See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

Inland Real Estate Corporation was formed on May 12, 1994. The Company owns, and may acquire, additional Neighborhood Retail Centers and Community Centers located primarily within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois. The Company owns, and may also acquire, single-user retail properties located throughout the United States. The Company is also permitted to construct or develop properties, or render services in connection with such development or construction, subject to the Company's compliance with the rules governing real estate investment trusts under the Internal Revenue Code of 1986, as amended (the "Code").

The Company, through a total of four public offerings of common stock, on a best efforts basis, sold a total of 51,642,397 shares of its common stock at prices ranging from $10 to $11 per share. In addition, as of March 31, 2003, the Company had issued 11,183,998 shares through the Company's Distribution Reinvestment Program ("DRP") at prices ranging from $9.05 to $10.45 per share and has repurchased a total of 4,224,200 shares through the Company's Share Repurchase Program ("SRP") at prices ranging from $9.05 to $9.50 per share, for an aggregate cost of $39,186,150. As a result, the Company has realized total offering proceeds of $677,544,357 as of March 31, 2003.

The Company qualified as a real estate investment trust ("REIT") under the Code for federal income tax purposes commencing with the tax year ending December 31, 1995. So long as the Company qualifies for treatment as a REIT, the Company generally will not be subject to federal income tax to the extent it distributes its REIT taxable income to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and federal income and excise taxes on its undistributed income.

The Company has elected to be taxed, for federal income tax purposes, as a REIT. This election has important consequences for it requires the Company to satisfy certain tests regarding the nature of the revenues it can generate and the distributions that it pays to stockholders. To ensure that the Company qualifies to be taxed as a REIT, the Company determines, on a quarterly basis, that the gross income, asset and distribution tests imposed by the Internal Revenue Code are met. On an ongoing basis, as due diligence is performed by the Company on potential real estate purchases or temporary investment of uninvested capital, the Company determines that the income from the new assets qualifies for REIT purposes.

The preparation of consolidated financial statements in conformity with GAAP requires 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 during the reporting periods. Actual results could differ from those estimates.

In the opinion of management, the financial statements contain all the adjustments necessary, which are of a normal recurring nature, to present fairly the financial position and results of operations for the period presented herein. Results of interim periods are not necessarily indicative of results to be expected for the year.

Certain reclassifications were made to the 2002 financial statements to conform with the 2003 presentation.

The Company classifies its investment in securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All securities not included in trading or held-to-maturity are classified as available for sale. Investment in securities at March 31, 2003 consists of preferred and common stock investments in various real estate investment trusts and are classified as available-for-sale securities. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification b asis. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend income is recognized when received. Sales of investment securities available-for-sale during the three months ended March 31, 2003 resulted in a gain on sale of $2,299. This gain is included in other income in the accompanying Consolidated Statements of Operations.

On January 1, 2003, the Company adopted FASB Statement of Financial Accounting Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which amended SFAS No. 4, affects income statement classification of gains and losses from extinguishment of debt. SFAS No. 4 required that gains and losses from extinguishment of debt be classified as an extraordinary item, if material. Under SFAS No. 145, extinguishment of debt is now considered a risk management strategy by the reporting enterprise and the FASB does not believe it should be considered extraordinary under the criteria in APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," unless the debt extinguishment meets the unusual in nature and infrequency of occurrence criteria in APB Opinion No. 30. The adoption of SFAS 145 did not have a material effect on the Company's results of operations or financial condition.

On January 1, 2003, the Company adopted FASB Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The adoption of FIN 45 did not have a material effect on the Company's financial statements.

On January 1, 2003, the Company adopted FASB Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Adoption of this standard did not have an impact on our results of operations or financial condition because all stock based compensation was recorded at fair value.

The accompanying consolidated financial statements of the Company include, in addition to the accounts of the wholly-owned subsidiaries, the accounts of Inland Ryan, LLC and Inland Ryan Cliff Lake, LLC (Inland Ryan and Inland Ryan Cliff Lake are collectively referred to as the "LLCs"). Due to the Company's ability as managing member to directly control these LLCs, they are consolidated with the Company for financial reporting purposes. The third parties' interests in the LLCs are reflected as minority interest in the accompanying consolidated financial statements. As of March 31, 2003, the Company and the non-managing members have entered into four amendments to the LLC agreement to reflect various transactions with individual members of Inland Ryan, LLC. In aggregate, these amendments had no effect on the Company's and the non-managing members' interest in Inland Ryan, LLC which remains at approximately 78% and 22%, respectively.

On February 1, 2001, a wholly-owned subsidiary of the Company entered into an LLC agreement with a wholly-owned subsidiary of Tri-Land Properties, Inc. for the acquisition and redevelopment of the Century Consumer Mall in Merrillville, Indiana. The property is located at the southeast corner of the intersection of U.S. Route 30 and Broadway in Merrillville, west of Interstate 65. The property currently has one anchor tenant, a 139,451 square foot Burlington Coat Factory store on the south end of the property. On the north end of the property, there is a vacant 148,420 square foot store, previously occupied by Montgomery Wards, which is currently being marketed to new users. In between was 105,000 square feet of enclosed mall space, which has been demolished, as part of the phased redevelopment of the property. The phased redevelopment also calls for construction of 26,000 square feet of new retail space along Route 30, construction of 30,000 square feet of new retail space on the western p ortion of the property, and construction of up to 104,700 square feet of new open-air retail space between the existing anchors. The first phase of new construction commenced in January 2003 for an 18,000 square foot retail building fronting U.S. Route 30. This building will be anchored by a 4,800 square foot Panera Bread store pursuant to an executed ten year lease. It is anticipated that completion of construction and lease up of this building will occur by the fourth quarter of 2003. Each partner's initial equity contribution was $500,000. The Company is a non-managing member of the LLC and does not exercise control therefore, the Company uses the equity method. Under the equity method, the operations of a joint venture are not consolidated with the operations of the Company but instead are reflected as income or loss from the operations of unconsolidated ventures on the Company's Consolidated Statement of Operations. Additionally, the Company's net investment in the joint venture is reflected as an asset on the Consolidated Balance Sheets. A wholly-owned subsidiary of the Company has the right of first refusal to acquire the property after it is redeveloped. As of March 31, 2003, the Company's net investment was ($127,286). In addition, the Company has committed to lend the LLC up to $17,800,000. The loan bears interest at an initial rate of 9% per annum, paid monthly on average outstanding balances. The loan matures in five years. As of March 31, 2003, the principal balance of this mortgage receivable was $7,005,933.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests obtained in variable interest entities after January 31, 2003. The interpretation is applied to the enterprise no later than the end of the first annual reporting period beginning after June 15, 2003. The interpretation requires certain disclosures in financial statements issued after January 21, 2003 if it is reasonably possible that the Company will consolidated or disclose information about variable interest entities when the interpretation becomes effective.

