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 may acquire existing Neighborhood Retail Centers and Community Centers located primarily within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois. The Company may also acquire single-user retail properties in locations throughout the United States, either directly or through sale and leaseback transactions with creditworthy tenants. 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 June 30, 2002, the Company has issued 9,616,254 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 3,501,227 shares through the Company's Share Repurchase Program at prices ranging from $9.05 to $9.50 per share for an aggregate cost of $32,317,891. As a result, total net offering proceeds were $667,969,680 as of June 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. Ownership of the Company's stock is tested, upon purchase by the stockholders, to determine that no more than 50% in value of the outstanding stock is owned directly, or indirectly, by five or fewer persons or entities at any time. The Company also 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.

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 144"), "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 requires 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. The effects of the adoption of SFAS 145 are currently indeterminable by the Company.

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 June 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 identification ba sis. 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 three and six months ended June 30, 2002 and 2001 resulted in a gain on sale of $38,200 and $51,122, respectively, which is included in other income.

During the three and six months ended June 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 six months ended June 30, 2002 and 2001, these expenses, totaling $1,445,918 and $1,177,548, 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 six months ended June 30, 2002 and 2001 were $70,266 and $65,580, respectively, and are also included in general and administrative expenses.

During the six months ended June 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 based on costs incurred by The Inland Real Estate Group, Inc. and are currently purchased at $190.00 per hour. For the six months ended June 30, 2002 and 2001, the Company paid $104,612 and $30,045, respectively, for these legal services.

An affiliate of The Inland Group, Inc. holds a mortgage on the Walgreens property, owned by the Company, located in Decatur, Illinois. As of June 30, 2002, the remaining balance of the mortgage is $660,153. 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 six months ended June 30, 2002, the Company paid principal and interest payments totaling $34,133 on this mortgage.

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, which is secured by one of the Company's investment properties, the Company paid a commission for mortgage brokerage services to Cohen Financial in an amount equal to $40,000 (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 independent directors, is a limited partner of Cohen Financial. Additionally, 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 o f the indebtedness).

In connection with the purchase of several investment properties, the Company, from time to time, receives payments under master lease agreements covering spaces vacant at the time of acquisition of these investment properties. 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 spaces are leased and tenants begin paying rent. As of June 30, 2002, the Company did not have any investment properties subject to a master lease agreement. GAAP requires the Company to treat these payments as a reduction to the purchase price of the investment properties upon receipt, rather than as rental income. The cumulative amount of such payments was $6,879,164 and $6,873,457 through the six months ended June 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. in the amount of $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. In conjunction with this sale, the Company 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. After the debt payoff, the Company received net sales proceeds of approximately $926,000, net of closing costs. The net proceeds were deposited with a qualified tax deferred exchange agent with the intent of using these proceeds for future acquisitions (Note 14). These proceeds are included in restricted cash in the accompanying consolidated financial statements. This sale resulted in a gain on sale of $533,942.

Results of operations for Antioch Plaza for the period ended March 28, 2002 and for the six months ended June 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. In conjunction with this sale, the Company 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. After the debt payoff, the Company received net sales proceeds of approximately $2,877,000, net of closing costs. The net proceeds were deposited with a qualified tax deferred exchange agent with the intent of using these proceeds for future acquisitions (Note 14). These proceeds are included in restricted cash in the accompanying consolidated financial statements. This sale resulted in a gain on sale of $828,144.

Results of operations for Shorecrest Plaza for the period ended June 12, 2002 and for the six months ended June 30, 2001 were as follows:

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 June 30, 2002, all six leases have been rejected and the stores have closed. As of June 30, 2002, the Company has signed a lease for a portion of one of the vacant spaces. 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 June 30, 2002, two of the stores remain open and one has closed. The Company paid approximately $115,000 of real estate taxes for the vacant store. These properties account for approximately 4% of the Company's total square footage and approximately 2% of the Company's annual rental income. Management of the Company does not expect these bankruptcy filings to have a material adverse effect on the operations or the financial condition of the Company.

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 reclassed to net investment properties. The property contains approximately 193,300 square f eet 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 has committed to lend the LLC up to an additional $17,800,000 to fund the initial acquisition and subsequent redevelopment 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 June 30, 2002, the principal balance of this mortgage receivable is $6,232,302. 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 June 30, 2002 and December 31, 2001: