<PAGE>

================================================================================

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

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

                                   FORM 10-K

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

                     For The Year Ended December 31, 2001

                        Commission File Number 1-14784

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

                   Income Opportunity Realty Investors, Inc.
            (Exact Name of Registrant as Specified in Its Charter)

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

                1800 Valley View Lane
              Suite 300, Dallas, Texas                   75234
       (Address of Principal Executive Office)        (Zip Code)

                                (469) 522-4200
             (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 registered
     Common 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 [X]  No [_]

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

   As of March 4, 2002, the Registrant had 1,438,945 shares of Common Stock
outstanding. Of the total shares outstanding 576,480 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $10,463,112
based on the last trade as reported on the American Stock Exchange on March 4,
2002. The basis of this calculation does not constitute a determination by the
Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.

                     Documents Incorporated by Reference:

                                     NONE

================================================================================

<PAGE>

                                   INDEX TO
                          ANNUAL REPORT ON FORM 10-K

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

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

                                           PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............  11
Item 6. Selected Financial Data..............................................................  12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations  13
Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk......................  17
Item 8. Financial Statements and Supplementary Data..........................................  18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  42

                                          PART III

Item 10. Directors, Executive Officers and Advisor of the Registrant.........................  42
Item 11. Executive Compensation..............................................................  47
Item 12. Security Ownership of Certain Beneficial Owners and Management......................  49
Item 13. Certain Relationships and Related Transactions......................................  49

                                           PART IV

Item 14. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K......  51
Signature Page...............................................................................  52
</TABLE>


                                      2

<PAGE>

                                    PART I

ITEM 1.  BUSINESS

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

   At December 31, 2001, IORI's real estate consisted of 16 properties held for
investment. In addition, IORI owns interests in two partnerships, each of which
owns a property and a third partnership which holds a wraparound mortgage note
receivable. IORI's real estate portfolio is more fully discussed in ITEM 2.
"PROPERTIES."

Proposed Acquisition by American Realty Investors, Inc.

   On October 23, 2001, IORI, Transcontinental Realty Investors, Inc. ("TCI")
and American Realty Investors, Inc. ("ARI") jointly announced a preliminary
agreement with the plaintiff's legal counsel of the derivative action entitled
Olive et al. V. National Income Realty Trust, et al. for complete settlement of
all disputes in the lawsuit. In February 2002, the court granted final approval
of the proposed settlement. Under the proposal, ARI would 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. ARI will pay $19.00 cash per IORI
share and $17.50 cash per TCI share for the stock held by non-affiliated
stockholders. ARI would issue one share of Series H Preferred Stock with a
liquidation value of $21.50 per share for each share of IORI Common Stock for
stockholders who affirmatively elect to receive ARI preferred stock in lieu of
cash. ARI would issue one share of Series G Preferred Stock with a liquidation
value of $20.00 per share for each share of TCI Common Stock for stockholders
who affirmatively elect to receive ARI preferred stock in lieu of cash. Each
share of Series H Preferred Stock will be convertible into 2.25 shares of ARI
Common Stock during a 75-day period that commences fifteen days after the date
of the first ARI Form 10-Q filing that occurs after the closing of the merger
transaction. Upon the acquisition of the IORI and TCI shares, IORI and TCI
would become wholly-owned subsidiaries of ARI. The transaction is subject to
the negotiation of a definitive merger agreement and a vote of the shareholders
of all three entities. IORI has the same board as TCI and the same advisor as
TCI and ARI.

Business Plan

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

   IORI's business is not seasonal. Management has determined to continue to
pursue a balanced investment strategy, seeking both current income and capital
appreciation. With respect to new investments, management's plan of operation
is to acquire higher class apartment and commercial properties in keeping with
the current class of properties in IORI's real estate portfolio. In 2002,
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

                                      3

<PAGE>

and/or improvements where appropriate. While renovation and/or improvement
expenditures increase the amount of revenue required to cover operating
expenses, management believes that such expenditures are necessary to maintain
or enhance the value of IORI's properties.

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

Management of the Company

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

   BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips serves as a representative of his children's trust,
which owns BCM and, in such capacity has substantial contact with the
management of BCM and input with respect to its performance of advisory
services to IORI. BCM is more fully described in ITEM 10. "DIRECTORS, EXECUTIVE
OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor."

   BCM has been providing advisory services to IORI since March 28, 1989. BCM
also serves as advisor to TCI and Directors of IORI are also directors of TCI.
BCM also serves as Advisor to ARI. The officers of IORI also serve as officers
of ARI, TCI and BCM. As of March 4, 2002, ARI and TCI owned approximately 28.5%
and 24.0%, respectively, of IORI's outstanding shares of Common Stock and BCM
owned approximately 7.4% of IORI's outstanding shares of Common Stock.

   Since February 1, 1990, affiliates of BCM have provided property management
services to IORI. Currently Triad Realty Services, Ltd. ("Triad") provides such
property management services. Triad subcontracts with other entities for the
provision of property-level management services to IORI. The general partner of
Triad is BCM. The limited partner of Triad is GS Realty Services, Inc. ("GS
Realty"), a related party. Triad subcontracts the property-level management and
leasing of IORI's seven office buildings and the two commercial properties
owned by real estate partnerships in which IORI and TCI are partners to Regis
Realty, Inc. ("Regis"), a related party, which is a company also owned by GS
Realty. Regis is entitled to receive property and construction management fees
and leasing commissions in accordance with the terms of its property-level
management agreement with Triad.

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

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

Competition

   The real estate business is highly competitive and IORI competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related
Party Transactions"), some of which have greater financial resources than those
of IORI. Management believes that success against such competition is dependent
upon the geographic location of the property, the performance of the
property-level managers in areas such as marketing,

                                      4

<PAGE>

collection and control of operating expenses, the amount of new construction in
the area and the maintenance and appearance of the property. Additional
competitive factors with respect to commercial properties are the ease of
access to the property, the adequacy of related facilities, such as parking,
and sensitivity to market conditions in setting rent levels. With respect to
apartments, competition is also based upon the design and mix of units and
IORI's ability to provide a community atmosphere for the tenants. Management
believes that beyond general economic circumstances and trends, the rate at
which properties are renovated or the rate new properties are developed in the
vicinity of each of IORI's properties also are competitive factors.

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

   As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--Related Party Transactions," the officers and Directors of IORI
also serve as officers or directors of certain other entities, also advised by
BCM, and which have business objectives similar to those of IORI. IORI's
Directors, officers and advisor owe fiduciary duties to such other entities as
well as to IORI under applicable law. In determining to which entity a
particular investment opportunity will be allocated, the officers, Directors
and advisor consider the respective investment objectives of each entity and
the appropriateness of a particular investment in light of each entity's
existing real estate and mortgage notes receivable portfolios. To the extent
that any particular investment opportunity is appropriate to more than one of
the entities, the investment opportunity will be allocated to the entity which
has funds available for investment for the longest period of time, or, if
appropriate, the investment may be shared among all or some of such entities.

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

Certain Factors Associated with Real Estate and Related Investments

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

ITEM 2.  PROPERTIES

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

   IORI's real estate portfolio at December 31, 2001, is set forth in Schedule
III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA." The

                                      5

<PAGE>

discussions set forth below under the headings "Real Estate" provide certain
summary information concerning IORI's real estate portfolio.

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

   IORI's real estate is geographically diverse. At December 31, 2001, IORI
held equity investments in apartments and office buildings in the Pacific,
Southwest and Southeast regions of the continental United States, as shown more
specifically in the table under "Real Estate" below. The majority of IORI's
properties are, however, located in California and Texas. At December 31, 2001,
IORI held a mortgage note secured by a second lien on 165 acres of unimproved
land in The Colony, Texas, as described more specifically under "Mortgage
Loans," below.

   At December 31, 2001, one of IORI's properties, the Travelers land parcel,
exceeded 10% of IORI's total assets. At December 31, 2001, 95% of IORI's assets
consisted of owned properties and less than 1% consisted of investments in
partnerships. The remaining 5% 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."

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

                                      6

<PAGE>

Geographic Regions

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

                                       [GRAPHIC MAP]

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

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

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

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

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

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



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

Real Estate

   At December 31, 2001, 95% of IORI's assets were invested in real estate, on
a leveraged basis, in the Pacific, Southeast and Southwest regions of the
continental United States. IORI's real estate portfolio consists of 16 owned
properties and an investment in two partnerships, each of which owns a
commercial property.

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

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

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

                                      7

<PAGE>

   The following table sets forth the percentages, by property type and
geographic region, (other than two parcels of unimproved land, as described
below) of IORI's owned real estate at December 31, 2001.

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

   The foregoing table is based solely on the number of apartment units and
commercial square footage owned and does not reflect the value of IORI's
investment in each region. IORI owns two parcels of unimproved land, 1.01 acres
and 204 acres, both in the Southwest region. See Schedule III to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for a detailed description of IORI's real estate.

   A summary of the activity in IORI's owned real estate portfolio during 2001
is as follows:

<TABLE>
                   <S>                                   <C>
                   Owned properties at January 1, 2001.. 16
                   Properties purchased................. --
                   Properties sold...................... --
                                                         --
                   Owned properties at December 31, 2001 16
                                                         ==
</TABLE>

   Properties Held for Investment.  Set forth below are IORI's owned properties
at December 31, 2001, 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, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                  Rent Per Square Foot   Occupancy%
                                                                  -------------------- --------------
Property               Location       Units/ Square Footage/Acres  2001   2000   1999  2001 2000 1999
--------         -------------------- --------------------------- ------ ------ ------ ---- ---- ----
<S>              <C>                  <C>                         <C>    <C>    <C>    <C>  <C>  <C>
Apartments
Brighton Court.. Midland, TX             60 Units/90,672 Sq. Ft.  $  .54 $  .53 $    *  93   93    *
Del Mar......... Midland, TX            92 Units/105,348 Sq. Ft.     .50    .50      *  98   98    *
Enclave......... Midland, TX             68 Units/89,734 Sq. Ft.     .57    .56      *  93   93    *
Meridian........ Midland, TX           280 Units/264,000 Sq. Ft.     .45    .41    .46  95   95   69
Signature Place. Midland, TX             57 Units/72,480 Sq. Ft.     .57    .56      *  86   86    *
Sinclair Place.. Midland, TX            114 Units/91,529 Sq. Ft.     .50    .49      *  96   96    *
Treehouse....... San Antonio, TX        106 Units/88,957 Sq. Ft.     .84    .83    .80  95   95   96

Office Buildings
2010 Valley View Farmers Branch, TX               39,568 Sq. Ft.   17.98  17.40  16.26  87   86   64
5600 Mowry...... Newark, CA                       56,120 Sq. Ft.   26.70  24.64  22.94  72  100  100
Akard Plaza..... Dallas, TX                       42,895 Sq. Ft.   16.95  15.46  15.34  90   91   92
Chuck Yeager.... Chantilly, VA                    60,060 Sq. Ft.   13.02  11.21  14.70 100   41   41
Daley Plaza..... San Diego, CA                   122,795 Sq. Ft.   18.42  15.32  14.68  98   88   79
La Mesa Village. La Mesa, CA                      92,611 Sq. Ft.   19.45  16.87  17.29  68   77   88
Westlake Village Westlake Village, CA             45,500 Sq. Ft.   18.72  18.10  16.96  60   52   70

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

                                      8

<PAGE>

   Partnership Properties.  Set forth below is the commercial property owned by
each of the two partnerships in which IORI is an equity investor and the
average annual rental rate and occupancy thereof at December 31, 2001, 2000 and
1999:

<TABLE>
<CAPTION>
                                            Rent per Square Foot   Occupancy%
                                            -------------------- --------------
Property         Location   Square Footage   2001    2000  1999  2001 2000 1999
--------        ----------- --------------- ------  ------ ----- ---- ---- ----
<S>             <C>         <C>             <C>     <C>    <C>   <C>  <C>  <C>
Shopping Center
Chelsea Square. Houston, TX  70,275 Sq. Ft. $ 9.63  $ 9.31 $8.78  77   77  100

Office Building
Eton Square.... Tulsa, OK   222,654 Sq. Ft.  11.27   10.52  9.77  85   59   87
</TABLE>

   IORI owns a 36.3% general partner interest and TCI owns a 63.7% limited
partner interest in Tri-City Limited Partnership ("Tri-City") which in turn
owns Chelsea Square Shopping Center. In February 2000, Tri-City obtained
mortgage financing of $2.1 million secured by the previously unencumbered
shopping center. Tri-City received net cash of $2.0 million after the funding
of required escrows and the payment of various closing costs. The mortgage bore
interest at a fixed rate of 10.24% per annum until February 2001 and a variable
rate thereafter, currently 9.44% per annum, requires monthly payments of
principal and interest of $20,601 and matures in February 2005. IORI received a
distribution of $739,000 of the net financing proceeds.

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

Mortgage Loans

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

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

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

   In September 2000, IORI funded a $1.5 million loan, secured by a second lien
on 165 acres of unimproved land in The Colony, Texas. In May 2001, IORI
received $1.0 million as a partial principal paydown. The loan bears interest
at 18.0% per annum, requires monthly payments of interest only and matured in
January 2002. In January 2002, the loan was extended to April 2002.

   Partnership mortgage loans.  IORI owns a 40% general partner interest and
TCI owns a 60% general partner interest in Nakash Income Associates ("NIA"),
which holds a wraparound mortgage note receivable secured by a building
occupied by a Wal-Mart in Maulden, Missouri. IORI advanced the partnership
$24,000 in 2001.

ITEM 3.  LEGAL PROCEEDINGS

Olive Litigation

   In February 1990, IORI, together with National Income Realty Trust,
Continental Mortgage and Equity Trust ("CMET") and TCI, three real estate
entities with, at the time, the same officers, directors or trustees and
advisor as IORI, entered into a settlement (the "Settlement") of a class and
derivative action entitled Olive et al.

                                      9

<PAGE>

v. National Income Realty Trust et al., relating to the operation and
management of each of the entities. On April 23, 1990, the Court granted final
approval of the terms of the Settlement. The Settlement was modified in 1994
(the "Modification").

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

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

   In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this provision
of the Olive Amendment. In January 2000, the Board engaged another
management/compensation consultant to perform the required evaluation again.
This evaluation was completed in April 2000 and was provided to plaintiffs'
counsel. The Board believes that any alleged breach of the Olive Amendment has
been fully remedied by the Board's engagement of the second consultant.
Although several status conferences on this matter have been held, there has
been no court order resolving whether there was any breach of the Olive
Amendment.

   In October 2000, plaintiffs' counsel asserted that the stock option
agreement to purchase TCI shares, which was entered into by IORI and ARI, an
affiliate of IORI, in October 2000 with 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 the provisions of the Settlement, Modification and
the Olive Amendment terminated on April 28, 1999. However, in September 2000,
the Court ruled that certain provisions of the Modification continue to be
effective after the termination date. This ruling has been appealed to the
United States Court of Appeals for the Ninth Circuit by IORI and TCI.

   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 for
the proposed settlement. Under the proposal, ARI would 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. ARI will pay $19.00 cash per IORI
share and $17.50 cash per TCI share for the stock held by non-affiliated
stockholders. ARI would issue one share of Series H Preferred Stock with a
liquidation value of $21.50 per share for each share of IORI Common Stock for
stockholders who elect to receive ARI preferred stock in lieu of cash. ARI
would issue one share of Series G Preferred Stock with a liquidation value of
$20.00 per share for each share of TCI Common Stock for stockholders who elect
to receive ARI preferred stock in lieu of cash. Each share of Series H
Preferred Stock will be convertible into 2.25 shares of ARI Common Stock during
a 75-day period that commences fifteen days after the date of the first ARI
Form 10-Q filing that occurs after the closing of the merger transaction. Upon
the acquisition of the IORI and TCI shares, IORI and TCI would become
wholly-owned subsidiaries of ARI. The transaction is subject to the negotiation
of a definitive merger agreement and a vote of the shareholders of all three
entities. IORI has the same board as TCI and the same advisor as TCI and ARI.

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

   Not applicable.

                                      10

<PAGE>

                                    PART II

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

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

<TABLE>
<CAPTION>
              QUARTER ENDED                           HIGH   LOW
              -------------                          ------ ------
              <S>                                    <C>    <C>
              March 31, 2002 (through March 4, 2002) $18.30 $17.20

              March 31, 2001........................   9.15   7.63
              June 30, 2001.........................   8.20   6.94
              September 30, 2001....................  13.50   9.10
              December 31, 2001.....................  23.50  12.75

              March 31, 2000........................   7.50   5.25
              June 30, 2000.........................   7.50   2.00
              September 30, 2000....................  10.25   6.75
              December 31, 2000.....................   9.25   8.00
</TABLE>

   As of March 4, 2002, the closing price of IORI's Common Stock on the AMEX
was $18.15 per share.

   As of March 4, 2002, IORI's Common Stock was held by 1,350 holders of record.

   IORI paid no dividends in 2001. See ITEM 7. "MANAGEMENT DISCUSSION AND
ANALYSIS--Liquidity and Capital Resources." IORI paid dividends in 2000 as
follows:

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


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

   On December 5, 1989, the Board of Directors approved a share repurchase
program, authorizing the repurchase of a total of 200,000 shares of IORI's
Common Stock. In June 2000, the Board increased this authorization to 300,000
shares. Through December 31, 2001, a total of 218,804 shares had been
repurchased at a cost of $1.9 million. In September 2001, the Board approved
separately a private block purchase of 75,100 shares of IORI Common Stock for a
total cost of $1.3 million.

                                      11

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                   For the Years Ended December 31,
                                       ---------------------------------------------------------
                                          2001        2000        1999       1998        1997
                                       ----------  ----------  ---------- ----------  ----------
                                               (dollars in thousands, except per share)
<S>                                    <C>         <C>         <C>        <C>         <C>
EARNINGS DATA
Rents................................. $   13,001  $   13,731  $   15,968 $   14,326  $   12,221
Property expense......................      6,591       6,969       6,768      6,462       5,900
                                       ----------  ----------  ---------- ----------  ----------
 Operating income.....................      6,410       6,762       9,200      7,864       6,321
Interest income.......................        194         319          29        172         266
Income (loss) from equity partnerships         (9)        (61)        148        113          52
Gain on sale of real estate...........         --      20,878       1,525        180       3,953
                                       ----------  ----------  ---------- ----------  ----------
                                              185      21,136       1,702        465       4,271
Other expense.........................     10,057      11,104       9,580      9,008       7,275
                                       ----------  ----------  ---------- ----------  ----------
Net income (loss)..................... $   (3,462) $   16,794  $    1,322 $     (679) $    3,317
                                       ----------  ----------  ---------- ----------  ----------
PER SHARE DATA
Net income (loss)..................... $    (2.32) $    11.03  $      .87 $     (.44) $     2.18
                                       ==========  ==========  ========== ==========  ==========
Dividends per share................... $       --  $      .45  $      .60 $      .60  $      .40
Weighted average Common shares
  outstanding.........................  1,493,675   1,522,510   1,527,386  1,521,832   1,519,888
</TABLE>

<TABLE>
<CAPTION>
                                                    December 31,
                                      ----------------------------------------
                                        2001    2000    1999    1998    1997
                                      -------  ------- ------- ------- -------
                                      (dollars in thousands, except per share)
 <S>                                  <C>      <C>     <C>     <C>     <C>
 BALANCE SHEET DATA
 Real estate held for investment, net $87,315  $86,277 $86,542 $83,691 $81,914
 Notes and interest receivable, net..     505    1,500      --      --   2,010
 Total assets........................  91,833   96,519  91,185  88,695  90,309
 Notes and interest payable..........  54,426   54,206  62,852  60,786  61,323
 Stockholders' equity................  35,222   39,998  23,991  23,560  25,131
 Book value per share................ $ 24.48  $ 26.42 $ 15.69 $ 15.44 $ 16.53

</TABLE>

   IORI purchased nine properties for a total of $46.5 million in 2000, one
property for $5.4 million in 1999, and eight properties for a total of $40.6
million in 1997. IORI sold seven properties for a total of $66.6 million in
2000, one property for $3.2 million in 1999, and three properties for a total
of $24.8 million in 1997. See ITEM 2. "PROPERTIES - Real Estate" and ITEM 8.
"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

                                      12

<PAGE>

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

Introduction

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

Liquidity and Capital Resources

   Cash and cash equivalents at December 31, 2001, totaled $66,000 compared to
$2.1 million at December 31, 2000. IORI's principal sources of cash have been
and will continue to be property operations, proceeds from property sales and
refinancings and partnership distributions. Although management anticipates
that IORI will generate excess cash from operations in 2002 due to increased
rental rates and occupancy at its properties, such excess, however, will not be
sufficient to discharge all of IORI's debt obligations as they mature.
Management intends to selectively sell income producing real estate, refinance
real estate and incur additional borrowings against real estate to meet its
cash requirements.

   Net cash used in operating activities was $2.0 million in 2001 as compared
to $1.9 million in 2000. 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) decreased to $6.0 million in 2001 from $6.6
million in 2000. A decrease of $2.0 million was due to the sale of three
apartments and two office buildings in 2000. The decrease was offset in part by
an increase of $721,000 from the purchase of five apartments in 2000 and an
increase of $700,000 due to increased rental rates and occupancies at IORI's
apartment and commercial properties.

   Interest collected decreased to $148,000 in 2001 from $310,000 in 2000. This
decrease was due to a decrease in short-term investment income and the partial
paydown of one mortgage note receivable in 2001.

   Interest paid on notes payable increased to $5.5 million in 2001 from $5.0
million in 2000. Of this increase, $427,000 was due to the purchase of five
apartments in 2000 and $1.6 million was due to the purchase of one parcel of
unimproved land in 2000. The increase also was due to a $188,000 increase from
a loan refinancing for a commercial property in 2001. This increase was offset
by a decrease of $883,000 from the sale of three apartments in 2000, $496,000
from the sale of two commercial properties in 2000, and $135,000 from the sale
of two unimproved land parcels in 2000. A decrease of $200,000 was due to
variable interest rates decreasing during 2001 for several of IORI's variable
rate notes.

   Advisory and net income fee paid to affiliate decreased to $1.1 million in
2001 from $2.6 million in 2000. A decrease of $1.4 million was due to a
decrease in the net income fee paid which is due to a decrease in IORI's net
income, the basis for such fee. The remaining decrease was due to a decrease in
gross assets. See NOTE 8. "ADVISORY AGREEMENT."

   General and administrative expenses paid increased to $1.6 million in 2001
from $1.2 million in 2000. This increase was due to increases in taxes accrued
in 2000 and paid in 2001.

   In 2001, IORI made improvements to its properties totaling $3.5 million
compared to the $1.9 million in 2000. The increase was primarily due to
improvements made to IORI's unimproved land.

                                      13

<PAGE>

   In 2001, IORI received cash of $1.0 million from mortgage receivable
principal payments, and net cash of $14.1 million from refinancings. In 2001,
$14.8 million was expended in principal payments on mortgage debt.

   Scheduled principal payments on notes payable of $12.0 million are due in
2002. For those mortgages that come due in 2002, 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 real estate. Management believes it will continue to be
successful in obtaining loan extensions and/or refinancings.

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

   IORI owns a 36.3% general partner interest in the Tri-City partnership. In
2001, IORI received a distribution of $18,000 from Tri-City's operating cash
flow, and advanced $4,000 to the partnership. IORI owns a 40% general partner
interest in the NIA partnership. In 2001, IORI received no distributions from
NIA and made a $24,000 contribution to the partnership. IORI owns a 10% limited
partnership interest in the TCI Eton Square partnership. IORI received no
distributions and made no contributions to the partnership in 2001. See NOTE 4.
"INVESTMENT IN EQUITY METHOD PARTNERSHIPS."

   IORI paid no dividends in 2001. 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.

   In 2001, IORI repurchased 75,100 shares of Common Stock in a private block
purchase for a total of $1.3 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

   2001 Compared to 2000.  IORI reported a net loss of $3.5 million in 2001, as
compared to net income of $16.8 million in 2000, which included gains on real
estate totaling $20.9 million. Fluctuations in these and the other components
of revenue and expense are discussed in the following paragraphs.

   Rents decreased to $13.0 million in 2001 from $13.7 million in 2000. Of this
decrease, $1.6 million was due to the sale of two commercial properties in 2000
and $2.0 million was due to the sale of three apartments in 2000. This decrease
was offset by increases of $1.4 million due to the purchase of five apartment
properties in 2000 and $1.3 million and $151,000 was due to increased rental
rates at IORI's commercial and apartment properties, respectively. Rents in
2002 are expected to decrease as IORI selectively sells properties.

   Property operations expense decreased to $6.6 million in 2001 from $7.0
million in 2000. Of this decrease, $1.1 million was due to the sale of three
apartments and $570,000 due to the sale of two commercial properties in 2000.
This decrease was offset by an increase of $673,000 due to the purchase of five
apartments in 2000, $320,000 was due to increased utility, cleaning, repairs,
and insurance expenses at IORI's commercial properties, and $250,000 was due to
an increase in property taxes for IORI's land. Properties operations expense is
expected to decrease in 2002 as IORI selectively sells properties.

                                      14

<PAGE>

   Interest income decreased to $194,000 in 2001 from $319,000 in 2000. This
decrease was due to a decrease in short-term investments, and from a $1.0
million principal paydown received in May 2001 on IORI's only note receivable.
Interest income is expected to decrease as IORI's mortgage loan is paid in full
in 2002.

   Interest expense increased to $6.1 million in 2001 from $5.1 million in
2000. Of this increase, $345,000 and $2.0 million was due to the purchase of
five apartments and one unimproved land parcel in 2000, respectively, and
$174,000 was due to one loan refinanced in 2001. These increases were offset by
decreases of $441,000 due to the sale of two commercial properties; $755,000
due to the sale of three apartments; and $134,000 due to the sale of two
unimproved land parcels in 2000. The remaining decrease of $203,000 was due to
lower variable interest rates at IORI's apartment and commercial properties.
Interest expense in 2002 is expected to decrease from 2001 due to a decrease in
outstanding debt.

   Depreciation expense decreased to $2.4 million in 2001 from $2.5 million in
2000. A decrease of $427,000 was from the sale of five properties in 2000,
offset by an increase of $138,000 from the purchase of five properties in 2000
and an increase of $200,000 was from tenant improvements. Depreciation expense
in 2002 is expected to approximate 2001.

   Advisory fee to affiliate increased to $817,000 in 2001 from $664,000 in
2000. The increase was attributable to an increase in gross assets, the basis
of such fee. The advisory fee in 2002 is expected to approximate 2001. See NOTE
8. "ADVISORY AGREEMENT."

   IORI paid no net income fee in 2001 compared to the $1.4 million in 2000.
The net income fee is based on 7.5% of IORI's net income.

   General and administrative expense decreased to $739,000 in 2001 from $1.5
million in 2000. This decrease was primarily due to a decrease in taxes.

   Equity losses of partnerships was $9,000 in 2001 compared to $61,000 in
2000. The decrease was primarily due to a decrease in operating expenses at
Eton Square Office Building.

   In 2001, IORI realized no gains on the sale of real estate.

   In 2000, gains on sale of real estate totaling $20.9 million were realized:
$903,000 on the sale of La Monte Park Apartments, $1.2 million on the sale of
Renaissance Parc Apartments, $1.9 million on the sale of Olympic Office
Building, $13.1 million on the sale of Saratoga Office Building, $2.2 million
on the sale of Eastpoint Apartments, $388,000 on the sale of Etheredge and
Fambrough land and a $1.3 million recognition of a deferred gain.

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

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

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

                                      15

<PAGE>

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

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

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

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

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

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

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

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

Environmental Matters

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

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

Inflation

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

                                      16

<PAGE>

Taxes

   For the years 1999, 2000 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 is required to hold at least 75%
of the value of its total assets in real estate assets, government securities,
cash and cash equivalents at the close of each quarter of each taxable year. As
a REIT, IORI is also required to distribute at least 90% (95% in 2000 and 1999)
of its REIT taxable income plus 90% (95% in 2000 and 1999) of its net income
from foreclosure property on an annual basis to stockholders.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

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

   The following table contains only those exposures that existed at December
31, 2001. Anticipation of exposures or risk on positions that could possibly
arise was not considered. IORI's ultimate interest rate risk and its affect on
operations will depend on future capital market exposures, which cannot be
anticipated with a probable assurance level. (Dollars in thousands.)

Liabilities

<TABLE>
<S>                            <C>      <C>      <C>      <C>     <C>     <C>        <C>
Notes payable
Variable interest rate-fair value................................................... $ 4,773
                                2002     2003     2004     2005    2006   Thereafter  Total
                               -------  -------  -------  ------  ------  ---------- -------
Instrument's maturities....... $11,289  $20,270   $7,442  $   --  $   --    $  ---   $39,001
Instrument's amortization.....     503      280      122      27      30     1,690     2,652
   Interest...................   3,422    1,729      433     180     177     2,063     8,004
   Average rate...............    9.04%    9.06%    9.50%  10.39%  10.39%    10.39%

Fixed interest rate-fair value                                                       $12,393
                                2002     2003     2004     2005    2006   Thereafter  Total
                               -------  -------  -------  ------  ------  ---------- -------
Instrument's maturities....... $    --  $    --    $   --  $   -- $6,214    $4,998   $11,212
Instrument's amortization.....     204      223      243     266     184        63     1,183
   Interest...................   1,102    1,083    1,063   1,040     838       412     5,538
   Average rate...............    9.00%    9.00%    9.01%   9.01%   9.28%     9.28%
</TABLE>

                                      17

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Report of Independent Certified Public Accountants...........................................  19

Consolidated Balance Sheets--December 31, 2001 and 2000......................................  20

Consolidated Statements of Operations--Years Ended December 31, 2001, 2000 and 1999..........  21

Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2001, 2000 and 1999  22

Consolidated Statements of Cash Flows--Years Ended December 31, 2001, 2000 and 1999..........  23

Notes to Consolidated Financial Statements...................................................  25

Schedule III--Real Estate and Accumulated Depreciation.......................................  38

Schedule IV--Mortgage Loans on Real Estate...................................................  40
</TABLE>

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

                                      18

<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
Income Opportunity Realty Investors, Inc.

   We have audited the accompanying consolidated balance sheets of Income
Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. We have also audited the schedules listed in the accompanying index.
These financial statements and the schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

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

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

   As discussed in Note 1, IORI adopted the provisions of SFAS 144, Accounting
for Impairment of Long Lived Assets, in 2001.

   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, 2001 and 2000, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, 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.

                                          BDO SEIDMAN, LLP

Dallas, Texas
March 11, 2002

                                      19

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                   ---------------------
                                                                                     2001        2000
                                                                                   ---------   --------
                                                                                   (dollars in thousands
                                                                                     except per share)
                                      Assets
<S>                                                                                <C>         <C>
Real estate held for investment................................................... $ 95,190    $ 91,837
Less--accumulated depreciation....................................................   (7,875)     (5,560)
                                                                                   --------    --------
                                                                                     87,315      86,277
Notes receivable..................................................................      505       1,500
Investment in real estate partnerships............................................      142         141
Cash and cash equivalents.........................................................       66       2,087
Other assets (including $3,862 in 2000 from affiliates)...........................    3,805       6,514
                                                                                   --------    --------
                                                                                   $ 91,833    $ 96,519
                                                                                   ========    ========
                       Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable........................................................ $ 54,426    $ 54,206
Other liabilities (including $593 in 2001 to affiliates)..........................    2,185       2,315
                                                                                   --------    --------
                                                                                     56,611      56,521
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding
  1,438,945 shares in 2001 and 1,514,045 shares in 2000...........................       14          15
Paid-in capital...................................................................   63,459      64,772
Accumulated distributions in excess of accumulated earnings.......................  (28,251)    (24,789)
                                                                                   --------    --------
                                                                                     35,222      39,998
                                                                                   --------    --------
                                                                                   $ 91,833    $ 96,519
                                                                                   ========    ========
</TABLE>



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


                                      20

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      For the Years Ended December 31,
                                                                  ----------------------------------------
                                                                      2001            2000            1999
                                                                  ------------    ------------    ------------
                                                                  (dollars in thousands, except per share)
<S>                                                               <C>             <C>             <C>
Property revenue
 Rents........................................................... $     13,001    $     13,731    $     15,968
Property expense
 Property operations (including $312 in 2001, $602 in 2000 and
   $618 in 1999 to affiliates and related parties)...............        6,591           6,969           6,768
                                                                  ------------    ------------    ------------
Operating income.................................................        6,410           6,762           9,200
Other income
 Interest........................................................          194             319              29
 Income (loss) from equity partnerships..........................           (9)            (61)            148
 Gain on sale of real estate.....................................           --          20,878           1,525
                                                                  ------------    ------------    ------------
                                                                           185          21,136           1,702
Other expense
 Interest........................................................        6,074           5,079           5,658
 Depreciation....................................................        2,427           2,450           2,723
 Advisory fee to affiliate.......................................          817             664             371
 Net income fee to affiliate.....................................           --           1,362              81
 General and administrative (including $323 in 2001, $287 in 2000
   and $260 in 1999 to affiliate)................................          739           1,549             747
                                                                  ------------    ------------    ------------
                                                                        10,057          11,104           9,580
                                                                  ------------    ------------    ------------
Net income (loss)................................................ $     (3,462)   $     16,794    $      1,322
                                                                  ============    ============    ============
Earnings per share
  Net income (loss).............................................. $      (2.32)   $      11.03    $        .87
                                                                  ============    ============    ============
Weighted average shares of Common Stock used in
  computing earnings per share...................................    1,493,675       1,522,510       1,527,386
                                                                  ============    ============    ============
</TABLE>

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

                                      21

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                Accumulated
                                                               Distributions
                                      Common Stock             in Excess of
                                    ----------------  Paid-in   Accumulated  Stockholders'
                                     Shares    Amount Capital    Earnings       Equity
                                    ---------  ------ -------  ------------- -------------
                                            (dollars in thousands, except shares)
<S>                                 <C>        <C>    <C>      <C>           <C>

Balance, January 1, 1999........... 1,526,043   $15   $64,857    $(41,312)      $23,560
Sale of Common Stock under dividend
  reinvestment plan................     2,865    --        17          --            17
Dividends ($.60 per share).........        --    --        --        (908)         (908)
Net income.........................        --    --        --       1,322         1,322
                                    ---------   ---   -------    --------       -------

Balance, December 31, 1999......... 1,528,908    15    64,874     (40,898)       23,991
Sale of Common Stock under dividend
  reinvestment plan................     5,037    --        32          --            32
Repurchase of Common Stock.........   (19,900)   --      (134)         --          (134)
Dividends ($.45 per share).........        --    --        --        (685)         (685)
Net income.........................        --    --        --      16,794        16,794
                                    ---------   ---   -------    --------       -------

Balance, December 31, 2000......... 1,514,045    15    64,772     (24,789)       39,998
Repurchase of Common Stock.........   (75,100)   (1)   (1,313)         --        (1,314)
Net loss...........................        --    --        --      (3,462)       (3,462)
                                    ---------   ---   -------    --------       -------

Balance, December 31, 2001......... 1,438,945   $14   $63,459    $(28,251)      $35,222
                                    =========   ===   =======    ========       =======
</TABLE>


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

                                      22

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        For the Years Ended December 31,
                                                                        -------------------------------
                                                                           2001         2000     1999
                                                                        ----------    --------  -------
                                                                             (dollars in thousands)
<S>                                                                     <C>           <C>       <C>
Cash Flows from Operating Activities
 Rents collected....................................................... $   12,966    $ 13,638  $16,065
 Interest collected....................................................        148         310       29
 Interest paid.........................................................     (5,528)     (5,036)  (5,458)
 Payments for property operations (including $312 in 2001, $602 in 2000
   and $618 in 1999 to affiliate and related party)....................     (6,981)     (7,068)  (6,325)
 Advisory and net income fee paid to affiliate.........................     (1,054)     (2,576)    (388)
 General and administrative expenses paid (including $323 in 2001, $287
   in 2000 and $260 in 1999 to affiliate)..............................     (1,618)     (1,185)    (793)
 Distributions from equity partnerships' operating cash flow...........         18          25      155
 Other.................................................................         20          --       34
                                                                        ----------    --------  -------
     Net cash provided by (used in) operating activities...............     (2,029)     (1,892)   3,319

Cash Flows from Investing Activities
 Acquisition of interest in equity partnership.........................         --          --     (384)
 Funding of equity partnerships........................................        (28)        (58)     (39)
 Real estate improvements..............................................     (3,466)     (1,947)  (2,199)
 Acquisition of real estate (including $1,514 in 2000 and $337 in 1999
   to affiliate and related party).....................................         --     (37,334)  (5,287)
 Deposits on pending purchases and financings..........................        (25)         --       --
 Proceeds from sale of real estate.....................................         --      43,393    2,673
 Distributions from equity partnership's investing cash flow...........         --          --    2,027
 Funding of note receivable............................................         --      (1,500)
 Collection of note receivable.........................................      1,000          --       --
                                                                        ----------    --------  -------
     Net cash provided by (used in) investing activities...............     (2,519)      2,554   (3,209)

Cash Flows from Financing Activities
 Proceeds from notes payable...........................................     14,900      22,875   10,778
 Payments on notes payable.............................................    (14,783)    (18,153)  (8,681)
 Deferred financing costs (including $99 in 2001 to affiliate).........       (911)        172     (258)
 Distributions from equity partnership's financing cash flow...........         --         739       --
 Sale of Common Stock under dividend reinvestment plan.................         --          32       17
 Dividends to stockholders.............................................         --        (685)    (908)
 Repurchase of Common Stock............................................     (1,314)       (134)      --
 Payments from (to) advisor............................................      4,635      (4,143)    (439)
                                                                        ----------    --------  -------
     Net cash provided by financing activities.........................      2,527         703      509
                                                                        ----------    --------  -------
 Net increase (decrease) in cash and cash equivalents..................     (2,021)      1,365      619
 Cash and cash equivalents, beginning of year..........................      2,087         722      103
                                                                        ----------    --------  -------
 Cash and cash equivalents, end of year................................ $       66    $  2,087  $   722
                                                                        ==========    ========  =======
</TABLE>

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

                                      23

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

              CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)

<TABLE>
<CAPTION>
                                                                      For the Years Ended December 31,
                                                                      -------------------------------
                                                                         2001         2000     1999
                                                                      ----------    --------  -------
                                                                           (dollars in thousands)
<S>                                                                   <C>           <C>       <C>

Reconciliation of net income (loss) to net cash provided by (used in)
  operating activities
 Net income (loss)................................................... $   (3,462)   $ 16,794  $ 1,322
 Adjustments to reconcile net income (loss) to net cash provided by
   (used in) operating activities
   Depreciation and amortization.....................................      2,930       2,450    2,967
   Gain on sale of real estate.......................................         --     (20,878)  (1,525)
   Equity in (income) loss of partnerships...........................          9          61     (148)
   Distributions from equity partnerships' operating cash flow.......         18          25      155
   Decrease in interest receivable...................................         --          --       --
   (Increase) decrease in other assets...............................     (1,554)        338      127
   (Decrease) in interest payable....................................       (103)        (87)     (44)
   Increase (decrease) in other liabilities..........................        133        (595)     465
                                                                      ----------    --------  -------
     Net cash provided by (used in) operating activities............. $   (2,029)   $ (1,892) $ 3,319
                                                                      ==========    ========  =======

Schedule of noncash investing and financing activities
 Notes payable from purchase of real estate.......................... $       --    $  2,814  $    --
 Notes payable assumed by buyer on sale of real estate...............         --      16,094       --
</TABLE>


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

                                      24

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

   Certain balances for 2000 and 1999 have been reclassified to conform to the
2001 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.

   In October 2001, IORI announced a preliminary agreement for the acquisition
of IORI by American Realty Investors, Inc. See ITEM 13. "LEGAL PROCEEDINGS."

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

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

   Accounting pronouncements.  In June 2001, the Financial Accounting Standards
Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that IORI recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001. It also requires, upon adoption of SFAS 142, that IORI
reclassify the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141.

   SFAS 142 requires, among other things that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that IORI identify reporting units in order to
assess potential future impairment of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. SFAS 142 requires that an
intangible asset with an indefinite useful life be tested for impairment in
accordance with specified guidelines. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires IORI to complete a transitional
goodwill impairment test six months from the date of

                                      25

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


adoption. IORI is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
Currently, IORI does not believe that the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.

   SFAS 143 requires that the fair value for an asset retirement obligation be
recognized in the period in which it is incurred, if a reasonable estimate of
fair value can be made, and that the carrying value of the asset, including
capitalized asset retirement costs, be tested for impairment. SFAS 143, is
effective for fiscal years beginning after June 15, 2002. Management does not
believe this statement will have a material effect on IORI's financial position
or results of operations.

   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.

   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 the fair value was
estimated using year end interest rates for mortgages with similar terms and
maturities.

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

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

                                      26

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



NOTE 2.  REAL ESTATE

   In 2000, the following properties were purchased:

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

Land
Etheredge........... Collin County, TX  74.98 Acres   1,875      391    1,406(2)  10.00    04/01(3)
Fambrough........... Collin County, TX  75.07 Acres   1,877      592    1,408(2)  10.00    04/01(3)
Frankel............. Midland County, TX  1.01 Acres      41       43       --        --       --
Travelers........... Farmers Branch, TX   204 Acres  24,848   13,117   12,000     14.00    12/01(4)
</TABLE>
--------
(1) The Frankel portfolio consisted of five apartments: 60 unit Brighton Court,
    92 unit Del Mar Villas, 68 unit Enclave, 57 unit Signature Place and 114
    unit Sinclair Place.
(2) Seller financing.
(3) The property was sold in September 2000.
(4) The loan was refinanced in December 2001. See NOTE 5. "NOTES AND INTEREST
    PAYABLE."

   In 2000, the following properties were sold:

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

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

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

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

NOTE 3.  NOTES AND INTEREST RECEIVABLE

   In September 2000, IORI funded a $1.5 million loan secured by a second lien
on 165 acres of unimproved land in The Colony, Texas. In May 2001, IORI
received $1.0 million as a partial principal paydown. The loan bears interest
at 18.0% per annum, requires monthly payments of interest only and matured in
January 2002. In January 2002, the loan was extended to April 2002. The loan
had an estimated fair value at December 31, 2001, equal to its principal
balance of $500,000.

                                      27

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



NOTE 4.  INVESTMENT IN EQUITY METHOD PARTNERSHIPS

   Investments in equity method partnerships consisted of the following:

<TABLE>
<CAPTION>
                                                      2001   2000
                                                      -----  -----
            <S>                                       <C>    <C>
            Tri-City Limited Partnership ("Tri-City") $(567) $(572)
            Nakash Income Associates ("NIA").........   376    343
            TCI Eton Square, L.P. ("Eton Square")....   333    370
                                                      -----  -----
                                                      $ 142  $ 141
                                                      =====  =====
</TABLE>

   IORI owns a 36.3% general partner interest in Tri-City, which at December
31, 2001, owned a shopping center in Houston, Texas. Transcontinental Realty
Investors, Inc. ("TCI") owns a 63.7% limited partner interest in Tri-City. In
February 2000, Tri-City obtained mortgage financing of $2.1 million secured by
the previously unencumbered shopping center. Tri-City received net cash of $2.0
million after the funding of required escrows and the payment of various
closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum
until February 2001 and currently, 9.44% per annum thereafter, requires monthly
payments of principal and interest of $20,601 and matures in February 2005.
IORI received a distribution of $739,000 of the net financing proceeds. In
1999, Tri-City sold a shopping center in Ft. Worth, Texas, and an office
building in Carrollton, Texas, for a total of $7.2 million, receiving net cash
of $5.4 million after paying off $1.3 million in mortgage debt and the payment
of various closing costs. IORI received a distribution of $2.1 million of the
net cash. Tri-City recognized gains of $2.9 million on the sales of which
IORI's equity share was $1.0 million.

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

   In September 1999, IORI invested $384,000 for a 10% limited partner interest
in Eton Square, which purchased the 222,654 sq. ft. Eton Square Building in
Tulsa, Oklahoma, for $14.0 million, paying $3.6 million in cash and obtaining
mortgage financing of $10.5 million. TCI owns a 90% general partner interest in
Eton Square.

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

<TABLE>
<CAPTION>
                                                   2001      2000
                                                 --------  --------
    <S>                                          <C>       <C>
    Notes receivable............................ $    902  $    902
    Real estate, net of accumulated depreciation
      ($2,795 in 2001 and $3,342 in 2000).......   17,464    17,788
    Other assets................................      646       190
    Notes payable...............................  (12,748)  (12,945)
    Other liabilities...........................   (1,211)     (652)
                                                 --------  --------
    Partners' capital........................... $  5,053  $  5,283
                                                 ========  ========
</TABLE>

                                      28

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   IORI's share of the equity partnerships' capital was $854,000 in 2001 and
$892,000 in 2000.

<TABLE>
<CAPTION>

                                                     2001      2000     1999
                                                   --------  --------  ------
 <S>                                               <C>       <C>       <C>
 Rents............................................ $  2,579  $  2,561  $1,873
 Interest income..................................       80       156     156
 Interest expense.................................   (1,131)   (1,165)   (375)
 Property operations expense......................   (1,230)   (1,197)   (781)
 Depreciation.....................................     (586)     (570)   (371)
                                                   --------  --------  ------
 Income (loss) before gains on sale of real estate     (288)     (215)    502
 Gain on sale.....................................       --        --   2,851
                                                   --------  --------  ------
 Net income (loss)................................ $   (288) $   (215) $3,353
                                                   ========  ========  ======
</TABLE>

   IORI's equity share of:

<TABLE>
<CAPTION>

                                                        2001 2000   1999
                                                        ---- ----  ------
      <S>                                               <C>  <C>   <C>
      Income (loss) before gains on sale of real estate $(9) $(61) $  148
      Gain on sale of real estate......................  --    --   1,035
                                                        ---  ----  ------
      Net income (loss)................................ $(9) $(61) $1,183
                                                        ===  ====  ======
</TABLE>

NOTE 5.  NOTES AND INTEREST PAYABLE

   Notes and interest payable consisted of the following:

<TABLE>
<CAPTION>
                                     2001              2000
                               ----------------- -----------------
                               Estimated         Estimated
                                 Fair     Book     Fair     Book
                                 Value    Value    Value    Value
                               --------- ------- --------- -------
              <S>              <C>       <C>     <C>       <C>
              Notes payable...  $54,172  $54,048  $53,556  $53,931
                                =======           =======
              Interest payable               378               275
                                         -------           -------
                                         $54,426           $54,206
                                         =======           =======
</TABLE>

   Scheduled notes payable principal payments are due as follows:

<TABLE>
                               <S>        <C>
                               2002...... $11,996
                               2003......  20,772
                               2004......   7,808
                               2005......     293
                               2006......   6,428
                               Thereafter   6,751
                                          -------
                                          $54,048
                                          =======
</TABLE>

   Notes payable at December 31, 2001, bear interest at rates ranging from
6.25% to 10.5% and mature between 2002 and 2025. The mortgages are
collateralized by deeds of trust on real estate with a net carrying value of
$87.3 million.

                                      29

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   In 2001, IORI refinanced the following properties:

<TABLE>
<CAPTION>
                                                    Debt      Debt    Net Cash Interest   Maturity
Property             Location       Sq.Ft./Acres  Incurred Discharged Received   Rate       Date
--------             --------      -------------- -------- ---------- -------- --------   --------
                                                     (dollars in thousands)
<S>             <C>                <C>            <C>      <C>        <C>      <C>        <C>
Office Building
Chuck Yeager... Chantilly, VA      60,000 Sq. Ft.  $5,000    $2,048    $2,898     9.5%(1)  01/04

Land
Travelers...... Farmers Branch, TX      204 Acres   9,900     9,577      (580)   10.5(1)   06/03
</TABLE>
--------
(1) Variable rate.

NOTE 6.  DIVIDENDS

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

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

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

NOTE 7.  RENTS UNDER OPERATING LEASES

   Operations include the leasing of office buildings. The leases thereon
expire at various dates through 2009. The following is a schedule of minimum
future rents on non-cancelable operating leases as of December 31, 2001:

<TABLE>
                               <S>        <C>
                               2002...... $ 4,241
                               2003......   3,652
                               2004......   2,683
                               2005......   2,233
                               2006......   1,257
                               Thereafter   2,948
                                          -------
                                          $17,014
                                          =======
</TABLE>

NOTE 8.  ADVISORY AGREEMENT

   Basic Capital Management, Inc. ("BCM"), an affiliate, has served as advisor
to IORI since March 28, 1989. BCM is a company owned by a trust for the benefit
of the children of Gene E. Phillips. Mr. Phillips serves as a representative of
his children's trust which owns BCM and, in such capacity, has substantial
contact with the management of BCM and input with respect to its performance of
advisory services to IORI.

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

                                      30

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



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

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

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

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

   Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by BCM if the Operating Expenses of IORI (as defined in the
Advisory Agreement) exceed certain limits specified in the Advisory Agreement.
The effect of this limitation was to require BCM to refund $256,000 of the 2001
annual advisory fee, and $289,000 of the 1999 annual advisory fee. BCM was not
required to refund any of its 2000 advisory fees.

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

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

NOTE 9.  PROPERTY MANAGEMENT

   Triad provides property management services for a fee of 5% or less of the
monthly gross rents collected on the residential properties and 3% or less of
the monthly gross rents collected on commercial properties under its
management. Triad subcontracts with other entities for the property-level
management services at various rates. The general partner of Triad is BCM. The
limited partner of Triad is GS Realty Services, Inc. ("GS Realty"), a related
party. Triad subcontracts the property-level management and leasing of IORI's
seven office buildings and the commercial property owned by each of Tri-City
and Eton Square, to Regis, a related party, which is a company owned by GS
Realty. Regis is entitled to receive property and construction management fees
and leasing commissions in accordance with the terms of its property-level
management agreement with Triad.

NOTE 10.  REAL ESTATE BROKERAGE

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

                                      31

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



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

   Fees and cost reimbursements to BCM and its affiliates:

<TABLE>
<CAPTION>
                                                               2001   2000   1999
                                                               ----- ------ ------
<S>                                                            <C>   <C>    <C>
Fees..........................................................
 Advisory..................................................... $ 817 $  664 $  371
 Net income...................................................    --  1,362     81
 Real estate brokerage........................................    --     --    337
 Property acquisition.........................................    --    417     --
 Mortgage brokerage and equity refinancing....................    99     --     78
 Property and construction management and leasing commissions*    --     --    618
                                                               ----- ------ ------
                                                               $ 916 $2,443 $1,485
                                                               ===== ====== ======
Cost reimbursements........................................... $ 323 $  287 $  260
                                                               ===== ====== ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                 2001   2000
                                                                 ----- ------
  <S>                                                            <C>   <C>
  Fees..........................................................
   Property acquisition......................................... $  -- $  925
   Real estate brokerage........................................    --  1,514
   Property and construction management and leasing commissions*   312    602
                                                                 ----- ------
                                                                 $ 312 $3,041
                                                                 ===== ======
</TABLE>
--------
 * Net of property management fees paid to subcontractors, other than Regis,
   and affiliates of BCM.

NOTE 12.  INCOME TAXES

   For the years 2001, 2000 and 1999, IORI has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to stockholders, provided that at least
90% (95% in 2000 and 1999) of its REIT taxable income, plus 90% (95% in 2000
and 1999) of its taxable income from foreclosure property as defined in Section
857 of the Code, is distributed.

   IORI had a net loss for federal income tax purposes before the application
of operating loss carryforwards in 2001, had net income for federal income tax
purposes in 2000 and had net losses for federal income tax purposes in 1999.
Therefore, IORI recorded no provision for income taxes. IORI's tax basis in its
net assets differs from the amount at which its net assets are reported for
financial statement purposes, principally due to the accounting for gains and
losses on property sales, depreciation on owned properties and investments in
joint venture partnerships. At December 31, 2001, IORI's tax basis in its net
assets exceeded their net basis for financial statement purposes by
approximately $2.1 million. As a result, aggregate future income for income tax
purposes will be less than such amount for financial statement purposes and
IORI would be able to maintain its REIT status without distributing 90% of its
financial statement income. Additionally, at December 31, 2001, IORI has
current and prior tax net operating loss carryforwards of $5.8 million expiring
through the year 2021.

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

                                      32

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



NOTE 13.  OPERATING SEGMENTS

   Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of general and administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow. Items
of income that are not reflected in the segments are interest, equity in
partnerships and previously deferred gains on sale of real estate totaling
$185,000 and $1.5 million for 2001 and 2000, respectively. Expenses that are
not reflected in the segments are general and administrative expenses,
non-segment interest expense and advisory incentive sales and net income fees
totaling $1.6 million and $3.6 million for 2001 and 2000, respectively.
Excluded from operating segment assets are assets of $4.4 million at December
31, 2001, and $10.2 million at December 31, 2000, which are not identifiable
with an operating segment. There are no intersegment revenues and expenses and
all business is conducted in the United States.

   Presented below is the operating income of each operating segment.

<TABLE>
<CAPTION>
                                           Commercial
                                   Land    Properties Apartments  Total
                                  -------  ---------- ---------- -------
      <S>                         <C>      <C>        <C>        <C>
      2001
      Rents...................... $    --   $ 7,900    $ 5,101   $13,001
      Property operating expenses     264     3,660      2,667     6,591
                                  -------   -------    -------   -------
      Operating income (loss).... $  (264)  $ 4,240    $ 2,434   $ 6,410
                                  =======   =======    =======   =======
      Depreciation............... $    --   $ 1,915    $   512   $ 2,427
      Interest...................   2,069     2,644      1,361     6,074
      Real estate improvements...   2,404     1,062                3,466
      Assets.....................  24,492    41,213     21,610    87,315

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

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

                                      33

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



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

           Property Sales
           Sales price................  $ 3,200              $ 3,200
           Cost of sale...............    2,710                2,710
                                        -------              -------
           Gain on sale...............  $   490              $   490*
                                        =======              =======
</TABLE>
--------
*  Excludes IORI's share of gains recognized by Tri-City, an equity affiliate
   of $1.1 million.

                                      34

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



NOTE 14.  QUARTERLY DATA

   The following is a tabulation of quarterly results of operations for the
years 2001 and 2000 (unaudited).

<TABLE>
<CAPTION>
                                                 Three Months Ended
                                     -----------------------------------------
                                     March 31 June 30  September 30 December 31
                                     -------- -------  ------------ -----------
<S>                                  <C>      <C>      <C>          <C>
2001
Rents...............................  $3,251  $ 3,289    $ 3,219      $ 3,242
Property expense....................   1,479    1,541      2,272        1,299
                                      ------  -------    -------      -------
   Operating income.................   1,772    1,748        947        1,943
Interest income.....................      72       62          8           53
Income (loss) in equity partnerships       9       (6)       (30)          19
Gain on sale of real estate.........      --       --         --           --
                                      ------  -------    -------      -------
                                          81       56        (22)          72
Other expense.......................   2,570    2,536      2,674        2,269
                                      ------  -------    -------      -------
Net income (loss)...................  $ (717) $  (732)   $(1,749)     $  (254)
                                      ======  =======    =======      =======
Earnings per share
Net income (loss)...................  $ (.47) $  (.49)   $ (1.16)     $  (.18)
                                      ======  =======    =======      =======

2000
Rents...............................  $4,115  $ 3,623    $ 2,994      $ 2,999
Property expense....................   1,848    1,771      1,667        1,683
                                      ------  -------    -------      -------
   Operating income.................   2,267    1,852      1,327        1,316

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

Other expense.......................   2,539    3,597      2,401        2,567
                                      ------  -------    -------      -------
Net income (loss)...................  $  592  $14,442    $ 2,888      $(1,128)
                                      ======  =======    =======      =======

Earnings per share
Net income (loss)...................  $  .39  $  9.43    $  1.88      $  (.67)
                                      ======  =======    =======      =======
</TABLE>

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

NOTE 15.  COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

   Olive Litigation.  In February 1990, IORI, together with National Income
Realty Trust, Continental Mortgage and Equity Trust ("CMET") and TCI, three
real estate entities with, at the time, the same officers, directors or
trustees and advisor as IORI, entered into a settlement (the "Settlement") of a
class and derivative

                                      35

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


action entitled Olive et al. v. National Income Realty Trust et al., relating
to the operation and management of each of the entities. On April 23, 1990, the
Court granted final approval of the terms of the Settlement. The Settlement was
modified in 1994 (the "Modification").

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

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

   In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this provision
of the Olive Amendment. In January 2000, the Board engaged another
management/compensation consultant to perform the required evaluation again.
This evaluation was completed in April 2000 and was provided to plaintiffs'
counsel. The Board believes that any alleged breach of the Olive Amendment has
been fully remedied by the Board's engagement of the second consultant.
Although several status conferences have been held on this matter, there has
been no Court order resolving whether there was any breach of the Olive
Amendment.

   In October 2000, plaintiffs' counsel asserted that the stock option
agreement to purchase TCI shares, which was entered into by IORI and an
affiliate of IORI, American Realty Investors, Inc. ("ARI"), in October 2000
with 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 Olive Amendment terminated on April 28, 1999. However, in September 2000,
the Court ruled that certain provisions of the Modification continue to be
effective after the termination date. This ruling has been appealed to the
United States Court of Appeals for the Ninth Circuit by IORI and TCI.

   On October 23, 2001, IORI 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 for a proposed
settlement. Under the proposal, ARI would 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. ARI will pay $17.50 cash per TCI share and $19.00 cash per
IORI share for the stock held by non-affiliated stockholders. ARI would issue
one share of Series G Preferred Stock with a liquidation value of $20.00 per
share for each share of TCI Common Stock for stockholders who elect to receive
ARI preferred stock in lieu of cash. ARI would issue one share of Series H
Preferred Stock with a liquidation value of $21.50 per share for each share of
IORI Common Stock for stockholders who elect to receive ARI preferred stock in
lieu of cash. Each share of Series H Preferred Stock will be convertible into
2.25 shares of ARI Common Stock during a 75-day period that commences fifteen
days after the date of the first ARI Form 10-Q filing that occurs after the
closing of the merger transaction. Upon the acquisition of IORI and TCI shares,
TCI and IORI would become wholly-owned subsidiaries of ARI. The transaction is
subject to the negotiation of a definitive merger agreement and a vote of the
shareholders of all three entities. TCI has the same board as IORI and the same
advisor as IORI and ARI.

                                      36

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

NOTE 16.  SUBSEQUENT EVENTS

   In January 2002, IORI sold the 124,059 sq. ft., Daley Corporate Center, in
San Diego, California, for $15.5 million, receiving net cash of $8.1 million
after paying off $6.6 million in mortgage debt and the payment of various
closing costs. A gain of $7.1 million was recognized on the sale.

   Also in January 2002, IORI purchased 100% of the outstanding common shares
of Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of ARI, a
related party, for $5.1 million cash. Rosedale owns the 83,331 sq. ft. Rosedale
Towers Office Building in Roseville, Minnesota. ARI has guaranteed that the
asset shall produce at least a 12% return annually of the purchase price for a
period of three years from the purchase date. If the assets fail to produce the
12% return, ARI shall pay IORI any shortfall. In addition, if the asset fails
to produce the 12% return for a calendar year, IORI may require ARI to
repurchase the shares of Rosedale for the purchase price. Management has
classified this related party transaction as a note receivable from ARI.

   In February 2002, IORI funded a $2.0 million mortgage loan as a
participation agreement with TCI. The loan is secured by a second lien on a
retail center in Montgomery County, Texas. The note receivable bears interest
at 16.0% per annum, requires monthly interest only payments of $67,000 and
matured in February 2002. IORI and TCI will receive 57% and 43%, respectively,
on the remaining principal and interest payments. In February 2002, the loan
was extended until April 2002.


                                      37

<PAGE>

                                                                   SCHEDULE III

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION

                               December 31, 2001

<TABLE>
<CAPTION>


                                                                                 Gross Amount
                                          Initial Cost         Cost       Carried at End of Year(1)   Accumu-
                                      --------------------  Capitalized  ----------------------------  lated    Date of
                              Encum-           Building &  Subsequent to          Building &          Depreci- Construc-   Date
Property/Location             brances  Land   Improvements  Acquisition   Land   Improvements  Total   ation     tion    Acquired
-----------------             ------- ------- ------------ ------------- ------- ------------ ------- -------- --------- --------
                                                                           (dollars in thousands)
<S>                           <C>     <C>     <C>          <C>           <C>     <C>          <C>     <C>      <C>       <C>
Properties Held For Investment
Apartments
Brighton Court, Midland, TX.. $ 2,456 $   339   $ 3,051       $    --    $   339   $ 3,051    $ 3,390  $  121    1983     06/00
Del Mar, Midland, TX.........   2,349     324     2,919            --        324     2,919      3,243     116    1983     06/00
Enclave, Midland, TX.........   2,349     324     2,919            --        324     2,919      3,243     116    1983     06/00
Meridian, Midland, TX........   2,892   1,138     4,552            --      1,138     4,552      5,690     237    1983     12/99
Signature Place, Midland, TX.   1,921     265     2,388            --        265     2,388      2,653      94    1983     06/00
Sinclair Place, Midland, TX..   1,601     221     1,990            --        221     1,990      2,211      79    1983     06/00
Treehouse, San Antonio, TX...   2,615     375     2,124           259        375     2,383      2,758     816    1975     09/89
Office Buildings
2010 Valley View, Farmers
 Branch, TX..................   1,814     120       479         2,981        120     3,460      3,580     741    1998     09/97
5600 Mowry, Newark, CA.......   4,125   1,263     5,054           652      1,263     5,706      6,969   1,014    1987     12/97
Akard Plaza, Dallas, TX......   2,040     734     2,936           454        734     3,390      4,124     439    1984     12/97
Chuck Yeager, Chantilly, VA..   4,939   1,080     4,321         1,566      1,080     5,887      6,967     934    1991     01/97
Daley Plaza, San Diego, CA...   6,618   1,502     6,008         1,589      1,502     7,597      9,099   1,627    1987     09/96
La Mesa Village, La Mesa, CA.   5,655   1,709     6,836           733      1,709     7,569      9,278   1,113    1991     05/97
Westlake Village, Westlake
 Village, CA.................   2,774     831     3,324           248        831     3,572      4,403     428    1982     11/97
Land
Frankel, Midland County, TX..              44        --            --         44        --         44      --      --     06/00
Travelers, Farmers Branch, TX   9,900  24,848        --         2,690     24,848     2,690     27,538      --      --     06/00
                              ------- -------   -------       -------    -------   -------    -------  ------
                              $54,048 $35,117   $48,901       $11,172    $35,117   $60,073    $95,190  $7,875
                              ======= =======   =======       =======    =======   =======    =======  ======
</TABLE>
<TABLE>
<CAPTION>
                                Life on
                                 Which
                              Depreciation
                               in Latest
                               Statement
                              of Operation
Property/Location             is Computed
-----------------             ------------

<S>                           <C>
Properties Held For Investment
Apartments
Brighton Court, Midland, TX..    40 years
Del Mar, Midland, TX.........    40 years
Enclave, Midland, TX.........    40 years
Meridian, Midland, TX........    40 years
Signature Place, Midland, TX.    40 years
Sinclair Place, Midland, TX..    40 years
Treehouse, San Antonio, TX...  5-40 years
Office Buildings
2010 Valley View, Farmers
 Branch, TX..................  5-40 years
5600 Mowry, Newark, CA.......  3-40 years
Akard Plaza, Dallas, TX......  5-40 years
Chuck Yeager, Chantilly, VA..  5-40 years
Daley Plaza, San Diego, CA...  2-40 years
La Mesa Village, La Mesa, CA.  5-40 years
Westlake Village, Westlake
 Village, CA.................  5-40 years
Land
Frankel, Midland County, TX..    40 years
Travelers, Farmers Branch, TX    40 years



</TABLE>
--------
(1) The aggregate cost for Federal income tax purposes is $94.0 million.


                                      38

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
                                                 2001      2000     1999
                                                -------  --------  -------
                                                  (dollars in thousands)
     <S>                                        <C>      <C>       <C>
     Reconciliation of Real Estate
     Balance at January 1,..................... $91,837  $ 96,051  $91,070
      Additions
        Acquisitions and Improvements..........   3,466    45,577    7,890
      Deductions
        Retirements............................    (113)       --       --
        Sale of real estate....................      --   (49,791)  (2,909)
                                                -------  --------  -------
     Balance at December 31,................... $95,190  $ 91,837  $96,051
                                                =======  ========  =======
     Reconciliation of Accumulated Depreciation
     Balance at January 1,..................... $ 5,560  $  9,509  $ 7,379
      Additions
        Depreciation...........................   2,427     2,450    2,723
      Deductions
        Retirements............................    (112)       --       --
        Sale of real estate....................      --    (6,399)    (593)
                                                -------  --------  -------
     Balance at December 31,................... $ 7,875  $  5,560  $ 9,509
                                                =======  ========  =======
</TABLE>


                                      39

<PAGE>

                                                                    SCHEDULE IV

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                         MORTGAGE LOANS ON REAL ESTATE
                               December 31, 2001

<TABLE>
<CAPTION>

                                       Final
                             Interest Maturity                              Prior
        Description            Rate      Date     Periodic Payment Terms    Liens
        -----------          --------    --    ---------------------------- -----

<S>                          <C>      <C>      <C>                          <C>
Junior Mortgage Loans
JNC Enterprises, Ltd........   18.0%   04/02    Interest only payments of   $9,000
                                                 $       7,500 due monthly.
Secured by 165 acres of land
 in The Colony, TX..........                                                $9,000
</TABLE>
<TABLE>
<CAPTION>
                                                         Principal Amount of
                                Face        Carrying       Loans Subject to
                               Amount        Amounts     Delinquent Principal
        Description          of Mortgage of Mortgage (1)     or Interest
        -----------          ----------- --------------- --------------------

<S>                          <C>         <C>             <C>
Junior Mortgage Loans
JNC Enterprises, Ltd........    $1,500        $500              $ --

Secured by 165 acres of land
 in The Colony, TX..........   $1,500         $500               $500
</TABLE>

--------
(1)  The aggregate cost for federal income tax purposes is $500,000.


                                      40

<PAGE>

                                                                    SCHEDULE IV
                                                                    (Continued)

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                         MORTGAGE LOANS ON REAL ESTATE


<TABLE>
<CAPTION>
                                              2001     2000   1999
                                            -------   ------  ----
                                            (dollars in thousands)
               <S>                          <C>       <C>     <C>
               Balance at January 1,....... $ 1,500   $ ----  $ --
               Additions
                  New mortgage loans.......      --    1,500    --
               Deductions
                  Collections of principal.  (1,000)      --    --
                                            -------   ------  ----
               Balance at December 31,..... $   500   $1,500  $ --
                                            =======   ======  ====
</TABLE>

                                      41

<PAGE>

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

   Not applicable.

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

                                   PART III

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

Directors

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

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

   TED P. STOKELY:  Age 68, Director (Independent) (since April 1990) and
Chairman of the Board (since January 1995).

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

   HENRY A. BUTLER:  Age 51, Director (Affiliated) (since December 2001).

      Broker--Land Sales (since 1992) of Basic Capital Management, Inc.
   ("BCM"); Owner/Operator (1989 to 1991) of Butler Interests, Inc.; and
   Director (since December 2001) of TCI.

   EARL D. CECIL:  Age 72, Director (Independent) (since March 2002).

      Financial and business consultant (since January 1994); Division Vice
   President (February 1987 to December 1993) of James Mitchell & Company, a
   financial services marketing organization; Director (since November 2001) of
   ARI; and Director (since March 2002) of TCI.

   MARTIN L. WHITE:  Age 62, Director (Independent) (since January 1995).

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

Board Committees

   The Board of Directors held seven meetings during 2001. 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.

                                      42

<PAGE>

   The Board of Directors has an Audit Committee, the function of which is to
review IORI's operating and accounting procedures. The current members of the
Audit Committee, all of whom are Independent Directors, are Messrs. Cecil,
Stokely and White. The Audit Committee met four times during 2001.

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

Executive Officers

   The following persons currently serve as executive officers of IORI: Mark
Branigan, Executive Vice President--Residential; Louis J. Corna Executive Vice
President--Tax; Ronald E. Kimbrough, Executive Vice President and Chief
Financial Officer; and David W. Starowicz, Executive Vice
President--Acquisitions, Sales and Construction. 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 47, Executive Vice President--Residential (since June
2001); 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--Residential (since June 2001), 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 Management (January 1992 to October
   1997) of BCM, American Realty Trust, Inc, ("ART") and TCI; Executive Vice
   President and Chief Financial Officer (August 2000 to June 2001) and
   Director (September 2000 to June 2001) of ARI; and real estate consultant
   (November 1997 to July 1999).

   LOUIS J. CORNA:  Age 54, 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 2001 to June 2001).

      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.

   RONALD E. KIMBROUGH: Age 49, Executive Vice President and Chief Financial
Officer (since January 2002).

      Executive Vice President and Chief Financial Officer (since January 2002)
   of BCM, ARI and TCI; Controller (from September 2000 to January 2002) of
   BCM; Vice President and Treasurer (from January 1998 to September 2000) of
   Syntek West, Inc. and One Realco Corporation; and Consultant (1997).

   DAVID W. STAROWICZ:  Age 46, Executive Vice President--Acquisitions, Sales
and Construction (since March 2001), Executive Vice President--Commercial Asset
Management (September 1999 to March 2001) and Vice President (May 1992 to
September 1999).

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

Officers

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

                                      43

<PAGE>

   ROBERT A. WALDMAN:  Age 49, Senior Vice President and General Counsel (since
January 1995); Vice President (December 1990 to January 1995) and Secretary
(December 1993 to February 1997 and since June 1999).

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

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

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

   Under the securities laws of the United States, IORI's Directors, executive
officers, and any persons holding more than ten percent of IORI's shares of
Common Stock are required to report their share ownership and any changes in
that ownership to the Securities and Exchange Commission (the "Commission").
Specific due dates for these reports have been established and IORI is required
to report any failure to file by these dates during 2001. All of these filing
requirements were satisfied by IORI's Directors and executive officers and ten
percent holders. In making these statements, IORI has relied on the written
representations of its incumbent Directors and executive officers and its ten
percent holders and copies of the reports that they have filed with the
Commission.

The Advisor

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

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

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

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

   The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of IORI and to receive an advisory fee comprised of a gross asset
fee of .0625% per month (.75% per annum) of the average of

                                      44

<PAGE>

the gross asset value (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% of IORI's net income.

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

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

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

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

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

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

   Under the Advisory Agreement all or a portion of the annual advisory fee
must be refunded by BCM if the Operating Expenses of IORI (as defined in the
Advisory Agreement) exceed certain limits specified in the Advisory Agreement
based on the book value, net asset value and net income of IORI during the
fiscal year. BCM was required to refund $256,000 of the 2001 advisory fee under
this provision.

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

                                      45

<PAGE>

discussed below, under Real Estate Brokerage IORI has engaged Regis Realty,
Inc. ("Regis"), a related party, on a non-exclusive basis to provide brokerage
services for IORI.

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

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

<TABLE>
<S>                  <C>

Mickey N. Phillips:  Director

Ryan T. Phillips:    Director

Mark W. Branigan     Executive Vice President--Residential

Louis J. Corna:      Executive Vice President--Tax

Ronald E. Kimbrough: Executive Vice President and Chief Financial Officer

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

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

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

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

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

Property Management

   Since February 1, 1990, affiliates of BCM have provided property management
services. Currently, Triad provides such property management services for a fee
of 5% or less of the monthly gross rents collected on residential properties
and 3% or less of the monthly gross rents collected on commercial properties
under its management. Triad subcontracts with other entities for the provision
of the property-level management services to IORI at various rates. The general
partner of Triad is BCM. The limited partner of Triad is GS Realty Services,
Inc. ("GS Realty"), a related party. Triad subcontracts the property-level
management and leasing of IORI's seven office buildings and the two commercial
properties owned by real estate partnerships in which IORI and TCI are partners
to Regis, a related party, which is a company owned by GS Realty. Regis is
entitled to receive property and construction management fees and leasing
commissions in accordance with its property-level management agreement with
Triad.

Real Estate Brokerage

   Regis also provides real estate brokerage services to IORI on a
non-exclusive basis. Regis is entitled to receive a real estate brokerage
commission for property acquisitions and sales in accordance with the following
sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first
$2.0 million of any purchase or sale transaction of which no more than 3.5%
would be paid to Regis or affiliates, (2) maximum fee of 3.5% on transaction
amounts between $2.0--$5.0 million of which no more than 3% would be paid to
Regis or affiliates, (3) maximum fee of 2.5% on transaction amounts between
$5.0--$10.0 million of which no more than 2% would be paid to Regis or
affiliates, and (4) maximum fee of 2% on transaction amounts in excess of $10.0
million of which no more than 1.5% would be paid to Regis or affiliates.

                                      46

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

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

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

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

   During 2001, $76,250 was paid to the Independent Directors in total
Directors' fees for all services including the annual fee for service during
the period January 1, 2001, through December 31, 2001, and 2001 special service
fees as follows: R. Douglas Leonhard, $18,250; Murray Shaw, $7,500; Ted P.
Stokely, $18,000; Martin L. White, $17,000; and Edward G. Zampa, $15,500.

                                      47

<PAGE>

Performance Graph

   The following performance graph compares the cumulative total stockholder
return on IORI's shares of Common Stock with the Dow Jones Equity Market Index
("DJ Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real
Estate Index"). The comparison assumes that $100 was invested on December 31,
1996, in IORI's shares of Common Stock and in each of the indices and further
assumes the reinvestment of all distributions. Past performance is not
necessarily an indicator of future performance.

                COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN



                                    [CHART]

<TABLE>
<CAPTION>
                               1996   1997   1998   1999   2000   2001
                              ------ ------ ------ ------ ------ ------
         <S>                  <C>    <C>    <C>    <C>    <C>    <C>
         IORI................ 100.00 108.20  62.87  59.91  95.53 213.27
         DJ Equity Index..... 100.00 131.82 164.63 202.05 183.32 161.47
         DJ Real Estate Index 100.00 118.08  93.15  88.20 112.47 125.74
</TABLE>

                                      48

<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   Security Ownership of Certain Beneficial Owners.  The following table sets
forth the ownership of IORI's shares of Common Stock, both beneficially and of
record, both individually and in the aggregate for those persons or entities
known by IORI to be beneficial owners of more than 5% of its shares of Common
Stock as of the close of business on March 4, 2002.

<TABLE>
<CAPTION>
                                                    Amount
                                                     and
                                                  Nature of  Percent
                                                  Beneficial    of
          Name and Address of Beneficial Owner    Ownership  Class(1)
          ------------------------------------    ---------- --------
          <S>                                     <C>        <C>
          EQK Holdings, Inc.(2)..................  409,935     28.5%
           1800 Valley View Lane
           Suite 300
           Dallas, Texas 75234

          Transcontinental Realty Investors, Inc.  345,728     24.0
           1800 Valley View Lane
           Suite 300
           Dallas, Texas 75234

          Basic Capital Management, Inc..........  106,802      7.4
           1800 Valley View Lane
           Suite 300
           Dallas, TX 75234
</TABLE>
--------
(1) Percentages are based upon 1,438,945 shares of Common Stock outstanding at
    March 4, 2002.
(2) EQK Holdings, Inc. ("EQK") is a wholly-owned subsidiary of ART which is a
    wholly-owned subsidiary of ARI.

   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 4, 2002.

<TABLE>
<CAPTION>
                                                                Amount and
                                                                Nature of  Percent
                                                                Beneficial    of
Name of Beneficial Owner                                        Ownership  Class(1)
------------------------                                        ---------- --------
<S>                                                             <C>        <C>
All Directors and Executive Officers as a group (8 individuals) 862,465(2)  59.9%
</TABLE>
--------
(1) Percentage is based upon 1,438,945 shares of Common Stock outstanding at
    March 4, 2002.
(2) Includes 345,728 shares owned by TCI of which the Directors of IORI may be
    deemed to be beneficial owners by virtue of their positions as directors of
    TCI and 409,935 shares owned by EQK and 106,802 shares owned by BCM, of
    which the executive officers of IORI may be deemed to be beneficial owners
    by virtue of their positions as executive officers of ARI and BCM. The
    Directors and executive officers disclaim beneficial ownership of such
    shares. Each of the directors of ARI may be deemed to be beneficial owners
    of the shares owned by ARI by virtue of their positions as directors of
    ARI. Each of the directors of BCM may be deemed to be beneficial owners of
    the shares owned by BCM by virtue of their positions as directors of BCM.
    The directors of ARI and BCM disclaim such beneficial ownership.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Business Relationships

   In February 1989, the Board of Directors voted to retain BCM as IORI's
advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT--The Advisor." BCM is a

                                      49

<PAGE>

company of which Messrs. Branigan, Corna, Kimbrough and Starowicz serve as
executive officers. BCM is owned by a trust for the benefit of the children of
Gene E. Phillips. Mr. Phillips serves as a representative of his children's
trust which owns BCM and, in such capacity has substantial contact with the
management of BCM and input with respect to BCM's performance of advisory
services to IORI.

   Since February 1, 1991, affiliates of BCM have provided property management
services to IORI. Currently, Triad provides such property management services.
The general partner of Triad is BCM. The limited partner of Triad is GS Realty,
a related party. Triad subcontracts the property-level management and leasing
of IORI's seven office buildings and two commercial properties owned by real
estate partnerships in which IORI and TCI are partners to Regis, a related
party, which is a company owned by GS Realty.

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

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

   From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid
consultant and since January 1993 as a part-time unpaid consultant for
Eldercare, a nonprofit corporation engaged in the acquisition of low income and
elderly housing. Eldercare had a revolving loan commitment from Syntek West,
Inc., a company owned by Gene E. Phillips. The loan commitment expired in 1998.

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.

   In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation, a wholly-owned subsidiary of ARI, for $5.1 million in
cash. See NOTE 16 "SUBSEQUENT EVENTS."

   In February 2002, IORI purchased a $2.0 million senior participation
interest in a loan from TCI. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."

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

   In 2001, IORI paid BCM and its affiliates and related parties $817,000 in
advisory fees, $99,000 in mortgage brokerage fees and $312,000 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, IORI has made advances to BCM, which generally have not had
specific repayment terms and have been reflected in IORI's financial statements
as other assets or other liabilities from affiliates. At December 31, 2001, BCM
advanced IORI $593,000. As of March 2002, IORI has repaid that amount to BCM.

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

                                      50

<PAGE>

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.

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

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

   1. Consolidated Financial Statements

      Report of Independent Certified Public Accountants

      Consolidated Balance Sheets--December 31, 2001 and 2000

      Consolidated Statements of Operations--Years Ended December 31, 2001,
   2000 and 1999

      Consolidated Statements of Stockholders' Equity--Years Ended December 31,
   2001, 2000 and 1999

      Consolidated Statements of Cash Flows--Years Ended December 31, 2001,
   2000 and 1999

      Notes to Consolidated Financial Statements

   2. Financial Statement Schedules

      Schedule III--Real Estate and Accumulated Depreciation

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

   3. Exhibits

   The following documents are filed as Exhibits to this Report:

<TABLE>
<CAPTION>
Exhibit
Number                                              Description
------                                              -----------
<C>     <S>
 3.0    Articles of Incorporation of Income Opportunity Realty Investors, Inc. (incorporated by reference to
        Appendix C to the Registrant's Registration Statement on Form S-4 dated February 12, 1996).

 3.1    Bylaws of Income Opportunity Realty Investors, Inc. (incorporated by reference to Appendix D to
        the Registrant's Registration Statement on Form S-4 dated February 12, 1996).

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

   (b) Reports on Form 8-K:

   A Current Report on Form 8-K, dated January 28, 2002, was filed with respect
to Item 5. "Other Events and Regulation FD Disclosures," which reports the
resignation of R. Douglas Leonhard and Edward G. Zampa as Directors of IORI and
the election of Henry A. Butler as Director of IORI and the execution of the
Second Amendment in the Olive Litigation.


                                      51

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Dated: March 20, 2002
                                               INCOME OPPORTUNITY REALTY
                                                 INVESTORS, INC.

                                               By:   /s/  Ronald E. Kimbrough
                                                   -----------------------------
                                                   Ronald E. Kimbrough 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      Chairman of the Board and     March 20, 2002
----------------------------- Director
        Ted P. Stokely

    /s/  HENRY A. BUTLER      Director                      March 20, 2002
-----------------------------
         Henry A. Butler

     /s/  EARL D. CECIL       Director                      March 20, 2002
-----------------------------
          Earl D. Cecil

    /s/  MARTIN L. WHITE      Director                      March 20, 2002
-----------------------------
         Martin L. White

  /s/  RONALD E. KIMBROUGH    Executive Vice President and  March 20, 2002
----------------------------- Chief   Financial Officer
       Ronald E. Kimbrough    (Principal   Financial and
                              Accounting Officer   and
                              Acting Principal Executive
                                Officer)


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