As described above, the Company has historically accounted for its investments in joint ventures, where the Company is not the managing member and does not have control, using the equity method of accounting. Management is in the process of analyzing FIN 46 to determine the impact, if any, on the Company's financial statements. The Company's maximum exposure to loss as a result of its involvement with the joint venture is approximately $6,900,000, potentially reduced by $2,500,000, which is guaranteed by Tri-Land Properties, Inc.

During the three months ended March 31, 2003, the Company purchased legal services from attorneys employed by The Inland Real Estate Group, Inc., a wholly-owned subsidiary of The Inland Group, Inc. The fees for these services are based on costs incurred by The Inland Real Estate Group, Inc. and are currently purchased at $220 per hour. For the three months ended March 31, 2003 and 2002, the Company paid $57,968 and $24,567, respectively, for these legal services.

An affiliate of The Inland Group, Inc. is the mortgagee on the Walgreens property, located in Decatur, Illinois. As of March 31, 2003, the remaining balance of the mortgage is $646,510. The loan secured by this mortgage bears interest at a rate equal to 7.65% per annum and matures on May 31, 2004. For the three months ended March 31, 2003 and 2002, the Company paid principal and interest payments totaling $17,067 each period on this mortgage.

On February 1, 2001, a wholly-owned subsidiary of the Company entered into an LLC agreement with a wholly-owned subsidiary of Tri-Land Properties, Inc. for the acquisition and redevelopment of the Century Consumer Mall in Merrillville, Indiana. Richard Dube, the brother-in-law of Mr. Daniel Goodwin, one of the Company's directors, is the president and a principal owner of Tri-Land. Each partner's initial equity contribution was $500,000. A wholly-owned subsidiary of the Company has the right of first refusal to acquire the property after it is redeveloped. As of March 31, 2003, the Company's net investment was ($127,286). In addition, the Company has committed to lend the LLC up to $17,800,000. The loan bears interest at an initial rate of 9% per annum, paid monthly on average outstanding balances. The loan matures in five years. As of March 31, 2003, the principal balance of this mortgage receivable was $7,005,933.

The Company, from time to time, receives payments under master lease agreements covering spaces vacant at the time of acquisition. The payments range from one to two years from the date of acquisition of the property or until the space is leased and tenants begin paying rent. GAAP requires the Company to treat these payments as a reduction to the purchase price of the investment properties upon receipt of the payment, rather than as rental income. As of March 31, 2003, the Company had three investment properties, Townes Crossing, located in Oswego, Illinois, Forest Lake, located in Forest Lake, Minnesota and Shops at Orchard Place, located in Skokie, Illinois, subject to master lease agreements. The cumulative amount of such payments was $7,061,883 and $6,973,832 for the three months ended March 31, 2003 and the year ended December 31, 2002, respectively.

On March 28, 2002, the Company sold, through a qualified tax deferred agent, one of its investment properties, Antioch Plaza, located in Antioch, Illinois, to a third party for $1,818,344, net of closing costs. In conjunction with this sale, the agent repaid indebtedness secured by the property of $875,000. The agent held the net proceeds of $926,000 until July 2002 when the funds were used to partially fund the purchase of an investment property. This sale resulted in a gain on sale of $533,942, for accounting purposes. For federal and state income tax purposes, the Antioch Plaza sale qualified as part of a tax deferred exchange. As a result, the gain is deferred, for federal income tax purposes, until the replacement property is disposed of in a subsequent taxable transaction.

Results of operations for Antioch Plaza for the three months ended March 31, 2003 and the period ended March 28, 2002 were as follows:

In March 2002, the Company received an unsolicited offer to purchase, at a price in excess of book value, Shorecrest Plaza, located in Racine, Wisconsin and accordingly, this asset was classified as held for sale and depreciation was suspended for the three months ended March 31, 2002. On June 12, 2002, the Company, through a qualified tax deferred agent, sold this investment property, to a third party for $6,085,261, net of closing costs. In conjunction with this sale, the agent repaid indebtedness secured by the property of $2,978,000. The agent held the net proceeds of $2,877,000 until July 2002 when the funds were used to partially fund the purchase of an investment property. This sale resulted in a gain on sale of $828,144, for accounting purposes. For federal and state income tax purposes, the Shorecrest Plaza sale qualified as part of a tax deferred exchange. As a result, the gain is deferred, for federal income tax purposes, until the replacement property is disposed o f in a subsequent taxable transaction.

Results of operations for Shorecrest Plaza for the three months ended March 31, 2003 and 2002 were as follows:

During the quarter ended March 31, 2003, the Company received an unsolicited offer to purchase, at a price in excess of book value, a 2,280 square foot free-standing restaurant building, Popeye's, which was part of one of the Company's existing investment properties, Calumet Square, located in Calumet City, Illinois. Accordingly, this asset has been classified as held for sale and depreciation has been suspended.

The following assets and liabilities relating to the Popeye's restaurant were classified as held for sale on the Consolidated Balance Sheet as of March 31, 2003.

