INLAND MONTHLY INCOME FUND III INC, 10-K405, 1997-03-28

INLAND MONTHLY INCOME FUND III INC
10-K405, 1997-03-28
REAL ESTATE INVESTMENT TRUSTS

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

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For The Fiscal Year Ended December 31, 1996

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission File #33-79012

Inland Real Estate Corporation
(Exact name of registrant as specified in its charter)

Maryland 36-3953261
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2901 Butterfield Road, Oak Brook, Illinois 60521
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: 630-218-8000

Securities registered pursuant to Section 12(g) of the Act:

Title of each class: Name of each exchange on which registered:
None None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

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

As of March 24, 1997, the aggregate market value of the Shares of Common Stock
held by non-affiliates of the registrant was approximately $106,137,967.

As of March 24, 1997, there were 10,628,676 Shares of Common Stock outstanding.

Documents Incorporated by Reference: The Prospectus of the Registrant dated
July 24, 1996, and Supplement No. 10 to the Prospectus of the Registrant dated
January 31, 1997, filed pursuant to Rule 424 under the Securities Act of 1933
are incorporated by reference in Parts I, II and III of this Annual Report on
Form 10-K.

-1-

INLAND REAL ESTATE CORPORATION
(A Maryland corporation)

TABLE OF CONTENTS

Part I Page
------ ----
Item 1. Business...................................................... 3

Item 2. Properties.................................................... 6

Item 3. Legal Proceedings............................................. 8

Item 4. Submission of Matters to a Vote of Security Holders........... 8

Part II
-------
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.............................. 9

Item 6. Selected Financial Data....................................... 10

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13

Item 8. Financial Statements and Supplementary Data................... 18

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 41

Part III
--------
Item 10. Directors and Executive Officers of the Registrant............ 41

Item 11. Executive Compensation........................................ 45

Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 46

Item 13. Certain Relationships and Related Transactions................ 46

Part IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................. 47

SIGNATURES............................................................. 48

-2-

PART I

Item 1. Business

The Company

Inland Real Estate Corporation, formerly known as Inland Monthly Income Fund
III, Inc., (the "Company") was formed on May 12, 1994. On October 14, 1994,
the Company commenced an initial public offering, on a best effort basis,
("Offering") of 5,000,000 shares of common stock ("Shares") at a price of $10
per Share and of 1,000,000 Shares at a price of $9.05 per Share to be
distributed pursuant to the Company's distribution reinvestment program (the
"DRP"). As of July 24, 1996, the Company had received subscriptions for a
total of 5,000,000 Shares, thereby completing the initial Offering. On July
24, 1996, the Company commenced an offering of an additional 10,000,000 Shares,
on a best efforts basis, (the "Second Offering") plus an additional 1,000,000
Shares through the DRP. As of December 31, 1996, the Company had received
subscriptions for a total of 3,137,776 Shares from the Second Offering,
resulting in $81,150,311 total in gross offering proceeds, which includes
$1,470,938 received for 162,534 Shares purchased through the Distribution
Reinvestment Program. As of December 31, 1996, the Company has repurchased
6,350 Shares through the Share Repurchase Program. Inland Real Estate Advisory
Services, Inc. (the "Advisor"), an Affiliate of the Company, is the advisor to
the Company.

The Company had four employees during 1996.

Description of Business

The Company is in the business of acquiring Neighborhood Retail Centers located
within an approximate 150-mile radius of its headquarters in Oak Brook,
Illinois. The Company may also acquire single-user retail properties in
locations throughout the United States.

It is the Company's intention, whenever possible, to acquire properties free
and clear of permanent mortgage indebtedness by paying the entire purchase
price of each property in cash or shares of the Company's stock, although, the
Company does, in certain instances, utilize borrowings to acquire properties.
On properties purchased on an all cash basis, the Company has from time to time
incurred mortgage indebtedness by obtaining loans secured by selected
properties. The proceeds from such loans are used to acquire additional
properties. The Company may also incur indebtedness to finance improvements to
the properties it acquires. The Company anticipates that aggregate borrowings
secured by all of the Company's properties will not exceed 50% of their
combined fair market values, however, the maximum amount of borrowings in the
absence of the consent of a majority of the Stockholders, may not exceed 300%
of Net Assets.

-3-

<TABLE>
As of December 31, 1996, the Company has acquired fee ownership of twenty one properties.

<CAPTION> Gross Mortgages
Leasable Payable Current
Area Date Year at No. of Anchor
Property (Sq. Ft.) Acq. Built Dec 31, 1996 Tenants Tenants*
- ----------------------------- ---------- ------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Single-User Retail Property
- ---------------------------
Walgreens, Decatur, IL 13,500 01/95 1988 $ 739,543 1 Walgreens

Zany Brainy, Wheaton, IL 12,499 07/96 1995 1,245,000 1 Zany Brainy

Neighborhood Retail Centers
- ---------------------------
Eagle Crest Shopping Center
Naperville, IL 67,650 03/95 1991 2,350,000 13 Eagle Foods

Montgomery-Goodyear 12,903 09/95 1991 630,000 3 Goodyear Tire & Rubber
Montgomery, IL Merlin Corp.
Natl. Carpet Outlet, Inc.

Hartford/Naperville Plaza 43,862 09/95 1995 2,310,000 8 Blockbuster Video
Naperville, IL Sears Hardware
Keller/Williams Realty

Nantucket Square Shopping Center 56,981 09/95 1980 2,200,000 17 Nuttco,Inc.
Schaumburg, IL Super Trak

Antioch Plaza, Antioch, IL 19,810 12/95 1995 875,000 4 Blockbuster Video

Mundelein Plaza, Mundelein, IL 67,896 03/96 1990 2,810,000 8 Sears, Roebuck & Co

Regency Point, Lockport, IL 49,826 04/96 1993 4,428,690 19 Walgreens
5,050 04/96 1995 Ace Hardware

Prospect Heights, 28,080 06/96 1985 1,095,000 5 Walgreens
Prospect Hts., IL Blockbuster Video
United Farmstand

Montgomery-Sears, Montgomery, IL 34,600 06/96 1990 1,645,000 3 Sears Paint & Hardware
Blockbuster Video
</TABLE>

-4-

<TABLE>
Gross Mortgages
Leasable Payable Current
Area Date Year at No. of Anchor
Property (Sq. Ft.) Acq. Built Dec 31, 1996 Tenants Tenants*
- ------------------------------ ---------- ------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Neighborhood Retail Centers (cont.)

Salem Square, Countryside, IL 112,310 08/96 1973/ $3,130,000 5 TJ Maxx
1985 Marshalls

Hawthorn Village, Vernon Hills,IL 98,686 08/96 1979 4,280,000 21 Dominicks
Walgreens

Six Corners, Chicago, IL 80,650 10/96 1966 3,100,000 7 Chicago Health Club
Illinois Masonic Health Center

Spring Hill Fashion Corner
West Dundee, IL 125,198 11/96 1985 - 18 TJ Maxx
Michaels Crafts

Crestwood Plaza, Crestwood, IL 20,044 12/96 1992 - 2 Entenmann's
Pet Supplies Plus

Park St. Claire, Schaumburg, IL 11,859 12/96 1994 - 2 Ameritech
Hallmark Showcase

Lansing Square, Lansing, IL 233,508 12/96 1991 - 16 Sam's Club
Baby Superstore
Office Max

Summit of Park Ridge
Park Ridge, IL 33,252 12/96 1986 - 13 LePeep Rest.
Giappos Pizza

Grand and Hunt Club, Gurnee, IL 21,222 12/96 1996 - 2 Jewelry 3
Super Crown Books

Quarry Outlot, Hodgkins, IL 9,650 12/96 1996 - 3 Dunkin Donuts
Baskin Robbins
The Casual Male
Jewelry 3

* Anchor tenants include tenants leasing more than 10% of the gross leasable area of a property.
</TABLE>

-5-

The Company's real property investments are described on pages 76-96 of the
Prospectus of the Company dated July 24, 1996 (the "Prospectus"), and in
Supplement No. 10 to the Prospectus dated January 31, 1997 ("Supplement No.
10"), which is incorporated herein by reference. Reference is also made to
Note (4) of the Notes to Financial Statements (Item 8 of this Annual Report)
for additional descriptions of these investments of the Company.

The Company's real property investments are subject to competition from similar
types of properties in the vicinity in which each is located. Approximate
occupancy levels for the properties are set forth on a quarterly basis in the
table set forth in Item 2 below to which reference is hereby made. The
Company's real property investments are all located within 150 miles of the
Company's headquarters in Illinois. The Company does not segregate revenues or
assets by geographic region, and such a presentation would not be material to
an understanding of the Company's business taken as a whole.

The terms of transactions between the Company and Affiliates of the Company are
set forth in Item 11 below and Note (2) to the Company's Financial Statements
(Item 8 of this Annual Report) to which reference is hereby made for a
description of such terms and transactions.

Qualification as a Real Estate Investment Trust

The Company qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 1995. Since the Company
qualified for taxation 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.

Item 2. Properties

The properties owned by the Company include nineteen Neighborhood Retail Centers
and two single-user retail properties. Each of these properties is located in
Illinois. Tenants of the properties are responsible for the payment of some or
all of the real estate taxes, insurance and common area maintenance. Reference
is made to Item 1 above for a description of the properties.

The following table lists the approximate physical occupancy levels for the
Company's investment properties as of the end of each quarter during 1996 and
1995. N/A indicates the property was not owned by the Company at the end of the
quarter.

-6-

1995 1996
------------------------ ------------------------
at at at at at at at at
Properties 03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31
---------- ----- ----- ----- ----- ----- ----- ----- -----
Walgreens 100% 100% 100% 100% 100% 100% 100% 100%
Decatur, Illinois

Eagle Crest 100% 100% 100% 100% 100% 100% 100% 100%
Naperville, Illinois

Montgomery-Goodyear N/A N/A 100% 100% 100% 100% 100% 100%
Montgomery, Illinois

Hartford/Naperville Plaza N/A N/A 48% 90% 100% 100% 100% 100%
Naperville, Illinois

Nantucket Square N/A N/A 92% 81% 81% 81% 94% 85%
Schaumburg, Illinois

Antioch Plaza N/A N/A N/A 33% 49% 49% 49% 57% *
Antioch, Illinois

Mundelein Plaza N/A N/A N/A N/A 100% 100% 100% 100%
Mundelein, IL

Regency Point N/A N/A N/A N/A N/A 97% 97% 97%
Lockport, IL

Prospect Heights N/A N/A N/A N/A N/A 78% 100% 100%
Prospect Heights, IL

Montgomery-Sears N/A N/A N/A N/A N/A 85% 85% 85% *
Montgomery, IL

Zany Brainy N/A N/A N/A N/A N/A N/A 100% 100%
Wheaton, IL

Salem Square N/A N/A N/A N/A N/A N/A 97% 97% *
Countryside, IL

Hawthorn Village N/A N/A N/A N/A N/A N/A 99% 98%
Vernon Hills, IL

Six Corners N/A N/A N/A N/A N/A N/A N/A 92%
Chicago, IL

Spring Hill Fashion Ctr. N/A N/A N/A N/A N/A N/A N/A 95%
West Dundee, IL

Crestwood Plaza N/A N/A N/A N/A N/A N/A N/A 100%
Crestwood, IL

Park St. Claire N/A N/A N/A N/A N/A N/A N/A 100%
Schaumburg, IL

Lansing Square N/A N/A N/A N/A N/A N/A N/A 89% *
Lansing, IL

-7-

1995 1996
------------------------ ------------------------
at at at at at at at at
Properties 03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31
---------- ----- ----- ----- ----- ----- ----- ----- -----
Summit of Park Ridge N/A N/A N/A N/A N/A N/A N/A 81% *
Park Ridge, IL

Grand and Hunt Club N/A N/A N/A N/A N/A N/A N/A 100%
Gurnee, IL

Quarry Outlot N/A N/A N/A N/A N/A N/A N/A 100%
Hodgkins, IL

* As part of the purchase of these properties the Company receives rent under
master lease agreements on the space which was vacant at the time of the
purchase, resulting in 100% economic occupancy at December 31, 1996 for
Antioch, Montgomery-Sears and Salem Square and 90% economic occupancy for
Lansing Square.

As part of the purchase of Summit of Park Ridge, a portion of the Seller's
proceeds were escrowed for the monthly release of master lease payments.
The master lease agreements along with credits for signed leases resulted in
93% economic occupancy at December 31, 1996.

The master lease agreements are for periods ranging from one to two years or
until the spaces are leased.

On behalf of the Company, the Advisor is currently exploring the purchase of
additional Neighborhood Retail Centers and single-user retail properties from
unaffiliated third parties.

Item 3. Legal Proceedings

The Company is not subject to any material pending legal proceedings.

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

There were no matters submitted to a vote of security holders during the fourth
quarter of 1996.

-8-

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters

Market Information

As of December 31, 1996, there were 3,819 Stockholders of the Company. There is
no public market for the Shares.

The Company's Share Repurchase Program is available to the Stockholders.
Reference is made to "Investment, Reinvestment and Share Repurchase Programs"
on page 112 of the Prospectus, which is incorporated herein by reference.

Distributions

The Company declared distributions to Stockholders totaling $.82 per weighted
average shares outstanding during 1996. Of this amount, $.69 qualifies as
distributions taxable as ordinary income for 1996 and the remainder constitutes
a return of capital for tax purposes.

-9-

Item 6. Selected Financial Data

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

For the years ended December 31, 1996, 1995 and for the
period from May 12, 1994 (formation of the Company)
to December 31, 1994

(not covered by the Independent Auditors' Report)

1996 1995 1994
---- ---- ----
Total assets...................... $104,508,686 18,750,877 2,402,373

Mortgages payable................. $ 30,838,233 750,727 -

Total income...................... $ 6,327,734 1,180,422 -

Net income........................ $ 2,452,221 496,514 -

Net income per share (b).......... $ .55 .53 -

Distributions declared............ $ 3,704,943 736,627 -

Distributions per share (b)....... $ .82 .78 -

Funds from Operations (b)(c)...... $ 3,391,365 666,408 -

Funds available for
distribution (c)................ $ 3,709,818 787,011 -

Cash flows from operating
activities...................... $ 5,529,709 978,350 -

Cash flows from investing
activities...................... $(68,976,841) (6,577,843) (1,703,498)

Cash flows from financing
activities...................... $ 71,199,936 6,327,490 1,714,432

Weighted average number of common
shares outstanding.............. 4,494,620 943,156 20,000

(a) The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.

(b) The net income and distributions per share are based upon the weighted
average number of common shares outstanding. The $.82 per share
Distribution for the year ended December 31, 1996, represented 109.3% of
the Company's Funds From Operations ("FFO") and 99.9% of funds available
for distribution for that period. See Footnote (b) below for information
regarding the Company's calculation of FFO. Distributions by the Company
to the extent of its current and accumulated earnings and profits for
federal income tax purposes will be taxable to Stockholders as ordinary
dividend income. Distributions in excess of earnings and profits
generally will be treated as a non-taxable reduction of the

-10-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

For the years ended December 31, 1996, 1995 and for the
period from May 12, 1994 (formation of the Company)
to December 31, 1994

(not covered by the Independent Auditors' Report)

stockholder's basis in the Shares to the extent thereof, and thereafter as
taxable gain (a return of capital). These Distributions will have the
effect of deferring taxation of the amount of the Distribution until the
sale of the Stockholder's Shares. For 1996, $611,418 (or 16.50% of the
$3,704,943 Distribution paid for 1996 represented a return of capital. In
order to maintain its qualification as a REIT, the Company must make
annual distributions to Stockholders of at least 95% of its taxable income
which was approximately $2,938,800 (or 79.32% of the Distribution paid).
Taxable income does not include net capital gains. Under certain
circumstances, the Company may be required to make Distributions in excess
of cash available for distribution in order to meet the REIT distribution
requirements. Distributions are determined by the Company's Board of
Directors and are dependent on a number of factors, including the amount
of funds available for distribution, the Company's financial condition,
any decision by the Board of Directors to reinvest funds rather than to
distribute the funds, the Company's capital expenditures, the annual
distribution required to maintain REIT status under the Code and other
factors the Board of Directors may deem relevant.

(c) "FFO" means net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization
and other non-cash items. FFO and funds available for distribution are
calculated as follows:

1996 1995
---- ----
Net income........................... $ 2,452,221 496,514
Depreciation......................... 939,144 169,894
------------ ------------
Funds from operations(1)........... 3,391,365 666,408

Deferred rent receivable (2)......... (119,225) (12,413)
Rental income received under
master lease agreements (2 and 3).. 437,678 133,016
------------ ------------
Funds available for distribution... $ 3,709,818 787,011
============ ============

(1) FFO does not represent cash generated from operating activities
calculated in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to
fund cash needs. FFO should not be considered as an alternative to
net income as an indicator of the Company's operating performance or
as an alternative to cash flow as a measure of liquidity.

-11-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

For the years ended December 31, 1996, 1995 and for the
period from May 12, 1994 (formation of the Company)
to December 31, 1994

(not covered by the Independent Auditors' Report)

(2) Reference is made to Note (5) of the Notes to Financial Statements
(Item 8 of this Annual Report).

(3) As part of several purchases, the Company will receive rent under
master lease agreements on the spaces currently vacant for periods
ranging from one year to eighteen months or until the spaces are
leased. Generally accepted accounting principles require that as
these payments are received, they be recorded as a reduction in the
purchase price of the properties rather than as rental income. The
Company has recorded $437,678 and $133,016 of such payments as of
December 31, 1996 and 1995, respectively.

-12-

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this annual report of
Form 10-K constitute "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, limitations on the area in which the
Company may acquire properties; risks associated with borrowings secured by the
Company's properties; competition for tenants and customers; federal, state or
local regulations; adverse changes in general economic or local conditions;
competition for property acquisitions with third parties that have greater
financial resources than the Company; inability of lessees to meet financial
obligations; uninsured losses; risks of failing to qualify as a REIT; and
potential conflicts of interest between the Company and its affiliates
including the Advisor.

Liquidity and Capital Resources

As of December 31, 1996, the Company had received subscriptions for a total of
8,137,776 Shares resulting in $81,150,311 in gross offering proceeds.The
Company's capital needs and resources are expected to undergo changes as a
result of the completion of the initial public offering of Shares, the
commencement of the Second Offering and the acquisition of properties.
Operating cash flow is expected to increase as these additional properties are
added to the portfolio. Distributions to Stockholders are determined by the
Company's Board of Directors and are dependent on a number of factors,
including the amount of funds available for distribution, the Company's
financial condition, capital expenditures, and the annual distribution required
to maintain REIT status under the Code.

As of December 31, 1996, the Company had acquired twenty one properties
utilizing $95,015,721 of cash and cash equivalents. Cash and cash equivalents
consists of cash and short-term investments. Cash and cash equivalents,
including amounts held by property manager, were $8,491,735 and $738,931 at
December 31, 1996 and 1995, respectively. This increase was due to the
additional Offering proceeds raised and $25,670,000 in loan proceeds from
financing the properties. Partially offsetting the increase in cash and cash
equivalents was the purchase of fifteen additional properties in 1996 and the
payment of Offering Costs.

The Company intends to use cash and cash equivalents to purchase additional
properties, to pay distributions and to pay offering costs.

-13-

The properties owned by the Company are currently generating sufficient cash
flow to cover operating expenses of the Company plus pay a monthly distribution
on weighted average shares. The Company paid monthly distributions of 8% per
annum during the first, second and third quarters of 1996. Commencing with the
fourth quarter of 1996, the Company increased the monthly distributions to 8.3%
per annum. Distributions declared for the year ended December 31, 1996 were
$3,704,943, of which $611,418 represents a return of capital for federal income
tax purposes. Beginning March 1, 1997, the Company increased the monthly
distribution paid to 8.5% per annum on weighted average shares.

Management of 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 quarterly 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. Management of the Company also reviews,
on a quarterly basis, the Company's compliance with the Gross Income, Asset and
Distribution Tests as described in the section of the Prospectus entitled
"Federal Income Tax Considerations--Taxation of the Company--REIT Qualification
Tests". On an ongoing basis, as due diligence is performed by Advisor on
potential real estate purchases or temporary investment of uninvested capital,
management of both entities determines that the income from the new asset will
qualify for REIT purposes. For the year ended December 31, 1996, the Company
qualified as a REIT.

Cash Flows From Operating Activities

Net cash provided by operating activities increased by approximately $4,550,000
for the year ended December 31, 1996 to $5,529,709 from $978,350 for the same
period in 1995. This increase is due primarily to an increase in net income,
as a result of the purchase of additional properties, for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. As of
December 31, 1996 the Company had acquired twenty-one properties, as compared
to six properties as of December 31, 1995. This increase is also due to
$437,678 of rental income received under master lease agreements for the year
ended December 31, 1996, as compared to $133,016 of rental income received
under master lease agreements for the year ended December 31, 1995.

Cash Flows From Investing Activities

During the year ended December 31, 1996, the Company utilized $68,976,841 in
cash and cash equivalents for the purchase of and additions to fifteen
properties, as compared to the $6,577,843 utilized in the year ended December
31, 1995 for the purchase of and additions to six properties. As part of the
purchases of the properties, the Company utilized $2,900,000 of short-term
notes payable from Affiliates, all of which had been repaid as of December 31,
1996.

-14-

Cash Flows From Financing Activities

For the year ended December 31, 1996, the Company generated $71,199,936 of cash
flows from financing activities as compared to $6,327,490 of cash flows
generated from financing activities for the year ended December 31, 1995. This
increase is due primarily to the increase in proceeds raised from the Offering
of $61,147,146 for the year ended December 31, 1996, as compared to $19,803,163
of Offering proceeds raised for the year ended December 31, 1995. This
increase is partially offset by an increase in the cash used for the payment of
Offering costs for the year ended December 31, 1996. The increase is also
partially offset by an increase in the amount of distributions paid for the
year ended December 31, 1996 of $3,285,528 as compared to the distributions
paid for the year ended December 31, 1995 of $607,095. The Company placed
financing on twelve of the Company's properties and received $25,670,000 in
loan proceeds.

The Advisor has guaranteed payment of all public offering expenses (excluding
selling commissions, the marketing contribution and the due diligence expense
allowance fee) in excess of 5.5% of the Gross Offering Proceeds of the Offering
(the "Gross Offering Proceeds") or all organization and offering expenses
(including such selling expenses) which together exceed 15% of the Gross
Offering Proceeds. As of December 31, 1996, organizational and offering costs
did exceed the 5.5% and 15% limitations. The Company anticipates that these
costs will not exceed these limitations upon completion of the Offering,
however, any excess amounts will be reimbursed by the Advisor.

-15-

Results of Operations

As of December 31, 1996, subscriptions for a total of 8,137,766 Shares had been
received from the public resulting in $81,150,311 in Gross Offering Proceeds,
which includes the Advisor's capital contribution of $200,000 and Shares
purchased through the DRP. At December 31, 1996, the Company owned nineteen
Neighborhood Retail Centers and two single-user retail properties.

Total income for the years ended December 31, 1996 and 1995 was $6,327,734 and
$1,180,422, respectively. This increase was due to the purchase of additional
properties in 1996. As of December 31, 1996, the Company had acquired twenty-
one properties, as compared to six properties as of December 31, 1995. The
purchase of additional properties also resulted in increases in property
operating expenses paid or payable to Affiliates and non-affiliates and
depreciation expense.

The decrease in mortgage interest to Affiliates for the years ended December
31, 1996, as compared to the years ended December 31, 1995, is due to the
payoff of the acquisition financing totaling $2,900,000. During 1994, the
Advisor advanced $193,300 to the Company for costs incurred with the Offering.
These advances were repaid with a market rate of interest to the Advisor in
January 1995 with interest ranging from 7.75% to 9.50%. As of December 31,
1996, the Company continues to be indebted on a mortgage in the principal
amount of $739,543, which bears interest at 7.655%, collateralized by the
Walgreens, Decatur property payable to an Affiliate.

The increase in mortgage interest to non-affiliates for the year ended December
31, 1996, as compared to the year ended December 31, 1995, is due in part to
the mortgage which was assumed as part of the purchase of Regency Point. The
Company obtained $25,670,000 of financing from an unaffiliated lender, using
twelve properties previously acquired as collateral.

Interest income is the result of cash and cash equivalents being invested in
short-term investments until a property is purchased.

The increases in professional services to Affiliates and non-affiliates and
general and administrative expenses to Affiliates and non-affiliates for the
year ended December 31, 1996, as compared to the year ended December 31, 1995,
is due to the management of an increased number of real estate assets.

Subsequent Events

As of March 24, 1997, subscriptions for a total of 10,628,676 Shares were
received, bringing total gross offering proceeds to $106,137,967.

In January 1997, the Company paid a distribution of $548,947 to the
Stockholders.

Beginning March 1, 1997, the Company increased the monthly distributions paid
to 8.5% per annum on weighted average Shares.

-16-

On January 9, 1997, the Company purchased the Maple Park Place Shopping Center
from an unaffiliated third party for approximately $15,260,000. The property
is located in Bolingbrook, Illinois and contains 220,095 square feet of
leasable space. Its anchor tenants include Kmart, Eagle Foods and Powerhouse
Gym.

On January 24, 1997, the Company purchased Lincoln Park Place from an
unaffiliated third party for approximately $2,100,000. The property is located
in Chicago, Illinois. It consists of a 10,678 square foot building occupied by
two tenants, Lechters and Nordic Track.

On, January 24, 1997, the Company purchased Aurora Commons Shopping Center
from an unaffiliated third party for approximately $11,500,000. The property
is located in Aurora, Illinois and consists of three buildings comprising
127,292 square feet. Its anchor tenants include Jewel/Osco, Boston Market and
Blockbuster.

In January 1997, the Company obtained additional financing secured by the
Lansing Square and Spring Hill Fashion Corner properties totaling $12,840,000
from an unaffiliated lender. The Company paid a 1 1/4% fee in connection with
these mortgage loans. The mortgage loans have a term of seven years and, prior
to maturity date, require payments of interest only, at 7.8%, fixed for the
first five years with the remaining two years at prime plus 1/2%.

On February 7, 1997, the Company made an initial deposit of $1,228,510 for the
purchase of Forest Commons. The balance of the purchase price, approximately
$10,607,000, will be paid upon completion of the redevlopement of the center
and when the anticipated main tenant, Dominick's Finer Foods, Inc., begins
paying rent under a lease agreement.

On February 7, 1997, the Company made an initial deposit of $1,265,630 for the
purchase of Downers Grove Plaza. The balance of the purchase price,
approximately $15,382,000, will be paid upon completion of the redevlopement of
the center and when the anticipated main tenant, Dominick's Finer Foods, Inc.,
begins paying rent under a lease agreement.

On behalf of the Company, the Advisor is currently exploring the purchase of
additional Neighborhood Retail Centers and single-user retail properties from
unaffiliated third parties.

Impact of Accounting Principles

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation Plans" was issued in October 1995. The Statement is
effective for fiscal years beginning after December 15, 1995. As allowed by
the new Statement, the Company plans to continue to use Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting
for its stock options. This accounting pronouncement did not have a material
effect on the financial position or results of operations of the Company.

-17-

Inflation

For the Company's Neighborhood Retail Centers, inflation is likely to increase
rental income from leases to new tenants and lease renewals, subject to market
conditions. The Company's rental income and operating expenses for those
properties owned or to be owned and operated under triple-net leases, like the
Walgreens/Decatur property, are not likely to be directly affected by future
inflation, since rents are or will be fixed under the leases and property
expenses are the responsibility of the tenants. The capital appreciation of
triple-net leased properties is likely to be influenced by interest rate
fluctuations. To the extent that inflation determines interest rates, future
inflation may have an effect on the capital appreciation of triple-net leased
properties.

Item 8. Financial Statements and Supplementary Data

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Index
-----
Page
----

Independent Auditors' Report............................................. 19

Financial Statements:

Balance Sheets, December 31, 1996 and 1995............................. 20

Statements of Operations for the years ended
December 31, 1996 and 1995........................................... 22

Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995 and for the period from
May 12, 1994 (formation of the Company) to December 31, 1994......... 23

Statements of Cash Flows for the years ended December 31, 1996
and 1995 and for the period from May 12, 1994 (formation of
the Company) to December 31, 1994.................................... 24

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

Real Estate and Accumulated Depreciation (Schedule III).................. 38

Schedules not filed:

All schedules other than those indicated in the index have been omitted as the
required information is inapplicable or the information is presented in the
financial statements or related notes.

-18-

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Inland Real Estate Corporation:

We have audited the financial statements of Inland Real Estate Corporation (the
Company) as listed in the accompanying index. In connection with the audits of
the financial statements, we also have audited the financial statement schedule
as listed in the accompanying index. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Inland Real Estate Corporation
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years ended December 31, 1996 and 1995 and for the period
from May 12, 1994 (formation date) to December 31, 1994 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

KPMG Peat Marwick

Chicago, Illinois
January 23, 1997
except as to Note 7 which is as of March 24, 1997

-19-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Balance Sheets

December 31, 1996 and 1995

Assets
------

1996 1995
---- ----
Investment properties (Notes 1 and 4):
Land............................................ $ 24,705,743 5,437,948
Building and improvements....................... 69,927,238 12,074,484
------------- -------------
94,632,981 17,512,432
Less accumulated depreciation................... 1,109,038 169,894
------------- -------------
Net investment properties....................... 93,523,943 17,342,538
------------- -------------
Cash and cash equivalents including amounts
held by property manager (Note 1)............... 8,491,735 738,931
Restricted cash (Note 1).......................... 122,043 150,000
Accounts and rents receivable (Note 5)............ 1,914,756 333,823
Deposits and other assets (Note 4)................ 95,828 158,123
Deferred organization costs (net of
accumulated amortization of $5,492 and $0 at
December 31, 1996 and 1995, respectively)
(Note 1)........................................ 21,970 27,462
Loan fees (net of accumulated amortization
of $11,875 at December 31, 1996) (Note 1)....... 338,411 -
------------- -------------

Total assets.................................. $104,508,686 18,750,877
============= =============

See accompanying notes to financial statements.

-20-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Balance Sheets
(continued)

December 31, 1996 and 1995

Liabilities and Stockholders' Equity
------------------------------------

1996 1995
Liabilities: ---- ----
Accounts payable................................ $ 289,912 6,875
Accrued offering costs to Affiliates (Note 2)... 298,341 222,353
Accrued offering costs to non-affiliates........ 4,236 6,444
Accrued interest payable to Affiliates.......... 4,718 5,242
Accrued interest payable to non-affiliates...... 52,402 -
Accrued real estate taxes....................... 2,770,889 374,180
Distributions payable (Note 7).................. 548,947 129,532
Security deposits............................... 247,769 54,483
Note payable to Affiliates (Note 6)............. - 360,000
Mortgages payable (Notes 4 and 6)............... 30,838,233 750,727
Unearned income................................. 64,590 39,846
Other liabilities............................... 32,820 178,852
Due to Affiliates (Note 2)...................... 255,591 7,277
------------- -------------
Total liabilities............................. 35,408,448 2,135,811
------------- -------------

Stockholders' Equity (Notes 1 and 2):
Common stock, $.01 par value, 24,000,000 Shares
authorized; 8,144,116 and 8,137,766 issued and
outstanding at December 31, 1996 and 2,003,073
and 2,000,073 Shares issued and outstanding
at December 31, 1995, respectively............ 81,000 19,996
Additional paid-in capital (net of offering
costs of $10,500,108 and $3,121,175 at
December 31, 1996 and 1995, respectively, of
which $8,096,213 and $2,129,264 was paid
to Affiliates, respectively).................. 70,512,073 16,835,183
Accumulated distributions in excess
of net income................................. (1,492,835) (240,113)
------------- -------------
Total stockholders' equity.................... 69,100,238 16,615,066
------------- -------------
Commitments and contingencies (Notes 3, 5 and 7)..
------------- -------------
Total liabilities and stockholders' equity........ $104,508,686 18,750,877
============= =============

See accompanying notes to financial statements.

-21-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Operations

For the years ended December 31, 1996 and 1995

1996 1995
Income: ---- ----
Rental income (Notes 1 and 5).................. $ 4,467,903 869,485
Additional rental income....................... 1,336,809 228,024
Interest income................................ 438,188 82,913
Other income................................... 84,834 -
------------ ------------
6,327,734 1,180,422
------------ ------------
Expenses:
Professional services to Affiliates............ 16,476 7,277
Professional services to non-affiliates........ 46,790 1,615
General and administrative expenses to
Affiliates.................................... 42,904 -
General and administrative expenses
to non-affiliates............................. 77,389 13,880
Advisor asset management fee................... 238,108 -
Property operating expenses to Affiliates...... 229,307 46,791
Property operating expenses to non-affiliates.. 1,643,867 279,930
Mortgage interest to Affiliates................ 64,165 146,821
Mortgage interest to non-affiliates............ 533,320 17,340
Depreciation................................... 939,144 169,894
Amortization................................... 17,367 -
Acquisition costs expensed..................... 26,676 360
------------ ------------
3,875,513 683,908
------------ ------------
Net income.................................... $ 2,452,221 496,514
============ ============

Net income per weighted average
common stock shares outstanding
(4,494,620 and 943,156 for the years
ended December 31, 1996 and 1995,
respectively).................................. $ .55 .53
============ ============

See accompanying notes to financial statements.

-22-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Stockholders' Equity

For the years ended December 31, 1996, 1995 and
for the period from May 12, 1994 (formation of the Company)
to December 31, 1994

Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
----------- ----------- ----------- ------------

Proceeds from initial
offering.................. $ 200 199,800 - 200,000
----------- ----------- ----------- ------------
Balance December 31, 1994... 200 199,800 - 200,000

Net income.................. - - 496,514 496,514

Distributions declared
($.78 per weighted average
common stock shares
outstanding).............. - - (736,627) (736,627)

Proceeds from Offering (net
of Offering costs of
$3,121,175).............. 19,826 16,662,162 - 16,681,988

Repurchases of Shares....... (30) (26,779) - (26,809)
----------- ----------- ----------- ------------
Balance December 31, 1995... 19,996 16,835,183 (240,113) 16,615,066

Net income.................. - - 2,452,221 2,452,221

Distributions declared
($.82 per weighted average
common stock shares
outstanding).............. - - (3,704,943) (3,704,943)

Proceeds from Offering (net
of Offering costs of
$10,500,108).............. 61,038 53,707,177 - 53,768,215

Repurchases of Shares....... (34) (30,287) - (30,321)
----------- ----------- ----------- ------------
Balance December 31, 1996... $ 81,000 70,512,073 (1,492,835) 69,100,238
=========== =========== =========== ============

See accompanying notes to financial statements.

-23-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Cash Flows

For the years ended December 31, 1996 and 1995
and for the period from May 12, 1994 (formation of the Company)
to December 31, 1994

1996 1995 1994
Cash flows from operating activities: ---- ---- ----
Net income........................ $ 2,452,221 496,514 -
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation.................... 939,144 169,894 -
Amortization.................... 17,367 - -
Rental income under master
lease agreements.............. 437,678 133,016 -
Straight line rental income..... (119,225) (12,413) -
Changes in assets and liabilities:
Accounts and rents receivable. (1,461,708) (321,410) -
Deposits and other assets..... 62,295 (4,006) -
Accounts payable.............. 283,038 6,875 -
Accrued interest payable...... 51,878 5,242 -
Accrued real estate taxes..... 2,396,709 374,180 -
Security deposits............. 193,286 54,483 -
Other liabilities............. 3,968 28,852 -
Due to Affiliates............. 248,314 7,277 -
Unearned income............... 24,744 39,846 -
------------- ------------- -------------
Net cash provided by operating
activities........................ 5,529,709 978,350 -
------------- ------------- -------------
Cash flows from investing activities:
Escrowed funds.................... - - (1,699,381)
Payments for acquisition expenses. - - (4,117)
Purchase of investment properties. (68,717,979) (6,376,708) -
Tenant improvements............... (136,819) (51,135) -
Deposit for tenant improvements... (122,043) (150,000) -
------------- ------------- -------------
Net cash used in investing
activities........................ (68,976,841) (6,577,843) (1,703,498)
------------- ------------- -------------
Cash flows from financing activities:
Repayment of loan from Advisor.... - (193,300) 193,300
Proceeds from offering............ 61,147,147 19,803,163 200,000
Subscriptions received............ - - 1,699,381
Repurchase of Shares.............. (30,321) (26,809) -
Payments of offering costs........ (7,305,153) (2,514,129) (378,249)
Loan proceeds..................... 25,670,000 - -
Loan fees......................... (350,286) - -

See accompanying notes to financial statements.

-24-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Cash Flows
(continued)

For the years ended December 31, 1996 and 1995
and for the period from May 12, 1994 (formation of the Company)
to December 31, 1994

1996 1995 1994
---- ---- ----
Distributions paid................ (3,285,528) (607,095) -
Repayment of notes from Affiliate. (3,271,185) - -
Principal payments of debt........ (1,374,738) (10,106,878) -
Payment of deferred organization
costs........................... - (27,462) -
------------- ------------- -------------
Net cash provided by financing
activities........................ 71,199,936 6,327,490 1,714,432
------------- ------------- -------------
Net increase in cash and
cash equivalents.................. 7,752,804 727,997 10,934
Cash and cash equivalents at
beginning of period............... 738,931 10,934 -
------------- ------------- -------------
Cash and cash equivalents at
end of period..................... $ 8,491,735 738,931 10,934
============= ============= =============

Supplemental schedule of noncash investing and financing activities:

1996 1995 1994
---- ---- ----
Purchase of investment properties.. $(77,421,408) (17,594,313) -
Assumption of mortgage debt...... 5,803,429 4,595,178 -
Note payable to Affiliate........ 2,900,000 6,622,427 -
------------- ------------- ------------
$(68,717,979) (6,376,708) -
============= ============= ============

Distributions payable.............. $ 548,947 129,532 -
============= ============= ============

Cash paid for interest............. $ 545,607 158,919 -
============= ============= ============

See accompanying notes to financial statements.

-25-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements

For the years ended December 31, 1996, 1995 and
for the period from May 12, 1994 (formation of the Company)
to December 31, 1994

(1) Organization and Basis of Accounting

Inland Real Estate Corporation (the "Company") was formed on May 12, 1994 to
invest in neighborhood retail centers located within an approximate 150-mile
radius of its headquarters in Oak Brook, Illinois. The Company may also
acquire single-user retail properties in locations throughout the United
States, certain of which may be sale and leaseback transactions, net leased to
creditworthy tenants. Inland Real Estate Advisory Services, Inc. (the
"Advisor"), an Affiliate of the Company, is the advisor to the Company. On
October 14, 1994, the Company commenced an initial public offering, on a best
efforts basis, ("Offering") of 5,000,000 shares of common stock ("Shares") at a
price of $10 per Share and 1,000,000 Shares at a price of $9.05 per Share to be
distributed pursuant to the Company's distribution reinvestment program (the
"DRP"). As of July 24, 1996, the Company had received subscriptions for a
total of 5,000,000 Shares, thereby completing the initial Offering. On July
24, 1996, the Company commenced an offering of an additional 10,000,000 Shares,
on a best efforts basis, (the "Second Offering") plus an additional 1,000,000
Shares for distribution through the DRP. As of December 31, 1996, the Company
had received subscriptions for a total of 3,137,776 Shares from the Second
Offering, resulting in $81,150,311 in gross offering proceeds, which includes
$1,470,938 received for 162,534 Shares purchased through the Distribution
Reinvestment Program. As of December 31, 1996, the Company has repurchased
6,350 Shares through the Share Repurchase Program.

The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

-26-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents and are carried at cost, which
approximates fair value. Cash and equivalents include $865,521 and $142,720
at December 31, 1996 and 1995, respectively, which are held by the Company's
affiliated property manager. Such amounts are unrestricted and held in the
Company's name.

Restricted cash at December 31, 1996 represents amounts held in escrow for
tenant improvements, concessions and leasing commissions at Antioch Plaza.
Such amounts will be added to the basis of the property as tenant improvements
are completed. Restricted cash at December 31, 1995 represents amounts held in
escrow for tenant improvements at Naperville/Hartford Plaza. The Company has
recorded a corresponding payable as a component of other liabilities.

The Partnership adopted 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 121") as required in the first quarter of 1996. SFAS
121 requires that the Partnership record an impairment loss on its property to
be held for investment whenever its carrying value cannot be fully recovered
through estimated undiscounted future cash flows from their operations and
sale. The amount of the impairment loss to be recognized would be the
difference between the property's carrying value and the property's estimated
fair value. The adoption of SFAS 121 did not have any effect on the
Partnership's financial position, results of operations or liquidity.

Depreciation expense is computed using the straight-line method. Buildings and
improvements are based upon estimated useful lives of 30 years. Tenant
improvements will be depreciated over the related lease period.

Loan fees are amortized on a straight line basis over the life of the related
loans.

Deferred organization costs are amortized over a 60-month period.

Offering costs are offset against the Stockholders' equity accounts. Offering
costs consist principally of printing, selling and registration costs.

Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned and the cash rent due under
the provisions of the lease agreements is recorded as deferred rent receivable.

-27-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

The Company believes that the interest rates associated with the mortgages
payable and notes payable to Affiliates approximate the market interest rates
for these types of debt instruments, and as such, the carrying amount of the
mortgages payable and notes payable to Affiliates approximate their fair value.

The carrying amount of cash and cash equivalents, restricted cash, accounts and
rents receivable, accounts payable and other liabilities, accrued offering
costs to Affiliates, accrued offering costs to non-Affiliates, accrued interest
payable to Affiliates, accrued real estate taxes, and distributions payable
approximate fair value because of the relatively short maturity of these
instruments.

Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation. Such reclassifications did not change the
1995 reported results.

(2) Transactions with Affiliates

As of December 31, 1996, the Company had incurred $10,500,108 of organization
and offering costs. Pursuant to the terms of the offering, the Advisor is
required to pay organizational and offering expenses (excluding sales
commissions, the marketing contribution and the due diligence expense allowance
fee) in excess of 5.5% of the gross proceeds of the Offering (the "Gross
Offering Proceeds") or all organization and offering expenses (including
selling commissions) which together exceed 15% of gross offering proceeds. As
of the completion of the initial Offering, organizational and offering did not
exceed the 5.5% or 15% limitations. As of December 31, 1996, organizational
and offering costs of the Second Offering did exceed the 5.5% and 15%
limitations. The Company anticipates that these costs will not exceed these
limitations upon completion of the offerings, however, any excess amounts will
be reimbursed by the Advisor.

The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
Offering. Such costs to Affiliates incurred relating to the offering were
$692,248 and $409,858 as of December 31, 1996 and 1995, respectively, of which
$27,976 and $120,269 were unpaid as of December 31, 1996 and 1995,
respectively. In addition, an Affiliate of the Advisor serves as dealer
manager of the offering and is entitled to receive selling commissions, a
marketing contribution and a due diligence expense allowance fee from the
Company in connection with the offering. Such amounts incurred were $7,403,965
and $1,719,406 for the years ended December 31, 1996 and 1995, respectively, of
which $270,365 and $102,084 was unpaid as of December 31, 1996 and 1995,
respectively. As of December 31, 1996, approximately $6,296,000 of these
commissions had been passed through from the Affiliate to unaffiliated
soliciting broker/dealers.

-28-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
administration of the Company. Such costs are included in professional
services to Affiliates, general and administrative expenses to Affiliates and
acquisition costs expensed of which $749 remained unpaid at December 31, 1996.

As of December 31, 1996, the Advisor has contributed $200,000 to the capital of
the Company for which it received 20,000 Shares.

During 1994, the Advisor advanced $193,300 to the Company for costs incurred
with the Offering. These advances were repaid to the Advisor in January 1995
with interest ranging from 7.75% to 9.50%. The principal of $193,300 and
interest totaling $3,162 were paid from Gross Offering Proceeds.

The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. For any year in which the
Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to
the extent that the Advisor Asset Management Fee plus Other Operating Expenses
paid during the previous calendar year exceed 2% of the Company's Average
Invested Assets for the calendar year or 25% of the Company's Net Income for
that calendar year; and (ii) to the extent that Stockholders have not received
an annual Distribution equal to or greater than the 8% Current Return. For the
year ended December 31, 1996, the Company has incurred $238,108 of such fees,
all of which remains unpaid at December 31, 1996.

An Affiliate of the Advisor is entitled to receive Property Management Fees for
management and leasing services. The Company incurred and paid Property
Management Fees of $229,307 and $46,791 for the years ended December 31, 1996
and 1995, respectively, all of which has been paid.

The Company has incurred costs to Affiliates relating to the acquisition of the
properties, of which $16,734 is unpaid at December 31, 1996.

-29-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(3) Stock Option and Dealer Warrant Plan

The Company adopted an Independent Director Stock Option Plan which granted
each Independent Director an option to acquire 3,000 Shares as of October 19,
1994 and an additional 500 Shares on the date of each annual stockholders'
meeting commencing with the annual meeting in 1995 if the Independent Director
is a member of the Board on such date. The options for the initial 3,000
Shares granted shall be exercisable as follows: 1,000 Shares on the date of
grant and 1,000 Shares on each of the first and second anniversaries of the
date of grant. The succeeding options are exercisable on the second
anniversary of the date of grant. As of December 31, 1996, options for 1,000
Shares have been exercised $9.05.

In addition to sales commissions, Soliciting Dealers will also receive one
Soliciting Dealer Warrant for each 40 Shares sold by such Soliciting Dealer
during the offerings, subject to state and federal securities laws. The holder
of a Soliciting Dealer Warrant will be entitled to purchase one Share from the
Company at a price of $12 during the period commencing with the first date upon
which the Soliciting Dealer Warrants are issued and ending upon the first to
occur of: (i) October 14, 1999 or (ii) the closing date of a secondary offering
of the Shares by the Company. Notwithstanding the foregoing no Soliciting
Dealer Warrant will be exercisable until one year from the date of issuance.
As of December 31, 1996, none of these warrants were exercised.

-30-

<TABLE> INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(4) Investment Properties
<CAPTION> Initial Cost (A) Gross amount at which carried
-------------------------- at end of period
Net -----------------------------------------
Buildings Adjustments Land Buildings
Date and to and and
Acq Land improvements Basis (B) improvements improvements Total
------- ------------ ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-user Retail
- ------------------
Walgreens/Decatur
Decatur, IL............. 01/95 $ 78,330 1,130,723 - 78,330 1,130,723 1,209,053

Zany Brainy
Wheaton, IL............. 07/96 838,000 1,626,033 - 838,000 1,626,033 2,464,033

Neighborhood Retail Centers
- ---------------------------
Eagle Crest Shopping Center
Naperville, IL.......... 03/95 1,878,618 2,938,352 - 1,878,618 2,938,352 4,816,970

Montgomery-Goodyear
Montgomery, IL.......... 09/95 315,000 834,659 (12,692) 315,000 821,967 1,136,967

Hartford/Naperville Plaza
Naperville, IL.......... 09/95 990,000 3,427,961 11,244 990,000 3,439,205 4,429,205

Nantucket Square
Schaumburg, IL.......... 09/95 1,908,000 2,349,918 (72,214) 1,908,000 2,277,704 4,185,704

Antioch Plaza
Antioch, IL............. 12/95 268,000 1,360,445 (130,984) 268,000 1,229,461 1,497,461

Mundelein Plaza
Mundelein, IL........... 03/96 1,695,000 3,965,560 (22,820) 1,695,000 3,942,740 5,637,740

Regency Point
Lockport, IL............ 04/96 1,000,000 4,720,800 (21,900) 1,000,000 4,698,900 5,698,900

Prospect Heights
Prospect Heights, IL.... 06/96 494,300 1,683,755 (11,989) 494,300 1,671,766 2,166,066

Montgomery-Sears
Montgomery, IL.......... 06/96 768,000 2,714,173 (31,525) 768,000 2,682,648 3,450,648
------------ ------------- ------------ ------------- ------------- ------------
Subtotal $10,233,248 26,752,379 (292,880) 10,233,248 26,459,499 36,692,747

</TABLE>

-31-

<TABLE>
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(4) Investment Properties (continued) Gross amount at which carried
<CAPTION> Initial Cost (A) at end of period
-------------------------- Net -----------------------------------------
Buildings Adjustments Land Buildings
Date and to and and
Acq Land improvements Basis (B) improvements improvements Total
------- ------------ ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Subtotal $10,233,248 26,752,379 (292,880) 10,233,248 26,459,499 36,692,747

Salem Square
Countryside, IL......... 08/96 1,735,000 4,449,217 (6,900) 1,735,000 4,442,317 6,177,317

Hawthorn Village
Vernon Hills, IL........ 08/96 2,619,500 5,887,640 - 2,619,500 5,887,640 8,507,140

Six Corners
Chicago, IL............. 10/96 1,440,000 4,538,152 - 1,440,000 4,538,152 5,978,152

Spring Hill Fashion Corner
West Dundee, IL......... 11/96 1,794,000 7,415,396 (9,000) 1,794,000 7,406,396 9,200,396

Crestwood Plaza
Crestwood, IL........... 12/96 325,577 1,483,183 - 325,577 1,483,183 1,808,760

Park St. Claire
Schaumburg, IL.......... 12/96 319,578 1,205,672 (3,463) 319,578 1,202,209 1,521,787

Lansing Square
Lansing, IL............. 12/96 4,075,000 12,179,383 (9,800) 4,075,000 12,169,583 16,244,583

Summit of Park Ridge
Park Ridge, IL.......... 12/96 672,000 2,497,950 (2,364) 672,000 2,495,586 3,167,586

Grand and Hunt Club
Gurnee, IL.............. 12/96 969,840 2,622,575 (58,333) 969,840 2,564,242 3,534,082

Quarry Outlot
Hodgkins, IL............ 12/96 522,000 1,278,431 - 522,000 1,278,431 1,800,431
------------ ------------- ------------ ------------- ------------- ------------
Total $24,705,743 70,309,978 (382,740) 24,705,743 69,927,238 94,632,981
============ ============ =========== ============ ============ ============

</TABLE>

-32-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

December 31, 1996

(4) Investment Properties (continued)

(A) The initial cost to the Company, represents the original purchase price of
the property, including amounts incurred subsequent to acquisition, which
were contemplated at the time the property was acquired.

(B) Adjustments to basis includes additions to investment properties and
payments received under master lease agreements. As part of several
purchases, the Company will receive rent under master lease agreements on
the spaces currently vacant for periods ranging from one to two years or
until the spaces are leased. Generally Accepted Accounting Principles
("GAAP") require that as these payments are received, they be recorded as a
reduction in the purchase price of the properties rather than as rental
income. As of December 31, 1996, the cumulative amount of such payments
was $570,694. (Note 5)

Cost and accumulated depreciation of the above properties are summarized as
follows:

1996 1995
---- ----
Single User Retail Properties:
Cost.................................... $ 3,673,086 1,209,053
Less accumulated depreciation........... 112,871 34,550
------------ ------------
3,560,215 1,174,503
------------ ------------
Neighborhood Retail Centers:
Cost.................................... 90,959,895 16,303,379
Less accumulated depreciation........... 996,167 135,344
------------ ------------
89,963,728 16,168,035
------------ ------------
Total................................... $93,523,943 17,342,538
============ ============

-33-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(5) Operating Leases

Master Lease Agreements

As part of the purchases of several of the properties, the Company will receive
rent under master lease agreements on spaces currently vacant for periods
ranging from one to two years or until the spaces are leased and tenants begin
paying rent. GAAP requires the Company to reduce the purchase price of the
properties as these payments are received, rather than record the payments as
rental income.

Minimum lease payments under operating leases to be received in the future,
excluding rental income under master lease agreements and assuming no expiring
leases are renewed:

Number of
Minimum Lease Leases
Payments Expiring
------------- ------------
1997...................................... $ 10,796,526 20
1998...................................... 10,269,714 33
1999...................................... 9,264,471 23
2000...................................... 8,471,277 23
2001...................................... 6,891,348 17
Thereafter................................ 45,063,881 60
-------------
Total..................................... $ 90,757,217
=============

No assumptions were made regarding the releasing of expired leases. It is the
opinion of the Company's management that the space will be released at market
rates.

Remaining lease terms range from one year to thirty two years. Pursuant to the
lease agreements, tenants of the property are required to reimburse the Company
for some or all of their pro rata share of the real estate taxes and operating
expenses of the property. Such amounts are included in additional rental
income.

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
financial statements include increases of $119,225 and $12,413 in 1996 and
1995, of rental income for the period of occupancy for which stepped rent
increases apply and $131,638 and $12,413 in related accounts receivable as of
December 31, 1996 and 1995, respectively. The Company anticipates collecting
these amounts over the terms of the related leases as scheduled rent payments
are made.

-34-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(6) Mortgages and Note Payable

Mortgages payable consist of the following at December 31, 1996 and 1995:

Balance at
December 31,
Property as Interest Maturity Monthly ------------
Collateral Rate Date Payment(a) 1996 1995
- ---------------- ---------- --------- ---------- -----------------------
Mortgage payable to Affiliate:

Walgreens 7.655% 05/2004 $ 5,689 $ 739,543 750,727

Mortgages payable to non-affiliates:

Regency Point (b) 08/2000 (b) 4,428,690 -

Eagle Crest 7.850% 10/2003 15,373 2,350,000 -

Nantucket Square 7.850% 10/2003 14,392 2,200,000 -

Antioch Plaza 7.850% 10/2003 5,724 875,000 -

Mundelein Plaza 7.850% 10/2003 18,382 2,810,000 -

Montgomery-Goodyear 7.850% 10/2003 4,121 630,000 -

Montgomery-Sears 7.850% 08/2003 10,761 1,645,000 -

Hartford/Naperville 7.850% 08/2003 15,111 2,310,000 -

Zany Brainy 7.590% 01/2004 7,875 1,245,000 -

Prospect Heights
Plaza 7.590% 01/2004 6,926 1,095,000 -

Hawthorn Village
Commons 7.590% 01/2004 27,071 4,280,000 -

Six Corners Plaza 7.590% 01/2004 19,608 3,100,000 -

Salem Square
Shopping Center 7.590% 01/2004 19,797 3,130,000 -
----------- ------------
Mortgages Payable.................................... $30,838,233 750,727
=========== ============

-35-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

Note payable to Affiliates consists of the following at December 31, 1996 and
1995:

9.5% promissory note payable to Inland
Real Estate Investment Corporation, paid
in full on January 9, 1996.......................... $ - 360,000
----------- ------------
Note payable to Affiliate............................. $ - 360,000
=========== ============

(a) All payments are interest only, with the exception of the loans secured by
the Walgreens and Regency Point properties.

(b) Payments on this mortgage are based on a floating interest rate of 180
basis points over the 30-day LIBOR rate, which adjusts monthly, amortizing
over 25 years.

As of December 31, 1996, the required future principal payments on the
Partnership's long-term debt over the next five years are as follows:

1997.................................... $ 71,495
1998.................................... 74,454
1999.................................... 84,911
2000.................................... 4,252,170
2001.................................... 16,380

-36-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(7) Subsequent Events

As of March 24, 1997, subscriptions for a total of 10,628,676 Shares were
received, bringing total gross offering proceeds to $106,137,967.

In January 1997, the Company paid a distribution of $548,947 to the
Stockholders.

On January 24, 1997, the Company purchased Aurora Commons Shopping Center from
an unaffiliated third party for approximately $11,500,000. The property is
located in Aurora, Illinois and consists of three buildings comprising 127,292
square feet. Its anchor tenants include Jewel/Osco, Boston Market and
Blockbuster.

-37-

<TABLE> INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III
Real Estate and Accumulated Depreciation

December 31, 1996

<CAPTION>
Initial Cost Gross amount at which carried
(A) at end of period (B)
------------------------ --------------------------------------------------
Buildings Adjustments Land Buildings Accumulated
and to and and Total Depreciation
Encumbrance Land improvements Basis (C) improvements improvements (D) (E)
------------ ----------- ------------ ------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-user Retail
- ------------------
Walgreens/Decatur
Decatur, IL.......... $ 739,543 $ 78,330 1,130,723 - 78,330 1,130,723 1,209,053 72,241

Zany Brainy
Wheaton, IL.......... 1,245,000 838,000 1,626,033 - 838,000 1,626,033 2,464,033 40,630

Neighborhood Retail Centers
- ---------------------------
Eagle Crest Shopping Center
Naperville, IL....... 2,350,000 1,878,618 2,938,352 - 1,878,618 2,938,352 4,816,970 179,566

Montgomery-Goodyear
Montgomery, IL...... 630,000 315,000 834,659 (12,692) 315,000 821,967 1,136,967 34,441

Hartford/Naperville Plaza
Naperville, IL....... 2,310,000 990,000 3,427,961 11,244 990,000 3,439,205 4,429,205 152,998

Nantucket Square
Schaumburg, IL....... 2,200,000 1,908,000 2,349,918 (72,214) 1,908,000 2,277,704 4,185,704 96,128

Antioch Plaza
Antioch, IL.......... 875,000 268,000 1,360,445 (130,984) 268,000 1,229,461 1,497,461 47,580

Mundelein Plaza
Mundelein, IL........ 2,810,000 1,695,000 3,965,560 (22,820) 1,695,000 3,942,740 5,637,740 98,844

Regency Point
Lockport, IL......... 4,428,690 1,000,000 4,720,800 (21,900) 1,000,000 4,698,900 5,698,900 117,613

Prospect Heights
Prospect Heights, IL. 1,095,000 494,300 1,683,755 (11,989) 494,300 1,671,766 2,166,066 27,712

Montgomery-Sears
Montgomery, IL....... 1,645,000 768,000 2,714,173 (31,525) 768,000 2,682,648 3,450,648 44,178
------------ ----------- ------------ ------------ ----------- ------------ ----------- -------------
Subtotal $20,328,233 $10,233,248 26,752,379 (292,880) 10,233,248 26,459,499 36,692,747 911,931

</TABLE>

<TABLE> INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III
Real Estate and Accumulated Depreciation

December 31, 1996

Date
Con-
stru- Date
cted Acq
------------ -----------
<S> <C> <C>
Single-user Retail
- ------------------
Walgreens/Decatur
Decatur, IL.......... 1988 01/95

Zany Brainy
Wheaton, IL.......... 1995 07/96

Neighborhood Retail Centers
- ---------------------------
Eagle Crest Shopping Center
Naperville, IL....... 1991 03/95

Montgomery-Goodyear
Montgomery, IL...... 1991 09/95

Hartford/Naperville Plaza
Naperville, IL....... 1995 09/95

Nantucket Square
Schaumburg, IL....... 1980 09/95

Antioch Plaza
Antioch, IL.......... 1995 12/95

Mundelein Plaza
Mundelein, IL........ 1990 03/96

Regency Point
Lockport, IL......... 1993 04/96

Prospect Heights
Prospect Heights, IL. 1985 06/96

Montgomery-Sears
Montgomery, IL....... 1990 06/96

</TABLE>

-38-

<TABLE>
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III (continued)
Real Estate and Accumulated Depreciation

December 31, 1996

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subtotal $20,328,233 $10,233,248 26,752,379 (292,880) 10,233,248 26,459,499 36,692,747 911,931

Salem Square
Countryside, IL...... 3,130,000 1,735,000 4,449,217 (6,900) 1,735,000 4,442,317 6,177,317 61,690

Hawthorn Village
Vernon Hills, IL..... 4,280,000 2,619,500 5,887,640 - 2,619,500 5,887,640 8,507,140 73,051

Six Corners
Chicago, IL.......... 3,100,000 1,440,000 4,538,152 - 1,440,000 4,538,152 5,978,152 31,486

Spring Hill Fashion Corner
West Dundee, IL...... - 1,794,000 7,415,396 (9,000) 1,794,000 7,406,396 9,200,396 30,880

Crestwood Plaza
Crestwood, IL........ - 325,577 1,483,183 - 325,577 1,483,183 1,808,760 -

Park St. Claire
Schaumburg, IL....... - 319,578 1,205,672 (3,463) 319,578 1,202,209 1,521,787 -

Lansing Square
Lansing, IL.......... - 4,075,000 12,179,383 (9,800) 4,075,000 12,169,583 16,244,583 -

Summit of Park Ridge
Park Ridge, IL....... - 672,000 2,497,950 (2,364) 672,000 2,495,586 3,167,586 -

Grand and Hunt Club
Gurnee, IL........... - 969,840 2,622,575 (58,333) 969,840 2,564,242 3,534,082 -

Quarry Outlot
Hodgkins, IL......... - 522,000 1,278,431 - 522,000 1,278,431 1,800,431 -
------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------
Total $30,838,233 $24,705,743 70,309,978 (382,740) 24,705,743 69,927,238 94,632,981 1,109,038
============ =========== ============ =========== =========== ============ =========== ============

</TABLE>

<TABLE>
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III (continued)
Real Estate and Accumulated Depreciation

December 31, 1996

<CAPTION>
Date
Con-
stru- Date
cted Acq
------------ -----------

<S> <C> <C>
Salem Square
Countryside, IL...... 1973 08/96

Hawthorn Village
Vernon Hills, IL..... 1979 08/96

Six Corners
Chicago, IL.......... 1966 10/96

Spring Hill Fashion Corner
West Dundee, IL...... 1985 11/96

Crestwood Plaza
Crestwood, IL........ 1992 12/96

Park St. Claire
Schaumburg, IL....... 1994 12/96

Lansing Square
Lansing, IL.......... 1991 12/96

Summit of Park Ridge
Park Ridge, IL....... 1986 12/96

Grand and Hunt Club
Gurnee, IL........... 1996 12/96

Quarry Outlot
Hodgkins, IL......... 1996 12/96

</TABLE>

-39-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III (continued)

Real Estate and Accumulated Depreciation

December 31, 1996 and 1995

Notes:

(A) The initial cost to the Company represents the original purchase price
of the property, including amounts incurred subsequent to acquisition
which were contemplated at the time the property was acquired.

(B) The aggregate cost of real estate owned at December 31, 1996 and 1995
for federal income tax purposes was approximately $95,296,000 and
$17,486,000, unaudited.

(C) As part of the Montgomery-Goodyear, Hartford/Naperville Plaza, Nantucket
Square, Antioch Plaza, Mundelein Plaza, Regency Point, Prospect Heights
Plaza, Montgomery-Sears and Salem Square purchases, the Company will
receive rent under master lease agreements on the spaces currently
vacant for periods ranging from one year to eighteen months or until the
spaces are leased. Generally accepted accounting principles require
that as these payments are received, they be recorded as a reduction in
the purchase price of the properties rather than as rental income. The
Company has recorded $437,678 and $133,016 of such payments as of
December 31, 1996 and 1995, respectively.

(D) Reconciliation of real estate owned:

1996 1995
------------- -------------
Balance at beginning of year............... $ 17,512,432 -
Purchases of property...................... 77,421,408 17,594,313
Additions.................................. 136,819 51,135
Payments received under master leases...... (437,678) (133,016)
------------- -------------
Balance at end of year..................... $ 94,632,981 17,512,432
============= =============

(E) Reconciliation of accumulated depreciation:

Balance at beginning of year............... $ 169,894 -
Depreciation expense....................... 939,144 169,894
------------- -------------
Balance at end of year..................... $ 1,109,038 169,894
============= =============

-40-

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

There were no disagreements on accounting or financial disclosure during 1996.

PART III

Item 10. Directors and Executive Officers of the Registrant

Officers and Directors

The Company's current officers, directors and key employees are as follows:

Functional Title

Robert D. Parks......... President, Chief Executive Officer, Chief Operating
Officer and Affiliated Director
G. Joseph Cosenza....... Affiliated Director
Douglas R. Finlayson, MD Independent Director
Heidi N. Lawton......... Independent Director
Roland W. Burris........ Independent Director
Roberta S. Matlin....... Vice President - Administration
Kelly Tucek............. Secretary, Treasurer and Chief Financial Officer
Patricia A. Challenger.. Assistant Secretary

ROBERT D. PARKS (age 53) is a Director of The Inland Group, Inc., President,
Chairman and Chief Executive Office of Inland Real Estate Investment
Corporation and President, Chief Executive Officer, Chief Operating Officer and
Affiliated Director of Inland Real Estate Corporation.

Mr. Parks is responsible for the ongoing administration of existing investment
programs, corporate budgeting and administration for Inland Real Estate
Investment Corporation. He oversees and coordinates the marketing of all
investments and investor relations.

Prior to joining Inland, Mr. Parks was a school teacher in Chicago's public
schools. He received his B.A. Degree from Northeastern Illinois University and
his M.A. Degree from the University of Chicago. He is a registered Direct
Participation Program Principal with the National Association of Securities
Dealers, Inc., and he is a member of the Real Estate Investment Association and
a member of NAREIT.

-41-

G. JOSEPH COSENZA (age 53) is a Director and Vice Chairman of The Inland Group,
Inc. Mr. Cosenza oversees, coordinates and directs Inland's many enterprises
and, in addition, immediately supervises a staff of eight persons who engage in
property acquisition. Mr. Cosenza has been a consultant to other real estate
entities and lending institutions on property appraisal methods.

Mr. Cosenza received his B.A. Degree from Northeastern Illinois University and
his M.S. Degree from Northern Illinois University. From 1967 to 1968, he
taught at the LaGrange School District in Hodgkins, Illinois and from 1968 to
1972, he served as Assistant Principal and taught in the Wheeling, Illinois
School District. Mr. Cosenza has been a licensed real estate broker since 1968
and an active member of various national and local real estate associations,
including the National Association of Realtors and the Urban Land Institute.

Mr. Cosenza has also been Chairman of the Board of American National Bank of
DuPage and has served on the Board of Directors of Continental Bank of Oakbrook
Terrace. He is presently Chairman of the Board of Westbank in Westchester,
Illinois.

DOUGLAS R. FINLAYSON M.D. (age 57) has been an Independent Director of the
company since October 1994. Dr. Finlayson is a full-time family practice and
nutritional medicine physician with Partners in Primary Care in Rolling
Meadows, Illinois and Westlake Clinic in Ingleside, Illinois. He joined the
Clinic in 1992. From 1968 to 1971, Dr. Finlayson was a battalion surgeon in
the United States Army. Dr. Finlayson began private practice in 1971 joining
the staff of Northwest Community Hospital, and from 1982 until 1988, Dr.
Finlayson served as Medical Director of the Rolling Meadows Alcohol and Drug
Dependence Program of Lutheran Welfare Services. From 1988 until joining
Westlake Clinic in 1992, Dr. Finlayson practiced medicine on a part-time basis
primarily in the area of nutritional medicine. Since 1975, Dr. Finlayson has
been involved with buying and selling real estate assets, including vacant
land, speculative housing and rental properties, for his own account. In 1978,
Dr. Finlayson acquired and developed 100 acres in South Barrington, Illinois,
and as a member of the Church Building Committee, led the development of the
Willow Creek Community Church Campus. Since 1983, Dr. Finlayson has been
designing computer software systems for medical application including projects
for the Illinois Hospital Association. Dr. Finlayson holds a B.S. Degree in
Chemistry from the University of Illinois and a M.D. Degree from the University
of Heidelberg, Germany.

-42-

HEIDI N. LAWTON (age 35) has been an Independent Director since October 1994.
Ms. Lawton is managing broker, owner and president of Lawton Realty Group, an
Oak Brook, Illinois real estate brokerage firm which she founded in 1989.
Lawton Realty Group employs four full-time associates and generates sales
volume of approximately $20,000,000 annually. The firm specializes in
commercial, industrial and investment real estate brokerage. Ms. Lawton is
responsible for all aspects of the operations of the company. She also
structures real estate investments for clients--procuring partner/investors,
acquiring land and properties and obtaining financing for development and/or
acquisition. Prior to founding Lawton Realty Group and while she was earning
her B.S. Degree in business management from the National College of Education,
she was managing broker for VCR Realty in Addison, Illinois. While there, she
was engaged primarily in brokerage of industrial and commercial property. She
also provided property management services, including leasing, for a portfolio
of more than 100 properties, including condominium complexes, industrial,
apartment and small retail shopping centers. At the beginning of her career in
real estate, she acted as a general contractor building and selling single-
family homes as well as a retail center in Lombard, Illinois. As a licensed
real estate professional since 1982, she has served as a member of the
Certified Commercial Investment Members, secretary of the Northern Illinois
Association of Commercial Realtors, and is a past board member and commercial
director of the DuPage Association of Realtors.

ROLAND W. BURRIS (age 59) has been an Independent Director since January 1,
1996. Mr. Burris has been the Managing Partner of Jones, Ware & Grenard, a
Chicago law firm since June 1995, where he practices primarily in the areas of
environmental, banking and consumer protection. After obtaining his law degree
from Howard University Law School in 1963, Mr. Burris began a career in the
banking industry initially as a federal bank examiner and then at Continental
Illinois National Bank where he rose to the position of vice president. From
1973 to 1995, Mr. Burris was involved in State of Illinois government including
holding the positions of State Comptroller and Attorney General of the State of
Illinois. Mr. Burris completed his undergraduate studies at Southern Illinois
University and studied international law as an exchange student at the
University of Hamburg in Germany. Mr. Burris serves on many boards, including
the Illinois Criminal Justice Authority, the Financial Accounting Foundation,
the Law Enforcement Foundation of Illinois, the African American Citizens
Coalition on Regional Development and the Boy Scouts of America. He currently
serves as chair of the Illinois State Justice Commission. He is also serving
as an adjunct professor in the Master of Public Administration Program at
Southern Illinois University.

ROBERTA S. MATLIN (age 52) has been Vice President - Administration of the
Company since March 1995. Ms. Matlin joined Inland in 1984 as Director of
Investor Administration and currently serves as Senior Vice President-
Investments of IREIC directing the day-to-day internal operations. She is also
the President and a director of Inland Securities Corporation. Prior to
joining Inland, Ms. Matlin spent 11 years with the Chicago Region of the Social
Security Administration of the United States Department of Health and Human
Services. Ms. Matlin received her B.A. Degree from the University of Illinois.
She is registered with the National Association of Securities Dealers, Inc. as
a general securities principal.

-43-

KELLY TUCEK (age 34) joined Inland in 1989 and is the Secretary, Treasurer and
Chief Financial Officer of the Company since August 1996. Ms. Tucek has been
the Secretary and Treasurer of the Advisor since August 1996. Ms. Tucek is an
Assistant Vice President of Inland Real Estate Investment Corporation. As of
August 1996, Ms. Tucek is responsible for the Investment Accounting Department
Which includes the accounting for the Company and all public limited
partnership accounting functions along with quarterly and annual SEC filings.
Prior to joining Inland, Ms. Tucek was on the audit staff of Coopers and
Lybrand since 1984. She received her B.A. Degree in Accounting and Computer
Science from North Central College.

PATRICIA A. CHALLENGER (age 44) has been Assistant Secretary of the Company
since January 1995. Ms. Challenger joined Inland in 1985 to organize, develop
and supervise the asset management function for IREIC. She is currently a
Senior Vice President of IREIC. As head of the Asset Management Department,
she develops operating and disposition strategies for all investment owned
properties. Ms. Challenger is a licensed real estate broker, is a National
Association of Securities Dealers registered securities sales representative
and is a member of the Urban Land Institute.

-44-

Item 11. Executive Compensation

As of December 31, 1996, the Company incurred $10,500,108 of organizational and
offering costs. Pursuant to the terms of the offering, the Advisor is required
to pay organizational and offering expenses (excluding sales commissions, the
marketing contribution and the due diligence expense allowance fee) in excess
of 5.5% of the gross offering proceeds or all organization and offering
expenses (including selling commissions) which together exceed 15% of Gross
Offering Proceeds. As of the completion of the initial Offering,
organizational and offering did not exceed the 5.5% or 15% limitations. As of
December 31, 1996, organizational and offering costs of the Second Offering did
exceed the 5.5% and 15% limitations. The Company anticipates that these costs
will not exceed these limitations upon completion of the offerings, however,
any excess amounts will be reimbursed by the Advisor.

The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
offering and to the administration of the Company. Such costs to Affiliates
incurred relating to the offering were $692,248 as of December 31, 1996 of
which $27,976 was unpaid as of December 31, 1996. In addition, an Affiliate of
the Advisor serves as dealer manager of the offering and is entitled to receive
selling commissions, a marketing contribution and a due diligence expense
allowance fee from the Company in connection with the offering. Such amounts
incurred were $7,403,965 for the year ended December 31, 1996 of which $298,341
was unpaid as of December 31, 1996. As of December 31, 1996, approximately
$6,296,000 of these commissions has been broker/dealers.

The Company pays its Independent Directors an annual fee of $1,000. In
addition, Independent Directors receive $250 for attendance (in person or by
telephone) at each quarterly meeting of the Board or committee thereof.
Officers of the Company who are Directors are not paid fees.

-45-

Item 12. Security Ownership of Certain Beneficial Owners and Management

(a) As of December 31, 1995, the Advisor owned 20,000 Shares of Common Stock
which represented a 1% ownership of the Company.

(b) The officers and directors of the Company own as a group the following
Shares of the Company as of December 31, 1996:

Amount and Nature
of Beneficial Percent
Title of Class Ownership of Class
-------------- ----------------- -------------------
Common Stock 4,633 Shares Less than 1%

No officer or director of the Company possesses a right to acquire
beneficial ownership of Shares.

(c) There exists no arrangement, known to the Company, the operation of which
may, at a subsequent date, result in a change in control of the Company.

Item 13. Certain Relationships and Related Transactions

There were no significant transactions or business relationships with the
Advisor, Affiliates or their management other than those described in Items 10
and 11 above. Reference is made to Note (2) of the Notes to Financial
Statements (Item 8 of this Annual Report) for information regarding related
party transactions.

-46-

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) List of documents filed:

(1) The financial statements listed in the index at page 18 of this Annual
Report are filed as part of this Annual Report.

(2) Financial Statement Schedules:

Financial statement schedule for the year ended December 31, 1996 is
submitted herewith.

Page
----
Real Estate and Accumulated Depreciation (Schedule III)...... 38

Schedules not filed:

All schedules other than those indicated in the index have been omitted
as the required information is inapplicable or the information is
presented in the financial statements or related notes.

(3) Exhibits. Required by the Securities and Exchange Commission Regulation
S-K, Item 601. The following documents are incorporated by reference:

27 Financial Data Schedule

28 Prospectus to Form S-11

Registration Statement on Form S-11 and related exhibits, as amended and
supplemented, File No. 33-79012, filed under the Securities Act of 1933

(b) Reports on Form 8-K:

Report on Form 8-K dated November 13, 1996

Item 2 Acquisition or Disposition of assets
Item 5 Other Events
Item 7 Financial Statements and Exhibits

Report on Form 8-K dated October 18, 1996

Item 2 Acquisition or Disposition of Assets
Item 7 Financial Statements and Exhibits

No Annual Report or proxy materials for the year 1996 have been sent to the
Stockholders of the Company. An Annual Report and proxy materials will be sent
to the Stockholders subsequent to this filing and the Company will furnish
copies of such materials to the Commission when they are sent to the
Stockholders.

-47-

SIGNATURES

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

INLAND REAL ESTATE CORPORATION

By: Robert D. Parks
Chief Executive Officer
and Affiliated Director
Date: March 24, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

By: Robert D. Parks
Chief Executive Officer
and Affiliated Director
Date: March 24, 1997

By: Kelly Tucek By: Heidi N. Lawton
Chief Financial and Independent Director
Accounting Officer Date: March 24, 1997
Date: March 24, 1997

By: G. Joseph Cosenza By: Roland W. Burris
Affiliated Director Independent Director
Date: March 24, 1997 Date: March 24, 1997

By: Douglas R. Finlayson, M.D.
Independent Director
Date: March 24, 1997

-48-

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