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, either directly or through sale and leaseback transactions. 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").

On October 14, 1994, the Company commenced a total of four public offerings of common stock, on a best efforts basis, at prices ranging from $10 to $11 per share, in which a total of 51,642,397 shares were sold. In addition, as of September 30, 2002, the Company has issued 10,142,694 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 3,800,019 shares through the Company's Share Repurchase Program at prices ranging from $9.05 to $9.50 per share for an aggregate cost of $35,156,420. As a result, total offering proceeds, net of offering expenses, were $670,632,452 as of September 30, 2002.

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("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.

The Company monitors the various qualification tests the Company must meet to maintain its status as a real estate investment trust. The Company determines, on a quarterly basis, that the gross income, asset and distribution tests imposed by the REIT requirements 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 asset will qualify for REIT purposes. Beginning with the tax year ended December 31, 1995, the Company has qualified as a REIT.

The Company records stock compensation granted to officers of the Company in accordance with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation." Under SFAS 123, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period.

On October 10, 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 replaces and supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business", for the disposal of segments of a business. SFAS 144 establishes accounting and reporting standards for the impairment or disposal of long-lived assets by requiring those long-lived assets be measured at the lower of carrying costs or fair value less selling costs, whether reported on continuing operations or in discontinued operations. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning afte r December 15, 2001. The Company adopted SFAS 144 on January 1, 2002.

On April 30, 2002, the FASB issued 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, will affect 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 Occurr ing Events and Transactions," unless the debt extinguishment meets the unusual in nature and infrequency of occurrence criteria in APB Opinion No. 30. SFAS 145 will be effective for fiscal years beginning after May 15, 2002. Upon adoption, extinguishments of debt shall be classified under the criteria in APB Opinion No. 30.

Certain reclassifications were made to the 2001 financial statements to conform to the 2002 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 September 30, 2002 consist 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 identificati on basis. 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. Sale of investment securities available-for-sale during the nine months ended September 30, 2002 and 2001 resulted in a gain on sale of $101,957 and $51,122, respectively, which is included in other income.

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., an unaffiliated third party, 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 104,700 square feet of new open-air retail space between the existing anchors. Each partner's initial equity contribution was $500,000. The Company is a non-managing member of the LLC, therefore, the operations are not consolidated for financial reporting purposes. A wholly-owned subsidiary of the Company has the right of first refusal to acquire the property after it is redeveloped. As of September 30, 2002, the Company's net investment was $129,830. In addition, the Company has committed to lend the LLC up to an additional $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 September 30, 2002, the principal balance of this mortgage receivable was $6,327,944.

During the three and nine months ended September 30, 2002 and 2001, the Company purchased various administrative services, such as payroll preparation and management, data processing, insurance consultation and placement, investor relations and mail processing from affiliates of The Inland Group, Inc. The Inland Group, Inc., through affiliates, owns approximately 10% of the Company's outstanding common stock. These services were purchased from these entities based on an hourly cost assigned to each employee of the affiliate providing the services. The hourly rate is based on the employee's salary, 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 their respective businesses. Computer services were purchased at a contract rate of $30.00 per hour. The Company continues to purchase these services from The Inland Group, Inc. affiliates and for the nine months ende d September 30, 2002 and 2001, these expenses, totaling $2,388,595 and $1,848,143, respectively, are included in general and administrative expenses. Additionally, the Company leases its corporate office space from an affiliate of The Inland Group, Inc. Payments under this lease for the nine months ended September 30, 2002 and 2001 were $112,724 and $98,370, respectively, and are also included in general and administrative expenses.

During the nine months ended September 30, 2002, 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 purchased at a rate equal to $190.00 per hour. For the nine months ended September 30, 2002 and 2001, the Company paid $166,511 and $100,410, respectively, for these legal services.

