INLAND REAL ESTATE CORP, 10-K, 1998-02-09

INLAND REAL ESTATE CORP
10-K, 1998-02-09
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, 1997

or
[ ] 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 60523
(Address of principal executive office) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None None

Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which registered:
Common 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 February 3, 1998, the aggregate market value of the Shares of Common Stock
held by non-affiliates of the registrant was approximately $271,891,000.

As of February 3, 1998, there were 27,259,012 Shares of Common Stock
outstanding.

Documents Incorporated by Reference: The Prospectus of the Registrant dated
July 14, 1997, and Supplement No. 7 to the Prospectus of the Registrant dated
January 14, 1998, 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.................................................... 8

Item 3. Legal Proceedings............................................. 10

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

Part II
-------
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.............................. 11

Item 6. Selected Financial Data....................................... 12

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 15

Item 8. Financial Statements and Supplementary Data................... 21

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 47

Part III
--------
Item 10. Directors and Executive Officers of the Registrant............ 47

Item 11. Executive Compensation........................................ 50

Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 51

Item 13. Certain Relationships and Related Transactions................ 51

Part IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................. 52

SIGNATURES............................................................. 53

-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 $10.00 per
share. 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 at
$10.00 per share, on a best efforts basis, (the "Second Offering"). As of July
10, 1997, the Company has received subscriptions for a total of 10,000,000
Shares, thereby completing the Second Offering. On July 14, 1997, the Company
commenced an offering of an additional 20,000,000 Shares at $10.00 per share,
on a best efforts basis, (the "Third Offering"). As of December 31, 1997, the
Company had received subscriptions for a total of 9,326,186 Shares from the
Third Offering. In addition, the Company has distributed 699,954 Shares
through the Company's Distribution Reinvestment Program ("DRP). As of December
31, 1997, the Company has repurchased 52,800 Shares through the Share
Repurchase Program. As a result, Gross Offering Proceeds total $249,231,797,
net of Shares repurchased 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 no employees during 1997, 1996 and 1995.

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 on such properties, subsequent to
acquisition. 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, 1997, the Company has acquired fee ownership of forty-four
properties.
<CAPTION>

Gross Mortgages
Leasable Payable Current
Area Date Year at No. of Anchor
Property (Sq. Ft.) Acq. Built Dec 31, 1997 Tenants Tenants*
- ---------------------------- ---------- ------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Single-User Retail Property
- ---------------------------
Walgreens, Decatur, IL 13,500 01/95 1988 $ 727,472 1 Walgreens Pharmacy

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

Ameritech, Joliet, IL 4,505 05/97 1995 522,375 1 Ameritech

Dominicks-Schaumburg
Schaumburg, IL 71,400 05/97 1996 5,345,500 1 Dominick's Finer Foods

Dominicks-Highland Park
Highland Park, IL 71,442 06/97 1996 6,400,000 1 Dominick's Finer Foods

Dominicks-Glendale Heights
Glendale Heights, IL 68,923 09/97 1997 - 1 Dominick's Finer Foods

Party City Store
Oak Brook Terrace, IL 10,000 11/97 1985 - 1 Party City

Eagle Country Market, Roselle, IL 42,283 11/97 1990 - 1 Eagle Foods

Neighborhood Retail Centers
- ---------------------------
Eagle Crest Shopping Center
Naperville, IL 67,650 03/95 1991 2,350,000 12 Eagle Foods

Montgomery-Goodyear 12,903 09/95 1991 630,000 2 Goodyear Tire & Rubber
Montgomery, IL Merlin Corp.

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 18 Hallmark
Schaumburg, IL Trak Auto
The Dental Store Ltd.

Antioch Plaza, Antioch, IL 19,810 12/95 1995 875,000 5 Blockbuster Video
Radio Shack

Mundelein Plaza, Mundelein, IL 68,056 03/96 1990 2,810,000 8 Sears

Regency Point, Lockport, IL 49,826 04/96 1993 4,373,461 18 Walgreens Pharmacy
5,050 04/96 1995 Ace Hardware

Prospect Heights, 28,080 06/96 1985 1,095,000 4 Walgreens Pharmacy
Prospect Hts., IL Blockbuster Video

-4-

Neighborhood Retail Centers (cont.)
- -----------------------------------
Montgomery-Sears, Montgomery, IL 34,600 06/96 1990 1,645,000 5 Sears Paint & Hardware
Blockbuster Video

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 Dominick's Finer Foods
Walgreens Pharmacy

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

Spring Hill Fashion Corner
West Dundee, IL 125,198 11/96 1985 4,690,000 20 TJ Maxx
Michaels Crafts

Crestwood Plaza, Crestwood, IL 20,044 12/96 1992 904,380 2 Entenmann's
Pet Supplies Plus

Park St. Claire, Schaumburg, IL 11,859 12/96 1994 762,500 2 Ameritech
Hallmark Showcase

Lansing Square, Lansing, IL 233,508 12/96 1991 8,150,000 17 Sam's Club
Baby Superstore
Office Max
Summit of Park Ridge
Park Ridge, IL 33,252 12/96 1986 1,600,000 13 LePeep Rest.
Giappos Pizza

Grand and Hunt Club, Gurnee, IL 21,222 12/96 1996 1,796,000 2 Jewelry 3
Super Crown Books

Quarry Outlot, Hodgkins, IL 9,650 12/96 1996 900,000 3 Dunkin Donuts/
Baskin Robbins
The Casual Male
Jewelry 3

Maple Park Place, Bolingbrook, IL 215,662 01/97 1992 7,650,000 19 K-Mart Corporation
Eagle Foods
Aurora Commons, Aurora,IL 127,292 01/97 1988 9,392,602 24 Jewel/Osco

Lincoln Park Place, Chicago, IL 10,678 01/97 1990 1,050,000 1 Lechters Housewares

-5-

Gross Mortgages
Leasable Payable Current
Area Date Year at No. of Anchor
Property (Sq. Ft.) Acq. Built Dec 31, 1997 Tenants Tenants*
- ---------------------------- ---------- ------- -------- ------------ ---------- ----------
Neighborhood Retail Centers (cont.)
- -----------------------------------
Niles Shopping Center, Niles, IL 26,117 04/97 1982 1,617,500 5 Jennifer Convertibles
Acel Cellular
Wolf Camera & Video

Mallard Crossing,
Elk Grove Village, IL 82,949 05/97 1993 - 10 Eagle Foods

Cobblers Crossing, Elgin, IL 102,643 05/97 1993 - 12 Jewel Food Store

Calumet Square, Calumet City, IL 39,936 06/97 1967/ 1,032,920 3 Aronson Furniture
1994 Super Trak Warehouse

Sequoia Shopping Center
Milwaukee, WI 35,407 06/97 1988 1,505,000 12 Kinko's
U.S. Post Office
Play It Again Sports

Riversquare Shopping Center
Naperville, IL 58,158 06/97 1988 - 18 Salon Suites Limited
Harbour Contractors, Inc.

Rivertree Court, Vernon Hills, IL 299,055 07/97 1988 15,700,000 41 Best Buy
Plitt Theaters

Shorecrest Plaza, Racine, WI 91,176 07/97 1977 - 14 Piggly Wiggly Grocery
Wisconsin Health & Fitness

Dominicks-Countryside
Countryside, IL 62,344 12/97 1975 - 1 Dominick's Finer Foods

Terramere Plaza,
Arlington Heights, IL 40,965 12/97 1980 - 17 None

Wilson Plaza, Batavia, IL 11,160 12/97 1986 - 7 White Hen Pantry
Dimples Donuts
Riverside Liquors

Iroquois Center, Naperville, IL 140,981 12/97 1983 - 26 Total Beverage
Sears

Fashion Square, Skokie, IL 83,959 12/97 1984 6,800,000 13 Cost Plus
Designer Shoe Outlet

Naper West, Naperville, IL 165,311 12/97 1985 - 23 Douglas TV
TJ Maxx

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

</TABLE>

-6-

The Company's real property investments are described on pages 75-98 of the
Prospectus of the Company dated July 14, 1997 (the "Prospectus"), and in
Supplement No. 7 to the Prospectus dated January 14, 1998 ("Supplement No. 7"),
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 currently 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 Company does not believe any risk exists due to a concentration of any
single tenant at the centers. Currently the largest single tenant is
Dominick's Finer Foods, which has five leases totaling 321,049 square feet, or
approximately 9.5% of the total gross leasable area owned by the Company.
Annualized base rental income of these five leases is projected to be
$3,739,348 for the year ended December 31, 1998, or approximately 10.87% of the
total annualized base rental income based on the current properties.

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.

The Company has reviewed its current computer systems and does not anticipate
any future problems relating to the year 2000.

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.

-7-

Item 2. Properties

As of December 31, 1997, the properties owned by the Company included thirty-six
Neighborhood Retail Centers and eight single-user retail properties. Each of
the properties, with the exception of two are located in Illinois. The other
two properties are located in Wisconsin. 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 1997 and
1996. N/A indicates the property was not owned by the Company at the end of the
quarter.

1996 1997
------------------------ ------------------------
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% 97% 97% 97% 97%
Naperville, Illinois
Montgomery-Goodyear 100% 100% 100% 100% 77% 77% 77% 77%
Montgomery, Illinois
Hartford/Naperville Plaza 100% 100% 100% 100% 100% 100% 94% 100%
Naperville, Illinois
Nantucket Square 81% 81% 94% 85% 94% 94% 96% 96%
Schaumburg, Illinois
Antioch Plaza 49% 49% 49% 57% 59% 59% 68% 68%*
Antioch, Illinois
Mundelein Plaza 100% 100% 100% 100% 100% 96% 97% 100%
Mundelein, IL
Regency Point N/A 97% 97% 97% 100% 100% 97% 97%
Lockport, IL
Prospect Heights N/A 78% 100% 100% 83% 83% 83% 83%*
Prospect Heights, IL
Montgomery-Sears N/A 85% 85% 85% 85% 85% 85% 95%*
Montgomery, IL
Zany Brainy N/A N/A 100% 100% 100% 100% 100% 100%
Wheaton, IL
Salem Square N/A N/A 97% 97% 97% 97% 97% 97%*
Countryside, IL
Hawthorn Village N/A N/A 99% 98% 97% 98% 99% 99%
Vernon Hills, IL
Six Corners N/A N/A N/A 92% 94% 94% 94% 90%*
Chicago, IL
Spring Hill Fashion Ctr. N/A N/A N/A 95% 96% 96% 96% 100%
West Dundee, IL
Crestwood Plaza N/A N/A N/A 100% 100% 100% 100% 100%
Crestwood, IL
Park St. Claire N/A N/A N/A 100% 100% 100% 100% 100%
Schaumburg, IL
Lansing Square N/A N/A N/A 89% 90% 90% 90% 90%
Lansing, IL

-8-

Summit of Park Ridge N/A N/A N/A 81% 82% 81% 84% 83%*
Park Ridge, IL
Grand and Hunt Club N/A N/A N/A 100% 100% 100% 100% 100%
Gurnee, IL
Quarry Outlot N/A N/A N/A 100% 100% 100% 100% 100%
Hodgkins, IL
Maple Park Place N/A N/A N/A N/A 99% 97% 98% 98%
Bolingbrook, IL
Aurora Commons N/A N/A N/A N/A 99% 100% 100% 98%*
Aurora, IL
Lincoln Park Place N/A N/A N/A N/A 100% 100% 100% 60%*
Chicago, IL
Ameritech N/A N/A N/A N/A N/A 100% 100% 100%
Joliet, IL
Dominicks-Schaumburg N/A N/A N/A N/A N/A 100% 100% 100%
Schaumburg, IL
Dominicks-Highland Park N/A N/A N/A N/A N/A 100% 100% 100%
Highland Park, IL
Niles Shopping Center N/A N/A N/A N/A N/A 100% 87% 60%*
Niles, IL
Mallard Crossing N/A N/A N/A N/A N/A 95% 95% 95%*
Elk Grove Village, IL
Cobblers Crossing N/A N/A N/A N/A N/A 91% 89% 89%*
Elgin, IL
Calumet Square N/A N/A N/A N/A N/A 100% 100% 100%
Calumet City, IL
Sequoia Shopping Center N/A N/A N/A N/A N/A 96% 97% 93%*
Milwaukee, WI
Riversquare Shopping Ctr. N/A N/A N/A N/A N/A 100% 100% 95%
Naperville, IL
Rivertree Court N/A N/A N/A N/A N/A N/A 97% 99%*
Vernon Hills, IL
Shorecrest Plaza N/A N/A N/A N/A N/A N/A 96% 96%*
Racine, WI
Dominicks-Glendale Heights N/A N/A N/A N/A N/A N/A 100% 100%
Glendale Heights, IL
Party City Store
Oak Brook Terrace, IL N/A N/A N/A N/A N/A N/A N/A 100%
Eagle Country Market
Roselle, IL N/A N/A N/A N/A N/A N/A N/A 100%
Dominicks-Countryside
Countryside, IL N/A N/A N/A N/A N/A N/A N/A 100%
Terramere Plaza
Arlington Heights, IL N/A N/A N/A N/A N/A N/A N/A 80%
Wilson Plaza, Batavia, IL N/A N/A N/A N/A N/A N/A N/A 100%
Iroquois Center
Naperville, IL N/A N/A N/A N/A N/A N/A N/A 81%
Fashion Square, Skokie, IL N/A N/A N/A N/A N/A N/A N/A 88%
Naper West, Naperville, IL N/A N/A N/A N/A N/A N/A N/A 86%

-9-

* 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, 1997 for
Montgomery-Sears, Mallard Crossing, Sequoia Shopping Center, Shorecrest
Plaza and Rivertree Court, and 98% economic occupancy for Cobblers Crossing.
The master lease agreements resulted in 100% economic occupancy through June
30, 1997 for Antioch Plaza and through August 1, 1997 for Salem Square, at
which times these master leases expired.

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
90% economic occupancy for Summit of Park Ridge at December 31, 1997.

As of November 1997, the Company began receiving master lease payments on
spaces which were vacated at Lincoln Park Place and Niles Shopping Center.
The master lease agreements result in 100% economic occupancy at December
31, 1997 for Lincoln Park Place and 73% economic occupancy for Niles
Shopping Center.

The Company continues to collect rental income on space vacated at Six
Corners and Aurora Commons. This income results in 94% economic occupancy
at December 31, 1997 for Six Corners and 100% economic occupancy for Aurora
Commons.

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

The Company has received termination fees resulting in 100% economic
occupancy for Prospect Heights through September 30, 1997.

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 1997.

-10-

PART II

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

Market Information

As of December 31, 1997, there were 10,305 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 136 of the Prospectus, which is incorporated herein by reference.

Distributions

The Company declared distributions to Stockholders totaling $.86 per weighted
average shares outstanding during 1997. Of this amount, $.64 qualifies as
distributions taxable as ordinary income for 1997 and the remainder constitutes
a return of capital for tax purposes.

Sales of Unregistered Securities

Options to purchase up to 12,500 Shares have been granted as of December 31,
1997 to the Independent Directors pursuant to the Independent Director Stock
Option Plan. On October 24, 1996, 1,000 shares of common stock were sold to
Roland Burris, a Director of the Company, for an aggregate of $9,050, pursuant
to the exercise of options by Mr. Burris. Since the transaction did not involve
any public offering or general solicitation and Mr. Burris had access to the
Company's registration statement and knowledge and experience in financial and
business matters to evaluate the transaction, the Company relied on the
exemption from registration provided in Section 4(2) of the Securities Act in
order to issue the shares to Mr. Burris.

-11-

Item 6. Selected Financial Data

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

For the years ended December 31, 1997, 1996 and 1995

(not covered by the Independent Auditors' Report)

1997 1996 1995
---- ---- ----
Total assets.................... $ 333,590,131 104,508,686 18,750,877

Mortgages payable............... $ 106,589,710 30,838,233 750,727

Total income.................... $ 29,421,585 6,327,734 1,180,422

Net income...................... $ 8,647,221 2,452,221 496,514

Net income per share (b)........ $ .57 .55 .53

Distributions declared.......... $ 13,127,597 3,704,943 736,627

Distributions per share (b)..... $ .86 .82 .78

Funds from Operations (b)(c).... $ 13,203,666 3,391,365 666,408

Funds available for
distribution (c).............. $ 13,141,242 3,680,824 787,011

Cash flows provided by operating
activities.................... $ 15,923,839 5,529,709 978,350

Cash flows used by investing
activities.................... $ (146,994,619) (68,976,841) (6,577,843)

Cash flows provided by financing
activities.................... $ 173,724,632 71,199,936 6,327,490

Weighted average number of common
shares outstanding............ 15,225,983 4,494,620 943,156

(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 $.86 per share

-12-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

For the years ended December 31, 1997, 1996 and 1995

(not covered by the Independent Auditors' Report)

Distributions for the year ended December 31, 1997, represented 99.4% 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 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 1997, $3,388,364 (or 25.81% of the $13,127,597
Distribution paid for 1997 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, or
approximately $9,252,000 for 1997. 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 of real property
and amortization and other non-cash items. FFO and funds available for
distribution are calculated as follows:

Year ended December 31,
1997 1996
---- ----
Net income........................... $ 8,647,221 2,452,221
Depreciation......................... 4,556,445 939,144
------------ ------------
Funds from operations(1)........... 13,203,666 3,391,365

Normal amortizing principal
payments of debt................... (67,300) (55,670)
Deferred rent receivable (2)......... (654,978) (119,225)
Acquisition cost expenses (3)........ 249,493 26,676
Rental income received under
master lease agreements (4)........ 410,361 437,678
------------ ------------
Funds available for distribution... $13,141,242 3,680,824
============ ============

-13-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

For the years ended December 31, 1997, 1996 and 1995

(not covered by the Independent Auditors' Report)

(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.

(2) 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.

(3) Acquisition cost expenses include costs and expenses relating to the
acquisition of properties. These costs are estimated to be up to
.5% of the Gross Offering Proceeds and are paid from the Proceeds of
the Offering.

(4) 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.

-14-

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 on 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 July 24, 1996, the Company had received subscriptions for a total of
5,000,000 Shares, offered on a best efforts basis, at $10.00 per Share, thereby
completing the Company's initial Offering. On July 24, 1996, the Company
commenced an offering of an additional 10,000,000 shares, the Second Offering,
at $10.00 per Share, on a best efforts basis. As of July 10, 1997, the Company
had received subscriptions for a total of 10,000,000 Shares, thereby completing
the Company's Second Offering. On July 14, 1997, the Company commenced an
offering of an additional 20,000,000 Shares, the Third Offering, at $10.00 per
Share, on a best efforts basis. As of December 31, 1997, the Company had
received subscriptions for a total of 9,326,186 Shares from the Third Offering.
In addition, as of December 31, 1997, the Company has distributed 699,954 Shares
through the Company's Distribution Reinvestment Program. As of December 31,
1997, the Company has repurchased 52,800 Shares through the Company's Share
Repurchase Program. As a result, Gross Offering Proceeds, total $249,231,797,
net of Shares repurchased through the Share Repurchase Program.

The Company's capital needs and resources are expected to undergo changes as a
result of the completion of the Company's first follow-on public offering of
Shares, the commencement of the second follow-on Offerings 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 upon 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.

-15-

Cash and cash equivalents consists of cash and short-term investments. Cash and
cash equivalents, at December 31, 1997 and December 31, 1996, were $51,145,587
and $8,491,735 respectively. The increase in cash and cash equivalents since
December 31, 1996 is due to the additional Offering proceeds raised and
additional loan proceeds from financing secured by the Company's properties.
Partially offsetting the increase in cash and cash equivalents was the purchase
of additional properties since December 31, 1996 and the payment of Offering
Costs relating to the Second and Third Offerings. The Company intends to use
cash and cash equivalents to purchase additional properties, to pay
distributions and to pay Offering Costs.

As of December 31, 1997, the Company had acquired forty-four properties. 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. Commencing with the fourth quarter of 1996, the
Company increased the monthly distributions from 8.0% to 8.3% per annum on
weighted average shares. Beginning March 1, 1997, the Company increased the
monthly distribution paid to 8.5% per annum on weighted average shares.
Beginning August 1, 1997, the Company increased the monthly distribution paid to
8.7% per annum on weighted average shares. Distributions declared for the year
ended December 31, 1997 were $13,127,597, of which $3,388,364 represents a
return of capital for federal income tax purposes.

Management of the Company monitors the various qualification tests the Company
must meet to maintain its status as a real estate investment trust. Large
ownership of the Company's stock is tested upon purchase 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 determines, on a quarterly basis, that 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" are met. On an ongoing basis, as due diligence is performed by
management of both the Company and the 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, 1997, the Company qualified as a
REIT.

Cash Flows From Operating Activities

Net cash provided by operating activities increased from $978,350 for the year
ended December 31, 1995 to $5,529,709 for the year ended December 31, 1996 to
$15,923,839 for the year ended December 31, 1997. These increases are due
primarily to the purchase of additional properties. As of December 31, 1997 the
Company had acquired forty-four properties, as compared to twenty-one properties
as of December 31, 1996, and six properties as of December 31, 1995.

-16-

Cash Flows From Investing Activities

Cash flows used in investing activities were utilized primarily for the purchase
of and additions to properties. In addition, the Company made deposits totaling
$3,018,530 for two centers to be purchased in 1998.

Cash Flows From Financing Activities

For the year ended December 31, 1997, the Company generated $173,724,632 of cash
flows from financing activities as compared to $71,199,936 of cash flows
generated from financing activities for the year ended December 31, 1996 and
$6,327,490 for the year ended December 31, 1995. These increases are due
primarily to the increase in proceeds raised from the Offering of $168,559,450
for the year ended December 31, 1997, as compared to $61,147,146 of Offering
proceeds raised for the year ended December 31, 1996 and $19,803,163 of Offering
proceeds raised for the year ended December 31, 1995. These increases are also
due to $43,926,176 in financing placed on fifteen of the Company's properties
for the year ended December 31, 1997, as compared to $25,670,000 in financing
placed on twelve of the Company's properties for the year ended December 31,
1996. These increases are partially offset by an increase in the cash used for
the payment of Offering costs for the years ended December 31, 1997 and 1996.
These increases are also partially offset by an increase in the amount of
distributions paid for the year ended December 31, 1997 of $11,899,431 as
compared to the distributions paid for the year ended December 31, 1996 of
$3,285,528 and distributions paid for the year ended December 31 ,1995 of
$607,095.

In December 1997, the Company committed to additional financing secured by
Cobbler Crossing and Shorecrest Shopping Center properties totaling $8,454,500
from an unaffiliated lender. The funding of these loans is to occur in early
1998. The mortgage loan secured by Cobbler Crossing will have a term of seven
years and, prior to maturity date, will require payments of interest only, fixed
at 7.00%. The mortgage loan secured by Shorecrest Shopping Center will have a
term of five years and, prior to maturity date, will require payments of
interest only, fixed at 7.10%.

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, 1997, organizational and offering costs
did not exceed either of these limitations.

-17-

Results of Operations

As of December 31, 1997, subscriptions for a total of 25,026,140 Shares had been
received from the public resulting in $249,231,797 in Gross Offering Proceeds,
which includes the Advisor's capital contribution of $200,000 and Shares
purchased through the DRP. At December 31, 1997, the Company owned thirty-six
Neighborhood Retail Centers and eight single-user retail properties.

Total income for the years ended December 31, 1997, 1996 and 1995 was
$29,421,585, $6,327,734 and $1,180,422 respectively. These increases were due
to the purchase of additional properties in 1997 and 1996. As of December 31,
1997, the Company had acquired forty-four properties, as compared to twenty-one
properties as of December 31, 1996 and six properties as of December 31, 1995.
The purchase of additional properties also resulted in increases in property
operating expenses 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.

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 as well as
financing placed on previously acquired properties.

The increase in mortgage interest to Affiliates and non-affiliates for the year
ended December 31, 1997, as compared to the year ended December 31, 1996, is due
to financing placed on previously acquired centers as well as mortgages assumed
as part of the purchases of Regency Point, Aurora Commons, Rivertree Court and
Fashion Square. The mortgages payable totaled $106,589,710 for the year ended
December 31, 1997 as compared to $30,838,233 for the year ended December 31,
1996. The Company continues to have a mortgage payable to an Affiliate
collateralized by the Walgreens, Decatur property.

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, 1997, as compared to the year ended December 31, 1996
and 1995, is due to the management of an increased number of real estate assets.

The increase in acquisition cost expenses to Affiliates and non-affiliates is
due to the increased number of properties considered for acquisition by the
Company and not purchased.

-18-

Subsequent Events

As of February 3, 1998, subscriptions for a total of 27,259,012 Shares were
received, bringing total gross offering proceeds to approximately $272,544,000.

In January 1998, the Company paid a distribution of $1,777,113 to the
Stockholders.

On January 2, 1998, the Company purchased the Woodfield Plaza Shopping Center
from an unaffiliated third party for approximately $19,200,000. The property is
located in Schaumburg, Illinois and contains approximately 177,418 square feet
of leasable space. Its anchor tenants include Kohl's, Barnes and Noble and
Linens N' Things.

On January 8, 1998, the Company purchased The Shops of Coopers Grove from an
unaffiliated third party for approximately $5,700,000. The property is located
in Country Club Hills, Illinois and contains approximately 72,518 square feet of
leasable space. Its anchor tenant is Eagle Food Center.

On January 15, 1998, the Company made a $600,000 paydown of the bond secured by
the Fashion Square property.

On January 22, 1998, the Company purchased the West Chicago Dominick's property
from an unaffiliated third party for approximately $6,300,000. The property is
located in West Chicago, Illinois and contains approximately 77,000 square feet
of leasable space. It's sole tenant is Dominick's.

In January 1998, the Company obtained additional financing secured by the
Dominick's Glendale Heights and Riversquare Shopping Center properties totaling
$7,150,000 from an unaffiliated lender. Loan fees total $53,625 in connection
with these mortgage loans. The mortgage loans have a term of seven years and,
prior to maturity date, requires payment of interest only. Interest is at 7.0%
on the Dominick's Glendale Heights loan and 7.15% on the Riversquare Shopping
Center loan.

On January 30, 1998, the Company purchased Maple and Belmont property from an
unaffiliated third party for approximately $3,165,000. The property is located
in Downers Grove, Illinois and contains approximately 31,298 square feet of
leasable space. Anchor tenants include J.C. Licht, Goodyear Tire and Copy
Center.

On February 2, 1998, the Company purchased Orland Park Retail from an
unaffiliated third party for approximately $1,250,000. The property is located
in Orland Park, Illinois and contains approximately 8,500 square feet of
leasable space. Anchor tenants include Video Update and All Cleaners.

At the completion of the Third Offering, the Company contemplates an additional
offering (the "Fourth Offering") for 25,000,000 shares at $11.00 per Share, on a
best efforts basis, plus 2,000,000 Shares to be issued through the Company's DRP
at $10.45 per Share. The Company filed a registration statement with Securities
and Exchange Commission on January 30, 1998.

On behalf of the Company, the Advisor is currently exploring the purchase of
additional shopping centers from unaffiliated third parties.

-19-

Impact of Accounting Principles

Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information" was issued in 1997. The Statement is
effective for fiscal years beginning after December 31, 1997. This Statement
requires the Company to report financial and descriptive information about its
reportable operating segments.

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 7(a). Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in any hedge transactions or derivative financial
instruments.

-20-

Item 8. Financial Statements and Supplementary Data

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Index
-----
Page
----

Independent Auditors' Report............................................. 22

Financial Statements:

Balance Sheets, December 31, 1997 and 1996............................. 23

Statements of Operations for the years ended
December 31, 1997, 1996 and 1995..................................... 25

Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995..................................... 26

Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995..................................... 27

Notes to Financial Statements.......................................... 29

Real Estate and Accumulated Depreciation (Schedule III).................. 43

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.

-21-

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, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, 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 LLP

Chicago, Illinois
January 23, 1998

-22-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Balance Sheets

December 31, 1997 and 1996

Assets
------

1997 1996
---- ----
Investment properties (Notes 1 and 4):
Land............................................ $ 75,801,319 24,705,743
Building and improvements....................... 200,509,519 69,927,238
------------- -------------
276,310,838 94,632,981
Less accumulated depreciation................... 5,665,483 1,109,038
------------- -------------
Net investment properties....................... 270,645,355 93,523,943
------------- -------------
Cash and cash equivalents including amount
held by property manager (Note 1)............... 51,145,587 8,491,735
Restricted cash (Note 1).......................... 2,073,799 122,043
Accounts and rents receivable (Note 5)............ 4,926,643 1,914,756
Deposits and other assets (Note 7)................ 3,924,431 95,828
Deferred organization costs (net of
accumulated amortization of $10,985 and $5,492
at December 31, 1997 and 1996, respectively)
(Note 1)........................................ 16,477 21,970
Loan fees (net of accumulated amortization
of $131,266 and $11,875 at December 31, 1997
and 1996, respectively,) (Note 1)............... 857,839 338,411
------------- -------------

Total assets.................................. $ 333,590,131 104,508,686
============= =============

See accompanying notes to financial statements.

-23-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Balance Sheets
(continued)

December 31, 1997 and 1996

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

1997 1996
Liabilities: ---- ----
Accounts payable................................ $ 47,550 289,912
Accrued offering costs to Affiliates (Note 2)... 544,288 298,341
Accrued offering costs to non-affiliates........ 36,574 4,236
Accrued interest payable to Affiliates.......... 4,641 4,718
Accrued interest payable to non-affiliates...... 560,821 52,402
Accrued real estate taxes....................... 7,031,732 2,770,889
Distributions payable (Note 9).................. 1,777,113 548,947
Security deposits............................... 754,359 247,769
Mortgages payable (Note 6)...................... 106,589,710 30,838,233
Unearned income................................. 495,535 64,590
Other liabilities............................... 493,116 32,820
Due to Affiliates (Note 2)...................... 337,825 255,591
------------- -------------
Total liabilities............................. 118,673,264 35,408,448
------------- -------------

Stockholders' Equity (Notes 1 and 2):
Common stock, $.01 par value, 106,000,000 Shares
authorized; 25,026,140 and 24,973,340 issued and
outstanding at December 31, 1997 and 8,144,116
and 8,137,766 Shares issued and outstanding
at December 31, 1996, respectively............ 249,470 81,000
Additional paid-in capital (net of offering
costs of $28,341,719 and $10,500,108 at
December 31, 1997 and 1996, respectively, of
which $24,172,634 and $8,096,213 was paid
to Affiliates, respectively).................. 220,640,608 70,512,073
Accumulated distributions in excess
of net income................................. (5,973,211) (1,492,835)
------------- -------------
Total stockholders' equity.................... 214,916,867 69,100,238
------------- -------------
Commitments and contingencies (Note 8)............

Total liabilities and stockholders' equity........ $333,590,131 104,508,686
============= =============

See accompanying notes to financial statements.

-24-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Operations

For the years ended December 31, 1997, 1996 and 1995

1997 1996 1995
Income: ---- ---- ----
Rental income (Notes 1 and 5)..... $21,112,365 4,467,903 869,485
Additional rental income.......... 6,592,983 1,336,809 228,024
Interest income................... 1,615,520 438,188 82,913
Other income...................... 100,717 84,834 -
------------ ------------ ------------
29,421,585 6,327,734 1,180,422
------------ ------------ ------------
Expenses:
Professional services to
Affiliates...................... 29,304 16,476 7,277
Professional services to
non-affiliates.................. 96,681 46,790 1,615
General and administrative
expenses to Affiliates.......... 115,468 42,904 -
General and administrative
expenses to non-affiliates...... 241,501 77,389 13,880
Advisor asset management fee...... 843,000 238,108 -
Property operating expenses to
Affiliates...................... 1,120,429 229,307 46,791
Property operating expenses to
non-affiliates.................. 7,742,595 1,643,867 279,930
Mortgage interest to Affiliates... 86,455 64,165 146,821
Mortgage interest to
non-affiliates.................. 5,568,109 533,320 17,340
Depreciation...................... 4,556,445 939,144 169,894
Amortization...................... 124,884 17,367 -
Acquisition cost expenses to
Affiliates...................... 194,187 - -
Acquisition cost expenses to
non-affiliates.................. 55,306 26,676 360
------------ ------------ ------------
20,774,364 3,875,513 683,908
------------ ------------ ------------
Net income...................... $ 8,647,221 2,452,221 496,514
============ ============ ============

Net income per weighted average
common stock shares outstanding
(15,225,983, 4,494,620 and 943,156
for the years ended December 31,
1997, 1996 and 1995, respectively) $ .57 .55 .53
============ ============ ============

See accompanying notes to financial statements.

-25-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Stockholders' Equity

For the years ended December 31, 1997, 1996 and 1995

Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
----------- ------------ ------------ ------------
Balance January 1, 1995... $ 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
$7,378,933)............. 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

Net income................ - - 8,647,221 8,647,221
Distributions declared
($.86 per weighted average
common stock shares
outstanding)............ - - (13,127,597) (13,127,597)
Proceeds from Offering (net
of Offering costs of
$17,841,611)............ 168,935 150,548,904 - 150,717,839
Repurchases of Shares..... (465) (420,369) - (420,834)
----------- ------------ ------------ -------------
Balance December 31, 1997. $ 249,470 220,640,608 (5,973,211) 214,916,867
=========== ============ ============ =============

See accompanying notes to financial statements.

-26-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Cash Flows

For the years ended December 31, 1997, 1996 and 1995

1997 1996 1995
Cash flows from operating activities: ---- ---- ----
Net income........................ $ 8,647,221 2,452,221 496,514
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation.................... 4,556,445 939,144 169,894
Amortization.................... 124,884 17,367 -
Rental income under master
lease agreements.............. 410,361 437,678 133,016
Straight line rental income..... (654,978) (119,225) (12,413)
Changes in assets and liabilities:
Accounts and rents receivable. (2,356,909) (1,461,708) (321,410)
Other assets.................. (810,073) 62,295 (4,006)
Accounts payable.............. (242,362) 283,038 6,875
Accrued interest payable...... 508,342 51,878 5,242
Accrued real estate taxes..... 4,260,843 2,396,709 374,180
Security deposits............. 506,590 193,286 54,483
Other liabilities............. 460,296 3,968 28,852
Due to Affiliates............. 82,234 248,314 7,277
Unearned income............... 430,945 24,744 39,846
Net cash provided by operating -------------- ------------- -------------
activities........................ 15,923,839 5,529,709 978,350
-------------- ------------- -------------
Cash flows from investing activities:
Restricted cash................... (1,951,756) - -
Additions to investment properties (836,962) (136,819) (51,135)
Purchase of investment properties. (141,187,371) (68,717,979) (6,376,708)
Deposit for tenant improvements... - (122,043) (150,000)
Deposits on investment properties. (3,018,530) - -
Net cash used in investing -------------- ------------- -------------
activities........................ (146,994,619) (68,976,841) (6,577,843)
-------------- ------------- -------------
Cash flows from financing activities:
Repayment of loan from Advisor.... - - (193,300)
Proceeds from offering............ 168,559,450 61,147,147 19,803,163
Repurchase of Shares.............. (420,834) (30,321) (26,809)
Payments of offering costs........ (17,563,326) (7,305,153) (2,514,129)
Loan proceeds..................... 43,926,176 25,670,000 -
Loan fees......................... (638,819) (350,286) -

See accompanying notes to financial statements.

-27-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Statements of Cash Flows
(continued)

For the years ended December 31, 1997, 1996 and 1995

1997 1996 1995
---- ---- ----
Distributions paid................ $ (11,899,431) (3,285,528) (607,095)
Repayment of notes from Affiliate. (8,000,000) (3,271,185) -
Principal payments of debt........ (238,584) (1,374,738) (10,106,878)
Payment of deferred organization
costs........................... - - (27,462)
Net cash provided by financing -------------- ------------- -------------
activities........................ 173,724,632 71,199,936 6,327,490
-------------- ------------- -------------
Net increase in cash and
cash equivalents.................. 42,653,852 7,752,804 727,997
Cash and cash equivalents at
beginning of year................. 8,491,735 738,931 10,934
-------------- ------------- -------------
Cash and cash equivalents at
end of year....................... $ 51,145,587 8,491,735 738,931
============== ============= =============

Supplemental schedule of noncash investing and financing activities:

1997 1996 1995
---- ---- ----
Purchase of investment properties.. $(181,251,256) (77,421,408) (17,594,313)
Assumption of mortgage debt...... 32,063,885 5,803,429 4,595,178
Note payable to Affiliate........ 8,000,000 2,900,000 6,622,427
-------------- ------------- -------------
$(141,187,371) (68,717,979) (6,376,708)
============== ============= ============

Distributions payable.............. $ 1,777,113 548,947 129,532
============== ============= ============

Cash paid for interest............. $ 5,146,222 545,607 158,919
============== ============= ============

See accompanying notes to financial statements.

-28-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements

For the years ended December 31, 1997, 1996, and 1995

(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, ("Initial Offering") of 5,000,000 shares of common stock
("Shares") at $10.00 per Share. 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 at $10.00 per Share, on a best efforts basis, (the "Second
Offering"). As of July 10, 1997, the Company had received subscriptions for a
total of 10,000,000 Shares, thereby completing the Second Offering. On July
14, 1997, the Company commenced an offering of an additional 20,000,000 Shares
at $10.00 per Share, on a best efforts basis, (the "Third Offering"). As of
December 31, 1997, the Company had received subscriptions for a total of
9,326,186 Shares from the Third Offering. In addition, as of December 31,
1997, the Company has distributed 699,954 shares through the Company's
Distribution Reinvestment Program ("DRP"). As of December 31, 1997, the
Company has repurchased a total of 52,800 Shares through the Share Repurchase
Program. As a result, as of December 31, 1997, Gross Offering Proceeds total
$249,231,797, net of Shares repurchased 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.

-29-

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.

Restricted cash at December 31, 1997 includes $861,716 held in escrow for the
principal payments payable on the Aurora Commons mortgage and $87,496 held in
escrow by the mortgagee for the payment of real estate taxes at Aurora Commons.
Restricted cash at December 31, 1997 also includes amounts held as vacancy
escrows on Cobbler Crossing, Mallard Crossing and Shorecrest Shopping Center.
The monthly amounts drawn for rent under the master lease escrows decrease the
basis of the respective properties. Restricted cash at December 31, 1997 also
includes $325,000 held in escrow for tenant improvement costs at Fashion Square
and $600,000 held at Cole Taylor bank to redeem a portion of the bonds at
Fashion Square (Note 9).

Statement of Financial Accounting Standards No. 121 requires the Company to
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 operations and sale of properties. 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. As of December 31,
1997, the Company does not believe any such impairments of its properties
exists.

Depreciation expense is computed using the straight-line method. Buildings and
improvements are depreciated based upon estimated useful lives of 30 years for
the building and building improvements and 15 years for the site improvements.

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 on a straight-line basis
and the cash rent due under the provisions of the lease agreements is recorded
as deferred rent receivable.

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.

-30-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

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.

In 1997, the Company adopted FASB No. 123, "Accounting for Stock Based
Compensation". As allowed by FASB No. 123, 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.

In 1997, the FASB issued Statement No. 128, Earnings per Share, which the
company will adopt in fiscal year 1998. This Statement will have no material
effect on the Company's primary or diluted net income per share.

(2) Transactions with Affiliates

The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to each of the
Offerings. Such expenses include postage, data processing and marketing and
are reimbursed at cost. The collective costs to Affiliates incurred relating
to the Offerings were $1,047,694 and $692,248 as of December 31, 1997 and 1996,
respectively, of which $24,374 and $27,976 were unpaid as of December 31, 1997
and 1996, respectively. In addition, an Affiliate of the Advisor serves as
dealer manager of each of the Offerings and is entitled to receive selling
commissions, a marketing contribution and a due diligence expense allowance fee
from the Company in connection with each of the Offerings. Such amounts
incurred were $23,124,939 and $7,403,965 for the years ended December 31, 1997
and 1996, respectively, of which $519,914 and $270,365 was unpaid as of
December 31, 1997 and 1996, respectively. As of December 31, 1997,
approximately $19,581,000 of these commissions had been passed through from the
Affiliate to unaffiliated soliciting broker/dealers.

-31-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

As of December 31, 1997, the Company had incurred $28,369,181 of total
organization and offering costs to Affiliates and non-affiliates. Pursuant to
the terms of each of the Offerings, 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 Offerings (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 and second Offerings, organizational and offering did not exceed the
5.5% or 15% limitations. As of December 31, 1997, organizational and offering
costs of the Third Offering did not exceed the 5.5% and 15% limitations. The
Company anticipates that these costs will not exceed either of 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
administration of the Company. Such costs are included in professional
services to Affiliates, general and administrative expenses to Affiliates and
acquisition costs expensed.

As of December 31, 1997, the Advisor has contributed $200,000 to the capital of
the Company for which it received 20,000 Shares.

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. The
Advisor Asset Management Fee plus other operating expenses paid during the
previous calendar year did not 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 Stockholder's received an annual Distribution greater than an
8% return. Accordingly, for the year ended December 31, 1997, the Company has
incurred $843,000 of Advisor Asset Management Fees, of which $320,000 remained
unpaid at December 31, 1997.

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 $1,120,429 and $229,307 for the years ended December 31,
1997 and 1996, respectively, all of which has been paid.

The Advisor and its Affiliates are entitled to reimbursement for salaries and
expense of employees of the Advisor and its Affiliates relating to selecting,
evaluating and acquiring of properties. Such amounts are included in building
and improvements for those costs relating to properties purchased. Such
amounts are included in acquisition cost expenses to Affiliates for costs
relating to properties not acquired.

-32-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(3) Stock Option Plan and Soliciting 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 the date they
become a Director 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 for $9.05 per Share.

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, 1997, none of these warrants were exercised.

-33-

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

Notes to Financial Statements
(continued)

(4) Investment Properties 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>
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 1,626,033 664 838,000 1,626,697 2,464,697

Ameritech
Joliet, IL.............. 05/97 170,000 883,293 2,544 170,000 885,837 1,055,837

Dominicks-Schaumburg
Schaumburg, IL.......... 05/97 2,294,437 8,388,263 2,679 2,294,437 8,390,942 10,685,379

Dominicks-Highland Park
Highland Park, IL....... 06/97 3,200,000 9,593,565 2,200 3,200,000 9,595,765 12,795,765

Dominicks-Glendale Heights
Glendale Heights, IL.... 09/97 1,265,000 6,934,230 9,194 1,265,000 6,943,424 8,208,424

Party City
Oakbrook Terrace, IL.... 11/97 750,000 1,230,030 - 750,000 1,230,030 1,980,030

Eagle Country Market
Roselle, IL............. 11/97 966,667 1,935,350 - 966,667 1,935,350 2,902,017

Neighborhood Retail Centers
- ---------------------------
Eagle Crest Shopping Center
Naperville, IL.......... 03/95 1,878,618 2,938,352 115,828 1,878,618 3,054,180 4,932,798

Montgomery-Goodyear
Montgomery, IL.......... 09/95 315,000 834,659 (11,158) 315,000 823,501 1,138,501

Hartford/Naperville Plaza
Naperville, IL.......... 09/95 990,000 3,427,961 13,002 990,000 3,440,963 4,430,963

Nantucket Square
Schaumburg, IL.......... 09/95 1,908,000 2,349,918 (69,881) 1,908,000 2,280,037 4,188,037

Antioch Plaza
Antioch, IL............. 12/95 268,000 1,360,445 (120,629) 268,000 1,239,816 1,507,816

Mundelein Plaza
Mundelein, IL........... 03/96 1,695,000 3,965,560 (53,429) 1,695,000 3,912,131 5,607,131
------------ ------------- ----------- ------------ ------------ ------------
Subtotal $16,617,052 46,598,382 (108,986) 16,617,052 46,489,396 63,106,448

-34-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(4) Investment Properties (continued) Gross amount at which carried
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
------- ------------ ------------- ------------ ------------- ------------- ------------

Subtotal $16,617,052 46,598,382 (108,986) 16,617,052 46,489,396 63,106,448

Regency Point
Lockport, IL............ 04/96 1,000,000 4,720,800 (19,377) 1,000,000 4,701,423 5,701,423

Prospect Heights
Prospect Heights, IL.... 06/96 494,300 1,683,755 (9,724) 494,300 1,674,031 2,168,331

Montgomery-Sears
Montgomery, IL.......... 06/96 768,000 2,714,173 (48,504) 768,000 2,665,669 3,433,669

Salem Square
Countryside, IL......... 08/96 1,735,000 4,449,217 (16,960) 1,735,000 4,432,257 6,167,257

Hawthorn Village
Vernon Hills, IL........ 08/96 2,619,500 5,887,640 46,891 2,619,500 5,934,531 8,554,031

Six Corners
Chicago, IL............. 10/96 1,440,000 4,538,152 3,638 1,440,000 4,541,790 5,981,790

Spring Hill Fashion Corner
West Dundee, IL......... 11/96 1,794,000 7,415,396 3,955 1,794,000 7,419,351 9,213,351

Crestwood Plaza
Crestwood, IL........... 12/96 325,577 1,483,183 4,750 325,577 1,487,933 1,813,510

Park St. Claire
Schaumburg, IL.......... 12/96 319,578 986,920 226,674 319,578 1,213,594 1,533,172

Lansing Square
Lansing, IL............. 12/96 4,075,000 12,179,383 18,087 4,075,000 12,197,470 16,272,470

Summit of Park Ridge
Park Ridge, IL.......... 12/96 672,000 2,497,950 5,886 672,000 2,503,836 3,175,836

Grand and Hunt Club
Gurnee, IL.............. 12/96 969,840 2,622,575 (52,811) 969,840 2,569,764 3,539,604

Quarry Outlot
Hodgkins, IL............ 12/96 522,000 1,278,431 8,872 522,000 1,287,303 1,809,303

Maple Park Place
Bolingbrook, IL......... 01/97 3,665,909 11,669,428 10,603 3,665,909 11,680,031 15,345,940

Aurora Commons
Aurora, IL.............. 01/97 3,220,000 8,318,661 3,901 3,220,000 8,322,562 11,542,562
------------ ------------- ----------- ------------ ------------ ------------
Subtotal $40,237,756 119,044,046 76,895 40,237,756 119,120,941 159,358,697

-35-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

Subtotal $40,237,756 119,044,046 76,895 40,237,756 119,120,941 159,358,697

Lincoln Park Place
Chicago, IL............. 01/97 819,000 1,299,902 (11,788) 819,000 1,288,114 2,107,114

Niles Shopping Center
Niles, IL............... 04/97 850,000 2,408,467 (22,157) 850,000 2,386,310 3,236,310

Mallard Crossing
Elk Grove Village, IL... 05/97 1,778,667 6,331,943 (22,929) 1,778,667 6,309,014 8,087,681

Cobblers Crossing
Elgin, IL............... 05/97 3,200,000 7,763,940 (67,400) 3,200,000 7,696,540 10,896,540

Calumet Square
Calumet City, IL........ 06/97 527,000 1,537,316 6,664 527,000 1,543,980 2,070,980

Sequoia Shopping Center
Milwaukee, WI........... 06/97 1,216,914 1,802,336 (8,060) 1,216,914 1,794,276 3,011,190

Riversquare Shopping Center
Naperville, IL.......... 06/97 2,853,226 3,124,732 103,872 2,853,226 3,228,604 6,081,830

Rivertree Court
Vernon Hills, IL........ 07/97 8,651,875 22,861,547 6,233 8,651,875 22,867,780 31,519,655

Shorecrest Plaza
Racine, WI.............. 07/97 1,150,000 4,749,758 (17,469) 1,150,000 4,732,289 5,882,289

Dominicks-Countryside
Countryside, IL......... 12/97 1,375,000 925,106 - 1,375,000 925,106 2,300,106

Terramere Plaza
Arlington Heights, IL... 12/97 1,435,000 2,966,411 - 1,435,000 2,966,411 4,401,411

Wilson Plaza
Batavia, IL............. 12/97 310,000 984,720 - 310,000 984,720 1,294,720

Iroquois Center
Naperville, IL.......... 12/97 3,668,347 8,258,584 - 3,668,347 8,258,584 11,926,931

Fashion Square
Skokie, IL.............. 12/97 2,393,534 6,822,071 - 2,393,534 6,822,071 9,215,605

Naper West
Naperville, IL.......... 12/97 5,335,000 9,584,779 - 5,335,000 9,584,779 14,919,779
------------ ------------- ----------- ------------ ------------ ------------
Total $75,801,319 200,465,658 43,861 75,801,319 200,509,519 276,310,838
=========== ============ =========== ============ ============ ============
</TABLE>

-36-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

December 31, 1997

(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. The cumulative amount of such payments was $981,055 and $570,694
as of December 31, 1997 and 1996, respectively (Note 5).

Cost and accumulated depreciation of the above properties are summarized as
follows:
1997 1996
Single User Retail Properties: ---- ----
Cost.................................... $ 41,301,202 3,673,086
Less accumulated depreciation........... 674,772 112,871
------------- ------------
40,626,430 3,560,215
Neighborhood Retail Centers: ------------- ------------
Cost.................................... 235,009,636 90,959,895
Less accumulated depreciation........... 4,990,711 996,167
------------- ------------
230,018,925 89,963,728
------------- ------------
Total................................... $270,645,355 93,523,943
============= ============

Pro Forma Information (unaudited)

The Company acquired its investment properties at various times over the three
year period ended December 31, 1997 as described in Note 4. The following
table sets forth certain summary unaudited pro forma operating data as if the
acquisitions had been consummated as of the beginning of the previous
respective period.
For the years ending
December 31,
1997 1996
---- ----
Total revenues.......................... $ 43,073,222 38,856,382
Total depreciation...................... 6,947,224 6,693,622
Total expenses.......................... 30,975,575 27,294,953
Net income.............................. 12,097,647 11,561,429

The unaudited pro forma operating data are presented for comparative purposes
only and are not necessarily indicative of what the actual results of
operations would have been for each of the periods presented, nor does such
data purport to represent the results to be achieved in future periods.

-37-

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
------------- -----------
1998...................................... $ 30,852,420 66
1999...................................... 27,815,045 101
2000...................................... 24,678,197 73
2001...................................... 21,377,331 49
2002...................................... 18,920,519 55
Thereafter................................ 137,903,729 82
-------------
Total..................................... $261,547,241
=============

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 $654,978, $119,225 and $12,413 in
1997, 1996 and 1995, of rental income for the period of occupancy for which
stepped rent increases apply and $786,616 and $131,638 in related accounts
receivable as of December 31, 1997 and 1996, respectively. The Company
anticipates collecting these amounts over the terms of the related leases as
scheduled rent payments are made.

-38-

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, 1997 and 1996:

Current Current Balance at
Property as Interest Maturity Monthly Dec. 31, Dec. 31,
Collateral Rate Date Payment(a) 1997 1996
- ------------ ---------- --------- --------- ------------ ------------
Mortgage payable to Affiliate:
Walgreens 7.655% 05/2004 $ 5,689 $ 727,472 739,543

Mortgages payable to non-affiliates:
Regency Point 7.4875% 08/2000 (b) 4,373,461 4,428,690
Eagle Crest 7.850% 10/2003 15,373 2,350,000 2,350,000
Nantucket Square 7.850% 10/2003 14,392 2,200,000 2,200,000
Antioch Plaza 7.850% 10/2003 5,724 875,000 875,000
Mundelein Plaza 7.850% 10/2003 18,382 2,810,000 2,810,000
Montgomery-Goodyear 7.850% 10/2003 4,121 630,000 630,000
Montgomery-Sears 7.850% 08/2003 10,761 1,645,000 1,645,000
Hartford/Naperville 7.850% 08/2003 15,111 2,310,000 2,310,000
Zany Brainy 7.590% 01/2004 7,875 1,245,000 1,245,000
Prospect Heights
Plaza 7.590% 01/2004 6,926 1,095,000 1,095,000
Hawthorn Village
Commons 7.590% 01/2004 27,071 4,280,000 4,280,000
Six Corners Plaza 7.590% 01/2004 19,608 3,100,000 3,100,000
Salem Square
Shopping Center 7.590% 01/2004 19,797 3,130,000 3,130,000
Lansing Square 7.800% 01/2004 52,975 8,150,000 -
Spring Hill Fashion
Mall 7.800% 01/2004 30,485 4,690,000 -
Aurora Commons (c) 9.000% 10/2001 70,556 9,392,602 -
Maple Park Place 7.650% 06/2004 48,769 7,650,000 -
Dominicks-Schaumburg 7.49% 06/2004 33,365 5,345,500 -
Summit Park Ridge 7.49% 06/2004 9,987 1,600,000 -
Lincoln Park Place 7.49% 06/2004 6,554 1,050,000 -
Crestwood Plaza 7.650% 06/2004 5,765 904,380 -
Park St. Claire 7.650% 06/2004 4,861 762,500 -
Quarry 7.650% 06/2004 5,738 900,000 -
Grand/Hunt Club 7.49% 06/2004 11,210 1,796,000 -
Rivertree Court (d) 10.030% 11/1998 131,226 15,700,000 -
Niles Shopping Center 7.23% 01/2005 9,745 1,617,500 -
Ameritech 7.23% 01/2005 3,147 522,375 -
Calumet Square 7.23% 01/2005 6,223 1,032,920 -

-39-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

Current Current Balance at
Property as Interest Maturity Monthly Dec. 31, Dec. 31,
Collateral Rate Date Payment(a) 1997 1996
- ------------ ---------- --------- --------- ------------ ----------

Sequoia Shopping
Center 7.23% 01/2005 9,068 1,505,000 -
Dominick's Highland
Park 7.21% 12/2004 38,453 6,400,000 -
Fashion Square (e) 4.10% 12/2014 27,642 6,800,000 -
------------ -----------
Mortgages Payable.................................... $106,589,710 30,838,233
============ ===========

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

(c) The Company received a credit for interest expense on the debt at closing,
which is included in restricted cash along with an amount set aside by the
Company for principal payments on the debt. Interest income earned on the
restricted cash amounts, when netted with interest expense on the debt,
results in an adjusted interest rate on the debt of approximately 8.2%.

(d) The Company received a credit for interest expense on the debt at closing.

(e) As part of the purchase of this property, the Company assumed the existing
mortgage-backed Economic Development Revenue Bonds, Series 1994 offered by
the Village of Skokie, Illinois. The interest rate floats and is reset
weekly by a re-marketing agent. The current rate is 4.10%. The bonds are
further secured by an Irrevocable Letter of Credit, issued by LaSalle Bank
at a fee of 1.25% of the bond outstanding. In addition, there is a .125%
re-marketing fee paid annually.

As of December 31, 1997, the required future principal payments on the
Company's long-term debt over the next five years are as follows:

1998.................................... $ 845,541
1999.................................... 288,310
2000.................................... 4,474,649
2001.................................... 8,812,017
2002.................................... 17,679

-40-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

(7) Deposits on Investment Properties

On February 7, 1997, the Company made an initial deposit of $1,228,510 for the
purchase of Oak Forest Commons. On July 31, 1997, the Company made an
additional deposit of $524,390. The balance of the purchase price,
approximately $10,083,000, will be paid upon completion of the redevelopement
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 redevelopement
of the center and when the anticipated main tenant, Dominick's Finer Foods,
Inc. begins paying rent under a lease agreement.

The Company earns interest on these deposits at the rate of 9.3% per annum.

(8) Loan Commitments

In December 1997, the Company committed to additional financing secured by
Cobbler Crossing and Shorecrest Shopping Center properties totaling $8,454,500
from an unaffiliated lender. The funding of these loans is to occur in early
1998. The mortgage loan secured by Cobbler Crossing will have a term of seven
years and, prior to maturity date, will require payments of interest only,
fixed at 7.00%. The mortgage loan secured by Shorecrest Shopping Center will
have a term of five years and, prior to maturity date, will require payments of
interest only, fixed at 7.10%.

(9) Subsequent Events, unaudited

As of February 3, 1998, subscriptions for a total of 27,259,012 Shares were
received, bringing total gross offering proceeds to approximately $272,544,000.

In January 1998, the Company paid a distribution of $1,777,113 to the
Stockholders.

On January 2, 1998, the Company purchased the Woodfield Plaza Shopping Center
from an unaffiliated third party for approximately $19,200,000. The property
is located in Schaumburg, Illinois and contains approximately 177,418 square
feet of leasable space. Its anchor tenants include Kohl's, Barnes and Noble
and Linens N' Things.

On January 8, 1998, the Company purchased The Shops of Coopers Grove from an
unaffiliated third party for approximately $5,700,000. The property is located
in Country Club Hills, Illinois and contains approximately 72,518 square feet
of leasable space. Its anchor tenant is Eagle Food Center.

On January 15, 1998, the Company made a $600,000 paydown of the bond secured by
the Fashion Square property.

-41-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Notes to Financial Statements
(continued)

On February 2, 1998, the Company purchased Orland Park Retail from an
unaffiliated third party for approximately $1,250,000. The property is located
in Orland Park, Illinois and contains approximately 8,500 square feet of
leasable space. anchor tenants include Video Update and All Cleaners.

At the completion of the Third Offering, the Company contemplates an additional
offering (the "Fourth Offering") for 25,000,000 shares at $11.00 per Share, on
a best efforts basis, plus 2,000,000 Shares to be issued through the Company's
DRP at $10.45 per Share. The Company filed a registration statement with the
Securities and Exchange Commission on January 30, 1998.

On behalf of the Company, the Advisor is currently exploring the purchase of
additional shopping centers from unaffiliated third parties.

-42-

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

Schedule III
Real Estate and Accumulated Depreciation

December 31, 1997
<CAPTION>
Initial Cost Gross amount at which carried
(A) at end of period (B)
------------------------ --------------------------------------------------
Date
Buildings Adjustments Land Buildings Accumulated Con-
and to and and Total Depreciation stru- Date
Encumbrance Land improvements Basis (C) improvements improvements (D) (E) cted Acq
----------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-user Retail
- ------------------
Walgreens/Decatur
Decatur, IL.......... $ 727,472 78,330 1,130,723 - 78,330 1,130,723 1,209,053 109,931 1988 01/95

Zany Brainy
Wheaton, IL.......... 1,245,000 838,000 1,626,033 664 838,000 1,626,697 2,464,697 81,313 1995 07/96

Ameritech
Joliet, IL........... 522,375 170,000 883,293 2,544 170,000 885,837 1,055,837 19,595 1995 05/97

Dominicks-Schaumburg
Schaumburg, IL....... 5,345,500 2,294,437 8,388,263 2,679 2,294,437 8,390,942 10,685,379 163,147 1996 05/97

Dominicks-Highland Park
Highland Park, IL.... 6,400,000 3,200,000 9,593,565 2,200 3,200,000 9,595,765 12,795,765 224,931 1996 06/97

Dominicks-Glendale Heights
Glendale Heights, IL. - 1,265,000 6,934,230 9,194 1,265,000 6,943,424 8,208,424 61,949 1997 09/97

Party City
Oakbrook Terrace, IL. - 750,000 1,230,030 - 750,000 1,230,030 1,980,030 6,809 1985 11/97

Eagle Country Market
Roselle, IL.......... - 966,667 1,935,350 - 966,667 1,935,350 2,902,017 7,097 1990 11/97

Neighborhood Retail Centers
- ---------------------------
Eagle Crest Shopping Center
Naperville, IL....... 2,350,000 1,878,618 2,938,352 115,828 1,878,618 3,054,180 4,932,798 281,851 1991 03/95

Montgomery-Goodyear
Montgomery, IL...... 630,000 315,000 834,659 (11,158) 315,000 823,501 1,138,501 61,859 1991 09/95

Hartford/Naperville Plaza
Naperville, IL....... 2,310,000 990,000 3,427,961 13,002 990,000 3,440,963 4,430,963 277,899 1995 09/95

Nantucket Square
Schaumburg, IL....... 2,200,000 1,908,000 2,349,918 (69,881) 1,908,000 2,280,037 4,188,037 171,240 1980 09/95

Antioch Plaza
Antioch, IL.......... 875,000 268,000 1,360,445 (120,629) 268,000 1,239,816 1,507,816 90,049 1995 12/95

Mundelein Plaza
Mundelein, IL........ 2,810,000 1,695,000 3,965,560 (53,429) 1,695,000 3,912,131 5,607,131 229,796 1990 03/96

Regency Point
Lockport, IL......... 4,373,461 1,000,000 4,720,800 (19,377) 1,000,000 4,701,423 5,701,423 274,247 1993 04/96
------------ ----------- ------------ ----------- ----------- ------------ ----------- -------------
Subtotal $ 29,788,808 17,617,052 51,319,182 (128,363) 17,617,052 51,190,819 68,807,871 2,061,713

-43-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III (continued)
Real Estate and Accumulated Depreciation

December 31, 1997

Initial Cost Gross amount at which carried
(A) at end of period (B)
------------------------ --------------------------------------------------
Date
Buildings Adjustments Land Buildings Accumulated Con-
and to and and Total Depreciation stru- Date
Encumbrance Land improvements Basis (C) improvements improvements (D) (E) cted Acq
----------- ----------- ------------ ----------- ----------- ------------ ---------- ------------ ----- -----

Subtotal $ 29,788,808 17,617,052 51,319,182 (128,363) 17,617,052 51,190,819 68,807,871 2,061,713

Prospect Heights
Prospect Heights, IL. 1,095,000 494,300 1,683,755 (9,724) 494,300 1,674,031 2,168,331 83,479 1985 06/96

Montgomery-Sears
Montgomery, IL....... 1,645,000 768,000 2,714,173 (48,504) 768,000 2,665,669 3,433,669 134,141 1990 06/96

Salem Square
Countryside, IL...... 3,130,000 1,735,000 4,449,217 (16,960) 1,735,000 4,432,257 6,167,257 209,482 1973 08/96

Hawthorn Village
Vernon Hills, IL..... 4,280,000 2,619,500 5,887,640 46,891 2,619,500 5,934,531 8,554,031 274,230 1979 08/96

Six Corners
Chicago, IL.......... 3,100,000 1,440,000 4,538,152 3,638 1,440,000 4,541,790 5,981,790 182,845 1966 10/96

Spring Hill Fashion Corner
West Dundee, IL...... 4,690,000 1,794,000 7,415,396 3,955 1,794,000 7,419,351 9,213,351 278,079 1985 11/96

Crestwood Plaza
Crestwood, IL........ 904,380 325,577 1,483,183 4,750 325,577 1,487,933 1,813,510 49,565 1992 12/96

Park St. Claire
Schaumburg, IL....... 762,500 319,578 986,920 226,674 319,578 1,213,594 1,533,172 59,391 1994 12/96

Lansing Square
Lansing, IL.......... 8,150,000 4,075,000 12,179,383 18,087 4,075,000 12,197,470 16,272,470 407,128 1991 12/96

Summit of Park Ridge
Park Ridge, IL....... 1,600,000 672,000 2,497,950 5,886 672,000 2,503,836 3,175,836 83,749 1986 12/96

Grand and Hunt Club
Gurnee, IL........... 1,796,000 969,840 2,622,575 (52,811) 969,840 2,569,764 3,539,604 85,654 1996 12/96

Quarry Outlot
Hodgkins, IL......... 900,000 522,000 1,278,431 8,872 522,000 1,287,303 1,809,303 42,860 1996 12/96

Maple Park Place
Bolingbrook, IL...... 7,650,000 3,665,909 11,669,428 10,603 3,665,909 11,680,031 15,345,940 440,388 1992 01/97

Aurora Commons
Aurora, IL........... 9,392,602 3,220,000 8,318,661 3,901 3,220,000 8,322,562 11,542,562 281,096 1988 01/97
------------ ---------- ------------ ------------ ---------- ------------ ----------- -----------
Subtotal $ 78,884,290 40,237,756 119,044,046 76,895 40,237,756 119,120,941 159,358,697 4,673,800

-44-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III (continued)
Real Estate and Accumulated Depreciation

December 31, 1997

Lincoln Park Place
Chicago, IL.......... 1,050,000 819,000 1,299,902 (11,788) 819,000 1,288,114 2,107,114 39,828 1990 01/97

Niles Shopping Center
Niles, IL............ 1,617,500 850,000 2,408,467 (22,157) 850,000 2,386,310 3,236,310 56,614 1982 04/97

Mallard Crossing
Elk Grove Village, IL - 1,778,667 6,331,943 (22,929) 1,778,667 6,309,014 8,087,681 148,038 1993 05/97

Cobblers Crossing
Elgin, IL............ - 3,200,000 7,763,940 (67,400) 3,200,000 7,696,540 10,896,540 179,263 1993 05/97

Calumet Square
Calumet City, IL..... 1,032,920 527,000 1,537,316 6,664 527,000 1,543,980 2,070,980 29,861 1967/ 06/97
1994
Sequoia Shopping Center
Milwaukee, WI........ 1,505,000 1,216,914 1,802,336 (8,060) 1,216,914 1,794,276 3,011,190 32,470 1988 06/97

Riversquare Shopping Center
Naperville, IL....... - 2,853,226 3,124,732 103,872 2,853,226 3,228,604 6,081,830 64,297 1988 06/97

Rivertree Court
Vernon Hills, IL.... 15,700,000 8,651,875 22,861,547 6,233 8,651,875 22,867,780 31,519,655 375,277 1988 07/97

Shorecrest Plaza
Racine, WI........... - 1,150,000 4,749,758 (17,469) 1,150,000 4,732,289 5,882,289 66,035 1977 07/97

Countryside
Countryside, IL...... - 1,375,000 925,106 - 1,375,000 925,106 2,300,106 - 1975 12/97

Terramere Plaza
Arlington Heights, IL - 1,435,000 2,966,411 - 1,435,000 2,966,411 4,401,411 - 1980 12/97

Wilson Plaza
Batavia, IL.......... - 310,000 984,720 - 310,000 984,720 1,294,720 - 1986 12/97

Iroquois Center
Naperville, IL....... - 3,668,347 8,258,584 - 3,668,347 8,258,584 11,926,931 - 1983 12/97

Fashion Square
Skokie, IL........... 6,200,000 2,393,534 6,822,071 - 2,393,534 6,822,071 9,215,605 - 1984 12/97

Naper West
Naperville, IL....... - 5,335,000 9,584,779 - 5,335,000 9,584,779 14,919,779 - 1985 12/97
------------ ----------- ------------ ----------- ---------- ------------ ----------- -----------
Total $105,989,710 75,801,319 200,465,658 43,861 75,801,319 200,509,519 276,310,838 5,665,483
============ =========== ============ =========== ========== ============ =========== ===========

-45-

INLAND REAL ESTATE CORPORATION
(a Maryland corporation)

Schedule III (continued)

Real Estate and Accumulated Depreciation

December 31, 1997, 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, 1997 and 1996
for federal income tax purposes was approximately $277,000,000 and
$95,000,000, unaudited respectively.

(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. GAAP requires that as these payments are received,
the Company record the payments as a reduction in the purchase price of
the properties rather than as rental income. The Company has recorded
$410,361, $437,678 and $133,016 of such payments as of December 31,
1997, 1996 and 1995, respectively.

(D) Reconciliation of real estate owned:

1997 1996 1995
------------- ------------- -------------
Balance at beginning of year $ 94,632,981 17,512,432 -
Purchases of property....... 181,251,256 77,421,408 17,594,313
Additions................... 836,962 136,819 51,135
Payments received under
master leases............. (410,361) (437,678) (133,016)
------------- ------------- -------------
Balance at end of year...... $276,310,838 94,632,981 17,512,432
============= ============= =============

(E) Reconciliation of accumulated depreciation:

Balance at beginning of year $ 1,109,038 169,894 -
Depreciation expense........ 4,556,445 939,144 169,894
------------- ------------- -------------
Balance at end of year...... $ 5,665,483 1,109,038 169,894
============= ============= =============

-46-

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

There were no disagreements on accounting or financial disclosure during 1997.

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
Heidi N. Lawton......... Independent Director
Roland W. Burris........ Independent Director
Joel G. Herter.......... 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 54) President, Chief Executive Officer, Chief Operating
Officer and Director of the Company since its formation in 1994. Mr. Parks
joined The Inland Group, Inc. ("TIGI") and its affiliates in 1968. Mr. Parks
is a Director of TIGI and is Chairman of Inland Real Estate Investment
Corporation ("IREIC") and is a Director of both Inland Securities Corporation
and the Advisor. Mr. Parks is responsible for the ongoing administration of
existing partnerships, corporate budgeting and administration for IREIC. In
this capacity he oversees and coordinates the marketing of all investments
nationwide and has overall responsibility for investor relations. Mr. Parks
received his B.A. Degree from Northeastern Illinois University in 1965 and M.A.
from the University of Chicago in 1968. He is a registered Direct
Participation Program Principal with the National Association of Securities
Dealers, Inc. and a licensed real estate broker. He is a member of the Real
Estate Investment Association and the National Association of Real Estate
Investment Trusts.

G. JOSEPH COSENZA (age 54) Director of the Company since its formation in 1994.
Mr. Cosenza is a Director and Vice Chairman of The Inland Group, Inc. Mr.
Cosenza oversees, coordinates and directs TIGI's many enterprises and, in
addition, immediately supervises a staff of eight property acquisition
personnel. 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 in 1966 and his M.S. Degree
from Northern Illinois University in 1972. 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.

-47-

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.

HEIDI N. LAWTON (age 36) 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. The firm
specializes in commercial, industrial and investment real estate brokerage.
Ms. Lawton is responsible for all aspects of the operations of the company,
including structuring real estate investments, 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,
Ms. Lawton was managing broker for VCR Realty in Addison, Illinois. Ms. Lawton
has been licensed as a real estate professional since 1982 and 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 60) Independent Director since January 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. From 1973 to 1995, Mr. Burris held various
governmental positions in the State of Illinois including State Comptroller
(1979 to 1991) and Attorney General (1991 to 1995). Mr. Burris completed his
undergraduate studies at Southern Illinois University in 1959 and studied
international law as an exchange student at the University of Hamburg in
Germany. Mr. Burris graduated from Howard University Law School in 1963. Mr.
Burris serves on the board of 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 and is an adjunct professor in the Master of Public Administration
Program at Southern Illinois University.

JOEL G. HERTER, CPA (age 60) Independent Director of the Company since 1997,
Mr. Herter is a senior partner of Wolf & Company LLP ("Wolf") where he has been
employed since 1978. Mr. Herter graduated from Elmhurst College in 1959 with a
Bachelor of Science degree in business administration. His business experience
includes accounting and auditing, tax and general business services including
venture and conventional financing, forecasts and projections, and strategic
planning to a variety of industries. From 1978 to 1991, Mr. Herter served as
managing partner for Wolf. Mr. Herter is a member of the American Institute of
Certified Public Accountants and the Illinois CPA Society and was a past
president and director of the Elmhurst Chamber of Commerce and was appointed by
Governor Thompson of the State of Illinois to serve on the 1992 World's Fair
Authority. Mr. Herter currently serves as chairman of the Board of Trustees,
Elmhurst Memorial Hospital; director of Suburban Bank and Trust Company,;
"chairman elect" of the Board of Trustees, Elmhurst College; chairman of the
DuPage Water Commission; treasurer to the House Republican Campaign Committee
and Friends of Lee Daniels Committee; treasurer for Illinois Attorney General,
Jim Ryan. Mr. Herter has also been appointed by Governor Edgar of the State
of Illinois to the Illinois Sports Facilities Authority.

-48-

ROBERTA S. MATLIN (age 53) Vice President - Administration of the Company since
March 1995. Ms. Matlin joined TIGI in 1984 as Director of Investor
Administration and currently serves as Senior Vice President-Investments of
IREIC directing the day-to-day internal operations. Ms. Matlin is a Director
of both Inland Securities Corporation and the Advisor. Prior to joining TIGI,
Ms. Matlin was employed for eleven years by 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
in 1966 and is registered with the National Association of Securities Dealers,
Inc. as a general securities principal.

KELLY TUCEK (age 35) Secretary, Treasurer and Chief Financial Officer of the
Company since August 1996. Ms. Tucek joined TIGI in 1989 and is an Assistant
Vice President of Inland Real Estate Investment Corporation. 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 TIGI,
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 in 1984.

PATRICIA A. CHALLENGER (age 45) Assistant Secretary of the Company since March
1995. Ms. Challenger joined Inland in 1985. She is currently a Senior Vice
President of IREIC in charge of the Asset Management Department, where she is
responsible for developing operating and disposition strategies for properties
owned by IREIC related entities. Ms. Challenger received her B.S. degree from
George Washington University in 1975 and her Master's Degree from Virginia Tech
University in 1980. Ms. Challenger was selected and served from 1980 to 1984
as Presidential Management Intern, where she was part of a special government-
wide task force to eliminate waste, fraud and abuse in government contracting
and also served as Senior Contract Specialist responsible for capital
improvements in 109 governmental properties. Ms. Challenger is a licensed real
estate broker, a National Association of Securities Dealers registered
securities sales representative and a member of the Urban Land Institute.

-49-

Item 11. Executive Compensation

As of December 31, 1997, the Company incurred $28,341,719 of organizational and
offering costs. Pursuant to the terms of the Offerings, 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 prior Offerings,
organizational and offering costs did not exceed the 5.5% or 15% limitations.
As of December 31, 1997, organizational and offering costs of the Third
Offering did not exceed the 5.5% and 15% limitations. The Company anticipates
that these costs will not exceed these limitations upon completion of the
current offering, 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 $1,047,694 as of December 31, 1997 of
which $24,374 was unpaid as of December 31, 1997. 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 $23,124,939 for the year ended December 31, 1997 of which
$519,914 was unpaid as of December 31, 1997. As of December 31, 1997,
approximately $19,581,288 of these commissions has been passed through from the
Affiliate to unaffiliated broker/dealers.

The Company adopted an Independent Director Stock Option Plan which granted
each Independent Director an option to acquire 3,000 Shares as of the date they
become a Director and an additional 500 Shares on the date of each annual
stockholders' meeting commencing with the annual meeting in 1995 so long as the
Independent Director remains a member of the Board on such date. The options
for the initial 3,000 Shares granted are 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, 1997, options
for 1,000 Shares have been exercised for $9.05 per Share.

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.

-50-

Item 12. Security Ownership of Certain Beneficial Owners and Management

(a) As of December 31, 1997, the Advisor owned 20,000 Shares of Common Stock
which represented less than 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, 1997:

Amount and Nature
of Beneficial Percent
Title of Class Ownership of Class
-------------- ----------------- --------------
Name of Beneficial Owner
------------------------
Robert D. Parks
G. Joseph Cosenza
Roland W. Burris
Joel G. Herter
Heidi N. Lawton
Patricia A. Challenger
Kelly Tucek
Roberta S. Matlin

Common Stock 49,832 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.

-51-

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 21 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, 1997 is
submitted herewith.

Page
----
Real Estate and Accumulated Depreciation (Schedule III)...... 43

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.

Item No. Description

The following exhibits are filed as part of this document:

27 Financial Data Schedule

The following exhibits are incorporated herein by reference:
3.1 Inland Monthly Income Fund III, Inc. Second Articles of
Amendment and Restatement (2)

3.2 Amend and Restated bylaws of Inland Real Estate Corporation (3)

3.3 Inland Monthly Income Fund III, Inc. Articles of Amendment (3)

3.4 Inland Real Estate Corporation Articles of Amendment of Second
Articles of Amendment and Restatement (1)

4 Specimen Stock Certificate (1)

10.1 Escrow Agreement between Inland Real Estate Corporation and
LaSalle National Bank, N.A. (1)

10.2 Advisory Agreement between Inland Real Estate Corporation and
Inland Real Estate Advisory Services dated October 14, 1994 (2)

10.2 (a) Amendment No. 1 to the Advisory Agreement dated October 13, 1995
(4)

10.2 (b) Amendment No. 2 to the Advisory Agreement dated October 13, 1996
(4)

-52-

10.2 (c) Amendment No. 3 to the Advisory Agreement effective as of
October 13, 1997 (1)

10.3 Form of Management Agreement Between Inland Real Estate
Corporation and Inland Commercial Property Management, Inc. (3)

10.4 Amended and Restated Independent Director Stock Option Plan (2)

(1) Included in the Registrant's Registration Statement on Form S-11 as
filed by Registrant on January 30, 1998.

(2) Included in the Registrant's Registration Statement on Form S-11
(file number 333-6459) as filed by Registrant on June 20, 1996.

(3) Included in Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-11 (file number 333-6459) as filed
by the Registrant on July 18, 1996.

(4) Included in Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-11 (file number 333-6459) as filed
by the Registrant on November 1, 1996.

(b) Reports on Form 8-K:

There were no reports of Form 8-K filed during the quarter ended December
31, 1997.

No Annual Report or proxy materials for the year 1997 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.

-53-

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

/s/ Robert D. Parks

By: Robert D. Parks
Chief Executive Officer
and Affiliated Director
Date: February 4, 1998

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:

/s/ Robert D. Parks

By: Robert D. Parks
Chief Executive Officer
and Affiliated Director
Date: February 4, 1998

/s/ Kelly Tucek /s/ Heidi N. Lawton

By: Kelly Tucek By: Heidi N. Lawton
Chief Financial and Independent Director
Accounting Officer Date: February 4, 1998
Date: February 4, 1998

/s/ G. Joseph Cosenza /s/ Roland W. Burris

By: G. Joseph Cosenza By: Roland W. Burris
Affiliated Director Independent Director
Date: February 4, 1998 Date: February 4, 1998

/s/ Joel G. Herter

By: Joel G. Herter
Independent Director
Date: February 4, 1998

-54-

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