Results of operations for Popeye's portion of Calumet Square for the three months ended March 31, 2003 and 2002 were as follows:

Certain tenant leases contain provisions providing for "stepped" rent increases. GAAP requires the Company to record rental income for the period of occupancy using the effective monthly rent, which is the average monthly rent for the entire period of occupancy during the term of the lease. The accompanying consolidated financial statements include increases of $510,199 and $307,604 for the three months ended March 31, 2003 and 2002, respectively, of rental income for the period of occupancy for which stepped rent increases apply and $15,020,972 and $14,510,773 in related accounts and rents receivable as of March 31, 2003 and December 31, 2002, respectively. The Company anticipates collecting these amounts over the terms of the leases as scheduled rent payments are made.

K-Mart, a tenant at three of the Company's investment properties, filed its bankruptcy in January 2002. As of March 31, 2003, two of the stores remained open and one had closed. K-mart completed its bankruptcy reorganization on May 6, 2003. The parent company of Zany Brainy, FAO, Inc.("Zany Brainy"), a tenant at four of the Company's investment properties, filed its bankruptcy in January 2003. As of the date of this filing, leases at three of these locations have been rejected. Zany Brainy completed its bankruptcy reorganization on April 24, 2003. The parent company of Rainbow Foods, Fleming Companies, Inc., a tenant at five of the Company's investment properties, filed its bankruptcy in April 2003. As of the date of this filing, all of the stores are expected to remain open. Eagle Food Centers, Inc., a tenant at three of the Company's investment properties, filed its bankruptcy in April 2003. As of the date of this filing, all of the stores are expected to remain open. The K-Mart, Zany Br ainy, Rainbow Foods and Eagle Food Store locations account for approximately 7% of the Company's total square footage and approximately 5% of its annual rental income for the three months ended March 31, 2003. In conjunction with these bankruptcy filings, the Company has recorded approximately $426,000 as provision for doubtful accounts on the accompanying Consolidated Balance Sheets. The Company does not believe that these bankruptcy filings will cause any of its investment properties to be considered impaired under the requirements of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

On February 1, 2001, the Company entered into an LLC agreement with Tri-Land Properties, Inc. and committed to lend the LLC up to $17,800,000 to fund the initial acquisition and subsequent redevelopment of the property commonly referred to as the Century Consumer Mall, located in Merrillville, Indiana and owned by the LLC. Draws on the loan bear interest at a rate of 9% per annum with interest only paid monthly. The loan is secured by the property and matures on January 31, 2006. As of March 31, 2003, the principal balance of this mortgage receivable is $7,005,933. A wholly-owned subsidiary of the Company has the right of first refusal to acquire the property after it is redeveloped.

The Company's mortgages payable are secured by certain of its investment properties and consist of the following at March 31, 2003 and December 31, 2002:

1. The Company received a subsidy at closing totaling approximately $390,000 from the seller to be used over a period of five years, which together with interest earnings on the initial deposit, will provide a sum that will be drawn down on a monthly basis by the Company to reduce the effective interest rate paid on the loan to 7% per annum.
2. These loans require payments of principal and interest monthly; all other loans listed are interest only.
3. Payments on these loans are calculated using a floating rate of interest based on LIBOR, adjusted monthly.

5. As part of the purchase of the property securing this loan, the Company assumed the existing mortgage-backed Economic Development Revenue Bonds, Series 1994 issued by the Village of Skokie, Illinois. The interest rate on these bonds floats and is reset weekly by a re-marketing agent. The rate at March 31, 2003 was 1.56%. The bonds are further secured by an Irrevocable Letter of Credit, issued by LaSalle Bank at a fee of 1.25% of the principal amount outstanding, paid annually. In addition, the Company is required to pay a re-marketing fee of .125% per annum of the principal amount outstanding, paid quarterly and a trustee fee of $500 also paid quarterly.

Basic earnings per share ("EPS") is computed by dividing net income by the basic weighted average number of common shares outstanding for the period (the "commons shares"). Diluted EPS is computed by dividing net income by the common shares plus shares issuable upon exercise of existing option or other contracts. As of March 31, 2003 and December 31, 2002, options to purchase 27,500 shares of common stock at exercise prices ranging from $9.05 to $10.45 per share were outstanding. These options were not included in the computation of basic or diluted EPS.

As of March 31, 2003, warrants to purchase 362,928 shares of common stock at a price of $12.00 per share were outstanding, but were not included in the computation of basic or diluted EPS because the warrants exercise price was greater than the market price of common shares, as quoted over the counter bulletin board.

As of March 31, 2003, 5,454.45 shares of common stock issued pursuant to employment agreements were outstanding. These shares are excluded from the computation of basic EPS but reflected in diluted EPS by application of the treasury stock method.

The basic weighted average number of common shares outstanding were 64,658,652 and 63,606,680 for the three months ended March 31, 2003 and 2002, respectively. The diluted weighted average number of common shares outstanding were 64,664,106 and 63,612,134 for the three months ended March 31, 2003 and 2002.

The Company has agreed to issue common stock to certain officers of the Company pursuant to employment agreements entered into with these officers. These agreements became effective January 1, 2002.

As of March 31, 2003, an aggregate of 5,454.45 shares of the Company's common stock, issued at a value of $11.00 per share, comprising an aggregate value of $60,000, were issued pursuant to these agreements. For purposes of determining the fair value, the Company has used the offering price of $11.00 per share, which is the last price at which shares were issued in a public offering, excluding shares issued through the Company's DRP. Under each of the employment agreements each officer vests an equal portion of shares over a five-year vesting period beginning January 1, 2003. Compensation cost of $12,000 was recorded in connection with the issuance of these shares for the three months ended March 31, 2003.

The officers may also receive additional restricted shares of the Company's common stock, which are also subject to a five-year vesting period. The number of these shares is to be determined based upon the future performance of the Company beginning January 1, 2003. No additional shares were issued for the three months ended March 31, 2003.

The Company owns and acquires "Neighborhood Retail Center" and "Community Centers" located primarily within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois, as well as, single-user properties located throughout the United States. The Company currently owns investment properties within the States of Florida, Illinois, Indiana, Michigan, Minnesota, Missouri, Ohio, Tennessee and Wisconsin. These properties are typically anchored by grocery and drug stores complemented with additional stores providing a wide range of other goods and services.

The Company assesses and measures operating results on an individual property basis for each of its investment properties based on net property operations. Since all of the Company's investment properties exhibit highly similar economic characteristics, generally have tenants that offer products catering to the day-to-day living needs of individuals, and offer similar degrees of risk and opportunities for growth, the shopping centers have been aggregated and reported as one operating segment.

The property revenues and property net operations are summarized in the following table for the three months ended March 31, 2003 and 2002, along with reconciliation to income from operations. Net investment properties and total assets are also presented as of March 31, 2003 and 2002:

Three of the Company's investment properties are located in tax increment financing districts. The Company has agreed to fund any shortfalls in the Tax Increment generated in these districts. At March 31, 2003, the Company does not believe any monies will be due.

On April 8, 2003, the Company sold a 2,280 square foot free-standing restaurant building, Popeye's, which was part of one of the Company's existing investment properties, Calumet Square, located in Calumet City, Illinois for $365,000.

On April 17, 2003, the Company paid a distribution of $5,172,554 to stockholders of record as of March 1, 2003.

On April 22, 2003, the Company purchased a property from an unaffiliated third party for $16,208,443. The purchase price was funded using cash and cash equivalents. The property is located in Mankato Heights, Minnesota and contains 129,162 square feet of leaseable space. Its major tenants include Michael's, Old Navy and TJ Maxx. An affiliate of The Inland Group, Inc. was paid an acquisition fee equal to 1% of the purchase price of the property, or $162,084, in connection with the purchase of this property.

On May 2, 2003, the Company amended its line of credit agreement with KeyBank N.A. This amendment reduces the interest rate charged on the outstanding balance by 1.25% and extends the maturity to May 2, 2006. In addition, the aggregate commitment of the Company's line was increased by $50,000,000, to a total of $150,000,000. In conjunction with this amendment, the Company paid approximately $750,000 in fees and costs.

On May 6, 2003, the Company obtained a loan secured by Brunswick Market Center, located in Brunswick, Ohio. This loan has a principal balance of $7,130,000, an interest rate of 4.70% and matures in seven years.

On May 6, 2003, the Company obtained a loan secured by Medina Marketplace, located in Medina, Ohio. This loan has a principal balance of $5,250,000, an interest rate of 4.70% and matures in seven years.

In connection with obtaining these financings, the Company paid a commission for mortgage brokerage services to Cohen Financial in an amount equal to $61,900 (equivalent to one-half of one percent of the principal amount of the indebtedness). Joel D. Simmons, one of the Company's independent directors, is a limited partner of Cohen Financial.

This section provides a narrative discussion of our Consolidated Balance Sheet as of March 31, 2003 and compares it to the Consolidated Balance Sheet as of December 31, 2002 as well as our Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002, respectively. First, we discuss the critical accounting policies that impact the treatment, for financial statement purposes, of certain items such as how we value our investment properties, recognize rental income and depreciate our assets. Next, we discuss the Consolidated Balance Sheets and Consolidated Statements of Cash Flows and how the changes in balance sheet and cash flow items from period to period impact our liquidity and capital resources. Third, we discuss results of operations, including changes in funds from operations from period to period and discuss the impact that inflation may have on our results.

We have elected to be taxed, for federal income tax purposes, as a real estate investment trust ("REIT"). This election has important consequences for it requires us to satisfy certain tests regarding the nature of the revenues we can generate and the distributions that we pay to our stockholders. To ensure that we qualify to be taxed as a REIT, we determine, on a quarterly basis, that the gross income, asset and distribution tests imposed by the Internal Revenue Code are satisfied. We also perform due diligence on potential real estate purchases or temporary investment of uninvested capital, to determine that the income from the new assets would qualify for REIT purposes.

We have qualified to be taxed as a REIT since the year ending December 31, 1995. As such, we generally will not be subject to federal income tax to the extent we satisfy the distribution requirements. If we fail to qualify as a REIT in any taxable year, our income will be subject to federal income tax at regular corporate tax rates. Even if we qualify for taxation as a REIT, our income may be subject to certain state and local taxes and property and federal income and excise taxes on our undistributed income.

On December 12, 2001, the Securities and Exchange Commission issued Financial Reporting Release ("FRR") No. 60 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies." A critical accounting policy is one that would materially effect our operations or financial condition, and requires management to make estimates or judgements in certain circumstances. We believe that our most critical accounting policies relate to how we value our investment properties, recognize rental income and lease termination income, our cost capitalization and depreciation policies and consolidation/equity accounting policies. These judgements often result from the need to make estimates about the effect of matters that are inherently uncertain. The purpose of the FRR is to provide stockholders with an understanding of how management forms these policies. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordanc e with accounting principles generally accepted in the United States of America ("GAAP"). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgements known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.

Valuation and Allocation of Investment Properties. In determining the value of an investment property and whether the property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age, physical condition and investor return requirements among others. Additionally, we obtain an appraisal prepared by a third party for every investment property purchased. All of the aforementioned factors are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain factors, either individually or taken as a whole. Should the actual results differ from man agement's judgement, the valuation could be negatively or positively affected.

We allocate the purchase price of the each acquired investment property between land, building and improvements, other intangibles (including acquired above market leases, acquired below market leases and acquired in place lease origination cost (the market cost avoidance of executing each acquired lease)) and any assumed financing that is determined to be above or below market terms. The allocation of the purchase price is an area that requires complex judgments and significant estimates. The value allocated to land as opposed to building affects the amount of depreciation expense we record. If more value is attributed to land, depreciation expense would be lower than if more value was attributed to building. We use the information contained in the third party appraisals as the primary basis for allocating the purchase price between land and site improvements. We determine whether any financing assumed is above or below market based upon comparison to similar financing terms for similar investment proper ties. We also allocate a portion of the purchase price to the estimated lease origination cost based on estimated lease execution costs for similar leases and consider various factors including geographic location and size of leased space. We then evaluate each acquired lease based upon current market rates at the acquisition date and consider various factors including geographic location, size and location of leased space within the investment property, tenant profile and the credit risk of the tenant in determining whether the acquired lease is above or below market. After an acquired lease is determined to be above or below market, we allocate a portion of the purchase price to the acquired above or below market lease based upon the present value of the difference between the contractual lease rate and the estimated market rate. The determination of the discount rate used in the present value calculation is based upon a rate for each individual lease and primarily based upon the credit worthiness of each individual tenant.

On a quarterly basis, in accordance with Statement of Financial Accounting Standards No. 144, we conduct an impairment analysis to ensure that the carrying value of each property does not exceed its estimated fair value. If this were to occur, we would be required to record an impairment loss equal to the excess of carrying value over fair value.

The valuation and allocation of the purchase price and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management's continuous process of analyzing each property.

Recognition of Rental Income. Under GAAP, we are required to recognize rental income based on the effective monthly rent for each lease. The effective monthly rent is equal to the average monthly rent during the term of the lease, not the stated rent for any particular month. The process, known as "straight-lining" rent generally has the effect of increasing rental revenues during the early phases of a lease and decreasing rental revenues in the latter phases of a lease. Due to the impact of "straight-lining," rental income exceeded the cash collected for such rent by $510,199 and $307,604 for the three months ended March 31, 2003 and 2002, respectively. If rental income calculated on a straight-line basis exceeds the cash rent due under the lease, the difference is recorded as an increase in deferred rent receivable and included as a component of accounts and rents receivable in the accompanying Consolidated Balance Sheets. If the cash rent due under the lease exceeds rental income calculated on a straight-line basis, the difference is recorded as a decrease in deferred rent receivable and is also included as a component of accounts and rents receivable in the accompanying Consolidated Balance Sheets. In accordance with Staff Accounting Bulletin 101, we defer recognition of contingent rental income, such as percentage/excess rent, until the specified target that triggers the contingent rental income is achieved. We periodically review the collectability of outstanding receivables. Allowances are taken for tenants with outstanding balances due for a period greater than ninety days and tenants with outstanding balances due for a period less than ninety days but that we believe are potentially uncollectable.

Recognition of Lease Termination Income. We recognize lease termination income upon receipt of the income. We accrue lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.

Cost Capitalization and Depreciation Policies. We review all expenditures and capitalize any item exceeding $5,000 deemed to be an upgrade or a tenant improvement. If we capitalize more expenditures, current depreciation expense would be higher, however, total current expenses would be lower. Depreciation expense is computed using the straight-line method. Buildings and improvements are depreciated based upon estimated useful lives of 30 years for buildings and improvements, 15 years for site improvements and the remaining life of the related lease for tenant improvements. Acquired above and below market leases are amortized on a straight-line basis over the life of the related leases as an adjustment to rental income. Acquired in place lease origination cost is amortized over the life of the lease as a component of amortization expense.

Consolidation/Equity Accounting Policies. We consolidate the operations of a joint venture when we are the managing member, since we are then able to control the joint venture. A third party's interest in a joint venture controlled by us is reflected as minority interest in our consolidated financial statements. In instances where we are not the managing member and do not control the joint venture, we use the equity method of accounting. Under the equity method, the operations of a joint venture are not consolidated with our operations but instead are reflected as income or loss from the operations of unconsolidated ventures on our Consolidated Statement of Operations. Additionally, our net investment in the joint venture is reflected as an asset on the Consolidated Balance Sheets.

This section describes our balance sheet and discusses our liquidity and capital commitments. Our most liquid asset is our cash and cash equivalents which consists of cash and short-term investments. Cash and cash equivalents at March 31, 2003 and December 31, 2002 were $19,247,994 and $21,433,995, respectively. Income generated from our investment properties is the primary source from which we generate cash. Other sources of cash include amounts raised from the sale of securities under our dividend reinvestment program ("DRP"), our draws on the line of credit with KeyBank and proceeds from financings secured by our investment properties. The decrease in our cash from December 31, 2002 to March 31, 2003, described in more detail below, results from receiving approximately $19,200,000 from operations, while using approximately $9,300,000 in investing activities and approximately $12,100,000 in financing activities.

As of March 31, 2003, we owned interests in 135 investment properties including thirteen unencumbered by any indebtedness. We generally limit our indebtedness to approximately fifty- percent (50%) of the carrying value of our investment properties in the aggregate. The remaining thirteen unencumbered investment properties have a carrying value of approximately $69,000,000 and would therefore yield approximately $35,000,000 in additional cash from financing, using this standard. These 135 investment properties, in the aggregate, are currently generating sufficient cash flow to pay our operating expenses, debt service requirements and distributions equal to $.94 per share on an annual basis.

Net cash provided by operating activities increased from $13,858,601 for the three months ended March 31, 2002 to $19,203,105 for the three months ended March 31, 2003 due to a number of factors. Within cash flows from operating activities, net income is increased or decreased adjusted by certain non-cash items. During the three months ended March 31, 2002, we sold more investment properties and recognized approximately $550,000 more in gains than during the three months ended March 31, 2003. Similarly, the straight-lining of rental income, as required by GAAP, increased income more during the three months ended March 31, 2003 than during the three months ended March 31, 2002 by approximately $200,000. During the three months ended March 31, 2003, our operating cash flows were reduced by approximately $275,000 due to the amortization of below market acquired leases. An acquired below market lease is defined as a lease acquired at purchase that is deemed to be below market rent at the d ate of acquisition. The amortization of acquired below market leases is recorded as an increase to rental income. We had no such amortization during the three months ended March 31, 2002. The amortization of acquired below market leases is subtracted from net income. During the three months ended March 31, 2003, we recorded depreciation expense on our investment properties of $8,343,563, as compared to depreciation of $6,792,299 during the three months ended March 31, 2002. Depreciation is a non-cash expense that is added back to net income. The primary reason for the increase in depreciation is the additional depreciation recorded on properties purchased during 2002 as well as depreciation on approximately $3,000,000 in tenant improvements and additions completed during the three months ended March 31, 2003. During the three months ended March 31, 2003, we recorded amortization expense of $232,071, as compared to $113,936 during the three months ended March 31, 2002. Amortization is a non-cash expense that is added back to net income. Included in amortization expense is amortization on leasing commissions, loan fees and acquired in place lease origination cost on acquired leases. The primary increase in amortization is due to amortization of the acquired in place lease origination cost of our acquired leases, as required by FASB 141, for the three months ended March 31, 2003. Additionally, amortization on loan fees increased approximately $24,000 during the three months ended March 31, 2003, as compared to the three months ended March 31, 2002, due to legal fees in conjunction with debt obtained or refinanced after March 31, 2002. This increase was partially offset by a decrease of approximately $13,000 in amortization of leasing commissions. During the three months ended March 31, 2002, we wrote off approximately $32,000 of leasing commissions in relation to our discontinued operations. During the three months ended March 31, 2003, we recorded approximately $180,000 for amortization of acquired above market l eases. An acquired above market lease is defined as a lease acquired at purchase that is deemed to be above market rent at the date of acquisition. The amortization of acquired above market leases is recorded as a decrease to rental income. We had no such amortization during the three months ended March 31, 2002.

Net income is also adjusted for changes in assets and liabilities. These changes decreased cash flows from operating activities for the three months ended March 31, 2003 by approximately $127,000, as compared to approximately $3,900,000 for the three months ended March 31, 2002. Generally, an increase in assets or a decrease in liabilities represents a reduction in operating cash flows. Conversely, a decrease in assets or an increase in liabilities generally represents an increase in operating cash flows. Restricted cash decreased approximately $1,900,000 during the three months ended March 31, 2003, thereby increasing operating cash. This decrease is primarily due to a refund of approximately $2,400,000 from our real estate tax escrow account for the overpayment of monthly escrow payments. This decrease is offset by additional monthly payments to our real estate tax escrow accounts. Accounts and rents receivable increased approximately $2,400,000 and approximately $1,200,000 for the t hree months ended March 31, 2003 and 2002, respectively, thereby reducing operating cash. These increases are due primarily to increases in accrued real estate taxes. The increase for the three months ended March 31, 2003 is also attributable to amounts recorded for a full three months on properties purchased during the fourth quarter of 2002. Changes in accounts and rents receivable are also affected by changes in payment streams from our tenants. Prepaid rents and unearned income increased approximately $1,000,000 for the three months ended March 31, 2003, thereby increasing operating cash. Prepaid rents and unearned income decreased approximately $1,300,000 for the three months ended March 31, 2002, thereby decreasing operating cash. Payments by tenants are a factor in determining when rent is considered prepaid and receipt of payment from the tenants tends to vary from period to period.

We used $9,308,136 in cash for investing activities for the three months ended March 31, 2003 as compared to $2,505,503 for the three months ended March 31, 2002. The primary reason for the increase in cash used is the use of approximately $5,000,000 to purchase one investment property during the three months ended March 31, 2003. During the three months ended March 31, 2002, we did not purchase any investment properties. Additionally, we used approximately $3,300,000 for tenant improvements and additions to our investment properties during the three months ended March 31, 2003, as compared to approximately $1,400,000 during the three months ended March 31, 2002. This increase in cash used was also due to a decrease in cash received for the sale of investment properties. During the three months ended March 31, 2002, we sold one investment property for approximately $1,800,000. During the three months ended March 31, 2003, we did not sell any investment properties. We also used $1,500,0 00 to purchase the partial interest of a minority interest partner in the Inland Ryan, LLC during the three months ended March 31, 2002. We did not use any cash to purchase minority interests during the three months ended March 31, 2003.

We used $12,080,970 in cash for financing activities for the three months ended March 31, 2003, as compared to $4,781,485 for the three months ended March 31, 2002. The increase in cash used is primarily due to no loan proceeds received during the three months ended March 31, 2003, as compared to $8,000,000 received during the three months ended March 31, 2002.

The table below presents our obligations and commitments to make future payments under debt obligations, maintenance contracts and lease agreements as of March 31, 2003:

Net income for the three months ended March 31, 2003 was $9,874,542, as compared to $10,210,701 for the three months ended March 31, 2002. Net income per share, basic and diluted, was $.15 for the three months ended March 31, 2003, as compared to $.16 for the three months ended March 31, 2002 (based on basic weighted average common shares outstanding of 64,658,652 and 63,606,680, respectively and diluted weighted average common shares outstanding of 64,664,106 and 63,612,134, respectively). The changes in net income are described in more detail below.

On a "same store" basis, (comparing the results of operations of the investment properties owned during the three months ended March 31, 2003 with the results of the same investment properties during the three months ended March 31, 2002), property net operating income increased by approximately $280,000 with total revenues increasing by approximately $630,000 and total property operating expenses increasing by approximately $350,000. Total rental and additional rental income for the three months ended March 31, 2003 was $44,166,293, as compared to $35,976,736 for the three months ended March 31, 2002. The primary reason for this increase was an increase of approximately $7,600,000 in rental and additional rental income received on the properties purchased during 2002. The increase in "same store" income is partially due to the signing of 130 new leases during 2002. This increase is offset by vacancies in these "same store" investment properties. The increase in vacancies was primarily due to the bankruptcy of certain national tenants, most notably, K-Mart and Zany Brainy, and their subsequent rejection of leases at several sites.

K-Mart, a tenant at three of our investment properties, filed its bankruptcy in January 2002. As of March 31, 2003, two of the stores remained open and one had closed. K-mart completed its bankruptcy reorganization on May 6, 2003. The parent company of Zany Brainy, FAO, Inc. ("Zany Brainy"), a tenant at four of our investment properties, filed its bankruptcy in January 2003. As of the date of this filing, leases at three of these locations have been rejected. Zany Brainy completed its bankruptcy reorganization on April 24, 2003. The parent company of Rainbow Foods, Fleming Companies, Inc., a tenant at five of our investment properties, filed its bankruptcy in April 2003. As of the date of this filing, all of the stores are expected to remain open. Eagle Food Centers, Inc., a tenant at three of our investment properties, filed its bankruptcy in April 2003. As of the date of this filing, all of the stores are expected to remain open. The K-Mart, Zany Brainy, Rainbow Foods and Eagle Food Store locations acco unt for approximately 7% of our total square footage and approximately 5% of our annual rental income for the three months ended March 31, 2003. In conjunction with these bankruptcy filings, the Company has recorded approximately $426,000 as provision for doubtful accounts on the accompanying Consolidated Balance Sheets. The Company does not believe that these bankruptcy filings will cause any of its investment properties to be considered impaired under the requirements of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

Lease termination income for three tenants was $369,819 for the three months ended March 31, 2003, as compared to $618,981 for two tenants for the three months ended March 31, 2002.

We earn interest income by investing our cash and cash equivalents in short-term investments pending investment in real estate. Interest income was $126,898 for the three months ended March 31, 2003, as compared to $544,651 for the three months ended March 31, 2002. The primary reason for this decrease was due to interest received during the three months ended March 31, 2002 of approximately $345,000 for the mortgage receivable for Thatcher Woods Shopping Center. This receivable was subsequently paid during the second quarter of 2002. This decrease is also due to a decrease in the cash and cash equivalents held in short-term investments.

Dividend income earned on our portfolio of preferred and common stocks was $273,548 for the three months ended March 31, 2003, as compared to $262,245 for the three months ended March 31, 2002. This increase is due to an increase in the yield on shares held for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. This increase was offset by a decrease in our preferred and common stocks held for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002.

Total property operating expenses for the three months ended March 31, 2003 were $14,520,998, as compared to $11,884,229 for the three months ended March 31, 2002. The primary reason for this increase was an increase of approximately $2,300,000 in property operating expenses incurred on the properties purchased during 2002. This increase is also due to an increase of approximately $300,000 in property operating expenses incurred on the "same store" investment properties.

Professional services were $81,442 for the three months ended March 31, 2003, as compared to $141,721 for the three months ended March 31, 2002. The legal costs for the three months ended March 31, 2002 were higher than the legal costs for the three months ended March 31, 2003 due primarily to an increase in litigation costs incurred in relation to the lawsuit previously filed on May 1, 2001 between us and our former general counsel and secretary. Cash paid for professional fees for auditing and tax services decreased for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002.

General and administrative expenses were $1,091,856 for the three months ended March 31, 2002, as compared to $949,894 for the three months ended March 31, 2002. This increase is due primarily to an increase in salary and health insurance expenses of approximately $55,000, as a result of increases in staff, as well as annual increases. Additionally, office rents increased approximately $22,000 and supplies increased approximately $15,000 due to the expansion of office space to accommodate the growth of our staff.

Bad debt expense was $812,105 for the three months ended March 31, 2003, as compared to $16,146 for the three months ended March 31, 2002. This increase was due to an increase in the provision for doubtful accounts. The provision for doubtful accounts at March 31, 2003 was increased from March 31, 2002 due to an increase in tenants with outstanding balances due for a period greater than ninety days and tenants with outstanding balances due for a period less that ninety days but that management believes are potentially uncollectable pursuant to its review of each specific outstanding balance.

Interest expense was $9,941,186 for the three months ended March 31, 2003, as compared to $7,844,269 for the three months ended March 31, 2002. Interest expense for the three months ended March 31, 2003 includes approximately $1,100,000 of interest expense on the amounts outstanding relating to the line of credit with KeyBank N.A. The increase was also due to an increase in the mortgages payable from approximately $497,200,000 at March 31, 2002 to approximately $582,200,000 at March 31, 2003.

Acquisition cost expense increased by approximately $16,000 for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. This increase is due to an increase in investment properties considered for acquisition, but not purchased.

The Inland Group, Inc., through affiliates, owns approximately 10% of our outstanding common stock. For accounting purposes however, we are not directly affiliated with The Inland Group, Inc., or its affiliates, therefore, the expenses paid to these affiliates of The Inland Group, Inc. are classified as expenses to non-affiliates on the Consolidated Statements of Operations. During the three months ended March 31, 2003 and 2002, we purchased various administrative services, such as payroll preparation and management, data processing, insurance consultation and placement, investor relations, property tax reduction services and mail processing from affiliates of The Inland Group, Inc. We pay for these services on an hourly basis. The hourly rate is based on the salary of the individual rendering the services, plus a pro rata allocation of overhead including, but not limited to, employee benefits, rent, materials, fees, taxes and operating expenses incurred by each entity in operating the ir respective businesses. Computer services were purchased at a contract rate of $30 per hour. We continue to purchase these services from The Inland Group, Inc. affiliates and for the three months ended March 31, 2003 and 2002, these expenses, totaling $184,785 and $113,161, respectively, are included in general and administrative expenses and property operating expenses. Additionally, we lease our corporate office space from an affiliate of The Inland Group, Inc. Payments under this lease for the three months ended March 31, 2003 and 2002 were $57,102 and $35,113, respectively, and are also included in general and administrative expenses to non-affiliates.

During the three months ended March 31, 2003, we purchased legal services from attorneys employed by The Inland Real Estate Group, Inc., a wholly-owned subsidiary of The Inland Group, Inc. The fees for these services are based on costs incurred by The Inland Real Estate Group, Inc. and are currently purchased at $220 per hour. For the three months ended March 31, 2003 and 2002, we paid $57,968 and $24,567, respectively, for these legal services.

An affiliate of The Inland Group, Inc. is the mortgagee on the Walgreens property, located in Decatur, Illinois. As of March 31, 2003, the remaining balance of the mortgage is $646,510. The loan secured by this mortgage bears interest at a rate equal to 7.65% per annum and matures on May 31, 2004. For the three months ended March 31, 2003 and 2002, we paid principal and interest payments totaling $17,067 each period on this mortgage.

On February 1, 2001, a wholly-owned subsidiary of ours entered into an LLC agreement with a wholly-owned subsidiary of Tri-Land Properties, Inc. for the acquisition and redevelopment of the Century Consumer Mall in Merrillville, Indiana. Richard Dube, the brother-in-law of Mr. Daniel Goodwin, one of our directors, is the president and a principal owner of Tri-Land. Each partner's initial equity contribution was $500,000. A wholly-owned subsidiary of ours has the right of first refusal to acquire the property after it is redeveloped. As of March 31, 2003, our net investment was ($127,286). In addition, we have committed to lend the LLC up to $17,800,000. The loan bears interest at an initial rate of 9% per annum, paid monthly on average outstanding balances. The loan matures in five years. As of March 31, 2003, the principal balance of this mortgage receivable was $7,005,933.

Our accompanying consolidated financial statements include, in addition to the accounts of our wholly-owned subsidiaries, the accounts of Inland Ryan, LLC and Inland Ryan Cliff Lake, LLC (Inland Ryan and Inland Ryan Cliff Lake are collectively referred to as the "LLCs"). Due to our ability as managing member to directly control these LLCs, they are consolidated for financial reporting purposes. The third parties' interests in the LLCs are reflected as minority interest in the accompanying consolidated financial statements. As of March 31, 2003, we have entered into four amendments to the LLC agreement with the non-managing members to reflect various transactions with individual members of Inland Ryan, LLC. In aggregate, these amendments had no effect on our interest or on the non-managing members' interest in Inland Ryan, LLC which remains at approximately 78% and 22%, respectively.

On February 1, 2001, a wholly-owned subsidiary of ours entered into an LLC agreement with a wholly-owned subsidiary of Tri-Land Properties, Inc. for the acquisition and redevelopment of the Century Consumer Mall in Merrillville, Indiana. The property is located at the southeast corner of the intersection of U.S. Route 30 and Broadway in Merrillville, west of Interstate 65. The property currently has one anchor tenant, a 139,451 square foot Burlington Coat Factory store on the south end of the property. On the north end of the property, there is a vacant 148,420 square foot store, previously occupied by Montgomery Wards, which is currently being marketed to new users. In between was 105,000 square feet of enclosed mall space, which has been demolished, as part of the phased redevelopment of the property. The phased redevelopment also calls for construction of 26,000 square feet of new retail space along Route 30, construction of 30,000 square feet of new retail space on the western portion of the property, and construction of up to 104,700 square feet of new open-air retail space between the existing anchors. The first phase of new construction commenced in January 2003 for an 18,000 square foot retail building fronting U.S. Route 30. This building will be anchored by a 4,800 square foot Panera Bread store pursuant to an executed ten year lease. It is anticipated that completion of construction and lease up of this building will occur by the fourth quarter of 2003. Each partner's initial equity contribution was $500,000. We are a non-managing member of the LLC and do not exercise control therefore, we use the equity method. Under the equity method, the operations of a joint venture are not consolidated with our operations but instead are reflected as income or loss from the operations of unconsolidated ventures on our Consolidated Statement of Operations. Additionally, our net investment in the joint venture is reflected as an asset on the Consolidated Balance Sheets. A wholly-owned subsidiary of our has the right of first refusal to acquire the property after it is redeveloped. As of March 31, 2003, our net investment was ($127,286). In addition, we have committed to lend the LLC up to $17,800,000. The loan bears interest at an initial rate of 9% per annum, paid monthly on average outstanding balances. The loan matures in five years. As of March 31, 2003, the principal balance of this mortgage receivable was $7,005,933.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests obtained in variable interest entities after January 31, 2003. The interpretation is applied to the enterprise no later than the end of the first annual reporting period beginning after June 15, 2003. The interpretation requires certain disclosures in financial statements issued after January 21, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the interpretation becomes effective.

As described above, we have historically accounted for our investments in joint ventures, where we are not the managing member and do not have control, using the equity method of accounting. Management is in the process of analyzing FIN 46 to determine the impact, if any, on our financial statements. Our maximum exposure to loss as a result of its involvement with the joint venture is approximately $7,000,000, potentially reduced by $2,500,000, which is guaranteed by Tri-Land Properties, Inc.

We consider "Funds From Operations" or "FFO" for short, a widely accepted and appropriate measure of performance for a REIT that provides a relevant basis for comparison among REITs. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a standard known as FFO, which it believes more accurately reflects the operating performance of a REIT such as us. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnership and joint ventures in which the REIT holds an interest. We have adopted the NAREIT definition for computing FFO because management believes that FFO provides a better basis than net income for comparing our performance and operations to those of other REITs. We believe that FFO is a better measure of our operating performance because FFO excludes non-cash items from GAAP net income. This allows us to compare our relative property performance to determine our return on capital. Management uses the calculation of FFO for several reasons. FFO is used in certain employment agreements to determine incentives received based on our performance. We also use FFO to compare our performance to that of other REITs in our peer group. Additionally, we use FFO in conjunction with our acquisition policy to determine investment capitalization strategy. The calculation of FFO may vary from entity to entity since capitalization and expense policies tend to vary from entity to entity. Items, which are capitalized, do not impact FFO, whereas items that are expensed reduce FFO. Consequently, our presentation of FFO may not be comparable to other similarly titled measures presented by other REITs. FFO does not represent cash flows from operations as defined by GAAP, it is not indicative of cash available to fund all cash fl ow needs and liquidity, including our ability to pay distributions and should not be considered as an alternative to net income, as determined in accordance with GAAP, for purposes of evaluating our operating performance. FFO is calculated as follows: