<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, 2002

                        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           (I.R.S. Employer
                  Jurisdiction of          Identification No.)
                 Incorporation or
                   Organization)

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

                                (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]

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

   The aggregate market value of the shares of voting and non-voting common
equity held by non-affiliates of the Registrant, computed by reference to the
closing sales price of the Common Stock on the American Stock Exchange as of
June 28, 2002 (the last business day of the Registrant's most recently
completed second fiscal quarter) was $10,376,640 based upon a total of 576,480
shares held as of June 28, 2002 by persons believed to be non-affiliates of the
Registrant. The basis of the calculation does not constitute a determination by
the Registrant as defined in Rule 405 of the Securities Act of 1933, as
amended, such calculation, if made as of a date within sixty days of this
filing would yield a different value. As of March 19, 2003, there were
1,438,945 shares of common stock outstanding.

                     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....................................................................  10
Item 4. Submission of Matters to a Vote of Security Holders..................................  11

                                           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  12
Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk......................  18
Item 8. Financial Statements and Supplementary Data..........................................  19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  44

                                          PART III

Item 10. Directors, Executive Officers and Advisor of the Registrant.........................  44
Item 11. Executive Compensation..............................................................  49
Item 12. Security Ownership of Certain Beneficial Owners and Management......................  51
Item 13. Certain Relationships and Related Transactions......................................  52

                                           PART IV

Item 14. Controls and Procedures.............................................................  53
Item 15. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K......  53
Signature Page...............................................................................  55
</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. Prior to January 1, 2003, IORI
elected to be treated as a Real Estate Investment Trust ("REIT") under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code").
Due to the completion of the tender offer by American Realty Investors, Inc.
("ARI"), an affiliate, on March 19, 2003, as discussed below, and the resulting
concentration of ownership, IORI no longer met the requirement as of January 1,
2003 for tax treatment as a REIT. IORI cannot re-qualify for REIT tax status
for at least five years.

   At December 31, 2002, IORI's real estate consisted of 14 properties held for
investment. In addition, IORI owns interest in one partnership, which owns a
property and a 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 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
(the "Olive Litigation"). In February 2002, the court granted final approval of
the proposed settlement (the "Olive Settlement"). Under the Olive Settlement,
ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI
not currently owned by ARI for a cash payment or shares of ARI preferred stock
or (ii) make a tender offer for all of the outstanding shares of IORI and TCI
not currently owned by ARI. On November 15, 2002, ARI commenced the tender
offer for the IORI and TCI shares. The tender offer was completed on March 19,
2003. ARI paid $19.00 cash per IORI share and $17.50 cash per TCI share for the
stock held by non-affiliated stockholders. Pursuant to the tender offers, ARI
acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the
tender offers fulfills the obligations under the Olive Settlement and the Olive
Litigation has been dismissed with prejudice. IORI has the same board as TCI
and the same advisor as TCI and ARI. Two of the directors of IORI and TCI also
serve as directors of 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 2003,
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 indirectly owned by a trust for the children of Gene E. Phillips. Mr.
Phillips is not an officer or director of BCM, but serves as a representative
of the trust, is indirectly involved in daily consultation with the officers of
BCM and has significant influence over the conduct of BCM's business, including
the rendering of advisory services and the making of investment decisions for
itself and for 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 19, 2003, and including shares tendered, ARI
and TCI owned approximately 46.5% 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 Highland Realty Services, Inc.
("Highland"), a related party. Triad subcontracted the property-level
management and leasing of IORI's five office buildings and the commercial
property owned by a real estate partnership in which IORI and TCI are partners
to Regis Realty, Inc. ("Regis"), a related party, which is a company also owned
by Highland, until December 2002. Regis was entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Triad, until December
2002. Regis also was entitled to receive real estate brokerage commissions in
accordance with the terms of a non-exclusive brokerage agreement. Since January
1, 2003, Regis Realty I, LLC ("Regis I") has provided these services. Regis I
is owned by Highland. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR
OF 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, 2002, 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 14 owned properties and an
investment in a partnership which owns commercial property. Of the 14
properties, seven apartments were sold to partnerships controlled by Metra
Capital, LLC ("Metra"). See NOTE 5. "NOTES AND INTEREST PAYABLE." Since that
transaction was accounted for as a finance transaction, IORI continues to
account for those properties as owned properties. IORI is a partner in a
partnership in which it is a 40% general partner that holds a wraparound
mortgage note. 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, 2002, 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. However, the majority of
IORI's properties are located in Texas.

   At December 31, 2002, one of IORI's properties, the Travelers land parcel,
exceeded 10% of IORI's total assets. At December 31, 2002, 83% of IORI's assets
consisted of owned properties and less than 1% consisted of investments in
partnerships. The remaining 17% 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 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.

                                     [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 2 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, 2002, 84% 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 14 owned
properties and an investment in a partnership 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, 2002.

<TABLE>
<CAPTION>
                                             Commercial
                        Region    Apartments Properties
                        ------    ---------- ----------
                        <S>       <C>        <C>
                        Pacific..    -- %        51%
                        Southwest    100         28
                        Southeast     --         21
                                     ---        ---
                                     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 2002
is as follows:

<TABLE>
                   <S>                                   <C>
                   Owned properties at January 1, 2002.. 16
                   Properties purchased................. --
                   Properties sold...................... (2)
                                                         --
                   Owned properties at December 31, 2002 14
                                                         ==
</TABLE>

   Properties Held for Investment.  Set forth below are IORI's owned properties
at December 31, 2002, 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, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                               Rent Per Square Foot  Occupancy %
                                                               -------------------- --------------
Property              Location      Units/Square Footage Acres  2002   2001   2000  2002 2001 2000
--------         ------------------ -------------------------- ------ ------ ------ ---- ---- ----
<S>              <C>                <C>                        <C>    <C>    <C>    <C>  <C>  <C>
Apartments
Brighton Court.. Midland, TX          60 Units/90,672 Sq.Ft.   $  .55 $  .54 $  .53  99   93   93
Del Mar......... Midland, TX         92 Units/105,348 Sq.Ft.      .53    .50    .50  95   98   98
Enclave......... Midland, TX          68 Units/89,734 Sq.Ft.      .59    .57    .56  97   93   93
Meridian........ Midland, TX         280 Units264,000 Sq.Ft.      .46    .45    .41  91   95   95
Signature Place. Midland, TX          57 Units/72,480 Sq.Ft.      .59    .57    .56  93   86   86
Sinclair Place.. Midland, TX         114 Units/91,529 Sq.Ft.      .54    .50    .49  92   96   96
Treehouse....... San Antonio, TX     106 Units/88,957 Sq.Ft.      .88    .84    .83  89   95   95

Office Buildings
2010 Valley View Farmers Branch, TX           39,568 Sq. Ft.    18.56  17.98  17.40  92   87   86
5600 Mowry...... Newark, CA                   56,120 Sq. Ft.    29.49  26.70  24.64  43   72  100
Akard Plaza..... Dallas, TX                   42,895 Sq. Ft.    18.23  16.95  15.46  70   90   91
Chuck Yeager.... Chantilly, VA                60,060 Sq. Ft.    13.71  13.02  11.21 100  100   41
La Mesa Village. La Mesa, CA                  92,611 Sq. Ft.    19.98  19.45  16.87  73   68   77

Land
Frankel......... Midland County, TX               1.01 Acres
Travelers....... Farmers Branch, TX                204 Acres
</TABLE>

                                      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, 2002, 2001 and
2000:

<TABLE>
<CAPTION>
                                             Rent per Square Foot  Occupancy %
                                             -------------------- --------------
   Property        Location  Square Footage  2002   2001   2000   2002 2001 2000
   --------        --------- --------------- -----  -----  -----  ---- ---- ----
   <S>             <C>       <C>             <C>    <C>    <C>    <C>  <C>  <C>
   Office Building
   Eton Square.... Tulsa, OK 222,654 Sq. Ft. 11.35  11.27  10.52   42   85   59
</TABLE>

   IORI owned a 36.3% general partner interest and TCI owned a 63.7% limited
partner interest in Tri-City Limited Partnership ("Tri-City") which in turn
owned 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, required monthly payments of principal and interest of $20,601
and matured in February 2005. IORI received a distribution of $739,000 of the
net financing proceeds. In November 2002, Tri-City sold the Chelsea Square
Shopping Center. Tri-City received net cash of $1.9 million after the payment
of debt and closing costs. IORI received a distribution of $704,000 of the sale
proceeds. Tri-City recognized a gain of $1.1 million of which $383,000 was
IORI's equity share.

   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 loans that
IORI originated as well as events that affected previously funded junior
mortgage loans during 2002.

   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 bore interest at
18.0% per annum, required monthly payments of interest only and matured in
January 2002. In January 2002, the loan was extended to April 2002. In April
2002, the loan was paid off, including accrued but unpaid interest.

   In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty
Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owned
the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI
guaranteed that the asset would produce at least a 12% return annually of the
purchase price for a period of three years from the purchase date. If the asset
failed to produce the 12% return, ARI shall pay IORI any shortfall. Management
classified this related party transaction as a note receivable from ARI. In the
first quarter of 2002, after reviewing the property's fair value after costs to
sell, even though ARI guaranteed the 12% return, IORI recognized a provision
for loss on the note receivable of $767,000. In December 2002, the Rosedale
Towers Office Building was sold for $7.2 million. ARI received $3.5 million of
the proceeds after the payment of the first lien debt and various closing costs
and IORI recognized an additional loss of $801,000 on its note. The $3.5
million received by ARI is included within other assets in the accompanying
Consolidated Balance Sheet.

                                      9

<PAGE>

   In February 2002, IORI funded a $2.0 million mortgage loan as a
participation agreement with Transcontinental Realty Investors, Inc. ("TCI"), a
related party. The loan was secured by a second lien on a retail center in
Montgomery County, Texas. The note receivable bore interest at 16.0% per annum,
required monthly interest only payments of $47,000 and matured in February
2002. In February 2002, the loan was extended until April 2002. In April 2002,
IORI extended the loan until July 2002, receiving $8,500 as an extension fee.
In July 2002, the loan was extended until September 2002, with IORI receiving
$8,500 as an extension fee. Of the $2.0 million in principal payments, $1.5
million was received by TCI and $500,000 was received by Basic Capital
Management, Inc. ("BCM"), an affiliate and the advisor to IORI. These amounts
are included within receivable from affiliates in the accompanying Consolidated
Balance Sheet.

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

ITEM 3.  LEGAL PROCEEDINGS

Olive Litigation

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

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

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

                                      10

<PAGE>

   On October 23, 2001, TCI, IORI and ARI jointly announced a preliminary
agreement with the plaintiff's legal counsel for complete settlement of all
disputes in the lawsuit. For further information, refer to ITEM 1. "LEGAL
PROCEEDINGS" included in TCI's Second Quarter Report on Form 10-Q for the six
months ended June 30, 2002.

   On November 15, 2002, ARI commenced the tender offer for the IORI and TCI
shares. The tender offer was completed on March 19, 2003.

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

   Not applicable.

                                    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 foll owing 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, 2003 (through March 19, 2003) $18.75 $17.00

             March 31, 2002.........................  18.30  17.20
             June 30, 2002..........................  18.40  17.95
             September 30, 2002.....................  18.05  12.00
             December 31, 2002......................  20.25  12.90

             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
</TABLE>

   As of March 19, 2003, the closing price of IORI's Common Stock on the AMEX
was $18.75 per share.

   As of March 19, 2003, IORI's Common Stock was held by 920 holders of record.

   IORI paid no dividends in 2002 or 2001 and management does not intend to pay
dividends in 2003. See ITEM 7. "MANAGEMENT DISCUSSION AND ANALYSIS--Liquidity
and Capital Resources."

   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, 2002, 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,
                                       ---------------------------------------------------------
                                          2002        2001        2000        1999       1998
                                       ----------  ----------  ----------  ---------- ----------
                                                (dollars in thousands, except per share)
<S>                                    <C>         <C>         <C>         <C>        <C>

EARNINGS DATA
Rents................................. $    9,884  $   10,179  $    8,085  $   15,968 $   14,326
Property expense......................      5,647       5,416       4,364       6,768      6,462
                                       ----------  ----------  ----------  ---------- ----------
 Operating income.....................      4,237       4,763       3,721       9,200      7,864

Interest income.......................        270         194         319          29        172
Gain on sale of real estate...........         --          --      20,878       1,525        180
Income (loss) from equity partnerships        862          (9)        (61)        148        113

Other expense.........................      9,966       8,638       7,768       9,580      9,008
                                       ----------  ----------  ----------  ---------- ----------

Net income (loss) from continuing
  operations..........................     (4,597)     (3,690)     17,089       1,322       (679)
                                       ----------  ----------  ----------  ---------- ----------

Discontinued operations...............      6,682         228        (295)         --         --
                                       ----------  ----------  ----------  ---------- ----------

Net income (loss)..................... $    2,085  $   (3,462) $   16,794  $    1,322 $     (679)
                                       ==========  ==========  ==========  ========== ==========

PER SHARE DATA
Net income (loss)..................... $     1.45  $    (2.32) $    11.03  $      .87 $     (.44)
                                       ==========  ==========  ==========  ========== ==========
Dividends per share................... $       --  $       --  $      .45  $      .60 $      .60

Weighted average common shares
  outstanding.........................  1,438,945   1,493,675   1,522,510   1,527,386  1,521,832

                                                              December 31,
                                       ---------------------------------------------------------
                                          2002        2001        2000        1999       1998
                                       ----------  ----------  ----------  ---------- ----------
                                                (dollars in thousands, except per share)

BALANCE SHEET DATA
Real estate held for investment, net.. $   74,750  $   87,315  $   86,277  $   86,542 $   83,691
Notes and interest receivable, net....         --         505       1,500          --         --
Total assets..........................     90,185      91,833      96,519      91,185     88,695
Notes and interest payable............     51,432      54,426      54,206      62,852     60,786
Stockholders' equity..................     37,307      35,222      39,998      23,991     23,560
Book value per share.................. $    25.93  $    24.48  $    26.42  $    15.69 $    15.44
</TABLE>

   IORI purchased nine properties for a total of $46.5 million in 2000, and one
property for $5.4 million in 1999. IORI sold two properties for a total of
$19.2 million in 2002, seven properties for a total of $66.6 million in 2000,
and one property for $3.2 million in 1999. See ITEM 2. "PROPERTIES--Real
Estate" and ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

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.

                                      12

<PAGE>

Critical Accounting Policies

   Critical accounting policies are those that are both important to the
presentation of IORI's financial condition and results of operations and
require management's most difficult, complex or subjective judgements. IORI's
critical accounting policies relate to the evaluation of impairment of
long-lived assets and the evaluation of the collectibility of accounts and
notes receivable.

   If events or changes in circumstances indicate that the carrying value of a
rental property to be held and used or land held for development may be
impaired, management performs a recoverability analysis based on estimated
undiscounted cash flows to be generated from the property in the future. If the
analysis indicates that the carrying value is not recoverable from future cash
flows, the property is written down to estimated fair value and an impairment
loss is recognized. If management decides to sell rental properties or land
held for development, management evaluates the recoverability of the carrying
amounts of the assets. If the evaluation indicates that the carrying value is
not recoverable from estimated net sales proceeds, the property is written down
to estimated fair value less costs to sell and an impairment loss is recognized
within income from continuing operations. IORI's estimates of cash flow and
fair values of the properties are based on current market conditions and
considers matters such as rental rates and occupancies for comparable
properties, recent sales data for comparable properties and, where applicable,
contracts or the results of negotiations with purchasers or prospective
purchasers. IORI's estimates are subject to revision as market conditions and
IORI's assessments of them change.

   IORI's allowance for doubtful accounts receivable and notes receivable is
established based on analysis of the risk of loss on specific accounts. The
analysis places particular emphasis on past due accounts. Management considers
such information as the nature and age of the receivable, the payment history
of the tenant or other debtor, the financial condition of the tenant or other
debtor and IORI's assessment of its ability to meet its lease or interest
obligations. IORI's estimate of the required allowance, which is reviewed on a
quarterly basis, is subject to revision as these factors change and is
sensitive to the effects of economic and market conditions.

Obligations and Commitments

   IORI has contractual obligations and commitments primarily with regards to
the payment of mortgages.

   The following table aggregates IORI's expected contractual obligations and
commitments subsequent to December 31, 2002. (Dollars in thousands.)

<TABLE>
<CAPTION>
                                             PAYMENTS DUE BY PERIOD
                             ------------------------------------------------------
                                                 (in thousands)
                              2003    2004   2005   2006   2007  Thereafter  Total
                             ------- ------ ------ ------ ------ ---------- -------
<S>                          <C>     <C>    <C>    <C>    <C>    <C>        <C>
Variable interest rate notes
 Instrument's maturities.... $11,897 $4,338 $   -- $   -- $   --  $    --   $16,235
 Instrument's amortization..     361     25     27     30     34    1,656     2,133
   Interest.................     922    198    180    177    174    1,890     3,541

Fixed interest rate notes
 Instrument's maturities....      --     --     --  3,878  4,998   19,772    28,648
 Instrument's amortization..     384    417    454    470    372    1,950     4,047
   Interest.................   2,496  2,463  2,427  2,297  1,759    5,855    17,297

Principal payments..........  12,642  4,780    481  4,378  5,404   23,378    51,063
</TABLE>

Liquidity and Capital Resources

   Cash and cash equivalents totaled $10,000, $66,000 and $2.1 million at
December 31, 2002, 2001 and 2000. IORI's principal sources of cash have been
and will continue to be property operations, proceeds from property

                                      13

<PAGE>

sales and refinancings and partnership distributions. Although management
anticipates that IORI will generate excess cash from operations in 2003 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 $2.5 million in 2002, $2.0 million
in 2001, and $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) was $3.4 million in 2002, $6.0 million in 2001,
and $6.6 million in 2000. In 2002, a decrease of $1.7 million was due to the
sale of two office buildings in 2002 and $900,000 was due to decreased
occupancies at IORI's commercial properties. Of the decrease in 2001 from 2000,
$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 was $291,000 in 2002, $148,000 in 2001, and $310,000 in
2000. The increase in 2002 was due to the funding of two notes. The decrease in
2001 from 2000 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 was $4.3 million in 2002, $5.5 million in
2001, and $5.0 million in 2000. Of the decrease in 2002 from 2001, $600,000 was
due to the sale of two commercial properties, $600,000 was due to the
refinancing of Travelers land, $200,000 was due to decreased variable rates and
principal reductions and a $200,000 increase was due to the refinancing of
apartments. Of the increase in 2001 from 2000, $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 was $868,000 in 2002, $1.1
million in 2001, and $2.6 million in 2000. The decrease in 2002 from 2001, was
due to a decrease in gross assets. Of the decrease in 2001 from 2000, $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 was $1.0 million in 2002, $1.6
million in 2001, and $1.2 million in 2000. The decrease in 2002 from 2001, was
due to decreases in franchise taxes paid. The increase in 2001 from 2000, was
due to increases in taxes accrued in 2000 and paid in 2001.

   IORI made improvements to its properties totaling $365,000 in 2002, $3.5
million in 2001, and $1.9 million in 2000. The variance was primarily due to
improvements made to IORI's unimproved land.

   IORI received cash of $500,000 in 2002 and $1.0 million from mortgage
receivable principal payments in 2001, and net cash of $22.9 million in 2002
and $14.1 million from refinancings in 2001. In 2002, $26.3 million was
expended in principal payments on mortgage debt, $14.8 million was expended in
2001, and $18.2 million was expended in 2000.

   Scheduled principal payments on notes payable of $12.6 million are due in
2003. For those mortgages that come due in 2003, it is management's intent to
either seek an extension of the due dates by one or more years, or

                                      14

<PAGE>

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 owned a 36.3% general partner interest in the Tri-City partnership.
IORI received a distribution of $25,000 in 2002, $18,000 in 2001, and $25,000
in 2000 from Tri-City's operating cash flow. In 2002, IORI received $752,000 as
a distribution from the sales proceeds. IORI owns a 40% general partner
interest in the NIA partnership. In 2002 and 2001, IORI received no
distributions from NIA and made a $24,000 contribution in 2001 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 2002 or 2001. See NOTE 4. "INVESTMENT IN EQUITY METHOD
PARTNERSHIPS."

   IORI paid no dividends in 2002 and 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. Management
does not plan to pay quarterly dividends for 2003.

   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

   IORI reported net income of $2.1 million in 2002, a net loss of $3.5 million
in 2001 and net income of $16.8 million in 2000. Fluctuations in these and the
other components of revenue and expense are discussed in the following
paragraphs.

   Rents were $9.9 million in 2002, $10.2 million in 2001 and $8.1 million in
2000. The decrease in 2002 from 2001 was due to decreased occupancies at IORI's
commercial properties. Of the increase in 2001 from 2000, $1.4 million was due
to the purchase of five apartment properties in 2000 and $500,000 and $169,000
was due to increased rental rates at IORI's commercial and apartment
properties, respectively. Rents in 2003 are expected to decrease as IORI
selectively sells properties.

   Property operations expense was $5.6 million in 2002, $5.4 million in 2001,
and $4.4 million in 2000. Of the increase in 2002 from 2001, $100,000 was due
to an increase in property taxes for IORI's land and $100,000 was due to
increased utility and insurance expenses. Of the increase in 2001 from 2000,
$598,000 was due to the purchase of five apartments in 2000, $235,000 was due
to the increased utility, cleaning, repairs and insurance expense at IORI's
commercial properties and $250,000 was due to an increase in property taxes for
IORI's land. Property operations expense is expected to decrease in 2003 as
IORI selectively sells properties.

                                      15

<PAGE>

   Interest income was $270,000 in 2002, $194,000 in 2001, and $319,000 in
2000. This increase was due to an increase in short term notes receivable which
were paid off by the end of 2002. The decrease in 2001 from 2000, 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 all of IORI's notes have been paid off.

   Interest expense was $4.7 million in 2002, $5.2 million in 2001, and $2.7
million in 2000. Of the decrease in 2002 from 2001, $569,000 was due to the
refinancing of Travelers land, and $219,000 was due to lower variable interest
rate and principal paydowns. This decrease was offset by an increase of
$300,000 due to the refinancing of the apartments. Of the increase in 2001 from
2000, $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. The remaining decrease of $156,000 was due to lower
variable interest rates at IORI's apartment and commercial properties. Interest
expense in 2003 is expected to remain constant or decrease as IORI selectively
sells properties.

   Depreciation expense was $1.8 million in 2002, $1.9 million in 2001, and
$1.5 million in 2000. The decrease was due to fully depreciated tenant
improvements. Of the increase in 2001 from 2000, $138,000 was from the purchase
of five properties in 2000 and an increase of $200,000 was from tenant
improvements. Depreciation expense in 2003 is expected to approximate 2002.

   Advisory fee to affiliate was $714,000 in 2002, $817,000 in 2001, and
$664,000 in 2000. The change was due to changes in gross assets, the basis of
the fee. The advisory fee in 2003 is expected to decrease due to property sales
in 2002. See NOTE 8. "ADVISORY AGREEMENT."

   IORI paid a net income fee of $169,000 in 2002. IORI paid no net income fee
in 2001 compared to $1.4 million in 2000. The net income fee is based on 7.5%
of IORI's net income.

   General and administrative expense was $1.0 million in 2002, $739,000 in
2001, and $1.5 million in 2000. The increase in 2002 from 2001, was primarily
due to an increase in Director's and Officer's insurance. The decrease in 2001
from 2000, was primarily due to a decrease in franchise taxes.

   Equity gains of partnerships was $862,000 in 2002 and equity losses were
$9,000 in 2001, and $61,000 in 2000. The increase in 2002 was due to dissolving
of the Tri-City partnership. The decrease in 2001 was primarily due to a
decrease in operating expenses at Eton Square Office Building.

   IORI realized gains on the sale of real estate of $7.1 million in 2002 and
$20.9 million in 2000. In 2002, gains on sale of real estate represented the
gain on the sale of Daley Corporate Center.

   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.

                                      16

<PAGE>

   IORI realized net income (loss) on discontinued operations of $6.7 million,
$228,000 and $(295,000) in 2002, 2001 and 2000. The income (loss) relates to
two properties that IORI sold during 2002. The following table summarizes
revenue and expense information for the properties sold.

<TABLE>
<CAPTION>
                                                            2002    2001   2000
                                                           ------  ------ ------
<S>                                                        <C>     <C>    <C>
Revenue
Rental.................................................... $  515  $2,822 $5,646
Property operations.......................................    683   1,175  2,605
                                                           ------  ------ ------
                                                             (168)  1,647  3,041
Expenses
 Interest.................................................    193     877  2,396
 Depreciation.............................................    109     542    940
                                                           ------  ------ ------
                                                              302   1,419  3,336

Net loss from discontinued operations.....................   (470)    228   (295)

 Gain on sale of real estate..............................  6,769      --     --
 Equity in gain on sale of real estate by equity investees    383      --     --
                                                           ------  ------ ------

Net income (loss) from discontinued operations............ $6,682  $  228 $ (295)
                                                           ======  ====== ======
</TABLE>

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.

Taxes

   For the years 2002, 2001 and 2000, IORI elected and in the opinion of
management qualified to be taxed as a REIT as defined under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended. To continue to
qualify for federal taxation as a REIT, IORI is required to hold at least 75%
of the value of its total assets in real estate assets, government securities,
cash and cash equivalents at the close of each quarter of each taxable year. As
a REIT, IORI is also required to distribute at least 90% (95% in 2000) of its
REIT taxable income plus 90% (95% in 2000) of its net income from foreclosure
property on an annual basis to stockholders.

   Due to the completion of the tender offer by ARI on March 19, 2003, and the
resulting concentration of ownership, IORI no longer met the requirement for
tax treatment as a REIT as of January 1, 2003. IORI cannot re-qualify for tax
treatment as a REIT for at least five years.

                                      17

<PAGE>

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.

   IORI is exposed to interest rate risk associated with variable rate notes
payable and maturing debt that has to be refinanced. IORI does not hold
financial instruments for trading or other speculative purposes, but rather
issues these financial instruments to finance its portfolio of real estate
assets. IORI's interest rate sensitivity position is managed by IORI's finance
department. Interest rate sensitivity is the relationship between changes in
market interest rates and the fair value of market rate sensitive assets and
liabilities. IORI's earnings are affected as changes in short-term interest
rates impact its cost of variable rate debt and maturing fixed rate debt. A
large portion of IORI's market risk is exposure to short-term interest rates
from variable rate borrowings. The impact on IORI's financial statements of
refinancing fixed debt that matured during 2002 was not material. As permitted,
management intends to convert a significant portion of variable rates
borrowings to fixed rates in 2003. If market interest rates for variable rate
debt average 100 basis points more in 2003 than they did during 2002, IORI's
interest expense would increase and income would decrease by $417,000. This
amount is determined by considering the impact of hypothetical interest rates
on IORI's borrowing cost. This analysis did not consider the effects of the
reduced level of overall economic activity that could exist in such an
environment. Further, in the event of a change of such magnitude, management
would likely take actions to further mitigate its exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, the sensitivity analysis assumes no change in IORI's
financial structure.

   The following table contains only those exposures that existed at December
31, 2002. 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................................................. $18,901

                                 2003    2004    2005    2006    2007   Thereafter  Total
                               -------  ------  ------  ------  ------  ---------- -------
Instrument's maturities....... $11,897  $4,338  $   --  $   --  $   --        --   $16,235
Instrument's amortization.....     361      25      27      30      34     1,656     2,133
 Interest.....................     922     198     180     177     174     1,890     3,541
 Average rate.................     9.1%    9.9%   10.4%   10.4%   10.4%     10.4%

Fixed interest rate-fair value                                                     $31,501

                                 2003    2004    2005    2006    2007   Thereafter  Total
                               -------  ------  ------  ------  ------  ---------- -------
Instrument's maturities....... $    --  $   --  $   --  $3,878  $4,998   $19,772   $28,648
Instrument's amortization.....     384     418     453     470     372     1,950     4,047
 Interest.....................   2,496   2,463   2,427   2,297   1,759     5,855    17,297
 Average rate.................     8.2%    8.2%    8.2%    8.1%    7.8%      7.6%
</TABLE>


                                      18

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Report of Independent Certified Public Accountants...........................................  20

Consolidated Balance Sheets--December 31, 2002 and 2001......................................  21

Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and 2000..........  22

Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2002, 2001 and 2000  23

Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000..........  24

Notes to Consolidated Financial Statements...................................................  26

Financial Statement Schedules

Schedule III--Real Estate and Accumulated Depreciation.......................................  41

Schedule IV--Mortgage Loans on Real Estate...................................................  43
</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.


                                      19

<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, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2002. We have also audited the schedules listed in the accompanying index.
These financial statements and the schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

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

   As described in Note 17, Income Opportunity Realty Investors, Inc.'s
management has indicated its intent to both sell income producing properties
and refinance or extend debt secured by real estate, to meet its liquidity
needs.

   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, 2002 and 2001, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, 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 21, 2003


                                      20

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                   ---------------------
                                                                                     2002        2001
                                                                                    --------   --------
                                                                                   (dollars in thousands,
                                                                                    except per share)
<S>                                                                                <C>         <C>
                                      Assets
Real estate held for investment................................................... $ 82,252    $ 95,190
Less--accumulated depreciation....................................................   (7,502)     (7,875)
                                                                                    --------   --------
                                                                                     74,750      87,315

Notes and interest receivable.....................................................       --         505
Investment in real estate partnerships............................................      609         142
Cash and cash equivalents.........................................................       10          66
Receivables from affiliates.......................................................   10,497          --
Other assets......................................................................    4,319       3,805
                                                                                    --------   --------
                                                                                   $ 90,185    $ 91,833
                                                                                    ========   ========
                       Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable........................................................ $ 51,432    $ 54,426
Other liabilities (including $33 in 2002 and $593 in 2001 due to affiliates)......    1,446       2,185
                                                                                    --------   --------
                                                                                     52,878      56,611

Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding
  1,438,945 shares in 2002 and 2001...............................................       14          14
Paid-in capital...................................................................   62,774      63,459
Accumulated deficit...............................................................  (25,481)    (28,251)
                                                                                    --------   --------
                                                                                     37,307      35,222
                                                                                    --------   --------
                                                                                   $ 90,185    $ 91,833
                                                                                    ========   ========
</TABLE>


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


                                      21

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                    For the Years Ended December 31,
                                                                   ---------------------------------------
                                                                      2002          2001          2000
                                                                    ----------    ----------   ----------
                                                                   (dollars in thousands, except per share)
<S>                                                                <C>           <C>           <C>
Property revenue
 Rents............................................................ $    9,884    $   10,179    $    8,085
Property expense
 Property operations..............................................      5,647         5,416         4,364
                                                                    ----------    ----------   ----------
Operating income..................................................      4,237         4,763         3,721

Other income
 Gain on sale of real estate......................................         --            --        20,878
 Interest.........................................................        270           194           319
 Equity in income (loss) of equity partnerships...................        862            (9)          (61)
                                                                    ----------    ----------   ----------
                                                                        1,132           185        21,136
Other expense
 Interest.........................................................      4,721         5,197         2,683
 Depreciation.....................................................      1,757         1,885         1,510
 Advisory fee to affiliate........................................        714           817           664
 Net income fee to affiliate......................................        169            --         1,362
 Provision for loss on receivable from related party..............      1,568            --            --
 General and administrative.......................................      1,037           739         1,549
                                                                    ----------    ----------   ----------
                                                                        9,966         8,638         7,768

Net income (loss) from continuing operations......................     (4,597)       (3,690)       17,089
                                                                    ----------    ----------   ----------

Discontinued operations:
 Income (loss) from operations....................................       (470)          228          (295)
 Gain on sale of real estate by equity investees..................        383            --            --
 Gain on sale of operations.......................................      6,769            --            --
                                                                    ----------    ----------   ----------
Net income (loss) from discontinued operations....................      6,682           228          (295)
                                                                    ----------    ----------   ----------
Net income (loss)................................................. $    2,085    $   (3,462)   $   16,794
                                                                    ==========    ==========   ==========

Earnings per share
 Net income (loss) from continuing operations..................... $    (3.19)   $    (2.47)   $    11.22
 Discontinued operations..........................................       4.64           .15          (.19)
                                                                    ----------    ----------   ----------
 Net income (loss)................................................ $     1.45    $    (2.32)   $    11.03
                                                                    ==========    ==========   ==========
Weighted average shares of Common Stock used in computing earnings
  per share.......................................................  1,438,945     1,493,675     1,522,510
                                                                    ==========    ==========   ==========
</TABLE>



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

                                      22

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

Balance, January 1, 2000........... 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    64,087    (24,104)      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    62,774    (27,566)      35,222
Net income.........................        --    --        --      2,085        2,085
                                    ---------   ---   -------   --------      -------

Balance, December 31, 2002......... 1,438,945   $14   $62,774   $(25,481)     $37,307
                                    =========   ===   =======   ========      =======
</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

<TABLE>
<CAPTION>
                                                                        For the Years Ended December 31,
                                                                        -------------------------------
                                                                          2002       2001       2000
                                                                        --------   --------   --------
                                                                           (dollars in thousands)
<S>                                                                     <C>        <C>        <C>
Cash Flows from Operating Activities
 Rents collected....................................................... $ 10,554   $ 12,966   $ 13,638
 Payments for property operations......................................   (7,131)    (6,981)    (7,068)
 Interest collected....................................................      291        148        310
 Interest paid.........................................................   (4,339)    (5,528)    (5,036)
 Advisory and net income fee paid to affiliate.........................     (868)    (1,054)    (2,576)
 General and administrative expenses paid..............................   (1,029)    (1,618)    (1,185)
 Distributions from equity partnerships' operating cash flow...........       25         18         25
 Other.................................................................       --         20         --
                                                                        --------   --------   --------
     Net cash used in operating activities.............................   (2,497)    (2,029)    (1,892)

Cash Flows from Investing Activities
 Funding of equity partnerships........................................       --        (28)       (58)
 Real estate improvements..............................................     (365)    (3,466)    (1,947)
 Acquisition of real estate............................................       --         --    (37,334)
 Deposits on pending purchases and financings..........................       --        (25)        --
 Proceeds from sale of real estate.....................................   19,230         --     43,393
 Distributions from equity partnership's investing cash flow...........      752         --         --
 Funding of note receivable (including $5,109 in 2002 to related party)   (7,109)        --     (1,500)
 Collection of note receivable.........................................      500      1,000         --
 Payments from (to) advisor and affiliates.............................   (6,244)     4,635     (4,143)
                                                                        --------   --------   --------
     Net cash provided by (used in) investing activities...............    6,764      2,116     (1,589)

Cash Flows from Financing Activities
 Proceeds from notes payable...........................................   23,152     14,900     22,875
 Payments on notes payable.............................................  (26,308)   (14,783)   (18,153)
 Deferred financing costs..............................................   (1,167)      (911)       172
 Distributions from equity partnership's financing cash flow...........       --         --        739
 Sale of Common Stock under dividend reinvestment plan.................       --         --         32
 Dividends to stockholders.............................................       --         --       (685)
 Repurchase of Common Stock............................................       --     (1,314)      (134)
                                                                        --------   --------   --------
     Net cash provided by (used in) financing activities...............   (4,323)    (2,108)     4,846
                                                                        --------   --------   --------
Net increase (decrease) in cash and cash equivalents...................      (56)    (2,021)     1,365
Cash and cash equivalents, beginning of year...........................       66      2,087        722
                                                                        --------   --------   --------
Cash and cash equivalents, end of year................................. $     10   $     66   $  2,087
                                                                        ========   ========   ========
</TABLE>



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

                                      24

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

              CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)

<TABLE>
<CAPTION>
                                                                             For the Years Ended December 31,
                                                                             -------------------------------
                                                                               2002       2001       2000
                                                                              -------    -------   --------
<S>                                                                          <C>        <C>        <C>
Reconciliation of net income (loss) to net cash used in operating activities
   Net income (loss)........................................................ $ 2,085    $(3,462)   $ 16,794
   Adjustments to reconcile net income (loss) to net cash used in operating
     activities
       Depreciation and amortization........................................   1,867      2,930       2,450
       Gain on sale of real estate..........................................  (7,152)        --     (20,878)
       Equity in (income) loss of partnerships..............................    (862)         9          61
       Distributions from equity partnerships' operating cash flow..........      25         18          25
       Provision for loss...................................................   1,568         --          --
       Decrease in interest receivable......................................       5         --          --
       (Increase) decrease in other assets..................................     774     (1,554)        338
       Decrease in interest payable.........................................      (9)      (103)        (87)
       Increase (decrease) in other liabilities.............................    (798)       133        (595)
                                                                              -------    -------   --------
   Net cash used in operating activities.................................... $(2,497)   $(2,029)   $ (1,892)
                                                                              =======    =======   ========

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
   Notes receivable collected by affiliates.................................   5,541         --          --
</TABLE>



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

                                      25

<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 accounting principles generally accepted in the United States of America,
the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES." The Notes to Consolidated Financial Statements are an
integral part of these Consolidated Financial Statements. The data presented in
the Notes to Consolidated Financial Statements are as of December 31 of each
year and for the year then ended, unless otherwise indicated. Dollar amounts in
tables are in thousands, except per share amounts.

   Certain balances for 2001 and 2000 have been reclassified to conform to the
2002 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. ("ARI"), a related party. See NOTE
17. "COMMITMENTS AND CONTINGENCIES AND LIQUIDITY."

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

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

   Recent accounting pronouncements.  In April 2002, the FASB issued Statement
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Correction" ("SFAS No. 145"). Statement 4,
"Reporting Gains and Losses from Extinguishment of Debt" ("SFAS No. 4"),
required that gains and losses from the extinguishment of debt that were
included in the determination of net income be aggregated and, if material,
classified as an extraordinary item. The provisions of SFAS No. 145 related to
the rescission of SFAS No. 4 will require IORI to reclassify prior period items
that do not meet the extraordinary classification. The provisions of SFAS No.
145 that relates to the rescission of SFAS No. 4 become effective in fiscal
years beginning after May 15, 2002. The adoption of SFAS No. 145 is not
expected to have a material impact on the consolidated financial position or
results of operations of IORI.

   In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force ("EITF") Issue No. 94-3. IORI will adopt
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized.

                                      26

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for an entity
that voluntarily changes to the fair value method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. Management currently believes that the adoption of SFAS
No. 148 will not have a material impact on the financial statements.

   In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which disclosures are effective for
financial statements issued after December 15, 2002. While IORI has various
guarantees included in contracts in the normal course of business, these
guarantees do not represent significant commitments or contingent liabilities
of the indebtedness of entities outside of the consolidated company.

   In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to financial
statements to be issued by IORI after 2002, however, disclosures are required
currently if IORI expects to consolidate any variable interest entities. IORI
does not currently believe that any entities will be consolidated as a result
of FIN 46.

   Real estate held for investment and depreciation.  Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
144 ("SFAS No. 144") requires that a property be considered impaired, if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the property. If impairment
exists, an impairment loss is recognized by a charge against earnings equal to
the amount by which the carrying amount of the property exceeds the fair value
of the property. If impairment of a property is recognized, the carrying amount
of the property is reduced by the amount of the impairment and a new cost for
the property is established. Such new cost is depreciated over the property's
remaining useful life. Depreciation is provided by the straight-line method
over estimated useful lives, which range from 2 to 40 years.

   Revenue recognition on the sale of real estate.  Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment sale, the cost recovery or the financing method, whichever is
appropriate. See NOTE 2. "REAL ESTATE."

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

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

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

                                      27

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

NOTE 2.  REAL ESTATE

   In 2002, IORI sold the following properties:

<TABLE>
<CAPTION>
                                                     Sales  Net Cash    Debt    Gain/(Loss)
Property                 Location        Sq.Ft.      Price  Received Discharged   on Sale
--------                 --------    -------------- ------- -------- ---------- -----------
<S>                    <C>           <C>            <C>     <C>      <C>        <C>
Office Building
Daley Corporate Center San Diego, CA 124,059 Sq.Ft. $15,500  $7,820    $6,618     $7,105
Westlake Village...... Westlake, CA   45,500 Sq.Ft.   3,730     767     2,728       (336)
</TABLE>

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

NOTE 3.  NOTES AND INTEREST RECEIVABLE

   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.

   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 bore interest at
18.0% per annum, required monthly payments of interest only and matured in
January 2002. In January 2002, the loan was extended to April 2002. In April
2002, the loan was paid off including accrued but unpaid interest.

   In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty
Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owned
the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI
guaranteed that the asset would produce at least a 12% return annually of the
purchase price for a period of three years from the purchase date. If the asset
failed to produce the 12% return, ARI agreed to pay IORI any shortfall.
Management recorded this related party transaction as a note receivable from
ARI. In the first quarter of 2002, after reviewing the property's fair value
after costs to sell, even though ARI has guaranteed the 12% return, IORI
recognized a provision for loss on the note receivable of $767,000. In December
2002, the Rosedale Towers Office Building was sold for $7.2 million. ARI
received $3.5 million of the proceeds after the payment of the first lien debt
and various closing costs, and IORI recognized an additional loss of $801,000
on this note. The $3.5 million received by ARI is included within other assets
in the accompanying Consolidated Balance Sheet.

   In February 2002, IORI funded a $2.0 million mortgage loan as a
participation agreement with Transcontinental Realty Investors, Inc. ("TCI"), a
related party. The loan was secured by a second lien on a retail

                                      28

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

center in Montgomery County, Texas. The note receivable bore interest at 16.0%
per annum, required monthly interest only payments of $47,000 and matured in
February 2002. In February 2002, the loan was extended until April 2002. In
April 2002, IORI extended the loan until July 2002, receiving $8,500 as an
extension fee. In July 2002, the loan was extended until September 2002, with
IORI receiving an additional $8,500 as an extension fee. Also in July 2002,
$500,000 in principal was paid on the note. In August 2002, the note was paid
off including accrued but unpaid interest. Of the $2.0 million in principal
payments, $1.5 million was received by TCI and $500,000 was received by Basic
Capital Management, Inc. ("BCM"), an affiliate and the advisor to IORI. These
amounts are included within receivables from affiliates in the accompanying
Consolidated Balance Sheet.

NOTE 4.  INVESTMENT IN EQUITY METHOD PARTNERSHIPS

   Investments in equity method partnerships consisted of the following:

<TABLE>
<CAPTION>
                                                       2002   2001
                                                       ----- -----
             <S>                                       <C>   <C>
             Tri-City Limited Partnership ("Tri-City") $  -- $(567)
             Nakash Income Associates ("NIA").........   275   376
             TCI Eton Square, L.P. ("Eton Square")....   334   333
                                                       ----- -----
                                                       $ 609 $ 142
                                                       ===== =====
</TABLE>

   IORI owned a 36.3% general partner interest in Tri-City, which in turn owned
a shopping center in Houston, Texas. TCI owned a 63.7% limited partner interest
in Tri-City. In November 2002, the shopping center was sold for $4.2 million.
Tri-City received net cash of $1.9 million after the payment of various closing
costs. IORI received a distribution of $704,000 of the net proceeds and
recognized a gain of $1.3 million on its investment in Tri-City.

   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.

   IORI further owns a 10% limited partner interest in Eton Square, which at
December 31, 2002, owned the Eton Square Building in Tulsa, Oklahoma. TCI owns
a 90% general partner interest in Eton Square.

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

<TABLE>
<CAPTION>
                                                       2002      2001
                                                     --------  --------
        <S>                                          <C>       <C>
        Notes receivable............................ $    902  $    902
        Real estate, net of accumulated depreciation
          ($1,230 in 2002 and $2,795 in 2001).......   14,152    17,464
        Other assets................................       --       646
        Notes payable...............................  (10,362)  (12,748)
        Other liabilities...........................     (559)   (1,211)
                                                     --------  --------
        Partners' capital........................... $  4,133  $  5,053
                                                     ========  ========
</TABLE>

                                      29

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                 2002     2001     2000
                                               -------  -------  -------
      <S>                                      <C>      <C>      <C>
      Rents................................... $ 2,981  $ 2,579  $ 2,561
      Interest income.........................     156       80      156
      Interest expense........................  (1,119)  (1,131)  (1,165)
      Property operations expense.............  (1,453)  (1,230)  (1,197)
      Depreciation............................    (628)    (586)    (570)
                                               -------  -------  -------
      Loss before gains on sale of real estate     (63)    (288)    (215)
      Gain on sale............................   1,054       --       --
                                               -------  -------  -------
      Net income (loss)....................... $   991  $  (288) $  (215)
                                               =======  =======  =======
</TABLE>

   IORI's equity share of:

<TABLE>
<CAPTION>
                                                         2002   2001 2000
                                                        ------  ---- ----
      <S>                                               <C>     <C>  <C>
      Income (loss) before gains on sale of real estate $ 862 * $(9) $(61)
      Gain on sale of real estate......................    383   --    --
                                                        ------  ---  ----
      Net income (loss)................................ $1,245  $(9) $(61)
                                                        ======  ===  ====
</TABLE>
--------
* Includes the $1.3 million gain from the sale of IORI's investment in Tri-City.

NOTE 5.  NOTES AND INTEREST PAYABLE

   Notes and interest payable consisted of the following:

<TABLE>
<CAPTION>
                                     2002              2001
                               ----------------- -----------------
                               Estimated         Estimated
                                 Fair     Book     Fair     Book
                                 Value    Value    Value    Value
                               --------- ------- --------- -------
              <S>              <C>       <C>     <C>       <C>
              Notes payable...  $50,402  $51,063  $54,172  $54,048
                                =======           =======
              Interest payable               369               378
                                         -------           -------
                                         $51,432           $54,426
                                         =======           =======
</TABLE>

   Scheduled notes payable principal payments are due as follows:

<TABLE>
                               <S>        <C>
                               2003...... $12,642
                               2004......   4,780
                               2005......     481
                               2006......   4,378
                               2007......   5,404
                               Thereafter  23,378
                                          -------
                                          $51,063
                                          =======
</TABLE>

   Notes payable at December 31, 2002, bear interest at rates ranging from
4.25% to 10.5% and mature between 2003 and 2025. The mortgages are
collateralized by deeds of trust on real estate with a net carrying value of
$74.7 million.

                                      30

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In April 2002, IORI sold all of its residential properties to partnerships
controlled by Metra Capital, LLC ("Metra"). These properties include: the 60
unit Brighton Court, the 92 unit Del Mar, the 68 unit Enclave, the 280 unit
Meridian, the 57 unit Signature, the 114 unit Sinclair, located in Midland,
Texas, and the 106 unit Treehouse, located in San Antonio, Texas. Innovo
Realty, Inc., a subsidiary of Innovo Group, Inc. ("Innovo") is a limited
partner in the partnerships that purchased the properties. Joseph Mizrachi, a
director of ARI, a related party, controls approximately 11.67% of the
outstanding common stock of Innovo. The sale constituted 23% of the total
assets of IORI as of December 31, 2001. The sales price for the properties
totaled $26.2 million. IORI received $5.4 million in cash after the payoff of
$16.1 million in debt and various closing costs. Management has determined to
account for this sale as a refinancing transaction, in accordance with SFAS No.
66, "Accounting for Sales of Real Estate." IORI will continue to report the
assets and the new debt incurred by the Metra partnerships on the IORI
financial statements. The new debt on the properties totals $21.4 million,
bears interest at 7.57% per annum, requires monthly interest only payments of
$135,000 and matures in May 2012. IORI also received $5.2 million of 8%
non-recourse, non-convertible Series A Preferred Stock ("Preferred Shares") of
Innovo.

   The dividend on the Preferred Shares will be funded entirely and solely
through member distributions from cash flows generated by the operation and
subsequent sale of the sold properties. In the event the cash flows for the
properties are insufficient to cover the 8% annual dividend, Innovo will have
no obligation to cover any shortfall.

   The Preferred Shares have a mandatory redemption feature and are redeemable
from the cash proceeds received by Innovo from the operation and sale of the
properties. All member distributions that are in excess of current and accrued
8% dividends must be used by Innovo to redeem the Preferred Shares. Since
redemption of these shares is subject to the above future events, management
has not recorded any basis in the Preferred Shares.

   In 2001, IORI refinanced the following properties:

<TABLE>
<CAPTION>
                                                                     Net Cash
                                                   Debt      Debt    Received/ Interest   Maturity
Property             Location      Sq.Ft./Acres  Incurred Discharged  (Paid)     Rate       Date
--------        ------------------ ------------- -------- ---------- --------- --------   --------
<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.  RELATED PARTY TRANSACTIONS

   In January 2002, IORI purchased 100% of the outstanding common shares of
Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty
Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owned
the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI
guaranteed that the asset would produce at least a 12% return annually of the
purchase price for a period of three years from the purchase date. If the asset
failed to produce the 12% return, ARI shall pay IORI any shortfall. Management
has classified this related party transaction as a note receivable from ARI. In
the first quarter of 2002, after reviewing the property's fair value after
costs to sell, even though ARI has guaranteed the 12% return, IORI recognized a
provision for loss on the note receivable of $767,000. In December 2002, the
Rosedale Towers Office Building was sold for $7.2 million. ARI received $3.5
million of the proceeds after the payment of the first lien debt and various
closing costs and IORI recognized an additional loss of $801,000 on its note.
The $3.5 million received by ARI is included within other assets in the
accompanying Consolidated Balance Sheet.

                                      31

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In February 2002, IORI funded a $2.0 million mortgage loan as a
participation agreement with Transcontinental Realty Investors, Inc. ("TCI"), a
related party. The loan was secured by a second lien on a retail center in
Montgomery County, Texas. The note receivable bore interest at 16.0% per annum,
required monthly interest only payments of $47,000 and matured in February
2002. In February 2002, the loan was extended until April 2002. In April 2002,
IORI extended the loan until July 2002, receiving $8,500 as an extension fee.
In July 2002, the loan was extended until September 2002, with IORI receiving
$8,500 as an extension fee. Also in July 2002, IORI received a $500,000
principal paydown on the note. In August 2002, the note was paid off including
accrued but unpaid interest. Of the $2.0 million in principal payments, $1.5
million was received by TCI and $500,000 was received by Basic Capital
Management, Inc. ("BCM"), an affiliate and the advisor to IORI. These amounts
are included within receivable from affiliates in the accompanying Consolidated
Balance Sheet.

   During 2002, IORI's Board of Directors authorized IORI's Chief Financial
Officer to advance funds either to or from IORI, through BCM, in an amount up
to $5.0 million, on the condition that such advances shall be repaid in cash or
transfers of assets within 90 days.

   The following table reconciles the beginning and ending balances of Accounts
Receivable from Affiliates as of December 31, 2002.

<TABLE>
<CAPTION>
                                              BCM     ARI     TCI
                                            -------  ------ ------
            <S>                             <C>      <C>    <C>
            Balance, December 31, 2001..... $  (494) $   -- $   --

               Cash transfers..............   8,151      --  4,000
               Cash repayments.............  (5,827)     --    (80)
               Participation loan payments.     500      --  1,500
               Sale of Rosedale Towers.....      --   3,541     --
               Fees payable to Advisor.....    (343)     --     --
               Other additions.............     267      --     39
               Other repayments............    (558)     --   (199)
                                            -------  ------ ------

            Balance, December 31, 2002..... $ 1,696  $3,541 $5,260
                                            =======  ====== ======
</TABLE>

   Returns on Metra Properties.  As described more fully in Note 5, IORI sold
all of its residential properties during 2002 to partnerships controlled by
Metra. The partnership agreement for each of these partnerships states that the
Metra Partners, as defined, receive cash flow distributions at least quarterly
in an amount sufficient to provide them with a fifteen percent cumulative
compounded annual rate of return on their invested capital, as well as a
cumulative annual amount of 0.50% of the average outstanding balance of the
mortgage indebtedness secured by any of these residential properties. These
distributions to the Metra Partners have priority over distributions to any of
the other partners.

NOTE 7.  DIVIDENDS

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

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

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

                                      32

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   No dividends were declared or paid in 2002 or 2001. Management expects to
pay no dividends in 2003.

NOTE 8.  RENTS UNDER OPERATING LEASES

   Operations include the leasing of office buildings. The leases thereon
expire at various dates through 2011. The following is a schedule of minimum
future rents on non-cancelable operating leases as of December 31, 2002:

<TABLE>
                               <S>        <C>
                               2003...... $ 3,448
                               2004......   2,498
                               2005......   2,109
                               2006......   1,243
                               2007......     868
                               Thereafter   2,084
                                          -------
                                          $12,250
                                          =======
</TABLE>

NOTE 9.  ADVISORY AGREEMENT

   BCM is indirectly owned by a trust for the children of Gene E. Phillips. Mr.
Phillips is not an officer or director of BCM, but serves as a representative
of the trust, and is indirectly involved in daily consultation with the
officers of BCM and has significant influence over the conduct of BCM's
business, including the rendering of advisory services and the making of
investment decisions for itself and for 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 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.

                                      33

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 $68,000 of the 2002
annual advisory fee and $256,000 of the 2001 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, provided, on a non-exclusive
basis, brokerage services.

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

NOTE 10.  PROPERTY MANAGEMENT

   Triad provides property management services for a fee of 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 property-level management services
at various rates. The general partner of Triad is BCM. The limited partner of
Triad is Highland Realty Services, Inc. ("Highland"), a related party. Triad
subcontracted to Regis, which is owned by Highland, the property-level
management and leasing of IORI's five office buildings and the commercial
property owned by Eton Square, until December 2002. Since January 1, 2003,
Regis Realty I, LLC, which is owned by Highland, provided property management
services. Regis was and Regis Realty I, LLC is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Triad.

NOTE 11.  REAL ESTATE BROKERAGE

   Regis also provided brokerage services on a non-exclusive basis until
December 2002. Regis was and Regis Realty I, LLC is entitled to receive a
commission for property purchases and sales in accordance with a sliding scale
of total brokerage fees to be paid by IORI.

NOTE 12.  ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

   Fees and cost reimbursements to BCM and its affiliates:

<TABLE>
<CAPTION>
                                                       2002  2001  2000
                                                      ------ ---- ------
        <S>                                           <C>    <C>  <C>
        Fees
           Advisory.................................. $  714 $817 $  664
           Net income................................    169   --  1,362
           Property acquisition......................     --   --    417
           Mortgage brokerage and equity refinancing.    262   99     --
                                                      ------ ---- ------
                                                      $1,145 $916 $2,443
                                                      ====== ==== ======
        Cost reimbursements.......................... $  246 $323 $  287
                                                      ====== ==== ======
</TABLE>

   Costs incurred by BCM related to IORI, ARI and TCI are allocated based on
the relative book values of each company's assets.

                                      34

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                   2002  2001
                                                                   ----- -----
 <S>                                                               <C>   <C>
 Fees
    Real estate brokerage......................................... $ 397 $  --
    Property and construction management and leasing commissions*.   262   312
                                                                   ----- -----
                                                                   $ 659 $ 312
                                                                   ===== =====
</TABLE>
--------
*  Net of property management fees paid to subcontractors, other than Regis.

NOTE 13.  INCOME TAXES

   For the years 2002, 2001 and 2000, IORI elected and qualified to be treated
as a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), and as such,
was not taxed for federal income tax purposes on that portion of its taxable
income which is distributed to stockholders. Due to the completion of the
tender offer by ARI, an affiliate, and the resulting concentration of
ownership, IORI no longer met the requirements for tax treatment as a REIT
under the Code as of January 1, 2003, and is prohibited for re-qualifying for
REIT status for at least five years.

   IORI had net income for federal income tax purposes before the application
of operating loss carryforwards in 2002 and 2000 and had a net loss for federal
income tax purposes in 2001. 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, 2002,
IORI's tax basis in its net assets was exceeded by their net basis for
financial statement purposes by approximately $20 million and IORI's tax basis
in its net mortgage liabilities was exceeded by their net basis for financial
statement purposes by approximately $23.0 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, 2002, IORI has current and prior tax net operating loss
carryforwards of $2.4 million expiring through the year 2021.

   As a result of IORI's election to be treated as a REIT for income tax
purposes for years 2001 and 2000 and its then intention to distribute its REIT
taxable income, if any, in future years, no deferred tax asset, liability or
valuation allowance was recorded. In anticipation of its January 1, 2003 loss
of REIT status, it was determined that at December 31, 2002 that IORI had a net
deferred tax asset of $4.0 million due to tax deductions available to it in
future years. However, as management cannot determine that it is more likely
than not that IORI will relaize the benefit of the deferred tax asset, a 100%
valuation allowance has been established.

NOTE 14.  OPERATING SEGMENTS

   Significant differences among the accounting policies of the operating
segments as compared to the Consolidated Financial Statements principally
involve the calculation and allocation of general and administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow. Items
of income that are not reflected in the segments are interest, and equity in
partnerships totaling $1.1 million, $185,000 and $258,000 for 2002, 2001 and
2000, respectively. Expenses that are not reflected in the segments are general
and administrative expenses, advisory and net income fees and provision for
losses totaling $3.5 million, $1.6 million and $3.6 million for 2002, 2001 and
2000, respectively. Excluded from operating segment assets are assets of
$15.4 million at December 31, 2002, and $4.4 million at December 31, 2001,
which are not identifiable with an operating segment. There are no intersegment
revenues and expenses and all business is conducted in the United States.

                                      35

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Presented below is the operating income of each operating segment.

<TABLE>
<CAPTION>
                                           Commercial
                                    Land   Properties Apartments  Total
                                  -------  ---------- ---------- -------
      <S>                         <C>      <C>        <C>        <C>
      2002
      Rents...................... $    --   $ 4,539    $ 5,345   $ 9,884
      Property operating expenses     361     2,497      2,789     5,647
                                  -------   -------    -------   -------
      Operating income (loss).... $  (361)  $ 2,042    $ 2,556   $ 4,237
                                  =======   =======    =======   =======

      Depreciation............... $    --   $ 1,280    $   477   $ 1,757
      Interest...................   1,500     1,547      1,674     4,721
      Real estate improvements...     437       240         --       677
      Assets.....................  24,929    28,688     21,133    74,750

      Property Sales
      Sales price................           $19,230              $19,230
      Cost of sale...............            12,461               12,461
                                            -------              -------
      Gain on sale...............           $ 6,769              $ 6,769
                                            =======              =======

      2001
      Rents...................... $    --   $ 5,134    $ 5,045   $10,179
      Property operating expenses     264     2,485      2,667     5,416
                                  -------   -------    -------   -------
      Operating income (loss).... $  (264)  $ 2,649    $ 2,378   $ 4,763
                                  =======   =======    =======   =======

      Depreciation............... $    --   $ 1,373    $   512   $ 1,885
      Interest...................   2,069     1,767      1,361     5,197
      Real estate improvements...   2,404     1,062                3,466
      Assets.....................  24,492    41,213     21,610    87,315

      2000
      Rents...................... $    --   $ 4,647    $ 3,438   $ 8,085
      Property operating expenses       9     2,278      2,077     4,364
                                  -------   -------    -------   -------
      Operating income (loss).... $    (9)  $ 2,369    $ 1,361   $ 3,721
                                  =======   =======    =======   =======

      Depreciation............... $    --   $ 1,133    $   377   $ 1,510
      Interest...................      51     1,625      1,007     2,683
      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.

                                      36

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 15.  DISCONTINUED OPERATIONS

   Effective January 1, 2002, IORI adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which established a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. This
statement requires that the operations related to properties that have been
sold or properties that are intended to be sold be presented as discontinued
operations in the statement of operations for all periods presented, and
properties intended to be sold are to be designated as "held-for-sale" on the
balance sheet.

   For 2002, 2001 and 2000, income (loss) from discontinued operations relates
to two properties that IORI sold during 2002. The following table summarizes
revenue and expense information for these properties sold.

<TABLE>
<CAPTION>
                                                               2002    2001   2000
                                                              ------  ------ ------
<S>                                                           <C>     <C>    <C>
Revenue
   Rental.................................................... $  515  $2,822 $5,646
   Property operations.......................................    683   1,175  2,605
                                                              ------  ------ ------
                                                                (168)  1,647  3,041

Expenses
   Interest..................................................    193     877  2,396
   Depreciation..............................................    109     542    940
                                                              ------  ------ ------
                                                                 302   1,419  3,336

Net loss from discontinued operations........................   (470)    228   (295)
   Gain on sale of real estate...............................  6,769      --     --
   Equity in gain on sale of real estate by equity investees.    383      --     --
                                                              ------  ------ ------

Net income (loss) from discontinued operations............... $6,682  $  228 $ (295)
                                                              ======  ====== ======
</TABLE>


                                      37

<PAGE>

NOTE 16.  QUARTERLY DATA

   The following is a tabulation of quarterly results of operations for the
years 2002, 2001 and 2000 (unaudited).

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                             -----------------------------------------
                                             March 31 June 30  September 30 December 31
                                             -------- -------  ------------ -----------
<S>                                          <C>      <C>      <C>          <C>
2002
Rents....................................... $ 2,519  $ 2,393    $ 2,562      $ 2,410
Property expense............................   1,196    1,345      1,610        1,496
                                             -------  -------    -------      -------
   Operating income.........................   1,323    1,048        952          914

Interest income.............................      37      310        185         (262)
Income (loss) in equity partnerships........     (17)      48         60          771
Other expense...............................   3,062    2,265      2,018        2,621
                                             -------  -------    -------      -------

Net loss from continuing operations.........  (1,719)    (859)      (821)      (1,198)
Discontinued operations.....................   6,792      (28)      (420)         338
                                             -------  -------    -------      -------
Net income (loss)........................... $ 5,073  $  (887)   $(1,241)     $  (860)
                                             =======  =======    =======      =======

Earnings per share
Net income (loss)........................... $  3.53  $  (.62)   $  (.86)     $  (.60)
                                             =======  =======    =======      =======

2001
Rents....................................... $ 2,632  $ 2,559    $ 2,488      $ 2,500
Property expense............................   1,253    1,244      1,993          926
                                             -------  -------    -------      -------
   Operating income.........................   1,379    1,315        495        1,574

Interest income.............................      72       62          8           52
Income (loss) in equity partnerships........       9       (6)       (30)          18
Other expense...............................   2,182    2,191      2,319        1,946
                                             -------  -------    -------      -------

Net loss from continuing operations.........    (722)    (820)    (1,846)        (302)
Discontinued operations.....................       5       88         97           38
                                             -------  -------    -------      -------
Net income (loss)........................... $  (717) $  (732)   $(1,749)     $  (264)
                                             =======  =======    =======      =======

Earnings per share
Net income (loss)........................... $  (.47) $  (.49)   $ (1.16)     $  (.18)
                                             =======  =======    =======      =======

2000
Rents....................................... $ 1,630  $ 1,705    $ 2,312      $ 2,438
Property expense............................     872      874      1,262        1,356
                                             -------  -------    -------      -------
   Operating income.........................     758      831      1,050        1,082

Gain on sale of real estate.................     903   16,119      3,856           --
Interest income.............................       7       91        108          113
Income (loss) in equity partnerships........     (46)     (23)        (2)          10
Other expense...............................   1,258    2,517      1,777        2,216
                                             -------  -------    -------      -------

Net income (loss) from continuing operations     364   14,501      3,235       (1,011)
Discontinued operations.....................     228      (59)      (347)        (117)
                                             -------  -------    -------      -------
Net income (loss)........................... $   592  $14,442    $ 2,888      $(1,128)
                                             =======  =======    =======      =======

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

                                      38

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In the first quarter of 2002, the Daley Corporate Center office building was
sold, and a gain on sale of real estate of $7.1 million was recognized. In the
third quarter of 2002, the Westlake Village Office Building was sold at a loss
of $336,000. In the fourth quarter of 2002, IORI recognized a gain of $383,000,
IORI's share of gain on sale of real estate from an equity investee.

NOTE 17.  COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

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

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

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

   On October 23, 2001, IORI, TCI and ARI jointly announced a preliminary
agreement with the plaintiff's legal counsel for complete settlement of all
disputes in the lawsuit. In February 2002, the court granted final approval of
the proposed settlement (the "Second Amendment"). Under the Second Amendment,
the appeal has been dismissed and ARI agreed to either (i) acquire all of the
outstanding shares of IORI and TCI not currently owned by ARI for a cash
payment or shares of ARI preferred stock or (ii) make a tender offer for all of
the

                                      39

<PAGE>

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

outstanding common shares of IORI and TCI not currently owned by ARI. Under the
merger, ARI would 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 Redeemable Convertible 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 Redeemable Convertible 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
Redeemable Convertible 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 was 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. Earl D. Cecil and Ted P. Stokely who serve as Directors
of IORI and TCI, are also directors of ARI.

   On November 15, 2002, ARI commenced, through subsidiaries, a tender offer
for shares of common stock of TCI and IORI. The price per share was $17.50 for
TCI shares and $19.00 for IORI shares. The tender offers were made to cure a
default under the settlement resulting from ARI's failure to timely complete
the SEC review process of the registration statement for the proposed mergers
with TCI and IORI. The tender offers were completed on March 19, 2003. ARI
acquired 265,036 shares of IORI and 1,213,226 TCI shares. The completion of the
tender offer fulfills the obligations under the Second Amendment and the Olive
Litigation has been dismissed with prejudice. ARI has deferred further action
on the mergers.

   Liquidity.  Although management anticipates that IORI will generate excess
cash from operations in 2002, 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.

                                      40

<PAGE>

                                                                   SCHEDULE III

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION

                               December 31, 2002

<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-
Property/Location              brances  Land   Improvements  Acquisition   Land   Improvements  Total   ation     tion
-----------------              ------- ------- ------------ ------------- ------- ------------ ------- -------- ---------
                                                                            (dollars in thousands)
<S>                            <C>     <C>     <C>          <C>           <C>     <C>          <C>     <C>      <C>
Properties Held For Investment
Apartments
Brighton Court, Midland, TX... $ 2,867 $   339   $ 3,051       $   --     $   339   $ 3,051    $ 3,390  $  195    1983
Del Mar, Midland, TX..........   2,748     324     2,919           --         324     2,919      3,243     186    1983
Enclave, Midland, TX..........   2,907     324     2,919           --         324     2,919      3,243     186    1983
Meridian, Midland, TX.........   4,540   1,138     4,552           --       1,138     4,552      5,690     347    1983
Signature Place, Midland, TX..   2,429     265     2,388           --         265     2,388      2,653     152    1983
Sinclair Place, Midland, TX...   2,071     221     1,990           --         221     1,990      2,211     127    1983
Treehouse, San Antonio, TX....   3,783     375     2,124          259         375     2,383      2,758     864    1975

Office Buildings
2010 Valley View,
 Farmers Branch, TX...........   1,794     120       479        2,981         120     3,460      3,580   1,020    1998
5600 Mowry, Newark, CA........   4,081   1,263     5,054          575       1,263     5,629      6,892   1,156    1987
Akard Plaza, Dallas, TX.......   2,004     734     2,936          454         734     3,390      4,124     573    1984
Chuck Yeager, Chantilly, VA...   4,670   1,080     4,321        1,566       1,080     5,887      6,967   1,219    1991
La Mesa Village, La Mesa, CA..   5,557   1,709     6,836          926       1,709     7,762      9,471   1,477    1991

Land
Frankel, Midland County, TX...      --      44        --           --          44        --         44      --      --
Travelers, Farmers Branch, TX.   9,900  24,848        --        3,138      27,986        --     27,986      --      --
                               ------- -------   -------       ------     -------   -------    -------  ------
                               $49,351 $32,784   $39,569       $9,899     $35,922   $46,330    $82,252  $7,502
                               ======= =======   =======       ======     =======   =======    =======  ======
</TABLE>
<TABLE>
<CAPTION>
                                          Life on
                                           Which
                                        Depreciation
                                         in Latest
                                         Statement
                                 Date   of Operation
Property/Location              Acquired is Computed
-----------------              -------- ------------

<S>                            <C>      <C>
Properties Held For Investment
Apartments
Brighton Court, Midland, TX...  06/00      40 years
Del Mar, Midland, TX..........  06/00      40 years
Enclave, Midland, TX..........  06/00      40 years
Meridian, Midland, TX.........  12/99      40 years
Signature Place, Midland, TX..  06/00      40 years
Sinclair Place, Midland, TX...  06/00      40 years
Treehouse, San Antonio, TX....  09/89    5-40 years

Office Buildings
2010 Valley View,
 Farmers Branch, TX...........  09/97    5-40 years
5600 Mowry, Newark, CA........  12/97    3-40 years
Akard Plaza, Dallas, TX.......  12/97    5-40 years
Chuck Yeager, Chantilly, VA...  01/97    5-40 years
La Mesa Village, La Mesa, CA..  05/97    5-40 years

Land
Frankel, Midland County, TX...  06/00
Travelers, Farmers Branch, TX.  12/00



</TABLE>
--------
(1) The aggregate cost for Federal income tax purposes is $60.0 million.

                                      41

<PAGE>

                                                                   SCHEDULE III
                                                                    (Continued)

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
                                                 2002      2001     2000
                                               --------  -------  --------
                                                  (dollars in thousands)
    <S>                                        <C>       <C>      <C>
    Reconciliation of Real Estate
    Balance at January 1,..................... $ 95,190  $91,837  $ 96,051
     Additions
       Acquisitions and Improvements..........      677    3,466    45,577
     Deductions
       Retirements............................     (462)    (113)       --
       Sale of real estate....................  (13,153)      --   (49,791)
                                               --------  -------  --------
    Balance at December 31,................... $ 82,252  $95,190  $ 91,837
                                               ========  =======  ========

    Reconciliation of Accumulated Depreciation
    Balance at January 1,..................... $  7,875  $ 5,560  $  9,509
     Additions
       Depreciation...........................    1,867    2,427     2,450
     Deductions
       Retirements............................       --     (112)       --
       Sale of real estate....................   (2,240)      --    (6,399)
                                               --------  -------  --------
    Balance at December 31,................... $  7,502  $ 7,875  $  5,560
                                               ========  =======  ========
</TABLE>


                                      42

<PAGE>

                                                                    SCHEDULE IV
                                                                    (Continued)

                   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                         MORTGAGE LOANS ON REAL ESTATE

<TABLE>
<CAPTION>
                                                  2002     2001    2000
                                                -------  -------  ------
                                                 (dollars in thousands)
        <S>                                     <C>      <C>      <C>

        Balance at January 1,.................. $   500  $ 1,500  $   --
        Additions
         New mortgage loans....................   7,109       --   1,500
        Deductions
         Amounts charged off...................  (1,568)      --      --
         Collections of principal..............    (500)              --
         Collections of principal by affiliates  (5,541)  (1,000)     --
                                                -------  -------  ------
        Balance at December 31,................ $    --  $   500  $1,500
                                                =======  =======  ======
</TABLE>

                                      43

<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 69, 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; General Manager (since April 2002)
   of Unified Housing Foundation, Inc., a nonprofit corporation; Director and
   Chairman of the Board of ARI (since November 2002); and Director (since
   April 1990) and Chairman of the Board (since January 1995) of
   Transcontinental Realty Investors, Inc. ("TCI").

   HENRY A. BUTLER:  Age 52, 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 73, 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 63, 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.

                                      44

<PAGE>

Board Committees

   The Board of Directors held 10 meetings during 2002. For such year, no
incumbent Director attended fewer than 75% of the aggregate of (1) the total
number of meetings held by the Board during the period for which he had been a
Director and (2) the total number of meetings held by all committees of the
Board on which he served during the period that he served.

   The Board of Directors has 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 2002.

   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; and Ronald E. Kimbrough, Acting Principal Executive Officer,
Executive Vice President and Chief Financial Officer. Their positions with IORI
are not subject to a vote of stockholders. Their ages, terms of service, all
positions and offices with IORI or BCM, other principal occupations, business
experience and directorships with other companies during the last five years or
more are set forth below.

   MARK W. BRANIGAN:  Age 48, 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 55, 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 50, Acting Principal Executive Officer, Executive
Vice President and Chief Financial Officer (since January 2002).

      Acting Principal Executive Officer, 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).

                                      45

<PAGE>

Officers

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

   ROBERT A. WALDMAN:  Age 50, 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 2002. All of these filing
requirements were satisfied by IORI's Directors and executive officers and ten
percent holders. In making these statements, IORI has relied on the written
representations of its incumbent Directors and executive officers and its ten
percent holders and copies of the reports that they have filed with the
Commission.

The Advisor

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

   BCM has served as IORI's advisor since March 1989. BCM is a company of which
Messrs. Branigan, Corna and Kimbrough serve as executive officers. BCM is
indirectly owned by a trust for the children of Gene E. Phillips. Mr. Phillips
is not an officer or director of BCM, but serves as a representative of trust,
is indirectly involved in daily consultation with the officers of BCM and has
significant influence over the conduct of BCM's business, including the
rendering of advisory services and the making of investment decisions for
itself and for 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.

                                      46

<PAGE>

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

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

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

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

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

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

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

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

   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

                                      47

<PAGE>

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

   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>
<C>                  <S>
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: Acting Principal Executive Officer, Executive Vice President and
                     Chief Financial Officer

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 indirectly 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 Highland Realty
Services, Inc. ("Highland"), a related party. Triad subcontracted the
property-level management and leasing of 5 of IORI's commercial properties to
Regis, a related party, which is a company owned by Highland, until December
2002. Regis was entitled to receive property and construction management fees
and leasing commissions in accordance with its property-level management
agreement with Triad, until December 2002. Beginning January 1, 2003, Regis
Realty I, LLC ("Regis I") provides these services. The sole member of Regis I
is Highland.

Real Estate Brokerage

   Regis also provided real estate brokerage services to IORI (on a
non-exclusive basis), until December 2002. Regis was entitled to receive a real
estate commission for property purchases and sales in accordance with the
following sliding scale of total fees to be paid: (1) maximum fee of 4.5% on
the first $2.0 million of any purchase

                                      48

<PAGE>

or sale transaction of which no more than 3.5% would be paid to Regis or
affiliates; (2) maximum fee of 3.5% on transaction amounts between $2.0
million-$5.0 million of which no more than 3% would be paid to Regis or
affiliates; (3) maximum fee of 2.5% on transaction amounts between $5.0
million-$10.0 million of which no more than 2% would be paid to Regis or
affiliates; and (4) maximum fee of 2% on transaction amounts in excess of $10.0
million of which no more than 1.5% would be paid to Regis or affiliates.
Beginning January 1, 2003, Regis I provides these services. The sole member of
Regis I is Highland.

ITEM 11.  EXECUTIVE COMPENSATION

   IORI has no employees, payroll or benefit plans and pays no compensation to
its executive officers. The executive officers of IORI, who are also officers
or employees of 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 2002, $43,557 was paid to the Independent Directors in total
Directors' fees for all services including the annual fee for service during
the period January 1, 2002, through December 31, 2002, and 2002 special service
fees as follows: Earl D. Cecil, $12,057; Ted P. Stokely, $16,500; and Martin L.
White, $15,000.

                                      49

<PAGE>

Performance Graph

   The following performance graph compares the cumulative total stockholder
return on IORI's shares of Common Stock with the Dow Jones US Total Market
Index ("DJ Total Market Index") and the Dow Jones Real Estate Investment Index
("DJ Real Estate Index"). The comparison assumes that $100 was invested on
December 31, 1997, 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.
                                    [CHART]


          IORI    DJ Total Market Index    DJ Real Estate Index
          ----    ---------------------    --------------------
1997     100.00           100.00                 100.00
1998      58.11           124.90                  78.88
1999      55.37           153.28                  74.69
2000      88.29           139.07                  95.24
2001     197.12           122.50                 106.49
2002     204.24            95.45                 110.35



<TABLE>
<CAPTION>

                               1997   1998   1999   2000   2001   2002
                              ------ ------ ------ ------ ------ ------
        <S>                   <C>    <C>    <C>    <C>    <C>    <C>
        IORI................. 100.00  58.11  55.37  88.29 197.12 204.24
        DJ Total Market Index 100.00 124.90 153.28 139.07 122.50  95.45
        DJ Real Estate Index. 100.00  78.88  74.69  95.24 106.49 110.35
</TABLE>

                                      50

<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 19, 2003.

* Update for post tender offer

<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*    28.9%*
           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 19, 2003.
(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 19, 2003.

<TABLE>
<CAPTION>
                                                                   Amount and
                                                                   Nature of      Percent
                                                                   Beneficial        of
Name of Beneficial Owner                                           Ownership      Class(1)
------------------------                                        ----------        --------
<S>                                                             <C>               <C>
Mark W. Branigan...............................................  869,031(2)(3)(4)   59.9%
Henry A. Butler................................................  345,728(2)         24.0
Earl D. Cecil..................................................  762,229(2)(3)      52.5
Louis J. Corna.................................................  869,031(2)(3)(4)   59.9
Ronald E. Kimbrough............................................  869,031(2)(3)(4)   59.9
Ted P. Stokely.................................................  762,229(2)(3)      52.5
Martin L. White................................................  345,728(2)         24.0
All Directors and Executive Officers as a group (7 individuals)  869,031(2)         59.9
</TABLE>
--------
(1) Percentage is based upon 1,438,945 shares of Common Stock outstanding at
    March 19, 2003.
(2) Includes 345,728 shares owned by TCI of which the Directors and executive
    officers of IORI may be deemed to be beneficial owners by virtue of their
    positions as directors and executive officers of TCI.
(3) Includes 416,501 shares owned by EQK, 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 of which Messrs. Cecil, and Stokely may be
    deemed to be beneficial owners by virtue of their positions as directors of
    ARI, the parent company of EQK. The Directors and executive officers
    disclaim beneficial ownership of such shares.
(4) Includes 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 BCM.

                                      51

<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Business Relationships

   In February 1989, the Board of Directors voted to retain BCM as IORI's
advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT--The Advisor." BCM is a company of which Messrs. Branigan, Corna and
Kimbrough serve as executive officers. BCM is indirectly owned by a trust for
the children of Gene E. Phillips. Mr. Phillips is not an officer or director of
BCM, but serves as a representative of trust, is indirectly involved in daily
consultation with the officers of BCM and has significant influence over the
conduct of BCM's business, including the rendering of advisory services and the
making of investment decisions for itself and for IORI.

   Since February 1, 1991, affiliates of BCM have provided property management
services to IORI. Currently, Triad provides such property management services.
The general partner of Triad is BCM. The limited partner of Triad is Highland,
a related party. Triad subcontracted the property-level management and leasing
of five of IORI's commercial properties to Regis, a related party, which is a
company owned by Highland, until December 2002. Since January 1, 2003, Regis I
provided this service.

   Regis also provides real estate brokerage services for IORI, on a
non-exclusive basis, and receives brokerage commissions in accordance with the
brokerage agreement, until December 2002. Since January 1, 2003, Regis I
provided this service.

   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. Cecil and Stokely also serve as Directors of ARI.
Messrs. Branigan, Corna and Kimbrough serve as executive officers of ARI.

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 ("Rosedale"), a wholly-owned subsidiary of American Realty
Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owned
the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI
guaranteed that the asset would produce at least a 12% return annually of the
purchase price for a period of three years from the purchase date. If the asset
failed to produce the 12% return, ARI shall pay IORI any shortfall. Management
has classified this related party transaction as a note receivable from ARI. In
the first quarter of 2002, after reviewing the property's fair value after
costs to sell, even though ARI has guaranteed the 12% return, IORI recognized a
provision for loss on the note receivable of $767,000. In December 2002, the
Rosedale Towers Office Building was sold for $7.2 million. IORI received $3.5
million of the proceeds after the payment of the first lien debt and various
closing costs. IORI recognized an additional loss of $801,000 on its note.

   In February 2002, IORI funded a $2.0 million mortgage loan as a
participation agreement with Transcontinental Realty Investors, Inc. ("TCI"), a
related party. The loan was secured by a second lien on a retail center in
Montgomery County, Texas. The note receivable bore interest at 16.0% per annum,
required monthly interest only payments of $47,000 and matured in February
2002. In February 2002, the loan was extended until April 2002. In April 2002,
IORI extended the loan until July 2002, receiving $8,500 as an extension fee.
In July 2002, the loan was extended until September 2002, with IORI receiving
$8,500 as an extension fee. Also in July 2002, IORI received a $500,000
principal paydown on the note. In August 2002, the note was paid off including
accrued but unpaid interest.

                                      52

<PAGE>

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

   In 2002, IORI paid BCM and its affiliates and related parties $714,000 in
advisory fees $169,000 in net income fees, $262,000 in mortgage brokerage and
equity refinancing fees, $397,000 in real estate brokerage fees and $262,000 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, 2002,
IORI had advanced BCM, ARI and TCI, $1.7 million, $3.5 million and $5.3
million, respectively.

Restrictions on Related Party Transactions

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

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

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

                                    PART IV

ITEM 14.  CONTROLS AND PROCEDURES

   (a) Within the 90 days prior to the date of this report, IORI carried out an
       evaluation, under the supervision and with the participation of IORI's
       management, including IORI's Acting Principal Executive Officer and
       principal accounting officer, of the effectiveness of the design and
       operation of IORI's disclosure controls and procedures pursuant to
       Exchange Act Rule 13a-14. Based upon the evaluation, IORI's Acting
       Principal Executive Officer and principal accounting officer concluded
       that IORI's disclosure controls and procedures are effective in timely
       alerting him to material information relating to IORI (including its
       consolidated subsidiaries) required to be included in IORI's periodic
       SEC filings.

   (b) There have been no significant changes in IORI's internal controls or in
       other factors that could significantly affect IORI's internal controls
       subsequent to the date IORI carried out this evaluation, including any
       corrective actions with regard to significant deficiencies and material
       weaknesses.

ITEM 15.  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, 2002 and 2001

      Consolidated Statements of Operations--Years Ended December 31, 2002,
   2001 and 2000

                                      53

<PAGE>

      Consolidated Statements of Stockholders' Equity--Years Ended December 31,
   2002, 2001 and 2000

      Consolidated Statements of Cash Flows--Years Ended December 31, 2002,
   2001 and 2000

      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).

 99.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002.
</TABLE>

   (b) Reports on Form 8-K:

      None.

                                      54

<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.

<TABLE>
        <S>                     <C>  <C>
        Dated: March 31, 2003   INCOME OPPORTUNITY REALTY INVESTORS, INC.

                                           /s/  RONALD E. KIMBROUGH
                                By:  ------------------------------------
                                             Ronald E. Kimbrough
                                      Executive Vice President and Chief
                                         Financial Officer (Principal
                                     Financial and Accounting Officer and
                                     Acting Principal Executive Officer)
</TABLE>

   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 31, 2003
-----------------------------    Director
       Ted P. Stokely

    /s/  HENRY A. BUTLER       Director                       March 31, 2003
-----------------------------
       Henry A. Butler

     /s/  EARL D. CECIL        Director                       March 31, 2003
-----------------------------
        Earl D. Cecil

    /s/  MARTIN L. WHITE       Director                       March 31, 2003
-----------------------------
       Martin L. White

  /s/  RONALD E. KIMBROUGH     Executive Vice President and   March 31, 2003
-----------------------------    Chief Financial Officer
     Ronald E. Kimbrough         (Principal Financial and
                                 Accounting Officer and
                                 Acting Principal Executive
                                 Officer)

                                      55

<PAGE>

                                 CERTIFICATION

I, Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and Acting Principal Executive
Officer) of Income Opportunity Realty Investors, Inc. ("IORI"), certify that:

1. I have reviewed this annual report on Form 10-K of IORI;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of
   the registrant as of, and for, the periods presented in this annual report;

4. I am responsible for establishing and maintaining internal controls and
   procedures and have:

    a. designed such internal controls to insure that material information
       relating to IORI and its consolidated subsidiaries is made known to me
       by others within those entities, particularly for the periods presented
       in this annual report;

    b. evaluated the effectiveness of IORI's internal controls as of a date
       within 90 days prior to the filing date of this annual report; and

    c. presented in this annual report my conclusions about the effectiveness
       of the disclosure controls and procedures based on a date within 90 days
       prior to the filing date of this annual report;

5. I have disclosed to IORI's auditors and Audit Committee of the Board of
   Directors (or persons fulfilling the equivalent function):

    a. all significant deficiencies in the design or operation of internal
       controls which could adversely affect IORI's ability to record, process,
       summarize, and report financial data and have identified for IORI's
       auditors any material weaknesses in internal controls; and

    b. any fraud, whether or not material, that involves management or other
       employees who have a significant role in IORI's internal controls; and

6. I have indicated in this annual report whether or not there were significant
   changes in internal controls or in other factors that could significantly
   affect internal controls subsequent to the date of my most recent
   evaluation, including corrective actions with regard to significant
   deficiencies and material weaknesses.

             Date: March 31, 2003       /s/  RONALD E. KIMBROUGH
                                        -------------------------
                                           Ronald E. Kimbrough
                                        Executive Vice President
                                           and Chief Financial
                                                 Officer
                                        (Principal Financial and
                                         Accounting Officer and
                                            Acting Principal
                                           Executive Officer)

                                      56

<PAGE>

                           ANNUAL REPORT ON FORM 10-K

                                  EXHIBIT INDEX

                      For the Year Ended December 31, 2002

Exhibit                                                                   Page
 Number                           Description                            Number
--------  ------------------------------------------------------------  --------

 99.1     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.