An affiliate of The Inland Group, Inc. holds a mortgage on the Walgreens property, located in Decatur, Illinois. As of September 30, 2002, the remaining balance of the mortgage was $655,692. 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 nine months ended September 30, 2002, the Company paid principal and interest payments totaling $51,199 on this mortgage.

On July 18, 2002, the Company purchased a property from an affiliate of The Inland Group, Inc. for $27,187,100, which is equal to the price paid by the affiliate. The Company assumed the current mortgage on the property in the amount of $13,600,000 and the balance of the purchase price was funded using cash and cash equivalents. The property is located in Celebration, Florida and contains 166,131 square feet of net rentable space leased entirely by the Walt Disney Company for a minimum period of 10 years. An affiliate of The Inland Group, Inc. was paid an acquisition fee equal to 1% of the purchase price of the property, excluding assumption of indebtedness, or $271,871, in connection with the purchase of this property.

During the nine months ended September 30, 2002, the Company completed financing transactions which resulted in the Company incurring additional indebtedness of $31,600,000. In connection with obtaining this financing, the Company retained the services of Cohen Financial and paid a commission to Cohen in an amount equal to $158,000 (equivalent to one-half of one percent of the principal amount of the indebtedness). The Company anticipates utilizing the services of Cohen Financial in future financing activities. In each case, the Company anticipates paying Cohen Financial a brokerage fee equal to one-half of one percent. Joel D. Simmons, one of the Company's directors, is a limited partner of Cohen Financial.

In February 2002, the Company completed a financing transaction which resulted in the Company incurring additional indebtedness of $8,000,000. In connection with obtaining this financing, the Company paid a commission for mortgage brokerage services to Inland Mortgage Corporation, an affiliate of The Inland Group, Inc., in an amount equal to $20,000 (equivalent to one-quarter of one percent of the principal amount of the indebtedness). In July 2002, the Company completed a financing transaction which resulted in the Company incurring additional indebtedness of $13,600,000. In connection with obtaining this financing, the Company paid a commission for mortgage brokerage services to Inland Mortgage Corporation, in an amount equal to $68,000 (equivalent to one-half of one percent of the principal amount of the indebtedness).

In connection with the purchase of several investment properties, the Company, from time to time, receives payments under master lease agreements covering space vacant at the time of acquisition. The payments to be made to the Company range from one to two years from the date of acquisition of the property or until the vacant space is leased and tenants begin paying rent. As of September 30, 2002, the Company has two investment properties, Townes Crossing, located in Oswego, Illinois and Forest Lake Marketplace, located in Forest Lake, Minnesota, subject to master lease agreements. 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. The cumulative amount of such payments was $6,886,869 and $6,873,457 for the nine months ended September 30, 2002 and the year ended December 31, 2001, respectively (Note 6).

On February 12, 2001, the Company entered into a bankruptcy court-approved settlement with Eagle Food Stores, Inc. receiving $4,120,000 to settle the Company's claims for damages as a result of two leases previously rejected by Eagle Food Stores, Inc. Of the $4,120,000, approximately $1,972,000 was for rental and additional rental income due through February 12, 2001 and approximately $2,148,000 was a one-time lease termination fee.

On April 17, 2001, the Company sold one of its investment properties, Lincoln Park Place, located in Chicago, Illinois, to a tenant at the property for $2,372,500. In conjunction with this sale, the Company paid off existing debt on the property of $1,050,000. The Company recorded an extraordinary loss on the early extinguishment of this debt totaling $49,823, of which $40,604 was a prepayment penalty and $9,219 was the write-off of unamortized deferred loan fees. After the debt payoff, the Company received net sales proceeds of approximately $1,274,000, net of closing costs. This sale resulted in a gain on sale of $467,337.

On March 28, 2002, the Company sold one of its investment properties, Antioch Plaza, located in Antioch, Illinois, to a third party for $1,818,344, net of closing costs. The Company had assigned its interest in Antioch Plaza to a qualified tax deferred agent (the "agent"), which in turn handled the sale. In conjunction with this sale, the agent paid off existing debt on the property of $875,000. The Company recorded an extraordinary loss on the early extinguishment of this debt totaling $4,378, which was for the write-off of unamortized deferred loan fees. 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 (the "replacement property"). This sale resulted in a gain on sale of $533,942. 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 until the replacement property is disposed of in a subs equent taxable transaction.

Results of operations for Antioch Plaza for the period from January 1, 2002 through March 28, 2002, the date of sale, and for the nine months ended September 30, 2001 were as follows:

On June 12, 2002, the Company sold one of its investment properties, Shorecrest Plaza, located in Racine, Wisconsin, to a third party for $6,085,261, net of closing costs. The Company had assigned its interest in Shorecrest Plaza to a qualified tax deferred agent (the "agent"), which in turn handled the sale. In conjunction with this sale, the agent paid off existing debt on the property of $2,978,000. The Company recorded an extraordinary loss on the early extinguishment of this debt totaling $131,742, of which $111,289 was a prepayment penalty and $20,453 was the write-off of unamortized deferred loan fees. 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 (the "replacement property"). This sale resulted in a gain on sale of $828,144. 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 deferr ed until the replacement property is disposed of in a subsequent taxable transaction.

Results of operations for Shorecrest Plaza for the period from January 1, 2002 through June 12, 2002, the date of sale, and for the nine months ended September 30, 2001 were as follows:

On August 1, 2002, the Company sold approximately 1/3 of an acre of land at one of its investment properties, Maple Grove Retail, located in Maple Grove, Minnesota, to the city of Maple Grove for $308,186, net of closing costs. This land was taken by the city to be used to expand a road adjacent to the Company's investment property. The Company does not expect this sale to have any affect on the operations of this investment property. This sale resulted in a gain on sale of $220,335.

Certain of the Company's leases with tenants 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 $1,381,902 and $1,795,155 for the nine months ended September 30, 2002 and 2001, respectively, of rental income for the period of occupancy for which stepped rent increases apply and $12,474,587 and $11,092,685 in related accounts and rents receivable as of September 30, 2002 and December 31, 2001, respectively. The Company anticipates collecting these amounts over the terms of the leases as scheduled rent payments are made.

Trak Auto, a tenant at six of the Company's investment properties filed for Chapter 11 bankruptcy protection under the Federal bankruptcy code in July 2001. As of September 30, 2002, all six leases have been rejected and the stores have closed. As of September 30, 2002, the Company has re-leased three of the vacant spaces, totaling approximately 39,000 square feet, as well as approximately 11,000 square feet of the approximately 42,000 square feet vacant at a fourth location. K-Mart, a tenant at three of the Company's investment properties filed for Chapter 11 bankruptcy protection under the Federal bankruptcy code in January 2002. As of September 30, 2002, two of the stores remain open and one has closed. The remaining vacant Trak Auto spaces and the three K-Mart locations account for approximately 3% of the Company's total square footage and approximately 1% of the Company's annual rental income. Management of the Company does not expect these bankruptcy filings to have a material advers e effect on the Company's results of operations or financial condition.

On May 28, 1999, the Company entered into a loan agreement with an unaffiliated third party and committed to lend a total of $15,500,000. The loan, secured by Thatcher Woods Shopping Center in River Grove, Illinois, had a maturity date of June 30, 2002 and required the borrower to make monthly interest-only payments on amounts outstanding at a rate of 9% per annum. The Company had, at its option, an election to purchase this property, upon completion of construction, subject to certain fair-value-based criteria stated in the contract. On April 25, 2002, the Company exercised its option to purchase Thatcher Woods Shopping Center for approximately $18,500,000. Of the purchase price, approximately $15,456,000, which was included in mortgages receivable, was from the repayment of the loan agreement and the balance was funded using cash and cash equivalents. Subsequently, the mortgage receivable was reclassified to net investment properties. The property contains approximately 193,300 squar e feet of leasable space. Its major tenants are Dominick's Finer Foods, A.J. Wright, Walgreens and Ace Hardware.

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. Draws on the loan bear interest at a rate of 9% per annum with interest only paid monthly. The loan, secured by Century Consumer Mall in Merrillville, Indiana, matures on January 31, 2006. As of September 30, 2002, the principal balance of this mortgage receivable is $6,327,944. A wholly-owned subsidiary of the Company has the right of first refusal to acquire the property after it is redeveloped.

Basic earnings per share ("EPS") is computed by dividing net income by the basic weighted average number of common shares outstanding for the period. Diluted EPS is computed by reflecting the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. As of September 30, 2002 and December 31, 2001, options to purchase 27,500 and 23,500 shares of common stock, respectively, at prices ranging from $9.05 to $10.45 per share were outstanding.

As of September 30, 2002, warrants to purchase 1,156,520 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 average market prices of common shares,

As of September 30, 2002, 5,454.45 shares of restricted common stock at a price of $11 per share were outstanding. Such shares, which were issued in conjunction with certain employment agreements, 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 63,739,999 and 63,037,736 for the nine months ended September 30, 2002 and 2001 respectively. The diluted weighted average number of common shares outstanding were 63,745,453 and 63,037,736 for the nine months ended September 30, 2002 and 2001, respectively.

The Company has entered into stock compensation plans with certain officers of the Company. The stock compensation plans, included as a component of the officers' employment agreements, became effective January 1, 2002.

As of September 30, 2002, an aggregate of 5,454.45 shares of the Company's common stock, with a value of $11.00 per share, comprising an aggregate value of $60,000, were issued pursuant to the plans. 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. The compensation plans provide for each officer to vest in an equal portion of their shares over a five-year vesting period beginning January 1, 2003, therefore, no compensation cost has been recognized related to these shares as of September 30, 2002.

Pursuant to the stock compensation plans, 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.

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, either directly or through sale and leaseback transactions. The Company currently owns investment properties within the states of Florida, Illinois, Indiana, Michigan, Minnesota, Ohio, Tennessee and Wisconsin and 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. 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 and nine months ended September 30, 2002 and 2001, along with a reconciliation to income from operations. Also, net investment properties and total assets are presented as of September 30, 2002 and 2001:

Three of the Company's investment properties are located in tax increment-financing districts. The Company has agreed to be liable for any shortfalls in the Tax Increment generated in these districts. At September 30, 2002, the Company does not believe any shortfalls will be due.

On July 15, 2002, the Company resolved the lawsuit previously filed in the Circuit Court of Cook County on May 1, 2001 between the Company and Samuel A. Orticelli, who had served as the Company's General Counsel and Secretary from July 1, 2000 until April 6, 2001. Management of the Company does not believe the settlement and any obligations thereunder to have a material effect on the operations or financial condition of the Company.

On October 17, 2002, the Company paid a distribution of $4,958,011 to stockholders of record as of September 1, 2002.

On October 17, 2002, the Company purchased a property from an unaffiliated third party for $3,100,000. The purchase price was funded using cash and cash equivalents. The property is located in Naperville, Illinois and contains 50,000 square feet of leasable space. This building is adjacent to Naper West, one of the Company's current investment properties, and is currently vacant.

On October 30, 2002, the Company purchased a property from an unaffiliated third party for $2,380,000. The purchase price was funded using cash and cash equivalents. The property is located in Jennings, Missouri and contains 15,120 square feet of leasable space currently leased by Walgreens.

On November 5, 2002, the Company purchased a property from an unaffiliated third party for $3,400,000. The purchase price was funded using cash and cash equivalents. The property is located in Niles, Illinois and contains 21,415 square feet of leasable space. Its major tenant is Factory Card Outlet.

On November 5, 2002, the Company purchased a property from an unaffiliated third party for $18,159,020. The Company assumed the current mortgage on the property in the amount of $12,527,611 and the balance of the purchase price was funded using cash and cash equivalents. The property is located in Niles, Illinois and contains 281,368 square feet of leasable space. Its major tenants include Jewel Food Store, Rhodes and Wickes Furniture.

On November 8, 2002, the Company incurred debt secured by the property commonly known as Forest Lake Marketplace, located in Forest Lake, Minnesota. The loan has a principal balance of $6,589,000, an interest rate of 4.35% and a maturity date of December 1, 2007. In connection with obtaining this financing, the Company retained the services of Cohen Financial and paid a commission to Cohen in an amount equal to $32,945 (equivalent to one-half of one percent of the principal amount of the indebtedness). Joel D. Simmons, one of the Company's directors, is a limited partner of Cohen Financial. Additionally, in connection with obtaining this financing, the Company paid a commission for mortgage brokerage services to Inland Mortgage Corporation, an affiliate of The Inland Group, Inc., an amount equal to $8,236 (equivalent to one-eighth of one percent of the principal amount of the indebtedness).

The Company is currently exploring the purchase of additional shopping centers from unaffiliated third parties.

The Company defines a critical accounting policy as one that would materially effect the Company's operations or financial condition, and requires management to make estimates or judgements in certain circumstances. The Company believes that its most critical accounting policies relate to the valuation of investment properties, recognition of rental income, cost capitalization and depreciation policies and consolidation/equity accounting policies. These policies are set forth in the Company's annual report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on March 14, 2002.

Cash and cash equivalents consist of cash and short-term investments. Cash and cash equivalents at September 30, 2002 and December 31, 2001 were $32,412,113 and $29,976,991, respectively. The increase in total cash and cash equivalents from December 31, 2001 to September 30, 2002 results from receiving approximately $52,100,000 from operations, approximately $12,800,000 in financing activities, while using approximately $62,500,000 in investing activities. These changes are described in more detail below. The Company intends to use cash and cash equivalents to purchase additional investment properties, to pay distributions and for working capital requirements. The source of future cash for investing in properties will be from financing secured by unencumbered investment properties, operations from current investment properties, amounts raised through the Company's DRP and proceeds received from the $100,000,000 unsecured acquisition line of credit facility the Company arranged with Key Bank, N.A.

As of September 30, 2002, the Company owned interests in 126 investment properties. Eight investment properties were purchased during 2002, one was purchased during 2001 and 120 were purchased prior to 2001. As of September 30, 2002, the Company had sold three of its 129 investment properties purchased. Of the 126 investment properties owned, seven are currently unencumbered by any indebtedness. As the Company generally limits its indebtedness to approximately fifty percent (50%) of the carrying value of its investment properties, the remaining seven unencumbered investment properties, with a carrying value of approximately $28,000,000, would yield approximately $14,000,000 in additional cash from financing. These 126 investment properties are currently generating sufficient cash flow to cover operating expenses of the Company, pay current debt service requirements and pay distributions equal to $.94 per share on an annual basis. For the nine months ended September 30, 2002, Funds Availabl e for Distribution were $47,552,808 and distributions declared for the nine months ended September 30, 2002 were $44,840,538, or $.70 per diluted weighted average common shares outstanding, a portion of which represents a return of capital for federal income tax purposes. The return of capital portion of the distributions cannot be determined at this time and will be calculated at year-end. For the nine months ended September 30, 2002, the Company received proceeds from the Company's DRP totaling $16,247,250 and repurchased shares through the Company's Share Repurchase Program totaling $7,404,896.

Net cash provided by operating activities decreased from $56,723,342 for the nine months ended September 30, 2001 to $52,112,300 for the nine months ended September 30, 2002, due to a number of factors. Net income decreased approximately $3,200,000 partially due to the fact that income for the nine months ended September 30, 2001 included amounts received from Eagle Food Stores, Inc. in settlement of claims the Company had for damages as a result of the two leases rejected by Eagle during its bankruptcy. Within cash flows from operating activities, net income is adjusted by certain non-cash items to reconcile to actual operating cash flows. During the nine months ended September 30, 2002, the Company recorded a gain on sale of investment properties of $1,582,421, as compared to a gain of $467,337 for the nine months ended September 30, 2001, resulting in a larger reduction in net income. During the nine months ended September 30, 2002, the Company recorded depreciation expense on the C ompany's investment properties of $21,072,245, as compared to depreciation of $19,806,089 for the nine months ended September 30, 2001, resulting in a larger addition to net income. The decrease in cash provided by operating activities is also due to a reduction of approximately $2,300,000 in security and other deposits. Included in security and other deposits for the nine months ended September 30, 2001, was cash received as a result of a claim for damages relating to certain of the Company's investment properties. Additionally, the decrease is due to a reduction of approximately $1,100,000 in other assets, a reduction of approximately $1,200,000 in accrued real estate taxes, and a reduction of approximately $1,300,000 in prepaid rents and unearned income. This decrease was partially offset by an increase of approximately $2,600,000 in accounts and rents receivable and an increase of approximately $1,600,000 in accounts payable and accrued expenses.

The Company used $62,526,064 in cash for investing activities for the nine months ended September 30, 2002, as compared to $15,046,192 for the nine months ended September 30, 2001. The primary reason for the increase in cash used was an increase in cash resources used for the purchase of investment properties. During the nine months ended September 30, 2002, the Company used $78,000,546 to purchase eight investment properties, as compared to using $3,303,657 to purchase one investment property during the nine months ended September 30, 2001. Additionally, the increase in cash used was due to an increase in the purchase of minority interest units of $1,500,000 and a decrease in cash used for construction in progress. The increase in cash used was partially offset by an increase in cash received from the sale of investment properties. During the nine months ended September 30, 2002, the Company received $8,211,791 for the sale of two investment properties, as compared to receiving $2,364 ,378 during the nine months ended September 30, 2001 for the sale of one investment property. Additionally, the increase in cash used was partially offset by the reduction in mortgages receivable of approximately $21,400,000, due primarily to the Company purchasing the Thatcher Woods Shopping Center and the mortgage receivable being paid off and a reduction in cash resources used for the purchase of investment securities

The Company received net cash of $12,848,886 from financing activities for the nine months ended September 30, 2002, as compared to using cash of $6,066,019 for the nine months ended September 30, 2001. The primary reason for the increase in cash is due to a draw by the Company of $25,000,000 on an unsecured line of credit. As of September 30, 2002, the Company had $75,000,000 of remaining availability under this $100,000,000 line of credit. This line of credit has a three year term, maturing on June 30, 2004. Interest is charged and paid monthly on the amounts outstanding at a variable rate of 3.75% plus the LIBOR (London Interbank) index. The Company used less cash for the repurchase of shares through the Share Repurchase Program, which was offset by a reduction in cash received from loan proceeds of approximately $3,500,000. The Company received $31,600,000 during the nine months ended September 30, 2002, as compared to receiving $35,130,000 during the nine months ended September 30 , 2001. Additionally, the increase in cash was also partially offset by an increase in loan fees paid of approximately $1,800,000 and an increase in payoffs of debt of $2,800,000.

The table below presents the principal amount of the debt maturing each year including monthly annual amortization of principal through December 31, 2006 and thereafter:

At September 30, 2002, the Company owned 29 single-user retail properties, 77 Neighborhood Retail Centers and 20 Community Centers. The Company's property operations account for almost all of the net operating income earned by the Company. In order to evaluate the Company's overall portfolio, management analyzes the operating performance of properties that have been owned and operated by the Company for comparable periods. A total of 117 investment properties owned by the Company, or "same store" properties, comprising approximately 9.3 million square feet, satisfied this criterion during the periods presented below. The remaining nine investment properties, those that have been acquired, sold or held for sale during 2002 and 2001 are presented as "other investment properties" in the table below. The "same store" investment properties represent approximately 91% of the square footage of the Company's portfolio at September 30, 2002. The following table presents the pre-depreciation operati ng results of the investment properties for the nine months ended September 30, 2002 and 2001:

Trak Auto, a tenant at six of the Company's investment properties filed for Chapter 11 bankruptcy protection under the Federal bankruptcy code in July 2001. As of September 30, 2002, all six leases have been rejected and the stores have closed. As of September 30, 2002, the Company has re-leased three of the vacant spaces, totaling approximately 39,000 square feet, as well as approximately 11,000 square feet of the approximately 42,000 square feet vacant at a fourth location. K-Mart, a tenant at three of the Company's investment properties filed for Chapter 11 bankruptcy protection under the Federal bankruptcy code in January 2002. As of September 30, 2002, two of the stores remain open and one has closed. The remaining vacant Trak Auto spaces and the three K-Mart locations account for approximately 3% of the Company's total square footage and approximately 1% of the Company's annual rental income. Management of the Company does not expect these bankruptcy filings to have a ma terial adverse effect on the Company's results of operations or financial condition.

Lease termination income was higher for the nine months ended September 30, 2001, as compared to the nine months ended September 30, 2002, due primarily to the Company receiving a one-time lease termination fee in February 2001 of approximately $2,148,000 through a bankruptcy settlement from Eagle Food Stores, Inc., as a result of the two rejected leases. During 2002, the Company received two lease termination fees totaling approximately $619,000 upon termination of leases at two of the Company's investment properties.

The Company earns interest income on the investment of cash and cash equivalents in short-term instruments pending investment in real estate. Interest income decreased for the three and nine months ended September 30, 2002, as compared to the three and nine months ended September 30, 2001, due to the use of cash resources to purchase and upgrade investment properties, pay distributions, repurchase shares through the Share Repurchase Program and pay off debt. Additionally, interest income decreased as a result of lower interest rates.

Professional services decreased for the nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001, as a result of a decrease in legal and accounting expenses required by the Company.

General and administrative expenses increased for the three and nine months ended September 30, 2002, as compared to the three and nine months ended September 30, 2001, due primarily to an increase in salary expense due to the addition of staff as well as annual increases. Additionally, annual conference expenses, postage and printing increased for the nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001.

Bad debt expense increased for the three and nine months ended September 30, 2002, as compared to the three and nine months ended September 30, 2001 as a result of the amounts written off as uncollectable and the change in the provision for doubtful accounts. The provision for doubtful accounts at September 30, 2002 was increased from December 31, 2001, 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 than ninety days but that management believes are potentially uncollectable.

Interest expense decreased for the nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001, due to a decrease in interest rates charged on the variable rate debt from approximately 5.0% for the nine months ended September 30, 2001, as compared to approximately 3.4% for the nine months ended September 30, 2002. The decrease was partially offset by an increase in mortgages payable from approximately $501,505,000 at September 30, 2001 to approximately $540,145,000 at September 30, 2002.

During the three and nine months ended September 30, 2002 and 2001, the Company purchased various administrative services, such as payroll preparation and management, data processing, insurance consultation and placement, investor relations and mail processing from affiliates of The Inland Group, Inc. The Inland Group, Inc., through affiliates, owns approximately 10% of the Company's outstanding common stock. These services were purchased from these entities based on an hourly cost assigned to each employee of the affiliate providing the services. The hourly rate is based on the employee's salary, 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 their respective businesses. Computer services were purchased at a contract rate of $30.00 per hour. The Company continues to purchase these services from The Inland Group, Inc. affiliates and for the nine months ende d September 30, 2002 and 2001, these expenses, totaling $2,388,595 and $1,848,143, respectively, are included in general and administrative expenses. Additionally, the Company leases its corporate office space from an affiliate of The Inland Group, Inc. Payments under this lease for the nine months ended September 30, 2002 and 2001 were $112,724 and $98,370, respectively, and are also included in general and administrative expenses.

During the nine months ended September 30, 2002, 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 purchased at a rate equal to $190.00 per hour. For the nine months ended September 30, 2002 and 2001, the Company paid $166,511 and $100,410, respectively, for these legal services.

An affiliate of The Inland Group, Inc. holds a mortgage on the Walgreens property, located in Decatur, Illinois. As of September 30, 2002, the remaining balance of the mortgage was $655,692. 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 nine months ended September 30, 2002, the Company paid principal and interest payments totaling $51,199 on this mortgage.

On July 18, 2002, the Company purchased a property from an affiliate of The Inland Group, Inc. for $27,187,100, which is equal to the price paid by the affiliate. The Company assumed the current mortgage on the property in the amount of $13,600,000 and the balance of the purchase price was funded using cash and cash equivalents. The property is located in Celebration, Florida and contains 166,131 square feet of net rentable space leased entirely by the Walt Disney Company for a minimum period of 10 years. An affiliate of The Inland Group, Inc. was paid an acquisition fee equal to 1% of the purchase price of the property, excluding assumption of indebtedness, or $271,871, in connection with the purchase of this property.

During the nine months ended September 30, 2002, the Company completed financing transactions which resulted in the Company incurring additional indebtedness of $31,600,000. In connection with obtaining this financing, the Company retained the services of Cohen Financial and paid a commission to Cohen in an amount equal to $158,000 (equivalent to one-half of one percent of the principal amount of the indebtedness). The Company anticipates utilizing the services of Cohen Financial in future financing activities. In each case, the Company anticipates paying Cohen Financial a brokerage fee equal to one-half of one percent. Joel D. Simmons, one of the Company's directors, is a limited partner of Cohen Financial.

In February 2002, the Company completed a financing transaction which resulted in the Company incurring additional indebtedness of $8,000,000. In connection with obtaining this financing, the Company paid a commission for mortgage brokerage services to Inland Mortgage Corporation, an affiliate of The Inland Group, Inc., in an amount equal to $20,000 (equivalent to one-quarter of one percent of the principal amount of the indebtedness). In July 2002, the Company completed a financing transaction which resulted in the Company incurring additional indebtedness of $13,600,000. In connection with obtaining this financing, the Company paid a commission for mortgage brokerage services to Inland Mortgage Corporation, in an amount equal to $68,000 (equivalent to one-half of one percent of the principal amount of the indebtedness).

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 the 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 September 30, 2002, the Company and the non-managing members have entered into five 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., an unaffiliated third party, 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 104,700 square feet of new open-air retail space between the existing anchors. Each partner's initial equity contribution was $500,000. The Company is a non-managing member of the LLC, therefore, the operations are not consolidated for financial reporting purposes. A wholly-owned subsidiary of the Company has the right of first refusal to acquire the property after it is redeveloped. As of September 30, 2002, the Company's net investment was $129,830. In addition, the Company has committed to lend the LLC up to an additional $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 September 30, 2002, the principal balance of this mortgage receivable was $6,327,944.

One of the Company's objectives is to provide cash distributions to its stockholders from funds generated by the Company's operations. Funds generated from operations is not equivalent to the Company's net operating income as determined under GAAP. 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 "Funds From Operations" or "FFO" for short, which it believes more accurately reflects the operating performance of a REIT such as the Company. 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. The Company has adopted the NAREIT definition for computing FFO because management believes that FFO provides a bett er basis than net income for comparing the performance and operations of the Company to those of other REITs. 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, the presentation of FFO by the Company may not be comparable to other similarly titled measures presented by other REITs. FFO should not be considered as an alternative to "Net Income" as an indicator of the Company's operating performance or to as an alternative to "Cash Flows from Operating Activities" as determined by GAAP as a measure of the Company's capacity to pay distributions. "Funds Available for Distribution" or "FAD" for short, means excluding from FFO normalized recurring real estate related expenditures and other non-cash items. FFO and FAD are calculated as follows: