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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K  þ
    ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For The Year Ended December 31, 2004 Commission File Number 001-14784 Income Opportunity Realty Investors, Inc. (Exact Name of Registrant as Specified in Its Charter)
 Nevada
(State or Other Jurisdiction of
Incorporation or Organization)
    
    75-2615944
(I.R.S. Employer
Identification No.)1755 Wittington Place, Suite 340
Dallas, Texas
(Address of Principal Executive Office)
    
    75234
(Zip Code)
 (214) 750-5800
(Registrants Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock, $.01 par value
    
    American Stock Exchange
 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 þ No o 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.       þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ The aggregate market value of the shares of voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the closing sales price of the Common
Stock on the American Stock Exchange as of June 30, 2004 (the last business day of the Registrants
most recently completed second fiscal quarter) was $4,034,394 based upon a total of 298,844 shares
held as of June 30, 2004 by persons believed to be non-affiliates of the Registrant. The basis of
the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the
Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of
this filing would yield a different value. As of March 18, 2005, there were 1,389,345 shares of
common stock outstanding. Documents Incorporated by Reference:
NONE




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INDEX TO
ANNUAL REPORT ON FORM 10-K PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    12Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18PART IIItem 5.
    
    Market for the Registrants Shares of Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    18Item 6.
    
    Selected Financial Data
    
    
    20Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A.
    
    Quantitative and Qualitative Disclosures Regarding Market Risk
    
    
    27Item 8.
    
    Financial Statements and Supplementary Data
    
    
    29Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    63Item 9A.
    
    Controls and Procedures
    
    
    64Item 9B.
    
    Other Information
    
    
    64PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    65Item 11.
    
    Executive Compensation
    
    
    74Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    77Item 13.
    
    Certain Relationships and Related Transactions
    
    
    79PART IVItem 14.
    
    Principal Accoutant Fees and Services.
    
    
    82Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    84Signature Page
    
    
    86SubsidiariesCertification of Acting Principal Executive Officer and CFOCertification Pursuant to Section 906
  2




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FORWARD-LOOKING STATEMENTS Certain Statements in this Form 10-K are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. The words estimate, plan, intend,
expect, anticipate, believe, and similar expressions are intended to identify forward-looking
statements. The forward-looking statements are found at various places throughout this Report and
in the documents incorporated herein by reference. The Company disclaims any intention or
obligations to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Although we believe that our expectations are based upon
reasonable assumptions, we can give no assurance that our goals will be achieved. Important
factors that could cause our actual results to differ from estimates or projections contained in
any forward-looking statements are described under Risks Related to the Company beginning on page
7. 
 PART I 
 ITEM 1. BUSINESS Income Opportunity Realty Investors, Inc. (IORI or the Company or we or us), a Nevada
corporation, is the successor to a California business trust organized on December 14, 1984, which
commenced operations on April 15, 1985. Prior to January 1, 2003, IORI 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). Due to the completion of a tender offer by American Realty
Investors, Inc. (ARI), an affiliate, on March 19, 2003, and the resulting concentration of
ownership, IORI no longer met the requirement as of January 1, 2003 for tax treatment as a REIT.
Currently, Transcontinental Realty Investors, Inc. (TCI), an affiliate, owns approximately 24.9%
of IORIs outstanding shares of Common Stock. IORI cannot re-qualify for REIT tax status for at
least five years after January 1, 2003. At December 31, 2004, IORIs real estate consisted of 10 properties held for investment. In
addition, IORI owns an interest in one partnership, which owns real property and a second
partnership which holds a wraparound mortgage note receivable. IORIs real estate portfolio is more
fully discussed in ITEM 2. PROPERTIES. Acquisition by Syntek West, Inc.  Change of Control On June 2, 2003, Syntek West, Inc. (SWI) purchased 106,802 shares and 674,971 shares of IORI
Common Stock (a total of 781,773 shares, or approximately 54.3% of the outstanding shares) as a
block from Basic Capital Management, Inc. (BCM) at a price of $18.45 per share for a total
price of $14,423,711. SWI is also the contractual advisor to IORI. 3




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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 Southwest region 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 has three operating segments, Apartments, Commercial
Properties and land ownership. See Note 14 to the Financial Statements. IORIs business is not seasonal. Management has determined 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 2005, 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 Syntek
West, Inc. (SWI), the contractual advisor under the supervision of the Board. SWIs duties
include, among other things, locating, investigating, evaluating and recommending real estate and
mortgage note investment, acquisitions, and sales opportunities, as well as financing and
refinancing sources. SWI also serves as a consultant in connection with IORIs business plan and
investment decisions made by the Board. All of the issued and outstanding common stock of SWI is owned by Gene 4




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E. Phillips. Mr. Phillips is Chairman, President, Chief Executive Officer, and a Director of SWI,
and he is involved in daily consultation with the officers of SWI and has significant influence
over the conduct of SWIs business, including the rendering of advisory services and the making of
investment decisions for itself and for IORI. See ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
ADVISOR OF THE REGISTRANTThe Advisor. Effective June 30, 2003 IORI terminated its Advisory Agreement with BCM. BCM had served as IORIs
advisor from 1989 to June 30, 2003. On July 1, 2003 IORI entered into an Advisory Agreement with
SWI, the beneficial owner and holder of approximately 54.3% of IORIs common stock at the time.
The new advisory agreement with SWI contains the same terms as the old one with BCM. 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 partner of Triad is Highland Realty Services, Inc.
(Highland). Triad subcontracted the property-level management and leasing of IORIs five office
buildings and the commercial property owned by a real estate partnership in which IORI and TCI are
partners to Regis Realty, Inc. (Regis), which is a company owned by Highland, until December
2002. Regis was entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management agreement with Triad,
until December 2002. Regis also was entitled to receive real estate brokerage commissions in
accordance with the terms of a non-exclusive brokerage agreement. Since January 1, 2003, Regis
Realty I, LLC (Regis I) has provided these services. Regis I is also owned by Highland. See
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT-The Advisor. IORI has no employees. Employees of SWI 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 5




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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) two of the officers of IORI also serve as officers or directors of certain other
entities, such as BCM, Prime Income Asset Management, Inc. (PIAMI), ARI and TCI, some of which
have business objectives similar to those of IORI. One Director of IORI also serves as an officer
and director of SWI. 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 contractual advisors 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 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 these 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 SWI, 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, SWI 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, 6




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federal or local economic or rent controls, floods, earthquakes, hurricanes and other acts of God
and other factors beyond the control of management or SWI. The illiquidity of real estate
investments also may impair the ability of management to respond promptly to changing
circumstances. Management believes that such risks can be 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. Available Information IORIs Common Stock is traded on the American Exchange, Inc. (AMEX) under the symbol IOT. Our
principal executive offices are located at 1755 Wittington Place, Suite 340, Dallas, Texas 75234,
and our telephone number is 214-750-5800. We maintain an internet
website at http://www.incomeopp-realty.com. We make available through our
website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon
as reasonably practicable after we electronically file or furnish such materials to the Securities
and Exchange Commission. In addition, we have posted the Charters of our Audit Committee,
Compensation Committee, and our Governance and Nominating Committee, as well as our Code of
Business Conduct and Ethics, Corporate Governance Guidelines on Director Independence, and other
information on our website. These charters and principles are not incorporated in this Report by
reference. We will also provide a copy of these documents free of charge to stock holders upon
written request. The Company issues Annual Reports containing audited financial statements to its
common stockholders. Risks Related to the Company Adverse events concerning existing tenants, or negative market conditions that may affect existing
tenants could have an adverse impact on our ability to attract new tenants, relet space, collect
rent or renew leases, and thus could adversely affect our cash flow from operations and inhibit
growth. Our cash flow from operations depends on the ability to lease space to tenants on economically
favorable terms. Therefore, we could be adversely affected by various facts and events over which
we have limited control, such as:  
    lack of demand for space in areas where our properties are located 7




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
    inability to retain existing tenants and attract new tenants
    oversupply of or reduced demand for space and changes in market rental rates
    defaults by our tenants or their failure to pay rent on a timely basis
    the need to periodically renovate and repair our space
    physical damage to our properties
    economic or physical decline of the areas where our properties are located
    potential risk of functional obsolescence of our properties over time At any time, any of our tenants may experience a downturn in its business that may weaken its
financial condition. As a result, a tenant may delay lease commencement, fail to make rental
payments when due, decline to extend a lease upon its expiration, become insolvent or declare
bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments
when due could result in the termination of the tenants lease and material losses to our Company. If tenants do not renew their leases as they expire, we may not be able to rent the space.
Furthermore, leases that are renewed, and some new leases for space that is relet, may have terms
that are less economically favorable to us than current lease terms, or may require us to incur
significant costs, such as for renovations, tenant improvements or lease transaction costs. Any of these events could adversely affect our cash flow from operations and our ability to make
expected distributions to shareholders and service our indebtedness. A significant portion of our costs, such as real estate taxes, insurance costs, and debt service
payments, generally are not reduced when circumstances cause a decrease in cash flow from our
properties. We may not be able to compete successfully with other entities that operate in our industry. We experience a great deal of competition in attracting tenants for our properties and in locating
land to develop and properties to acquire. In our effort to lease our properties, we compete for tenants with a broad spectrum of other
landlords in each of our markets. These competitors include, among others, publicly-held REITs,
privately-held 8




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entities, individual property owners and tenant who wish to sublease their space. Some of these
competitors may be able to offer prospective tenants more attractive financial terms than we are
able to offer. If the availability of land or high quality properties in our markets diminishes, our operating
results could be adversely affected. We may experience increased operating costs, which could adversely affect our operations. Our properties are subject to increases in operating expenses such as insurance, cleaning,
electricity, heating, ventilation and air conditioning, administrative costs and other costs
associated with security, landscaping, repairs and maintenance of our properties. While our
current tenants generally are obligated to pay a significant portion of these costs, there is no
assurance that these tenants will make such payments or agree to pay these costs upon renewal or
that new tenants will agree to pay these costs. If operating expenses increase in our markets, we
may not be able to increase rents or reimbursements in all of these markets so as to meet increased
expenses without at the same time decreasing occupancy rates. If this occurs, our ability to make
distributions to shareholders and service our indebtedness could be adversely affected. We face risks associated with property acquisitions. We acquire individual properties and portfolios of properties, and intend to continue to do so.
Our acquisition activities and their successes are subject to the following risks:  
    when we are able to locate a desired property, competition from other real estate
investors may significantly increase the purchase price
    acquired properties may fail to perform as expected
    the actual costs of repositioning or redeveloping acquired properties may be higher
than our estimates
    acquired properties may be located in new markets where we face risks associated
with an incomplete knowledge or understanding of the local market, a limited number of
established business relationships in the area and a relative unfamiliarity with local
governmental and permitting procedures
    we may be unable to quickly and efficiently integrate new acquisitions, particularly
acquisitions of portfolios of properties, into our existing operations, and as a
result, our results of operations and financial condition could be adversely affected 9




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We may acquire properties subject to liabilities and without any recourse, or with only limited
recourse, with respect to unknown liabilities. As a result, if a liability were asserted against
us based upon ownership of those properties, we might have to pay substantial sums to settle it,
which could adversely affect our cash flow. Many of our properties are concentrated in our primary markets, and we therefore may suffer
economic harm as a result of adverse conditions in those markets. Our properties are located principally in specific geographic areas in the Southwestern United
States. Due to the concentration of our properties in these areas, performance is dependent on
economic conditions in these areas. These areas have experienced periods of economic decline. We may not be able to access financial markets to obtain capital on a timely basis, or on
acceptable terms. We rely on proceeds from property dispositions and third party capital
sources for a portion of our capital needs, including capital for acquisitions and development.
The public debt and equity markets are among the sources we rely on. There is no guarantee that we
will be able to access these markets, or any other source of capital. The ability to access the
public debt and equity markets depends on a variety of factors, including:  
    general economic conditions affecting these markets
    our own financial structure and performance
    the markets opinion of REITs and real estate companies in general
    the markets opinion of REITs and real estate companies that own properties like
ours We may suffer adverse effects as a result of the terms of and covenants relating to our
indebtedness. Required payments on our indebtedness generally are not reduced if the economic performance of the
portfolios declines. If the economic performance declines, net income, cash flow from operations
and cash available for distribution to stockholders will be reduced. If payments on debt cannot be
made, we could sustain a loss, or in the case of mortgages, suffer foreclosures by mortgagees or
suffer judgments. Further, some obligations contain cross-default and/or cross-acceleration
provisions, which means that a default on one obligation may constitute a default on other
obligations. We anticipate that only a small portion of the principal of our debt will be repaid prior to
maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding
debts as it matures. There is a risk that we may not be able to refinance existing debt or 10




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that the terms of any refinancing will not be as favorable as the terms of our existing debt. If
principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from
other sources, such as the proceeds of sales of assets or new equity securities, our cash flow will
not be sufficient to repay all maturing debt in years when significant balloon payments come due. Our credit facilities and unsecured debt securities contain customary restrictions, requirements
and other limitations on our ability to incur indebtedness, including total debt to asset ratios,
secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered
assets to unsecured debt which we must maintain. Our continued ability to borrow is subject to
compliance with our financial and other covenants. In addition, our failure to comply with such
covenants could cause a default under credit facilities, and we may then be required to repay such
debt with capital from other sources. Under those circumstances, other sources of capital may not
be available to us, or be available only on unattractive terms. Our degree of leverage could limit our ability to obtain additional financing or affect the market
price of our common stock. Our degree of leverage could affect our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, development or other general corporate purposes. Our degree of
leverage could also make us more vulnerable to a downturn in business or the economy generally. An increase in interest rates would increase our interest costs on variable rate debt and could
adversely impact our ability to refinance existing debt. We currently have, and may incur more, indebtedness that bears interest at variable rates.
Accordingly, if interest rates increase, so will our interest costs, which would adversely affect
our cash flow and our ability to pay principal and interest on our debt and our ability to make
distributions to our shareholders. Further, rising interest rates could limit our ability to
refinance existing debt when it matures. We may need to sell properties from time to time for cash flow purposes. Because of the lack of liquidity of real estate investments generally, our ability to respond to
changing circumstances may be impaired. Real estate investments generally cannot be sold quickly.
In the event that we must sell assets to generate cash flow, we cannot predict whether there will
be a market for those assets in the time period we desire or need to sell them, or whether we will
be able to sell them at a price that will allow us to fully recoup our investment. We may not be
able to realize the full potential value of our assets, and we may incur costs related to the early
pay-off of the debt secured by such assets. 11




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Our business overall is subject to all of the risks associated with the real estate industry. We are subject to all the risks incident to investment in real estate, many of which relate to the
general lack of liquidity of real estate investments, including, but not limited to:  
    changes in general or local economic conditions  because our real estate assets are
concentrated in the Southwest, any deterioration in the general economic conditions in
any of those states could have an adverse effect our business and assets in that state;
    changes in interest rates that may make our ability to satisfy our debt service
requirements materially more burdensome;
    lack of availability of financing that may render the purchase, sale or refinancing
of a property more difficult or unattractive;
    changes in real estate and zoning laws;
    increases in real estate taxes and insurance costs;
    federal or local economic or rent control; and
    floods, earthquakes and other similar natural disasters. 
 ITEM 2. PROPERTIES IORIs principal executive offices have been located since January 1, 2005 at 1755 Wittington
Place, Suite 340, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate
for IORIs present operations at such location and are fully utilized. IORIs real estate portfolio at December 31, 2004, is set forth in Schedule III to the Consolidated
Financial Statements included at ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The
following provides certain summary information concerning IORIs real estate portfolio. At March 18, 2005, IORIs real estate portfolio consists of 10 owned properties and an investment
in a partnership which owns commercial property. Of the 10 owned properties, in 2002 six
apartments were sold to partnerships controlled by Metra Capital, LLC (Metra). See NOTE 5.
NOTES AND INTEREST PAYABLE. Since that transaction was accounted for as a financing transaction,
IORI continues to account for those properties as owned properties. IORI is a partner in a
partnership in which it is a 40% general partner that holds a wraparound mortgage note.
At December 31, 2004, IORI held equity investments in apartments and office buildings in the
Southwest region of the continental United States, and more specifically in Texas. At December 31, 2004, 35% of IORIs assets consisted of investment in owned real properties on a
leveraged basis, in the Southwest region of 12




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the continental United States, and 60% consisted of notes receivable. Less than 1% of IORIs
assets consisted of investments in partnerships. The remaining 4% 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. Geographic Regions All properties of IORI are located in Texas. Real Estate Types of Real Estate Investments.IORIs real estate consists of apartments and commercial
properties (office buildings) with 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. The IORI Board
may alter the types of and criteria for selecting new real estate investments and for obtaining
financing. 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. In the opinion of management, IORIs properties are adequately covered by insurance. During 2004, the activity in IORIs owned real estate portfolio was: Owned properties at January 1, 2004
    
    
    15Properties purchased
    
    
    0Properties sold
    
    
    (5
    )Owned properties at December 31, 2004
    
    
    10
 13




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Properties Held for Investment.Set forth below are IORIs owned properties at December 31, 2004,
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, 2004, 2003 and 2002: Rent PerUnits/

    
    Square Foot
    
    
    Occupancy %Property
    
    Location
    
    Square Footage/Acres

   
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002ApartmentsBrighton Court
    
    Midland, TX
    
    60 Units/90,672 Sq.Ft.
    
    $
    .60
    
    
    $
    .56
    
    
    $
    .55
    
    
    
    97
    
    
    
    94
    
    
    
    99Del Mar
    
    Midland, TX
    
    92 Units/105,348 Sq.Ft.
    
    
    .54
    
    
    
    .54
    
    
    
    .53
    
    
    
    96
    
    
    
    94
    
    
    
    95Enclave
    
    Midland, TX
    
    68 Units/89,734 Sq.Ft.
    
    
    .61
    
    
    
    .61
    
    
    
    .59
    
    
    
    97
    
    
    
    99
    
    
    
    97Meridian
    
    Midland, TX
    
    280 Units/264,000 Sq.Ft.
    
    
    .48
    
    
    
    .49
    
    
    
    .46
    
    
    
    94
    
    
    
    95
    
    
    
    91Signature Place
    
    Midland, TX
    
    57 Units/72,480 Sq.Ft.
    
    
    .63
    
    
    
    .59
    
    
    
    .59
    
    
    
    95
    
    
    
    93
    
    
    
    93Sinclair Place
    
    Midland, TX
    
    114 Units/91,529 Sq.Ft.
    
    
    .56
    
    
    
    .56
    
    
    
    .54
    
    
    
    95
    
    
    
    90
    
    
    
    92Office Buildings2010 Valley View
    
    Farmers Branch, TX
    
    40,066 Sq. Ft.
    
    
    15.17
    
    
    
    18.26
    
    
    
    18.56
    
    
    
    56
    
    
    
    72
    
    
    
    92Shopping CenterParkway Centre
    
    Dallas, TX
    
    28,374 Sq. Ft.
    
    
    16.36
    
    
    
    15.98
    
    
    
    15.08
    
    
    
    69
    
    
    
    64
    
    
    
    73Industrial WarehouseEagle Crest
    
    Farmers Branch, TX
    
    133,000 Sq. Ft.
    
    
    3.30
    
    
    
    3.60
    
    
    
    3.52
    
    
    
    100
    
    
    
    100
    
    
    
    98LandThree Hickory Centre
    
    Farmers Branch, TX
    
    9 Acres
 Partnership Properties.Set forth below is the commercial property owned by the partnership
in which IORI is an equity investor and the average annual rental rate and occupancy thereof at
December 31, 2004, 2003 and 2002: Rent per Sq. Foot
    
    
    Occupancy %Property
    
    Location
    
    Square Footage

    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Office BuildingEton Square
    
    Tulsa, OK
    
    222,654 Sq. Ft.
    
    
    11.09
    
    
    
    11.60
    
    
    
    11.35
    
    
    
    75
    
    
    
    38
    
    
    
    42
 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 sought to fund or acquire
new mortgage loans, other than those which may have originated in conjunction with purchase money
financing of a property sale provided by IORI. See ITEM 1. BUSINESS. IORI funded no new mortgage notes in 2004. 14




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##### Table of Contents



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. On September 30, 2004, a Secured Promissory Note in the amount of $1,222,500 given by Unified
Housing Foundation, Inc. (UHF) for Unified Housing of Parkside Crossing, LLC to Regis I and the
accrued interest receivable of $112,878 were assigned from Regis I to IORI as a paydown of certain
intercompany receivables. On September 30, 2004, a Secured Promissory Note in the amount of $1,053,616 given by UHF for
Unified Housing of Temple, LLC to Regis I and the accrued interest receivable of $98,338 were
assigned from Regis I to IORI as a paydown of certain intercompany receivables. On September 30, 2004, a Secured Promissory Note in the amount of $835,658 given by UHF for Unified
Housing of Terrell, LLC to Regis I and the accrued interest receivable of $80,223 were assigned
from Regis I to IORI as a paydown of certain intercompany receivables. On September 30, 2004, a Secured Promissory Note in the amount of $1,770,000 given by UHF for
Housing for Seniors of Lewisville, LLC (Lewisville) to Regis I and the accrued interest
receivable of $174,640 were assigned from Regis I to IORI as a paydown of certain intercompany
receivables. On May 24, 2004, a Secured Promissory Note in the amount of $2,990,000 given by UHF for Unified
Housing of McKinney, LLC (UHM) to Transcontinental Eldorado, Inc. was assigned from TCI to IORI
as a partial payment for TCIs repurchase of 100% of the outstanding common shares of
Transcontinental Treehouse Corporation (Treehouse-IR) from IORI. On December 30, 2003, a Secured Promissory Note in the amount of $6,363,360 given by Housing for
Seniors of Humble, LLC (Humble) to NLP Lakeshore Villas, LLC (NLP) was assigned from ARI to
IORI as a paydown of certain intercompany receivables. On December 30, 2003, a Secured Promissory Note in the amount of $2,000,000 given by Humble to NLP
was assigned from ARI to IORI as additional paydown of certain intercompany receivables. On October 14, 2003, IORI purchased, sold, and conveyed an office building known as One Hickory
Centre, and sold 202 acres of unimproved real property known as the Travelers Land in Dallas
County, Texas to Encino Executive Plaza, Ltd. The sale price for One Hickory Centre was $12,200,000
and Encino Executive Plaza, Ltd. executed a wrap-around promissory note in the amount of
$11,973,025 payable to the order of IORI secured by a Deed of Trust encumbering One Hickory Centre.
The remaining difference of which was as a result of prorations and various 15




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##### Table of Contents



expenses paid by IORI in
connection with the closing of the transaction. The note bears interest at 5.5% per annum. The
sale price for the Travelers Land was $25,000,000. At closing, Encino Executive Plaza, Ltd.
executed an all inclusive wrap-around promissory note payable to the order of IORI in the principal
amount of $22,801,987 secured by a Deed of Trust covering the Travelers Land sold and delivered
cash to IORI in the amount of $1,946,715. As with the prior transaction, the difference between the
purchase price and the promissory note represented adjustments for various prorations. The note
bears interest at 5.5% per annum. Subsequently, IORI made a loan to Encino Executive Plaza, Ltd.
in the amount of $1,567,232 payable upon demand or if no demand is made prior thereto on June 30,
2006 with a market rate of interest. Encino Executive Plaza, Ltd. executed and delivered a
promissory note payable to the order of IORI in the stated principal amount of $1,567,232. The note
bears interest at 5.5% per annum. 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. 
 ITEM 3. LEGAL PROCEEDINGS Innovo Realty, Inc.On August 10, 2004, American Realty Investors, Inc., Transcontinental Realty
Investors, Inc., and Income Opportunity Realty Investors, Inc. instituted an action in Texas State
District Court as Cause No. 2004-60231-393 styled American Realty Investors, Inc., Transcontinental
Realty Investors, Inc. and Income Opportunity Realty Investors, Inc., Plaintiffs v. Innovo Realty,
Inc. and Innovo Group, Inc., Involuntary Plaintiffs v. Innovo Realty, Inc., Metra Capital LLC,
Innovo Group, Inc., Joseph Mizrachi, Simon Mizrachi, Hubert Guez, Third Millennium Partners LLC,
Third Millennium Partners, Inc., Third Millennium Group LLC and Sunridge Management Group, Inc.,
Defendants. Plaintiffs Complaint alleges that Joseph Mizrachi, a former director of ARI and
others, offered a plan to the Plaintiffs to create one or more joint venture arrangements with one
or more of the Plaintiffs to pursue alternative forms of financing or refinancing portions of
Plaintiffs real estate portfolios, which entailed the creation of 22 separate limited partnerships
to acquire 28 separate apartment complexes in three states (Texas, Florida and Louisiana), the
general partners of which are affiliates of, or controlled by, Joseph Mizrachi. Plaintiffs
Complaint alleges that the overall transaction required the establishment of a sinking fund by the
Defendants and the 22 limited partnerships as a trust for the benefit of certain preferred
shareholders of Innovo Group, Inc. and the payment of certain proceeds to the Plaintiffs.
Plaintiffs assert that payments have not been made pursuant to the agreement of the parties.
Plaintiffs allege that Defendants conduct constituted a common business enterprise, alleges breach
of contract and derivative claims on behalf of Innovo Group, Inc.
against Joseph Mizrachi and others, and requests declaratory relief 16




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##### Table of Contents



involving the Plaintiffs
rights in the partnerships, an accounting of proceeds, and the creation of a constructive trust.
Plaintiffs Complaint also alleges that Joseph Mizrachi engaged in fraud, negligent
misrepresentation and/or breach of fiduciary duty and seeks unspecified damages, attorneys fees,
the establishment of a constructive trust and other relief. Sunset Management, LLC. On October 5, 2004, Sunset Management LLC (Sunset) filed a Complaint as
a purported stockholders derivative action on behalf of Transcontinental Realty Investors, Inc. in
the United States District Court for the Northern District of Texas, Dallas Division, against
American Realty Investors, Inc., Basic Capital Management, Inc., Prime Income Asset Management,
Inc., Prime Income Asset Management, LLC, Income Opportunity Realty Investors, Inc., United Housing
Foundation, Inc. (United), Regis Realty, Inc., Transcontinental Realty Investors, Inc., and
Transcontinental Realty Investors, Inc.s current directors and officers and others. Sunsets
Complaint was instituted as Case No. 304CV02162-B styled Sunset Management LLC, Derivatively on
Behalf of Transcontinental Realty Investors, Inc. v. American Realty Investors, Inc., et al.
Sunsets Complaint alleges (i) Sunset is the owner of 10 shares of Common Stock of TCI and Sunset
is the pledgee and beneficial owner of 3,673,115 shares of Common Stock of TCI, (ii) Sunset is a
single-member limited liability company, (iii) all of the Defendants* have in their various
capacities breached fiduciary duties to TCI, and (iv) unjust enrichment of the various Defendants.
Sunsets Complaint seeks an injunction prohibiting TCI from entering into any related-party
transactions that are not fair to TCI and approved by disinterested directors and/or the
stockholders of TCI with full knowledge of the common interest of the directors and/or officers,
unspecified damages, attorneys fees and costs. All Defendants believe the action is not properly
brought as a derivative action on behalf of TCI, as Sunsets interests are adverse to the interests
of TCI. The current action brought by Sunset contains many of the same allegations raised by
Sunset in four other cases which, as rulings have occurred, have resulted in a denial of Sunsets
requested relief. The Defendants intend to vigorously defend the action, and on November 8, 2004,
filed a Motion to Dismiss the case pursuant to Rules 12 and 23.1 of the Federal Rules of Civil
Procedure on the basis that Sunsets allegations are insufficient to evade the stringent demand
requirement under the futility exception for stockholder derivative actions, and that Sunset cannot
fairly and adequately represent the interests of other stockholders. Separately, one of the
individual Defendants has also filed on January 4, 2005 a motion to disqualify Sunsets counsel.   *       

Except for this allegation, the Sunset Complaint makes no
real allegations against the Company and seeks no specified relief against the
Company. The Sunset Complaint does allege that as of March 1, 2003, TCI owned
24% of the stock of the Company. 17




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##### Table of Contents



The Company and its subsidiaries, from time to time, have been involved in various items of
litigation incidental to and in the ordinary course of its business and, in the opinion of
management, the outcome of such litigation will not have a material adverse impact upon the
Companys financial condition, results of operations or liquidity. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. During the fourth quarter of the fiscal year covered by this report, no matter was
submitted to a vote of security holders of the Company. 
 PART II 
  ITEM 5.
    MARKET FOR THE REGISTRANTS SHARES OF COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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 IOTs Common Stock as reported on the AMEX. QUARTER ENDED
    
    HIGH
    
    
    LOWMarch 31, 2005 (through March 18, 2005)
    
    $
    16.70
    
    
    $
    15.70March 31, 2004
    
    
    16.60
    
    
    
    15.25June 30, 2004
    
    
    15.55
    
    
    
    13.35September 30, 2004
    
    
    15.40
    
    
    
    11.50December 31, 2004
    
    
    16.65
    
    
    
    13.25March 31, 2003
    
    
    18.81
    
    
    
    17.00June 30, 2003
    
    
    18.60
    
    
    
    12.55September 30, 2003
    
    
    15.05
    
    
    
    10.65December 31, 2003
    
    
    15.75
    
    
    
    12.00
 As of March 18, 2005, the closing price of IORIs Common Stock on the AMEX was $16.30 per share. As of March 18, 2005, IORIs Common Stock was held by 826 holders of record. No dividends on the IORI Common Stock were declared or paid in 2004 or 2003. Although no express
intention with respect to the future declaration or payment of dividends has been adopted by the
Board of Directors, it is unlikely that any cash dividends on the IORI Common Stock will be
declared or paid in 2005. See also ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS  Liquidity and
Capital Resources. 18




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##### Table of Contents



On December 5, 1989, the Board of Directors approved a share repurchase program authorizing the
repurchase of up to a total of 200,000 shares of the predecessor. In June 2000, the Board of
IORIs predecessor increased the authorization to up to 300,000. In September 2001, the Board of
Directors approved separately a private block purchase of 75,100 shares of IORI Common Stock at a
total cost of $1.3 million. During 2004, a total of 49,600 shares of IORI Common Stock were
repurchased at a total cost of $791,327. Through December 31, 2004, a total of 268,404 shares (out
of the authorization of up to 300,000 shares) had been repurchased at a cost of $2.7 million. The
following table represents shares repurchased during the three months ended December 31, 2004: Total Number of
    
    
    Maximum NumberTotal Number of Average Price
    
    
    Shares Purchased as
    
    
    of Shares that mayShares
    
    
    Paid per
    
    
    Part of Publicly
    
    
    be PurchasedPeriod
    
    Purchased
    
    
    Share
    
    
    Announced Program
    
    
    Under PlanSeptember 1 through September 30, 2004
    
    
    13,200
    
    
    $
    15.14
    
    
    $
    232,004
    
    
    
    67,996October 1 through October 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1 through November 30, 2004
    
    
    36,400
    
    
    $
    16.25
    
    
    $
    268,404
    
    
    
    31,596December 1 through December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals:
    
    
    49,600
    
    
    $
    15.95
    
    
    $
    268,404
    
    
    
    31,596
 19




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA For the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands, except per share)EARNINGS DATARents
    
    $
    5,905
    
    
    $
    5,224
    
    
    $
    5,298
    
    
    $
    4,956
    
    
    $
    8,761Property expense
    
    
    3,129
    
    
    
    3,331
    
    
    
    2,748
    
    
    
    2,637
    
    
    
    4,652Operating income
    
    
    2,776
    
    
    
    1,893
    
    
    
    2,550
    
    
    
    2,319
    
    
    
    4,109Interest income
    
    
    3,325
    
    
    
    626
    
    
    
    270
    
    
    
    194
    
    
    
    319Income (loss) from equity partnerships
    
    
    (3
    )
    
    
    (7
    )
    
    
    862
    
    
    
    (9
    )
    
    
    (61
    )Recovery of A/R written off
    
    
    
    
    
    
    1,569
    
    
    
    
    
    
    
    
    
    
    
    Other expense
    
    
    5,990
    
    
    
    4,352
    
    
    
    5,694
    
    
    
    3,868
    
    
    
    9,580Net income (loss) from continuing
operations
    
    
    108
    
    
    
    (271
    )
    
    
    (2,012
    )
    
    
    (1,364
    )
    
    
    (4,086
    )Discontinued operations
    
    
    5,384
    
    
    
    2,053
    
    
    
    4,097
    
    
    
    (2,098
    )
    
    
    20,880Net income (loss)
    
    $
    5,492
    
    
    $
    1,782
    
    
    $
    2,085
    
    
    $
    (3,462
    )
    
    $
    16,794PER SHARE DATANet income (loss)
    
    $
    3.95
    
    
    $
    1.24
    
    
    $
    1.45
    
    
    $
    (2.32
    )
    
    $
    11.03Dividends per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    .45Weighted average common shares
outstanding
    
    
    1,389,345
    
    
    
    1,438,945
    
    
    
    1,438,945
    
    
    
    1,493,675
    
    
    
    1,522,510
 Earnings data reflects the retroactive changes in the discontinued operations from 2000 to
2004. As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands, except per share)BALANCE SHEET DATAReal estate held for investment, net
    
    $
    31,368
    
    
    $
    50,365
    
    
    $
    74,750
    
    
    $
    87,315
    
    
    $
    86,277Notes and interest receivable, net
    
    
    54,911
    
    
    
    45,531
    
    
    
    
    
    
    
    505
    
    
    
    1,500Total assets
    
    
    91,201
    
    
    
    101,144
    
    
    
    90,185
    
    
    
    91,833
    
    
    
    96,519Notes and interest payable
    
    
    44,571
    
    
    
    60,825
    
    
    
    51,432
    
    
    
    54,426
    
    
    
    54,206Stockholders equity
    
    
    43,791
    
    
    
    39,089
    
    
    
    37,307
    
    
    
    35,222
    
    
    
    39,998Book value per share
    
    $
    31.52
    
    
    $
    27.17
    
    
    $
    25.93
    
    
    $
    24.48
    
    
    $
    26.42
 IORI purchased four properties for a total of $21.0 million in 2003, and nine properties for a
total of $46.5 million in 2000. IORI sold five properties for a total of $ 24.5 million in 2004,
four properties for a total of $55.7 million in 2003, two properties for a total of $19.2 million
in 2002, and seven properties for a total of $66.6 million in 2000. See ITEM 2. PROPERTIES  Real
Estate and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 20




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  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. Critical Accounting Policies Critical accounting policies are those that are both important to the presentation of IORIs
financial condition and results of operations and require managements most difficult, complex or
subjective judgments. IORIs critical accounting policies relate to the evaluation of impairment
of long-lived assets and the evaluation of the collectibility of accounts and notes receivable. If events or changes in circumstances indicate that the carrying value of a rental property to be
held and used or land held for development may be impaired, management performs a recoverability
analysis based on estimated undiscounted cash flows to be generated from the property in the
future. If the analysis indicates that the carrying value is not recoverable from future cash
flows, the property is written down to estimated fair value and an impairment loss is recognized.
If management decides to sell rental properties or land held for development, management evaluates
the recoverability of the carrying amounts of the assets. If the evaluation indicates that the
carrying value is not recoverable from estimated net sales proceeds, the property is written down
to estimated fair value less costs to sell and an impairment loss is recognized within income from
continuing operations. IORIs estimates of cash flow and fair values of the properties are based on
current market conditions and considers matters such as rental rates and occupancies for comparable
properties, recent sales data for comparable properties and, where applicable, contracts or the
results of negotiations with purchasers or prospective purchasers. IORIs estimates are subject to
revision as market conditions and IORIs assessments of them change. IORIs allowance for doubtful accounts receivable and notes receivable is established based on
analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past
due accounts. Management considers such information as the nature and age of the receivable, the
payment history of the tenant or other debtor, the financial condition of the tenant or other
debtor and IORIs assessment of its ability to meet its lease or interest obligations. IORIs
estimate of the required allowance, which is reviewed on a quarterly basis, is subject to revision
as these factors change and is sensitive to the effects of economic and market conditions. 21




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##### Table of Contents



Obligations and Commitments IORI has contractual obligations and commitments primarily with regards to the payment of
mortgages. The following table aggregates IORIs expected contractual obligations and commitments subsequent
to December 31, 2004. (Dollars in thousands) See ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK-Liabilities and NOTE 5. NOTES AND INTEREST PAYABLE. PAYMENTS DUE BY PERIOD(in thousands)2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalVariable interest rate notesInstruments maturities
    
    $
    5,175
    
    
    $
    3,542
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,717Instruments amortization
    
    
    500
    
    
    
    458
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958Interest
    
    
    493
    
    
    
    243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Fixed interest rate notesInstruments maturities
    
    
    
    
    
    
    1,371
    
    
    
    
    
    
    
    2,083
    
    
    
    
    
    
    
    25,536
    
    
    
    28,990Instruments amortization
    
    
    771
    
    
    
    730
    
    
    
    717
    
    
    
    750
    
    
    
    742
    
    
    
    1,966
    
    
    
    5,676Interest
    
    
    2,337
    
    
    
    2,204
    
    
    
    2,093
    
    
    
    2,006
    
    
    
    1,852
    
    
    
    3,947
    
    
    
    14,439Principal payments
    
    
    6,446
    
    
    
    6,101
    
    
    
    717
    
    
    
    2,833
    
    
    
    742
    
    
    
    27,502
    
    
    
    44,341
 Liquidity and Capital Resources Cash and cash equivalents totaled $399,000, $58,000, and $10,000 at December 31, 2004, 2003 and
2002. IORIs principal sources of cash have been and will continue to be property operations,
proceeds from property sales and refinancings and partnership distributions. Management anticipates
that IORI will generate excess cash from operations in 2005 due to increased interest income and
increased rental rates and occupancy at its properties, however, if such excess does not prove to
be sufficient to satisfy all IORIs obligations as they mature, when necessary, management also may
selectively sell income producing assets, refinance real estate and incur additional borrowings
secured by real estate to meet cash requirements. Net cash (used in) provided by operating activities was ($124,000) in 2004, $92,000 in 2003, and
($2.5) million in 2002. The primary factors affecting cash flow from operating activities are
discussed in the following paragraphs. Cash flow from property operations (rents collected less payments for property operating expenses)
was $3.0 million in 2004, $4.8 million in 2003, and $3.4 million in 2002. The decrease of $1.8
million in 2004 from 2003 was primarily due to a decrease in rental income caused by sale of five
properties during the year. The increase of $1.4 million 22




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in 2003 from 2002 was primarily due to a decrease in property operating expenses. Interest collected was $2.4 million in 2004, $262,000 in 2003, and $291,000 in 2002. The
significant increase in 2004 was due to the increase in notes receivable from sale of properties
throughout 2004. The decrease in 2003 was due to the reduction of two notes from 2002, offset by
funding of a new note in 2003. Interest paid on notes payable was $3.9 million in 2004, $3.7 million in 2003, and $4.3 million in
2002. Of the decrease in 2003 from 2002, $300,000 was due to the sale of three commercial
properties in 2003 and the sale of two commercial properties in 2002, and $300,000 was the effect
of Metra refinancing in 2002 and the payments to Metra for its return on capital. Advisory and net income fee paid to affiliate was $1.1 million in 2004, $451,000 in 2003, and
$868,000 in 2002. The increase in 2004 from 2003 was due to $323,000 increase in net income fee and
$269,000 increase in advisory fee incurred. The decrease in 2003 from 2002 was due to a decrease
in advisory fees caused by the increase in the operating expenses over the specified limit. See
NOTE 8. ADVISORY AGREEMENT. General and administrative expenses paid was $562,000 in 2004, $785,000 in 2003, and $1.0 million
in 2002. The decrease in 2004 from 2003 was primarily due to a decrease in legal expense and
advisor cost reimbursement paid. The decrease in 2003 from 2002 was primarily due to a decrease in
director insurance expense. Net cash provided by investing activities was $1.8 million in 2004, $60,000 in 2003, and $6.8
million in 2002. Cash from investing activities increased in 2004 from 2003 due to less payments
were made to the advisor and the affiliates. The cash increases were partially offset by less
proceeds received from sale of real estate in 2004 than in 2003. Net cash used in financing activities was $1.3 million in 2004, $104,000 in 2003, and $4.3 million
in 2002. The increase of cash spending on financing activities in 2004 from 2003 was primarily due
to repurchase of IORI common stock and more payments were made on notes payable in 2004. Scheduled principal payments on notes payable of $6.5 million are due in 2005. For those mortgages
that come due in 2005, it is managements intent to either seek an extension of the due dates by
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 assets. Management believes it will continue to be successful in
obtaining loan extensions and/or refinancings. 23




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##### Table of Contents



Management expects that funds from existing cash resources, selective sales of income producing
assets, 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 owned a 36.3% general partner interest in the Tri-City partnership until it was sold in 2002.
IORI received a distribution of $25,000 in 2002 from Tri-Citys operating cash flow. In 2002, IORI
received $752,000 as a distribution from the sales proceeds. IORI owns a 40% general partner
interest in the NIA partnership. IORI received no distributions and made no contributions to the
partnership in from 2002 to 2004. IORI owns a 10% limited partnership interest in the TCI Eton
Square partnership. IORI received no distributions and made no contributions to the partnership
from 2002 to 2004. See NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS. IORI paid no dividends in 2004 and 2003. 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 were
anticipated in 2001 and that IORI had no REIT taxable income that required a distribution. It is
unlikely that IORI will pay any cash dividends for 2005. In 2001, IORI repurchased 75,100 shares of Common Stock in a private block purchase for a total of
$1.3 million. In 2004, IORI repurchased 49,600 shares of IORI Common Stock for a total cost of
$791,327. Through December 31, 2004, a total of 268,404 shares had been repurchased at a cost of
$2.7 million. 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 IORI reported a net income of $5.5 million in 2004, net income of $1.8 million in 2003, and net
income of $2.1 million in 2002. Fluctuations in these and the other components of revenue and
expense are discussed in the following paragraphs. 24




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##### Table of Contents



Rents were $5.9 million in 2004, $5.2 million in 2003 and $5.3 million in 2002. Rents in 2005 are
expected to increase if IORI selectively buys properties. Property operations expense was $3.1 million in 2004, $3.3 million in 2003, and $2.8 million in
2002. The slight decrease in 2004 from 2003 was due to a decrease in property taxes. The increase
in 2003 from 2002 was due to an overall increase in various operating expenses including property
taxes. Property operations expense is expected to increase in 2005 if IORI purchases more
properties. Interest income was $3.3 million in 2004, $626,000 in 2003, and $270,000 in 2002. The significant
increase in 2004 from 2003 was due to additional interest earned from the additional notes
receivable obtained from affiliates of IORI. The increase in 2003 from 2002 was due to interest
income earned from the payment of the notes receivable on Rosedale Towers. Interest income is
expected to increase in 2005 due to the increase in notes receivable during 2004. Interest expense was $3.5 million in 2004, $1.4 million in 2003, and $1.5 million in 2002. The
increase in 2004 from 2003 was due to increase in Metra net income, purchase of Parkway Centre and
One Hickory Center in late 2003. Interest expense in 2005 is expected to decrease due to the
retirement of four notes payable from sale of properties during 2004, however, it may possibly
increase if IORI purchases additional properties in 2005. Depreciation expense was $740,000 in 2004, $816,000 in 2003, and $748,000 in 2002. The decrease in
2004 from 2003 was due to sale of properties and fully depreciated tenant improvements in 2004.
Depreciation expense in 2005 is expected to approximate 2004 and/or increase if IORI adds more
properties. Advisory fees to affiliates were $743,000 in 2004, $425,000 in 2003, and $714,000 in 2002. The
increase in 2004 was due to decrease in the operating expenses which resulted in no refund from SWI
for the cost reimbursement payment IORI had made to SWI during the year. See NOTE 8. ADVISORY
AGREEMENT. IORI paid net income fees to its contractual advisors of $453,000 in 2004, $130,000 in 2003, and
$169,000 in 2002. The net income fee is based on 7.5% of IORIs net income. General and administrative expense was $563,000 in 2004, $779,000 in 2003, and $1.0 million in
2002. The decrease in 2004 from 2003 was primarily due to decrease in legal fees and advisor cost
reimbursement. The decrease in 2003 from 2002 resulted from reduced director and officers insurance
premiums. Equity losses in partnerships were $3,000 in 2004 and $7,000 in 2003, and equity gains were
$862,000 in 2002. The Tri-City partnership was dissolved in 2002, which resulted in equity gain in
that year. 25




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##### Table of Contents



IORI realized gains on the sale of real estate of $5.5 million in 2004, $3.8 million in 2003, and
$6.8 million in 2002. In 2004, the gains on sale of real estate derived from the sale of Akard and
Yeager, Treehouse (San Antonio), and Frankel Land. In 2003, the gains on sale of real estate
represent the gain on the sale of Mowry and La Mesa, commercial properties. In 2002, the gain on
sale of real estate represents the gain from the sale of Daley Corporate Center. IORI realized a loss on operations from discontinued operations of $89,000, $1.8 million, and $3.1
million in 2004, 2003 and 2002. The loss relates to the operating losses on two commercial
properties, two residential properties, and a land property that IORI sold during 2004. The
following table summarizes revenue and expense information for the properties sold. 2004
    
    
    2003
    
    
    2002RevenueRental Revenue
    
    $
    1,771
    
    
    $
    4,581
    
    
    $
    5,101Property operations
    
    
    981
    
    
    
    3,087
    
    
    
    3,582790
    
    
    
    1,494
    
    
    
    1,519Interest Income
    
    
    
    
    
    
    462
    
    
    
    ExpensesInterest
    
    
    556
    
    
    
    2,987
    
    
    
    3,457Depreciation
    
    
    323
    
    
    
    740
    
    
    
    1,117879
    
    
    
    3,727
    
    
    
    4,574Net loss from discontinued operations
    
    
    (89
    )
    
    
    (1,771
    )
    
    
    (3,055
    )Gain on sale of real estate
    
    
    5,473
    
    
    
    3,824
    
    
    
    6,769Equity in gain on sale of real estate by equity
investees
    
    
    
    
    
    
    
    
    
    
    383Net income (loss) from discontinued operations
    
    $
    5,384
    
    
    $
    2,053
    
    
    $
    4,097
 Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, IORI may be
potentially liable for removal or remediation costs, as well as certain other potential costs,
relating to hazardous or toxic substances (including governmental fines and injuries to persons and
property) where property-level managers have arranged for the removal, disposal or treatment of
hazardous or toxic substances. In addition, certain environmental laws impose liability for release
of asbestos-containing materials into the air, and third parties may seek recovery for personal
injury associated with such materials. Management is not aware of any environmental liability that would have a material adverse effect on
IORIs business, assets or results of operations. Inflation 26




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##### Table of Contents



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 2002 and 2001, 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 was 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 was also required to
distribute at least 90% (95% in 2000) of its REIT taxable income plus 90% (95% in 2000) of its net
income from foreclosure property on an annual basis to stockholders. Due to the completion of the tender offer by ARI on March 19, 2003, and the resulting concentration
of ownership, IORI no longer met the requirement for tax treatment as a REIT as of January 1, 2003.
IORI cannot re-qualify for tax treatment as a REIT for at least five years from that time. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
change 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. IORI is exposed to interest rate risk associated with variable rate notes payable and maturing debt
that has to be refinanced. IORIs interest rate sensitivity position is managed by IORIs finance
department. Interest rate sensitivity is the relationship between changes in market interest rates
and the fair value of market rate sensitive assets and liabilities. IORIs earnings are affected
as changes in short-term interest rates impact its cost of variable rate debt and maturing fixed
rate debt. A large portion of IORIs market risk is exposure to short-term interest rates from
variable rate borrowings. The impact on IORIs financial statements of refinancing fixed debt that
matured during 2004 was not material. If market interest rates for variable rate debt average 100
basis points more in 2005 than they did during 2004, IORIs interest expense would increase and
income would decrease by $101,000. This amount is determined by considering the impact of
hypothetical interest rates on IORIs 27




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##### Table of Contents



borrowing cost. This analysis did not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event of a change of
such magnitude, management would likely take actions to further mitigate its exposure to the
change. However, due to the uncertainty of the specific actions that would be taken and their
possible effects, the sensitivity analysis assumes no change in IORIs financial structure. The following table contains only those exposures that existed at December 31, 2004. 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) See ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Obligations
and Commitments and NOTE 5. NOTES AND INTEREST PAYABLE. Liabilities Notes payableVariable interest rate-fair value
    
    $
    1,639
 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalInstruments maturities
    
    $
    5,175
    
    
    $
    3,542
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,717Instruments amortization
    
    
    500
    
    
    
    458
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958Interest
    
    
    493
    
    
    
    243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Average rate
    
    
    7.3
    %
    
    
    7.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fixed interest rate-fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    29,869
 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalInstruments maturities
    
    
    
    
    
    
    1,371
    
    
    
    
    
    
    
    2,083
    
    
    
    
    
    
    
    25,536
    
    
    
    28,990Instruments amortization
    
    
    771
    
    
    
    730
    
    
    
    717
    
    
    
    750
    
    
    
    742
    
    
    
    1,966
    
    
    
    5,676Interest
    
    
    2,337
    
    
    
    2,204
    
    
    
    2,093
    
    
    
    2,006
    
    
    
    1,852
    
    
    
    3,947
    
    
    
    14,439Average rate
    

    
    7.6
    %
    
    
    7.5
    %
    
    
    7.5
    %
    
    
    7.5
    %
    
    
    7.6
    %
    
    
    6.3
    %
 28




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageFinancial StatementsReport of Independent Registered Public Accounting Firms
    
    
    30Consolidated Balance SheetsDecember 31, 2004 and 2003
    
    
    33Consolidated Statements of OperationsYears Ended December 31,
2004, 2003 and 2002
    
    
    34Consolidated Statements of Stockholders EquityYears Ended
December 31, 2004, 2003 and 2002
    
    
    36Consolidated Statements of Cash FlowsYears Ended December 31,
2004, 2003 and 2002
    
    
    37Notes to Consolidated Financial Statements
    
    
    39Financial Statement SchedulesSchedule IIIReal Estate and Accumulated Depreciation
    
    
    60Schedule IVMortgage Loans on Real Estate
    
    
    62
 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. 29




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of
Income Opportunity Realty Investors, Inc. We have audited the accompanying consolidated balance sheet of Income Opportunity Realty Investors,
Inc. and Subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, stockholders equity and cash flows for year ended December 31, 2004. 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 audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 audit provides a
reasonable basis for our opinion. 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, 2004 and the consolidated results of their operations and their
cash flows for year ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the schedules referred to above presents fairly, in all material respects,
the information set forth therein. Swalm & Associates, P.C.
March 2, 2005 30




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of
Income Opportunity Realty Investors, Inc. We have audited the accompanying consolidated balance sheet of Income Opportunity Realty
Investors, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements
of operations, stockholders equity and cash flows for year ended December 31, 2003. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. 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 audit provides a reasonable basis for our
opinion. 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, 2003 and the consolidated results of their operations and their
cash flows for year ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the schedules referred to above presents fairly, in all material respects,
the information set forth therein. Farmer, Fuqua, & Huff, P.C.
March 12, 2004 31




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of
Income Opportunity Realty Investors, Inc. We have audited the accompanying consolidated statements of operations, stockholders equity and
cash flow of Income Opportunity Realty Investors, Inc. for the year
ended December 31, 2002. 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 based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. As described in Note 17, 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 results of their operations and their cash flows of Income
Opportunity Realty Investors, Inc. for the year ended December 31, 2002,in conformity
with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedules presents fairly, in all material respects, the information set
forth therein. BDO SEIDMAN, LLP Dallas, Texas
March 21, 2003 32




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##### Table of Contents



INCOME OPPORTUNITY REALTY INVESTORS, INC. 
 CONSOLIDATED BALANCE SHEETS December 31,2004
    
    
    2003(dollars in thousands,except per share)AssetsReal estate held for investment
    
    $
    34,988
    
    
    $
    56,367Less  accumulated depreciation
    
    
    (3,620
    )
    
    
    (6,002
    )31,368
    
    
    
    50,365Notes and interest receivable
    
    
    54,911
    
    
    
    45,531Investment in real estate partnerships
    
    
    604
    
    
    
    607Cash and cash equivalents
    
    
    399
    
    
    
    58Receivables from affiliates
    
    
    261
    
    
    
    457Other assets
    
    
    3,658
    
    
    
    4,126$
    91,201
    
    
    $
    101,144Liabilities and Stockholders EquityLiabilitiesNotes and interest payable
    
    $
    44,571
    
    
    $
    60,825Payables to affiliates
    
    
    1,286
    
    
    
    Other liabilities
    
    
    1,553
    
    
    
    1,23047,410
    
    
    
    62,055Commitments and contingenciesStockholders equityCommon Stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
and 1,389,345 shares in 2004 and 1,438,945
shares in 2003
    
    
    14
    
    
    
    14Paid-in capital
    
    
    61,983
    
    
    
    62,774Accumulated deficit
    
    
    (18,206
    )
    
    
    (23,699
    )43,791
    
    
    
    39,089$
    91,201
    
    
    $
    101,144
 The accompanying notes are an integral part of these Consolidated Financial Statements. 33




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##### Table of Contents



INCOME OPPORTUNITY REALTY INVESTORS, INC. 
  For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands, except per share)Property revenueRents
    
    $
    5,905
    
    
    $
    5,224
    
    
    $
    5,298Property expenseProperty operations
    
    
    3,129
    
    
    
    3,331
    
    
    
    2,748Operating income
    
    
    2,776
    
    
    
    1,893
    
    
    
    2,550Other incomeInterest
    
    
    3,325
    
    
    
    626
    
    
    
    270Equity in income (loss) of equity
partnerships
    
    
    (3
    )
    
    
    (7
    )
    
    
    862Recovery of loss provision on
receivable from related party
    
    
    
    
    
    
    1,569
    
    
    
    3,322
    
    
    
    2,188
    
    
    
    1,132Other expenseInterest
    
    
    3,491
    
    
    
    1,354
    
    
    
    1,457Depreciation
    
    
    740
    
    
    
    816
    
    
    
    748Advisory fee to affiliate
    
    
    743
    
    
    
    425
    
    
    
    714Net income fee to affiliate
    
    
    453
    
    
    
    130
    
    
    
    169Provision for loss on receivable
from related party
    
    
    
    
    
    
    
    
    
    
    1,568Provision for Asset Impairment
    
    
    
    
    
    
    848
    
    
    
    General and administrative
    
    
    563
    
    
    
    779
    
    
    
    1,0385,990
    
    
    
    4,352
    
    
    
    5,694Net income (loss) from continuing
operations
    
    
    108
    
    
    
    (271
    )
    
    
    (2,012
    )Discontinued operations:Income (loss) from operations
    
    
    (89
    )
    
    
    (1,771
    )
    
    
    (3,055
    )Gain on sale of real estate by
equity investees
    
    
    
    
    
    
    
    
    
    
    383Gain on sale of operations
    
    
    5,473
    
    
    
    3,824
    
    
    
    6,769Net income (loss) from discontinued
operations
    
    
    5,384
    
    
    
    2,053
    
    
    
    4,097Net income (loss)
    
    $
    5,492
    
    
    $
    1,782
    
    
    $
    2,085
 34




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##### Table of Contents



INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.) Earnings per shareNet income (loss) from continuing
operations
    
    $
    0.08
    
    
    $
    (0.19
    )
    
    $
    (1.40
    )Discontinued operations
    
    
    3.87
    
    
    
    1.43
    
    
    
    2.85Net income (loss)
    
    $
    3.95
    
    
    $
    1.24
    
    
    $
    1.45Weighted average shares of
Common Stock used in computing
earnings per share
    
    
    1,389,345
    
    
    
    1,438,945
    
    
    
    1,438,945
 The accompanying notes are an integral part of these Consolidated Financial Statements. 35




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INCOME OPPORTUNITY REALTY INVESTORS, INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity(dollars in thousands, except shares)Balance, January 1, 2002
    
    
    1,438,945
    
    
    
    14
    
    
    
    62,774
    
    
    
    (27,566
    )
    
    
    35,222Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,085
    
    
    
    2,085Balance, December 31, 2002
    
    
    1,438,945
    
    
    
    14
    
    
    
    62,774
    
    
    
    (25,481
    )
    
    
    37,307Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,782
    
    
    
    1,782Balance, December 31, 2003
    
    
    1,438,945
    
    
    $
    14
    
    
    $
    62,774
    
    
    $
    (23,699
    )
    
    $
    39,089Repurchase of Common Stock
    
    
    (49,600
    )
    
    
    
    
    
    
    (791
    )
    
    
    
    
    
    
    (791
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,493
    
    
    
    5,493Balance, December 31, 2004
    
    
    1,389,345
    
    
    $
    14
    
    
    $
    61,983
    
    
    $
    (18,206
    )
    
    $
    43,791
 The accompanying notes are an integral part of these Consolidated Financial Statements. 36




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INCOME OPPORTUNITY REALTY INVESTORS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Cash Flows from Operating ActivitiesRents collected
    
    $
    8,106
    
    
    $
    10,671
    
    
    $
    10,554Payments for property operations
    
    
    (5,086
    )
    
    
    (5,903
    )
    
    
    (7,131
    )Interest collected
    
    
    2,413
    
    
    
    262
    
    
    
    291Interest paid
    
    
    (3,885
    )
    
    
    (3,702
    )
    
    
    (4,339
    )Advisory and net income fee paid to affiliate
    
    
    (1,110
    )
    
    
    (451
    )
    
    
    (868
    )General and administrative expenses paid
    
    
    (562
    )
    
    
    (785
    )
    
    
    (1,029
    )Distributions from equity partnerships
operating cash flow
    
    
    
    
    
    
    
    
    
    
    25Net cash provided by (used in) operating
activities
    
    
    (124
    )
    
    
    92
    
    
    
    (2,497
    )Cash Flows from Investing ActivitiesReal estate improvements
    
    
    
    
    
    
    
    
    
    
    (365
    )Deposits on pending purchases and financings
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of real estate
    
    
    5,680
    
    
    
    9,582
    
    
    
    19,230Distributions from equity partnerships
investing cash flow
    
    
    
    
    
    
    
    
    
    
    752Funding of note receivable (including $5,109
in 2002 to related party)
    
    
    
    
    
    
    (1,567
    )
    
    
    (7,109
    )Collection of note receivable
    
    
    
    
    
    
    
    
    
    
    500Payments from (to) advisor and affiliates
    
    
    (3,866
    )
    
    
    (7,955
    )
    
    
    (6,244
    )Net cash provided by investing activities
    
    
    1,814
    
    
    
    60
    
    
    
    6,764Cash Flows from Financing ActivitiesProceeds from notes payable
    
    
    1,193
    
    
    
    917
    
    
    
    23,152Payments on notes payable
    
    
    (1,435
    )
    
    
    (603
    )
    
    
    (26,308
    )Deferred financing costs
    
    
    (316
    )
    
    
    (418
    )
    
    
    (1,167
    )Retirement of Treasury Stock
    
    
    (791
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (1,349
    )
    
    
    (104
    )
    
    
    (4,323
    )Net increase (decrease) in cash and cash
equivalents
    
    
    341
    
    
    
    48
    
    
    
    (56
    )Cash and cash equivalents, beginning of year
    
    
    58
    
    
    
    10
    
    
    
    66Cash and cash equivalents, end of year
    
    $
    399
    
    
    $
    58
    
    
    $
    10
 The accompanying notes are an integral part of these Consolidated Financial Statements. 37




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INCOME OPPORTUNITY REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Reconciliation of net income (loss) to net cash
used in operating activitiesNet income
    
    $
    5,492
    
    
    $
    1,782
    
    
    $
    2,085Adjustments to reconcile net income (loss) to
net cash used in operating activitiesDepreciation and amortization
    
    
    1,392
    
    
    
    2,165
    
    
    
    1,867Gain on sale of real estate
    
    
    (5,473
    )
    
    
    (3,824
    )
    
    
    (7,152
    )Impairment of asset
    
    
    
    
    
    
    848
    
    
    
    Equity in (income) loss of partnerships
    
    
    3
    
    
    
    2
    
    
    
    (862
    )Distributions from equity partnerships
operating cash flow
    
    
    
    
    
    
    
    
    
    
    25Provision for loss
    
    
    
    
    
    
    
    
    
    
    1,568(Increase) decrease in interest receivable
    
    
    (912
    )
    
    
    (826
    )
    
    
    5(Increase) decrease in other assets
    
    
    (781
    )
    
    
    1
    
    
    
    774Increase (decrease) in interest payable
    
    
    (168
    )
    
    
    29
    
    
    
    (9
    )Increase (decrease) in other liabilities
    
    
    323
    
    
    
    (85
    )
    
    
    (798
    )Net cash (used in) provided by
Operating activities
    
    $
    (124
    )
    
    $
    92
    
    
    $
    (2,497
    )Schedule of noncash investing and financing
activitiesNotes payable from purchase of real estate
    
    $
    
    
    
    $
    18,687
    
    
    $
    Notes payable assumed by buyer on sale of real
estate
    
    
    15,844
    
    
    
    9,637
    
    
    
    Notes receivable collected by affiliates
    
    
    
    
    
    
    
    
    
    
    5,541Notes receivable collected from affiliates
    
    
    8,339
    
    
    
    44,706
    
    
    
    
 The accompanying notes are an integral part of these Consolidated Financial Statements. 38




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INCOME OPPORTUNITY REALTY INVESTORS, INC. 
  The accompanying Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. and
consolidated entities were prepared in conformity with accounting principles generally accepted in
the United States of America, the most significant of which are described in NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES. 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 2003 and 2002 have been reclassified to conform to the 2004 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 accounting principles generally accepted in the United States of America, it is 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. Recent accounting Pronouncements.SFAS No. 151  In November 2004, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 151, Inventory Costs, an
Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends ARB 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted
materials (spoilage) be recognized as current period charges. It also requires that allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material
impact on the consolidated financial position or results of operations of IORI. 39




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) SFAS No. 152  In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, Accounting for Real Estate Time-Sharing Transactions
(SFAS No. 152). SFAS No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate,
to reference the financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position 04-2, Accounting for Real Estate
Time-Sharing Transactions (SOP 04-2). This Statement also amends FASB Statement No. 67,
Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not
apply to real estate time-sharing transactions. The accounting for those operations and costs is
subject to the guidance in SOP 04-2. SFAS No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005,
and is to be reported as a cumulative effect of a change in accounting principle. The adoption of
SFAS No. 145 is not expected to have a material impact on the consolidated financial position or
results of operations of IORI. SFAS No. 123  In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Share-Based Payment, revised (SFAS No. 123R). SFAS No.
123R addresses the accounting for share-based payments to employees, including grants of employee
stock options. Under the new standard, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees. Instead, companies will be required to account for such
transactions using a fair-value method and recognize the expense in the consolidated statement of
income. SFAS No. 123R will be effective for periods beginning after June 15, 2005 and allows, but
does not require, companies to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS No. 123R. The Company has not yet determined which
fair-value method and transitional provision it will follow. The adoption of SFAS No. 123R is not
expected to have a material impact on the Companys consolidated financial position or results of
operations. SFAS No. 153  In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, An Amendment of APB
Opinion No. 29 (SFAS No. 153). The guidance in APB Opinion No. 29, Accounting for Non-monetary
Transactions, is based on the principle that exchanges of non-monetary assets should be measured
based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however,
included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges 40




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) of non-monetary assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges in fiscal
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a
material impact on the consolidated financial position or results of operations of IORI. Real estate held for investment and depreciation.Real estate held for investment is carried at
cost. Statement of Financial Accounting Standards No. 144 (SFAS No. 144) requires that a property
be considered impaired, if the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the property. If impairment exists, an
impairment loss is recognized by a charge against earnings equal to the amount by which the
carrying amount of the property exceeds the fair value 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. See NOTE 2. REAL ESTATE. 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. 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 41




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 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
investments 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 2004, IORI sold the following properties: Sales
    
    
    Net Cash
    
    
    Debt
    
    
    Gain/(Loss)Property
    
    Location
    
    Sq.Ft.
    
    
    Price
    
    
    Received
    
    
    Discharged
    
    
    on SaleOffice BuildingAkard Building
    
    Dallas, TX
    
    42,258 Sq.Ft.
    
    $
    3,900
    
    
    $
    2,007
    
    
    $
    1,849
    
    
    $
    427Yeager Building
    
    Chantilly, VA
    
    60,060 Sq.Ft.
    
    $
    7,600
    
    
    $
    2,174
    
    
    $
    5,230
    
    
    $
    1,939Residential BuildingTreehouse
(San Antonio)
    
    San Antonio, TX
    
    88,957 Sq.Ft.
    
    $
    5,400
    
    
    $
    1,437
    
    
    $
    3,747
    
    
    $
    3,091Treehouse(Irving)
    
    Irving,    TX
    
    153,072 Sq.Ft.
    
    $
    7,500
    
    
    
    
    
    
    $
    5,018
    
    
    
    LandFrankel Land
    
    Midland County, TX
    
    1 Acre
    
    $
    63
    
    
    $
    61
    
    
    
    
    
    
    $
    16
 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. 42




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NOTE 3. NOTES AND INTEREST RECEIVABLE Junior Mortgage Loans.Junior mortgage loans are loans secured by mortgages that are subordinate
to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on
the loans ordinarily includes the real estate which secures the loan, other collateral and personal
guarantees of the borrower. On September 30, 2004, a Secured Promissory Note in the amount of $1,222,500 given by UHF for
Unified Housing of Parkside Crossing, LLC to Regis I and the accrued interest receivable of
$112,878 were assigned from Regis I to IORI as a paydown of certain intercompany receivables. On September 30, 2004, a Secured Promissory Note in the amount of $1,053,616 given by UHF for
Unified Housing of Temple, LLC to Regis I and the accrued interest receivable of $98,338 were
assigned from Regis I to IORI as a paydown of certain intercompany receivables. On September 30, 2004, a Secured Promissory Note in the amount of $835,658 given by UHF for Unified
Housing of Terrell, LLC to Regis I and the accrued interest receivable of $80,223 were assigned
from Regis I to IORI as a paydown of certain intercompany receivables. On September 30, 2004, a Secured Promissory Note in the amount of $1,770,000 given by UHF for
Housing for Seniors of Lewisville, LLC to Regis I and the accrued interest receivable of $174,640
were assigned from Regis I to IORI as a paydown of certain intercompany receivables. On May 24, 2004, a Secured Promissory Note in the amount of $2,990,000 given by UHF for UHM to
Transcontinental Eldorado, Inc. was assigned from TCI to IORI as a partial payment for TCIs
repurchase of 100% of the outstanding common shares of Treehouse-IR from IORI. On December 30, 2003, a Secured Promissory Note in the amount of $6,363,360 given by Humble to NLP
was assigned from ARI to IORI as a paydown of certain intercompany receivables. On December 30, 2003, a Secured Promissory Note in the amount of $2,000,000 given by Humble to NLP
was assigned from ARI to IORI as additional paydown of certain intercompany receivables. On October 14, 2003, IORI purchased, sold, and conveyed an office building known as One Hickory
Centre, and sold 202 acres of unimproved real property known as the Travelers Land in Dallas
County, Texas to Encino Executive Plaza, Ltd. The sale price for One Hickory Centre was $12,200,000
and Encino Executive Plaza, Ltd. executed a wrap-around promissory note in the amount of
$11,973,025 payable to the order of IORI secured by a Deed of Trust encumbering One Hickory Centre.
The remaining difference of which was as a result of prorations and various expenses paid by IORI
in connection with the closing of the transaction. The note bears interest at 5.5% per annum. The
sale price for the Travelers Land was $25,000,000. At closing, Encino Executive Plaza, Ltd.
executed an all inclusive wrap-around promissory note payable to the 43




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order of IORI in the principal amount of $22,801,987 secured by a Deed of Trust covering the
Travelers Land sold and delivered cash to IORI in the amount of $1,946,715. As with the prior
transaction, the difference between the purchase price and the promissory note represented
adjustments for various prorations. The note bears interest at 5.5% per annum. Subsequently, IORI
made a loan to Encino Executive Plaza, Ltd. in the amount of $1,567,232 payable upon demand or if
no demand is made prior thereto on June 30, 2006 with a market rate of interest. Encino Executive
Plaza, Ltd. executed and delivered a promissory note payable to the order of IORI in the stated
principal amount of $1,567,232. The note bears interest at 5.5% per annum. NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS Investments in equity method partnerships consisted of the following: 2004
    
    
    2003Nakash Income Associates (NIA)
    
    
    402
    
    
    
    341TCI Eton Square, L.P. (Eton Square)
    
    
    202
    
    
    
    266$
    604
    
    
    $
    607
 IORI 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. IORI also owns a 10% limited partner interest in Eton Square, which at December 31, 2004, owned the
Eton Square Building in Tulsa, Oklahoma. 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: 2004
    
    
    2003Notes receivable
    
    $
    902
    
    
    $
    902Real estate, net of accumulated depreciation
($2,146 in 2004 and $1,631 in 2003)
    
    
    14,595
    
    
    
    13,753Other assets
    
    
    (262
    )
    
    
    (262
    )Notes payable
    
    
    (10,054
    )
    
    
    (10,206
    )Other liabilities
    
    
    (2,154
    )
    
    
    (677
    )Partners capital
    
    $
    3,027
    
    
    $
    3,510
 44




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS(Continued) 2004
    
    
    2003
    
    
    2002Rents
    
    $
    1,365
    
    
    $
    1,233
    
    
    $
    2,981Interest income
    
    
    156
    
    
    
    156
    
    
    
    156Interest expense
    
    
    (739
    )
    
    
    (685
    )
    
    
    (1,119
    )Property operations expense
    
    
    (775
    )
    
    
    (802
    )
    
    
    (1,453
    )Depreciation
    
    
    (475
    )
    
    
    (400
    )
    
    
    (628
    )Loss before gains on sale of real estate
    
    
    (468
    )
    
    
    (498
    )
    
    
    (63
    )Gain on sale
    
    
    
    
    
    
    
    
    
    
    1,054Net income (loss)
    
    $
    (468
    )
    
    $
    (498
    )
    
    $
    991
 IORIs equity share of: 2004
    
    
    2003
    
    
    2002Income (loss) before gains on
sale of real estate
    
    $
    (3
    )
    
    $
    (7
    )
    
    $
    862
    *Gain on sale of real estate
    
    
    
    
    
    
    
    
    
    
    383Net income (loss)
    
    $
    (3
    )
    
    $
    (7
    )
    
    $
    1,245
  *
    Includes the $1.3 million gain from the sale of IORIs investment in Tri-City. NOTE 5. NOTES AND INTEREST PAYABLE Notes and interest payable consisted of the following: 2004
    
    
    2003Estimated
    
    
    
    
    
    
    EstimatedFair
    
    
    Book
    
    
    Fair
    
    
    BookValue
    
    
    Value
    
    
    Value
    
    
    ValueNotes payable
    
    $
    42,444
    
    
    $
    44,342
    
    
    $
    60,930
    
    
    $
    60,427Interest payable
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    398$
    44,571
    
    
    
    
    
    
    $
    60,825
 45




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 5. NOTES AND INTEREST PAYABLE(Continued) Scheduled notes payable principal payments are due as follows: 2005
    
    $
    6,4462006
    
    
    6,1012007
    
    
    7172008
    
    
    2,8332009
    
    
    742Thereafter
    
    
    27,503$
    44,342
 Notes payable at December 31, 2004, bear interest at rates ranging from 4.48% to 9.56% and mature
between 2005 and 2012. The mortgages are collateralized by deeds of trust on real estate with a net
carrying value of $31.4 million. As indicated in the foregoing schedule, the book value of notes
payable decreased $16.1 million in 2004 from 2003 due to retirement of notes payable resulting from
sale of four properties during 2004. See ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Obligations and Commitments and ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK-Liabilities. In April 2002, IORI sold all of its residential properties to partnerships controlled by Metra
Capital, LLC (Metra). These properties include: the 60 unit Brighton Court, the 92 unit Del
Mar, the 68 unit Enclave, the 280 unit Meridian, the 57 unit Signature, the 114 unit Sinclair,
located in Midland, Texas, and the 106 unit Treehouse, located in San Antonio, Texas. Innovo
Realty, Inc., a subsidiary of Innovo Group, Inc. (Innovo) is a limited partner in the
partnerships that purchased the properties. Joseph Mizrachi, a former director of ARI, a related
party, controls approximately 11.67% of the outstanding common stock of Innovo. The sale
constituted 23% of the total assets of IORI as of December 31, 2001. The sales price for the
properties totaled $26.2 million. IORI received $5.4 million in cash after the payoff of $16.1
million in debt and various closing costs. Management has determined to account for this sale as a
refinancing transaction, in accordance with SFAS No. 66, Accounting for Sales of Real Estate.
IORI continues to report the assets and the new debt incurred by the Metra partnerships on the IORI
financial statements. The debt on the properties totaled $21.4 million at the time of sale, and it
bears interest at 7.57% per annum, requires monthly interest only payments of $135,000 and matures
in May 2012. IORI also received $5.2 million of 8% non-recourse, non-convertible Series A
Preferred Stock (Preferred Shares) of Innovo. The Treehouse property was subsequently sold to a
non-related party in February 2004 and all of its debts have been repaid to the lenders at the time
of sale. The dividend on the Preferred Shares was to be funded entirely and 46




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solely through member distributions from cash flows generated by the operation and subsequent sale
of the sold properties. In the event the cash flows for the properties are insufficient to cover
the 8% annual dividend, Innovo was to have no obligation to cover any shortfall. The Preferred Shares have a mandatory redemption feature and are redeemable from the cash proceeds
received by Innovo from the operation and sale of the properties. All member distributions that
are in excess of current and accrued 8% dividends must be used by Innovo to redeem the Preferred
Shares. Since redemption of these shares is subject to the above future events, management has not
recorded any basis in the Preferred Shares. In 2004, IORI refinanced the following property: Net CashDebt
    
    
    Debt
    
    
    Received/
    
    
    Interest
    
    
    MaturityProperty
    
    Location
    
    Sq.Ft./Acrs
    
    Incurred
    
    
    Discharged
    
    
    (Paid)
    
    
    Rate
    
    
    DateOffice BuildingChuck Yeager
    
    Chantilly, VA
    
    60,060 Sq.Ft.
    
    $
    5,500
    
    
    $
    4,307
    
    
    $
    1,193
    
    
    
    5.25
    %(1)
    
    
    1/07
  (1)
    Variable rate. NOTE 6. RELATED PARTY TRANSACTIONS On September 30, 2004, a Secured Promissory Note in the amount of $1,222,500 given by UHF for
Unified Housing of Parkside Crossing, LLC to Regis I and the accrued interest receivable of
$112,878 were assigned from Regis I to IORI as a paydown of certain intercompany receivables due to
IORI. On September 30, 2004, a Secured Promissory Note in the amount of $1,053,616 given by UHF for
Unified Housing of Temple, LLC to Regis I and the accrued interest receivable of $98,338 were
assigned from Regis I to IORI as a paydown of certain intercompany receivables due to IORI. On September 30, 2004, a Secured Promissory Note in the amount of $835,658 given by UHF for Unified
Housing of Terrell, LLC to Regis I and the accrued interest receivable of $80,223 were assigned
from Regis I to IORI as a paydown of certain intercompany receivables due to IORI. On September 30, 2004, a Secured Promissory Note in the amount of $1,770,000 given by UHF for
Housing for Seniors of Lewisville, LLC to Regis I and the accrued interest receivable of $174,640
were assigned from Regis I to IORI as a paydown of certain intercompany receivables due to IORI. On May 24, 2004, a Secured Promissory Note in the amount of $2,990,000 given by UHF for UHM to
Transcontinental Eldorado, Inc. was assigned from TCI to IORI as a partial payment for TCIs
repurchase of 100% of the outstanding common shares of Treehouse-IR from IORI. 47




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##### Table of Contents



On December 30, 2003, a Promissory Note in the amount of $6.3 million given by Humble to NLP was
assigned from ARI to IORI. On December 30, 2003, a Promissory Note in the amount of $2.0 million
given by Humble to NLP was assigned from ARI to IORI. These assignments were payments on certain
intercompany receivables due to IORI. On September 19, 2002, IORIs Board of Directors authorized the Chief Financial Officer of the
Company to advance funds either to or from the Company, through the advisor, in an amount up to
$5.0 million on the condition that such advances shall be repaid in cash or transfers of assets
within 90 days. The following table reconciles the beginning and ending balances of Accounts Receivable from
Affiliates as of December 31, 2004. SWI
    
    
    Regis I
    
    
    ARI
    
    
    TCIBalance, December 31, 2003
    
    
    302
    
    
    
    (473
    )
    
    $
    367
    
    
    $
    261Cash transfers
    
    
    11,530
    
    
    
    
    
    
    
    
    
    
    
    Cash repayments
    
    
    (5,831
    )
    
    
    
    
    
    
    (367
    )
    
    
    Other additions
    
    
    176
    
    
    
    1,075
    
    
    
    
    
    
    
    Other repayments
    
    
    (7,463
    )
    
    
    (602
    )
    
    
    
    
    
    
    Balance, December 31, 2004
    
    
    (1,286
    )
    
    $
    
    
    
    $
    
    
    
    $
    261
 Returns on Metra Properties.As described in Note 5, IORI sold all of its residential properties
during 2002 to partnerships controlled by Metra. The partnership agreement for each of these
partnerships states that the Metra Partners, as defined, receive cash flow distributions at least
quarterly in an amount sufficient to provide them with a fifteen percent cumulative compounded
annual rate of return on their invested capital, as well as a cumulative annual amount of 0.50% of
the average outstanding balance of the mortgage indebtedness secured by any of these residential
properties. These distributions to the Metra Partners are to have priority over distributions to
any of the other partners. NOTE 7. DIVIDENDS While IORI was a REIT, dividends of $685,000 ($.45 per share) were paid in 2000. It was reported
to the Internal Revenue Service that 100% of the dividends paid in 2000 represented capital gains. 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 were anticipated in 2001 and that IORI had no REIT
taxable income that required a distribution. No quarterly dividends were declared or paid in 2004, 2003 or 2002. Management expects to pay no
cash dividends in 2005. 48




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##### Table of Contents



NOTE 8. RENTS UNDER OPERATING LEASES Operations include the leasing of office buildings. The leases thereon expire at various dates
through 2012. The following is a schedule of minimum future rents on non-cancelable operating
leases as of December 31, 2004: 2005
    
    $
    1,1342006
    
    
    8672007
    
    
    6382008
    
    
    5292009
    
    
    176Thereafter
    
    
    446$
    3,790
 NOTE 9. ADVISORY AGREEMENT SWI is 100% owned by Gene E. Phillips. Mr. Phillips is Chairman, President, Chief Executive
Officer, and Director of SWI, and is involved in daily consultation with the officers of SWI and
has significant influence over the conduct of SWIs business, including the rendering of advisory
services and the making of investment decisions for itself and for IORI. Under the Advisory Agreement, SWI 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. SWI 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 SWI 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 SWI shall
be deemed to be in a fiduciary relationship to the stockholders and contains a broad standard
governing SWIs liability for losses incurred by IORI. The Advisory Agreement provides for SWI 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 SWI to receive an annual incentive sales fee. SWI or an
affiliate of SWI is to receive an acquisition commission for supervising the purchase or long-term
lease of real estate. SWI or an affiliate of SWI is to receive a mortgage or 49




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##### Table of Contents



loan acquisition fee with respect to the purchase of any existing mortgage loan. SWI or an
affiliate of SWI also is to receive a mortgage brokerage and equity refinancing fee for obtaining
loans or refinancing of IORIs properties. In addition, SWI receives reimbursement of certain
expenses incurred by it, in the performance of advisory services for IORI. The Advisory Agreement requires SWI or any affiliate of SWI 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 SWI 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 SWI to refund
$-0- of the 2004 annual advisory fee, $226,000 of the 2003 annual advisory fee, and $68,000 of the
2002 annual advisory fee. Additionally, if management was to request that SWI render services other than those required by
the Advisory Agreement, SWI 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 10.
PROPERTY MANAGEMENT, Triad Realty Services, Ltd., an affiliate of BCM, provides property
management services and, as discussed in NOTE 11. REAL ESTATE BROKERAGE, Regis Realty I, LLC.,
provided, on a non-exclusive basis, brokerage services. SWI may assign the Advisory Agreement only with the prior consent of IORI. NOTE 10. PROPERTY MANAGEMENT Triad provides property management services for a fee of 6% 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 property-level management services at various rates. The
general partner of Triad is BCM. The limited partner of Triad is Highland. Triad subcontracted to
Regis, which is owned by Highland, the property-level management and leasing of IORIs five office
buildings and the commercial property owned by Eton Square, until December 2002. Since January 1,
2003, Regis I, which is also owned by Highland, provided property management services. Regis was
and Regis I 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 11. REAL ESTATE BROKERAGE Regis also provided brokerage services on a non-exclusive basis until December 2002. Regis was and
Regis I is entitled to receive a commission for property purchases and sales in accordance with a
sliding scale of total brokerage fees to be paid by IORI. 50




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NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC. Fees and cost reimbursements to SWI/BCM and affiliates: 2004
    
    
    2003
    
    
    2002FeesAdvisory
    
    $
    743
    
    
    $
    425
    
    
    $
    714Net income
    
    
    453
    
    
    
    130
    
    
    
    169Commission on property sale
    
    
    301
    
    
    
    473
    
    
    
    Mortgage brokerage and equity refinancing
    
    
    518
    
    
    
    547
    
    
    
    262Property & Construction Mgt. & Leasing Comm
    
    
    120
    
    
    
    323
    
    
    
    0$
    2,135
    
    
    $
    1,898
    
    
    $
    1,145Cost reimbursements
    
    $
    78
    
    
    $
    173
    
    
    $
    246
 NOTE 13. INCOME TAXES For the year 2002, IORI 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, was not taxed for federal income tax purposes on that portion of its
taxable income which is distributed to stockholders. Due to the completion of the tender offer by
ARI, an affiliate, and the resulting concentration of ownership, IORI no longer met the
requirements for tax treatment as a REIT under the Code as of January 1, 2003, and is prohibited
for re-qualifying for REIT status for at least five years. IORI had net income for federal income tax purposes before the application of operating loss
carryforwards in 2004, 2003 and 2002. 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. Deferred income taxes reflect the tax effects of temporary timing differences between carrying
amounts of assets and liabilities reflected on the financial statements and the amounts used for
income tax purposes. The tax effects of temporary differences and net operating loss carryforwards
that give rise to the deferred tax assets are presented below: 51




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December 31,2004
    
    
    2003Deferred tax assetsBasis difference in preferred stock
    
    $
    1,542
    
    
    $
    1,960Accumulated Depreciation and amortization
    
    
    284
    
    
    
    449Basis difference in Metra assets and liabilities
    
    
    425
    
    
    
    219Other
    
    
    182
    
    
    
    Federal benefit of net operating loss carryforward
    
    
    122
    
    
    
    855Deferred tax asset
    
    
    2,555
    
    
    
    3,483Less valuation allowance
    
    
    (2,555
    )
    
    
    (3,483Total deferred tax asset
    
    
    
    
    
    
    
 Recognition of the benefits of the deferred tax assets will require the Company to generate
future taxable income. There is no assurance that the Company will generate earnings in future
years. Therefore the Company has established a valuation allowance for deferred tax assets of
approximately $2,555,000 and $3,483,000 as of December 31, 2004 and 2003. In prior years the Company had losses, which resulted in net operating losses carryforwards for tax
purposes amounting to approximately $321,000 at December 31, 2004 that may be offset against future
taxable income. These carryforwards expire in 2021. The following table presents the principal reasons for the differences between the Companys
effective tax rate and the United States statutory income tax rate of 35%. 2004
    
    
    2003
    
    
    2002Federal income tax at statutory rate
    
    
    1,922
    
    
    
    623
    
    
    
    730State tax expense
    
    
    100
    
    
    
    41
    
    
    
    110Gain on sale differences
    
    
    (1,261
    )
    
    
    (243
    )
    
    
    62Other
    
    
    (36
    )
    
    
    (106
    )
    
    
    282Utilization of net operating loss carryforward
    
    
    (725
    )
    
    
    (315
    )
    
    
    (1,184
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    Effctive income tax rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 NOTE 14. 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 52




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##### Table of Contents



reflected in the segments are interest and equity in partnerships totaling $3.3 million, $2.2
million, $1.1 million for 2004, 2003 and 2002, respectively. Expenses/(Gains) that are not
reflected in the segments are general and administrative expenses, advisory and net income fees,
provision for loss, and provision for asset impairment totaling $1.8 million, $2.2 million, and
$3.5 million for 2004, 2003 and 2002, respectively. Excluded from operating segment assets are
assets of $59.5 million at December 31, 2004, $50.8 million at December 31, 2003, and $15.4 million
at December 31, 2002, 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. Commercial2004
    
    Land
    
    
    Properties
    
    
    Apartments
    
    
    TotalRents
    
    $
    
    
    
    $
    1,244
    
    
    $
    4,661
    
    
    $
    5,905Property operating expenses
    
    
    
    
    
    
    673
    
    
    
    2,456
    
    
    
    3,129Operating income (loss)
    
    $
    
    
    
    $
    571
    
    
    $
    2,205
    
    
    $
    2,776Depreciation
    
    $
    
    
    
    $
    294
    
    
    $
    446
    
    
    $
    740Interest
    
    
    996
    
    
    
    874
    
    
    
    1,621
    
    
    
    3,491Real estate improvements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assets
    
    
    
    
    
    
    12,998
    
    
    
    18,370
    
    
    
    31,368
 CommercialProperty Sales
    
    Land
    
    
    Properties
    
    
    Apartments
    
    
    TotalSales price
    
    $
    63
    
    
    $
    11,500
    
    
    $
    12,900
    
    
    $
    24,463Cost of sale
    
    
    47
    
    
    
    9,134
    
    
    
    9,809
    
    
    
    18,990Gain on sale
    
    $
    16
    
    
    $
    2,366
    
    
    $
    3,091
    
    
    $
    5,473
 53




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##### Table of Contents



INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 14. OPERATING SEGMENTS(Continued) Commercial2003
    
    Land
    
    
    Properties
    
    
    Apartments
    
    
    TotalRents
    
    $
    
    
    
    $
    718
    
    
    $
    4,506
    
    
    $
    5,224Property operating expenses
    
    
    
    
    
    
    389
    
    
    
    2,942
    
    
    
    3,331Operating income
    
    $
    
    
    
    $
    329
    
    
    $
    1,564
    
    
    $
    1,893Depreciation
    
    $
    
    
    
    $
    456
    
    
    $
    360
    
    
    $
    816Interest
    
    
    
    
    
    
    217
    
    
    
    1,137
    
    
    
    1,354Real estate improvements
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    494Assets
    
    
    44
    
    
    
    22,105
    
    
    
    28,216
    
    
    
    50,365
 CommercialProperty Sales
    
    Properties
    
    
    TotalSales price
    
    $
    55,700
    
    
    $
    55,700Cost of sale
    
    
    51,876
    
    
    
    51,876Gain on sale
    
    $
    3,824
    
    
    $
    3,824
 Commercial2002
    
    Land
    
    
    Properties
    
    
    Apartments
    
    
    TotalRents
    
    $
    
    
    
    $
    778
    
    
    $
    4,520
    
    
    $
    5,298Property operating expenses
    
    
    
    
    
    
    360
    
    
    
    2,388
    
    
    
    2,748Operating income
    
    $
    
    
    
    $
    418
    
    
    $
    2,132
    
    
    $
    2,550Depreciation
    
    $
    
    
    
    $
    320
    
    
    $
    428
    
    
    $
    748Interest
    
    
    
    
    
    
    149
    
    
    
    1,308
    
    
    
    1,457Real estate improvements
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    240Assets
    
    
    24,929
    
    
    
    28,688
    
    
    
    21,133
    
    
    
    74,750
 CommercialProperty Sales
    
    Properties
    
    
    TotalSales price
    
    $
    19,230
    
    
    $
    19,230Cost of sale
    
    
    12,461
    
    
    
    12,461Gain on sale
    
    $
    6,769
    
    
    $
    6,769
 54




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##### Table of Contents



INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 15. DISCONTINUED OPERATIONS Effective January 1, 2002, IORI adopted Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which established a single
accounting model for the impairment or disposal of long-lived assets, including discontinued
operations. This statement requires that the operations related to properties that have been sold
or properties that are intended to be sold be presented as discontinued operations in the statement
of operations for all periods presented, and properties intended to be sold are to be designated as
held-for-sale on the balance sheet. For 2004, 2003, and 2002, income (loss) from discontinued operations relates to two properties that
IORI sold during 2002, four properties sold during 2003, and five properties sold during 2004. The
following table summarizes revenue and expense information for these properties sold. 2004
    
    
    2003
    
    
    2002RevenueRental
    
    $
    1,771
    
    
    $
    4,581
    
    
    $
    5,101Property operations
    
    
    981
    
    
    
    3,087
    
    
    
    3,582790
    
    
    
    1,494
    
    
    
    1,519Interest Income
    
    
    
    
    
    
    462
    
    
    
    ExpensesInterest
    
    
    556
    
    
    
    2,987
    
    
    
    3,457Depreciation
    
    
    323
    
    
    
    740
    
    
    
    1,117879
    
    
    
    3,727
    
    
    
    4,574Net income (loss) from discontinued operations
    
    
    (89
    )
    
    
    (1,771
    )
    
    
    (3,055
    )Gain on sale of real estate
    
    
    5,473
    
    
    
    3,824
    
    
    
    6,769Equity in gain on sale of real estate by equity
investees
    
    
    
    
    
    
    
    
    
    
    383Net income (loss) from discontinued operations
    
    $
    5,384
    
    
    $
    2,053
    
    
    $
    4,097
 55




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 16. QUARTERLY DATA The following is a tabulation of quarterly results of operations for the years 2004, 2003 and 2002
(unaudited). Three Months Ended2004
    
    March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Rents
    
    $
    1,448
    
    
    $
    1,469
    
    
    $
    1,428
    
    
    $
    1,560Property expense
    
    
    842
    
    
    
    764
    
    
    
    902
    
    
    
    621Operating income
    
    
    606
    
    
    
    705
    
    
    
    526
    
    
    
    939Interest income
    
    
    598
    
    
    
    605
    
    
    
    1,017
    
    
    
    1,105Income (loss) in equity
partnerships
    
    
    (1
    )
    
    
    11
    
    
    
    (20
    )
    
    
    7Other expense
    
    
    1,681
    
    
    
    1,469
    
    
    
    1,228
    
    
    
    1,612Net loss from continuing
operations
    
    
    (478
    )
    
    
    (148
    )
    
    
    295
    
    
    
    439Discontinued operations
    
    
    3,131
    
    
    
    466
    
    
    
    15
    
    
    
    1,772Net income (loss)
    
    $
    2,653
    
    
    $
    318
    
    
    $
    310
    
    
    $
    2,211Earnings per shareNet income (loss)
    
    $
    1.91
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    1.59
 Three Months Ended2003
    
    March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Rents
    
    $
    1,319
    
    
    $
    1,297
    
    
    $
    1,321
    
    
    $
    1,287Property expense
    
    
    670
    
    
    
    729
    
    
    
    873
    
    
    
    1,059Operating income
    
    
    649
    
    
    
    568
    
    
    
    448
    
    
    
    228Recovery of A/R written off
    
    
    
    
    
    
    1,569
    
    
    
    
    
    
    
    Interest income
    
    
    
    
    
    
    614
    
    
    
    12
    
    
    
    Income (loss) in equity
partnerships
    
    
    (15
    )
    
    
    
    
    
    
    (13
    )
    
    
    21Other expense
    
    
    1,086
    
    
    
    1,747
    
    
    
    969
    
    
    
    550Net loss from continuing
operations
    
    
    (452
    )
    
    
    1,004
    
    
    
    (522
    )
    
    
    (301
    )Discontinued operations
    
    
    (546
    )
    
    
    (372
    )
    
    
    (455
    )
    
    
    3,426Net income (loss)
    
    $
    (998
    )
    
    $
    632
    
    
    $
    (977
    )
    
    $
    3,125Earnings per shareNet income (loss)
    
    $
    (0.69
    )
    
    $
    0.44
    
    
    $
    (.68
    )
    
    $
    2.17
 56




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 16. QUARTERLY DATA(Continued) Three Months Ended2002
    
    March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Rents
    
    $
    1,271
    
    
    $
    1,280
    
    
    $
    1,444
    
    
    $
    1,303Property expense
    
    
    557
    
    
    
    618
    
    
    
    854
    
    
    
    719Operating income
    
    
    714
    
    
    
    662
    
    
    
    590
    
    
    
    584Interest income
    
    
    37
    
    
    
    310
    
    
    
    185
    
    
    
    (262
    )Income (loss) in equity
partnerships
    
    
    (17
    )
    
    
    48
    
    
    
    60
    
    
    
    771Other expense
    
    
    2,076
    
    
    
    1,184
    
    
    
    724
    
    
    
    1,710Net income (loss) from
continuing operations
    
    
    (1,342
    )
    
    
    (164
    )
    
    
    111
    
    
    
    (617
    )Discontinued operations
    
    
    6,415
    
    
    
    (723
    )
    
    
    (1,352
    )
    
    
    (243
    )Net income (loss)
    
    $
    5,073
    
    
    $
    (887
    )
    
    $
    (1,241
    )
    
    $
    (860
    )Earnings per shareNet income (loss)
    
    $
    3.53
    
    
    $
    (0.62
    )
    
    $
    (0.86
    )
    
    $
    (0.60
    )
 In the first quarter of 2004, the Treehouse (San Antonio) Building was sold and $3.1 million
gain on sale was recognized. In the second quarter of 2004, Treehouse (Irving) Building was sold
and $150,000 deferred gain on sale was recognized. In the third quarter of 2004, Akard Building
was sold and $427,000 gain on sale was recognized. In the fourth quarter of 2004, Frankel Land and
Yeager Building were sold. $16,000 gain was recognized on the sale of Frankel Land, and $1.9
million gain was recognized on the sale of Yeager Building. NOTE 17. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY Olive Litigation.In February 1990, IORI, together with National Income Realty Trust, Continental
Mortgage and Equity Trust, which subsequently merged with and into TCI, 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.(the Olive Litigation), 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), which was
amended on January 27, 1997 by Amendment to the Modification effective January 9, 1994 (the First
Amendment). 57




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 17. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY(Continued) In October 2000, plaintiffs counsel asserted that a stock option agreement to purchase TCI shares
(which was entered into by IORI and an affiliate of IORI, ARI, in October 2000 with an investment
fund) 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 First 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 was appealed
to the United States Court of Appeals for the Ninth Circuit by IORI and TCI. On October 23, 2001, IORI, TCI and ARI jointly announced a preliminary agreement with the
plaintiffs legal counsel for complete settlement of all disputes in the lawsuit. In February
2002, the court granted final approval of the proposed settlement (the Second Amendment). Under
the Second Amendment, the appeal was dismissed and ARI agreed to either (i) acquire all of the
outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI
preferred stock or (ii) make a tender offer for all of the outstanding common shares of IORI and
TCI not currently owned by ARI. At the time, IORI had the same board as TCI and the same advisor
as TCI and ARI. Earl D. Cecil and Ted P. Stokely who served as Directors of IORI and TCI, were
also directors of ARI. On November 15, 2002, ARI commenced, through subsidiaries, a tender offer for shares of common
stock of TCI and IORI. The price per share was $17.50 for TCI shares and $19.00 for IORI shares.
The tender offers were completed on March 19, 2003. ARI acquired 265,036 shares of IORI (which
were subsequently contributed to a subsidiary and later acquired by SWI) and 1,213,226 TCI shares.
The completion of the tender offer fulfilled the obligations under the Second Amendment and the
Olive Litigation was dismissed with prejudice. Liquidity.Management anticipates that IORI will generate excess cash from operations in 2005 due
to increased rental rates and occupancy 58




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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued NOTE 17. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY(Continued) at its properties, however, such excess may not be sufficient to discharge all of IORIs debt
obligations as they mature. Management intends to selectively sell income producing assets,
refinance real estate and/or 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. 59




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SCHEDULE III INCOME OPPORTUNITY REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2004 Life onWhichDepreciationCost
    
    
    Gross Amount
    
    
    Accumu-
    
    
    
    
    
    
    
    
    
    
    in LatestInitial Cost
    
    
    Capitalized
    
    
    Carried at End of Year(1)
    
    
    lated
    
    
    Date of
    
    
    
    
    
    
    StatementEncum-
    
    
    
    
    
    
    Building &
    
    
    Subsequent to
    
    
    
    
    
    
    Building &
    
    
    
    
    
    
    Depreci-
    
    
    Construc-
    
    
    Date
    
    
    of OperationProperty/Location
    
    brances
    
    
    Land
    
    
    Improvements
    
    
    Acquisition
    
    
    Land
    
    
    Improvements
    
    
    Total
    
    
    ation
    
    
    tion
    
    
    Acquired
    
    
    is Computed(dollars in thousands)Properties Held For Investment
ApartmentsBrighton Court, Midland, TX
    
    $
    2,843
    
    
    $
    339
    
    
    $
    3,051
    
    
    $
    
    
    
    $
    339
    
    
    $
    3,051
    
    
    $
    3,390
    
    
    $
    344
    
    
    
    1983
    
    
    
    06/00
    
    
    40 yearsDel Mar, Midland, TX
    
    
    2,725
    
    
    
    324
    
    
    
    2,919
    
    
    
    
    
    
    
    324
    
    
    
    2,919
    
    
    
    3,243
    
    
    
    328
    
    
    
    1983
    
    
    
    06/00
    
    
    40 yearsEnclave, Midland, TX
    
    
    2,882
    
    
    
    324
    
    
    
    2,919
    
    
    
    
    
    
    
    324
    
    
    
    2,919
    
    
    
    3,243
    
    
    
    328
    
    
    
    1983
    
    
    
    06/00
    
    
    40 yearsMeridian, Midland, TX
    
    
    4,502
    
    
    
    1,138
    
    
    
    4,553
    
    
    
    
    
    
    
    1,138
    
    
    
    4,553
    
    
    
    5,691
    
    
    
    569
    
    
    
    1983
    
    
    
    12/99
    
    
    40 yearsSignature Place, Midland, TX
    
    
    2,410
    
    
    
    265
    
    
    
    2,388
    
    
    
    
    
    
    
    265
    
    
    
    2,388
    
    
    
    2,653
    
    
    
    269
    
    
    
    1983
    
    
    
    06/00
    
    
    40 yearsSinclair Place, Midland, TX
    
    
    2,054
    
    
    
    221
    
    
    
    1,990
    
    
    
    
    
    
    
    221
    
    
    
    1,990
    
    
    
    2,211
    
    
    
    224
    
    
    
    1983
    
    
    
    06/00
    
    
    40 yearsOffice Buildings2010 Valley View, Farmers
Branch, TX
    
    
    2,426
    
    
    
    120
    
    
    
    479
    
    
    
    2,979
    
    
    
    120
    
    
    
    3,458
    
    
    
    3,578
    
    
    
    1,423
    
    
    
    1998
    
    
    
    09/97
    
    
    5-40 yearsParkway Ctr, Farmers Branch, TX
    
    
    1,631
    
    
    
    333
    
    
    
    3,511
    
    
    
    
    
    
    
    333
    
    
    
    3,511
    
    
    
    3,844
    
    
    
    88
    
    
    
    1979
    
    
    
    12/03
    
    
    5-40 yearsIndustrial WarehouseEagle Crest, Farmers Branch, TX
    
    
    
    
    
    
    2,129
    
    
    
    1,906
    
    
    
    
    
    
    
    2,129
    
    
    
    1,906
    
    
    
    4,035
    
    
    
    47
    
    
    
    
    
    
    
    12/03
    
    
    5-40 yearsLand3 HickoryCtr, FarmersBranch, TX
    
    
    
    
    
    
    2,804
    
    
    
    
    
    
    
    296
    
    
    
    3,100
    
    
    
    
    
    
    
    3,100
    
    
    
    
    
    
    
    
    
    
    
    $
    21,473
    
    
    $
    7,997
    
    
    $
    23,716
    
    
    $
    3,275
    
    
    $
    8,293
    
    
    $
    26,695
    
    
    $
    34,988
    
    
    $
    3,620
 60




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SCHEDULE III 
(Continued) INCOME OPPORTUNITY REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION 2004
    
    
    2003
    
    
    2002(dollars in thousands)Reconciliation of Real EstateBalance at January 1,
    
    $
    56,367
    
    
    $
    82,252
    
    
    $
    95,190AdditionsAcquisitions and Improvements
    
    
    
    
    
    
    15,365
    
    
    
    677DeductionsRetirements
    
    
    
    
    
    
    
    
    
    
    (462
    )Sale of real estate
    
    
    (21,379
    )
    
    
    (41,250
    )
    
    
    (13,153
    )Balance at December 31,
    
    $
    34,988
    
    
    $
    56,367
    
    
    $
    82,252Reconciliation of Accumulated DepreciationBalance at January 1,
    
    $
    6,002
    
    
    $
    7,502
    
    
    $
    7,875AdditionsDepreciation
    
    
    1,063
    
    
    
    1,552
    
    
    
    1,867DeductionsRetirements
    
    
    
    
    
    
    
    
    
    
    Sale of real estate
    
    
    (3,445
    )
    
    
    (3,052
    )
    
    
    (2,240
    )Balance at December 31,
    
    $
    3,620
    
    
    $
    6,002
    
    
    $
    7,502
 61




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SCHEDULE IV INCOME OPPORTUNITY REALTY INVESTORS, INC. MORTGAGE LOANS ON REAL ESTATE 2004
    
    
    2003
    
    
    2002(dollars in thousands)Balance at January 1,
    
    $
    45,531
    
    
    $
    
    
    
    $
    500AdditionsNew mortgage loans
    
    
    8,655
    
    
    
    45,531
    
    
    
    7,109Interest receivable on mortgage loans
    
    
    913
    
    
    
    
    
    
    
    DeductionsAmounts charged off
    
    
    (188
    )
    
    
    
    
    
    
    (1,568
    )Collections of principal by IORI
    
    
    
    
    
    
    
    
    
    
    (500
    )Collections of principal by affiliates
    
    
    
    
    
    
    
    
    
    
    (5,541
    )Balance at December 31,
    
    $
    54,911
    
    
    $
    45,531
    
    
    $
    
 62




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE Effective July 1, 2003, the Board of Directors of the Company engaged Farmer, Fuqua & Huff, P.C. as
the independent accountant to audit the Companys financial statements for the fiscal year ending
December 31, 2003. During the Companys two most recent fiscal years ended December 31, 2002 and
any subsequent interim period, the Company did not consult with Farmer, Fuqua & Huff, P.C. or any
of its members about the application of accounting principles to any specified transaction or any
other matter. The engagement effective July 1, 2003 of Farmer, Fuqua & Huff, P.C. as a new
independent accountant for the Company necessarily resulted in the termination or dismissal of the
then principal accountant which audited the Companys financial statements for the past two fiscal
years ended December 31, 2001 and 2002, BDO Seidman, LLP. BDO Seidman, LLP made a fee proposal
estimate the Company for 2003 which was greater than the fee proposal of Farmer, Fuqua & Huff, P.C.
for the same work. During the Companys two most recent fiscal years and any subsequent interim
period through July 1, 2003, BDO Seidman, LLPs report on the Companys financial statements for
those two years did not contain an adverse opinion or disclaimer of opinion, nor was such opinion
qualified or modified as to uncertainty, audit scope or accounting principles, and no disagreement
existed between the Company and BDO Seidman, LLP concerning any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. The decision to change
accountants was approved by the then Audit Committee of the Board of Directors of the Company which
then consisted of Messrs. Ted P. Stokely, Earl D. Cecil (who resigned as a director on February 29,
2004) and Martin L. White (who resigned as a director on March 15, 2004), Effective June 1, 2004, Farmer, Fuqua & Huff, P.C. was engaged by the Audit Committees of two
affiliates of the Company to serve as those entities independent accountant for the fiscal year
ending December 31, 2004. By virtue of the other assignments for Farmer, Fuqua & Huff, P.C. with
those affiliates of IOT, Farmer, Fuqua & Huff suggested that perhaps another firm should handle the
audit of IOTs financial statements for the fiscal year ending December 31, 2004 and in fact
recommended Swalm & Associates, P.C. The approval of the engagement of Swalm & Associates, P.C.
was given by the Audit Committee of the Board of Directors of IOT effective June 1, 2004, and a
Current Report on Form 8-K for event occurring May 31, 2004 was filed with the Securities and
Exchange Commission (the SEC). However, it was discovered that Swalm & Associates, P.C. had not
completed the registration process with the Public Company Accounting Oversight Board (PCAOB).
Accordingly, on June 17, 2004, the Audit Committee of the Board of Directors (consisting of Messrs.
Allard, Jakuszewski and Larsen) re-engaged Farmer, Fuqua & Huff, P.C. as the independent
accountants for the Company. During the short period of time of engagement of Swalm & Associates,
P.C. (June 1, 2004 through June 17, 2004), Swalm & Associates, P.C. performed no work for the
Company. In
addition, during the Companys two most recent fiscal years ended December 31, 2003, and any
subsequent interim period 63




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through May 31, 2004, the Company did not consult with Swalm &
Associates, P.C. or any of its members about the application of accounting principles to any
specified transaction or any other matter. On July 19, 2004, the Company received notification that Swalm & Associates, P.C.s registration
with the PCAOB had become effective. Effective July 22, 2004, the Audit Committee (consisting of
Messrs. Allard, Jakuszewski and Larsen) of the Board of Directors re-engaged the Plano, Texas firm
of Swalm & Associates, P.C. as the independent accountant to audit the Companys financial
statements for the fiscal year ending December 31, 2004. The engagement effective July 22, 2004 of
Swalm & Associates, P.C. as the independent accountant for the Company necessarily resulted in the
termination or dismissal of the principal accountant which had audited the Companys financial
statements for the fiscal year ended December 31, 2003, Farmer, Fuqual & Huff, P.C. During the
Companys most recent fiscal year and any subsequent interim period, Farmer, Fuqua & Huff, P.C.
report on the Companys financial statements for that year did not contain an adverse opinion or
disclaimer of opinion nor was such opinion qualified or modified as to uncertainty, audit scope or
accounting principles, and no disagreement existed between the Company and Farmer, Fuqua & Huff,
P.C. concerning any matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure. 
 ITEM 9A. CONTROLS AND PROCEDURES IORI, under the supervision and with the participation of its management, including IORIs Acting
Principal Executive Officer and Principal Accounting Officer, evaluated the effectiveness of the
design and operation of IORIs disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act) as of the end of the period covered by this report. Based on
that evaluation, IORIs Acting Principal Executive Officer and Principal Accounting Officer
concluded that IORIs disclosure controls and procedures were effective at December 31, 2004 to
ensure that information relating to IORI and its consolidated subsidiaries required to be disclosed
in IORIs reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms.
There has been no change in IORIs internal control over financial reporting during the quarter
ended December 31, 2004, that has materially affected or is reasonably likely to materially affect
IORIs internal control over financial reporting. 
 ITEM 9B. OTHER INFORMATION Not Applicable. 64




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The affairs of 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. After December 31, 2003, a number of changes occurred in the composition of the Board of Directors
of IORI, the creation of certain Board committees, the adoption of Committee charters, the adoption
of a Code of Ethics for Senior Financial Officers, and the adoption of Guidelines for Director
Independence. Also, the composition of the members of the Board of Directors changed with the
resignations of Henry A. Butler (July 1, 2003), Earl D. Cecil (February 29, 2004) and Martin L.
White (March 15, 2004), as well as the election of Ken L. Joines as a director in July 2003, and
independent directors, David E. Allard and Peter L. Larsen on February 20, 2004, and Robert A.
Jakuszewski on March 16, 2004. It is the Boards objective that a majority of the Board consist of independent directors. For a
director to be considered independent, the Board must determine that the Director does not have any
direct or indirect material relationship with IORI. The Board has established guidelines to assist
it in determining director independence which conform to, or are more exacting than, the
independence requirements in the American Stock Exchange listing rules. The independence
guidelines are set forth in IORIs Corporate Governance Guidelines. The text of this document
has been posted on IORIs internet website at http://www.incomeopp-realty.com and is available in
print to any stockholder who requests it. In addition to applying these guidelines, the Board will
consider all relevant facts and circumstances in making an independent determination. IORI has adopted a code of conduct that applies to all Directors, officers, and employees,
including our principal executive officer, principal financial officer and principal accounting
officer. Stockholders may find our code of conduct on our website by going to our website address
at http://www.incomeopp-realty.com. We will post any amendments to the code of conduct, as well as
any waivers that are required to be disclosed by the rules of the SEC or the AMEX on our website. Our Board of Directors has adopted Charters for our Audit, Compensation and Governance and
Nominating Committees of the Board of Directors. Stockholders may find these documents on our
website by going to the website address at
http://www.incomeopp-realty.com.You may also obtain a
printed copy of the materials referred to by
contacting us at the 65




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following address: Income Opportunity Realty Investors, Inc.
Attn: Investor Relations
1755 Wittington Place, Suite 340
Dallas, Texas 75234
Telephone: 214-750-5800 The Audit Committee of the Board of Directors is an audit committee for the purposes of
Section 3(a)(58) of the Securities Exchange Act of 1934. The members of that Committee are David
E. Allard (Chairman), Robert A. Jakuszewski and Peter L. Larsen. Mr. Allard, a member of the Audit
Committee, is qualified as an audit committee financial expert within the meaning of SEC
regulations, and the Board has determined that he has accounting and related financial management
expertise within the meaning of the listing standards of the AMEX. All of the members of the Audit
Committee meet the independence and experience requirements of the listing standards of the AMEX. All members of the Audit Committee, Compensation Committee, and the Governance and Nominating
Committee must be independent directors. Members of the Audit Committee must also satisfy
additional independence requirements, which provide (i) that they may not accept, directly or
indirectly, any consulting, advisory, or compensatory fee from IORI or any of its subsidiaries
other than their Directors compensation (other than in their capacity as a member of the Audit
Committee, the Board of Directors, or any other committee of the Board), and (ii) no member of the
Audit Committee may be an affiliated person of IORI or any of its subsidiaries, as defined by the
Securities and Exchange Commission. The current Directors of IORI are listed below, together with their ages, terms of service, all
positions and offices with IORI or its advisor, SWI, 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 SWI 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 SWI, 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 71, Director (Affiliated) (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 66




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corporation; General Manager (since April 2002) of
Unified Housing Foundation, Inc., a nonprofit corporation; Director and Chairman of the
Board of ARI (since November 2002); and Director (since April 1990) and Chairman of the
Board (since January 1995) of TCI. DAVID E. ALLARD: Age 46, Director (Independent) (Elected on February 20, 2004) Chief Financial Officer (Since February 2005) of Digital Witness, a Dallas Texas based
development stage software provider; Executive Vice President (April 2003 to February
2005) of Internet America, Inc., an internet access provider; Chief Operating Officer
(2000 to 2002) of Primedia Workplace Learning, a workplace training business; Executive
Vice President and Chief Financial Officer (1999 to 2000) of E-Train, a provider of online
job training and seminars; Special Advisor (1998 to 1999) of Thayer Capital Partners;
Chief Operating Officer (1997 to 1998) of Careertrack, Inc. a TCI Subsidiary; Senior Vice
President and Vice President  Business Development (1995 to 1996) of Westcott
Communications, Inc.; Partner (1985 to 1992) of Farmer and Allard, a CPA firm; Audit
Manager/CPA (1983 to 1985) of Grant Thornton, a CPA firm; Audit Senior/CPA of Laventhol &
Horwath, a CPA firm. ROBERT A. JAKUSZEWSKI: Age 42, Director (Independent) (Elected March 22, 2004) Vice President  Sales & Marketing of New Horizons Communications (since September 1998);
Consultant for New Horizons Communications (January 1998 to August 1998); Regional Sales
Manager of Continental Funding (May 1996 to July 1998); Territory Manager of Sigvaris Inc.
(August 1992 to April 1996); Senior Sales Representative (Mead Johnson Nutritional Division,
USPNG (January 1998 to July 1992); Sales Representative of Muro Pharmaceutical, Inc. (April
1986 to December 1987). KEN L. JOINES: Age 37, Director (Affiliated) (since July 2003) General Manager, Vice President, Secretary and Treasurer (since March 2001) of SWI, an
administrative services company. Owner/Operator of Joines & Associates, a financial
consulting company, subcontractor of Whitson Management Group (since September 1998).
Financial consultant with Whitson Financial/Whitson Management Group (July 1996  September
1998). PETER L. LARSEN: Age 63, Director (Independent) (Elected on February 20, 2004). 67




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Mr. Larsen has been involved in the commercial real estate industry since 1972; Senior
Vice President  Acquisitions (1996 to 2002) of Tarragon Corporation (formerly Tarragon
Realty Investors, Inc.) and its predecessors, a publicly-held real estate entity, the
common stock of which is traded on the NASDAQ National Market; since 1992. Director of
four non-profit corporations that own 545 apartment units and are overseeing the
development of a Catholic Retirement Center in Coppell, Texas. Board Committees The Board of Directors held 12 meetings during 2004. 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. The Board of Directors has standing Audit, Compensation and Governance and Nominating Committees.
The Audit Committee was formed on February 20, 2003, and its function is to review IORIs operating
and accounting procedures. A Charter of the Audit Committee has also been adopted by the Board.
The current members of the Audit Committee, all of whom are independent within the meaning of the
SEC Regulations, the listing standards of the AMEX and IORIs Corporate Governance Guidelines, are
Messrs. Allard, Jakuszewski and Larsen. Mr. David E. Allard, a member of the Committee is
qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the
Board has determined that he has accounting and related financial management expertise within the
meaning of the listing standards of the AMEX. The Governance and Nominating Committee is responsible for developing and implementing policies and
practices relating to corporate governance, including reviewing and monitoring implementation of
IORIs Corporate Governance Guidelines. In addition, the Committee develops and reviews background
information on candidates for the Board and makes recommendations to the Board regarding such
candidates. The Committee also prepares and supervises the Boards annual review of director
independence and the Boards performance self-evaluation. The Charter of the Governance and
Nominating Committee was adopted on March 22, 2004. The members of the Committee are Messrs.
Larsen (Chairman), Allard and Jakuszewski. The Board has also formed a Compensation Committee of the Board of Directors, adopted a Charter for
the Compensation Committee on March 22, 2004, and selected Messrs. Larsen (Chairman), Allard and
Jakuszewski as the members of such Committee. The members of the Board of Directors on the date of this Report and the Committees of the Board on
which they serve are identified below: 68




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Governance andNominatingAudit Committee
    
    Committee
    
    Nominating CommitteeTed P. StokleyDavid E. Allard
    
    þ
    
    þ
    
    þRobert A. Jakuszewski
    
    þ
    
    þ
    
    þKen L. JoinesPeter L. Larsen
    
    þ
    
    þ
    
    þ
 During February 2004, the Board adopted it Corporate Governance Guidelines. The Guidelines
adopted by the Board meet or exceed the new listing standards adopted during the year by the AMEX.
Pursuant to the Guidelines, the Board undertook its annual review of director independence, and
during this review, the Board considered transactions and relationships between each director or
any member of his or her immediate family and IORI and its subsidiaries and affiliates, including
those reported under Certain Relationships and Related Transactions below. The Board also examined
transactions and relationship between directors or their affiliates and members of IORIs senior
management or their affiliates. As provided in the Guidelines, the purpose of such review was to
determine whether such relationships or transactions were inconsistent with the determination that
the director is independent. Executive Officers The following persons currently serve as executive officers of IORI: Mark Branigan, Executive Vice
President  Multi-Family Construction; Louis J. Corna Executive Vice President  General
Counsel/Tax Counsel and Secretary; and Robert N. Crouch II, Acting Principal Executive Officer,
Executive Vice President and Chief Financial Officer. 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. MARK W. BRANIGAN: Age 50, Executive Vice President  Multi-Family Construction (since September
2004); Executive Vice President  Residential (June 2001 to September 2004); Executive Vice
President and Chief Financial Officer (August 2000 to June 2001), 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  Multi-Family Construction (since September 2004); Executive
Vice President  Residential (June 2001 to September 2004); Executive Vice President and
Chief Financial Officer (August 2000 to June 2001); Vice President  Director of
Construction (August 1999 to August 2000) of TCI, ARI and BCM; Director (September 2000 to
June 2001) of TCI and ARI; Executive Vice President  Residential (since June 2003) of
Prime and PIAMI; and Executive Vice President  Residential Asset Management 69




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(January 1992
to October 1997) of American Realty Trust, Inc. (ART); Real Estate Consulting (November
1997 to July 1999). LOUIS J. CORNA: Age 57, Executive Vice President  General Counsel/Tax Counsel and Secretary (as
of February 2004), Executive Vice President  Tax (since October 2001), Executive Vice President,
Chief Financial Officer and Tax Counsel (June 2001 to October 2001), and Senior Vice President -
Tax (December 2000 to June 2001). Executive Vice President  General Counsel/Tax Counsel and Secretary (as of February 2004),
Executive Vice President  Tax (since October 2001), Executive Vice President and Chief
Financial Officer (June 2001 to October 2001), and Senior Vice President  Tax (December
2000 to June 2001) of BCM, ARI and TCI; Private Attorney (January 2000 to December 2000);
Vice President  Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global,
Inc.; and Vice President  Taxes (July 1991 to February 1998) of Whitman Corporation. ROBERT NEIL CROUCH II: Age 52, Acting Principal Executive Officer, Executive Vice President and
Chief Financial Officer (since September 2004) Mr. Crouch was Corporate Controller (from September 2002 to September 2004) of Apptricity
Corporation, a small Dallas, Texas-based software development company; prior thereto
(January 1999 to September 2002), he was Corporate Controller of Attenza, Inc., a Dallas,
Texas web-based computer self-help company. Mr. Crouch has been a certified public
accountant since 1981. In addition to the foregoing officers, IORI has several vice presidents and assistant secretaries
who are not listed herein. Code of Ethics IORI has adopted a code of ethics entitled Code of Business Conduct and Ethics that applies to
all directors, officers, and employees (including those of the contractual Advisor to IORI. In
addition, IORI has adopted a code of ethics entitled Code of Ethics for Senior Financial Officers
that applies to the principal executive officer,
president, principal financial officer, chief financial officer, principal accounting officer, and
controller. The text of these documents has been posted on IORIs internet website at
http://www.incomeopp-realty.com and are available in print to any stockholder who requests them. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Under the securities laws of the United States, IORIs Directors, 70




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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 2002. 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. SWI has served as IORIs advisor since June 2003. SWI is 100% owned by Gene E. Phillips. Mr.
Phillips is a Chairman, President, Chief Executive Officer, and a Director of SWI, and is involved
in daily consultation with the officers of SWI and has significant influence over the conduct of
SWIs business, including the rendering of advisory services and the making of investment decisions
for itself and for IORI. Mr. Joines, a director of IORI since July 2003, is an officer and a
director of SWI. Under the Advisory Agreement, SWI 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. SWI 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 SWI 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 SWI shall be deemed to be in a fiduciary relationship to the stockholders; contains a
broad standard governing SWIs liability for losses by IORI; and contains guidelines for SWIs
allocation of investment opportunities as among itself, IORI and other entities it advises. The Advisory Agreement provides for SWI to be responsible for the day- 71




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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 SWI 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, SWI or an affiliate of SWI 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 SWI or any affiliate of SWI 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 SWI or any affiliate of SWI 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 SWI or an affiliate of SWI 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. 72




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Under the Advisory Agreement, SWI or an affiliate of SWI 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 SWI or an affiliate of SWI without the approval of the Board of Directors. No fee shall be
paid on loan extensions. Under the Advisory Agreement, SWI is to receive reimbursement of certain expenses incurred by it,
in the performance of advisory services to IORI. Under the Advisory Agreement all or a portion of the annual advisory fee must be refunded by SWI 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. SWI was not required to refund any amount of the 2004 advisory fee paid
under this provision. Additionally, if management were to request that SWI render services other than those required by
the Advisory Agreement, SWI or an affiliate
of SWI 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.,
an affiliate of BCM, to provide management for IORIs properties and, as discussed below, under
Real Estate Brokerage IORI has engaged Regis Realty I, LLC, a related party, on a non-exclusive
basis to provide brokerage services for IORI. SWI may assign the Advisory Agreement only with the
prior consent of IORI. The directors and principal officers of SWI are set forth below. Gene E. Philips:
    
    Chairman, President, Chief Executive Officer, and DirectorKen L. Joines:
    
    Vice President, Treasurer, Secretary, and Director
 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 6% 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 partner of Triad is Highland Realty Services, 73




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Inc. (Highland).
Triad subcontracted the property-level management and leasing of 5 of IORIs commercial properties
to Regis, which is a company owned by Highland, until December 2002. Regis was entitled to receive
property and construction management fees and leasing commissions in accordance with its
property-level management agreement with Triad, until December 2002. Beginning January 1, 2003,
Regis I provides these services. The sole member of Regis I is Highland. Real Estate Brokerage Regis also provided real estate brokerage services to IORI (on a non-exclusive basis), until
December 2002. Regis was entitled to receive a real estate commission for property purchases and
sales in accordance with the following 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
million-$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 million-$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. Beginning January 1,
2003, Regis I provides these services. The sole member of Regis I is Highland. 
 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 PIAMI, a related party, are
compensated by PIAMI. Such executive officers perform a variety of services for PIAMI and the
amount of their compensation is determined solely by PIAMI. See ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANTThe Advisor for a more detailed discussion of the
compensation payable to SWI/PIAMI. The only remuneration paid by IORI is to the Directors who are not officers or directors of SWI.
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 74




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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 2004, $75,005 was paid to the Independent Directors in total Directors fees for all
services including the annual fee for service during the period January 1, 2004, through December
31, 2004. Those fees by directors are as follows: Earl D. Cecil, $7,500 (who resigned on February
29, 2004); Martin L. White (who resigned on March 15, 2004) $7,500; Ted P. Stokely, $16,500; David
E. Allard, $14,940; Peter L. Larsen, $14,690; and Robert A. Jakuszewski, $13,875. Performance Graph The following performance graph compares the cumulative total stockholder return on IORIs shares
of Common Stock with the Dow Jones
US Total Market Index (DJ Total Market Index) and the Dow Jones Real Estate Investment Index (DJ
Real Estate Index). The comparison assumes that $100 was invested on December 31, 1999, 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. 75




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(PERFORMANCE GRAPH) 76




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 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 18, 2005. Amount andNature of
    
    ApproximateBeneficial
    
    Percent ofName and Address of Beneficial Owner
    
    Ownership
    
    Class (1)Syntek West, Inc.
1755 Wittington Place
Suite 340
Dallas, Texas 75234
    
    
    794,223
    
    
    
    57.2
    %Transcontinental Realty Investors, Inc.
    
    
    345,728
    
    
    
    24.9
    %1800 Valley View Lane
Suite 300
Dallas, Texas 75234
   (1) Percentages are based upon 1,389,345 shares of Common Stock outstanding at March 18, 2005. 77




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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 18, 2005. Amount andNature of
    
    
    ApproximateBeneficial
    
    
    Percent ofName of Beneficial Owner
    
    Ownership
    
    
    Class(1)David E. Allard
    
    
    -0-
    
    
    
    0.0
    %Ken L. Joines
    
    
    794,223
    (2)
    
    
    57.2
    %Henry A. Butler
    
    
    345,728
    (2)
    
    
    24.9
    %Robert N. Crouch II
    
    
    -0-
    
    
    
    0.0
    %Louis J. Corna
    
    
    345,728
    (3)
    
    
    24.9
    %Sharon Hunt
    
    
    345,728
    (3)
    
    
    24.9
    %Mark W. Branigan
    
    
    345,728
    (3)
    
    
    24.9
    %Robert A. Jakuszewski
    
    
    -0-
    
    
    
    0.0
    %Scott T. Lewis
    
    
    345,728
    (3)
    
    
    24.9
    %Peter L. Larsen
    
    
    -0-
    
    
    
    0.0
    %Ted R. Munselle
    
    
    345,728
    (3)
    
    
    24.9
    %Gene E. Phillips
    
    
    794,223
    (2)
    
    
    57.2
    %Martin L. White
    
    
    345,728
    (3)
    
    
    24.9
    %All Directors and Executive Officers as
a group (13 individuals)
    
    
    1,139,951
    (2)(3)
    
    
    82.0
    %
   (1)
    
    Percentage is based upon 1,389,345 shares of Common Stock outstanding at March 18, 2005.(2)
    
    Includes 794,223 shares owned by SWI of which the directors and executive officers of SWI
(Messrs. Joines and Phillips) may be deemed to be the beneficial owners by virtue of their
positions as directors and executive officers of SWI. 78




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(3)
    
    Includes 345,728 shares owned by TCI of which the directors and executive officers of TCI
may be deemed to be the beneficial owners by virtue of their positions as directors and
executive officers of TCI. Each of the directors (Messrs. Butler, Munselle, Stokely, and
White, and Mrs. Hunt) and executive officers (Messrs. Branigan, Corna, and Lewis) of TCI
disclaim beneficial ownership of such shares. 
 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. BCM is a company
of which Messrs. Branigan and Corna serve as executive officers. Similarly, Messrs. Branigan and
Corna serve as executive officers of Prime Income Asset Management, Inc. and Prime Income Asset
Management, LLC, (Prime), the advisor to ARI and TCI since October 1, 2003. BCM and Prime are
indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips is not an officer
or director of BCM or Prime, but serves as a representative of the trust, is indirectly involved in
daily consultation with the officers of BCM and Prime and has significant influence over the
conduct of BCM and Primes business, including the rendering of advisory services and the making of
investment decisions for itself and for IORI. On June 30, 2003, BCM ended its advisory agreement
with IORI. SWI has served as IORIs advisor since July 2003. SWI is 100% owned by Gene E.
Phillips. Mr. Phillips is Chairman, President, Chief Executive Officer, and a Director of SWI, and
is involved in daily consultation with the officers of SWI and has significant influence over the
conduct of SWIs business, including the rendering of advisory services and the making of
investment decisions for itself and for 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 partner of Triad is Highland. Triad subcontracted the property-level management and
leasing of five of IORIs commercial properties to Regis, which is a company owned by Highland,
until December 2002. Since January 1, 2003, Regis I provided this service. Affiliates of BCM have also provided real estate brokerage services for IORI, on a non-exclusive
basis, and received brokerage commissions in accordance with the brokerage agreement, until
December 2002. Since January 1, 2003, Regis I provided this service. Messrs. Mark W. Branigan and Louis J. Corna are employed by Prime, the sole member of which is
PIAMI, which is owned by Realty Advisors, Inc. (79%) and SWI (21%). Messrs. Ken L. Joines and
Robert N. Crouch II are employed by SWI. Messrs. Branigan and Corna, executive officer of IORI,
also serve as executive officer of ARI and TCI, and accordingly, owe 79




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fiduciary duties to those entities, as well as to IORI. Mr. Joines is the President and Mr. Ted P.
Stokely is the General Manager of Unified Housing Foundation, Inc., and they owe fiduciary duties
to this entity as well as to IORI. Mr. Stokely, who serves as a director of ARI and TCI, owes
fiduciary duties to TCI and ARI under applicable law. 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. On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental
Brewery Corporation (Brewery), a wholly-owned subsidiary of TCI, a related party, for $4.0
million for a reduction of intercompany debt in the same amount. Brewery owns the 19.96 acres of
land and the 133,000 sq. ft. Eagle Crest Warehouse Building in Farmers Branch, Texas. On December 18, 2003, IORI purchased 100% of the outstanding common shares of Treehouse-IR, a
wholly-owned subsidiary of TCI, for $7.5 million for a reduction of intercompany debt in the amount
of $2.4 million subject to mortgage lien in the amount of $5.1 million. Treehouse-IR owns the
153,072 sq. ft. Treehouse Apartments Building in Irving, Texas. On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental
Parkway Corporation (Parkway), a wholly-owned subsidiary of TCI, for $4.0 million for reduction
of intercompany debt in the amount of $2.4 million subject to mortgage lien in the amount of $1.6
million. Parkway owns the 28,374 sq. ft. Parkway Shopping Center in Dallas, Texas. On December 30, 2003, a Promissory Note in the amount of $6.3 million given by Humble to NLP was
assigned from ARI to IORI. On December 30, 2003, a Promissory Note in the amount of $2.0 million
given by Humble to NLP was assigned from ARI to IORI. These assignments were payments on certain
intercompany receivables due to IORI. On May 24, 2004, a Secured Promissory Note in the amount of $2,990,000 given by UHF for UHM to
Transcontinental Eldorado, Inc. was assigned from TCI to IORI as a partial payment for TCIs
repurchase of 100% of the outstanding common shares of Treehouse-IR from IORI. The sale price of
Treehouse-IR was $7.5 million. On September 30, 2004, a Secured Promissory Note in the amount of $1,222,500 given by UHF for
Unified Housing of Parkside Crossing, LLC to Regis I and the accrued interest receivable of
$112,878 were assigned from Regis I to IORI as a paydown of certain intercompany receivables
due to IORI. 80




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On September 30, 2004, a Secured Promissory Note in the amount of $1,053,616 given by UHF for
Unified Housing of Temple, LLC to Regis I and the accrued interest receivable of $98,338 were
assigned from Regis I to IORI as a paydown of certain intercompany receivables due to IORI. On September 30, 2004, a Secured Promissory Note in the amount of $835,658 given by UHF for Unified
Housing of Terrell, LLC to Regis I and the accrued interest receivable of $80,223 were assigned
from Regis I to IORI as a paydown of certain intercompany receivables due to IORI. On September 30, 2004, a Secured Promissory Note in the amount of $1,770,000 given by UHF for
Housing for Seniors of Lewisville, LLC, to Regis I and the accrued interest receivable of $174,640
were assigned from Regis I to IORI as a paydown of certain intercompany receivables due to IORI. As more fully described in ITEM 2. PROPERTIESReal Estate, IORI is a partner with TCI in Nakash
Income Associates and TCI Eton Square, L.P. TCI owns 345,728 shares of Common Stock of IORI
(approximately 24%). In 2004, IORI paid SWI $743,000 in advisory fees, $250,000 in net income fees, $518,000 in mortgage
brokerage and equity refinancing fees, and $120,000 in property and construction management fees
and leasing commissions, net of property management fees paid to subcontractors other than Regis.
In addition, from time-to-time, advances were made between IORI and SWI, and they have not had
specific repayment terms. At December 31, 2004, SWI had advanced to IORI $1.3 million, and IORI
had advanced to TCI $261,000. See NOTE 6. RELATED PARTY TRANSACTIONS for more details. 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. 81




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PART IV 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following tables sets forth the aggregate fees for professional services rendered to the
Company for the years 2004 and 2003 by the Companys principal accounting firms, BDO Seidman, LLP
(January 2002 to June 2003), Farmer Fuqua & Huff, P.C. (July 1, 2003 to December 31, 2003 and
January 1, 2004 to July 22, 2004) and Swalm & Associates, P.C. (July 22, 2004 to December 31,
2004): Type of Fees
    
    2004
    
    
    2003Audit Fees
    
    $
    55,274
    (a)
    
    $
    53,507
    (b)Audit-Related Fees
    
    
    0
    
    
    
    0Tax Fees
    
    
    2,000
    (a)
    
    
    2,000
    (b)All Other Fees
    
    
    0
    
    
    
    0Total Fees:
    
    $
    57,274
    
    
    $
    55,507
   (a)
    
    The amount of audit fees paid to Farmer, Fuqua &
Huff, P.C. for January 1, 2004 to July 2, 2004, was $48,274; the amount of audit fees paid to Swalm
& Associates, P.C. for July 22, 2004 through December 31, 2004 was $7,000. All tax fees for 2004
were paid to Farmer, Fuqual & Huff, P.C.(b)
    
    The amount of audit fees paid to BDO Seidman, LLP
for January to June 2003 was $10,269; the amount of audit fees paid to Farmer, Fuqua & Huff, P.C.
for July through December 2003 was $43,238. All tax fees for 2003 were paid to Farmer, Fuqua &
Huff, P.C. All services rendered by the principal auditors are permissible under applicable laws and
regulations and were pre-approved by either the Board of Directors or the Audit Committee, as
required by law. The fees paid the principal auditors for services described in the above table
fall under the categories listed below: Audit Fees. These are fees for professional services performed by the principal
auditor for the audit of the Companys annual financial statements and review of financial
statements included in the Companys 10-Q filings and services that are normally provided in
connection with statutory and regulatory filing or engagements. Audit-Related Fees. These are fees for assurance and related services performed by the
principal auditor that are 82




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reasonably related to the performance of the audit or review of the Companys financial
statements. These services include attestation by the principal auditor that are not
required by statute or regulation and consulting on financial accounting/reporting
standards. Tax Fees. These are for professional services performed by the principal auditor with
respect to tax compliance, tax planning, tax consultation, returns preparation and reviews
of returns. The review of tax returns includes the Company and its consolidated
subsidiaries. All Other Fees. These are fees for other permissible work performed by the principal
auditor that do not meet the above category descriptions. These services are actively monitored (as to both spending level and work content) by the Audit
Committee to maintain the appropriate objectivity and independence in the principal auditors core
work, which is the audit of the Companys consolidated financial statements. Under the Sarbanes-Oxley Act of 2002 (the SO Act), and the rules of the Securities and
Exchange Commission (the SEC), the Audit Committee of the Board of Directors is responsible
for the appointment, compensation and oversight of the work of the independent auditor. The
purpose of the provisions of the SO Act and the SEC rules for the Audit Committee role in
retaining the independent auditor is two-fold. First, the authority and responsibility for the
appointment, compensation and oversight of the auditors should be with directors who are
independent of management. Second, any non-audit work performed by the auditors should be
reviewed and approved by these same independent directors to ensure that any non-audit services
performed by the auditor do not impair the independence of the independent auditor. To
implement the provisions of the SO Act, the SEC issued rules specifying the types of services
that an independent may not provide to its audit client, and governing the Audit Committees
administration of the engagement of the independent auditor. As part of this responsibility,
the Audit Committee is required to preapprove the audit and non-audit services performed by the
independent auditor in order to assure that they do not impair the auditors independence.
Accordingly, the Audit Committee has adopted a preapproval policy of audit and non-audit
services (the Policy), which sets forth the procedures and conditions pursuant to which
services to be performed by the independent auditor are to be preapproved. Consistent with the
SEC rules establishing two different approaches to preapproving non-prohibited services, the
Policy of the Audit Committee covers Preapproval of audit services, audit-related services,
international administration tax services, non-U.S. income tax compliance services, pension and
benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the
beginning of each fiscal year, the Audit Committee will evaluate other 83




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known potential engagements of the independent auditor, including the scope of work proposed to
be performed and the proposed fees, and the approve or reject each service, taking into account
whether services are permissible under applicable law and the possible impact of each non-audit
service on the independent auditors independence from management. Typically, in addition to the
generally preapproved services, other services would include due diligence for an acquisition
that may or may not have been known at the beginning of the year. The Audit Committee has also
delegated to any member of the Audit Committee designated by the Board or the financial expert
member of the Audit Committee responsibilities to preapprove services to be performed by the
independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit
services, and such authority may only be exercised when the Audit Committee is not in session. 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following documents are filed as part of this Report:  1.
    Consolidated Financial Statements  Report of Independent Certified Public AccountantsConsolidated Balance SheetsDecember 31, 2004 and 2003Consolidated Statements of OperationsYears Ended December 31,
2004, 2003 and 2002Consolidated Statements of Stockholders EquityYears Ended
December 31, 2004, 2003 and 2002Consolidated Statements of Cash FlowsYears Ended December 31,
2004, 2003 and 2002Notes to Consolidated Financial Statements  2.
    Financial Statement SchedulesSchedule 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. 84




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3.
    Exhibits  The following documents are filed as Exhibits to this Report: ExhibitNumber
    
    Description3.0
    
    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 July 1, 2003, between Income
Opportunity Realty Investors, Inc. and
Syntek West, Inc., (incorporated by reference to Exhibit 10.0
to the Registrants Current Report on Form 8-K for event
reported July 1, 2003).14.0
    
    Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14.0 to Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2003).21.0*
    
    Subsidiaries of the Registrant.31.0*
    
    Rule 13a-14(a) Certification by Acting Principal Executive
Officer and Chief Financial Officer.32.0*
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith 85




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##### Table of Contents



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.Dated:
    
    March 30, 2005
    
    By:
    
    /s/ Robert N. Crouch IIRobert N. Crouch II
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer and Acting
Principal Executive Officer)
 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. Signature
    
    Title
    
    Date/s/ Ted P. Stokely

Ted P. Stokely
    
    Chairman of the Board
and Director
    
    March 30, 2005/s/ David E. Allard

David E. Allard
    
    Director
    
    March 30, 2005/s/ Robert A. Jakuszewski

Robert A. Jakuszewski
    
    Director
    
    March 30, 2005/s/ Ken L. JoinesKen L. Joines
    
    Director
    
    March 30, 2005/s/ Peter L. Larsen

Peter L. Larsen
    
    Director
    
    March 30, 2005/s/ Robert N. Crouch II

Robert N. Crouch II
    
    Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer and
Acting Principal Executive
Officer)
    
    March 30, 2005
 86




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##### Table of Contents



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.Dated:
    March 30, 2005
    
    By:
    
    /s/ Robert N. Crouch IIRobert N. Crouch II
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer and Acting
Principal Executive Officer)
 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. Signature
    
    Title
    
    DateTed P. Stokely
    
    Chairman of the Board
and Director
    
    March 30, 2005Director
    
    March 30, 2005David E. AllardRobert A. Jakuszewski
    
    Director
    
    March 30, 2005Ken L. Joines
    
    Director
    
    March 30, 2005Peter L. Larsen
    
    Director
    
    March 30, 2005Robert N. Crouch II
    
    Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer and
Acting Principal Executive
Officer)
    
    March 30, 2005
 87




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ANNUAL REPORT ON FORM 10-K 
 EXHIBIT INDEX For the Year Ended December 31, 2004 ExhibitNumber
    
    Description3.0
    
    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 July 1, 2003,
between Income Opportunity Realty Investors, Inc. and Syntek
West, Inc., (incorporated by reference to Exhibit 10.0 to the
Registrants Current Report on Form 8-K for event reported
July 1, 2003).14.0
    
    Code of Ethics for Senior Financial Officers
(incorporated by reference to Exhibit 14.0 to Registrants
Annual Report Form 10-K for the year ended December 31, 2003).21.0*
    
    Subsidiaries of the Registrant.31.0*
    
    Rule 13a-14(a) Certification by Acting Principal Executive
Officer and Chief Financial Officer.32.0*
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith