========   ====  =======    ========       =======
</TABLE>



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

                                       21
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                        For the Years Ended
                                                           December 31,
                                                      -------------------------
                                                       2000     1999     1998
                                                      -------  -------  -------
                                                      (dollars in thousands)
<S>                                                   <C>      <C>      <C>
Cash Flows from Operating Activities
 Rents collected..................................... $13,638  $16,065  $14,326
 Interest collected..................................     310       29      182
 Interest paid.......................................  (5,036)  (5,458)  (5,540)
 Payments for property operations (including $602 in
  2000, $618 in 1999 and $634 in 1998 to affiliate
  and related party).................................  (7,068)  (6,325)  (6,427)
 Advisory and net income fee paid to affiliate.......  (2,576)    (388)    (534)
 General and administrative expenses paid (including
  $287 in 2000, $260 in 1999 and $228 in 1998 to
  affiliate).........................................  (1,185)    (793)    (798)
 Distributions from equity partnerships' operating
  cash flow..........................................      25      155      181
 Escrow funding......................................     --       --      (135)
 Other...............................................     --        34     (259)
                                                      -------  -------  -------
   Net cash provided by (used in) operating
    activities.......................................  (1,892)   3,319      996

Cash Flows from Investing Activities
 Acquisition of interest in equity partnership.......     --      (384)     --
 Funding of equity partnerships......................     (58)     (39)      (8)
 Real estate improvements............................  (1,947)  (2,199)  (3,945)
 Acquisition of real estate (including $1,514 in 2000
  and $337 in 1999 to affiliate and related party)... (37,334)  (5,287)     --
 Proceeds from sale of real estate...................  43,393    2,673      --
 Distributions from equity partnership's investing
  cash flow..........................................     --     2,027      399
 Funding of note receivable..........................  (1,500)
 Collection of note receivable.......................     --       --     2,000
                                                      -------  -------  -------
   Net cash provided by (used in) investing
    activities.......................................   2,554   (3,209)  (1,554)
</TABLE>


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

                                       22
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)

<TABLE>
<CAPTION>
                                             For the Years Ended December 31,
                                             -----------------------------------
                                                2000         1999        1998
                                             -----------  ----------  ----------
                                                  (dollars in thousands)
<S>                                          <C>          <C>         <C>
Cash Flows from Financing Activities
 Proceeds from notes payable...............  $    22,875  $   10,778  $      800
 Payments on notes payable.................      (18,153)     (8,681)     (1,422)
 Deferred financing costs..................          172        (258)        (25)
 Distributions from equity partnership's
  financing cash flow......................          739         --          --
 Sale of Common Stock under dividend
  reinvestment plan........................           32          17          53
 Dividends to stockholders.................         (685)       (908)       (945)
 Repurchase of Common Stock................         (134)        --          --
 Payments (to) from advisor................       (4,143)       (439)      1,055
                                             -----------  ----------  ----------
   Net cash provided by (used in) financing
    activities.............................          703         509        (484)
                                             -----------  ----------  ----------
Net increase (decrease) in cash and cash
 equivalents...............................        1,365         619      (1,042)
Cash and cash equivalents, beginning of
 year......................................          722         103       1,145
                                             -----------  ----------  ----------
Cash and cash equivalents, end of year.....  $     2,087  $      722  $      103
                                             ===========  ==========  ==========

Reconciliation of net income (loss) to net
 cash provided by (used in) operating
 activities
 Net income (loss).........................  $    16,794  $    1,322  $     (679)
 Adjustments to reconcile net income (loss)
  to net cash provided by (used in)
  operating activities
  Depreciation and amortization............        2,450       2,967       2,297
  Gain on sale of real estate..............      (20,878)     (1,525)       (180)
  Equity in (income) loss of partnerships..           61        (148)       (113)
  Distributions from equity partnerships'
   operating cash flow.....................           25         155         181
  Decrease in interest receivable..........          --          --           17
  (Increase) decrease in other assets......          338         127        (102)
  Increase (decrease) in interest payable..          (87)        (44)         80
  Increase (decrease) in other
   liabilities.............................         (595)        465        (505)
                                             -----------  ----------  ----------
   Net cash provided by (used in) operating
    activities.............................  $    (1,892) $    3,319  $      996
                                             ===========  ==========  ==========
Schedule of noncash investing and financing
 activities
 Notes payable from purchase of real
  estate...................................  $     2,814  $      --   $      --
 Notes payable assumed by buyer on sale of
  real estate..............................       16,094         --          --
</TABLE>

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

                                       23
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  The accompanying Consolidated Financial Statements of Income Opportunity
Realty Investors, Inc. and consolidated entities were prepared in conformity
with generally accepted accounting principles, the most significant of which
are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These,
along with the remainder of the Notes to Consolidated Financial Statements,
are an integral part of these Consolidated Financial Statements. The data
presented in the Notes to Consolidated Financial Statements are as of December
31 of each year and for the year then ended, unless otherwise indicated.
Dollar amounts in tables are in thousands, except per share amounts.

  Certain balances for 1999 and 1998 have been reclassified to conform to the
2000 presentation.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Organization and business. Income Opportunity Realty Investors, Inc.
("IORI") is the successor to a California business trust organized on December
14, 1984, which commenced operations on April 10, 1985. IORI invests in real
estate through direct ownership, leases and partnerships and it also may
invest in mortgage loans on real estate.

  Basis of consolidation. The Consolidated Financial Statements include the
accounts of IORI and controlled subsidiaries and partnerships. All significant
intercompany transactions and balances have been eliminated.

  Accounting estimates. In the preparation of the Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
necessary for management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses for the year then ended. Actual
results could differ from those estimates.

  Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") 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
of 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 2 to 40 years.

  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"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment sale, the cost recovery or the financing method, whichever is
appropriate.

  Investment in noncontrolled partnerships. The equity method is used to
account for investments in partnerships which IORI does not control. Under the
equity method, an initial investment, recorded at cost, is increased by a
proportionate share of the partnership's operating income and any additional
advances and decreased by a proportionate share of the partnership's operating
losses and distributions received.

  Operating segments. Management has determined reportable operating segments
to be those that are used for internal reporting purposes which disaggregates
operations by type of real estate.

                                      24
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Fair value of financial instruments. The following assumptions were used in
estimating the fair value of notes receivable and payable. For notes
receivable the fair value was estimated by discounting future cash flows using
current interest rates for similar loans. For notes payable the fair value was
estimated using year end interest rates for mortgages with similar terms and
maturities.

  Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
all highly liquid debt instruments purchased with an original maturity of
three months or less are considered cash equivalents.

  Earnings per share. Income (loss) per share is presented in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
Income (loss) per share is computed based upon the weighted average number of
shares of Common Stock outstanding during each year.

NOTE 2. REAL ESTATE

  In 2000, the following properties were purchased:

<TABLE>
<CAPTION>
                                                        Purchase Net Cash   Debt      Interest Maturity
Property                      Location      Units/Acres  Price     Paid   Incurred      Rate     Date
--------                      --------      ----------- -------- -------- --------    -------- --------
<S>                      <C>                <C>         <C>      <C>      <C>         <C>      <C>
Apartments
Frankel Portfolio(1).... Midland, TX          391 Units $14,034  $ 3,784  $10,875       9.13%   07/03

Land
Etheredge............... Collin County, TX  74.98 Acres   1,875      391    1,406(2)    10.0    04/01
Fambrough............... Collin County, TX  75.07 Acres   1,877      592    1,408(2)    10.0    04/01
Frankel................. Midland County, TX  1.01 Acres      41       43      --         --       --
Travelers............... Farmers Branch, TX   204 Acres  28,650   13,117   12,000       14.0    12/01
</TABLE>
--------
(1)  The Frankel portfolio consisted of five apartments: 60 unit Brighton
     Court, 92 unit Del Mar Villas, 68 unit Enclave, 57 unit Signature Place
     and 114 unit Sinclair Place.
(2)  Seller financing.

  In 2000, the following properties were sold:

<TABLE>
<CAPTION>
                                                                                              Gain
                                                                Sales  Net Cash    Debt        on
Property                     Location      Units/ Sq.Ft./Acres  Price  Received Discharged    Sale
--------                     --------      ------------------- ------- -------- ----------   ------
<S>                      <C>               <C>                 <C>     <C>      <C>          <C>
Apartments
East Point.............. Mesquite, TX             126 Units    $ 5,575  $1,804   $ 3,242     $2,179
La Monte Park........... Houston, TX              128 Units      5,000   1,066     3,829(1)     903
Renaissance Parc........ Dallas, TX               294 Units     17,198   4,536    12,265(1)   1,213

Office Buildings
Olympic................. Los Angeles, CA     46,685 Sq. Ft.      8,500   3,811     4,443      1,850
Saratoga................ Saratoga, CA        89,825 Sq. Ft.     25,000  17,709     6,968     13,056

Land
Etheredge............... Collin County, TX      74.98 Acres      2,341     754     1,406        194
Fambrough............... Collin County, TX      75.07 Acres      2,338     754     1,408        194
</TABLE>
--------
(1)  Debt assumed by purchaser.

In 1999, the following property was purchased:

<TABLE>
<CAPTION>
                                               Purchase Net Cash   Debt   Interest Maturity
Property                  Location     Units    Price     Paid   Incurred   Rate     Date
--------                  --------   --------- -------- -------- -------- -------- --------
<S>                      <C>         <C>       <C>      <C>      <C>      <C>      <C>
Apartment
Meridian................ Midland, TX 280 Units  $5,375   $2,401   $2,992    8.85%   12/04
</TABLE>


                                      25
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In 1999, the following property was sold:

<TABLE>
<CAPTION>
                                                       Sales  Net Cash    Debt    Gain on
Property                    Location       Sq. Ft.     Price  Received Discharged  Sale
--------                 -------------- -------------- ------ -------- ---------- -------
<S>                      <C>            <C>            <C>    <C>      <C>        <C>
Shopping Center
Town Center............. Boca Raton, FL 23,518 Sq. Ft. $3,200  $1,505    $1,168    $490
</TABLE>

  Concentration of investment risk. IORI has a high concentration of
investment risk on properties in the Southwest region of the United States.
This risk includes, but is not limited to changes in local economic
conditions, changes in real estate and zoning laws, increases in real estate
taxes, floods, tornados and other acts of God and other factors beyond the
control of management. In the opinion of management, this investment risk is
partially mitigated by the diversification of property types in other
geographical regions of the United States, management's review of additional
investments, acquisitions in other areas and by insurance.

NOTE 3. NOTES AND INTEREST RECEIVABLE

  In September 2000, IORI funded a $1.5 million loan secured by a second lien
on 165 acres of unimproved land in The Colony, Texas. The loan bears interest
at 18.0% per annum, requires monthly payments of interest only and matures in
January 2002. The loan had an estimated fair value at December 31, 2000, equal
to its principal balance of $1.5 million.

NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS

  Investments in equity method partnerships consisted of the following:

<TABLE>
<CAPTION>
                                                                    2000   1999
                                                                    -----  ----
   <S>                                                              <C>    <C>
   Tri-City Limited Partnership ("Tri-City")....................... $(572) $194
   Nakash Income Associates ("NIA")................................   343   316
   TCI Eton Square, L.P. ("Eton Square")...........................   370   397
                                                                    -----  ----
                                                                    $ 141  $907
                                                                    =====  ====
</TABLE>

  IORI owns a 36.3% general partner interest in Tri-City, which at December
31, 2000, owned a shopping center in Houston, Texas. Transcontinental Realty
Investors, Inc. ("TCI") owns a 63.7% limited partner interest in Tri-City. In
February 2000, Tri-City obtained mortgage financing of $2.1 million secured by
the previously unencumbered shopping center. Tri-City received net cash of
$2.0 million after the funding of required escrows and the payment of various
closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum
until February 2001 and currently, 10.0% per annum thereafter, requires
monthly payments of principal and interest of $20,601 and matures in February
2005. IORI received a distribution of $739,000 of the net financing proceeds.
In 1999, Tri-City sold a shopping center in Ft. Worth, Texas, and an office
building in Carrollton, Texas, for a total of $7.2 million, receiving net cash
of $5.4 million after paying off $1.3 million in mortgage debt and the payment
of various closing costs. IORI received a distribution of $2.1 million of the
net cash. Tri-City recognized gains of $2.9 million on the sales of which
IORI's equity share was $1.0 million.

  IORI also owns a 40% general partner interest in NIA. NIA's only asset is a
wraparound mortgage note receivable secured by a shopping center in Maulden,
Missouri. TCI owns the remaining 60% general partner interest in NIA.

  In September 1999, IORI invested $384,000 for a 10% limited partner interest
in Eton Square, which purchased the 222,654 sq. ft. Eton Square Building in
Tulsa, Oklahoma, for $14.0 million, paying $3.6 million

                                      26
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in cash and obtaining mortgage financing of $10.5 million. TCI owns a 90%
general partner interest in Eton Square.

 Set forth below are summarized financial data for the partnerships accounted
for using the equity method:

<TABLE>
<CAPTION>
                                                          2000      1999
                                                        --------  --------
   <S>                                                  <C>       <C>
   Notes receivable.................................... $    902  $    902
   Real estate, net of accumulated depreciation
    ($3,342 in 2000 and $1,600 in 1999)                   17,788    17,936
   Other assets........................................      190       526
   Notes payable.......................................  (12,945)  (11,134)
   Other liabilities...................................     (652)     (734)
                                                        --------  --------
   Partners' capital................................... $  5,283  $  7,496
                                                        ========  ========
</TABLE>

  IORI's share of the equity partnerships' capital was $892,000 in 2000 and
$1.7 million in 1999.

<TABLE>
<CAPTION>
                                                    2000      1999     1998
                                                   -------  --------  -------
   <S>                                             <C>      <C>       <C>
   Rents.......................................... $ 2,561  $  1,873  $ 2,116
   Interest income................................     156       156      156
   Interest expense...............................  (1,165)     (375)    (260)
   Property operations expense....................  (1,197)     (781)  (1,077)
   Depreciation...................................    (570)     (371)    (483)
                                                   -------  --------  -------
   Income (loss) before gains on sale of real
    estate........................................    (215)      502      452
   Gain on sale...................................     --      2,851      496
                                                   -------  --------  -------
   Net income (loss).............................. $  (215) $  3,353  $   948
                                                   =======  ========  =======

  IORI's equity share of:

<CAPTION>
                                                    2000      1999     1998
                                                   -------  --------  -------
   <S>                                             <C>      <C>       <C>
   Income (loss) before gains on sale of real es-
    tate.......................................... $   (61) $    148  $   113
   Gain on sale of real estate....................     --      1,035      180
                                                   -------  --------  -------
   Net income (loss).............................. $   (61) $  1,183  $   293
                                                   =======  ========  =======
</TABLE>

NOTE 5. NOTES AND INTEREST PAYABLE

  Notes and interest payable consisted of the following:

<TABLE>
<CAPTION>
                                                   2000              1999
                                             ----------------- -----------------
                                             Estimated         Estimated
                                               Fair     Book     Fair     Book
                                               Value    Value    Value    Value
                                             --------- ------- --------- -------
   <S>                                       <C>       <C>     <C>       <C>
   Notes payable............................  $53,556  $53,931  $62,548  $62,490
                                              =======           =======
   Interest payable.........................               275               362
                                                       -------           -------
                                                       $54,206           $62,852
                                                       =======           =======
</TABLE>

                                      27
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Scheduled notes payable principal payments are due as follows:

<TABLE>
   <S>                                                                   <C>
   2001................................................................. $14,561
   2002.................................................................  11,953
   2003.................................................................  10,835
   2004.................................................................   3,049
   2005.................................................................     280
   Thereafter...........................................................  13,253
                                                                         -------
                                                                         $53,931
                                                                         =======
</TABLE>

  Notes payable at December 31, 2000, bear interest at rates ranging from
7.75% to 14.0% and mature between 2001 and 2025. The mortgages are
collateralized by deeds of trust on real estate with a net carrying value of
$86.3 million.

  In 1999, mortgage debt totaling $7.8 million, secured by an apartment and
two office buildings was refinanced. Net cash of $440,000 was received from
the refinancings, after the payoff of $6.6 million in existing mortgage debt,
the funding of escrows and the payment of various closing costs. The mortgages
bear interest rates ranging from 7.95% to 10.39% per annum, require monthly
payments of principal and interest totaling $61,622 and mature between August
2002 and January 2025.

NOTE 6. DIVIDENDS

  Dividends were paid of $685,000 ($.45 per share) in 2000, $908,000 ($.60 per
share) in 1999 and $945,000 ($.60 per share) in 1998.

  It was reported to the Internal Revenue Service that 100% of the dividends
paid in 2000 represented capital gains and that 100% of the dividends paid in
1999 and 1998 represented a return of capital.

  In December 2000, the Board of Directors determined not to pay a fourth
quarter dividend to holders of IORI's Common Stock. The non-payment decision
was based on the Board determining that IORI needed to retain cash for
acquisitions that are anticipated in 2001 and that IORI had no REIT taxable
income that required a distribution.

NOTE 7. RENTS UNDER OPERATING LEASES

  Operations include the leasing of office buildings. The leases thereon
expire at various dates through 2009. The following is a schedule of minimum
future rents on non-cancelable operating leases as of December 31, 2000:

<TABLE>
   <S>                                                                   <C>
   2001................................................................. $ 6,196
   2002.................................................................   5,025
   2003.................................................................   4,434
   2004.................................................................   3,251
   2005.................................................................   2,682
   Thereafter...........................................................   1,252
                                                                         -------
                                                                         $22,840
                                                                         =======
</TABLE>

NOTE 8. ADVISORY AGREEMENT

  Basic Capital Management, Inc. ("BCM"), an affiliate, has served as advisor
to IORI since March 28, 1989. BCM is a company owned by a trust for the
benefit of the children of Gene E. Phillips. Mr. Phillips serves as a

                                      28
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

representative of his children's trust which owns BCM and, in such capacity,
had, until June 2000, substantial contact with the management of BCM and input
with respect to its performance of advisory services to IORI.

  Renewal of the Advisory Agreement with BCM, was approved by the Board of
Directors on August 18, 2000. Subsequent renewals of the Advisory Agreement
with BCM do not require the approval of stockholders, but do require approval
of the Board of Directors.

  Under the Advisory Agreement, BCM is required to annually formulate and
submit for Board approval a budget and business plan containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales and
purchases, borrowing activity and other investments. BCM is required to report
quarterly to the Board on IORI's performance against the business plan. In
addition, all transactions require prior Board approval, unless they are
explicitly provided for in the approved business plan or are made pursuant to
authority expressly delegated to BCM by the Board.

  The Advisory Agreement also requires prior Board approval for the retention
of all consultants and third party professionals other than legal counsel. The
Advisory Agreement provides that BCM shall be deemed to be in a fiduciary
relationship to the stockholders and contains a broad standard governing BCM's
liability for losses incurred by IORI.

  The Advisory Agreement provides for BCM to be responsible for IORI's day-to-
day operations and to receive an advisory fee comprised of a gross asset fee
of .0625% per month (.75% per annum) of the average of the gross asset value
(total assets less allowance for amortization, depreciation or depletion and
valuation reserves) and an annual net income fee equal to 7.5% per annum of
net income.

  The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is to receive an acquisition commission
for supervising the purchase or long-term lease of real estate. BCM or an
affiliate of BCM is to receive a mortgage or loan acquisition fee with respect
to the purchase of any existing mortgage loan. BCM or an affiliate of BCM also
is to receive a mortgage brokerage and equity refinancing fee for obtaining
loans or refinancing of IORI's properties. In addition, BCM receives
reimbursement of certain expenses incurred by it, in the performance of
advisory services for IORI.

  The Advisory Agreement requires BCM or any affiliate of BCM to pay to IORI
one-half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by IORI.

  Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by BCM if the Operating Expenses of IORI (as defined in the
Advisory Agreement) exceed certain limits specified in the Advisory Agreement.
The effect of this limitation was to require BCM to refund $289,000 and
$336,000, of the 1999 and 1998 annual advisory fee, respectively. BCM was not
required to refund any of its 2000 advisory fees.

  Additionally, if management was to request that BCM render services other
than those required by the Advisory Agreement, BCM or an affiliate of BCM
would be separately compensated for such additional services on terms to be
agreed upon from time to time. As discussed in NOTE 9. "PROPERTY MANAGEMENT,"
Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, provides property
management services and, as discussed in NOTE 10. "REAL ESTATE BROKERAGE,"
Regis Realty, Inc. ("Regis"), a related party, provides, on a non-exclusive
basis, brokerage services.

  BCM may assign the Advisory Agreement only with the prior consent of IORI.

                                      29
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 9. PROPERTY MANAGEMENT

  Triad provides property management services for a fee of 5% or less of the
monthly gross rents collected on the residential properties and 3% or less of
the monthly gross rents collected on commercial properties under its
management. Triad subcontracts with other entities for the property-level
management services at various rates. The general partner of Triad is BCM. The
limited partners of Triad are Gene E. Phillips and GS Realty Services, Inc.
("GS Realty"), a related party, which is a company not affiliated with Mr.
Phillips or BCM. Triad subcontracts the property-level management and leasing
of IORI's seven office buildings and the commercial property owned by each of
Tri-City and Eton Square, to Regis, a related party, which is a company owned
by GS Realty. Regis is entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Triad.

NOTE 10. REAL ESTATE BROKERAGE

  Regis also provides brokerage services on a non-exclusive basis. Regis is
entitled to receive a commission for property purchases and sales in
accordance with a sliding scale of total brokerage fees to be paid.

NOTE 11. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

  Fees and cost reimbursements to BCM and its affiliates:

<TABLE>
<CAPTION>
                                                             2000   1999  1998
                                                            ------ ------ ----
   <S>                                                      <C>    <C>    <C>
   Fees
    Advisory............................................... $  664 $  371 $329
    Net income.............................................  1,362     81  --
    Real estate brokerage..................................    --     337  --
    Property acquisition...................................    417    --   --
    Mortgage brokerage and equity refinancing..............    --      78    8
    Property and construction management and leasing
     commissions*..........................................    --     618  634
                                                            ------ ------ ----
                                                            $2,443 $1,485 $971
                                                            ====== ====== ====
   Cost reimbursements..................................... $  287 $  260 $228
                                                            ====== ====== ====
</TABLE>

  Fees paid to GS Realty, a related party to IORI.

<TABLE>
<CAPTION>
                                                                          2000
                                                                         ------
   <S>                                                                   <C>
   Fees
    Property acquisition................................................ $  925
    Real estate brokerage...............................................  1,514
    Property and construction management and leasing commissions*.......    602
                                                                         ------
                                                                         $3,041
                                                                         ======
</TABLE>
--------
* Net of property management fees paid to subcontractors, other than Regis,
  and affiliates of BCM.

NOTE 12. INCOME TAXES

  For the years 2000, 1999 and 1998, IORI has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to stockholders, provided that at
least 95% of its REIT taxable income, plus 95% of its taxable income from
foreclosure property as defined in Section 857 of the Code, is distributed.

                                      30
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  IORI had net income for federal income tax purposes before the application
of operating loss carryforwards in 2000 and net losses for federal income tax
purposes in 1999 and 1998. Therefore, IORI recorded no provision for income
taxes. IORI's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property sales, depreciation on owned
properties and investments in joint venture partnerships. At December 31,
2000, IORI's tax basis in its net assets exceeded their basis for financial
statement purposes by $1.9 million. As a result, aggregate future income for
income tax purposes will be less than such amount for financial statement
purposes and IORI would be able to maintain its REIT status without
distributing 95% of its financial statement income. Additionally, at December
31, 2000, IORI had tax net operating loss carryforwards of $1.7 million
expiring through the year 2019.

  As a result of IORI's election to be treated as a REIT for income tax
purposes and its intention to distribute its REIT taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.

NOTE 13. OPERATING SEGMENTS

  Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of general and administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow. Items
of income that are not reflected in the segments are interest, equity in
partnerships and previous deferred gains on sale of real estate totaling $1.5
million and $1.7 million for 2000 and 1999, respectively. Expenses that are
not reflected in the segments are general and administrative expenses, non-
segment interest expense and advisory incentive sales and net income fees
totaling $3.6 million and $1.2 million for 2000 and 1999, respectively.
Excluded from operating segment assets are assets of $10.2 million at December
31, 2000, and $4.6 million at December 31, 1999, which are not identifiable
with an operating segment. There are no intersegment revenues and expenses and
all business is conducted in the United States.

  Presented below is the operating income of each operating segment.

<TABLE>
<CAPTION>
                                                 Commercial
                                         Land    Properties Apartments  Total
                                        -------  ---------- ---------- -------
<S>                                     <C>      <C>        <C>        <C>
2000
Rents.................................. $   --    $ 8,200    $ 5,531   $13,731
Property operating expenses............       9     3,786      3,174     6,969
                                        -------   -------    -------   -------
Operating income (loss)................ $    (9)  $ 4,414    $ 2,357   $ 6,762
                                        =======   =======    =======   =======
Depreciation........................... $   --    $ 1,851    $   599   $ 2,450
Interest...............................     186     3,131      1,762     5,079
Real estate improvements...............     --      1,935         12     1,947
Assets.................................  24,892    39,262     22,122    86,276

Property Sales
Sales price............................ $ 4,679   $33,500    $27,773   $65,952
Cost of sale...........................   4,291    18,594     23,477    46,362
                                        -------   -------    -------   -------
Gain on sale........................... $   388   $14,906    $ 4,296   $19,590*
                                        =======   =======    =======   =======
</TABLE>
--------
* Excludes a $1.3 million deferred gain on the sale of a property to an
  affiliate, on the affiliate's subsequent resale of the property.

                                      31
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                  Commercial
                                                  Properties Apartments  Total
                                                  ---------- ---------- -------
<S>                                               <C>        <C>        <C>
1999
Rents............................................  $ 10,639   $ 5,329   $15,968
Property operating expenses......................     4,394     2,374     6,768
                                                   --------   -------   -------
Operating income.................................  $  6,245   $ 2,955   $ 9,200
                                                   ========   =======   =======
Depreciation.....................................  $  2,111   $   612   $ 2,723
Interest.........................................     3,802     1,856     5,658
Real estate improvements.........................     2,199       --      2,199
Assets...........................................    56,566    29,976    86,542

<CAPTION>
                                                  Commercial
                                                  Properties             Total
                                                  ----------            -------
<S>                                               <C>        <C>        <C>
Property Sales
Sales price......................................  $  3,200             $ 3,200
Cost of sale.....................................     2,710               2,710
                                                   --------             -------
Gain on sale.....................................  $    490             $   490
                                                   ========             =======

<CAPTION>
                                                  Commercial
                                                  Properties Apartments  Total
                                                  ---------- ---------- -------
<S>                                               <C>        <C>        <C>
1998
Rents............................................  $  9,058   $ 5,268   $14,326
Property operating expenses......................     3,852     2,610     6,462
                                                   --------   -------   -------
Operating income.................................  $  5,206   $ 2,658   $ 7,864
                                                   ========   =======   =======
Depreciation.....................................  $  1,573   $   595   $ 2,168
Interest.........................................     3,898     1,858     5,756
Real estate improvements.........................     3,907        38     3,945
Assets...........................................    58,793    24,898    83,691
</TABLE>

NOTE 14. QUARTERLY DATA

  The following is a tabulation of quarterly results of operations for the
years 2000 and 1999 (unaudited).

<TABLE>
<CAPTION>
                                               Three Months Ended
                                    ------------------------------------------
                                    March 31 June 30  September 30 December 31
                                    -------- -------  ------------ -----------
<S>                                 <C>      <C>      <C>          <C>
2000
Rents..............................  $4,115  $ 3,623     $2,994      $ 2,999
Property expense...................   1,848    1,771      1,667        1,683
                                     ------  -------     ------      -------
  Operating income.................   2,267    1,852      1,327        1,316

Interest income....................       7       91        108          113
Income (loss) in equity
 partnerships......................     (46)     (23)        (2)          10
Gain on sale of real estate........     903   16,119      3,856          --
                                     ------  -------     ------      -------
                                        864   16,187      3,962          123

Other expense......................   2,539    3,597      2,401        2,567
                                     ------  -------     ------      -------
Net income (loss)..................  $  592  $14,442     $2,888      $(1,128)
                                     ======  =======     ======      =======
Earnings per share
Net income (loss)..................  $  .39  $  9.43     $ 1.88      $  (.67)
                                     ======  =======     ======      =======
</TABLE>

                                       32
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In the first quarter of 2000, the La Monte Park Apartments were sold, a gain
on sale of real estate of $903,000 was recognized. In the second quarter of
2000, gains on sale of real estate totaling $16.1 million were recognized on
the sale of Renaissance Parc Apartments, Olympic Office Building and Saratoga
Office Building. In the third quarter of 2000, gains on sale of real estate
totaling $2.6 million were recognized on the sale of the Fambrough and
Etheredge land, Eastpoint Apartments and a $1.3 million deferred gain also was
recognized on the sale of a property by an affiliate, which it had previously
purchased from IORI.

<TABLE>
<CAPTION>
                                                Three Months Ended
                                     -----------------------------------------
                                     March 31 June 30 September 30 December 31
                                     -------- ------- ------------ -----------
<S>                                  <C>      <C>     <C>          <C>
1999
Rents...............................  $3,728  $4,089     $4,199      $3,952
Property expense....................   1,672   1,622      1,783       1,691
                                      ------  ------     ------      ------
  Operating income..................   2,056   2,467      2,416       2,261

Interest income.....................       7       6         10           6
Income (loss) in equity
 partnerships.......................      52      39         28          29
Gain on sale of real estate.........     --      213        822         490
                                      ------  ------     ------      ------
                                          59     258        860         525
Other expense.......................   2,336   2,480      2,497       2,267
                                      ------  ------     ------      ------
Net income (loss)...................  $ (221) $  245     $  779      $  519
                                      ======  ======     ======      ======
Earnings per share
Net income (loss)...................  $ (.14) $  .16     $  .51      $  .34
                                      ======  ======     ======      ======
</TABLE>

  In the second quarter of 1999, a gain on sale of real estate of $213,000 was
recognized, IORI's share of the gain recognized by Tri-City, an equity
partnership. In the third quarter of 1999, a gain on sale of real estate of
$822,000 was recognized, IORI's share of the gain recognized by Tri-City. In
the fourth quarter of 1999, a gain on sale of real estate of $490,000 was
recognized from the sale of the Town Center Shopping Center. See NOTE 2. "REAL
ESTATE" and NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."

NOTE 15. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

  Olive Litigation. In February 1990, IORI, together with National Income
Realty Trust, Continental Mortgage and Equity Trust ("CMET") and TCI, three
real estate entities with, at the time, the same officers, directors or
trustees and advisor as IORI, entered into a settlement (the "Settlement") of
a class and derivative action entitled Olive et al. v. National Income Realty
Trust et al., relating to the operation and management of each of the
entities. On April 23, 1990, the Court granted final approval of the terms of
the Settlement. The Settlement was modified in 1994 (the "Modification").

  On January 27, 1997, the parties entered into an Amendment to the
Modification effective January 9, 1997 (the "Olive Amendment"). The Olive
Amendment provided for the settlement of additional matters raised by
plaintiffs' counsel in 1996. The Court issued an order approving the Olive
Amendment on July 3, 1997.

  The Olive Amendment provided that IORI's Board retain a
management/compensation consultant or consultants to evaluate the fairness of
the BCM advisory contract and any contract of its affiliates with IORI, CMET
and TCI, including, but not limited to, the fairness to IORI, CMET and TCI of
such contracts relative to other means of administration. In 1998, the Board
engaged a management/compensation consultant to perform the evaluation which
was completed in September 1998.

  In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a

                                      33
<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

breach of this provision of the Olive Amendment. In January 2000, the Board
engaged another management/compensation consultant to perform the required
evaluation again. This evaluation was completed in April 2000 and was provided
to plaintiffs' counsel. The Board believes that any alleged breach of the
Olive Amendment has been fully remedied by the Board's engagement of the
second consultant. Although several status conferences have been held on this
matter, there has been no Court order resolving whether there was any breach
of the Olive Amendment.

  In October 2000, plaintiffs' counsel asserted that the stock option
agreement to purchase TCI shares, which was entered into by IORI and an
affiliate of IORI, American Realty Investors, Inc. ("ARI"), in October 2000
with Gotham Partners, breached a provision of the Modification. As a result of
this assertion, IORI assigned all of its rights to purchase the TCI shares
under this stock option agreement to ARI.

  The Board believes that all provisions of the Settlement, the Modification
and Olive Amendment terminated on April 28, 1999. However, in September 2000,
the Court ruled that certain provisions of the Modification continue to be
effective after the termination date. This ruling has been appealed to the
United States Court of Appeals for the Ninth Circuit by IORI and TCI.

  Liquidity. Although management anticipates that IORI will generate excess
cash from operations in 2001, due to increased rental rates and occupancy at
its properties, such excess, however, will not be sufficient to discharge all
of IORI's debt obligations as they mature. Management intends to selectively
sell income producing real estate, refinance real estate and incur additional
borrowings against real estate to meet its cash requirements.

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

NOTE 16. SUBSEQUENT EVENTS

  In the first quarter of 2001, IORI increased its mortgage obligation secured
by the 60,060 sq. ft., Chuck Yeager Office Building in Chantilly, Virginia, to
$5.0 million from $2.0 million. IORI received $2.9 million in net proceeds
after paying various lending fees. The new mortgage bears interest at 9.5% per
annum, until February 2002, and at a variable rate thereafter, requires
monthly payments of principal and interest of $22,126 and matures January
2004.

                                      34
<PAGE>

                                                                    SCHEDULE III

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                    REAL ESTATE AND ACCUMULATED DEPRECIATION

                               December 31, 2000

<TABLE>
<CAPTION>
                                                                    Gross Amount
                               Initial Cost                  Carried at End of Year(1)
                           --------------------             ----------------------------
                                                                                                                       Life on
                                                                                                                        Which
                                                   Cost                                                              Depreciation
                                                Capitalized                              Accumu-                      in Latest
                                                Subsequent                                lated    Date of           Statement of
                   Encum-           Building &      to               Building &          Depreci- Construc-   Date   Operation is
Property/Location  brances  Land   Improvements Acquisition  Land   Improvements  Total   ation     tion    Acquired   Computed
-----------------  ------- ------- ------------ ----------- ------- ------------ ------- -------- --------- -------- ------------
                                                               (dollars in thousands)
<S>                <C>     <C>     <C>          <C>         <C>     <C>          <C>     <C>      <C>       <C>      <C>
Properties Held
For Investment
Apartments
Brighton Court,
Midland, TX.....   $ 2,490 $   339   $ 3,051      $   --    $   339   $ 3,051    $ 3,390  $   44    1983     06/00      40 years
Del Mar,
Midland, TX.....     2,382     324     2,919         --         324     2,919      3,243      42    1983     06/00      40 years
Enclave,
Midland, TX.....     2,382     324     2,919         --         324     2,919      3,243      42    1983     06/00      40 years
Meridian,
Midland, TX.....     2,949   1,138     4,552         --       1,138     4,552      5,691     124    1983     12/99      40 years
Signature Place,
Midland, TX.....     1,949     265     2,388         --         265     2,388      2,654      35    1983     06/00      40 years
Sinclair Place,
Midland, TX.....     1,624     221     1,990         --         221     1,990      2,211      29    1983     06/00      40 years
Treehouse, San
Antonio, TX.....     2,673     375     2,124         258        375     2,382      2,757     749    1975     09/89    5-40 years
Office Buildings
2010 Valley
View, Farmers
Branch, TX......     1,832     120       479       2,981        120     3,460      3,580     460    1998     09/97    5-40 years
5600 Mowry,
Newark, CA......     4,165   1,263     5,054         653      1,263     5,707      6,970     714    1987     12/97    3-40 years
Akard Plaza,
Dallas, TX......     2,068     734     2,936         420        734     3,356      4,089     306    1984     12/97    5-40 years
Chuck Yeager,
Chantilly, VA...     2,070   1,080     4,321       1,342      1,080     5,663      6,743     672    1991     01/97    5-40 years
Daley Plaza, San
Diego, CA.......     6,766   1,502     6,008       1,427      1,502     7,435      8,938   1,259    1987     09/96    2-40 years
La Mesa Village,
La Mesa, CA.....     5,744   1,709     6,836         549      1,709     7,385      9,094     784    1991     05/97    5-40 years
Westlake
Village,
Westlake
Village, CA.....     2,837     831     3,324         185        831     3,509      4,342     300    1982     11/97    5-40 years
Land
Frankel, Midland
County, TX......       --       44       --          --          44       --          44     --      --      06/00      40 years
Travelers,
Farmers Branch,
TX..............    12,000  24,848       --          --      24,848       --      24,848     --      --      06/00      40 years
                   ------- -------   -------      ------    -------   -------    -------  ------
                   $53,931 $35,117   $48,901      $7,815    $35,117   $56,716    $91,837  $5,560
                   ======= =======   =======      ======    =======   =======    =======  ======
</TABLE>
----
(1)  The aggregate cost for Federal income tax purposes is $92.0 million.


                                       35
<PAGE>

                                                                    SCHEDULE III
                                                                     (Continued)

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                    REAL ESTATE AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
                                                       2000     1999     1998
                                                     --------  -------  -------
                                                      (dollars in thousands)
<S>                                                  <C>       <C>      <C>
Reconciliation of Real Estate
Balance at January 1,............................... $ 96,051  $91,070  $87,125
 Additions
  Acquisitions and Improvements.....................   45,577    7,890    3,945
 Deductions
  Sale of real estate...............................  (49,791)  (2,909)     --
                                                     --------  -------  -------
Balance at December 31,............................. $ 91,837  $96,051  $91,070
                                                     ========  =======  =======
Reconciliation of Accumulated Depreciation
Balance at January 1,............................... $  9,509  $ 7,379  $ 5,211
 Additions
  Depreciation......................................    2,450    2,723    2,168
 Deductions
  Sale of real estate...............................   (6,399)    (593)     --
                                                     --------  -------  -------
Balance at December 31,............................. $  5,560  $ 9,509  $ 7,379
                                                     ========  =======  =======
</TABLE>

                                       36
<PAGE>

                                                                     SCHEDULE IV

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                         MORTGAGE LOANS ON REAL ESTATE
                               December 31, 2000

<TABLE>
<CAPTION>
                                                                                                      Principal Amount of
                                 Final                                                   Carrying       Loans Subject to
                       Interest Maturity                           Prior  Face Amount     Amounts     Delinquent Principal
     Description         Rate     Date    Periodic Payment Terms   Liens  of Mortgage of Mortgage (1)     or Interest
     -----------       -------- -------- ------------------------- ------ ----------- --------------- --------------------
                                                                                   (dollars in thousands)
<S>                    <C>      <C>      <C>                       <C>    <C>         <C>             <C>
Junior Mortgage Loans
JNC Enterprises,
Ltd. ................    18.0%   01/02   Interest only payments of $9,000   $1,500        $1,500             $   --
                                              $22,500 due monthly.
Secured by 165 acres
of land in The Colo-
ny, TX. .............                                              $9,000   $1,500        $1,500             $1,500
</TABLE>
----
(1) The aggregate cost for federal income tax purposes is $1.5 million.

                                       37
<PAGE>

                                                                     SCHEDULE IV
                                                                     (Continued)

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                         MORTGAGE LOANS ON REAL ESTATE

<TABLE>
<CAPTION>
                                                             2000  1999  1998
                                                            ------ ---- -------
                                                                (dollars in
                                                                thousands)
<S>                                                         <C>    <C>  <C>
Balance at January 1,...................................... $  --  $--  $ 2,010
Additions
  New mortgage loans.......................................  1,500  --      --
Deductions
  Collections of principal.................................    --   --   (2,010)
                                                            ------ ---- -------
Balance at December 31,.................................... $1,500 $--  $   --
                                                            ====== ==== =======
</TABLE>

                                       38
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

  Not applicable.

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

                                   PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT

Directors

  The affairs of Income Opportunity Realty Investors, Inc. ("IORI") are
managed by a Board of Directors. The Directors are elected at the annual
meeting of stockholders or appointed by the incumbent Board and serve until
the next annual meeting of stockholders or until a successor has been elected
or approved.

  The Directors of IORI are listed below, together with their ages, terms of
service, all positions and offices with IORI or its advisor, Basic Capital
Management, Inc. ("BCM"), their principal occupations, business experience and
directorships with other companies during the last five years or more. The
designation "Affiliated", when used below with respect to a Director, means
that the Director is an officer, director or employee of BCM or an officer of
IORI. The designation "Independent" when used below with respect to a
Director, means that the Director is neither an officer of IORI nor a
director, officer or employee of BCM, although IORI may have certain business
or professional relationships with the Director as discussed in ITEM 13.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business
Relationships."

  TED P. STOKELY: Age 67, Director (Independent) (since April 1990) and
Chairman of the Board (since January 1995).

    General Manager (since January 1995) of ECF Senior Housing Corporation, a
  nonprofit corporation; General Manager (since January 1993) of Housing
  Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid
  consultant (since January 1993) of Eldercare Housing Foundation
  ("Eldercare"), a nonprofit corporation; and Director (since April 1990) and
  Chairman of the Board (since January 1995) of Transcontinental Realty
  Investors, Inc. ("TCI").


  R. DOUGLAS LEONHARD: Age 64, Director (Independent) (since January 1998).

    Director (since November 1998) and Chairman (since October 1999) of
  Optel, Inc.; Senior Vice President (1986 to 1997) of LaCantera Development
  Company, a wholly-owned subsidiary of USAA; and Director (since January
  1998) of TCI.

  MARTIN L. WHITE: Age 61, Director (Independent) (since January 1995).

    Chief Executive Officer (since 1995) of Builders Emporium, Inc.; Chairman
  and Chief Executive Officer (since 1993) of North American Trading Company
  Ltd.; President and Chief Operating Officer (since 1992) of Community Based
  Developers, Inc.; and Director (since January 1995) of TCI.

  EDWARD G. ZAMPA: Age 65, Director (Independent) (since January 1995).

    General Partner (since 1976) of Edward G. Zampa and Company; and Director
  (since January 1995) of TCI.

Board Committees

  The Board of Directors held 16 meetings during 2000. For such year, no
incumbent Director attended fewer than 75% of the aggregate of (1) the total
number of meetings held by the Board during the period for which he had been a
Director and (2) the total number of meetings held by all committees of the
Board on which he served during the period that he served.

                                      39
<PAGE>

  The Board of Directors has an Audit Committee, the function of which is to
review IORI's operating and accounting procedures. The current members of the
Audit Committee, all of whom are Independent Directors, are Messrs. Stokely,
Leonhard and White. The Audit Committee met four times during 2000.

  The Board of Directors does not have Nominating or Compensation Committees.

Executive Officers

  The following persons currently serve as executive officers of IORI: Karl L.
Blaha, President; Mark W. Branigan, Executive Vice President and Chief
Financial Officer; Bruce A. Endendyk, Executive Vice President; and David W.
Starowicz, Executive Vice President--Commercial Asset Management. Their
positions with IORI are not subject to a vote of stockholders. Their ages,
terms of service, all positions and offices with IORI or BCM, other principal
occupations, business experience and directorships with other companies during
the last five years or more are set forth below.

  KARL L. BLAHA: Age 53, President (since September 1999); Executive Vice
President--Commercial Asset Management (July 1997 to September 1999); and
Executive Vice President and Director of Commercial Management (April 1992 to
August 1995).

    President (since September 1999), Executive Vice President--Commercial
  Asset Management (July 1997 to September 1999) and Executive Vice President
  and Director of Commercial Management (April 1992 to August 1995) of BCM
  and TCI; President and Director (since August 2000) of American Realty
  Investors, Inc.; Director (since June 1996), President (since October 1993)
  and Executive Vice President and Director of Commercial Management (April
  1992 to October 1993) of American Realty Trust, Inc. ("ART"); President and
  Director (since 1996) of First Equity Properties, Inc., which is 50% owned
  by BCM; President (since August 1999), Executive Vice President (January
  1998 to August 1999) and Director (since December 1998) of NRLP Management
  Corp. ("NMC"), a wholly-owned subsidiary of ART and general partner of
  National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the
  operating partnership of NRLP.

  MARK W. BRANIGAN: Age 46, Executive Vice President and Chief Financial
Officer (since August 2000), Vice President--Director of Construction (August
1999 to August 2000) and Executive Vice President--Residential Asset
Management (January 1992 to October 1997).

    Executive Vice President and Chief Financial Officer (since August 2000),
  Vice President--Director of Construction (August 1999 to August 2000) and
  Executive Vice President--Residential Management (January 1992 to October
  1997) of BCM, ART and TCI; Executive Vice President and Chief Financial
  Officer (since August 2000) and Director (since September 2000) of ARI; and
  real estate consultant (November 1997 to July 1999).

  BRUCE A. ENDENDYK: Age 52, Executive Vice President (since January 1995).

    Executive Vice President (since January 1995) of BCM, ART and TCI, and
  (since January 1998) of NMC; Executive Vice President (since August 2000)
  of ARI; and Management Consultant (November 1990 to December 1994).

  DAVID W. STAROWICZ: Age 45, Executive Vice President--Acquisitions, Sales
and Construction (since March 2001); Executive Vice President--Commercial
Asset Management (September 1999 to March 2001) and Vice President (May 1992
to September 1999).

    Executive Vice President--Acquisitions, Sales and Construction (since
  March 2001); Executive Vice President--Commercial Asset Management
  (September 1999 to March 2001), Vice President (May 1992 to September 1999)
  and Asset Manager (November 1990 to May 1992) of BCM, ART and TCI; and
  Executive Vice President--Commercial Asset Management (since August 2000)
  of ARI.


                                      40
<PAGE>

Officers

  Although not an executive officer, Robert A. Waldman currently serves as
Senior Vice President, Secretary and General Counsel. His position with IORI
is not subject to a vote of stockholders. His age, term of service, all
positions and offices with IORI or BCM, other principal occupations, business
experience and directorships with other companies during the last five years
or more is set forth below.

  ROBERT A. WALDMAN: Age 48, Senior Vice President and General Counsel (since
January 1995); Vice President (December 1990 to January 1995) and Secretary
(December 1993 to February 1997 and since June 1999).

    Senior Vice President and General Counsel (since January 1995), Vice
  President (December 1990 to January 1995) and Secretary (December 1993 to
  February 1997 and since June 1999) of TCI; Senior Vice President and
  General Counsel (since January 1995), Vice President (January 1993 to
  January 1995) and Secretary (since December 1989) of ART; Senior Vice
  President and General Counsel (since November 1994), Vice President and
  Corporate Counsel (November 1989 to November 1994), and Secretary (since
  November 1989) of BCM; and Senior Vice President, Secretary and General
  Counsel (since January 1998) of NMC and (since August 2000) of ARI.

  In addition to the foregoing officers, IORI has several vice presidents and
assistant secretaries who are not listed herein.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

  Under the securities laws of the United States, IORI's Directors, executive
officers, and any persons holding more than ten percent of IORI's shares of
Common Stock are required to report their share ownership and any changes in
that ownership to the Securities and Exchange Commission (the "Commission").
Specific due dates for these reports have been established and IORI is
required to report any failure to file by these dates during 2000. All of
these filing requirements were satisfied by IORI's Directors and executive
officers and ten percent holders. In making these statements, IORI has relied
on the written representations of its incumbent Directors and executive
officers and its ten percent holders and copies of the reports that they have
filed with the Commission.

The Advisor

  Although the Board of Directors is directly responsible for managing the
affairs of IORI and for setting the policies which guide it, day-to-day
operations are performed by a contractual advisor under the supervision of the
Board. The duties of the advisor include, among other things, locating,
investigating, evaluating and recommending real estate and mortgage note
investment and sales opportunities as well as financing and refinancing
sources. The advisor also serves as a consultant to the Board in connection
with the business plan and investment decisions made by the Board.

  BCM has served as IORI's advisor since March 1989. BCM is a company of which
Messrs. Blaha, Branigan, Endendyk and Starowicz serve as executive officers.
BCM is owned by a trust for the benefit of the children of Gene E. Phillips.
Mr. Phillips serves as a representative of his children's trust which owns BCM
and, in such capacity, had, until June 2000, substantial contact with the
management of BCM and input with respect to BCM's performance of advisory
services to IORI.

  On August 18, 2000, the Board of Directors approved the renewal of the
Advisory Agreement with BCM. Subsequent renewals of the Advisory Agreement
with BCM do not require the approval of stockholders, but do require Board
approval.

  Under the Advisory Agreement, BCM is required to annually formulate and
submit for Board approval a budget and business plan containing a twelve-month
forecast of operations and cash flow, a general plan for asset sales and
purchases, borrowing activity, and other investments. BCM is required to
report quarterly to the Board

                                      41
<PAGE>

on IORI's performance against the business plan. In addition, all transactions
require prior Board approval, unless they are explicitly provided for in the
approved business plan or are made pursuant to authority expressly delegated
to BCM by the Board.

  The Advisory Agreement also requires prior approval of the Board for the
retention of all consultants and third party professionals, other than legal
counsel. The Advisory Agreement provides that BCM shall be deemed to be in a
fiduciary relationship to the stockholders; contains a broad standard
governing BCM's liability for losses by IORI; and contains guidelines for
BCM's allocation of investment opportunities as among itself, IORI and other
entities it advises.

  The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of IORI and to receive an advisory fee comprised of a gross asset
fee of .0625% per month (.75% per annum) of the average of the gross asset
value (total assets less allowance for amortization, depreciation or depletion
and valuation reserves) and an annual net income fee equal to 7.5% of IORI's
net income.

  The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by IORI during the fiscal year exceeds
the sum of: (1) the cost of each property as originally recorded in IORI's
books for tax purposes (without deduction for depreciation, amortization or
reserve for losses), (2) capital improvements made to such assets during the
period owned, and (3) all closing costs, (including real estate commissions)
incurred in the sale of such real estate. However, no incentive fee shall be
paid unless (a) such real estate sold in such fiscal year, in the aggregate,
has produced an 8% simple annual return on the net investment, including
capital improvements, calculated over the holding period before depreciation
and inclusive of operating income and sales consideration and (b) the
aggregate net operating income from all real estate owned for each of the
prior and current fiscal years shall be at least 5% higher in the current
fiscal year than in the prior fiscal year.

  Additionally, pursuant to the Advisory Agreement, BCM or an affiliate of BCM
is to receive an acquisition commission for supervising the acquisition,
purchase or long-term lease of real estate equal to the lesser of (1) up to 1%
of the cost of acquisition, inclusive of commissions, if any, paid to
nonaffiliated brokers, or (2) the compensation customarily charged in arm's-
length transactions by others rendering similar property acquisition services
as an ongoing public activity in the same geographical location and for
comparable property, provided that the aggregate purchase price of each
property (including acquisition fees and real estate brokerage commissions)
may not exceed such property's appraised value at acquisition.

  The Advisory Agreement requires BCM or any affiliate of BCM to pay IORI one-
half of any compensation received from third parties with respect to the
origination, placement or brokerage of any loan made by IORI. However, the
compensation retained by BCM or any affiliate of BCM shall not exceed the
lesser of (1) 2% of the amount of the loan commitment or (2) a loan brokerage
and commitment fee which is reasonable and fair under the circumstances.

  The Advisory Agreement also provides that BCM or an affiliate of BCM is to
receive a mortgage or loan acquisition fee with respect to the purchase of any
existing mortgage loan equal to the lesser of (1) 1% of the amount of the loan
purchased or (2) a brokerage or commitment fee which is reasonable and fair
under the circumstances. Such fee will not be paid in connection with the
origination or funding of any mortgage loan by IORI.

  Under the Advisory Agreement, BCM or an affiliate of BCM also is to receive
a mortgage brokerage and equity refinancing fee for obtaining loans or
refinancing on properties equal to the lesser of (1) 1% of the amount of the
loan or the amount refinanced or (2) a brokerage or refinancing fee which is
reasonable and fair under the circumstances. However, no such fee shall be
paid on loans from BCM or an affiliate of BCM without the approval of the
Board of Directors. No fee shall be paid on loan extensions.

  Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it, in the performance of advisory services to IORI.

                                      42
<PAGE>

  Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by BCM if the Operating Expenses of IORI (as defined in the
Advisory Agreement) exceed certain limits specified in the Advisory Agreement
based on the book value, net asset value and net income of IORI during the
fiscal year. BCM was not required to refund any of the 2000 advisory fee under
this provision.

  Additionally, if management were to request that BCM render services other
than those required by the Advisory Agreement, BCM or an affiliate of BCM is
separately compensated for such additional services on terms to be agreed upon
from time to time. As discussed below, under Property Management, IORI has
hired Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, to provide
management for IORI's properties and, as discussed below, under Real Estate
Brokerage IORI has engaged Regis Realty, Inc. ("Regis"), a related party, on a
non-exclusive basis to provide brokerage services for IORI.

  BCM may assign the Advisory Agreement only with the prior consent of IORI.

  The directors and principal officers of BCM are set forth below.

<TABLE>
   <S>                  <C>
   Mickey N. Phillips:  Director

   Ryan T. Phillips:    Director

   Karl L. Blaha:       President

   Mark W. Branigan:    Executive Vice President and Chief Financial Officer

   Rick D. Conley:      Executive Vice President--Marketing and Promotion

   Bruce A. Endendyk:   Executive Vice President

   David W. Starowicz:  Executive Vice President--Acquisitions, Sales and Construction

   Dan S. Allred:       Senior Vice President--Land Development

   Michael E. Bogel:    Senior Vice President--Projects Manager

   Robert A. Waldman:   Senior Vice President, Secretary and General Counsel
</TABLE>

  Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene
E. Phillips' son. Gene E. Phillips serves as a representative of the trust
established for the benefit of his children which owns BCM and, in such
capacity had, until June 2000, substantial contact with the management of BCM
and input with respect to its performance of advisory services to IORI.

Property Management

  Since February 1, 1990, affiliates of BCM have provided property management
services. Currently, Triad provides such property management services for a
fee of 5% or less of the monthly gross rents collected on residential
properties and 3% or less of the monthly gross rents collected on commercial
properties under its management. Triad subcontracts with other entities for
the provision of the property-level management services to IORI at various
rates. The general partner of Triad is BCM. The limited partners of Triad are
Gene E. Phillips and GS Realty Services, Inc. ("GS Realty"), a related party,
which is a company not affiliated with Mr. Phillips or BCM. Triad subcontracts
the property-level management and leasing of IORI's seven office buildings and
the two commercial properties owned by real estate partnerships in which IORI
and TCI are partners to Regis, a related party, which is a company owned by GS
Realty. Regis is entitled to receive property and construction management fees
and leasing commissions in accordance with its property-level management
agreement with Triad.

Real Estate Brokerage

  Regis also provides real estate brokerage services to IORI on a non-
exclusive basis. Regis is entitled to receive a real estate brokerage
commission for property acquisitions and sales in accordance with the
following

                                      43
<PAGE>

sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first
$2.0 million of any purchase or sale transaction of which no more than 3.5%
would be paid to Regis or affiliates, (2) maximum fee of 3.5% on transaction
amounts between $2.0-$5.0 million of which no more than 3% would be paid to
Regis or affiliates, (3) maximum fee of 2.5% on transaction amounts between
$5.0-$10.0 million of which no more than 2% would be paid to Regis or
affiliates, and (4) maximum fee of 2% on transaction amounts in excess of
$10.0 million of which no more than 1.5% would be paid to Regis or affiliates.

ITEM 11. EXECUTIVE COMPENSATION

  IORI has no employees, payroll or benefit plans and pays no compensation to
its executive officers. The executive officers of IORI, who are also officers
or employees of BCM, IORI's advisor, are compensated by BCM. Such executive
officers perform a variety of services for BCM and the amount of their
compensation is determined solely by BCM. BCM does not allocate the cash
compensation of its officers among the various entities for which it serves as
advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT--The Advisor" for a more detailed discussion of the compensation
payable to BCM.

  The only remuneration paid by IORI is to the Directors who are not officers
or directors of BCM or its affiliated companies. The Independent Directors (1)
review the business plan of IORI to determine that it is in the best interest
of the stockholders, (2) review the advisory contract, (3) supervise the
performance of IORI's advisor and review the reasonableness of the
compensation paid to the advisor in terms of the nature and quality of
services performed, (4) reviews the reasonableness of the total fees and
expenses of IORI and (5) select, when necessary, a qualified independent real
estate appraiser to appraise properties acquired.

  Each Independent Director receives compensation in the amount of $15,000 per
year, plus reimbursement for expenses. The Chairman of the Board receives an
additional fee of $1,500 per year. The members of the Audit Committee receive
a fee of $250 for each committee meeting attended. In addition, each
Independent Director receives an additional fee of $1,000 per day for any
special services rendered by him to IORI outside of his ordinary duties as
Director, plus reimbursement of expenses.

  During 2000, $104,500 was paid to the Independent Directors in total
Directors' fees for all services including the annual fee for service during
the period January 1, 2000 through December 31, 2000, and 2000 special service
fees as follows: Richard W. Douglas, $7,500; Larry E. Harley, $7,500; R.
Douglas Leonhard, $18,000, Murray Shaw, $18,000; Ted P. Stokely, $19,000;
Martin L. White, $17,250; and Edward G. Zampa, $19,250.

                                      44
<PAGE>

Performance Graph

  The following performance graph compares the cumulative total stockholder
return on IORI's shares of Common Stock with the Dow Jones Equity Market Index
("DJ Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real
Estate Index"). The comparison assumes that $100 was invested on December 31,
1995, in IORI's shares of Common Stock and in each of the indices and further
assumes the reinvestment of all distributions. Past performance is not
necessarily an indicator of future performance.

                COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN

                  [CUMULATIVE TOTAL RETURN COMPARISON GRAPH]


<TABLE>
<CAPTION>
                                        1995   1996   1997   1998   1999   2000
                                       ------ ------ ------ ------ ------ ------
  <S>                                  <C>    <C>    <C>    <C>    <C>    <C>
  IORI................................ 100.00 116.55 125.79  77.45  69.68 121.76
  DJ Equity Index..................... 100.00 122.02 160.84 200.88 246.53 223.68
  DJ Real Estate Index................ 100.00 134.61 158.95 125.39 118.72 151.39
</TABLE>


                                      45
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of IORI's shares of Common Stock, both beneficially and of
record, both individually and in the aggregate for those persons or entities
known by IORI to be beneficial owners of more than 5% of its shares of Common
Stock as of the close of business on March 2, 2001.

<TABLE>
<CAPTION>
                                                         Amount and
                                                         Nature of    Percent
                                                         Beneficial      of
Name and Address of Beneficial Owner                     Ownership    Class(1)
------------------------------------                     ----------   --------
<S>                                                      <C>          <C>
American Realty Trust, Inc..............................  409,935       27.1%
 1800 Valley View Lane
 Suite 300
 Dallas, Texas 75234

Transcontinental Realty Investors, Inc..................  345,728       22.8%
 1800 Valley View Lane
 Suite 300
 Dallas, Texas 75234

Basic Capital Management, Inc...........................  106,802        7.1%
 1800 Valley View Lane
 Suite 300
 Dallas, TX 75234
--------
(1) Percentages are based upon 1,514,045 shares of Common Stock outstanding at
    March 2, 2001.

  Security Ownership of Management. The following table sets forth the
ownership of IORI's shares of Common Stock, both beneficially and of record,
both individually and in the aggregate, for the Directors and executive
officers of IORI as of the close of business on March 3, 2001.

<CAPTION>
                                                         Amount and
                                                         Nature of    Percent
                                                         Beneficial      of
Name and Address of Beneficial Owner                     Ownership    Class(1)
------------------------------------                     ----------   --------
<S>                                                      <C>          <C>
All Directors and Executive Officers as a group (8
 individuals)...........................................  862,465(2)    57.0%
</TABLE>
--------
(1) Percentage is based upon 1,514,045 shares of Common Stock outstanding at
    March 2, 2001.
(2) Includes 345,728 shares owned by TCI of which the Directors of IORI may be
    deemed to be beneficial owners by virtue of their positions as directors
    of TCI and 409,935 shares owned by ART and 106,802 shares owned by BCM, of
    which the executive officers of IORI may be deemed to be beneficial owners
    by virtue of their positions as executive officers of ARI and BCM. The
    Directors and executive officers disclaim beneficial ownership of such
    shares. Each of the directors of ARI may be deemed to be beneficial owners
    of the shares owned by ARI by virtue of their positions as directors of
    ARI. Each of the directors of BCM may be deemed to be beneficial owners of
    the shares owned by BCM by virtue of their positions as directors of BCM.
    The directors of ARI and BCM disclaim such beneficial ownership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Business Relationships

  In February 1989, the Board of Directors voted to retain BCM as IORI's
advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT--The Advisor." BCM is a company of which Messrs. Blaha, Branigan,
Endendyk and Starowicz serve as executive officers. BCM is owned by a trust
for the benefit of the children of Gene E. Phillips. Mr. Phillips serves as a
representative of his

                                      46
<PAGE>

children's trust which owns BCM and, in such capacity had, until June 2000,
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services to IORI.

  Since February 1, 1991, affiliates of BCM have provided property management
services to IORI. Currently, Triad provides such property management services.
The general partner of Triad is BCM. The limited partners of Triad are Gene E.
Phillips and GS Realty, a related party, which is a company not affiliated
with Mr. Phillips or BCM. Triad subcontracts the property-level management and
leasing of IORI's seven office buildings and two commercial properties owned
by real estate partnerships in which IORI and TCI are partners to Regis, a
related party, which is a company owned by GS Realty.

  Prior to May 1, 2000, affiliates of BCM provided brokerage services, on a
non-exclusive basis, and received brokerage commissions in accordance with a
brokerage agreement. Currently, Regis performs such brokerage services.

  The Directors and officers of IORI also serve as directors and officers of
TCI. The Directors owe fiduciary duties to TCI as well as to IORI under
applicable law. TCI has the same relationship with BCM as IORI. BCM also
serves as advisor to ARI. Messrs. Blaha, Branigan, Endendyk and Starowicz
serve as executive officers of ARI.

  From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
consultant and since January 1993 as a part-time unpaid consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income
and elderly housing. Eldercare has a revolving loan commitment from Syntek
West, Inc., a company owned by Gene E. Phillips. Eldercare filed for
bankruptcy protection in May 1995 and was reorganized in bankruptcy in
February 1996, and has since paid all debts as directed by the Bankruptcy
Court.

Related Party Transactions

  Historically, IORI has 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 as could have been obtained from unrelated third parties.

  As more fully described in ITEM 2. "PROPERTIES--Real Estate," IORI is a
partner with TCI in the Tri-City Limited Partnership, Nakash Income Associates
and TCI Eton Square, L.P.

  In 2000, IORI paid BCM and its affiliates and related parties $2.0 million
in advisory and net income fees, $1.5 million in property acquisition fees,
$1.3 million in real estate brokerage commissions and $602,000 in property and
construction management fees and leasing commissions, net of property
management fees paid to subcontractors, other than Regis.

Restrictions on Related Party Transactions

  Article FOURTEENTH of IORI's Articles of Incorporation provides that IORI
shall not, directly or indirectly, contract or engage in any transaction with
(1) any director, officer or employee of IORI, (2) any director, officer or
employee of the advisor, (3) the advisor or (4) any affiliate or associate (as
such terms are defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended) of any of the aforementioned persons, unless (a) the
material facts as to the relationship among or financial interest of the
relevant individuals or persons and as to the contract or transaction are
disclosed to or are known by IORI's Board of Directors or the appropriate
committee thereof and (b) IORI's Board of Directors or committee thereof
determines that such contract or transaction is fair to IORI and
simultaneously authorizes or ratifies such contract or transaction by the
affirmative vote of a majority of independent directors of IORI entitled to
vote thereon.

  Article FOURTEENTH defines an "Independent Director" as one who is neither
an officer or employee of IORI, nor a director, officer or employee of IORI's
advisor.

                                      47
<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

  (a) The following documents are filed as part of this Report:

  1. Consolidated Financial Statements

    Report of Independent Certified Public Accountants

    Consolidated Balance Sheets--December 31, 2000 and 1999

    Consolidated Statements of Operations--Years Ended December 31, 2000,
    1999 and 1998

    Consolidated Statements of Stockholders' Equity--Years Ended December
    31, 2000, 1999 and 1998

    Consolidated Statements of Cash Flows--Years Ended December 31, 2000,
    1999 and 1998

    Notes to Consolidated Financial Statements

  2. Financial Statement Schedules

    Schedule III--Real Estate and Accumulated Depreciation

  All other schedules are omitted because they are not applicable or because
the required information is shown in the Financial Statements or the Notes
thereto.

  3. Exhibits

  The following documents are filed as Exhibits to this Report:

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  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
         Form S-4 dated February 12, 1996).

 10.0    Advisory Agreement dated as of October 15, 1998, between Income
         Opportunity Realty Investors, Inc. and Basic Capital Management, Inc.,
         (incorporated by reference to Exhibit 10.0 to the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1998).
</TABLE>

  (b) Reports on Form 8-K:

  None.


                                       48
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) 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.

                                                     /s/ Karl L. Blaha
Dated: March 29, 2001                     By: _________________________________
                                                       Karl L. Blaha
                                                         President

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ Ted P. Stokely             Chairman of the Board and    March 29, 2001
______________________________________  Director
            Ted P. Stokely

     /s/ R. Douglas Leonhard           Director                     March 29, 2001
______________________________________
         R. Douglas Leonhard

       /s/ Martin L. White             Director                     March 29, 2001
______________________________________
           Martin L. White

       /s/ Edward G. Zampa             Director                     March 29, 2001
______________________________________
           Edward G. Zampa

       /s/ Mark W. Branigan            Executive Vice President     March 29, 2001
______________________________________  and Chief Financial
           Mark W. Branigan             Officer (Principal
                                        Financial Officer)
</TABLE>


                                      49